On Jan 31, we downgraded our recommendation on insurer giant -
) to Underperform based on its faltering growth guidance for 2013
amid challenging interest rates and intense competition. The
delay in submission of the refurbished capital plan to the
Federal Reserve (Fed) also raises the risk of a ratings downgrade
for this Zacks Rank #5 (Strong Sell) stock.
Why the downgrade?
Estimates for MetLife, which is a leading provider of
insurance and financial services, have been exhibiting a downward
trend ever since the company reported its third-quarter 2012
results on Oct 31. Although MetLife's third quarter earnings per
share of $1.32 beat the Zacks Consensus Estimate of $1.28,
revenues of $16.61 billion fell short of the Zacks Consensus
Estimate of $16.66 billion. Following this, on Dec 13, 2012,
management projected negative to flat growth in earnings in 2013
over 2012. Even the fourth-quarter earnings estimate ranging from
(4%) to 4% raises caution, on an annual basis.
MetLife's plan to withhold share buybacks in 2013 increased
the disappointment, given the inflationary pressure and an
extended low interest rate scenario across economies.
Consequently, the Zacks Consensus Estimate for 2012 has
gone down 1.5% to $5.21 per share, over the last 90 days. The
Zacks Consensus Estimate for 2013 has also declined significantly
(down 5.7% to $5.23 per share). This further justifies the Zacks
Rank on the company.
Cause for Concern
The current interest rate environment continues to put
pressure on the spreads and MetLife's risk-adjusted
capitalization. The ratings agencies are also concerned about the
high financial leverage as well as above-average exposure to
variable annuities that are adversely affected by the current
Moreover, MetLife missed three deadlines since Jun 2012 and
failed to submit a refurbished capital plan to the Fed. Despite
being adequately liquid, the company has not been able to return
wealth to shareholders in its full capacity as its comprehensive
capital plan has been rejected twice by the Fed based on the size
and scale of its banking operations. Further, although MetLife
has exited most of its banking operations, the ongoing regulatory
challenges and the risk of being acknowledged as a systemically
important financial institution could again put the company under
the Fed's supervision.
Other regulatory risks include financial services regulation,
securities regulation, pension regulation, health care
regulation, privacy, tort reform legislation and taxation in
different countries. These factors create a stressful growth
scenario and pose direct risks on the operating and competitive
leverage of MetLife.
Other Insurers That Warrant a Look
While we prefer to avoid MetLife until we see signs of
improvement in the markets as well as company's performance,
other insurance stocks worth a look are
Assured Guaranty Ltd.
Radian Group Inc.
). Both the stocks carry a Zacks Rank #1 (Strong Buy).
CNO Financial Group Inc.
), which carries a Zacks Rank #2 (Buy) also appears
ASSURED GUARNTY (AGO): Free Stock Analysis
CNO FINL GRP (CNO): Free Stock Analysis
METLIFE INC (MET): Free Stock Analysis Report
RADIAN GRP INC (RDN): Free Stock Analysis
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