大都會人壽保險 (MET) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife third-quarter earnings release conference call.

At this time, all telephone lines are in a listen-only mode.

Later, we will have an opportunity for questions and answers, with instructions given at that time.

If you should require assistance during the conference call, please press zero, followed by star.

As a reminder, your conference call today 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 security 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, 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

statement, whether as a result of new information, future developments, or otherwise.

With that, I'd like to turn the conference call over to Kevin Hellmentoller, head of investor relations.

Please go ahead.

Good morning and welcome to MetLife's third-quarter earnings conference call.

This morning, we will hear from Bob Benmosche, Chairman and CEO, Stu Nagler, Vice Chairman and CFO and Jerry Clark, Vice Chairman and Chief Investment Officer and then we will take your questions.

Before I turn it over to Bob,

I wanted to -quickly review a new disclosure in our press release.

The company has identified approximately 1.8 billion of market value of real estate properties that it is actively marketing.

FAS 144, which was recently adopted, requires that you identify those properties as being held for sale and also to disclose the results of operations associated with those properties.

It does not change the reported operating or net earnings or earnings per share.

This is for your information.

Upon completion of the 10-Q, you will be able to discretely identify the value of the properties for sale and the operating income those properties are generating.

Again, it does not affect the reported numbers, but does provide a good additional information for investors.

Both the QFS and our public filings will be immediately accessible on the company's website upon filing.

With that, let me now turn the call over to Bob Benmosche.

Thanks, Kevin and before I turn this over to Stu and Jerry, I just want to remind everybody that we are focusing on a plan.

We've been talking about the plan for three years.

And we're pretty much on schedule to achieving that plan and there's no question we've hit some bumps in the road in terms of markets, losses, and so on, but yet the organization is focused and you can see that in the earnings of this quarter, the results of that focus you see good diversity in our earnings streams, but you also see the top-line growth, premium fees again are up nearly 11% from the same quarter a year ago.

Our annuity deposits continue to be up almost 44% over that prior quarter.

And you can see the annuity deposits across all distribution systems.

So everyone continues to contribute to our sales, which are a leading indicator for future profits in this company.

Our expenses continue to come down, as we talked about and we expect to equal or even exceed our target of 200 million savings in the individual business alone, and you could also see, which I've said to keep an eye on, the head count coming down.

We're down about 5% from the prior year, and again, each quarter we're coming down slightly.

But the fact is that the marketplace is changing on all of us right now, and the landscape is different, and I've said in several of our investor day meetings that -- that we can't lose sight of the importance of the MetLife brand, our name, the strength it represents to the marketplace, and to our clients.

Our clients being those who buy our products and those who sell our products.

And what's most important to those people is that we make guarantees and we have to make sure there is no doubt in the public's mind that we will have the financial strength to live up to those guarantees.

And you will see, I believe, a continuing movement towards a flight to quality.

We've seen that now in the '80s and the early '90s and we believe that's going to start happening again, and so we want to make sure we are committed to our strong rating, from all the rating agencies, and we're going to continue to work hard to make sure we maintain and preserve those ratings.

So you will see us, for example, improving our stacked capital.

We've already moved 500 million from the holding company back into the life insurance company.

We're now looking at the debt markets, and we're going to see what kind of raise-up would be appropriate for our company based upon rates and what's happening in the marketplace in the fourth quarter, as another way of raising money for our stacked capital.

We are -- at the -- and Jerry will talk about it it -- at the final stages of selling some of our real estate, and these are properties, by the way, that have some sense -- some part of the capital gains in it, but it is not proportionate to the total package and Jerry will talk about that.

And that will also allow us to strengthen our stacked capital.

So as you can see, as you -- as we deal with some of the movements of sales, as well as raising some debt and moving some cash, we have that enormous flexibility in our company because, as I said, at this stage of the game, based upon the markets, we must preserve our ratings, which talk about the quality of our guarantees.

Therefore, we are not going to continue the share repurchase for the remainder of this year and we're evaluating that for the year 2003.

Here again, what's important is that we maintain -- and I'll say it five times, if it's necessary -- we will than maintain the financial strength to assure the public that we will live up to our guarantees not this year and next year, but 10, 15, and 20 years to come.

So when you go back to the IPO -- or just prior to it -- we talked about the year 2002, we talked about a plan, and we talked about an expectation to achieve approximately $2.59 a share.

If you look at where we are through the third quarter, we believe that we're pretty much on target to achieve about that number by the end of this year.

In spite of the difficult climate, in spite of the fact that we're down 39% in the S&P, in spite of all the issues we've had to deal with on the litigation front and so on.

We continue to focus on our plan and we're pretty close to executing it.

So we feel pretty good about this quarter.

We feel good as we begin to see the fruits of our labor over the last three years, and we expect that to continue as we move forward.

So what I'd like to do now is turn it over to Stu, who will highlight some of the numbers and then Jerry will talk about the investment portfolio.

Stu?

Thanks, Bob, and good morning.

We're very pleased with the results this quarter.

The fundamentals of our operations were very strong, especially in light of the economic situation.

Across all our businesses, expense, interest, and underwriting results were excellent.

We've included a lot of material in the press release, and hope that it's self-explanatory, so that I'll go through the details of the businesses very quickly in order to leave more time for questions.

Institutional generated $234 million in operating earnings for the quarter.

That was pretty much in line with our expectations, and these results were driven by what I just said before, good expense, interest, and underwriting results.

Similarly, in individual business, rigorous expense reductions, strong interest margins, and good underwriting results provided earnings strength.

As Bob said, the segment is on track to exceed its $200 million reduction in expenses versus last -- versus '01, and that's, of course, before the increase in pension and other post-retirement costs.

In the press release, we mentioned that $50 million of after-tax income, which came from partnership income and some -- some onetime items.

At the same time, we also had increased DAC amortization due to the effect of the equity markets.

The net of these items put us above our trend line, and in the fourth quarter, we expect to be back closer to the trend line that we've seen in the first two quarters of the year.

Auto and home also had a very strong result, coming in at $48 million.

This was driven by a 7% increase in auto average earned premium, a 14% increase in property average earned premium.

We've completed the integration of St. Paul, and we're seeing savings in our expense ratio, and we're on track to meet our very public goal of $155 million of earnings in auto and home.

In fact, if you look at the rolling four quarters of earnings, that exceeds $155 million.

And management is executing on their plan across all business fundamentals.

In international, we again had excellent results for the quarter, with $40 million in operating earnings.

We benefited from the acquisition of Hidalgo and that added about $18 million to our earnings and also the acquisition of Chile which was not in last year's results added another $4 million.

We also had about $8 million in onetime items during the quarter, which we wouldn't expect to be repeated.

So when you put all those operations together, you can see the strength that -- going across our whole results, and really just strong fundamentals.

Our statutory earnings for the quarter on an operating basis were $380 million after tax.

Similarly, on a statutory basis, if you look at net income, it was minus $142 million.

In other words, $142 million loss because of the impact of investment losses which Jerry will talk about later.

At this point, I'd like to discuss two other issues, DAC amortization and guaranteed minimum death benefits.

As we've said before, equity sensitivity is a relatively small issue for MetLife.

Due to the diversity of earnings sources and the breadth of coverages.

However, since this is a very hot topic now, let me give you more information.

First, deferred acquisition costs.

Our only exposure in deferred acquisition costs to equity markets is $1.2 billion in separate accounts associated with VL and UL, and this is approximately -- has approximately a 50% offset going the other way from an unearned revenues, which fluctuate inversely to market performance.

We also have $1 billion in separate accounts associated with separate account -- separate account DAC associated with annuities.

Our methodology for DAC was updated in July of 2001.

As I described on the last call, we use a mean reversion calculation with a 8 and 3/4% long-term assumption.

As happens every quarter, this quarter's results reflects the impact of the current quarter's equity market performance.

With DAC amortization increasing $91 million compared to the prior quarter and $70 million compared to the sequential quarter.

Our methodology immediately reflects the impacts of current market performance in the quarter in which it occurs.

Due to the extended market downturn, the equity assumption in the mean reversion is near it's 15% cap.

It's currently 14.65%.

And therefore, the mean reversion impact is nearly eliminated, as demonstrated by the level of DAC amortization.

We remain very comfortable with our DAC policy and assumptions, and have no plans to change.

With respect to guaranteed minimum death benefits, we had $10 million of claims this quarter, up from 5.6 million of claims in the prior quarter, and our exposure to guaranteed minimum death benefits was a face amount of $4.6 billion at the end of the quarter.

Now, there's $10 million of claims that we paid in this quarter.

It is not significant, as you'll recognize in relation to all of MetLife.

For example, we expect to pay this quarter, across MetLife, $1.7 billion in death claims.

So the $10 million in relation to $1.7 billion is not a big exposure for us.

If I now move to the fourth quarter, we currently believe that the existing range of analysts' expectations of 60 to 67 cents is appropriate and consistent with our internal expectations.

Let me now turn the call over to Jerry to talk about investments .

Thank you, Stu, and good morning, everyone.

Clearly, these are challenging times in the global financial markets, as evidenced by the recent 40-year lows in interest rates, the continued negative annual returns in the public equity markets, and the record dollar amounts in the credit markets of downgrades, fallen angels, and defaults.

As such, we felt it's important to present some observations regarding our $185 billion invested asset portfolio.

As we noted before, the prior focus of our -- primary focus of our investments department is to construct and manage the asset portfolio that best supports our liabilities with respect to quality, liquidity, and duration.

Here at MetLife, this asset/liability management function is implemented through a long-standing, very well established partnership between our lines of business, the investments department, and our financial management group, and represents what we believe is a competitive advantage designed to ensure the appropriateness of the investment portfolio backing our general account liability.

As many of you are aware, our portfolio is primarily fixed income in nature, with bonds and mortgages representing nearly 90% of the total invested assets.

The bond or fixed maturity portfolio, representing 72% of overall invested assets, remains strong overall, with an average credit rating of A 1.

Our high-quality, high-income-producing real estate mortgage and equity assets comprise 16% of the total investment portfolio, a diversification strategy that worked well especially in this corporate credit environment.

Below investment-grade bonds represent less than 6% of invested assets, fairly flat this year.

On a dollar basis, I will mention that the slight increase in below investment-grade bonds since year end that have has been driven mostly by fallen angels.

Finally, our investment portfolio's exposure to the corporate equity markets is quite manageable, at less than 2 1/2% of invested assets in total, from direct and indirect public and private corporate equities.

Next, the overall sector allocation of our investment portfolio on a percentage basis has not significantly changed since last year.

As to general activity over the past few quarters, we have reduced our cash position, primarily in favor -- excuse me -- of fixed maturity assets such as mortgage-backed securities and NAIC 1 rated corporates.

Additionally, during the third quarter and into early October, we opportunistically invested approximately $800 million in the domestic public equity market, primarily as a result of the lower actual than targeted allocation in corporate equities.

Regarding the remainder of the year, we currently view certain of the structured finance sectors as attractive from a relative value standpoint, and will she selectively make purchases in the credit sectors as opportunities arise.

Additionally, we remain focused on the privately-sourced fixed-income sectors, given the incremental yield and additional structure that we get from these securities.

Next, I'd like to address net realized investment losses, which, after offsets and taxes, totaled $169 million for the third quarter, just outside our 100 to $150 million per quarter guidance for this year.

Net after-tax realized losses year-to-date amounted to 366 million.

However -- and they're within the cumulative guidance for this period.

The third quarter pre-offset pretax net realized loss amount of 286 million was comprised of 525 million of gross realized gains, 256 million of gross realized losses, and $555 million of write-downs.

The majority of the gross gains and losses were in fixed maturities, and the vast majority of the write-downs were in fixed maturities as well.

The largest single write-down for the quarter was for about $95 million.

The next largest was approximately 30 million.

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

Despite the continued volatile financial markets, bottom line is that we remain confident in the overall quality and stability of our invested assets.

Here are some of the measures we use in assessing the state of the portfolio for the periods ended 9-30.

First of all problem fixed income securities represent less than 25 basis points of totaled fixed maturities and total problem assets, including all our asset categories represented less than 30 basis points of total invested assets.

Next, the unrealized gain position in our invested asset portfolio totaled almost $13 billion.

Of this amount, approximately 7 billion was in fixed maturities and 4 and a half billion in real estate equity.

Another measure, the dollar-weighted amount of ratings upgrades to downgrades for our investment grade corporate bond portfolio has under-performed slightly versus the market benchmark year-to-date.

As we held market under-weights in certain sizable upgraded credits such as Mexico, Italy, Korea, and Canada.

On the other hand, our high-yield corporate portfolio has outperformed on this measure due, principally, to under-weights through many of the telecom and energy issuers that have been downgraded.

Another measure, through generating a steady stream of operating income as our primary focus, we do monitor total rate of return as it provides a good measure of the health of our portfolio.

For the first nine months of the year, our fixed-income portfolio outperformed the Lehman aggregate index by 87 basis points.

We believe this is representative of the overall health of the portfolio.

Finally, I'd like to address some additional items regarding our portfolio that may be of interest to our investors.

As Kevin referenced at the beginning of the call, we are currently in the midst of an approximately $1.8 billion real estate equity sales program.

Market conditions producing attractive pricing and a corporate interest in harvesting some of the unrealized gain accumulated in the portfolio converged in our current sales program.

We are selling approximately 20 of our 160 investment properties.

Notable properties include 551 Fifth Avenue in New York City, 10 South LaSalle and 1 South Wacker in Chicago, and 701 [inaudible] in Miami.

This program is targeted for completion around the end of this year, and proceeds will be reinvested based upon relative value across all asset sectors.

Further, this sales program does not represent any fundamental change in our real estate business strategy, but does reinforce that the underlying capital gains imbedded in this portfolio are available to strengthen the company's financial position, as needed.

We actively manage our real estate equity portfolio by acquiring properties that will enhance our yield on a long-term basis, and opportunistically sell properties as market conditions permit.

Finally, I'd make some comments on prepayment risk, always a topic in a low interest rate environment.

Prepayment risk, like corporate credit risk, real estate credit risk, is, as you know, one of the various investment risks that we assume and manage as a financial intermediary funding its liabilities.

In our public corporate bond portfolio, a very low percentage is currently considered to be at call risk.

In the private corporate bond portfolio, may call provisions act as a strong deterrent to prepayments.

Same in our $23 billion mortgage portfolio.

Regarding our residential MBS portfolio, which represents approximately 15% of invested assets, I'll make the following observation.

First, we invest in the MBS sector for its credit quality, attractive spreads, risk diversification, liquidity, and asset/liability matching characteristics.

Secondly, while the average market price of our residential MBS portfolio is currently above par, the average book value is below par, and importantly, a considerable portion of the residential MBS portfolio supports general account liability.

I can tolerate degrees of reinvestment risk because of the cost -- because the cost of these liabilities can be adjusted downward, protecting investment margins.

Those represent my comments at this point, and we'll turn it over to questions now.

Thank you.

Ladies and gentlemen, if you do have any questions, please press the 1 on your touch-tone phone at this time.

You'll hear a tone indicating you've been placed in queue and may remove yourself from queue by pressing the pound key.

If you're using a speakerphone, we ask that you please pick up your handset before pressing any numbers.

Also, if you pressed 1 prior to this announcement, please press 1 again at this time.

One moment, please, for our first question.

Our first question will come from the line of Michelle Giordano of J P Morgan.

Go ahead please.

Good morning.

I had a couple of questions.

First, Jerry, I was hoping that you could give us a little bit more color on some of the realized losses in the quarter as they relate to specific segments like airlines, energy, tech and telecom and what your exposure to these segments are, you know, currently.

And then secondly, I was hoping we can get some feedback on what the likely accelerated pension expenses are going to be next year, and then I'll have a follow-up question.

Okay.

Thank you, Michelle.

Our losses really were across the board in all industry sectors.

I think that energy was probably the leading candidate, the leading sector that we experienced losses in going forward.

So it was really just broad-based.

You know, as most of you are aware, we've had a strategy -- I'd just like to comment about these losses because as you're aware, we've had a strategy since late 2000 of conservatively addressing our portfolio from the standpoint of taking other than temporary impairments, and where we do not see a change in the near-term or medium-term change in the underlying business of the credit, taking realized credit losses, while there are no definitive rules which apply uniformly across the industry by all companies, we believe our practice is conservative, which we view as particularly appropriate in this environment.

And to reinforce this conservative approach as to taking impairments, excluding WorldCom, about 70% of the dollar value of the securities which we've deemed other than temporarily impaired are still current in terms of interest and principal repayments.

But I want to stress on this issue of losses that we believe we have a very conservative practice and we've had this skins the end since the end of 2000.

In terms of what's in our portfolio in terms of exposure, a few different areas that may be leading candidates in the future .

Our telecom area, we have exposure of about 3.7 billion, but 80% of that is investment grade.

We have a broad exposure in pipeline, but not really very heavily concentrated in any four or five names.

And in the airline area, we reduced our exposure somewhat.

It's about $600 million, and 75% of that airline portfolio was comprised of airline trust certificates or double -- AA trust certificates.

Before Stu talks, I just want to reiterate for everyone as Jerry talks about it, keep in mind some things.

One is that we are writing down our book value of those fixed-income securities where the market price is lower -- or significantly lower than the book value, and so therefore, if we don't expect the market value to recover, we write those down.

And we can't write them back up.

We can only sell the asset to get it back up from a stat point of view and so on.

This is a one-way street.

It says when your market value is below book value, you write them down because you're not sure the market value will recover to book value.

So you need to focus on the 70% that Jerry talked about, in that we may be writing them down but that doesn't mean we expect not to receive our payments in the future or interest payments until they're -- the bonds are due.

So I'd like you to keep that in mind as you think about the investment portfolio vis-à-vis write-downs.

Stu?

Let me just comment on your question about '03 pension expense.

You know, in coming to this call, we made a conscious decision not to give '03 guidance, and that's because it's still a work in progress, that we're working very heavily on our plan.

And so when we get -- your question about pension expense, we'd rather not give you -- I mean, give any numbers at this particular point because that's just one factor in the total business plan.

And so to give a number that goes one way and not have the total picture, we don't think would be appropriate at this point.

So that we'd ask that you hold that question and similar questions until investor day.

It's only a couple of weeks away and we'll be able to provide, you know, a full picture of how we expect next year to emerge.

Okay.

And then just as a follow-up, on the fixed annuity business, the deposits in the quarter were actually pretty good.

Could you talk about what your crediting rates are relative to to the peers and, you know, it looks like you probably have quite a bit more room to reduce crediting rates if interest rates were to decline.

You -- it doesn't look like you'd get squeezed on hitting these minimum crediting rates but I just wanted to make sure because I know you do have an old book of fixed annuities.

Do most of your fixed annuities have a minimum 3% crediting rate?

Yeah, Michelle.

This is Rob Henrikson.

You're correct in terms of talking about our block of business.

By far, the -- probably well over 70% of our business is -- has the minimum rate of 3% in it.

You know, and as you know, our business is substantial.

In terms of new business adjustments, we have moved our rates down from October the 1st through, for example, the broker-dealer channel and the bank channels, and we have -- you know, we always like more room, but we have sufficient room to hit our target spreads in the annuity business.

I don't know if Stan wants to comment additionally to that.

I would just add that, you know, even though most of our business is at a 3% minimum guarantee, our current credited rate, which are resulting in the spreads that you see in the QFS, are still well above the 3%, so there's still more room in there for rates to go down or stay flat, and we could still achieve the same spreads.

Great.

Thank you.

We have a question in queue from the line of Ed Spehar with Merrill Lynch.

Your line is open.

Thank you.

Good morning.

I had a few questions.

I was wondering, when you look at the comments you've made about the consensus range for the fourth quarter, you know, it seems to me if you net out sort of the pluses and minuses this quarter, you probably had sort of a 66 , 67-cent kind of number and I'm wondering -- first of all, tell me if you think that's wrong but secondly, I'm wondering: What is it that you see that could happen in the fourth quarter that would drive you to the low end of the kind of ranges we're talking about?

And secondly, I was wondering, you talked about guaranteed minimum death benefit exposure.

Is there anything that you -- you want to talk about in terms of income benefits, guaranteed minimum income benefit exposure and what that might be?

Thank you.

Robert Benmosche You know, Ed, it's Bob Benmosche.

I must tell you that we're a third of the way through the fourth quarter and the fact is that these are unusual times, and we give our guidance based upon looking at the S&P.

It could very well crash on us, and we've got to just be aware of the fact that we look at a wide range of issues that we're dealing with, and we want to make sure that we cover what could be very unusual fluctuations.

And I believe you can see in these markets they're very jittery.

You know that, I know that.

All of us know that.

And so this is giving you sufficient guidance to say, yeah, we'd like to be able to say that things stay the way they are and things stay reasonably positive out there.

We don't know how the Christmas buying season is going to go.

We don't know how the economy is going to go.

We don't know if we're moving up or down in terms of recession.

So this gives you that range that says things may be more unpredictable than we'd like in terms of the economy but we do have good financial strength and we have good predictability of what we have, and that gives you the tightness of the range of 60 to 67.

I'll take the guaranteed minimum income benefit question.

You know, in terms of our exposure on guaranteed minimum income benefits, we were relatively late to the market.

We have $44 billion of annuities [inaudible] and only about 1-and-a-half billion of those have any guaranteed minimum benefit in them.

The way our product is -- or our feature is structured, it takes 10 years before anyone [inaudible] 8 years away from anyone actually annuitizing and as you know, the guaranteed annuity rates that are built into those minimum income guarantees are very, very conservative, so, you know, our current in-force, which is relatively small, is way out of the money at this point.

Thank you.

Thank you.

For our next -- we have a question in queue from the line of Joanne Smith.

One moment, please, while we open your line.

With UBS Warburg.

Go ahead, please.

Good morning.

I have a couple of questions.

One is, I'd like to explore a little bit the Hidalgo transaction, and what you're looking for in terms of integration savings there and on a go-forward basis what kind of earnings run rate would you look at?

With the 18 million that you reported in the third quarter of contribution to earnings, I'm just wondering if that's kind of a baseline and that we can expect some real improvement there?

In terms of the capital repatriation prospects for Hidalgo, I was wondering if you could comment on that.

I also have a question regarding the investment loss outlook, and -- and I guess my question is, if, in fact, we are looking at , you know, the fed possibly moving on interest rates today, signaling that the economy is not as strong as we would have hoped, if that suggests that there could be some more problems down the line in the bond portfolio and how the rating agency conversations are going in that regard.

And then I guess lastly, in terms of your planning going forward -- and I know you don't want to give '03 guidance -- I was just wondering if you could give us the kind of economic scenario that you're working with when you're -- when you are devising those plans.

Thank you.

On the last point -- and I would turn it over to Bill -- we are working really hard to get ready for investor day.

We take a lot of time to come up with very realistic, attainable goals for our company over the next three years and, you know, we have a lot of things yet to decipher and we're going to do the best we can in time for that meeting.

To do it now would just be premature.

There's just a lot of stuff that needs to settle down in the month of November before we can lock in on exactly what scenario we need as we move forward, but we will present that to you in December.

But it's just too much variability right now in terms of rates, the market, the economy, and so on.

We'll have a better sense of that as we begin to lock into what we expect for 2003 and beyond.

So let me turn it over to Bill, who has done an excellent job right now of doing the integration of Hidalgo and that's really proceeding very well for our company.

Bill.

Thanks, Bob.

Joanne, let me start with the earnings that have emerged this quarter.

First of all, I would say in a total comment, the Hidalgo transaction is moving very well, and as we expected.

And let me give you a couple of more details on that.

The earnings for this quarter, from Hidalgo, the 18 million that Stu mentioned, are a bit high, and let me explain why.

They're high, first of all, because they benefit, in the third quarter, from a little bit of the stub period.

If you recall, we closed -- we closed this transaction in June of '02, so there are some earnings in there that are actually generated in second quarter but not reported in the third-quarter numbers, so we're high for that reason.

We're also a little higher than we expected because some of the expenses of the integration that we originally expected to happen this year -- for example, expenses for advertising and re-branding -- aren't happening in this quarter.

They're going to happen in next year.

So those expenses are going to be deferred over to -- over to next year.

Having said all that, what's emerging at Hidalgo is a very good picture in terms of the retention of business, the growth potential of the business, and, you know, while I'm always loath to say things, what we looked at here in terms of the -- of the due diligence, when we looked at the company, was that we were expecting earnings to emerge at about $20 million per quarter, and I think we're -- you know, we're -- we're in -- in the future, once we get through these expenses, then I think we're on track for that.

Is that responsive to your question?

I guess just as a follow-up, that -- if they're running at 20 million per quarter, Bill, then that just -- that's a 8% return on invested capital.

So I'm -- I'm wondering if you're kind of low-balling that because you are, you know, carefully, you know, pursuing the issue of, you know, expense reductions there, and if maybe there is just a situation with excess capital that could be repatriated to the United States so that those concerns could be improved.

Let me start with the capital issue, because there is capital.

As we indicated to you, you know, in the call that we had back in May, there is capital in the company -- in the company which can and will be repatriated over the next couple of years, so there is money that we will be dividending back, and I think that as we -- as we do that, obviously, that will take down the -- the equity in the company, and will return the -- will improve the return on the equity.

In addition to that, I would say that we -- we are in the integration process, so we are expecting to do -- we -- well, let me just -- let me tell you what we've done so far and what we will continue to do.

We said, going in, to ourselves, that we thought we could reduce the employee staff as a -- remember, we're integrating two companies, so we had a company, MetLife [Henasis] in Mexico.

We've had that company for 10 years.

We're now integrating that company with Hidalgo.

The combined employee total in those two companies was -- was in excess of 1400, and we said we could take out 300 -- approximately 350 employees.

We have already taken out over 200, and we are continuing on that path.

We also said that we are going to integrate the systems of the two companies, and as of yet, we haven't done that.

That will get done during the remainder of this year and into '03.

So I think we can expect improvements going forward, and I think the combination of the improvements in the expense picture, which we are making and will continue to make, and the lowering of the capital, you'll start to see emerging an increased return on the investment.

And don't forget in the -- as we go through the planning process and the -- you know, after we get through this next 12 to 18 months, we would expect to make more money.

And Bill's obviously not buying it to keep it steady state.

He's buying it to grow in this marketplace, because we see it as a growth.

So I think you need to -- you know, again, we'll talk more about this in December.

Right.

But clearly, this is where we're starting out, not where we're ending up at 20 million a quarter.

Joanne, to your question about the rating agencies, Bob and Jerry and I and others have had meetings with each of the rating agencies, and expressed to them in unequivocal terms that we plan to defend our rating the same way Bob talked about it this morning, and that we will use our capital flexibility in whatever way is necessary to defend the rating.

You know, if you step back for a second, you know, one of the key points in us having such a high rating is that we have a strong stream of earnings which are diversified and which are getting better all the time, and so that's a primary component in having a strong quarter like this quarter obviously adds to our credibility in terms of our rating.

But in terms of capital issues, we have a lot -- a lot of flexibility in our balance sheet.

That's been a guiding principle since day one.

To maintain flexibility and use that flexibility in a way that enhances shareholder value.

And so that the flexibility we have, both in terms of additional debt capacity, which Bob talked about, the ability to realize capital gains on our real estate portfolio -- remember, Jerry just talked about a small portion of our real estate portfolio, so we sometime have considerable flexibility within our portfolio, so your question about what if we have an extended downturn, that's clearly one of the scenarios we're looking at, and we believe we have the flexibility within our balance sheet to be able to defend our rating, even in that kind of a scenario.

And Joanne, regarding investment loss guidance, we, for all the reasons already cited in this -- on this call, remain very cautious about the direction of the economy, much less its present anemic state.

When you add to this environment those situations wherein there's the potential for fraud, it makes it very difficult to forecast guidance.

Having said that, though, we would expect to continue our present guidance for the fourth quarter, absent the gains from our real estate sales program that we talked about a few times, of net-net a hundred to a hundred and fifty million dollars.

However, I want to -- I just really want to emphasize, we're very hesitant to mortgage the future of our income stream significantly by taking capital gains from our fixed-income portfolio.

The rating agencies, we've told the rating agencies this.

We spend time, as Stu has just mentioned with them, throughout the year and recently -- and I believe they have an good understanding of our portfolio, and they particularly understand the strength that we have from the diversification of the portfolio.

Gary, I guess my concern is the fact that your largest life insurance subsidiary reported a statutory loss in the quarter, and, you know, despite the fact that you've been able to harvest some gains to offset the losses, those gains are treated quite differently on a statutory basis than the losses are, and so I'm just wondering if the rating agencies, despite all of your efforts to, you know -- you know, to sell some real estate and take some other actions, including dividending cash down from the holding company, are concerned about, you know, the statutory capital issues that are being impacted by these very, very large losses.

Well, there's no question there's an impact on statutory capital, as you say, because of the way gains and losses are treated, but that's information that we've discussed with the rating agencies and that, in part, is why we're -- just as you've said, we're putting additional capital into the company.

And so the -- putting money down into the company clearly improves the capital position, and we have the ability to do that, not only the $500 million that we've already put down but as Bob referenced going out to the debt markets because we have unused debt capacity and using that capacity to put money down.

And again, don't overlook the -- the unrealized gain that's in the real estate portfolio because when you sell real estate, as we're doing this quarter, with a small portion of it, not only do you realize the gain but you also improve your risk profile.

So it has both the numerator and a dominator effect.

So, yes, you're absolutely right that capital losses are treated different from a statutory standpoint but we've handled that it in all our modeling and we're working through those issues

Thank you.

Just think again the issue that we're sharing with the rating agencies -- and that's why we reached out to them early -- is to make sure that they understand the quality of the write-downs, because that does affect the statutory reporting .

On the other hand, the question becomes they also understand that while it does show up stat-wise, they understand the write-downs are really a market value issue relative to book value and not necessarily translates to a credit quality issue.

So we've got to think through the numbers and making sure we have the financial strength and have the numbers there, but they also understand the difference between market issues and credit issues as we go through what's actually happening in these numbers.

So you have to look beyond the number.

Thanks, Bob.

Yeah.

We have a question in queue from the line of Vanessa Wilson with Deutsche Banc.

Your line is open.

Thank you, good morning.

Just following up on Joanne's question about capital, you stated, Bob, that there was some level of statutory surplus that you need to get to, and could you give us a sense of what is the statutory surplus number at September 30, and where are we trying to get to?

I don't have the exact number, and more important, the RBC ratio at September 30, but, you know, last year we ended with an RBC ratio of around 225, which we and the rating agencies were satisfied with.

At this point, we want to move our ratio up closer to 275 to 285.

Part of that, we get benefits from codification, but a big part of that is also just moving -- moving up the ratio by improving the capital position.

So we -- you know, we would -- we're targeting getting ourselves up to around 285.

Stu, you said you put 500 million in during the quarter.

Would your statutory surplus at September 30 be up from June 30, or would it still be down, even with that extra 500 million?

We just have to get the number to you.

I just don't have the number in front of me at this moment.

Okay.

And then can we get a sense of what type of gains could be released on the real estate and what size of debt offering you're considering?

I think at this point, we -- you know, we'd prefer to let that news emerge as it emerges.

But, again, you know, we have a target as to where we want to get from an RBC standpoint, just, you know, from a number of actions.

And like anything, you have a number of moving parts but I want to assure you that when we're doing this, the real capital improvements in the -- you know, in the -- in the life insurance company, and that will happen as these actions emerge because , you know, one is sometimes dependent on the other.

In other words, how much -- how much debt we issue depends on what's happening in other areas.

And so we're looking at everything.

There are a lot of moving parts, and -- but we'll keep you informed as things are happening.

And --

The guiding principles have to be, one, we will have sufficient stat capital to satisfy the rating agencies.

The fact is we're going to move to a roughly 285 in the RBC that we've talked about.

That we're committing to in the short run and so you're going to see us move there and we're going to do this in a way that minimizes any effect on our future operating earnings, so we're not going to take from the future and do something now.

So it's all of those are the guiding principles we're operating towards to achieve these objectives.

We think we can.

We're not there in all the details and that's why it makes it very hard for us to give you something today as we go through this analysis during the month of November.

Okay.

And my final question is for Jerry.

Jerry, I think we need more color on your write-downs and your mark to markets hits because you're one of the very few companies that's seeing an increase sequentially in this year and you're giving us large overall numbers but I think we need to hear, you know, what are some of the names that we should think about for you?

Are these individual corporate bonds?

Are these part of asset-backed pools?

You know, do you still have Enron that you haven't written down yet?

What exactly are we looking at here?

Well, as I said earlier, we're looking at a whole host of securities.

I'm -- I might add that the disclosure that we're providing in terms of categories like gross losses, gross gains, and total impairments is probably unparalleled, at least from the information that I've been able to observe throughout the industry.

)Vanessa Wilson).

Companies are providing that.

Right.

Our losses, realized losses, were really mostly in the corporate area.

Okay.

They were -- WorldCom was a part of it.

From the sale of the securities and also the energy sector.

As I said earlier -- and I'm not going to get into any names other than the WorldCom particular situation.

So as I said earlier, they're across the board, and they reflect our diversified portfolio.

And why we don't have, really, any very large names other than WorldCom and the one other situation I mentioned is, in fact, that our average exposures for credits among our very diversified portfolio is a very broad range

And what about asset backed securities, CDOs?

Asset backed securities were about -- a little over a hundred million dollars for the quarter and it represented about $20 million from the equity in four CDOs that MetLife has sponsored.

Okay.

Thank you.

We have a question in queue from the line now of Joan Zief of Goldman Sachs.

Go ahead please.

Hi, it's actually Steven Crone.

Good morning.

We actually have three questions.

First, could you just talk a little bit about your sensitivity to interest rates on the assets side?

I know we talked about your ability and your flexibility at a lower crediting rates further on the liability side but what can we expect our portfolio yield going forward, if interest rates stay at these low levels, decline even further, perhaps.

And I guess to the flip side, to the extent that interest rates may recover at some point in the future and ramp up, let's say, quickly, what could we expect there and how quick re-can you regain yield?

Secondly, with a Republican Congress, what -- how do you guys feel as far as your -- the chance of the estate tax being permanently repealed, and what would you expect that to do to the outlook on life sales going forward?

And finally, can you just review for us your comfortability level with asbestos reserves at this time and any cash payouts that you guys made during the second -- third quarter?

Yeah let me let Jerry talk first about the interest rate impact on the -- primarily the fixed maturity portfolio.

Right.

Obviously the longer we go in this current environment, the more it has an impact on the absolute yield of our interest rates.

During the first quarter, for example, our new money rate was about 6%.

Second quarter, it went up slightly.

But the third quarter, it has been hit relatively significantly, down to 5.45% for our newly invested -- our new investments made during the quarter.

So it -- I mean the future, just like the future in terms of impairments and write-downs -- impairments and realized losses depends upon the state of the economy going forward.

But we do have, with this diversified portfolio, and with our asset/liability strategy -- matching strategy, which you alluded to in the beginning, and which has allowed for the profitability that we have as a company this year, demonstrated the flexibility in our liabilities.

We do believe that irrespective of the interest rate environment away from extremes that we'll be able to maintain our overall profitability.

Is there any timetable as far as the interest rate level being persistently low at this rate?

Is there any timetable that you have that -- that you feel as though eventually you run out of room on the liabilities side and spreads would begin to narrow?

If interest rates remain the same right now?

Not in the near term.

Not in the near term.

Let me just follow up on a -- on an earlier question.

We -- we've had a guiding principle in the company that it is not appropriate, nor does it make good business sense, to announce names of portfolio -- of securities in our portfolio that that we're writing down during the year.

We have -- we've come out with a public statement at the end of the year, and so on, and we just have not done it.

I think it's not appropriate disclosure, and I think it -- it puts us in the middle of a controversy from time to time, so we have not disclosed that, and that's why Jerry did not give you the answer to the question about what are a couple of names but I'm going to make an exception for this call.

And the reason I want to make this exception is sort of like management on the fly with all of you is that there is concern out there.

I think you need to get some of the names in terms of what we're dealing with, so that we don't imagine the worst, and that's the reason for disclosing it now, and it's not something we will do going forward, but I want Jerry to maybe give you a couple of names that we talked about in terms of some of the write-downs during the -- give you two names.

We'll give you two, okay?

We're negotiating here as we go.

So Jerry, do you want to comment on just the two names that you --

Two names on write-downs.

Two names, there you go.

Okay.

Two names on write-downs.

NRG Energy we wrote down by 95 million and northern telecom, 32 million.

Okay.

Stu, can you just --

The question on asbestos reserves, you know, as we've said before, I would really refer you to our disclosures, our 10-K and 10 10-Q, that it's a very complicated issue with a lot of unknowns, and so it's -- it's really hard to summarize at any particular point in time.

You know, we haven't seen any meaningful change in the number of claims that's coming in, but we're also continuously analyzing the patterns of claims and what that means to our reserves and we're continuing to analyze, are in the midst of a study right now.

We also have insurance coverage, which again, is described in the disclosure, and so I would really refer you to the disclosure to get the best information on what's happening there.

Okay.

Okay.

Next question?

You had one other question.

This is Rob Henrikson.

Thinking about how to answer what the effect of the -- of a Republican victory would have on future taxes and planning and so forth, so one thing you need to know is, you know, we're not praying for any particular answer in terms of our product development and distribution going forward.

So the tempering you've seen in the marketplace, both on the institutional side and the individual side, around high-end executive programs and also tax planning for estate planning and so forth, that -- that -- we've already seen that temper in our business, and I think moving forward, we are about energizing in terms of product design with our top-end producers, and I think we'll probably talk a little bit more about the power of that in our meeting in December, but Gen Am, New England and top-end producers at MetLife, I think you'll see, are energized around new sets of products and services that are going to make it easy for their clients, both middle market and upper end, to proceed forward with protection product.

So , you know, I think we're about -- we're as Well-positioned as any company in the industry to respond to whatever comes down the pike the tax side.

We have a question in queue from the line of Nigel Dally from Morgan Stanley.

Go ahead please.

Thanks.

A couple of questions.

First with the real estate sales, can you discuss the impact that will have on portfolio yields since your new money rate of 5 1/2 is very low.

When you have -- when you sell those securities, will that have a significant impact on your portfolio yield?

Secondly, the stock buyback.

Should we assume that stock buybacks are out of the question until you hit the 285 RBC target or is it more complex than that?

And lastly, if you can just review your valuation method for your various venture capital investments.

Thanks.

In terms of - Nigel, in terms of the portfolio that we chose, just to restate, we have a portfolio which has a book value of about $5 billion and a market value of about 9-and-a-half billion, and by the way, this appraisal process with the early returns in the bids that we have gotten for these properties, it was very much of a market reaffirmation of the values that we come up on the properties because they've come right on top of our appraisals.

But in terms of the particular portfolio we're selling, it's part of the lower-yielding assets in our real estate investment portfolio, and when we invest dollars on a relative value from the sales of these programs, our yield will actually increase very slightly from it.

Also, the remaining portfolio after we get rid of these, quote, lower-yielding real estate assets, the remaining portfolio, the yield on it will increase on a run rate from about 11% of book value to about 11-and-a-half percent.

So this first block or this block that we're selling -- and as I indicated earlier, the portfolio is available to use the way the company wants to use it to strengthen its balance sheet, so we don't have any plans for further sales beyond the normal course, but they are to use to strengthen our balance sheet.

This first block that we're selling is the lower end of our yielding properties.

Great.

Thanks.

To your question on buybacks, I mean our priority at this point is defending our rating and getting our capital position, so we're putting buybacks aside for now.

What's going to happen in the future really depends on where we get in terms -- get in our -- in terms of our capital position, but right now we're not doing any buybacks because capital is the priority.

And the real priority, Nigel, is that the way -- the way you get there is to grow your earnings in a very fundamental way that's Evergreen and that you can replicate and improve year in and year out, and very clearly, as Stu says, defending the rating, preserving the ratings, you know, we believe that if we continue to strengthen our capital and improve our operating results -- and that's the plan going forward -- that even if we hold back on stock buybacks, there's no reason why the rating agencies might not even look favorably on an up-tick instead of a down-tick, and so we really are looking at strengthening our ratings as we go forward and we're going to do that with strong fundamental operating earnings and that's how we're going to go forward.

Allen, we've got time for maybe two more questions.

We'll go next to the line of Tom Gallagher with Legg Mason.

Please go ahead.

Good morning.

First on the 50 million of after-tax one-timers and individual, can you just break that out between the three items you listed?

And in particular, a question on: Will the reduction in policyholder dividend obligations within the closed block, will that be an ongoing benefit?

Let me just first change your language a little bit because when we talk about partnership income, that's irregular but not onetime.

So we had -- you know, in terms of partnership income, you know, it probably was something like 20 million out of the 50.

The rest, you had different pieces we'd rather not break down each particular piece.

And in terms of ongoing benefits, you know, what we did is break out what we thought were onetime things, and that -- we're not expecting something ongoing.

Okay.

And then next is on the MetLife Financial Services and New England Financial sales.

I noticed those went down pretty significantly in the quarter.

Can you just comment on what's happening there?

And then also on the General American side, sales were up significantly.

Presumably that was some of the COLI/BOLI and Gen Am, but also a question in terms of enhanced commissions that you had been talking about previously, in previous quarters, through general American.

Are you still using enhanced commissions, or have those gone away?

Rob, you want to start with the --

Yeah.

I would say in terms of the life sales, one of the things going forward as we're going forward and through our organizational design, it will be easier to see exactly how we're doing on the distribution side.

If you look at the life sales, MLFS, in terms of life insurance quarter -- you know, last quarter to -- last year's quarter to this, up about 3%.

NEF down about 7 and Gen Am up substantially at 48.

That's distribution channel and reflects pretty much what we expected in MLFS.

NEF sales a little soft because of that channel's historic focus on variable products.

And Gen Am up.

But here again, you're starting to see -- just beginning to see, the opening of the doors across the manufacturing and distribution arms, such that any MetLife producer can sell any product made in the franchise.

So sales -- sales on the life side are really -- I'm quite pleased with them, actually, and we're seeing a nice increase in the future.

In terms of the Gen Am, it's a little early to tell, in terms of what the effect of the bonus program rolling off is going to have.

We don't -- we'll see.

But to answer your question, no, we're -- we're not continuing bonus programs of that type going forward.

The other issue you're going to see in the QFS going forward, we're going to update you so that you can track in the QFS the amount of sales at MetLife financial services that are carried under the QFS's Gen Am sales.

In other words, for example, in the third quarter, we had close to $20 million of sales in General American that were made by MetLife Financial Services agents.

We had $7 1/2 million of sales in general American that is in the QFS that came from New England Financial.

So those numbers, that's where, again, as we talked about selling those products, those are two numbers in particular to this quarter that would reduce the amount of sales that would actually be done by the Gen Am system that were done by the MetLife and New England systems.

So we'll do a better job of giving you an ability to look at these sales by distribution channel, as well as by manufacturer.

Right and --

Or brand.

Right.

And what you'll -- and on the annuity side, just to mention there, really sales are up significant across all distribution channels, particularly with -- although NEF sales slightly soft, on the variable life side, made up for quite a bit in terms of very high increase in annuity sales.

And here again, you're seeing the distribution channels have the -- more of an open door in terms of understanding what our best of breed products are across the house.

Okay.

Operator.

I think we have time for one question.

And that will coming from the line of Eric Berg with Lehman Brothers.

Go ahead please.

Thanks very much.

My questions are either to Jerry or as to Stu, for whomever it is appropriate.

Really a couple questions regarding sort of investment accounting.

I just wanted to make clear that while different companies use different terms to describe the reduction in the carrying amount of invested assets -- write-down, write-off, impairment, and perhaps even other terms and these terms mean different things to different people -- at the end of the day, my understanding is that if a reduction in the carrying amount of an asset flows through earnings as a realized loss, it's permanent and that it's really -- and that by comparison, if it flows through the other comprehensive income section of the shareholders equity section of the balance sheet, that it's not permanent, that it's sort of a temporary or other than permanent.

Is it -- even though there are lots of terms we're using today, is that understanding essentially correct?

Yes, I would say it's other than temporary is the -- I think is the term of art.

So, you know, that's the distinction, that when it's temporary, it flows through other comprehensive income.

When it's other than temporary, it's written down, and so I -- and it stays down.

Okay.

And then my related question is: At one point in the conversation, Bob was pointing out that these are -- that when the market is significantly less than book, that this is somehow not credit related.

Maybe I misunderstand but I would think that while -- while I certainly understand that interest rates affect the value of bonds, especially if the coupon on the bond is out of line with current coupons, but if a bond is trading at a significant discount to par or to the carrying amount, that it probably is credit related.

And I was just trying to clarify.

Thank you.

Eric, certainly it can come from a number of factors, as you know.

In this environment where many instances bonds trade like stocks, as we've seen in the experience of Ford Motor over the last two months, I wouldn't say it's necessarily credit why the bonds traded within a 20-point range from the high and low during that period of time.

The majority of our other than temporary impairments are related to, in our view, taking a conservative view on the potential credit impairment of that obligation .

Okay.

Thank you very much.

Okay, Bob.

: Yeah.

I just -- again, as we go through that Eric, I think you raise a good issue for all of us, and that is language and so on.

And sometimes securities trade with a significantly lower market value to par only because the markets are going to drive your price there, and it's just related to noise and concern and not necessarily the ability.

And when I talk about credit, our belief that in the end, we'll get our money and our interest.

And that's what I mean by, you know, the issue of some securities we're going to write off because we're not going to get our interest and we're not going to get our principal.

Others, it's just the market value is down but we have absolute confidence we're going to get paid and they're going to continue to pay all the way through the commitment of the bonds.

So that's really what I'm referring to.

But again, I thank you all for your time.

Sorry we ran out of time.

And I look forward to seeing you all at the investor day meeting.

Thank you very much.

Thanks.

Ladies and gentlemen, that concludes your conference call for today.

Thank you for your participation, and for using AT&T's executive teleconference service.

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