大都會人壽保險 (MET) 2004 Q1 法說會逐字稿

Welcome to the MetLife first quarter earnings release conference call.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

If you should require assistance during the call, please press star then zero.

As a reminder, this conference is being recorded.

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

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

MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties including those described in MetLife filings with the SEC including its S-1 and S-3 registration statements.

MetLife 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 over to Kevin Helmintoller, head of Investor Relations.

Please go ahead.

Thank you.

Good morning.

Thanks for joining us.

First let me remind you of the fact that we are talking about some certain non-GAAP measures this morning.

We will be discussing certain historical and forward-looking financial information which includes measures not based on Generally Accepted Accounting Principals, so-called non-GAAP measures.

We have reconciled the historical financial information to the most directly comparable GAAP measures in our earnings press release and quarterly financial supplement for this quarter both of which are available at our Web site at Metlife.com on our Investor Relations page.

A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it is not possible to provide a reliable forecast of net investment related gains and losses which can fluctuate from period to period and may have a significant impact on GAAP net income.

This morning we will hear from Bob Benmosche, Rob Henrikson and Bill Wheeler.

And first I would like to turn it over to Bob.

Thanks, Kevin.

A lot of you remember in December when we had our investor day we presented a very clear plan and strategy to grow our businesses that would produce a 10 to 15% earnings per share growth handily over this three-year horizon that we talked about in the plan.

Our confidence then and our confidence now about achieving that plan is really about our diversity of earnings sources, which I believe you see in this quarter.

It's the financial strength of this company because this is a company that makes guarantees to people that are way out in the future.

It's about the MetLife brand that pulls us all together and it's really the breadth of talent in this company, the people that make this company come alive every day.

And so when you look at the quarter clearly, our premiums and fees were up 11.8% resulting in operating earnings up 33.6% from last year.

You also see our annuity deposits grew to $3.4 billion and here again, what the public is looking for is to do business with a company they know and trust that can provide them certain guarantees or promises in the future and that's where Living Benefits come into play as part of our business and from the growth of our business.

The Institutional segment, while we had some wind to our face last year, as we all remember talking about the retirement savings segment, we had a little wind to our back, and Rob will talk in just a few minutes about that segment of the business as well as the overall U.S. businesses.

Our spreads continue to have the same level over the last period of time.

Bill Wheeler will talk about again, what our spreads look like.

We keep reminding everybody this is important to have good asset liability matching and manage our spreads and not worry about what the actual rates are doing in the marketplace.

International earnings were also strong.

We're having some early successes in Mexico however they are early successes.

We still have to go through the entire year but things look pretty good there.

And last but by not least, it's Moody's.

Moody's as you know has moved Met's outlook to stable.

We're a solid Aa2 company which is important as we talk about our reputation, our brands in the marketplace and the guarantees we make.

So what I'd like to do now, because I look forward to your questions, is turn it over to Rob who will also make a few comments.

Rob?

Good morning everybody.

I'm pleased to report that our U.S. insurance and financial service operation generated very strong results in the first quarter of 2004.

First, Individual Business.

Individual Business produced a 15% increase in operating earnings versus the first quarter a year ago.

You'll hear more details about the earnings from Bill Wheeler.

This 15% bottom-line growth is being accomplished while adding top-line growth of 18% in premiums and deposits over the first quarter 2003.

Annuity deposits were up 32% to nearly $3.4 billion for the quarter.

Variable and universal life premiums and deposits were up 3% versus first quarter a year ago, decrease in variable life have been more than offset by the growth in our universal life business.

We continue to be pleased with our sales growth in Individual Business, although agent count is down due to enforced minimum performance standards, aggregate sales are up.

Sales productivity is also up substantially in the MetLife Financial Services and NEF channels over first quarter last year.

The increase in productivity shows across all product lines.

Cross-selling within the channels is, for example, evidenced by substantial sales growth in long-term care and disability.

As you know we introduced and are continuing to roll out an agency profitability model along with other metrics that have already helped us more clearly identify agencies doing well, not only for themselves but also for MetLife.

Finally we continue to sharpen our products.

On the life insurance front we recently launched a new term product for independent distribution and as many of you know we are introducing a guaranteed withdrawal benefit this summer in our highly competitive annuity line.

Now turning to Institutional.

The Institutional Business produced a 45% growth in operating earnings versus a year ago.

Premiums and fees were up 13% versus the prior year quarter, well above our targets.

Group Life premiums were up 9%.

As you know our guidance on Group Life premium growth is from 4 to 6% which is well above industry averages.

The unusual premium growth this quarter was helped significantly by our performance in integrating the John Hancock acquisition and some large case activity.

Excluding these events we are right on target.

Non-medical premiums were up 10%.

This growth was achieved despite the move toward more administrative service only business where we only record fee income but overall profitability is strong and with robust return on equity.

We're also pleased with our sales growth with Group Life sales over 15% and sales in our Small Business Center up over 35% versus the prior year quarter.

We see continued success in the national accounts jumbo market.

Of some note, new customers are buying and committing to effective dates with us off cycle, that's the typical January 1 cycle, which will be reflected in our premiums later this current year.

As you may have seen we announced last week the launch of a new generation of institutional annuity payout products providing future income for retirement needs.

We plan to continue to focus on this marketplace both on a group and retail basis.

And we are already seeing strong signs of growing institutional client interest.

As we discussed and predicted last quarter the group disability morbidity ratio came down nicely in the first quarter to 93.3%, with reported incidents down from the fourth quarter as we had expected.

Disability sales are up nicely, mostly driven by increased quote activity, particularly in the middle market.

Before I pass it to the Bill just a quick word on MetLife Bank.

Remember the bank was created to generate new customers for the enterprise and enhance cross-buying opportunities.

Deposits ended the quarter at 1.6 billion, up 1.1 billion in the last year and 23% just since year-end.

In addition the bank is on track to break even on a run rate basis by the end of the year, ahead of schedule.

So to reiterate we had a strong overall quarter, we're continuing to focus on improving profitability, and we're growing across each of our major product lines.

We've had a great foundation to meet our objectives for the full year 2004.

With that I'll turn it over to Bill.

Thank you, Rob.

Good morning everybody.

As I think you've probably seen in our press release and our quarterly financial supplement, MetLife's financial performance in this quarter was very strong.

I'm going to review some of the highlights of the quarter including our top line results, our key operating margins, our capital management strategy, and a couple other topics which I think you're going to be interested in.

We are certainly happy with the strong growth in our premiums and fees for the quarter.

You know we came in at over 6 billion and that's a record.

That’s the first time we've done that.

That represents top-line growth of premiums and fees of almost 12% year-over-year, which is very good.

And while this growth rate was influenced by the acquisition of the Allianz Life reinsurance business at RGA, and also a small block of group life business from John Hancock, we also divested our Spanish operations in the fourth quarter, or early this year, and if you adjust for all those transactions the top-line growth rate was still 9.7%, which is excellent.

In terms of some of the strong performers in the quarter, annuity fee income was up 59% year-over-year, premium and fee growth in reinsurance was 43%, international if you're adjusting for the Spain divestiture, had growth of 21%, and our entire International Business grew at 13% for the quarter.

So we had a number of divisions and product areas which did very well.

Now if you turn to our key operating margins I think one thing you need to keep in mind is that, you know, we derive a lot of strength from the diversity of our earnings and you'll see that in both our investment spreads this quarter as well as underwriting results.

And while you're going see certain variability in the margins among product lines, the overall results have been very stable and so let's look at investment margins for a minute.

Let me take you back in time.

If you look at our weighted average interest spread for all of our key spread businesses, and would be almost, you know, every spread that we disclosed in the QFS, our spread for all of 2002, investment spread, was approximately 182 basis points, and the comparable number for 2003 was 177 basis points.

For the first quarter of '04, it was back up to 182 basis points.

And I think what you can conclude from that is that MetLife's done a very good job of managing its spreads over time in very different interest rate environments.

It also means that we consider our investment spread results for the first quarter to be normal for the company overall.

I think it's important for you to realize that it's really the spread that drives earnings, it's not our yield alone.

And in all of our key product areas, crediting rates are going to continue to move down and we expect that that's going to continue even with the recent move to a 4.5% yield on the 10-year treasury.

In general we believe that we have structured our portfolio in a way which will preserve our investment margins under many different interest rate scenarios.

Now, turning to our underwriting results, as we discussed on our last call and as Rob just alluded to we expected to see a reversal of what happened in the fourth quarter, which was higher morbidity in group disability and low mortality experience in Group Life and AD&D.

And in fact that appears to be exactly what happened.

As we saw the reporting of deaths catch up here in the first quarter, claim closures and disability returned to normal and also our approved incidents rate in group disability declined approximately 10% while mortality in both Group Life and AD&D rose accordingly.

Unusual underwriting experience also impacted results in Retirement and Savings somewhat with higher reported mortality in the first quarter our close-out businesses underwriting results were quite strong but we would expect those to return to more normal levels for the remainder of the year.

Finally in Auto & Home, they also had a very good quarter from an underwriting point of view.

The combined ratio came in at 98.8% including 2.3 points of CATS, and that's compared with 103% the prior year, including 1.8 of CATS.

Now turning to operating expenses for a moment.

As we discussed in the fourth quarter, or for the fourth quarter period, operating expenses were higher than an expected run rate in the fourth.

We did see expenses come back down to what I would say a more normal, closer to a normalized level in the first quarter but we continue to invest heavily in our IT platforms and our customer service initiatives and we've also continued to rationalize office space and associated leases.

Our pension and post retirement costs did come down as expected in the quarter as you can clearly see in our QFS.

And also during the first quarter is when you're likely to see the costs of staffing up for new group contracts most of which will represent a new ongoing expense level but some of those costs will be sort of one-time in nature.

Now let me move on and talk about some of the other issues about the quarter and let's start with the adoption of SOP 03-1.

I'm sure many of you are becoming experts on this topic but unfortunately both the insurance industry and I think the accounting profession are still trying to figure out how to interpret these new regs.

And what we decided to do for the quarter is take a fairly conservative interpretation of the adoption of these regulations and so we applied SOP 03-1 to our UL business and that in our minds has resulted in reserves which we believe are at least partially redundant with our unearned premium reserves.

Even with this sort of adoption we don't see a material negative impact to our ongoing results.

It does affect the UL results slightly but only in a minor way.

But if the current interpretation of how this will affect UL holds, we'll probably to have change the design of our UL product and my guess is the whole industry will as well.

But it is our guess, and it is only a guess is that the FASB will release some new guidance to change the interpretation of how SOP 03-1 will affect UL, and that may very well result in another cumulative impact being recorded in a future quarter, so stay tuned.

In terms of the detail of the $158 million charge, let me give you a little breakdown there. 68 million would be considered to hit prior operating income and most of that occurred in individual business, and of the 68 million impact there after tax, 78 million of that would have been in UL reserves and we actually released 10 million of reserves in our annuities, and, yes, the SOP 03-1 caused to us release annuity reserves which is kind of interesting.

The other $90 million of impact here for the company is associated with the reclassification of 1.7 billion of separate accounts to the general account and the handling, and how the pass-through accounts are treated.

This is basically taking the unrealized investment gains that we had in our other comprehensive income account on our balance sheet and moving that to realized gains and losses.

And again that was broken down by about $60 million in Institutional Business and $30 million in International.

So hopefully I confused you already.

You heard Bob mention the recent change in our ratings outlook to stable by Moody's.

We're certainly happy with that change but I want to be clear on what that means in terms of capital management.

I think previously I've said that our target of $500 million stock buyback for this year was contingent upon a stable outlook from Moody's.

And so our expectation is that's what we're going to continue to do this year.

We only purchased $65 million in the first quarter sort of in front of the Moody's ruling but so to hit 500 million we're obviously going to have to step up the level of our activity to approximately 150 million a quarter for the remainder of the year to hit the full $500 million target.

Turning to statutory results they were also quite strong for the quarter.

The combined statutory entities’ net income was $668 million.

Now before, you annualize that number let me tell you that the first quarter number is always a little higher due to the way the tax benefit flows from policy holder dividends so we are still on track to achieve approximately 2 billion in full year net statutory income.

Total adjusted statutory capital for the quarter ended at 15.7 billion and this also reflected a $450 million contribution to our pension plan.

You know, overall I think all businesses in MetLife's organization had a very strong first quarter, and established a very good base for 2004.

While the operating results of 78 cents per share did come in above our internal plans we continue to target 308 to 318 in operating earnings per share for the full year '04 so we feel more confident about those numbers all the time.

We have had robust premium and deposit growth.

We have a very good handle on our margins, and we continue to operate from a position of strength with regard to our capital position.

So we feel good about what's happened this quarter.

And with that I'd like to turn it over to the operator for questions.

Linda, we'll be ready to take questions.

Thank you.

Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch-tone phone.

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You may remove yourself from the queue at any time by pressing the pound key.

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Once again, if you have a question please press star one at this time.

One moment, please, for the first question.

Our first question comes from the line of Liz Werner with Sandler O'Neill.

Please go ahead.

Good morning.

Thank you.

I had just two questions.

I wanted to know if you could talk about how much excess capital you think you'll generate this year and what -- I'm sorry?

Go ahead, Liz.

Okay.

And what you might expect to do above and beyond the share repurchase if there is anything you can do with the excess capital.

And then secondly, is it possible to quantify what you expect to achieve for expense savings this year recognizing that the first quarter may have had some additional expenses related to the group contracts but hopefully getting a little closer to what you would view as normalized expense run rate?

Sure.

In terms of excess capital, you know, I think we use a rule of thumb of something like after paying interest and dividends at the holding company, order of magnitude, 700, $800 million of capital that will be generated.

Obviously we're planning on spending most of that for the stock buyback this year.

So my expectation is, is that won't change unless there's some unusual event which occurs.

In terms of expense saves, you know, we actually, you know what we've said publicly is that, or what we said on investor day in December is that we expect over the next three years to improve our expense ratio for the whole company by 200 basis points, and that's total expenses, other operating expenses divided by premiums, fees and other income.

And that 200 basis point move in three years represents about sort of $600 million of added expense efficiency.

Now interestingly in the first quarter, even though we had sort of higher expense levels I think expenses increased by about 7%, a little over 7% quarter-over-quarter, but the top-line actually grew at 12.

So our expense efficiency ratio actually dropped 100 BIPS just in the first quarter alone.

I don't think that's necessarily sustainable because the top-line was so good, but we made good progress this year, or this quarter, and I suspect we're going to make good progress this year.

But it's hard for me to put a tighter number on that right now.

That's very helpful.

Thank you.

Our next question comes from the line of Ed Spehar with Merrill Lynch.

Please go ahead.

Good morning, everyone.

I had two questions.

First on annuity sales.

I think that early this year you lowered the accumulation rate on the IB product from 6 to 5%, while I think at least one of your bigger competitors there remains at 6.

So I'm wondering if you could talk about what do you think you're going to see?

Are you going to see some fall-off in variable annuity sales as you head into the sort of second half, or second quarter of the year?

And then on the SOP, Bill, I was wondering if you could tell us why you think it's sort of redundant reserves under the SOP.

I guess the feeling I've had is that, and some others have had, I think is that the secondary guarantee products had not been appropriately reflected, sort of the potential risk in the out years today and that this is trying to address that.

So maybe if you could give us a little bit more detail on that, it would be helpful.

Thanks.

Yes, Ed, on the annuity sales, in terms of the drop in the rate we've seen, you know, a slight decrease particularly in the third-party sales, but in terms of agency sales, there's virtually no effect at all, and moving forward, we have greater penetration with additional partners and so forth that we will continue robust sales there.

So I don't see anything material relative to the reduction in rates.

And, Ed, on SOP, [indiscernible] I'll give it my best shot to explain why we think it's redundant.

On UL, you know, the COI or the cost of insurance charges, we tend to take more of those early in the contract rather than later.

And I think under sort of good accounting policy you would say, well, then you should recognize more, if you're going to take the revenue early you should recognize the liabilities early.

And there's nothing wrong with that conceptually but we don't actually let those additional cost of insurance fees or income flow through our income statement.

We set up a UREV account, an unearned premium reserve and then we amortize those fees over the life of the contract.

So what the FASB has said, or some of their affiliates have said is that we don't -- we should recognize the reserves now even though we're not taking the revenue now, and so that's why we think they're redundant so.

So now we either are going to have to weigh the way we adjust the UREV account and start and maybe not amortize at all and just let it flow through, or we should probably not have -- or should we think about how the UL reserves are going to be calculated under this ruling.

Now, apparently, just to give you even more detail on this, there's a staff memo from the FASB that's circulating now which is rethinking how the treatment of UL.

But, you know, who knows what will -- I suspect there's going to be a lot of -- you know, there's going to be a lot of discussion before they kind of figure out how they may change their interpretation but I have a feeling they probably will, if I had to bet.

Did that clear it all up for you?

Just one quick follow-up.

They're laughing at me here in the room.

This is Bob Benmosche.

I must tell you that Eric Steigerwald, everybody says, "what happened to Eric, he makes a whole career out of UREV?”

Well, is it your sense that this approach to the unearned premium or unearned revenue account that you've taken is conservative relative to others or do you think it's a standard approach in the industry?

Do you have any sense for that?

I can't compare it to others.

I'm not sure.

I think it's pretty conservative.

But I don't know.

I suspect others are also -- you know, I think people are up-fronting generally the COIs on their UL and I can't believe they're letting it all flow through income.

That would be really fronting all your profits and I don't think most people are doing that.

Okay.

Thanks a lot.

Our next question comes from the line of Nigel Dally from Morgan Stanley.

Please go ahead.

Great, thank you.

Three quick questions.

First, with interest rates, hoping we can get a little more color on the impact of higher interest rates on your business, especially in your fixed annuity block where it's [indiscernible] appear to tick a little higher this quarter.

Second, on capital, just an update as where you stand with potentially securitizing the closed block and what impact this potentially could have on your capital position.

And lastly on hedging, just an update as to where you stand with your hedging program for Living Benefits.

Thanks.

Lee, could you talk about the interest rates?

Yes, I hope you can hear me.

Yes, I think -- Lee Launer speaking.

You look at the LM match, we're pretty well matched all across the board.

Not all 65 of our portfolios are dead-matched, but when you look at it totally totally, we're not long, and we're not short.

So I think it's something in the 100 to 150 basis points straight up parallel.

It's not going to give us a lot of problems.

Something over than that, maybe we could talk.

But other than that I really don't see much of an issue.

We've done a lot of work at the very, very short end of the curve, which is the zero to let's say, three year point.

We've done a lot of hedging and portfolio reconstruction in that area to make sure that really minimize the effect of a flat year if that were to take place.

Nigel, I hope that answers one of your three questions.

I guess, just to follow on from that, my concern I guess is more with surrender activity rather than your ability to maintain spreads.

If rates move significantly higher, are we going to be faced with additional surrender activity which is going to cause you to have to liquidate some of your portfolios to set aside those surrenders?

I think with the moderate increase in interest rates there's not going to be any significant increase in surrender activity.

I mean we have been managing in both up and down environments to be able to maintain our spreads.

You know in the first quarter we came in at 195, a little bit lower than our target but we're pretty confident that we're still going to you know, achieve our 205 to 210 for the full year.

Nigel, don't forget, too that unlike, you know, very aggressive fixed annuity writers we have not been in that ballpark of an aggressive fixed annuity writer.

And having lived on Wall Street during the period of the ‘80s and watching what happened, I understand your question from that perspective.

But also keep in mind that we have been very successful over the last ten years selling a variable annuity with an annual rate reset fixed component of that variable annuity and so that's about 14 billion, Stan, would you say, of PPA deposits that come in the general account and so those reset every year.

So I think you can't look at the whole general account block and assume those are aggressively priced fixed annuities.

They're not.

So you won't see the disintermediation that you normally would see with rapid rate increases with a lot of aggressively priced and older fixed annuities.

So it's just not a problem I think MetLife faces compared to other companies.

One other point, Nigel is that each deposit gets its own surrender period so it's not from the contract issue it's based on when the deposits are made.

So virtually all of our contracts, even the ones issued 10 or 15 years ago still have some level of surrender charges in them.

So, Nigel, it's Bill.

I'll talk about closed block.

I would just reiterate one thing about higher interest rates.

Higher interest rates right now -- Lee was kind of neutral but actually higher interest rates are going to help us.

We're still, you know, even with the 10-year at 4.5, our crediting rates are not at product minimums yet but they're getting there.

And the higher interest rates will help us move away from product minimums, and even though that's not going to bite us for a year or two in the long run that's going to be very good for us.

With regard to the closed block securitization we're studying it, we're working on it.

I would tell you, you know, by issues of the following, it's great to securitize the closed block, the issue is what do you do with the money.

And I think if all we do with the money is invest it, you know, at today's interest rates, you know, my guess is, this is the securitization is a dilutive transaction.

So my guess is, that the closed block securitization becomes closer to a reality as I think we have an alternate use for the money and that probably means an acquisition.

So I would sort of view that as when we have something to buy of size, for cash, this will be a great source of the funds.

So that's a little bit where we are.

And, Nigel this is Bob Benmosche.

We don't expect that to happen in the near future.

We do not have any plans and we're not thinking about it.

So I don't think you should leave saying we're drying the powder and getting ready.

Your final question was on the hedging program.

We're still on target for implementing that by end of second quarter.

We've got all of our linkages in place for administrative platforms, we've got some final decisions on the degree of hedging and some of the modeling but we're still on target for the end of the second quarter.

Great.

Thanks a lot.

Our next question comes from the line of Jason Zucker with Fox-Pitt, Kelton.

Please go ahead.

Great.

Thank you and good morning.

Couple of questions, too.

The first one is the big picture and the question is, are you seeing an improving economy and improving employment in your employee benefits businesses?

And then a couple other questions, and, again, back to employee benefits, if I look at the non-medical health I typically think of that line as one of your strongest growers, and I guess if I look at this quarter I'd probably characterize it as maybe below potential and I was wondering whether or not there's an expectation that growth can pick up there and what you were doing.

And then the last question on the Retirement Savings segment, just because it's tended to be so lumpy, is there a more normalized quarterly run rate that you're thinking about that we should be thinking about?

Thank you.

Okay.

Jason, this is Rob.

Let me start before I make any comments about the economy in general, let me get right to the second part of your question and then get back to the broader question.

You're right, I mean, premium and fee growth in the non-medical health segment, you know, is about 10% year-over-year.

That's, as you know, the lower end of the guidance we gave at investor day of 10 to 15%.

And I think there are several factors there.

First, and near and dear, is the aspect that some of our disability business where we maintained our focus on the renewals at the large end market.

Several customers did not accept our renewal rates for 1/1/04, and, of course, that has a depressing effect on the premium growth.

But financially it doesn't bother us, of course.

The lower volume of the insured quote opportunities on dental product with some in the middle market starting to move to ASO brings down the premium number as I mentioned, but, of course, you know, we don't record anything but the fees, but that's a strong business.

And allowing us, by the way, to continue to grow our dental network which gives us even more opportunity going forward.

Particularly, by the way, in the small-end market where we're seeing very strong dental sales exceeding our expectations.

So we certainly expect to be within our guidance for the remainder of the year.

We'll have double-digit growth and I think it's, you know, we're quite pleased with it.

In terms of the general economy, it's interesting, answering questions from the past about the effect of decreasing employment, we have been more insulated against that than others because of the mix of our business.

The question is with the employment going the other way, you know, do we see any kind of major uptick.

I think what we see is more customers particularly at the large end of the market now making decisions about changing some of their coverages at the upper end of the market, and this should accrue to our benefit.

So I can't give you any specific numbers in terms of the effect of economic growth, per se, or job creation, but job creation is good for our business, and we're looking forward to growing some of those large-end customers.

As I mentioned to you we did have something very interesting, even though -- if you're in this business, it's interesting.

It may not seem particularly exciting, but when you have large-end customers starting to buy away from January 1 effective dates we have some additional premium not yet seen in our numbers coming through in the second half of the year, and I think that will be a foreshadow of strong growth.

In the last piece just with respect to Retirement Savings?

Jason, this is Stan Talbi again.

I think definitely in the first quarter Retirement Savings was a little high.

If I look at the increase year-over-year more than half of that is due to the improvement in spreads and growth in the business.

The spreads were relatively low last year, and the other half comes from a combination of expense reduction, more interest on capital, and improved underwriting results.

So, you know, do we expect the same level, you know, in the out quarters?

No, it will come down a bit.

But again I just remind what you Bill said.

We had very favorable underwriting results in R&S, partly due to death and death processing of annuities, and that kind of offset, you know, maybe lower performance than expected in Group Life, universal life, and to some extent non-medical health where, you know, we would have expected a slightly higher increase in earnings but our accidental death and dismemberment results were a little bit low in the quarter, probably in the range of 3 to 5 million.

I think that's all attributable to the same issue.

It's all underwriting.

So on balance I think our underwriting results were strong in R&S but some of that is offset by, you know, future expected improvements in both universal life, Group Life, and non-medical health.

Let me just add one thing because Stan kind of said even though it appears like R&S was the big winner this quarter but you have to kind of net out overall underwriting experience.

The same thing is true with investment results.

Underwriting -- or investment spreads in R&S were very high, in other of our areas they were, you know, in annuities and ULVL they were a little low.

We think net for the company they were normal, so it's sort of the luck of which mortgage-backed security you got in your portfolio is a little bit which drove the results between business lines.

So R&S seems abnormal but for the overall company we think it was pretty much on track.

All right, good.

Thanks everyone.

Our next question comes from the line of Saul Martinez with Bear Stearns.

Please go ahead.

Hi, good morning.

Two questions.

First of all, on asset quality.

If I look at your below investment grade bond portfolio as a percentage of invested assets and as a percentage of equity, it came down in the first quarter relative to the last quarter and relative to the year-ago quarter.

I was wondering how much of that is related to just the better credit environment and how much of that is related to an actual shift in your investment strategy away from below investment grade bonds perhaps because you're not getting the spreads that are desirable in that asset class?

And my second question is on Mexico.

Bob mentioned briefly that results were good in Mexico, but I was just wondering if you had any update on any large cases that came due in the first quarter, any large cases that are expected to come due in the coming months.

Saul, hi, Lee Launer speaking.

On the below investment grade, no, that was really intentional on our behalf.

That wasn't just people growing from below investment grade to investment grade.

So we intentionally brought that down.

We've been bringing it down for a few quarters now and it's probably settling in right where we kind of like it.

And it's simply because below investment grade wasn't giving us enough yield, we thought, and so as you see we favored the BBB market, so it's simply as you thought.

Okay.

Saul, it's Bill Toppeta.

On Mexico, we're talking here about the institutional public business, the government business, I assume.

We're about one-third of the way through the renewals for this year.

Our percentage of retention is a little bit better than what we expected.

I would say that our margins are holding up.

In terms of large cases that have come up in the first quarter, the biggest one that we lost was Pemex, and in the second quarter, perhaps the third quarter, Federal Government health business will come up, and later in the year, the Federal Government life business will come up, and that will be likely for a 1/1/05 renewal.

So we're about a third of the way through and I would say doing well so far, but there's a lot more of the story to come, and I would say we're being extremely vigilant about that and not taking anything for granted.

You said you lost Pemex.

That's a pretty large, that's a pretty significant case, if I'm not mistaken.

Yes, it was about $15 million of premium, but it's an ASO-type case so it's kind of a pass-through.

So -- but, yes.

Now, remember, when I say that, that's just the group business on Pemex.

Okay.

I think just to -- you know, Bill gave you the top number, but from a bottom-line perspective I think it was a low six-digit number.

I mean it was a very small profit number and what's important is that while we lost that piece of it, and you can compete for some of this business for breakeven, what's important is the work side piece of it which is very important has gone unimpacted.

So I think part of this is to early on is where we're not going to waste a lot of powder on things that just don't provide any real value and I think that's where Bill is talking about being intelligent and being competitive about it as well.

So I think overall it still is proceeding well and we're still getting a lot of wins.

So that's one loss but we have a lot of wins down there and we're going to work hard to continue that pattern.

Great.

That's helpful.

Thanks.

Our next question comes from the line of Colin Devine with Smith Barney.

Please go ahead.

Good morning, gentlemen.

I have three questions for you.

First, if we could explore what went on in Retirement and Savings in a little more detail.

I'm just trying to reconcile how the policy holder benefits and dividends line dropped about 100 million from its run rate of the past few quarters while investment income held constant and if we could just quantify the magnitude of the reserve release that might have impacted that.

Secondly, with respect to the disability business I was wondering if you could tell us what sort of benefit ratio are you pricing there for?

I was certainly happy to see it improve versus the fourth quarter but I'd like to know what you're pricing it for.

And then lastly, if you could give us a few more details on the GMIB hedging program.

Also the details you mentioned you're going to be bringing out a withdrawal benefit product, what sort of hedging program you'll be putting on that as well and will it be prospective only going forward or will you be applying it to the in-force block and will there be any earnings impact from that?

Colin, I just want to correct you.

I think Stan will go through that.

But one is, there was no, you implied there was a reserve release and it's important that Stan goes through that because that's not the case.

I believe that's what it says in your press release, Bob.

What happens, Colin, is as we get data in from our customers as we get Social Security tapes in, which were somewhat delayed in the fourth quarter, we confirm with the employers that, you know, individuals who have deferred annuities have, in fact, expired, and as they expire we release the reserve associated with those lives.

So I mean, the reserve release is a natural part of the death process.

So it's really part of our death match process, and we just had, you know, an unusually high level of reported deaths in the first quarter.

I think part of it is, you know, just the higher level of mortality in the first quarter, and part of it is, you know, a combination of this delay in reporting which is not atypical for some of our customers, and I think coupled with the last two weeks of the year last year, you know, being a heavy holiday season, I think we had less people on the employee benefit side reporting information to us.

I think that's what drove the mortality results in retirement savings.

On the Retirement Savings should we be looking for that to reverse back in the next quarter, and is that really where Bill Wheeler is going withholding the earnings guidance?

You expect that to pop back up?

It should.

I mean, we obviously think there was -- the underwriting experience in R&S was unusual and so we should, you know, what it will exactly pop back up to I'm not sure, but it's, but we expect it to go back down to sort of a normal underwriting experience going forward.

Would that then be in that sort of 680 range?

Is that what you consider normal?

Well, it's lumpier than that so I'd rather stay away from an exact number because it will all depend on what -- there's always something lumpy and unusual that might happen in R&S in any given quarter but it will obviously move up.

A full 100 million and the idea that would drop to the bottom line or that sets some sort of pretax impact, it's not anything like that.

Okay.

In terms of the loss ratio on disability, I mean, you know, we obviously can't disclose our pricing targets but if you recall what I said on investor day, is that, you know, we're targeting 95 to 100, we're expecting with the price increases that we have put in and the price increases that have been accepted by our customers that we would expect to be at the lower end of that range.

And, in fact, you know, that's where we were in the first quarter, actually below the lower end of that range.

As Bill pointed out, you know, we had very good experience in the first quarter.

The incidence rates were down year-over-year, and I think we've got some of the phenomena that we've seen on the Retirement Savings side in that, you know, some of the deaths were processed, it was a little slowdown in activity in terms of closures of claims in the last two weeks of December so I think our net closures were up a little bit, too, as a result of people getting back to work and working on getting some of our claimants back to work.

I would hasten to say, Colin, unlike the Retirement and Savings where you'll have a pop up because of the way records are kept in terms of reporting deaths, there's no reason to believe there will be a pop up on the disability ratio.

That looks like it's moving in a direction that's quite favorable.

And I think your last question, Colin, was on the GMIB hedging program and the guaranteed minimum withdrawal benefits.

As we introduce that product later in the summer we will have a hedging program in place for that product as well.

As you probably know, you know, the cost of the hedging, you know, is built into the fees, and that's kind of what we're testing right now.

Is it going to be, you know -- what percentage of the fees is it going to cost to us do this hedging, and we're pretty confident that, you know, the fees are well in excess of the cost of the hedging at this point.

Now, the other thing that I specifically asked is putting in place the hedging program, I guess write down the GMIB if that's going to impact earnings?

Well, no, not significantly, because, you know, the new SOP requires a certain level of reserves based on modeling, and with the hedging in place that should reduce the reserve requirements.

So it's kind of a natural offset now with the new SOP in place.

You've got sufficient reserves to absorb the cost of this hedging program?

Yes.

Thank you.

Our next question comes from the line of Andrew Kligerman with UBS.

Please go ahead.

Good morning.

Two questions.

First with regard to investment spreads, and you've got guidance of 205 to 210 on individual annuities and in the Institutional area, 130 to 145, could you give us a scenario, low interest rates and high interest rates which would push you out of those ranges.

And secondly, the decline in agents at New England Financial, I think that operation has generally been seeing a declining agent count for quite some time.

Why would we expect that it's going to stabilize or increase after, I think, several years of decline?

Why don't I take a shot at the interest rates?

I hate to kind of play what-if games, because we have a complex set of liabilities and it's -- so Andrew I'd probably like to answer your question the following is, what we've sort of said publicly and we said this on investor day when I think the 10-year was at 4.25, roughly, we said that if interest rates stay flat that eventually we would get down to product minimums, and that we would eventually start having spread compression and that would probably occur sometime in '06.

I think what Lee also has just said is today is, that's sort of the down side, and it gives you kind of a feel for that.

If there is a downside out there it's a ways off though and it requires, you know, a pretty pessimistic view of interest rates going forward.

With regard to the increase in interest rates, for awhile they're clearly going to be positive because we'll move away from product minimums.

And I think what Lee's talked about is for 100 and 150 basis points move upward, he doesn't believe, and I don't -- certainly on the yield side, and obviously we don't feel that way on the crediting rate side that investment spreads are going to be materially affected.

So that's, you know, it kind of gives you -- what I conclude from that is that they can move around quite a bit and we can still hold our spreads.

That's helpful.

By the way Andrew, keep in mind that when Bill says 2006 that assumes the world stays where we are today.

Remember, robust sales, what comes in, new minimums that have been rolled out, you look at the new minimums coming out of our settlement account, the total control account and so on, as we have new minimums, we have some at 3%, we have a lot coming on the books now at 1.5.

So as we begin to look at those over time it extends it out if you were to really build a very strong projection model, so add that into your factor as well.

Andrew, on the sales count, I think you indicated, and I don't know how far back you're looking in terms of declining agent count, but I would say that under the previous economic model, which was, as you know, not working well, there was actually growth in, I'd call it artificial growth in headcount by increasing headcount being the total focus as opposed to productivity, so as you know, we've changed management, we've changed the management structure, we've changed the economic model, and on top of that, as you may know, in the past, the reduction, because of low performers, has all happened in the first quarter.

We started that in the fourth quarter this year.

You're correct, the count is down but I think it's particularly important that productivity in the New England channel, for example, is up substantially in excess of 15%.

And we're seeing a turnaround in variable annuity sales, for example -- excuse me, our variable life sales are starting to increase, and so we feel pretty good.

And in terms of recruiting going forward, there are some attractive events that we'll be able to talk about in the future.

So I feel good about the New England model, I think in terms of the past I would say that, you know, in terms of going back 2000, 2001, 2002, probably an artificial growth would focus on that alone.

So the career agent channel is not broken, you feel like it's going to grow over time?

I certainly do.

As a matter of fact, it's hard for me to hold my excitement on some of these things but recruiting, for example, quarter-over-quarter, in the MetLife Financial Services area, is quite high.

We've had our best first quarter results in several years.

So you'll see a growth in headcount, in MLFS you'll see stabilization and more quality headcount in New England Financial and we're quite pleased.

Great.

Thanks a lot.

Keep in mind, too, that, you know, when you look at the money that was written off and the fact that there was expenses that were not coming through, Eileen and Rob and the team really looked at the structure and we did, in fact, reduce almost 25% of the agencies that existed at New England because they just were not sustainable over time, and we were paying a lot of rent, a lot of overhead.

So when you reduce 25% of the agencies and you reduce the number of low-end performers this is outstanding results, and the fact that we really have to have production but it's got to be production where it's profitable or we see light at the end of the tunnel, so major restructuring went on here and it's a small number down relative to that restructuring.

Next caller.

Our next question comes from the line of Joan Zief with Goldman Sachs.

Please go ahead.

Thank you.

Good morning.

I was wondering if you could talk about the cost of implementing Sarbanes-Oxley, how far along you are, if you feel that there will be any issues with auditor opinions on that basis?

Let me turn it over to Tim Journy.

I must tell you though that we are in great shape, and the Board is very pleased with our performance and we think we're going to finish it off and be really almost best in class as we go through this.

We're pretty proud of what the whole team has done here at MetLife.

Tim Journy, our Controller will take you through the numbers and how we're going to finish the year off.

Tim?

Good morning.

In 2003, Met went ahead and implemented the provisions of Sarbanes a year early.

We took the time to analyze the impact and what it did for our organization, and spent a lot of time, developed teams and rolled it out throughout the organization.

Through that work in '03, and we received a letter from our external auditors on our internal controls environment and we took that and in 2004 we're rolling it out already.

We plan on spending as much time in '04 as we did in '03, and trying to continue to enhance our control environment.

Do you want to talk about the dollar amount we spent?

Is there any way to quantify?

I know we know the outside number, but do you want to --?

Sure.

In 2003 we spent over 80,000 staff hours to implement Sarbanes, and we spent on an outside basis in excess of $10 million.

Okay.

One last --

(indiscernible) I would just say one thing because Tim (multiple speakers) I'm sorry, Joan.

I would just say one thing, is that Tim is very modest.

We have effectively implemented Sarbanes a year early, or a year before I think the rest of the world has.

According to Deloitte, our outside auditor this is the only letter that they issued among any of their customers in terms of getting Sarbanes certification.

That doesn't mean we don't have a little more to do in '04 but it was a very good job, and so it's roughly -- the spend we expect in '04 won't be 10 million again.

I have just one other follow-up just wanting to go back to the International segment, and the comment on Mexico and sort of having to finally to go through the renewal process for some of the larger government cases.

What were you expecting in your forecast on the outcome of those two big government cases, and if you do not get those cases, you know, the Federal Government health or the Federal Government life, will that impact your earnings going forward in that division?

Sure.

Joan, it's Bill again.

I would say that if you look at the overall impact of the two big government cases that remain, which would be the policy, what we refer to as policy number one, which is federal employees, the impact in -- there would be some impact this year of the health part of that policy.

That will probably go to bid around June, maybe July, and I think there we're talking about an earnings impact if the case is lost of 2 to $3 million of earnings.

Then the next one would be the life piece of that, of the federal employees, which would come to bids, we think, later in the fall if it comes to bid as one package, it would be for, likely for January '05, so no impact on this year's earnings, but next year the impact could be up to about $10 million, if the whole case were lost.

Thank you.

Okay.

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

All right.

Our last question will be from the line of Vanessa Wilson with Deutsche Bank.

Please go ahead.

Thank you very much.

Bill, you talked about a $450 million contribution to the pension plan.

How does that affect the pension expense in '04 versus '03, and in this quarter in particular?

And then in addition, at one point in your prepared remarks you said you thought you had more crediting rate flexibility.

Could you talk a little bit about that specifically for annuities, UL, retirement?

Sure, I'll take those.

The 450, if you recall, I think on investor day we talked about making a $700 million -- and that's last December -- a $700 million contribution to our pension plan and that along with strong financial performance would drive down our pension expense approximately $50 million pretax '03 to '04.

Some of that pension contribution of the 700 was actually made early in January of this year as opposed to in December of last year, so it's the same amount of money, or it is the same pot of money.

So that's what's driving down our pension expenses, or part of what the reason is.

In the first quarter interestingly, I think our pension and post retirement benefit expenses were $14 million lower than the year-ago period.

That should probably widen each quarter as we go throughout the year.

So it's -- so you take 4 times 14, that's 56, we're actually thinking our pension and post retirement might get a little better.

And then the 200 basis point decline in the expense ratio, how much of that is related to this?

I guess you said it's 600 --

Well, I mean, if we're talking about 600 million of saves over three years, you know, it depends on -- and if we're talking about $50 million or more of saves this year in '04, you know it kind of depends on where do you think interest rates are going to go from here.

But if you think they're going to go up, which I suspect they will, that means our pension and post retirement benefit costs will probably decline in '05 and '06 as well.

So not insubstantial.

I mean, it's not half, but it's not -- it's an important part of the expense saves performance.

Okay.

To give you a feel for it.

Now, in terms of crediting rates, if others want to chime in, they can.

Maybe, Stan, do you want to take a shot at it?

On the individual business side, you know, the two portfolios, universal life, you know, right now our credited rates are still on average about 75 basis points above the minimum guarantees and on the annuity side, you know, despite the fact that we've been aggressively renewing, you know, deposits at lower rates, we're still at the end of the first quarter about 70 basis points above the minimums.

Okay.

And the Retirement?

Retirement Savings doesn't reset.

I mean, we're basically managing the assets and liabilities, we have a pretty close match and the liabilities basically are fixed, and the ones that do change are basically indexed generally to short-term rates.

Thank you.

Okay, I think that covers it for everybody, and, again, thank you for joining us on the call and look forward to speaking with you all again next quarter.

Thanks.

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