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MetLife's Lowered Ratings Could Increase Acquisition Costs

Source: WSJ

Posted on 02 Feb 2010

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A ratings agency downgrade of MetLife Inc. could potentially raise the insurer's cost of funding as it considers acquisitions to build its business.

Fitch Ratings cut MetLife's issuer default rating by one notch, to A from A+, Monday on concern "regarding the cumulative impact of adverse financial markets and the economic downturn over the past year on MetLife's capital, earnings, and liquidity," the report said. MetLife's "above average" exposure to commercial real estate-related assets is another concern, Fitch said.

The downturn in the commercial real estate market is expected to create more losses for life insurers, who invest in commercial mortgage-backed securities, own real estate directly and make direct commercial mortgage loans. Based on its stress-testing of MetLife's investment portfolio, Fitch projected that MetLife could have further investment gross losses in the $2.2 billion to $2.6 billion range for the fourth quarter of 2009 and full year 2010.

The downgrade comes as MetLife is reportedly in final negotiations with American International Group Inc. (AIG) to buy international life insurance unit American Life Insurance Co. or Alico, for a price of $14 billion to $15 billion, according to a recent report in the Wall Street Journal.

In recent conference calls, MetLife executives have said they are open to doing big acquisitions and there are deals available in the market. The company would likely use some external financing for big acquisitions, MetLife has said.

Although many factors come into play for financing an acquisition, a lowered rating doesn't help.

"All else being equal, lower ratings will generally translate to a higher cost of funding," said Douglas A. Meyer of Fitch.

The downgrade comes one day before MetLife is due to report fourth quarter earnings, but the report was not timed to coincide with the earnings release, Meyer said.

"While we're pleased that our insurance financial strength rating now has a stable outlook, we disagree with Fitch's downgrade," said Metlife spokesman John Calagna, via email. "However, we recognize that its decision is in line with actions the rating agency has taken across the industry."

In December, Moody's Investors Service lowered MetLife's senior debt rating to A3 from A2 and the insurance financial strength ratings of its subsidiaries, including Metropolitan Life Insurance Co., to Aa3 from Aa2.