MetLife (MET) Ratings, Outlook Affirmed by Moody's Amid Pending Assets Spin-off
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Moody's Investors Service recently confirmed MetLife Inc.'s A3 rating and stable outlook subsequent to the company's plan to spin-off core assets and create a separate entity in an effort to reduce product risk and improve profitability and cash flow. Earnings are anticipated to be less volatile as a result of the spin-off, although overleveraging cash flows to appease shareholders could place pressure on the company's credit profile, the ratings agency says in a new report.
"At the current rating level, we expect that MetLife will maintain a maximum financial leverage (excluding accumulated other comprehensive income (AOCI)) of 30% or below, earnings coverage ratio and cash flow coverage ratio of at least 6x and 4x, respectively, and will manage share buybacks so as to leave operating companies with robust capital levels," author of the report and Moody's analyst Manoj Jethani says.
Post-separation, MetLife will relinquish its top market position as total assets and shareholders' equity shrinks to $703 billion and $61 billion compared to total assets of $943 billion and total shareholders' equity of $79 billion as of June 30, 2016.
However, the separation of the US retail business will reduce overall product risk owing to lower exposure to interest rate and equity market volatility stemming from products such as universal life with secondary guarantees and variable annuities with living benefits.
As MetLife's remaining retail segment runs off, profitability from this segment will continue to decline, but should produce solid cash flow which could be used to support the growth of other businesses, service holding company debt and/or fund dividends and share repurchases. Additionally, the companies is focused on growing the group segment and international business to make up for the lost profitability from US retail businesses.
Moody's also anticipates the company will arrive at and maintain a financial leverage (excluding AOCI) ratio of less than 30% by year-end 2017, and maintain earnings coverage ratio and cash flow coverage ratio of at least 6x and 4x, respectively.
"We believe a reduction in leverage will be achieved through a combination of paying off upcoming debt maturities and prudently managing share buybacks," according to Jethani.
The report, "MetLife, Inc.: Insurer Spins Off Core US Retail Business to Improve Cash Flow, Reduce Capital Volatility", is available to Moody's subscribers at
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