Credit analyst: MetLife is a strong credit, but problems hold it back

By Ronda Fears

Nashville, Tenn., Sept. 3 - MetLife Inc. is a solid credit but there are too many problems that will keep it from outperforming its peers in the insurance group, said Kathy Shanley, senior bond analyst at Gimme Credit.

MetLifeLife (A2/A) announced last week its subsidiary, Metropolitan Life Insurance Co., had reached a proposed settlement in a class action lawsuit covering race-based underwriting of life insurance policies issued between 1901 and 1972.

"Problems of more recent vintage include deteriorating corporate credit quality and the weak equity markets," Shanley said in a report Tuesday.

In the second quarter, MetLife had $215 million in pretax realized losses related to WorldCom and wrote down a total of $250 million in fixed maturity securities.

"On average, the credit quality of the bond portfolio is strong, with two-thirds rated single-A or better, and 91% investment-grade rated," the analyst said.

"But we wouldn't rule out more investment losses. MetLife already disclosed over $300 million in unrealized losses on bonds where the fair value has dropped below cost for six months.

"MetLife is less exposed to the equity markets than some insurers, but it recently cut its earnings guidance modestly, warning weak capital markets would mean lower gains on equity partnerships and higher amortization of deferred policy acquisition costs tied to variable life and annuity products."

On the positive side, she said, MetLife's leverage remains conservative, with a 17% debt-to-capital ratio, 23% including the convertibles.

MetLife completed the recently-announced purchase of Mexican insurer Aseguradora Hidalgo at the end of June, the analyst noted, covering the $950 million purchase price by drawing down existing cash.

Buybacks continue at an aggressive pace, she added, with $2.4 billion added to treasury stock since mid-2000, including over $400 million in activity in the first half of 2002.

"In its last earnings call, MetLife emphasized the importance of its credit ratings and said it will maintain strong capital at its life companies, but the company also remains under pressure to deliver shareholder value," Shanley said.

"We consider MetLife a mid-A, but we don't view this credit as likely to outperform other insurance sector names over the near-term."

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