大都會人壽保險 (MET) 2002 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the MetLife second-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded.

Before we get started, I would like to read the following statement on behalf of MetLife.

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results, the markets for its products and the future development of its business.

MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described in MetLife's, Incorporated's filings with the SEC, including its S-1 and S-3 registration statements. MetLife, Incorporated specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

With that, I'd like to turn the call over to Kevin Helmantoller [phonetic], head of investor relations. Sir, you may begin

Thank you, and good morning. Welcome come MetLife's second-quarter earnings conference call. As you have noticed, to communicate with you more effectively, we have changed our release and call process to give you more time to review our press release and detailed financial supplement prior to our actual call. Further, we plan to end this call promptly at 9:00 a.m. so that you can analyze the information and communicate with your clients outside of normal trading hours. We have also eliminated the concept of adjusted operating earnings per share in our - these documents and discussions. This will be our practice from this quarter forward in our press releases, quarterly financial supplements and public filings. As you know, operating earnings is a non-GAAP performance measure. The company believes that such operating information aids in the analysis of its results of operations, and uses these measures in managing its business and evaluating its results.

A reconciliation of GAAP net income to operating earnings is included within our reports on file with the SEC and in our quarterly financial supplement. Operating earnings excludes net realized investment gains and losses and the cumulative impact of accounting changes. Any other significant unusual items [inaudible] will be identified in the text of our release and in our comments on the call. Both the QFS and our public filings may be accessed through the company's website.

With that, I will now turn the call over to Bob Benmosche, our chairman and CEO.

Good morning and thanks, Kevin and the key is to get right to the Q and A, but I do want to say that we are very pleased with this quarter's performance and it is fairly consistent with what our plan was as we reported to you in December and also at the time of the IPO. We have a very clear plan, we have a very clear focus, and we continue to execute that plan and you'll see those results in our key segments that were reported this quarter.

There's no question that we're seeing pressure from the equity markets and what that means to our business overall, and as we've said, we are getting better spreads because of the steepness of the yield curve which is helping to offset some of that pressure. However, in the second half, as we gave you the guidance, we see continued pressure coming from these markets. We don't expect to turn around in the second half like we did in the last quarter.

You will also see that we're making great progress on our expenses, particularly in the individual businesss, but overall, so to help you track that, we have added more information on the QFS so you can see our operations people, technology people, as well as corporate staff, so you can see those trends, but you can see that so far this year, we're down about 3.4% in head count. Year over year, we're down about 6.9%. So that [inaudible] technology and beginning to become state-of-the-art and reducing staff in the process is continuing, as we move through the rest of the year.

As far as the management changes we've announced, putting Rob in charge of our U.S. business, that proceeds well. It does give us, as I said, an opportunity to leverage our voluntary benefit platform, which is now approaching about $3 billion in premiums, so this allows us to look at the next five years and see a lot more growth there.

As far as our individual sales and other sales within the organization, they continue to be strong, and primarily because the public is now looking for guarantees and more predictability in things. That plays well for our fixed UL product. It plays well for our term product. It plays well for our fixed annuities as well as the fixed account in our variable annuities. So you see those sales. And the key, of course, is agents. We have a very strong cadre of agents that are tied to our company and it's agents who are working with people in America right now helping them plan their future and build that financial freedom, which is our vision. So things continue to proceed well, morale is strong out in the field as they're working with their clients, in spite of these markets, because of the nature of some of the products that we offer. So what I'd like to do now is turn it over to Jerry, who will take you through some of the investment and then he'll turn it over to Stew and then we'll open it up to questions. So Gerry?

Thank you, Bob, and good morning, everyone. These clearly are challenging times in the global financial markets and as such, we felt it's important to present some observations regarding our $175 billion invested asset portfolio. As we've noted before, the primary focus of our investment strategy is to construct and manage the asset portfolio that best supports our liabilities with respect to quality, liquidity and duration. Our portfolio is primarily fixed income in nature. Total corporate equities - that's public and joint ventures and structured securities - represent just $4 billion, or 2-and-a-half percent of total invested assets. So the impact of the recent equity market turmoil has been minimal. Our below investment grade bonds represent approximately 6% of total invested assets at 6/30. Relatively flat versus the prior two quarter ends.

I'll note that the manageable increase in the dollar amount of NAIC III to VI rated securities was as you may expect due primarily to fallen angels.

Further, especially in this credit market environment, we continue to reap the diversification benefits from our high-quality, high-income producing real estate mortgage and equity portfolio, which at 6/30 totaled $30 billion, or some 17% of our total invested assets.

Note that for the quarter ended 6/30, on an annualized basis, our mortgage portfolio yielded almost 8%, while our real estate equity portfolio yield approached 12%.

Next, I'd like to address net realized investment losses, which after offsets and taxes totaled $117 million for the quarter, within our guidance of 100 to $150 million per quarter for this year.

The pre-offset, pretax net realized loss amount of 266 million was comprised of approximately $500 million of gross realized gains and an equal amount of gross realized losses, and $260 million in write-downs. The majority of the gross gains and losses were in fixed maturities. Corporate equities generated approximately $80 million of the net gains.

Of the approximately $260 million of write-downs, $166 million was due to WorldCom. Of the remaining write-downs, no single name represented more than $11 million. And further, on WorldCom, coupled with $49 million of trading losses, our second-quarter realized loss for this credit totaled 215 million, which, by the way, represented 12 basis points against our total asset base.

Additionally, following these realized losses, WorldCom holdings were approximately $58 million at quarter end.

Now that I've covered realized gain/loss experience from the most recent quarter, I'd like to make some additional remarks regarding the general quality of our portfolio.

Despite the continued volatile financial markets, the bottom line is that we remain confident in the quality and stability of our invested assets. Here are some measures we use in assessing the state of our portfolio for the periods ended or at 6/30.

First, problem securities represented less than 20 basis points of total fixed maturities. Secondly, mortgage delinquencies remained low, in line with ACLI benchmarks. Next, the unrealized gain position in our invested asset portfolio totaled almost $10 billion. Of this amount, approximately $4 billion was in fixed maturities, with the remainder - the majority of the remainder represented by real estate equity. While the dollar-weighted amount of ratings upgrades to downgrades on our high-yield portfolio approximated that of our benchmark, our government-grade corporate bond portfolio underperformed somewhat on this measure.

As we held market underweights in certain sizable upgraded credits such as Mexico, Italy, and Korea.

And finally, though generating a steady stream of operating income is our primary focus, we do monitor total rate of return, as it provides a good measure of portfolio health and allows us to compare our performance versus the market. For the first six months of this year, our aggregate fixed income portfolio outperformed the Lehman market indices.

With that summary, I'd like to now turn the mic over to Stu Nagler, our chief financial officer. Stu?

Thanks, Gerry, and good morning. What I'll do is briefly review the results in our key segments, then talk about deferred acquisition costs, and finally, give you more color on our earnings forecast.

In terms of operating performance, we believe we had very strong performance across the board. We're very pleased with the results.

Looking at the key segments, institutional generated $250 million in operating earnings for the quarter. The key drivers were strong spreads, good underwriting, and prudent expense control, all the fundamentals are going well. Insurance expenses were flat while premiums and fees continue to grow. And top-line growth improved sequentially, driven by a large closeout sale in retirement and savings, as well as continued growth in dental, disability, and long-term care.

Looking at earnings, group life results improved 9% sequentially and were flat compared to a year ago. Higher investment spreads were offset by higher mortality versus an exceptionally good second quarter of 2001, as well as higher pension costs this year.

Retirement and savings results increased 18% sequentially and 53% from a year ago. Obviously, a terrific quarter.

Sequential improvements came from wider investment spreads and improved mortality in our pension closeout and structured settlement business. Also, our exit from unprofitable businesss in the fourth quarter of 2001 also added to the earnings increase versus last year.

Nonmedical health and other results were flat compared to a year ago, and declined 23% sequentially. The sequential decline was driven primarily by higher morbidity in group disability, as well as somewhat weaker results in dental.

We're experiencing a higher level of submitted claims in group disability. This higher claim experience is coming from certain national account cases, two of which are located at ground zero, and one who had significant - a significant number of people at the Pentagon. Because of the higher mortality experience from these three customers, we have released $8 million from our 9/11 disability reserve, and just as a reference point, we now have $89 million remaining in that reserve. I'm sorry. Correct. I said mortality. I meant morbidity.

Morbidity.

In the individual business, we had strong sales in both life and annuity, as Bob said, and operating results improved both sequentially and on a year-over-year basis, despite poor market performance, generating $196 million in operating results. And all product lines reflected the benefits of reductions in expenses.

Traditional life results were flat compared to the prior quarter and the prior year, and this is consistent with the runoff of the closed block. Variable life and universal life results improved 44% sequentially and 12% versus the prior quarter. Here, improvements were driven primarily by lower expenses and improved interest and mortality margins. These items more than offset the impact of equity markets. Though DAC amortization was substantially higher than prior periods, the cost of insurance charges and amortization of current end expense charges partially offset the increase.

Annuity results grew 25% sequentially and 6% over the prior year. Annuity results also benefitted from significant expense reductions which offset equity market impacts. And looking sequentially, increased investment margins also added to the results.

Looking at auto and home, it continued to meet our expectations and we're confident that you'll continue to see sequential improvements in operating results and that we will meet our $155 million target.

In international operational results were impacted by an allowance put up against a reinsurance recoverable, but other than that, the basic operating results continue to be good, and the integration in Mexico is going very well and we're very optimistic for that acquisition.

The three other segments, reinsurance, asset management, corporate and other, are pretty well explained in the press release and I won't go into more detail here.

Now, based on recent inquiries, we know there's a lot of interest around deferred acquisition costs, so let me give you some details on our deferred acquisition costs. Or DAC, as everybody calls it.

As you can see from the QFS, our unamortized DAC balance is $11.8 billion as of June 30th, 2002. However, as I'll show you in a second, most of it is not tied to the equity markets. If I just give you some details on that number, $3.2 billion is in the closed block and has no impact on our results. About $1 billion is in other traditional life products. $1.3 billion is in RGA, and has only a sliver of equity exposure. $1.7 billion is spread among institutional, auto and home, and international. Again, with minimal equity exposure.

Now, if we get to the parts that have equity exposure, $2.9 billion is in our variable life and universal life products, but only $1.5 billion is associated with the separate account piece. And as you know, the $1.5 billion has insurance fee offsets against poor equity markets, so the impact here is lessened.

Finally, in annuities, we have $1.9 billion in annuities, of which $1.5 billion is in variable products but only $1 billion of that is tied to the separate account portion of the variable products.

Now, our accounting policy for DAC reflects the use of the reversion of mean - to the mean assumptions which I guess everybody's familiar with from prior calls. In our method, our time horizon for the reversion to the mean is 5 years. And as we've discussed previously, we've assumed 8 and three-quarter percent equity market return over the long term in terms of our DAC amortization.

We also cap our future rate of return in doing the reversion to the mean at a high of 15% and we have a floor of zero.

For impairment testing, we look at QFS product segment totals for impairment, so because of that, there's no likely scenario which will generate profits less than our DAC balances, and therefore create a write-off. In other words, we see no scenario where a write-off would be necessary.

However, amortization will fluctuate based on the calculation under the reversion to mean methodology. And due to the recently steep market declines in the second quarter, and to date in the third quarter, amortization is expected to be more pronounced because we're near - excuse me, because we're near our 15% cap on assumed return.

And again, we'll be glad to discuss that in more detail if you want during the Q and A.

If we look at guaranteed minimum death benefit exposure, as of June 30th, we had $2.7 billion of potential total death benefits that were higher the underlying balances and during the second quarter, we paid only $5.6 million in death benefits, so we don't think that's a significant exposure for us.

Finally, let me update you on our earnings - our new earnings guidance. As you know, we reduced expectations to a range of 243 to 253, and this was caused basically, as Bob said, by the weak equity markets and our view of the remainder of the year being less optimistic than previously.

Just to give you one number, since our last call in May, the S and P average is down over 20%.

At the same time, I want to emphasize that our basic operating fundamentals - excuse me - are strong, so that there's nothing in our reduction in guidance which in any way reflects basic operating fundamentals.

So that let's talk about why the equity markets hurt us.

Obviously, it hurts us in lower fees. It increases DAC amortization. And it also reflects itself in our view on the income from various partnership-type investments which Gerry mentioned. As you know, the income from partnerships is lumpy. You can see that in the second quarter versus the first quarter, and what happened is we're just less optimistic about what we see in the third and fourth quarter from these partnerships. We don't know what's going to happen, but we're less optimistic.

So then if you take those things which are hurting us, we have to, again, emphasize not only the good fundamentals but the diversity of our earnings stream; that in these sorts of economic conditions we have offsets. For example, we've talked about the steepness of the yield curve helps us and so in areas on the short end of the yield curve, we can generate offsets. And of course we're very focused on reducing expenses and every dollar that comes out from expense goes to the bottom line.

So with that, we estimate that if the S and P remains at around 850, we'll produce operating earnings in the second half of the year of about $1.20 to $1.30, and of course this assumes no dramatic changes in the equity markets going forward. So if we add this to our reported earnings of - to date of $1.23, that puts us at 243 to 253. While this is below our previous expectations, I think it demonstrates a much lower than average sensitivity to the equity markets, as well as the significant strength of our broad earnings base.

Now, I should also mention that we expect the third quarter to take the brunt of the reduction in this - in the earnings forecast because of the previously mentioned impact of the steep equity market declines both in the second quarter and, more importantly, the third quarter to date. However, again, we feel very good about the fundamentals of each of our businesses. Each major segment has performed at or above our internal expectations and guidance, and we're very positive for the future.

Now we'd like to take your questions, so I'll turn it back to the operator. 00:21:41

Thank you. If you have a question at this time, please press the 1 key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key.

Once again, if you have a question, press the 1 key.

And our first question is from Ed Spehar of Merrill Lynch.

Good morning. Stu, I was wondering if we could talk a little bit more about the change in the outlook. I guess if we look at the 4-cent benefit you had this quarter that I believe you're including in your range for this year, that - I would assume, you know, that's - that was an unexpected benefit, so if we're thinking about the change in where we were versus where we are today, I think you're going from sort of a 256 to 259 range to an adjusted range, if I exclude that 4 cents, of 239 to 249.

And I guess the question is that that type of a reduction, you know, at the low end of the range it's sort of 6-and-a-half percent, at the high end it's approaching 4 percent. That just seems to be a little - I guess that seems to be a little bit more significant than what I would have expected, given your mix of business, and I'm wondering, could you talk a little bit more, maybe, about the partnership income. Is that the piece that maybe I haven't factored in enough or others haven't factored in enough in terms of equity sensitivity?

Ed, it's Bob Benmosche. Before Stu comments, let me take you back to the first quarter. As we sat here in the first quarter, we got hit with a $48 million after-tax charge from general American. As a management group, what we said was let's look at what the rest of the year looks like, and at that point in time, we had an expectation to see recovery in the second quarter and we felt with the recovery in the second quarter, the markets returning back to normal, that we said, gee, we have a shot at actually improving our guidance for the year is what we actually did. It was very clear, as we got to the latter part of the second quarter, that we aren't going to be able to handle that $48 million, and so we are going to go back to basically what was said back in December. Let's stick with our normal guidance, that the year is not going to be as strong, and therefore, we are giving up on that $48 million that we said was going to be below the line. So what you really have to do is take a look at the extraordinary item in the first quarter, match it a little bit to the - to what happened in the second quarter. Those are two items. And this guidance basically says, we're going to have a year pretty much like we planned back in December, not like we thought was going to occur during the first quarter. So that's really where we're at is you have to think about what we're doing now versus where we're going. But Stu, I'll have you follow up on that.

Yeah. You know, just adding to that, I think, you know, as I said in my prepared remarks, that you really have the three factors, you know: The reduction in fees and the DAC amortization, which I think is pretty straightforward and generates a portion of this, and as you suggested, the partnership income is something which, you know, also impacts it. And again, it's sort of our view as to what's going to happen rather than anything definite. You know, we've over the years invested in partnerships. It's given us good results but it gives you lumpy results, and obviously, you could be under some pressure when markets are down, and I think it would be good if Gerry Clark just talked a little bit about partnerships.

Right. As I indicated earlier, we have about $4 billion in equities, and in the three types of partnerships or joint ventures or structured equities and then pure equities, the - the realizations in the private equities and the joint ventures is these are all limited partnerships, as is typical in the industry, and they're totally beyond the control of the limited partner. In this case, MetLife. And with the IPO markets worldwide being really almost shut down, that's the primary area which provides income to us, but it's very, very unpredictable on a specific security selection basis.

The other areas in structured - in structures where we have things like equity-linked notes and we're just predicting that given the cumulative returns that for the last six months of the year, if the markets stay the same, that total, too, will be down.

So it's just a high degree of uncertainty in the private equity area that leads us to project lower income in the second half.

If I could follow up just one question, Bob, I - I think a lot of us had the sense that when you put out the expense save target for this year, that there was some room for a surprise on the up side. Does the change in the guidance here at all reflect any change in sort of internally how you're thinking about the timing of expense saves, particularly in the individual business?

Absolutely not. In fact, what you'll see happening with this reorganization is an acceleration of the pace, improving our confidence we're going to achieve those results as we move forward.

So the - what you heard is what Stu and Gerry just talked about. This is about the effects and the extended effect of the equity markets being down. It's a psychological effect of that being down. And our ability to continue to produce some of the incomes we talked about.

The fundamentals, as I said earlier, against our plan are proceeding extremely well, which is why we want to give you more data on the QFS so you can track exactly what's happening to those expenses and the people for that expenses, so no, we're very optimistic we're going to get there.

Thank you very much.

Thank you. And our next question is from Jason Zucker of Banc of America Securities.

Thanks. Good morning. Three three questions. The first, on the outlook but going out a little far they are, are you speaking with 15% EPS growth for '03 and '04?

The second question is, Stu, can you take us through your excess capital calculation for the rest of the year?

And the third question, with respect to the announcement in July with the - the restructuring plan, I guess two parts. One, do you plan on taking any future restructuring charges and then given your comments today, if you do, I should assume then that they go through operating earnings?

Thank you.

Let's start with the back one first. Anything we do will go through operating earnings. Our plan is everything will be in operating earnings and we'll explain to you significant variations and let you make the judgments on those things.

In terms of capital, you know, this is a time - we've always talked about capital flexibility, and at this particular point, we think it's really important to have flexibility. We're juggling a number of different forces. On the one hand, many of you like to see more share repurchases. On the other hand, the rating agencies are very conscious of capital, just as we're conscious of capital, particularly in uncertain times. And so at this point, we view capital as a very important resource. We need to keep our ratings where they are. And, you know, just from our standpoint, you know, we just want to be sure we use capital very prudently.

In terms of '03, '04, I think it's early really to give guidance. We'd like to let things shake out a little bit and then towards the end of the year, as we do on investor day, really give you a good forecast for '03, '04. I mean, so many things have changed, we think it's just good to wait until the end of the year to make a forecast.

But, I think, Stu - I don't know the implications if we would back off some of our goals, and I would say that we are - if we look at our fundamentals, as we said, last December that we still have an expectation we can grow our earnings 15% a year, and that expectation hasn't changed, and in fact, we're close to that this year, so my sense would be that there isn't anything fundamentally different going forward. The real question, as Stu is talking about, is what will the markets look likes at the end of this year. And so if the markets are reasonably normal, whatever normal is, we think 15% is achievable. But if the markets become destabilized, the yield curves becomes something dramatically different, then we're going to wait till December to give you a update. But the commitment is still here based upon what we know to be normal times, normal markets.

Just to follow up, could you give us numbers about excess capital and also going back to the restructuring charge. Should we expect something in the future?

I think in terms of numbers, you know, I don't have facile numbers right in front of me. I think you should just think of capital as something where we have flexibility and we can do what we need to do both in terms of if opportunities arise or to maintain our ratings.

In terms of restructuring charges, we don't - we're not anticipating anything coming, but the key point is that, you know, if - if we reorganize, if things happen, we'll take all those things as part of our operating earnings.

Great.

This re-org - just to underscore what Stu just said, this reorganization is to bring together in the U.S. market a lot more synergy. This is not about major discontinuances. We do have an ongoing reduction in staff, which has been planned. We have normal severance that's related to that that's all part of our plan. As we begin to reduce the number of people, as we leverage technology, organization, and so on. So there's no big bang here. This is a continued process that we've planned through, to have a much more efficient, highly-productive organization. So there's nothing that's going to happen that's going to be big or anything else that you need to worry about.

Great. Thank you.

Thank you. And our next question is from Michelle Giordano from J. P. Morgan.

Good morning. I have three questions. First, Gerry, I was hoping that you can tell us, based on the realized losses and write-downs that you've had year-to-date, what kind of an impact has that had on investment yields that flow through operating income, and what kind of an impact would you expect these interest losses to have on the second half of the year?

Secondly, Stu, I was hoping that you can give us a little bit more color on what you're hearing out of the rating agencies regarding, you know, either capital concerns or some issues that might cause you to be a little bit more capital constrained in the next six months.

And third, I was wondering if we can get some color on some of the trends in the group dental work and some initiatives you might have underway to accelerate premium growth in the second half.

Okay. Michelle, on the first question, the impact of the gains that we've taken, what impact do they have on our portfolio - on our earnings going forward, very, very little. Very little on a run rate basis. And it's really a question of scale. These gains, taken on the basis of a portfolio of $175 billion, I mean it just has a minimal impact at this point in time.

We made - we continued our various portfolio allocation processes, and that's what helped - while we didn't increase our high-yield at all, as the portfolio allocation process, it just kept the impact very low.

Just on the question of the rating agencies, just, again, to restate that our first - first, our ratings are very important to us and we're a highly-rated company and we intend to remain as a highly-rated company.

When you look at the material the rating agencies have put out and the feedback that they've given us, they're extremely pleased with our operating earnings and the improvements we've had there and the basic improvements in the financial results of MetLife over a period of time.

In terms of capital, because of their concern about the whole industry, they want to make sure that we're adequately capitalized and that we have enough capital, you know, in the life companies to be sure that our ratings stay where they are. And we're having those discussions with them to make sure that there's enough capital within those companies. And I'd say in particular if you look at some of the things they're saying about the life industry, that we need to be sure that we maintain a strong capital position within the life companies, and it's just an ongoing dialog with the rating agencies.

Relative to dental, Michelle, I would say there's a couple things that are worth pointing out. One is that dental in general, in the marketplace, growth has slowed down a little bit more affected by the economy than we might have thought.

Having said that, our growth rate is still almost twice what the market growth rate is. It has slowed down, as you can see, from double digits to just over 5%, you know, quarter over quarter, but we have made some adjustments in terms of new product, what I call lower-cost product, so that business that we had - had caused a slowdown for us in terms of that growth is primarily corporations going for what I call a lower-cost offering for their employees. We are countering with new products and services as we speak, and that uptick is very strong. So I would expect to see, just at maybe about a 10% growth rate going forward for us. Assuming current economic conditions.

The other thing that's interesting about dental is that we see growing voluntary dental leveraging in terms of what Bob had mentioned earlier, so dental is moving into the voluntary arena, which really plays to our strengths there.

Should we expect that the margins on the dental might decline sequentially if you're going to get more aggressive on pricing?

No, not at all. It's not being more - as a matter of fact, our margins, you know, have been very, very attractive on our - on our more high-end product. The idea with the - with the lower product is not to cut costs and margin, but to cut costs to the buyer because it's a lighter-weight product that the margin is very attractive to us.

Thank you.

Thank you. And our next question is from Ron Gallagher. I'm sorry. Ron McIntosh of Fox-Pitt, Kelton.

Thank you. Good morning. A few quick questions.

You got to stop changing your name here, Ron.

Exactly. First question, on the equity-linked notes, how much are they, number one? It looks like it may be the difference between the 3.4 billion in the supplement and the 4 billion you mentioned this morning. Just how much are in those and can you give us the yield variance on just that portion of the portfolio from say what it was a year ago to what you're expecting it now. And then secondly, if Stu could give me the statutory operating income for the quarter. And then thirdly you mentioned a trading loss in WorldCom of 49 million. Did that run through net investment income or was that on the realized loss line?

Let me give you the statutory number first.

The operating number for Metropolitan Life insurance company - remember, we have a number of other companies, although this is the bulk of it - for the quarter was $252 million. Now, that's down from the first quarter. Really because of a big swing in taxes. As you know, statutory taxes move around. If you look at the pretax numbers for the two quarters, the pretax numbers actually up second quarter versus first quarter, but we had a big swing in taxes between those two quarters, so that the after-tax number is 252.

On the equity-linked notes, we had about $400 million of them outstanding, and I don't have the actual yield that we expect for the remainder of the year because it's a running total based upon some of the gains in the portfolio over prior periods, Ron, but I'll get that to you. I.

WorldCom.

He asked the $49 million WorldCom loss.

What about it?

Did it go through net investment income.

No. I'm sorry. I missed that point. No. On the WorldCom trading loss, that was in the net realized capital losses.

Okay. If I could just follow up, follow up on Eddy Spehar's question, I mean it looks like just in round numbers, you've lowered guidance roughly a dime. If it's all related to that partnership portfolio, I guess that would be about a hundred million dollar swing on a $4 billion portfolio or about a 2-and-a-half percentage yield variance and if it's happening in half the year, it's about a 5% yield variance. Where is the largest piece of that hundred million dollars less that investment income if indeed that's where most of the guidance is -

No, no. I think maybe we're not being clear here. I mean the partnership is a piece of the swing, but probably the biggest piece is the lost fees from equity products and the increase in DAC amortization. Remember, you know, the movements in both the second quarter and the third quarter - and we're projecting using roughly today's S and P value, using, you know, a 850 value, so that the partnership is only a piece of it. But the - you know, just the DAC amortization and the lost fees are a very significant part of it.

And Ron, back on your question, the yields on the equity-linked notes for the second quarter, both ending '02 and '01, were about 5%.

Thank you.

Just before the next question, I guess I want to reiterate that if you look at the guidance for the second half and you listen to the conversation, what's important to keep in mind is that we have a lot of breadth in things we can look at as a company, and what's happening is, as you look at the uncertainty in the economy going into the second half, a lot of those things we look at are providing probability that there might be some negatives, and as a result, that provides the wide spread that you've seen in our guidance, and so don't forget there's a minimum and there's a maximum and it depends on what happens in terms of the economy in the second half, so we're just giving you a sense that a lot of different levers may go slightly south and if that all happens, you're getting a sense of the worst case at the low end of the range.

Thank you. And our next question is from Andrew Kligerman of Bear Stearns.

Good morning. Three questions. First, on the DAC, your original target, it appears, was 8 and three-quarters percent. The reversion to the mean is close to 15% at this stage in the game.

Can you give us an indication of how much additional DAC amortization that means on an annualized basis?

Second question: With regard to spreads, probably I guess the big spread areas are retirement and savings and fixed annuities, in which you have spreads in this quarter of 158 and 214 basis points respectively. Can you give us a sense of the - the outlook for the spreads in that area?

And then finally, with these equity partnerships, looking in your stat SUPP, you've got 3.4 billion in invested assets in equity partnerships and over the last 12 months, generating a yield of 2.7%. Where do you expect that yield to be going forward over the next 12 months?

And those are the three questions.

Let me start with the - with the spreads on the variable annuities and [inaudible] on the fixed and variable - and fixed universal life products.

We achieved, as you mentioned, 158 basis points spread in the second quarter and we expect that spread to stay in the 150 basis point range. It was a little high in the second quarter but we expect to maintain 150 basis points there. On the fixed annuities, the 214 had some mortgage prepayments in it and on an ongoing basis, we would expect that to remain above 200. With interest rates low, you know, we are going to get some pressure on maintaining that spread, but we do expect on an ongoing basis to keep it above, you know, 205 points, 205 to 210.

On the DAC question, the amortization that you're seeing in the second quarter, you know, reflects a 13.8% rate for the next five years, as Stu mentioned. You know, the fact that we're at the high end of the range and the market is down, again, in the third quarter, it's already down about 15%, we're not going to go much higher. Our cap is at 15%. So you are going to see a slightly higher amortization in the third quarter, and as Stu mentioned, that's the primary reason for the guidance in the third quarter being down somewhat.

But can you stay with me on that? I mean, what - in a normal market, maybe when you went public you were assuming 8 and three-quarters percent market appreciation and obviously now, unfortunately, it's much lower. I mean, I'm - I mean much - you need to get a much higher market performance in order to amortize this DAC at the amount you thought. But how much more DAC are we - are we looking at in terms of amortization each year than we would have initially thought? How much is this costing us to the bottom line each year? Because that seems to be the big component, and it seems very elusive in terms of getting a specific number as to why we're seeing the estimate go down so much.

Well, you know, if you look at the - at the QFS and the pattern of the DAC amortization, you know, you can see it's been in the high 30s and this quarter it was 58 million. You know, it will go higher if the market continues to go down. The methodology that we use, you know, does - does dampen the impact of the market when we're around our reversion rate of 8.75 and as we get closer to 15, the DAC does get accelerated. So, you know, it will go up.

Okay. So you were - when you were just talking about the high 30s and the $58 million, you were referring to equity-related DAC amortization? Is that what you were just referring to?

That was the - the amortization in the annuity line, which is the -

Oh, okay. That's the big piece.

- the biggest impact.

Okay.

If you look at the universal life, variable product, you know, the amortization there is offset by cost of maturity charges. As the market goes down, the net amount at risk increases, and our cost of insurance charges go up, so there's an offset there.

Okay. That was helpful. Thank you.

We should have introduced the expert you were just listening to. That was Stan [Talby], who is the CFO of our new U.S. business operation, so you'll be hearing a lot more from him on these issues and many other issues.

Andrew, let me speak once again to our corporate equity holdings. I can address the information that you have in terms of the amount of corporate JVs because we held book value of about 1.3 billion at 6/30, which is a part of the total equity components of $4 billion. And that's what I want to stress at this point in time. It is a very low portion of our total asset base. Just 2-and-a-half percent of our total assets are in equities. And really, yields in that area for the last 18 months have been very low, in line with the rest of the yields in the equity market, the returns in the equity markets. We have about $1.6 billion of committed, but un-funded take-downs in the private equity market, which will be - which have been going out, quite frankly, much slower because of the slow M and A activity.

Okay.

Andrew this - oh, I'm sorry.

No. I'm just kind of struggling with kind of quantifying. I mean I guess really the only - if you could give us some piece, and I think Ron McIntosh was trying to get at it, just some component where we see a big differential or a deviation that we can normalize going forward. Is there anywhere you could help out in that - in that vein?

Well, on our private equity partnerships, we build into our plans a 10% return over time, annualized 10% return, and in the years of '98, '97, '99, we overachieved that level. Significantly overachieved that level. And in the last 18 to 24 months, we've been underachieving it.

Okay. So maybe - yeah.

I think it's also helpful if you look sequentially over a period of time as to what these investments have produced. You know, if you go back a couple of years, we were getting returns, if I remember the numbers correctly, of around $200 million a year in that area, and so even if you look at the first and second quarters, you see the tremendous variation and we wish we could predict it better, but it - by its very nature, it bounces around because it's not under our control.

Understandable. Thanks very much.

And by the way, strategically, we talk about how much we want to introduce some variability, and that's why as Gerry goes through his asset allocation and what he wants to invest in, he wants to make sure that we don't create large bounces in here.

Andrew, this is rob. You asked the questions about spreads. I think that was your third question, on product and as to forth. Stan covered some of it. I would just, you know, highlight that, you know, on the instrumental business side we, as you know, have an unusual amount of leverage in our general account relative to other carriers. Not only on the retirement and savings side, but our group life is - side is tremendous in terms of the general account, as are nonmedical health and others. So all of those are growing, number one, very nicely, and to point out, I think, what your question is getting at is, you know, does it get any better than this, and I think the answer is, we're not expecting that it gets any better. We expect that the spread will narrow somewhat, but not in a dramatic fashion, as we look at our assets and liabilities. And I would say that in the institutional business, you're looking at assets and liabilities all along the yield curve. So this is intensely managed and this is not something where we're flying blind. So we're taking opportunities now, but we think it will tighten somewhat between now and the end of the year.

Thank you.

Thank you. And our next question is from Colin Devine. One moment for the next question. And our next question is from Eric Berg of Lehman Brothers.

Thanks very much and good morning. Just a few quick questions.

First, on the individual side, I was hoping we could revisit an issue that I touched on in the March quarter, which is the exceptional mortality. I think the statistical supplement shows that mortality came in at 77% of what you expected. Why is that happening, and is it sustainable? That's my first question.

My second question is: Now that you've exited certain 401(k) businesses and guaranteed products business, can you remind us of what the focus will be as we go forward in time in the retirement area?

And third, just a quick sort of a - quick sort of accounting issue. In the nonmedical health area, which would be, you know, dental insurance and other non-major medical health lines, help me understand the concept of spread. What type of products would you be selling in the nonmedical health area for which there would be, so to speak, an interest credited, like on an annuity? Thank you.

Okay, let's start with the mortality experience in the second quarter. You know, as you know, the mortality experience varies from quarter to quarter. The second quarter is typically a good quarter for mortality. Less people die. And in the second quarter, we just had very favorable mortality.

As you know, the mortality ratio includes all of our business, our closed block, and it is before reinsurance, so there are some impacts from time to time on earnings, depending on those offsets.

But I think the answer there is, we just had an exceptional quarter in the second quarter, and if you recall, the first quarter was not so good on mortality.

So, again, it's a seasonal effect and the second and third quarter are generally pretty good.

Okay. Eric, in terms of retirement and savings, I would not characterize, in terms of a top-line statement, that we're getting out of certain guaranteed products. We got out of the one that we wanted to get out of, which was really not particularly well correlated between the asset and the liability, so we're out of that.

On the other side of the coin, sales are up on a very, very healthy basis on all of our guaranteed products. The GIC business, in particular, and you see the emergence of something we may see more of in the future, and that is the close-down of certain defined benefit plans and so forth, which plays to our strength.

So we're really about understanding what the value proposition is from the institutional buyer, looking at MetLife it's very much about managing asset and liability with a guarantee around that proposition to the customer, and we're very bullish on that.

And Eric, it's Bill Wheeler. You know, with regard to your question about investment spread and nonmedical health. I think your instincts are right. I mean we have a page in the QFS which shows our balances, policyholder balances by product segment and in nonmedical health, we have $4 billion in general account liabilities. Now, that's a lot, but relative to our other segments, it's not - it's quite small. Most of that policyholder liability is with regard to the group disability business. You're right, dental - dental investment income is not large, because we don't - the liabilities are very short tail, but disability, group disability, is long tail, and so the majority of those assets are there. And that's where we're getting most of the investment spread.

I see. Stan, just a quick flop, most of the companies we follow, you know, it's my sense that they report mortality relative to their expectations around a hundred percent. To be sure, it will vary from quarter to quarter modestly, but it strikes me as just really extraordinary to see a number, you know, in the - in the low 80s or in the mid-70s. Why is this happening, maybe not uniquely at MetLife but it would seem to be, you know, pretty unusual. And if you could address the issue of the sustainability of these low numbers. Thank you.

Well, you know, if you look at those ratios over the last several quarters, you'll see, you know, back in the - you know, the - in 2001, we did have a ratio that was down as low as 75, or it might have even been in 2000, but the number does bounce around and it's generally bouncing around from the high 70s to the low to mid-90s depending on the season. So, you know, do we expect to maintain that level? Probably going forward in the second quarter, yes, but not in the first quarter, not in the fourth quarter.

Thank you.

Thank you. And our next question is from Vanessa Wilson of Deutsche Banc.

Thank you. Just a couple of quick questions. Gerry, you mentioned something about prepayment income this quarter. Was that a big help? Could you give us some sense of what that did in the quarter?

It's very small this quarter relative to prior times.

Okay. And then in your QFS, on your investment page, the cash and short-term investment yield dropped sequentially quite a bit. It was 285. It had been running between 4 and 6%. What - what drove that to drop like that, and should we expect that to stay at that level.

Yeah. Well, that was driven by a few factors. One, just a general - generally lower interest rates. But also, too, the amount outstanding, the amount that we had to invest was significantly lower from period to period, or from the - a year ago till now.

Stock buybacks would be a reason for that lower cash.

Okay. And Stan and Stu, on the DAC question, Stu you said in your prepared remarks that you're using a product segment total. I presume you're testing the variable annuity DAC on the variable annuity business. Is that correct? Or are you mixing it with fixed annuities.

We do the whole annuities. In other words we put all the annuities together. When I say segment, it's essentially the QFS segment. We think that's - you know, given the guidance as to how to do that, we think that's the most appropriate way to do it.

But you're - so you're testing your variable annuities but when you decide whether there's an impairment, you're using the profitability of the fixed annuities to support the variable?

We actually test it in total and, you know, as Stu mentioned, there's, you know, no reasonable, you know, market conditions that we can conceive that would cause us to have to write it off.

Okay. But as you test your variable annuities with your reversion to the mean approach, and you blow through the 15% cap, you're accelerating the amortization to bring the numbers down to 15.

That's correct.

And you're not going to accelerate it to go back to your 8 and three-quarters. It's just down to the 15.

That's correct.

Okay. Thank you very much.

Thank you. And our next question is from Nigel Dally of Morgan Stanley.

Great. Thank you. Stu, just a question on group disability. I think you commented that the World Trade Center and Pentagon and firms situated around those sites were the main reason for the pickup in claims there. Just interested in why that would impact the income statement, given that you'd already set up reserves for those sort of claims last year.

Secondly, a question on property/ casualty, just an estimate of the - how much were the [inaudible] and lastly, just a question on stock options, your view on potentially expensing stock options going forward.

Nigel, on the group disability question, you're right, because we do release a reserve which we think offsets the increased incidence caused by 9/11-related claims, it doesn't actually - you know, they offset each other, so it doesn't have a P and L effect, but what it - but what we've committed to do, I think, on previous calls, is to tell you all, the investment community, that - about our reserve releases from the 9/11 disability reserve that we've set up, so it will give you a sense of, you know, are we just releasing reserves or what's really going on with the health of the underlying business.

So that's why we mentioned it.

We did actually, you know - we have seen increased incidence outside of 9/11 somewhat, so it's not just the 9/11 phenomenon with the increased incidence.

On the expensing options, we're going to have a conversation with our board in our board meeting in September, and we don't see any problem of doing that. A good part of our long-term compensation is, in fact, expensed now because of the way we have it structured as a cash plan that converts the stock at the end of the period of time, so most of it is already being included and handled that way. The options, obviously, are not, but that's what we'll talk to the board about in September and proceed based upon where the universe is at that point in time.

Operator, we're showing about 9 o'clock, unfortunately we need to go ahead and end the call. We'd like to thank everybody for their questions. We understand there's still several more in the queue. John and I will obviously run back downstairs and get on the phone and be glad to follow up with, but thank you for your participation today, and I'll turn it over for Bob for just a wrap-up.

Again, I also thank you for your participation. We're working pretty hard here to get you the information that you need, to be as transparent as we possibly can as you do your work, but also understand we have a very strong plan, we're committed to that plan, and we're pretty positive as we look into the end of this year and into next year as well, so thank you all very much.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may disconnect at this time. Have a nice day.