Shares of MetLife, Inc. (MET) gained 5.4% immediately after a recent rating provided by Moody’s Investors Service, the credit rating wing of Moody’s Corporation (MCO). Although the shares pulled back 0.5% in the next trading session, overall gains since the rating was first announced were 4.9%. On Nov 7, 2013, Moody’s provided the 30-year fixed rate $1 billion senior unsecured notes of MetLife with an “A3” rating. The rating carried a negative outlook.
The rating came on the back of MetLife’s strong brand value, scale of distribution, operating leverage and financial strength. Further, an attractive product portfolio, which includes individual and group life insurance, annuities, accident and health, pension and other retirement products, acted in favor of the company.
Although the above debt issuance will elevate the financial leverage of the company, Moody’s believes that a reduction in the financial flexibility of the company will be offset in the long run by low borrowing costs.
In spite of the positives, Moody’s identifies certain snags like low interest rates, sluggish industry growth for individual life and exposure to legacy variable annuity guarantees and institutional spread and securities lending businesses that might affect profitability and the financial flexibility of the company.
Moody’s stated that a potential upgrade in the outlook of the ratings to stable on MetLife and its U.S. subsidiaries is likely on the fulfillment of certain criteria. These include a consistent return on capital of more than 8%, cash flow maintained above 4 times and earnings coverage maintained above 6 times. Maintaining the debt-to-capital ratio in the mid 20% range should also lead to a stable outlook.
On the other hand, a potential downgrade in the ratings is likely if cash flow and earnings coverage drop below 4 and 6 times, respectively, and securities lending and institutional funding agreement-backed issuances grow disproportionately compared to the holding company. Also, if the U.S. operations of MetLife incur a pre-tax gross investment loss of more than $1.25 billion over the next year and the NAIC RBC ratio sinks below 325%, a downgrade might take place.
Another credit rating agency, Fitch Ratings rated the senior debt of MetLife with an “A–” rating. The rating carried a stable outlook. The strong financial performance and balance sheet of MetLife led to the A– rating.
Strong ratings from credit rating agencies increase creditworthiness of a company in the market. We believe that MetLife’s present score with the credit rating agencies will help it write more business going forward.
MetLife currently carries a Zacks Rank #3 (Hold). Among others in the insurance space, Kemper Corporation (KMPR) and AXA Group (AXAHY) carry a favorable Zacks Rank #1 (Strong Buy) and appear impressive.
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