MetLife Ratings Review May Have "Material Adverse Impact"

Oh boy, MetLife has just put a huge bull’s eye on itself saying “We cannot afford to be downgraded!”

While the role of evil shorts in driving down financial company price is overdone (many firms’ shares should be trading at lousy levels, given the terrible outlook for earnings and dividends), this announcement will lead the stock to fall regardless. And perversely, low share prices increase the odds of a downgrade, since the rating agencies come to doubt the ability of the company to raise new equity on reasonable terms.

From Bloomberg (hat tip reader Steve):

MetLife Inc., the biggest U.S. life insurer, said a “major” credit-rating firm will conduct a review in the fourth quarter that may have “a material adverse effect” on results and the company’s financial condition.

“The difficulties experienced recently by many financial institutions, including our competitors in the insurance industry,” may prompt ratings companies to “heighten the level of scrutiny” for their reviews, New York-based MetLife said today in a regulatory filing.

Life insurance stocks have been pummeled in the last two weeks and Fitch Ratings lowered the industry’s outlook on concern that investment losses could erode capital. MetLife, which has dropped 46 percent this month, sold $2 billion in stock on Oct. 8 after reporting a third-quarter profit slide and a $7 billion increase in unrealized losses.

Rating firms, including Standard & Poor’s, Moody’s Investors Service, A.M. Best Co. and Fitch may increase the capital required to maintain credit grades, MetLife said. It didn’t identify which firm will do the review.

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  1. bg

    Banks, Investment Banks, and Insurance companies still going down daily. How many companies are left in XLF? Are any worth anything?.

    When the government starts buying prefered shares in these companies, what valuations will they give these companies. Will their common be worth zero? Can the government afford to care?

    Lets hope we wake up Monday with all the global financials nationalized, and XLF down 90%+. With our legs amputated, we can at least get running again.

  2. River

    AIG was/is into CDS. Sounds benign, since AIG is an insurer and credit default swaps are insurance, but insurance without reserve reqirements. The word ‘swaps’ was substituted for ‘insurance’ to avoid state regulation of insurance instruments. It is possible that MetLife also dabbled in CDS.

    MetLife certainly has something to hide or they would not have disclosed that any sort of problem exists.

  3. Anonymous

    Life insurance companies also have significant equity-linked exposures under the income and death benefit guarantees contained in their variable annuity (VA) contracts, particularly where the VA contract holders have chosen to make equity investments under their contracts. For example, many VA contracts have “high water mark” death benefit formulas so that upon the contract holder’s death the insurer must pay out the greatest of (i) the actual contract value at the date of death, or (ii) the highest contract value on any prior contract anniversary, or (iii) the amount of the holder’s original investment escalated at a fixed annual rate, such as 6%.

    During the post 9/11 market slump these death benefit formulas resulted in hundreds of millions of losses. The situation is likely much worse now because of the magnitude of the slump and the larger volumne of outstanding VA contracts.

  4. Let It Sink

    Warning, regulators and ratings agencies may look at our BS numbers and worthless collateral. This may negatively impact the odds of our survival. Also, any or all of our executive team could be thrown in jail for it’s fraudulent and incompetent management.

  5. David Merkel

    Material Adverse Effect in this case may be inability to write GICs and other ratings-sensitive business. There shouldn't be much in the way of ratings triggers given the way the business is done today, leaving aside increased collateral on ISDA agreements.

    Now, other bits of damage — even investment grade corporates are under threat in a depression. VA and VL fees decline, leading to a writedown in DAC.

    There should not be a solvency threat, as statutory accounting holds bonds at amortized cost unless there is a default.

    I did not think it would get this bad. If the life insurers are under threat, we are in deep trouble. The only thing worse would be if P&C insurers, which run with more underwriting risk and less asset risk, were in trouble.

    I have over 20 years of experience with life insurance…this is the worst I have seen it, and the life insurers came into this crisis with good balance sheets compared to 1988-2002.

    The State Guaranty funds stand behind all policies in a crisis, however, remember that they do so by surcharging the healthy companies in the next year.

  6. Matt Dubuque

    In its own way, this story about Met Life is every bit as important as AIG.

    It just will play out along somewhat different trajectories.

    But it is very near the top of the list of key stories from last week.

    The problem here is NOT so much that they INVESTED in derivatives using hyperleveraging.

    It is MUCH more important that they were major MARKET MAKERS in those same derviatives.

    Remember, there is no centralized clearing house for swaps, be they equity swaps, commodity swaps, currency swaps, sovereign swaps or credit default swaps. That’s what Corrigan is working on and we should have our first clearinghouse open in a few weeks.

    But the problem here is that everyone has their eye on credit defaults swaps. I guess that seems understandable.

    But credit default swaps are only a SMALL portion (around 33%) of the total swap market, ALL of which are coming under increasing pressure in the last six weeks.

    Matt Dubuque

  7. Jojo

    rbm411 said…What would happen to all of the people that have Met Life annuities in their if they failed?

    Similarly, AIG, MetLife and others write health, life and auto insurance policies. What happened to these policies when AIG got taken over by the government? How do renewals work? What will happen with MetLife or others?

    Seems to me there may be additional unknown/unintended consequences.

  8. tompain

    The question for MET shareholders is what the company’s response to a downgrade will be. Hopefully the managers of these companies will have learned from watching the monoline experience, but they probably won’t. They will dilute the crap out of their current shareholders in a desperate attempt to keep writing new business. Shareholders should at least hope that any capital raised is raised via rights offerings rather than dilutive sale to some sovereign wealth fund or warren buffett, whose money is no greener than that of existing shareholders.

  9. Anonymous

    Book of $42.
    When I went from mutal to stock owership, policyholders got stock in metlife. Basis is about $15.

    “Met Life could well take some lumps in the short term from the extreme volatility in markets. But its investment portfolio, valued at $329 billion, is widely viewed as conservatively positioned. It’s made up largely of plain-vanilla fixed-income instruments, with little to no exposure in riskier areas such as collateralized debt obligations. The company has previously disclosed exposure to AIG debt and Lehman Brothers debt of about $800 million, which is viewed as a very manageable level relative to the total investment portfolio

    Howie and anon

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