On Jan 31, we downgraded our recommendation on insurer giant – MetLife Inc. (MET - Analyst Report) to Underperform based on its faltering growth guidance for 2013 amid challenging interest rates and intense competition. The delay in submission of the refurbished capital plan to the Federal Reserve (Fed) also raises the risk of a ratings downgrade for this Zacks Rank #5 (Strong Sell) stock.
Why the downgrade?
Estimates for MetLife, which is a leading provider of insurance and financial services, have been exhibiting a downward trend ever since the company reported its third-quarter 2012 results on Oct 31. Although MetLife’s third quarter earnings per share of $1.32 beat the Zacks Consensus Estimate of $1.28, revenues of $16.61 billion fell short of the Zacks Consensus Estimate of $16.66 billion. Following this, on Dec 13, 2012, management projected negative to flat growth in earnings in 2013 over 2012. Even the fourth-quarter earnings estimate ranging from (4%) to 4% raises caution, on an annual basis.
MetLife’s plan to withhold share buybacks in 2013 increased the disappointment, given the inflationary pressure and an extended low interest rate scenario across economies. Consequently, the Zacks Consensus Estimate for 2012 has gone down 1.5% to $5.21 per share, over the last 90 days. The Zacks Consensus Estimate for 2013 has also declined significantly (down 5.7% to $5.23 per share). This further justifies the Zacks Rank on the company.
Cause for Concern
The current interest rate environment continues to put pressure on the spreads and MetLife’s risk-adjusted capitalization. The ratings agencies are also concerned about the high financial leverage as well as above-average exposure to variable annuities that are adversely affected by the current market volatility.
Moreover, MetLife missed three deadlines since Jun 2012 and failed to submit a refurbished capital plan to the Fed. Despite being adequately liquid, the company has not been able to return wealth to shareholders in its full capacity as its comprehensive capital plan has been rejected twice by the Fed based on the size and scale of its banking operations. Further, although MetLife has exited most of its banking operations, the ongoing regulatory challenges and the risk of being acknowledged as a systemically important financial institution could again put the company under the Fed’s supervision.
Other regulatory risks include financial services regulation, securities regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation in different countries. These factors create a stressful growth scenario and pose direct risks on the operating and competitive leverage of MetLife.
Other Insurers That Warrant a Look
While we prefer to avoid MetLife until we see signs of improvement in the markets as well as company's performance, other insurance stocks worth a look are Assured Guaranty Ltd. and Radian Group Inc. (RDN - Analyst Report) . Both the stocks carry a Zacks Rank #1 (Strong Buy). CNO Financial Group Inc. (CNO - Analyst Report) , which carries a Zacks Rank #2 (Buy) also appears impressive.