Standard & Poor's Ratings Services (“S&P”) reiterated its long-term counterparty credit rating of 'A-' on MetLife Inc. (MET) and long-term counterparty credit at 'AA-' and financial strength ratings on its subsidiaries. The outlook was also revised to stable from negative.
These rating affirmations came on the back of solid performance exhibited by the company in managing its diversified investment portfolio and enterprise risk to generate high quality earnings, and simultaneously securing its competitive advantage in the market. The rating agency believes that MetLife is well positioned financially and its effort to sustain excess capital enables the company to attain more flexibility in the operational process.
Given the company’s improving capital position as well as financial flexibility, the rating agency upgraded the outlook. The rating agency stated that prudent control of interest rate and equity market risks will act as a catalyst for future financial strength.
S&P expects MetLife’s core businesses to report solid results, with international businesses performing exceptionally well.
The rating agency also raised the ratings to 'AA-' from 'A+' on American Life Insurance Co. (DE) (“Alico”), which became a part of MetLife 18 months back. The outlook is stable.
S&P also upgraded MetLife Alico Japan to 'AA-/A-1+', given its standing within the Alico and MetLife. The outlook is negative.
The rating agency also upgraded the long-term financial strength and counterparty credit ratings on MetLife Alico Life Insurance KK (MetLife Alico Japan) to 'AA-' from 'A+' and short-term counterparty credit rating on MetLife Alico Japan to 'A-1+' from 'A-1'. The outlook on the long-term rating is negative.
Nevertheless, the rating agency expects strong competition in a few segments coupled with the prevailing low interest rate environment to be headwinds for the company to improve its operating performances. It estimates EBITDA in the band of $9-10 billion with EBITDA fixed-charge coverage of 6.5x to 7x. The rating agency also expects debt leverage to be about 24% in 2012 and financial leverage to be approximately 35%. It estimates share buybacks of about $2 billion.
S&P stated that a rating upgrade is unlikely going forward given the uncertain macro environment. However, if MetLife maintains a sound capital position, it would advocate favorably for the company. On the flip side, S&P would be forced to downgrade the rating if MetLife fails to maintain its competitive advantage in the market and the adverse market condition wears down its operational efficiency, resulting in an erosion in retained earnings.
In a separate development, Fitch Ratings reiterated its ratings on MetLife and its subsidiaries. The affirmation included ratings assigned on the insurance subsidiaries covering life at 'AA-' Insurer Financial Strength (“IFS”) along with Issuer Default Rating (“IDR”) at 'A'. The outlook is stable.
The affirmation was based on the company’s continued strong financial performances. The rating agency noted that prevailing low interest rates continues to be a hindrance for the company as well as for the industry at large.
Nevertheless, the interest rate hedging program will help in reducing the adverse effect on earnings in the medium term. The rating agency expects return on equity in 2012 to improve to the 11%-12% range on the heels of improved earnings from International segment and moderate growth in U.S.
Apart from this, Fitch also assigned 'AA-' rating to MetLife Global Funding I and MetLife Institutional Funding II. It also assigned 'F1+' rating on MetLife Short Term Funding LLC.
Fitch believes that these rating actions will ensure the credit worthiness of the notes program and along with that even the legal structure of these agreements will be brought under the purview of revision.
Fitch stated it could consider further rating upgrades provided MetLife maintains the NAIC RBC ratio above 450%, debt-equity ratio remains lower than 25%, interest coverage ratio is in the band of 8x-10x and successfully integrate Alico.
The rating would be subject to downgrade if NAIC RBC ratio falls below 350%, debt- equity ratio more than 30% and interest coverage ratio goes below 5x.
Last week, Fitch also affirmed IDR and IFS on Prudential Financial Inc. (PRU), a close competitor of MetLife. The rating agency affirmed an IDR of “A-“and an IFS rating of “A+”.
We retain our long-term Neutral recommendation on MetLife. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis Report
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