Fitch Ratings has affirmed all existing ratings assigned to MetLife, Inc. (MetLife) and its subsidiaries, including the 'AA-' Insurer Financial Strength (IFS) ratings assigned to certain domestic life insurance companies and 'A' Issuer Default Rating (IDR) assigned to MetLife. The Rating Outlook for MetLife and its subsidiaries is Stable.
Key Rating Drivers
The affirmation of MetLife's ratings reflects Fitch's view that the company's strong balance sheet fundamentals, excellent financial flexibility, and very strong market positions in several major insurance products lines and 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 are 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 of 430% at year-end 2013. The company's domestic life insurance subsidiaries reported combined statutory net operating gain of approximately $2.7 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.
The company's financial leverage was approximately 25% at June 30, 2014, which is at the high end of Fitch's rating expectations. Financial leverage has declined from a recent high of approximately 30% in the third quarter of 2010, shortly before its acquisition of ALICO.
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, 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 the fourth quarter 2010. Fitch expects GAAP 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, albeit unexpected, scenario.
As the largest life insurer in the U.S based on total admitted assets, Fitch believes that it is highly likely that MetLife will be designated a systematically important financial institution (SIFI) by the Financial Stability Oversight Board (FSOC). Although the specifics of the enhanced supervision to which non-bank SIFIs will be subject have not been finalized, Fitch expects such a designation to be credit neutral.
Key rating drivers that could lead to an upgrade of MetLife's ratings include NAIC risk-based capital 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 risk-based capital ratio below 350%, financial leverage above 30%, and GAAP fixed charge coverage ratio below 5x.
Fitch affirms the following with a Stable Outlook:
- Long-term IDR at 'A';
- Short-term IDR at 'F1';
- 5% senior notes due 2015 at 'A-';
- 6.75% senior notes due 2016 at 'A-';
- 1.756% senior notes due 2017 at 'A-';
- 6.817% senior notes due 2018 at 'A-';
- 7.717% senior notes due 2019 at 'A-';
- 5.25% sterling senior notes due 2020 at 'A-';
- 4.75% senior notes due 2021 at 'A-';
- 3.048% senior notes due 2022 at 'A-';
- 4.368% senior notes due 2023 'A-';
- 5.375% senior notes due 2024 at 'A-';
- 3.6% senior notes due 2024 at 'A-';
- 6.5% senior notes due 2032 at 'A-';
- 6.375% senior notes due 2034 at 'A-';
- 5.7% senior notes due 2035 at 'A-';
- 5.875% senior notes due 2041 at 'A-';
- 4.125% senior notes due 2042 at 'A-';
- 4.875% senior notes due 2043 at 'A-';
- 6.4% junior subordinated debentures due December 2036 at 'BBB';
- 10.75% junior subordinated debentures due August 2039 at 'BBB';
- Floating-rate preferred stock, series A at 'BBB';
- Fixed-rate preferred stock series B at 'BBB';
- Commercial paper at 'F1'.
MetLife Funding, Inc.
- Commercial paper at 'F1+'.
MetLife Capital Trust IV
- 7.875% trust securities at 'BBB'.
MetLife Capital Trust X
- 9.25% trust securities at 'BBB'.
Metropolitan Life Insurance Company
- IFS at 'AA-';
- IDR at 'A+';
- Surplus notes at 'A';
- Short-term IDR at 'F1+'.
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