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The Misadventures of Moody's: Touting The Hartford, Mangling MetLife

Most analysts don't have the access to the company financial records that Moody's Investors Service, Standard & Poor's and Fitch do when they formulate their credit ratings. Theoretically that should make them smarter than the rest of us.

But only theoretically. Each of the three big rating agencies got a black eye from its failure to understand, predict or provide insight into the real estate market crash that led to the recession. While the raters narrowly missed increased federal regulation, insurance regulators went after them with a vengeance, and now use Pimco as their rating agency of choice on the $145 billion portfolio of residential mortgage-backed securities that insurers currently hold.

So one can only wonder about Moody's latest prognostication: downgrading the largest and arguably the healthiest U.S. life insurer, MetLife, by one notch to the fourth lowest credit rating.

Bloomberg News points out that New York-based MetLife is bracing for losses on its $50 billion in commercial real estate loans and mortgage-backed securities. But that's predictable, since commercial mortgages usually follow residential mortgages as the other shoe to drop. However, a company spokesman expects net after tax investment losses, excluding derivatives, to be less than 1 percent.

The phrase "excluding derivatives" is the key because derivatives are essentially the insurance that insurers buy to protect their own portfolio, and it helps to balance out the gains or losses in the underlying portfolio. In other words, if the underlying loans go down, the value of the derivatives goes up and vice versa. So a loss on derivatives isn't necessarily bad.

Conversely, Moody's affirmed The Hartford's credit ratings as "stable," an improvement from its earlier outlook of "developing" and a lot better than the "negative" opinion given earlier this year.

But The Hartford is one of the weakest insurers. It took a shellacking on variable annuities over the last year and was in such bad shape that it had to beg the government for its $3.4 billion TARP infusion. In contrast, MetLife refused to take TARP money, and an audit of the major U.S. financial firms found that it was among the healthiest.

BernsteinResearch analyst Suneet Kamath is a sharp cookie who understands insurance companies. In a research note he said that The Hartford's business model of combining life and property insurance "does not make sense," but that the insurer's debt load prevents it from selling the property side of the company.

The Hartford also has an untested CEO in Liam McGee, who only joined the company in October. He came from Bank of America, where he had virtually no insurance experience. But then the same could probably be said for Moody's.

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