MetLife: No Longer Bankruptcy Candidate Material

We looked at MetLife (MET) last week as a potential short candidate. While there are certain observations (see below) on a negative side for the company, it is not in dire straights and is definitely not bankruptcy candidate material - although it is not a company that I would be willing to put my money in at this time. Following are some of our cursory observations:

Negatives

• The company’s risk primarily emanates off the investments in fixed maturity and equity securities which account for about 44.4% of the total assets. The portfolio primarily comprises of fixed maturity US corporate securities (31%) and RMBS (22%) and foreign corporate securities (15.3%) and CMBS (7.5%). Almost all of the securities have been categorized as level 2 assets, accounting for 86.4% with level 3 and level 1 standing at 10.3% and 3.3%, respectively.
• The company’s investment in RMBS stand at 9.8% of the total assets or 167.5% of the total shareholder’s equity while the investment in CMBS stand at 3.3% of the total assets and 56.6% of the total shareholders' equity.
• The accumulated unrealized losses relating to fixed maturity and equity securities rose to 12.2% of the total shareholder’s equity as of June 2008 against 1.5% and negative 9.8% as of March, 2008 and December, 2007. The spurt primarily came from US corporate securities, RMBS and CMBS in which the unrealized losses as % of total amortized value rose to 3.6%, 1.9% and 4.2%, respectively  as of June 2008 against 2.6%, 0.9% and 2.9%, respectively as of March 2008.
• The company’s exposure to credit default swaps entails a maximum possible loss (assuming the value of the underlying credits becomes worthless) of $1.9 billion which is about 5.8% of the total shareholder’s equity.
• The company is also facing operating margin pressures with margins falling to 12.4% and 9.3% in the second and first quarter of 2008 against 14.8% and 13.8%, last year.
• The company’s investment in unconsolidated VIE entail a maximum loss of $2.8 billion, representing 8.7% of its total equity. (50% of the maximum exposure is represented by asset backed securitization and collateralized debt obligations.

Positives

We believe that the company stands in a better position to withstand the current financial crisis relative to its nearest competitors. A key point to note is that the company’s exposure to CDS (unlike AIG (AIG) which had more than 400% exposure of its equity) is only 5% to its equity, and the preliminary valuation doesn’t represent an outsized fundamental downside from the current price level.

Key observations:

1. With $14 billion in cash, MetLife is not dependent on short-term funding. Also, the company has a huge amount available under its long-term facilities with only 10% of total debt amount payable in the next three years. ($458 million in 2008, $536 million in 2009, $285 million in 2010, $966 million in 2011, $471 million in 2012 and $6,912 million thereafter.)
2. Based on preliminary valuation exercise conducted using consensus estimates, MetLife’s valuation doesn’t suggest a significant downside from the current price levels (only 5% downside from the current level of $44.32 per share).
3. Although the company’s investment in RMBS stands at 9.8% of the total assets or 167.5% of the total shareholder’s equity, more than 90% of these securities were rated Aaa/AAA by Moody’s, S&P or Fitch as of Dec 31, 2007. These ratings may have changed subsequently in favor of lower grade but it is something that is difficult to substantiate in view of limited disclosure in the latest 10Q. This is something that may come back to bite.
4. The company’s exposure to AIG debt and Lehman Brothers debt is about $800 million, which seems very manageable level relative to the total investment portfolio.
5. MetLife’s CDS exposure stands at 5.8% of the total shareholder’s equity against 10.4% and 493.6% for Hartford and AIG, respectively.
6. In terms of quality of investment portfolio as reflected by the credit ratings and unrealized losses as % of amortized cost of investment portfolio, MetLife stands in a better position relative to its peers. The percentage of total investment portfolio invested in below investment grade is 6.5% against 31.7%, 18.0% and 6.3% for Hartford (HIG), AIG and Prudential (PRU). Further, the unrealized losses as % of amortized cost of investment portfolio is 1.6% against 5.2%, 2.4% and 1.3% for Hartford, AIG and Prudential.
7. In terms of operational performance, MetLife has delivered relatively better growth and margins:
   1. MetLife’s trailing twelve months revenue growth in the last reported quarter grew 4.1% while peers like Hartford, AIG and Prudential recorded a decline of 30.1%, 32.1% and 5.5%, respectively.
   2. MetLife’s underwriting costs as percentage of revenues on trailing twelve months basis stood at 19.0% against 32.1%, 32.3% and 23.1% for Hartford, AIG and Prudential, respectively.
8. MetLife also seems to have relatively comfortable leverage levels. MetLife’s leverage ratio (total assets to total shareholder’s equity) stands at 17.1 versus 19.8, 11.8 and 22.0 for Hartford, AIG and Prudential, respectively.

Comments

[Mathman Pro...:]

I'd put Prudential on a very safe list, these guys have a very low risk profile. You didn't mention Genworth (GNW), but I'd keep on eye on them. But I suppose the market value on Genworth has already reflected this outlook.

2008 Oct 08 09:08 AM

[JOHNKM:]

Mr. Middleton: You state the current price of MET is $44.32 per shr - Your post was this mornig but yesterday's close was$36.81 ?? -- Today it closed at $27.00 -- Where are you getting your numbers - $44.32 to $27.00 says there is much more to this story

2008 Oct 08 05:14 PM

[Reggie Midd...:]

The post was a couple of days ago for my site's research subscribers. SA's post was this morning, not mine. I do not post directly to SA, it is an aggregation service. My content will probably lag at least a day or two if viewed here.

MET has had extreme price movement, but we shoot for home runs over at BoomBustBlog, ex. Bear Stearns, Goldman, Morgan Stanley, Lehman, GGP, Countrywide, WaMu, etc. We are looking for potential bankruptcies and fraud to short. Met would have been a strong short two weeks ago, but I was late to the party and there are plenty weaker companies to go after at this point.

I invite you over to the blog to peruse the track record and methodology. I am sure you will be impressed.

2008 Oct 08 07:23 PM

[orangequant:]

Mr. Middleton, in my opinion you're an admirably thorough academic trader-- i really enjoy your analyses... would you now consider MET a strong short candidate? thanks.

Feb 21 01:39 AM