Credit analyst sees MetLife ratings by Moody's vulnerable

By Ronda Fears

Nashville, Tenn., May 28 - Because of MetLife's aggressive growth plan, which is focused on international acquisitions like its latest in Mexico, Kathy Shanley, senior bond analyst at Gimme Credit, said the firm's credit ratings by Moody's are vulnerable to a downgrade.

On Friday, MetLife was the winning bidder in an auction to privatize Aseguradora Hidalgo SA, one of Mexico's top insurers, and will pay nearly $1 billion in cash to expand its presence in Mexico.

"MetLife (A1/A) wants to be a global player in life insurance. International markets currently account for only a small portion of its operating income, but MetLife hopes to jumpstart growth by expanding abroad," Shanley said in a report Tuesday.

"Life insurance premiums in Mexico were up 13% industry-wide last year, but competition is increasing. MetLife is assuming the added risk of taking over a formerly government-owned enterprise."

As in the banking sector, where Citigroup last year paid $12.5 billion for Banamex, the insurance sector in Mexico is attracting foreign investors. ING is already the largest insurance company in the Mexican market.

Shanley said she did not yet have a chance to review Hidalgo's financials but reportedly the purchase price is equal to 14.8 times its trailing earnings.

MetLife says the deal will be neutral to slightly accretive this year, and accretive to earnings in 2003. The company outbid two other contestants in the auction, which was organized by Salomon Smith Barney.

"It appears the competition enabled the Mexican government to command a favorable price," Shanley said.

"Hidalgo's franchise is unique, which may partly justify the premium price. It has about a 30% share of the life insurance market, with a focus on the government market, including group products sold to government entities and individual products sold through payroll deduction."

A recent report by Standard & Poor's on the Mexican insurance sector ranked Hidalgo as the top performer among rated insurers last year, based on return on average assets, return on average equity, return on revenues and net income to earned premiums, the analyst noted.

On a combined basis, MetLife's Mexican market share will rise to 15% from 4% currently. Domestically, MetLife is a large provider of life and long-term care insurance to the U.S. federal government, so the Hidalgo acquisition appears complementary, she said.

"Although it looks like a stellar performer, Hidalgo may not be able to sustain its current profitability," Shanley added, however.

"After 2004, it will no longer have an exclusive contract to provide insurance to government workers. We also wonder about how much due diligence MetLife has been able to conduct into Hidalgo's reserves and investment portfolio."

According to the S&P data, the analyst said, Hidalgo's investment yield over the past two years far outpaced the industry, with an 11.8% yield in 2001, nearly twice the 6.1% average for the industry.

"These results may be indicative of a superior investment performance, but we worry Hidalgo's investment strategy may be more aggressive than average," Shanley said.

MetLife retains significant financial flexibility, and suggests it will finance the Hidalgo purchase out of "cash on hand." At the end of first quarter, leverage including trust preferred stock as debt, remained at about the 25% level.

Even including Hidalgo, international operations will account for a relatively small portion of MetLife's earnings. International accounted for under 4% of first quarter operating earnings, she noted.

"MetLife's recent share price performance has been unimpressive, suggesting the company will be reluctant to scale back its share repurchase program," Shanley said, noting that the company's buybacks totaled $240 million in first quarter.

"We already reduced our view of MetLife to mid single-A and see the Moody's senior debt rating as vulnerable."

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