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Is ALICO MetLife's Oxygen?

MET AIG

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Yesterday, Standards & Poor’s Ratings (S&P) assigned the credit ratings to MetLife Inc.’s (MET - Analyst Report) subsidiary – American Life Insurance Co. (ALICO), which highlighted its strong capital and debt profile. MetLife had acquired ALICO from American International Group Inc. (AIG - Analyst Report) in November 2010.

MetLife Flies on ALICO Japan Wing

S&P rendered a long-term financial strength rating (FSR) of “A+” on MetLife ALICO’s Japan wing, along with a short-term counterparty credit rating of “A-1.” The outlook for ALICO remains positive.

S&P acknowledges the strong credibility of MetLife’s ALICO as an entity, which holds a firm grip on the Asian markets, particularly in Japan. Armed with strong distribution network and a diversified product portfolio, ALICO enjoys an exceptional competitive leverage. Besides, ALICO’s sufficient capital flexibility blends well with its relative earnings potential despite having low-risk products in its portfolio basket.

Hence, S&P believes that upon successful integration of MetLife ALICO Japan, which is scheduled to commence operations on April 2 this year, this unit should enhance MetLife’s overall fundamental growth profile and its long-term growth strategy of international expansion. MetLife’s capital capability also keeps the rating agency optimistic about the smooth integration of ALICO Japan by the end of May 2012.

Weak Capitalization a Bane

However, S&P continues to assert its FSR of “AA-” on MetLife with a negative outlook given its weak capitalization.The current interest rate environment may continue to exert pressure on the spreads and the company’s risk-adjusted capitalization, which stands lower compared to its current rating level.

Although MetLife witnessed a vast improvement in its cash reserves and debt leverage in 2011, nominal statutory earnings restrict the fund required for long-term growth. The company’s higher-than-expected earnings in 2011 also came from derivative gains, reflecting the need to bolster steps to drive core fundamental growth and operating leverage.

Unaffected by Stress Test

Ratings agencies have remained unmoved by the latest capital stress test result in the US, wherein MetLife could not make it to the finishing line and flunked. Although the company had excess capital worth $3.5 billion at 2011-end, which is expected to grow to $6–7 billion by the end of 2012, the Fed remains cautious about MetLife based on its bank holding status.

Going ahead, MetLife is consistently and vigorously working toward its plan of shedding the banking status by the end of the second quarter of 2012. In a bid to achieve this, the company has already exited the forward mortgage business of MetLife Bank, while the sale of its depository and warehouse finance businesses are also on the cards.

As a result, last week ratings agency A.M. Best also affirmed its debt ratings along with the issuer credit rating (ICR) of “a-.” Meanwhile, MetLife’s life and health insurance subsidiaries’ ICR and FSR has been avowed at “aa-” and “A+” with a stable outlook. This reflects the company’s consistent growth from ALICO amid the low-rate interest environment.

Given the pros and cons, we reinstate a Neutral long-term stance on the stock with a Zacks Rank #3, which also implies a short-term Hold rating.

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