Fitch Avows MetLife's Debt - Analyst Blog
On Tuesday, Fitch Ratings affirmed all the debt and credit ratings of MetLife Inc. ( MET ) and its operating subsidiaries, reflecting its dominant market position and financial flexibility amid the low rate interest environment.
Accordingly, Fitch asserted the issuer default rating (IDR) of "A" for MetLife, while the financial strength ratings (FSR) were maintained at "AA-" for some of the company's domestic life insurance units. Meanwhile, the outlook for all the ratings remains stable.
The ratings agency believes that MetLife maintains a diversified business mix and is one of the globally leading brands.Moreover, the ALICO acquisition from American International Group Inc. ( AIG ) in November 2010 has become a feather in MetLife's cap.
The ALICO acquisition has increased MetLife's investment portfolio and expanded its global investment market reach. The acquisition is also well-aligned with the company's long-term strategy of achieving growth through international expansion. Its effects are already being witnessed by a diversified income and product mix along with solid growth in the company's Japanese operations, which is expected to generate a statutory solvency margin ratio of over 800% in 2012, thereby outperforming the peer group.
Moreover, MetLife enjoys strong liquidity with risk-based capitalization (RBC) of 450% and statutory earnings of $2.7 billion as of September 30, 2012, for its US-based life insurance divisions. Despite the lingering concerns regarding the low interest rate and economic volatility, MetLife has been successfully maintaining its investment portfolio and enterprise risk at efficient levels, primarily through annuity risk hedging programs, thereby securing a competitive advantage in the market.
In May last year, MetLife had also charted out its long-term return on equity (ROE) growth goals of 12-14% to be achieved by 2016, driven by higher operating earnings from emerging economies. On similar growth prospects, Fitch estimates the company to generate reported ROE of 10-11% in 2013, while MetLife's GAAP interest coverage ratio is projected to be between 6x and 7x for 2012.
Nevertheless, the ongoing low interest rate environment has been adversely affecting MetLife's exposure in the equity market, which again faces intense volatility, according to Fitch. Additionally, the company's financial leverage of 28% at the end of September 2012 remains a cause for concern, although the ratings agency anticipates an improvement in 2013 given the repayment of some debt along with accretion in retained earnings.
Fitch also elucidated the possibility of a rating upgrade provided MetLife maintains a number of factors. These include the RBC ratio above 450%, debt-equity ratio lower than 25%, interest coverage ratio in the band of 8x-10x and successful integration of ALICO. On the flip side, the ratings could be downgraded if NAIC RBC ratio falls below 350%, debt-equity ratio rises above 30% and interest coverage ratio dips below 5x in future.
While MetLife has come a long way from the troughs of the recent recession, we believe that the company is poised to pace its growth as the economy rebounds in the intermediate term.
Despite being adequately liquid, the company is unable to return wealth to shareholders in full capacity due to its comprehensive capital plan, which has been rejected thrice by the Federal Reserve based on the size and scale of its banking operations. This Zacks Rank #5 stock (Strong Sell) is scheduled to release its fourth-quarter 2012 earnings after the market closes on February 13, 2013.
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