CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to MetLife, Inc.'s (MetLife) $1 billion senior unsecured debentures as follows:
--$500 million of 1.903% Series E senior component debentures tranche 1 due 2017;
--$500 million of 4.721% Series E senior component debentures tranche 2 due 2044.
MetLife will remarket $999,848,000 of the debentures ($499,924,000 of each tranche), with holders of $76,000 of each tranche electing not to participate in the remarketing.
Fitch affirmed all of MetLife's existing ratings on Aug. 11, 2014 with a Stable Rating Outlook.
KEY RATING DRIVERS
The offering represents the scheduled remarketing of the Series E senior debt associated with the outstanding common equity units issued by MetLife in November 2010 as part of the financing of the acquisition of American Life Insurance Company and Delaware American Life Insurance Company (collectively, ALICO). Proceeds of the remarketing will be used by the holders of the common equity units to settle stock purchase contracts associated with the units.
Fitch expects the $1 billion of net proceeds realized by MetLife upon the settlement of the stock purchase contracts to be used for general corporate purposes. Fitch's view of MetLife's financial leverage is not affected by this transaction. The company's financial leverage ratio was 26% as of June 30, 2014. Financial leverage has declined from a recent high of approximately 30% in the third quarter of 2010 (3Q'10), shortly before its acquisition of ALICO.
MetLife's ratings reflect Fitch's view that the company's strong balance sheet fundamentals, excellent financial flexibility, and very strong market positions in several major insurance product lines, markets in the U.S. and select international markets, are consistent with rating expectations. Fitch believes that the company's large-scale, very strong brand name, and large and diverse distribution capabilities provide significant competitive advantages.
Fitch's primary rating concerns include MetLife's above-average, albeit moderating exposure to the variable annuity business, above-average investment risk, and macroeconomic challenges associated with the ongoing low interest rate environment.
MetLife's strong balance sheet fundamentals reflect the company's strong risk-adjusted capitalization and favorable liquidity profile. Fitch notes that the statutory capitalization of MetLife's U.S. and Japanese insurance operations is considered strong and in line with rating expectations. The company's domestic life insurance subsidiaries (excluding ALICO) reported combined statutory total adjusted capital of approximately $24 billion and risk-based capital (RBC) of 430% at year-end 2013. The company's domestic life insurance subsidiaries reported a combined statutory net operating gain of approximately $2.6 billion in 2013.
MetLife's Japanese insurance subsidiary represents the company's largest insurance business outside the U.S. The Japanese subsidiary reported a statutory solvency margin ratio significantly above 800% at year-end 2013, which is above both rating expectations and levels achieved by most Japanese peers.
MetLife's GAAP interest coverage has improved significantly over the past five years due primarily to solid growth in operating earnings. Interest expense has also been slowly declining since 2011. Fitch expects MetLife's GAAP fixed charge coverage ratio to be between 7x and 8x for full-year 2014 on a normalized basis on fairly stable earnings performance.
Despite the ongoing low interest rate environment, MetLife has experienced significant improvement in operating earnings. Earnings have been bolstered in part by growing asset-based fees driven by attractive capital market performance, relatively stable interest margins, which have benefited from active management of crediting rates and interest rate hedges, as well as international acquisition activity, particularly its acquisition of ALICO in 4Q'10. Fitch expects GAAP return on equity (ROE) to remain in the area of 12% in 2014 as continued growth in fee income and solid earnings from International operations are at least partially offset by pressure from low interest rates.
MetLife's equity market exposure is primarily attributable to its investment in alternative investments and the large, albeit declining, size of its variable annuity business. Fitch notes that the company's variable annuity hedging program is robust and did perform well during the financial crisis. However, the hedging of variable annuity risk requires the company to make policyholder behavior assumptions that may prove inaccurate. Deviations from pricing and hedging assumptions could have a material negative impact on MetLife's capital and earnings in a severe but unexpected scenario.
On Sept. 4, 2014, the Financial Stability Oversight Board (FSOC) announced that it had voted to preliminarily designate MetLife a non-bank systematically important financial institution (SIFI), which could result in more stringent oversight by the Federal Reserve. Although the specifics of the enhanced supervision to which non-bank SIFIs will be subject have not been finalized, it is likely that it will include higher capital requirements. MetLife has 30 days following the announcement to request a hearing to contest the decision before it becomes final, and Fitch believes that the company will do so. Fitch expects such a designation to be credit neutral.
Key rating drivers that could lead to an upgrade of MetLife's ratings include NAIC RBC ratio above 450%, financial leverage below 25%, and GAAP fixed charge coverage ratio above 9x.
Key rating drivers that could lead to a downgrade of MetLife's ratings include NAIC RBC ratio below 350%, financial leverage above 30%, and GAAP fixed charge coverage ratio below 5x.
Fitch has assigned the following ratings:
--1.903% Series E senior component debentures due 2017 'A-';
--4.721% Series E senior component debentures due 2044 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology