Fitch Affirms MetLife, Inc. and Most Subsidiaries
Today's rating actions follow Fitch's review of MetLife's operating performance through first - half 2016 (1H16) and reflect ongoing developments around the company's pending separation of a large portion of its U. S. Retail segment. In connection with the separation, it is expected that NELIC and MetLife USA will be the rated entities separated from MetLife and included in the new stand-alone organization, which has been named Brighthouse Financial, Inc. (Brighthouse Financial). When the separation was originally announced, GALIC was expected to join MetLife USA within Brighthouse Financial.
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 product lines and markets in the U. S. and select international markets remain consistent with rating expectations. Fitch believes that the company's large scale and very strong brand name will continue to provide the company with significant competitive advantages. Fitch views the pending separation of the Brighthouse Financial-related businesses as neutral to MetLife's ratings based on our view that any decline in diversification of MetLife as a result of the separation will largely be mitigated by the lower risk profile of the businesses remaining within MetLife.
The ratings also consider MetLife's above-average investment risk, lower operating profitability in recent quarters and continued macroeconomic challenges associated with the ongoing low interest rate environment. Fitch views the uncertainty around MetLife's ultimate status relative to a potential non-bank systemically important financial institution (SIFI) designation to be credit neutral.
The Rating Watch Negative status of the entities that are expected to be separated reflects Fitch's view that the operating risk profile of Brighthouse Financial is more exposed to capital market volatility and interest rate risk due to its business concentration in variable annuity and universal life with secondary guarantee businesses.
Existing ratings assigned to MetLife USA and NELIC benefit from the broad diversification and scale of the MetLife enterprise, which includes very strong competitive positions in group, voluntary and worksite; corporate benefit funding; and international insurance. Accordingly, it is likely that the ultimate ratings of the separated entities will be lower than the current ratings by one or two notches depending on whether or not the higher operating risk profile is sufficiently mitigated via extremely strong capitalization or other methods for which details are not yet available. Fitch expects to resolve the Rating Watch status of these entities upon finalization of the form of separation and further solidification of the capitalization and structure of Brighthouse Financial.
MetLife's strong balance sheet fundamentals reflect the company's solid risk-adjusted capitalization and favorable liquidity profile. Fitch considers the statutory capitalization of MetLife's U. S. and Japanese insurance operations to be strong and in line with rating expectations. The company's domestic life insurance subsidiaries (excluding American Life Insurance Company) reported combined statutory total adjusted capital of approximately $26.8 billion at year-end 2015, which resulted in consolidated risk-based capital (RBC) of 505%. Although the company does not provide intra-year RBC estimates, the company's domestic life insurance subsidiaries reported combined statutory net operating gain of approximately $1.3 billion in 1H16 and an increase of approximately $1.9 billion in total adjusted capital.
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 of 870% at the end of first quarter 2016, which is above both rating expectations and levels achieved by most Japanese peers.
The company's financial leverage was slightly below 25% at June 30, 2016, down from approximately 27% at yearend 2015, and within Fitch's expectations for the company's current ratings. Financial leverage benefited from the maturity of $1.25 billion of senior notes in June 2016.
Fitch views MetLife's operating profitability to be fundamentally sound, but notes ongoing pressure from low interest rates coupled with recent less favorable underwriting results. Reported operating income for first half 2016 was significantly affected by the outcome of the company's variable annuity actuarial assumption review, which was accelerated into the second quarter in 2016 from the typical third quarter timing in preparation for the pending separation of the Brighthouse Financial businesses. Second quarter operating earnings were also adversely affected by reserve increases driven by modeling improvements. DAC unlocking associated with the VA actuarial assumption review reduced reported operating earnings by $161 million, and the modeling improvements reduced reported operating earnings by $257 million.
Fitch considers MetLife's GAAP interest coverage to be somewhat below expectations for its current rating category, reflecting lower earnings pressure noted above. Fitch expects MetLife's GAAP fixed charge coverage ratio to recover somewhat from the 5.5x level achieved in 1H16
To a level between 7.0x and 7.5x for full-year 2016.
For two subsidiaries on Rating Watch Negative:
Fitch may downgrade ratings upon application of criteria for non-core entities as mentioned above or upon further announcements by the company of strategic plans.
For MetLife and remaining subsidiaries:
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%, run-rate ROE below 10%, and GAAP fixed charge coverage ratio below 5x.
FULL LIST OF RATING ACTIONS
Fitch places the following rating on Rating Watch Negative:
New England Life Insurance Company
--Insurer Financial Strength (IFS) 'AA-'.
Fitch removes from Rating Watch Negative and affirms the following rating with a stable outlook:
General American Life Insurance Company
--Insurer Financial Strength (IFS) 'AA-'.
Fitch maintains the following rating on Rating Watch Negative:
MetLife Insurance Company USA
--Insurer Financial Strength (IFS) 'AA-'.
Fitch affirms the following ratings with a Stable Outlook:
--Long-Term IDR at 'A';
--Short-Term IDR at 'F1';
--1.756% senior notes due 2017 at 'A-';
--1.903% senior notes due 2017 '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-';
--3.0% senior notes due 2025 at 'A-';
--3.6% senior notes due 2025 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-';
--4.05% senior notes due 2045 at 'A-';
--4.6% senior notes due 2046 at 'A-';
--6.4% junior subordinated debentures due December 2036 at 'BBB';
--10.75% junior subordinated debentures due August 2039 at 'BBB';
--4.721% senior notes due 2044 at 'A-';
--Floating-rate non-cumulative preferred stock, series A at 'BBB';
--5.25% fixed-to-floating rate non-cumulative preferred stock, series C 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-';
-- Long-Term IDR at 'A+';
--Surplus notes at 'A';
--Short-Term IDR at 'F1+'.
Metropolitan Life Global Funding I
--Medium-term note program at 'AA-'.
MetLife Short Term Funding LLC
--Commercial paper program at 'F1+'.