Recently, Reuters reported that MetLife Inc. (MET) has vended senior unsecured notes worth $750 million. The notes bear an interest rate of 4.125% and are scheduled to mature in February 15, 2042.
MetLife expects to utilize the funds raised from the issuance of these notes for business operations and to retire senior notes worth $750 million that are due to mature in August and November of 2013.
Additionally, the 30-year notes carry a rating of “a3” from Moody’s Investor Service of Moody’s Corp. (MCO) and “A-” from A.M. Best Co., Fitch Ratings and Standards & Poor’s (S&P). The outlook for all ratings remains stable.
Rating Agencies Approve New Debt
Earlier in May this year, S&P had upgraded its outlook on MetLife’s debt to stable from negative, while affirming all the long-term counterparty credit ratings of the company and its operating subsidiaries. The rating agency also upgraded the ratings of MetLife’s American Life Insurance Co.(ALICO) in Asia, which was acquired from American International Group Inc. (AIG) in November 2010. In the same month, Fitch had also affirmed its rating on the company.
The ratings from all these agencies validate MetLife’s solid earnings growth and escalated its operational scale on the heels of exceptional operating performance from its diversified business basket and brand appreciation. Moreover, efficient management of the company’s investment portfolio and enterprise risk has helped it secure competitive advantage in the market.
Despite the lingering concerns regarding the low interest rate and economic volatility, MetLife has been successfully maintaining acceptable risk-based adjusted capital (RBC) ratios. Further, the latest notes sale is not expected to hamper the financial leverage that stood at 27% at the end of June 2012, which is still higher given the lower capital in 2012 compared with 2011, primarily led by alterations in DAC accounting standards this year. Conversely, the debt leverage is expected to improve to about 24% by the end of 2013, when MetLife will have paid off the debts that are scheduled to mature next year.
Additionally, S&P anticipates MetLife to produce net retained earnings of about $3.9 billion and $4.2 billion in 2012 and 2013, respectively. This estimate includes the remarketing and settlement of equity units worth $1 billion, in both 2012 and 2013. The rating agency estimates EBITDA in the band of $9-10 billion with EBITDA fixed-charge coverage of 6.5x to 7x.
Meanwhile, Fitch elucidated the possibility of a rating upgrade provided MetLife maintains the NAIC RBC ratio above 450%, debt-equity ratio lower than 25%, interest coverage ratio is in the band of 8x-10x and successfully integrate ALICO.
On the flip side, the ratings could be downgraded if NAIC RBC ratio falls below 350%, debt-equity ratio more than 30% and interest coverage ratio dips below 5x in future.
Earnings Recap
MetLife reported second-quarter 2012 operating earnings per share of $1.33, smoothly outpacing both the Zacks Consensus Estimate of $1.25 and year-ago quarter’s earnings of $1.13. Operating earnings escalated 18% year over year to $1.43 billion. Total operating revenue for the reported quarter edged up 1% year over year to $16.79 billion and also exceeded the Zacks Consensus Estimate of $16.54 billion.
The upbeat results were primarily due to a robust earnings growth across U.S., Asia and EMEA along with improved underwriting results, higher net investment income, higher-than-expected derivative gains as well as lower-than-expected operating expenses. This was partially offset by lower-than-expected top-line growth across the U.S. and EMEA, particularly led by low premiums’ growth and continued underperformance from variable annuities as well as low interest rate environment.
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.
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