Rating agency A.M. Best affirmed the credit and financial strength ratings (FSR) of MetLife Inc. (MET) and its subsidiaries last week, while upgrading its outlook to stable from negative. This reflects the company’s consistent growth from the ALICO acquisition in a low rate interest environment.
Accordingly, A.M. Best maintained MetLife’s debt ratings along with the issuer credit rating (ICR) of “a-”, while its life and health insurance subsidiaries’ ICR and FSR have been avowed “aa-” and “A+”, respectively. Earlier, in February 2009, A.M. Best had downgraded the ICR of MetLife to “a-” from “a” and that of its subsidiaries to “aa-” from “aa”.
Presently, the rating agency believes that MetLife maintains a diversified business mix and is one of the strongest brands globally. The company’s variable annuity business has been witnessing strong performance.
Moreover, the ALICO acquisition from American International Group Inc. (AIG) in November last year has become a feather in MetLife’s cap. The improvement through this acquisition also validates A.M. Best’s revised outlook.
The ALICO acquisition has increased MetLife’s investment portfolio by about 25%, which thereby expands its global investment market reach and also accelerates its long-term global growth strategy. In the first nine months of 2011, the international segment has posted earnings of $1.65 billion against $478 million in the year-ago period, primarily backed by ALICO.
Overall, the deal is projected to be accretive to earnings by 40–45 cents per share and is likely to have a positive effect on return on equity (ROE) by 100 basis points in 2011.
Besides, MetLife holds a diminishing risk-profile with improved financial leverage and interest coverage ratios. The company also intends to eliminate some of its debt that is due for maturity in the near future.
However, the ongoing low interest rate environment has been adversely affecting MetLife’s exposure in the equity market, which again faces intense volatility. The current interest rate environment is likely to continue exerting pressure on the spreads and MetLife’s risk-adjusted capitalization, which stands lower for its current rating level.
Additionally, the company has significant investments in alternative investments, such as commercial mortgage loan portfolio and real estate assets, and variable annuity business. Although MetLife's variable annuity hedging program is performing well in 2008–2009, the risk associated with the hedging of variable annuity programs is expected to mar the desired upside in earnings.
Last month, Fitch Ratings asserted the issuer default rating (IDR) of "A" for MetLife, while the financial strength ratings were maintained at “AA-” for some of the company’s domestic life insurance units. Meanwhile, the outlook for all the ratings remains stable.
While MetLife has come a long way from the troughs of the recent recession, we believe that the company is poised to accelerate its growth as the economy rebounds in the intermediate term. Hence, we maintain a Neutral stance on the stock with a Zacks #3 Rank.
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