Credit analyst still recommends MetLife but notes sluggishness, risk

By Ronda Fears

Nashville, Tenn., Feb. 13 - MetLife (A1/A), with weak fourth quarter results and marred by the possibility that still more bad news may lie ahead despite the company's best efforts to focus attention on future growth opportunities, is still a good credit, according to Kathy Shanley, senior bond analyst at Gimme Credit. She said she still recommends MetLife but noted in a report Wednesday that sluggish growth and future risk will keep it from outperforming in the life insurance group.

MetLife reported Tuesday a net loss of $296 million in the latest quarter, a sharp reversal from the $591 million in income a year ago. Results include a slew of special charges, including a $250 million pretax charge set aside to settle allegations of race discrimination by black life insurance policyholders. Although debt levels are moderate and liquidity is ample, Shanley said MetLife is under increasing pressure to realize value for shareholders, and may not be through with one-time charges, given its significant exposure to asbestos-related litigation.

"Many of the special charges were preannounced in dribs and drabs over the past few months," related to restructuring, net realized investment losses as well as the Enron situation, Argentina, Shanley said. "Another legacy from the past that isn't going away is asbestos."

Although it was not a manufacturer or commercial insurer, MetLife is being sued because of allegations it did research, dating back to the 1920s through the 1950s, and learned or should have learned of the health risks of asbestos, the analyst said.

"The asbestos issue isn't new. MetLife took a $970 million charge to cover asbestos-related claims in 1998. It also bought excess insurance to limit its exposure. As of last year's 10-K, MetLife said the excess policies provide for recovery of losses up to $1.5 billion, after a $400 million self-insured retention," Shanley said.

"With the toll of asbestos-related bankruptcies mounting, MetLife concedes it is more likely defendants will look to it as a source of funds. In its third quarter 10-Q, the company suggests future charges to income may be necessary, which could be material. In its earnings conference call (Tuesday), MetLife declined to provide any color on the status of the asbestos claims filed against it, leaving investors to wait for the 2001 10-K for an update."

Shanley said she has recommended MetLife, and continues to see it as having significant financial flexibility. Leverage is moderate at about 25% debt to capital, including the convertible trust preferred stock as debt, she said. Since last fall's public debt offering, she noted that MetLife has cut its short-term debt to $355 million from over $1.0 billion at the end of 2000.

"Nevertheless, MetLife is taking longer than we once would have expected to boost its internal growth and is funneling a significant amount of cash into buybacks - $304 million this quarter; and $1.9 billion since April 2000. Even with the buyback activity, its share price performance over the past year has been unimpressive, suggesting there will be continued pressure to either continue aggressive buybacks or fund acquisitions," Shanley said.

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