大都會人壽保險 (MET) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MetLife first quarter earnings release teleconference.

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

Later, we will conduct a question and answer session with instructions given at this time.

If you should require assistance during the call, please press 0, then star, and an operator will assist you.

As a reminder, this teleconference is being recorded.

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

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

MetLife's actual results may differ materially from the results anticipated in the forward-looking statement as a result of risks and uncertainties, including those described in MetLife's Incorporated 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 would like to turn the conference call over to Kevin Helmintoller, Head of Investor Relations.

Please go ahead, sir.

Thanks, Bill, and good morning everyone.

Welcome to MetLife's first quarter 2003 earnings conference call.

Joining me this morning with brief prepared comments are Bob Benmosche, Chairman and CEO, Gerry Clark, Vice Chairman and Chief Investment Officer and Stew Nagler, Vice Chairman and CFO.

We will then take your questions.

In the room to participate in the discussion are Rob Henrikson, President of U.S.

Insurance and Financial Services Operations, Stan Talbee, CFO and Bill Toppeta, President of our International Operations, as well as other key members of the management team.

First, let me mention a few further enhancements that we've made to the QFS this quarter.

We have added a full legal entity ratings page, sequential details on gross investment gains and losses and a historical comparison of economic capitals versus risk based capitals by product line for the period since the IPO.

Also this morning, we will be discussing certain financial measures, not based on generally accepted accounting principles, so-called non-GAAP measures.

We have reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and our quarterly financial supplements, QFS, both of which are available on our website at MetLife.com on our Investors Relations Page.

With that, I would now like to turn it over to Bob Benmosche.

Thanks, Kevin.

And clearly our earnings performance came right in line with our plan for this quarter.

And we continue to work towards our full year plan objectives.

Clearly, there was a lot of moving parts in this quarter, and we anticipate getting some of that movement as we do our plan.

We are quite pleased with the top line, growing at about 8% on premiums, 9.4% on premiums and fees.

I think there was a big concern over prior years.

We had a strong quarter based upon good institutional sales.

We've talked about our institutional sales continuing to do well with special, [INAUDIBLE] quality with that really good deposit growth and strong persistency the clients have already, and I think you can see that throughout our QFS.

In fact, we had a record $2.6 billion of annuity deposits during this quarter for our company.

On expense front, we continue to make progress on expenses.

We had to prepare for this year because of the pension costs which I will come to in a moment.

But our primary barometer of expenses is, in fact, headcount.

Our headcount compared to where we were last year is down 3% from this quarter in 2002, and you can see across the board, we have enormous growth in our business.

We are taking more applications, we're taking in more new business and so on, and yet we are still able to achieve more efficiency through our investment in technology and re-engineering.

Clearly, if we look at some of the hurdles we had to achieve, get over in this quarter, first of all, you all are aware the fact that there's a 3.6% decline in the equity markets and that was against our assumption of about a 2% earnings growth.

So that's affected us about $30 million after taxes for this quarter.

Half of that is coming from DAC and fees and the other half, quite frankly, is coming from equity-like notes.

And if you look at the retirement savings sector segment of our company, clearly you would have expected some [ELI] kind of income into that spread.

So while we had a weak first quarter, we are anticipating a better second, third and fourth quarter income if the markets continue to improve here.

We talked last year about the fact we had about a $25 million after-tax charge coming from increased costs in our pension and post-retirement expenses.

In the auto and home businesses, we did a study, looked at where our reserves were at the end of the year and that was conducted during February and the feeling was, we had a good quarter in auto and home and so therefore we decided to strengthen our reserves for prior year issues.

And of course, we do have some pressure just to the fact that we incredibly low interest rates right now.

And we do have some investment into lower-yielding funds which is putting some pressure on us.

So when you look at all of those hurdles that we had to overcome, the company reacted quickly, people reacted quickly.

We dealt with some of our crediting rates, we dealt with some of our expense issues that we had to focus on.

So the breadth and diversity of our earnings sources clearly is what's giving us strength in this very weak period of time and it's what gives us our confidence as we move through the rest of 2003 to work towards our plan.

So what I'd like to do now is turn it over Gerry Clark and then I look forward to your questions.

Thank you, Bob and good morning.

I'm pleased to present a few of the highlights of our investment activity for the quarter.

In spite of the continued difficulty in the domestic and international economies and the continued uncertainty as the overall direction of future economic activity, our investment portfolio continued to perform on balance in an overall satisfactory manner.

Our portfolio actually experienced improved results as compared to our quarterly experience of last year both with respect to realized losses and our unrealized loss position at the end of the quarter.

This improvement occurred while we continued our strategy which has been consistent for the last three years.

And that is proactively addressing portfolio weaknesses through impairing assets and taking realized losses, all with the goal of maintaining as relatively unimpaired and investment portfolio as reasonably possible.

As such, our gross realized losses declined more than 40% versus the fourth quarter of '02 an our unrealized loss balance on fixed maturities actually declined 25% from year end, ending the quarter at $1.268 billion.

These unrealized losses represented 9/10 of 1% of our fixed maturity portfolio at the end of March.

During the first quarter, we had net realized investment losses after offsets and taxes totaling $84 million.

Our problems were concentrated largely in the airlines, followed by asset backs.

In airlines, the sector with continued high visibility, we took realized losses totaling $69 million during the quarter, on our portfolio which now stands at about $600 million.

After talking these losses, over one half of our portfolio remains investment grade and over 65% of it is secured.

Following are the specific components of the quarters capital gains and losses.

The first quarter's pre-offset, pre-tax realized loss was $136 million excluding hedging losses of $34 million and was comprised of $221 million of gross realized gains, $89 million of gross realized losses, and $268 million of write-downs.

As to the gains, about $100 million were related to real estate sales which were really a residue from our fourth quarter 2002 sales program.

Another aspect of our performance was that we experienced a decline in our fixed maturity and net investment income yields during the quarter, reflecting the continuation of the lower interest rate environment.

The lowest environment that we've had in over 40 years.

The most significant reason for this decline was, as I stated, the impact of lower reinvestment rate on new money, normal portfolio rollover and prior trading proceeds.

In closing these brief opening summaries, I would like to make some additional remarks regarding the general quality of our portfolio and our strategy.

Our fixed income portfolio remains strong.

The bond portfolio has an average credit rating of single A one, and the investment grade portion of our portfolio continues to increase.

We continue to operate within our overall duration benchmarks as it relates to asset liability matching.

Finally, we continue to like the private origination market, private corporate debt, commercial and agricultural loans.

And feel that the resources that we have devoted here give us a strong competitive advantage.

Our portfolio has challenges, however, which focus on both the uncertainty of direction of the economy in its general weakened state, coupled with the reinvestment of new assets raised by our business partners and normal portfolio rollover in this low-interest rate environment.

While none of these challenges are unique to MetLife's portfolio, we do believe that the relatively high degree of asset and sector diversification in our portfolio has been and we expect it will continue to be a source of stability during these difficult economic and credit market conditions.

With that, I'd like to turn it over to Stew Nagler, our Chief Financial Officer.

Thanks Gerry, and good morning everyone.

As Bob said, we are pleased to see operating earnings and operating earnings per share coming right in line with our internal plans.

Of course, we had some variances both above and below on specific product lines.

The diversification of earnings sources continues to serve us well, especially in this tough economic environment.

Our businesses are growing nicely.

Premiums were up 8% this quarter versus last year and that represents $360 million in incremental quarterly earning premium versus the prior year quarter.

This top line growth will produce stronger earnings growth in the future.

We're also pleased to see that fees grew 24% in spite of the year-over-year market decline due to strong deposit growth as Bob mentioned.

We're continuing to manage expenses aggressively and we expect to achieve our expense targets for the year.

Now I'll briefly discuss some of the trends in the key product lines, starting with institutional.

Group Life had a very good quarter with operating earnings up 15% to $78 million.

This improvement is being driven by strong new business growth along with disciplined pricing and renewal action.

The Retirements Savings product line was down from prior year due to lower levels of non-recurring investment income versus prior periods as well as overall lower yields.

Also the quarter was negatively impacted by about 10 basis point of unusual items which lowered the yield.

The quarter was also impacted by lower underwriting results versus the prior year quarter as well.

Our projections call for higher levels of non-recurring investment income on average for the remainder of the year.

As you know and have seen in the past, quarterly investment yields will vary by quarter in this product line.

Last year, they ranged from 122 basis points of spread to 158 basis points.

We expect, as I said, improving yields due to higher levels of non-recurring income, along with modestly improved expenses and some underwriting improvements as well going forward.

The Non-medical Health and other segment continues its rapid growth pattern with premiums up nearly 18% while the bottom line was up over 11%.

The premium line was favorably impacted by disability to reserve buyouts and other items.

Normalized top line growth was about 12.5%.

The morbidity ratio and disability came in at the lower end of our expected range of 95% to 100%.

It came in at 96.5% due to the aggressive price actions in late 2001 and into 2002.

Now turning to Individual.

In traditional life, earnings were down $22 million quarter-over-quarter.

In looking at traditional life, keep in mind that it primarily results from the runoff of the closed block.

This year's quarters earnings reflect a $6 million reduction investment income from the implementation of economic capital, $5 million in increase pension and post retirement costs and lower investment yields.

The prior year's results also benefited from a non-recurring adjustment that improved earnings.

As you will see in reviewing the QFS sales page, we continue to see weaker [VO] sales but much stronger UL sales.

Results in this segment were driven by widening spreads from both high yields and prudent crediting rate action which will continue and, in fact, accelerate through the remainder of the year.

The annuities line produced strong operating earnings growth of 25% versus the prior quarter.

This is being driven by aggressive spread management with crediting rates down 62 basis points versus the prior year quarter.

Very strong deposit growth has continued, as Bob mentioned, with total annuity deposits up 53% to $2.6 billion.

This has allowed us to maintain our fee levels, even with the current equity market.

This line was also impacted by higher DAC amortization and its share of the pension and poster time and expenses.

Looking at a couple of other businesses, the Auto and Home segment produced $30 million in after-tax earnings in spite of $30 million in after-tax prior year reserve strengthening.

This strengthening was primarily related to the integration of St. Paul into MetLife.

The Property segment had a very strong quarter, partially driven by a 7% reduction in non-cap claim frequencies along with the impact of rate increases and mandatory deductibles on certain types of losses.

Average earned premium for the quarter for Auto and Home increased 11% versus last year's first quarter.

We continue to see strong benefits from current and prior rate increases and overall exposure management.

Also, as you will recall, the first quarter has historically represented this segment's highest level of losses and lowest level of earnings.

Our International division also had a strong quarter, producing $28 million in after-tax earnings.

This reflects the benefits of the Hidalgo acquisition and integration, which is going very well as well as growth in Korea, Chile and Taiwan.

Hidalgo produced $20 million in after-tax earnings.

You probably noticed the sequential decline in premiums for International operations.

This relates to some tax law changes in Mexico that basically made a couple of Henesis products of little value to consumers but this was fully expected and planned for in our targets for 2003.

Moving now to statutory earnings data.

On a statutory basis, Metropolitan Life Insurance Company produced $406 million in operating earnings for the quarter and $247 million in net earnings.

Total adjusted capital grew to $11.9 billion, up $300 million from year end.

We are certainly in a challenging environment, especially as it relates to yields.

Though the market decline in rates appears to have slowed, new money yields continue to be a challenge.

However, we have substantial flexibility on crediting rates as we have demonstrated across the product lines.

This flexibility, along with the fundamental strength and market positions in our key businesses and broad earnings diversification, gives us confidence that we can deliver our objectives.

We continue to take the actions necessary whether through crediting actions, pricing or expense initiatives to achieve our planned plan objectives.

One other thing I would like to call your attention to.

As most of you know, on May 15th, the purchase contracts associated with the MetLife Capital Trust One Equity security units will be settled.

We expect to issue approximately 59 .8 million common shares on that date and we'll receive just over $1 billion in proceeds.

We expect to use the proceeds for general corporate purposes.

In addition to the interest earnings on the proceeds, we will also see a reduction in interest expense due to the lower interest rate on the two-year note which we issued.

Those notes appearing in long-term debt replaced the convertible securities previously shown as mezzanine debt.

For those of you modeling earnings, we would estimate that our share count for the second quarter will be about 730 million shares, and about 760 million shares in the third and fourth quarters.

With that, I will now turn it over to the operator to take your questions.

Thank you.

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The first line we'll open is Jason Zucker at Banc of America Securities.

Please go ahead.

Good morning, thank you.

One question on yields and one question on unrealized losses.

With respect to yields, you mentioned that the major factor during the quarter was that reinvestment rates went down and that's why the general account yield had declined.

Were there any steps taken late in the quarter or perhaps beginning of the second quarter to try to rebuild the yield level?

And the general account yield came in at 6.89%.

Is there any way you can give us a projection or at least a range so we can get a better idea of how this number might come in by year end?

And then, with respect to unrealized losses, going forward, last quarter, you were a little bit hesitant to say that things would improve in '03 versus '02.

The first quarter was certainly an improvement.

I was wondering whether or not the first quarter had changed your view?

Hi, Jason.

This is Gerry Clark.

Let me address the last question first.

As we have said all along, it is difficult to forecast losses without really knowing what the economy is going to do.

However, we do expect that the capital gains in the future quarters will be somewhat less as the first quarter included some leftover real estate sales from our fourth quarter program as I indicated in my opening comments.

As long as the economy shows some modest improvement or at least some stability, and very importantly, there is no big losses due to corporate fraud, we would expect to see the pattern of continuing declining losses throughout the year and really an improvement in our unrealized loss position.

In terms of forecasting for the rest of the year what our yields are going to be, this once again gets to the level, you know, very obviously gets to the economy and the level of interest rates.

We -- that will be the primary factor which impacts our total yield.

We'll say, though, that we are focusing very heavily on those private asset sectors which has incremental yield relative to what the marketplace provides, the public marketplace.

We have very these strong underwriting and production capabilities in both the commercial mortgage and the agriculture mortgage area and the spread is relative to corporate securities are very attractive in those two areas and we are active in those two areas this year.

In terms of private placements, we'll have a higher allocation for them this year as we've really strengthened our bench strength in that area and we are doing very good volume this year.

But in terms of my forecasting going forward, it really depends upon the impact of the economy going forward.

All other things being equal, if things stay the same, you know, quarter-to-quarter, the yield dropped about 36 basis points.

I wouldn't expect to normalize that, it seems pretty high.

Could you perhaps comment on where we are today and then relatively speaking where it should fluctuate in the future?

First of all, quarterly yields, as everyone knows, are annualized yields for the quarter.

Right.

And they are lumpy.

And there's a lot of factors that go into their lumpiness.

For example, in our real estate equity yields, there was an anomaly in that for the fourth quarter.

The asset -- the yields look inordinantly high because the fourth quarter ending balances of real estate did not include the assets that we sold and, yet, for the quarter, the income was for the total portfolio.

So things like that happen every quarter.

We have been experiencing basically over the last three or four quarters, about a 10 to 12 basis point decline in the normalized run rate of our fixed income portfolio.

And interest rates appear to have leveled off at this point in time now, so I would expect somewhere in that range to continue, if rates stay at this level.

All right.

Thank you.

You're welcome.

Thank you.

The next line we'll open, the line of Vanessa Wilson at Deutsche Bank.

Please go ahead.

Thank you.

Good morning.

I guess this question may be, be careful what you wish for.

We have higher rates in the future.

Could you talk a little bit about your asset liability duration mismatch and where is the duration of your liability?

You have been able to move liability costs down nicely over the last couple of years.

What would happen to your liabilities if rates grow?

Okay.

This is Stan Talbee.

Hi, Vanessa.

In terms of our asset liability duration match, we have a policy of staying within a half year and we are well within that on all of our business portfolios.

So we feel comfortable with that.

Obviously, as rates change, we are bringing in new business and resetting existing business where we have that flexibility at the current rate levels.

So when rates rise, we are going to see, you know, an increase in the yields on new business that we are writing.

You know, with some flexibility in our rate resets, we have gotten some pretty good margins.

We expect those to continue, particularly on the individual annuity side as well as our UL portfolios.

In terms of our TCA account, which is our account that holds the death benefit proceeds for survivors, we do have a minimum guarantee of 3% so our short-term rates rise, we should expect to see actually an increase in the yield.

We did, however, change that rate, minimum guarantee to 1.5% on new deaths occurring on the institutional side effective April 1.

So we do expect to see some margin improvement going out with flat rates and probably some margin of improvement with slightly increasing short-term rates.

Vanessa, this is Bob Benmosche.

Just a comment on the half year, that's on the short side and not the long side.

So in effect, that's put a little pressure on our spreads for the first quarter, so it's somewhat anticipatory for rates going up a little bit year end, so we're looking at that right now.

And Stan, just to follow up, you seem to have a lot of money flow into the fixed bucket of the variable account.

Have you planned for that?

Is there any issue there with the minimum and the ability to reinvest all those funds?

We do have, you know, certain share classes that are relatively short in nature.

We have withdrawn a couple of those from the market.

You know, right now, the money that's flowing in, about two thirds of it is going into the fixed account.

We believe as the market picks up, we'll see some of that money flow back into equities.

Gerry, on the $8 billion of cash and short-term that you showed this quarter, is there an opportunity there and what could we think about for that?

Vanessa, the $8 billion is really within the target range of our portfolio, 2 to 4% for short-term securities.

That's at the high end of the range but it's within the range.

And a lot of those assets really offset maturing liabilities, some in the securities lending area, but it's just a little bit higher so there is not going to be a massive redeployment into longer assets from that total.

If we bring it down to middle of the range, it would be a couple billion dollars into more appropriate assets.

But it's not out of range, really.

Thanks very much.

By the way, just to keep in mind, you have to think about each segment when you talk about going into the fixed account.

It's been very traditionally common within the MetLife sales force to use that fixed bucket as an asset allocation tool.

And it's going back to have some of our money at a principal guaranteed level, you know, people are looking for some of those guarantees, some of the money is going into the bond market, some of it into the equity market.

On the MLI side, you have enhanced dollar cost averaging which is really--.

The key here is to bring in assets, knowing that they have an opportunity in the variable annuity wrapper to move into the equity markets and the enhanced dollar cost averaging allows that to occur.

So this is gathering assets, puts a little pressure on us in some of the new deposits but it really allows us to look forward to growth coming from garnering those assets now.

So it's not like selling a three-year, five-year fixed annuity that you know that you have to deal with the rollover on that.

Thank you.

The next line we'll open will come from the line of Joan Zief of Goldman.

Please go ahead.

Thank you and good morning.

I was wondering if we could just have review of just the employee benefit marketplace, the pricing on, not just the group life, but what you're seeing pricing on the non-medical as well?

And also what you are seeing from an underwriting standpoint.

Are you seeing any change in incidence rates in recovery rates?

We hear a lot of different things from different companies.

That's my first question.

The second question is, are you maintaining your earnings per share guidance that you had given us at the end of the year?

And are you feeling, you know, more comfortable or less comfortable given the environment with interest rates and the economy?

I'll go first.

Joan, let me take the first part of your question.

In terms of the noise -- first of all, let's say the employees benefit business across the board is doing extremely well for us.

You know, I have said we are running on all cylinders and I'll continue to say that.

In terms of the noise around the non-medical health business, I assume you are focusing on disability and, there, you know, I would like to just reiterate we continue to be bullish on our disability business.

You may recall, if you go back to the road show that, prior to going public, MetLife had really revamped its entire disability line and that restructure continues to come through for us.

You know, we are number two in the group disability business, so from the standpoint of data, about the economy and so forth, we have got as much data as virtually anybody in the business and in a much, in a very broad market segment.

If you recall, you know, our business is unique in terms of its risk profile.

So if you look at the effect of the economy on the disability business for different carriers, the economy is the same but the risk profile is quite different because, as you know, we have high proportion of our business and participating business and ISO business where the customer take the risks and often establishes, you know, premium stabilization reserves and so forth.

In terms of new business, we continue to have very tight risk selection and pricing.

The discipline renewal strategy, as you know, has worked well for us and continues to do so.

You know, in terms of the reserves, I think that the other thing that is in the back of people's mind is what kind of reserving do you have?

What kind of [JACK] situation are you looking at?

For our business, you know, reserves are reviewed.

We have continued to feel we're conservative relative to our actual experience and we have looked at this literally across every claim duration.

And of course in terms of DAC, as you know, the group disability product line here, really has material DAC whatsoever.

So we're very comfortable.

By the way, I know that some might be concerned about the top line growth in disability.

If you take out reserve buyouts on our disability business, you see that, you know, with the buyouts, it's about 22% top line growth.

Without, about 13, which is a little bit higher than the market and I would say that's primarily because of better persistency despite our aggressive renewal actions.

And part of that has to do probably with the chopiness of the competitive landscape.

On the...

Does that cover?

Yeah, that's fine.

Except, what's the discount rate that you are using on your reserves?

Well, you know, in terms of -- if you look at dates of disability, for example, in 2003, it's about 4 1/4 and the new business reflects an appropriately lower rate than that.

Okay.

Okay.

On the plan for the year, we, as I say, when I started off, our plan was achieved in the first quarter, although not exactly how we thought but pretty much the way we thought, with strong operating results of the company.

We are very confident at this stage of the game with our full year plan objectives that we talked about, but we also know it's going to take enormous amount of work and some improvement in the environment around us which is what we are planning on.

So, as you recall, we are talking about improvements in the equity markets.

I look at the competitiveness of the United States right now in the global markets, the incredible strength of the Euro has got to begin to have an impact on our ability to export.

It a huge differential in price.

So I feel, as I look to the rest of this year and I look at our sales -- and that's a barometer, sales from our clients, clearly are strong in the first quarter so therefore I would anticipate that you will see a pretty good economy for the rest of the year.

And that gives us the confidence that we're going to see some things move our way that didn't move in the first quarter and while it's going to be a lot of hard work, we believe that we will achieve our plan for the year.

Thank you.

Thank you.

And the next line we'll open is Ed Spehar with Merrill Lynch.

Ed Spehar, CFA: Good morning.

I have a couple of questions.

I'd like to follow up on the portfolio yield question.

I guess, Gerry, if I heard you correctly, I think you were suggesting if interest rates stay where they are, you could see a 10 to 12 basis point decline quarterly.

And I guess I'm a little confused by that because it would seem to suggest that your whole portfolio would be at market rates in five to six years, which, I think suggests a shorter duration than what the portfolio actually is.

So I'm wondering if you could talk about that a little bit more?

And then on the equity sensitivity issue, Bob, I think initially you said there was a $30 million after-tax impact in the first quarter because of the decline in the equity market.

First, I'm wondering is that including the impact of the ELNs?

And whether it is or isn't, I guess that still sounds like a pretty high number in terms of equity sensitivity for a company that I think most of us perceive to be less equity sensitive.

So I was wondering if you could talk a little bit more about that?

Thank you.

Let me do the second one first.

When you're talking about a company that generates, as we approach $2 billion after taxes, I guess what you may think is a high concentration in the equity market is not what I see.

You look at our separate account balances, you look at some of the DAC relating to those, to me, it's minor.

So, what I said in my opening comments was that you saw a decline in the markets of about 3.6% in the first quarter.

We are getting anticipated, too.

So you've got that differential.

About half of the $30 million was related to DAC and fees.

Lower fee income.

So if you look at, it's important for all of you to look at our balances by our segments.

We have grown most of our balances this quarter so we have more assets here which means overtime, we're going to do better.

So I would say that half of that is related to DAC and the reduction in fees on separate accounts.

The other half was lower [DLN] income which we'd expect as the markets begin to improve, you'll start to see that flow back in.

My sense here would be that, when you're talking about 3 to 4% of our earnings that might be affected at any point in time with some adverse market conditions, I don't see that as -- and I apologize, because I just don't see it as a heavy impact due to the equity markets.

Ed Spehar, CFA: I guess just a follow-up.

It's not suggesting heavy impact but it seems a little bit more than what I would have thought given that the market wasn't great in the quarter but it was down only 3.5%.

You know, that just seems a little bit more.

And I understand it's a big company and they are moving pieces.

I guess my question is, if we had another quarter of down 3.5%, is this the type of, is $30 million the kind of number we should think about?

Or is there anything else with an unusual DAC unlocking I guess one question in the quarter?

No, there is nothing unusual.

If you continue to see declines in the equity markets, you're going to see some impact but on the other hand, other things should go well for us.

The point is that we see a flight to quality here.

We see people now looking at our long-term care product as having a great year because people are looking at our brand, they;re looking at confidence in what MetLife talks about, and so you will see that continue to grow.

There is flight to quality of our brand just in third party distributions through MLI because they want company they know that they can--- And you can say they should understand separate accounts are protecting them, they don't understand that.

They don't understand SIPIC either.

They want to know that the company there is going to be there for the long haul so we see a lot of those activities on the plus side.

So right now, the balance of our business say, we might is a little pressure here, a little pressure on the post retirement benefits which are affecting us both in the discount rate and the asset performance in our pension plan.

There are other things that are offsetting that.

So my sense would be, that when one part of the waterbed goes down, the other part of the waterbed would go up.

What will happen is, if you attempt to look at pieces of it without looking at the whole, you might come up with the wrong answer.

That's the best advice I can give you at this point.

Ed, let me address your question.

I will address it in two ways, the asset side and then just a general comment about asset liability management.

First of all, the run rate that I talked about, 10 to 12 basis points for the last few quarters of the decline in our overall yield, that's occurred in interest rate environments that you are aware of, has been rapidly falling really, over the last four or five quarters.

Whereas we have seen in the past few months it's leveled off somewhat.

So it depends as a big factor of where interest rates are going to go in the future, but they have leveled off over the past few months as opposed to the prior four quarters.

So I'm not projecting that our yields are going to decline going forward.

I'm saying there are conditions that it could happen but we are clearly investing in a lower interest rate environment today than exists in our portfolio and that's going to have a continuing impact.

Factors like spreads in individual assets, factors like the amount of new business that our company brings in and we are doing a wonderful job of that will impact the overall yield.

But spreads is really what we ask you to focus on and our ability to adjust the rates of our liability, the pending rates and to preserve our margins.

And I think 2002, and the first quarter of '03, demonstrated that in most of our portfolios, there are some that you mentioned that have been addressed earlier that we had difficulty in, some of our retirement savings, but most of them, we have adjusted to crediting rates to reflect the asset performance.

And when rates go up, we'll also adjust the crediting rates.

Ed, this is Stan Talbee.

Just one other comment that I would like to make.

As we write all of our new business, it's obviously coming in as much lower yields so that has a natural tendency to bring down the overall portfolio rate as well.

I think Jerry is right on the spread.

It really is managing the spreads as well as the rates of credit.

Ed Spehar, CFA: One very quick follow-up.

If rates stayed at, let's say new money yield around 4.5% which it seems to me it's pretty close to maybe where it is.

It seems like, given the portfolio maturities and cash flow, that maybe the overall yield, if rates stayed there, could decline by maybe 120 basis points, let's say, over the next five years.

Now, the question is, is there enough flexibility on your general account liabilities to offset half of that, all of it, you know, any -- if you just take what I said as a given, how much of that do you think you could offset?

Ed, this is Stew.

I think to get an answer to the question you have, we'd have to go through a little bit more modeling because we have such a diverse group of liabilities ranging from very short liabilities to annuities that play out you know, 30, 40, 50 years into the future.

I just come back to where Gerry was a little bit on spreads.

I think in all the businesses other than retirement and savings, we believe we have the capacity to manage our spreads to at least stay with a level -- at the level we're at and, in fact, in some cases, increase them.

So as rates move around, we can adjust the liabilities over a number of different scenarios.

Relative to retirement and savings, as I said earlier, we expect the yield on that portfolio during the year to go up a little bit because of the irregular income on non-recurring, whatever word you want to use, that we think we have the opportunity to widen our spreads there.

In that portfolio, about a third of the liabilities, we can reduce the rates on because they are not real long term, about but about two-thirds as long.

But there the assets are reasonable well matched, as we said, within a half a year.

As you playout different scenarios, we think we can keep our spreads up in that particular area also.

And Ed, we spend a lot time with our risk management process to really assess where we are crediting rates versus where we are in minimums.

And so we have an enormous amount of room from what we can see on most of the bigger portfolios with big amounts of assets.

So we watch that constantly and we are looking at where we might see continued pressure based upon minimums because right now we're pretty satisfied.

We've got plenty of room over the next few years to still deal with our crediting rate so there is no danger here.

Ed Spehar, CFA: Okay.

Thank you very much.

Thank you.

The next line we'll open is Colin Devine at Smith Barney.

Please, go ahead.

Colin Devine, CFA: Good morning.

A couple of questions, gentlemen.

First just on the spread so I'm clear.

Gerry, despite, I guess on the net yield about a 29 basis point drop year-over-year from the first quarter, at this point, you are confident that you can maintain that by lowering crediting rates and perhaps you can tell us how close you are to the minimum on certain blocks of your portfolio?

That's the first one.

Second for Stan, it's my understanding the bulk of your variable annuity sales these days are the GMIB product, which most of your competitors, in fact, just about all of them, aren't writing because of what they perceive is the above average risk tied to that.

Perhaps you could tell us why you feel so comfortable versus what, you know, what most of the other majors are doing out there?

And then I just wondered, Bob, if you can walk us through how you're going to get to your current guidance range given where we started the first quarter?

Colin, I think on the spread question, I will ask Stan to address that.

In terms of where we are relative to the minimums, our largest blocks we have rate resets, individual deferred annuities.

We are well in excess of 100 basis point of the minimum.

The same is true for our individual business universal life portfolio, and the same is true for our group universal life portfolio.

In terms of our group non-medical health portfolio, there really are no minimums.

A lot of the short time liabilities are indexed so we have a certain spread there.

We are at the minimum guarantee in our TCA account.

We mentioned that was 3%.

We did make a change effective April 1 to lower the minimum guarantee on new deposits into those accounts on our institutional business which represents about 80% of that pool effective April 1.

So we expect based on the relatively short-term nature of those liabilities, that that will be rolling out and getting closer to the 1.5% guarantee.

So we are building some margin in there as well.

You know, and as we've said in our retirement saving sector, that's where a lot of our liabilities are really fixed rate, long term guarantee so we don't have the flexibility there to manage crediting rates.

In terms of the GMIB issue, I'm going to pass that to Hugh McAfee who's our Product Manager for Individual Annuities.

Hi Colin, it's Hugh McAfee.

You are correct, we have some success with our GMIB and some of our competitors have pulled out but others actually effective May 1 we've seen them come into the marketplace.

There are approximately 8 to 10 what I would call popular GMIBs out there.

Due to the brand name of MetLife, we have been able to institute a price increase effective February 15th.

And our utilization went up a little bit in the first quarter as people sort of, the looming price increases, we saw an increase in sales.

So hopefully, we'll see a slight pull back in that utilization.

Also, very importantly, economic capitals, we measure capital allocation here at MetLife, we deployed that when we first brought out the product and priced it.

With the new SOPs coming out, we're finding that there's not much difference in our required reserve levels, so very confident in the level of pricing we have but we'll continue to monitor it closely if we can continue to maintain sales growth and review the benefit together, we'll continue to do that.

If there is any other questions on that, Colin.

Colin Devine, CFA: Let me follow up.

What level of capital are you putting aside for the GMIB product which has quite a different tail risk to it versus standard VA?

The economic capital methodology that we use measures volatility.

So what we do is we are looking at the tail risk.

Right now, the GMIB benefit is out of the money in all cases.

When we looked at the new SOP, and in fact, our own methodology, the amount of reserve that we would be holding under that new SOP is well under $10 million.

And in fact, we are holding gap reserves based on a similar methodology and we'll fine tune that once the new SOP is passed.

Right now, we are holding a $3 million reserve for GMIB which is kind of, one way to view the overall risk that we see on our books today.

Colin Devine, CFA: Isn't the bigger issue pending RBC charges on this product and the CT?

This is not a GAAP issue.

This is a risk based capital issue.

That's the number I'm trying to get at.

Yeah, I don't have that number handy.

Colin Devine, CFA: Okay.

That is something we are watching.

Colin, I would like to add that we did increase our prices and also our guaranteed minimum death benefit effective May 1, again in anticipation of where the market is going and increased both, all of our GMDBs by ten basis points.

Putting us, I would say, in the, as far as costs go, in the third quartile of costs, upper third quartile.

As far as getting to the rest of the year, let me go through major categories.

Number one is expense saves are going to continue to flow in here.

We are very pleased for example, in MetLife Investors.

While that was a huge drain from an expense point of view last year, it's actually making a profit this year and continues to show profits just on expense revenues.

For example, last year, for the first quarter, we had a credit from our bonus plan, this year we don't.

But that doesn't mean that, especially all of you on Wall Street know, we can look at that goal as we get into the fourth quarter of the year.

Gives us a little bit of flexibility there as well.

We expect to see, you know, mortality does tend to be a little bit seasonal, something that we haven't figured out yet, the science of it, but it tends to be.

Same thing for Auto and Home.

We know what the science is, it's weather.

And we would expect that to continue to be a strong earner as we proceed through the rest of the year.

The integration as you've heard with Mexico has continued to go well.

It gives us some positive benefits in this quarter.

That continues to be a good acquisition for us.

In terms of the businesses per se, I would guess that institutional through business growth, some improvements in the equity market which I talked about.

I'm somewhat optimistic you're going to see some positive trends in the markets through the rest of this year and business improvement.

And so, therefore, when you look at the growth of business and improvement in markets, I would expect institutional give you per quarter maybe anywhere form 4 to 6 cents.

We'd expect IB with some of the things they're doing , maybe 1 to 2 cents.

Auto and Home maybe in the area of 1 to 3 cents, and expect corporate maybe to give us, you know, anywhere from 1 to 3 cents a share.

So remember, some of our cost, because of the debt that we are now shifting, as you can see, a lot of things flowing through here and quite frankly what we've talked about in the technology front, while we're going to continue our level of investment ibn the first half of this year, we have a contingency plan that says, if, in fact, the second half does not look the way we think, then we are prepared to make some further expense saves there as well.

We have a lot of flexibility, we have a lot of moving parts and the good new is, most of this is moving in the right direction for us.

And as you saw, we had a tough first quarter and we are pretty pleased that we are able, we're pretty much close to plan in spite of the tough quarter.

So we are pretty optimistic based upon these issues for the rest of the year.

Colin Devine, CFA: Where do you stand with the rating agencies in terms of capital right now?

We are in constant conversation.

They are watching us as is everybody else.

I think the key for them is they know we have flexibility.

We can raise capital.

That's not an issue.

They see our real estate portfolio.

A lot of people wanted me to sell it three years ago but it's come in pretty handy if we needed to raise more capital.

The real concern they have -- and we are working hard, is to continually improve our expense ratios, continually show quality sales, quality underwriting.

This is about running a fundamental business and creating real operating earnings and real growth.

And that's what they're watching.

Because clearly, historically, we were a company that huge amounts of money, we were rich.

The problem was, we were not operating the right way and we were spending the richness.

They want to make sure we're now adding to the richness, not spending it.

And so far they've been, from what I can tell, pleased with our results but they expect a lot more to go on.

Colin Devine, CFA: Do you expect that you're going to need to raise capital this year or not?

Is it too early to tell?

I don't see the need right now.

Unless there is something that shocks us in the credit markets, I don't see anything that would require us to do anything other than keep earning money and adding it to the coffers and that's why we're going to continually add capital, and I know there's a lot of questions about, are we going to buy back stock?

And the answer is, that will be when that's the right, prudent thing to do in terms of how you want to manage you're capital going forward.

And so, right now, we want to build capital.

Colin Devine, CFA: Thanks very much.

Thank you.

The next line we'll open is the line of Caitlin Long with CSFB.

Please go ahead.

Good morning.

I just wanted to follow-up on the question that was asked earlier about the capital losses.

Obviously, you know, they were still fairly high in the quarter.

Just curious really about the incentives that you have laid out for your investment staff.

It seems like maybe last year, there wasn't that much attention paid to the capital losses and, you know, more attention paid to current income and, therefore, the capital losses came in kind of big.

Have you done anything to change those incentives and tried to manage down the capital losses this year?

Caitlin, there is no silver bullet to improve the credit posture of our portfolio outside of the sound analytics that we put in to this process.

As I've indicated, we have made some good key additions to the staff in the investment department, but we haven't changed the incentives of our investment professionals to focus on one particular area.

We're just, last year and this year and the year before that, we continue to pay attention to the fundamentals of credit analysis.

You have to, as I mentioned before, one has to look at the results over a period of time and not what happened this morning.

The first quarter happened to be, from the trend last year, happened to be good quarter and as we indicated earlier, we think that the rest of the year will probably be better than 2002 but it's just the same fundamental process that we've had with the addition of some people with no change in incentives.

How do you compensate the money managers?

We compensate the money managers based on, as a generalization two factors.

One is the expertise and success that they have in their own individual discipline and not necessarily in this order.

And secondly the partnering and success that they bring to our overall corporate results, working with our lines of business, working with the FMG, the financial management group, working in partnership because this company is a partnership.

It's not an investment department wrapped by an insurance company.

We have lines of business, we have many factors that people around this table spoke about today.

Investments is one part of that factor, but it's part of the partnership.

And so we maintain a balance in terms of the compensation programs of paying attention to the expertise that individuals in each sector bring, but also how well we can partner with the rest of the company and vice versa.

Our bonus plan is based upon 80% of the amount of money that gets allocated to a line of business or a sector of our company comes from company results, which is in line of what Gerry just said.

How well we all do together determines the pie. 20% of that, however, is really specifically tied to how well that division of the company or that department does.

And, so, we are continually focusing on performance management.

As you know, we have been very rigid about that.

Gerry's organization goes through the same process as the rest of the company does.

And so clearly, the performance of investments, while it's predicated on company results, on average, their bonuses were down somewhat this year versus last year.

So there is was an impact based upon divisional results.

But as far as the company results, we all share that as a broad base of how we operate because it is about operating, because it is about operating as a partnership around customers and how we get to the bottom line there.

But, Bob, actually, my question really relates more to, are you compensating them for total return or are you compensating them for current income?

Because I think it seems to us like --.

We are compensating them for both.

We're compensating them for really, walking and chewing gum at the same time and it's about total rate of return but it's also about current income.

It is the right balance.

It's when do you decide to trade out of a position because you are concerned about the future impact of the organization versus the fact that while we have to take writedowns and put some capital pressure on company, we also expect that to decline overtime and therefore we're going to get all of our money plus interest.

So those judgments are going all the time which makes it---.

Clearly, we have to have the right balance between total rate of return and the right balance between current income and thinking about our capital and thinking about our future.

All of that gets back to, including as Gerry said, how well we think about the liabilities that you're actually managing to and how well we stay open and communicate with each other.

So it's all of that which makes it a very complex issue for us to manage.

No different than at a bank.

Do you want to incent the banker for making a loans?

Do you want to wait til they get monies paid back?

You can't do either.

You have to use some judgement as you look at how that loan proceeds on the books for the bank.

Bill, I think we have time for one more question.

Thank you.

The last question we'll open is Nigel Dally with Morgan Stanley.

Please go ahead.

Great, thanks.

Three quick questions.

First on Group Life and Disability.

Just wondering how the sales outlook has changed including the number of requests you are getting for new proposals?

Second, on fixed annuities, has there been any change in the return on equity you're generating from your new sales?

And third, any update on asbestos claims this quarter?

Thanks.

Nigel, let me take the sales first.

In terms of, and you see it in our revenue numbers interestingly, as I mentioned, in terms of group life last year, remember our revenue numbers were flat but we talked in terms of our sales results being quite strong and that that would take us back into the 4 to 6% range in terms of growth on group life.

This year, and in fact, we're a little bit over that, you know, the 7% plus that you see there, take out a couple of lumpy numbers and we are right at the 6%.

So that's looking quite good.

The rationality in the marketplace is somewhat better than it was last year but as you know, you always have outliers and we continue not to chase either in terms of renewals or new business, numbers that don't make any sense.

So we feel very strong about our growth and our persistency in the group life side.

In disability, you know, we are -- let me go to the results in terms of closing.

We are still closing 5% of our opportunities.

So, in other words, our close ratio on new business has not increased.

However, we do see some movement at the upper end of the market, people who are asking us if we can take over administration and, so, bidding at the administration and underwriting for their disability business.

So we are seeing some activity at the upper end.

It should not know show in our numbers prior to probably the third quarter and, so, we are seeing strong disability results, very, very strong dental results.

As you may remember last year, we had some flattening there that we indicated we would address through reconfiguration of product and that's come through us very, very strongly.

We continue to see quite a bit activity there.

So sales on the -- on both life and non-medical health businesses are strong, literally, across the board, across markets, helped by some choppy waters by our competitors.

On the asbestos front, a couple of things.

One is that myself along with Gary Ballard, our general counsel, have been very active with the Senate as well as the Judiciary Chairman of the House.

We spent time with Orrin Hatch, Leahy and all the other key senators as we talk about legislation that really gives a definition of asbestos in terms of the medical conditions and how we would have a law that allows the money to go to the impaireds and not have this tremendous cost for all companies.

I think it's between 6 and 8,000 companies that are affected by it now.

We're pretty optimistic that you'll see some legislation coming out.

And if it does come out, it improves our position.

How much, we are not sure yet, but clearly it improves our position.

But we're satisfied we have sufficient reserves without any legislation as we look towards our extended future.

The other thing that you need to keep in mind before I answer your question, so I have to listen to this because you won't get the answer until I'm done explaining it.

But, clearly, what's happening right now is, the cost of the potential legislation, there is enormous advertising going on attempting to get anybody who might be somewhere close to having walked by a plant, whatever it takes to get somebody that might have some exposure attempting to get as many claims in as they can and so you will see lumpiness going on.

Having said that, you will see in our Q that our claims for the first quarter are down from where they were last quarter.

On the other hand, I don't think you should count that as a good thing or a bad thing.

It is what it is.

And so, we began to see a settling down of what's actually going on in this arena.

But we are satisfied as we look down to the future, that the reserve adjustments we did are going to hold through the long term to where we are.

As we've always said to you before, that if in fact, we are off a little bit, we still have money left in the insurance policy to cover future increases in the reserves if we need them over the next few years as we look at the pattern.

I hope that answers it.

That does.

And the fixed annuity ROE, any change there?

In terms of new business, low double digits.

Thank you.

I thank you all again.

Time went pretty fast.

Have a good second quarter, thanks.

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