大都會人壽保險 (MET) 2004 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the MetLife second 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, pardon me, 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 statements within the meaning of the Federal Securities laws including statements relating to trends in the company's operations and financial results and markets for products and the future development of its business.

MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties including those described in MetLife's Inc. filings with the SEC including in its F1 and F3 registration statement.

MetLife incorporated, especially 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 Tracy Deidrick, Head of Investor Relations.

Please go ahead.

Thank you, Linda, and good morning.

Welcome to MetLife second quarter 2004 earnings conference call.

Joining me this morning are Bob Benmosche, Chairman and CEO, Rob Henrikson, President and Chief Operating Officer, and Bill Wheeler, Chief Financial Officer.

After our brief prepared comments we will take your questions.

Here with us to participate in the discussion are Lee Launer, Chief Investment Officer, Bill Toppeta, President of International, Cathy Rein, President of MetLife Auto and Home, and Stan Talby Chief Financial Officer of the revenue producing businesses.

This morning we will be discussing certain financial measures not based on generally accepted accounting principles, so-called nonGAAP measures.

We've reconciled these nonGAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplement both of which are available on our Web site at www.metLife.com on the Investor Relations page.

A reconciliation of forward-looking financial information to the most directly comparable GAAP measures is not acceptable 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 significant impact on GAAP net income.

With that now I'd like to turn the call over to Bob Benmosche.

Thanks Tracy and a lot of you may not have met Tracy yet but Tracy was our principal interface with all of the rating agencies and as you know in the last few years that's been a very busy avenue for us to be traveling down and she did an outstanding job there and we know she's going to do an outstanding job in this move also.

So it's great to have you on the team and I look forward to working with you as all of you out there should work with her as well.

As you can see and has been reported we did have an outstanding quarter and it's been top line, it's been bottom line.

It's making sure we continue to make the right investments in the future while managing our expenses as well.

On investor day what we talked about in December is that we have a very clear plan and we've been on that plan for quite some time nd we are still focused on that plan for the next three years and that is to make sure we continually improve our operating efficiencies and continue to stay focused on growing our earnings in a range of about 10 to 15%.

Clearly in the last couple of years we've had some head winds and we've come out in the middle of that range.

As we move into '04 we talk about seeing a little bit more positive outlook and in fact that's what's happening.

So we feel for this year we are going to be at or above the high-end of our range.

So we are looking at somewhere around a 15 to 18% operating earnings this year versus 2003.

We are very confident as we look into the rest of this year and into '05.

A lot of good things are going well for our company.

As you look through what we produced here.

And in fact what's becoming clear, again, is the diversity of the earnings streams, our businesses.

What's even more clear is the outstanding results of the thousands and thousands and thousands of people throughout this company that are really moving in the right direction and balancing the need to grow earnings on a sustainable basis but improve our investment in the future as well.

So what I'd like to do now is turn it over to our new President and COO.

As you know Rob ran the major part of our company, individual and institutional, he now runs all of the revenue area.

He's been on the job a short period of time but I think you are all impressed with how he produced a great second quarter for us.

So, Rob, let me turn it over to you.

Thanks Bob.

Good morning, everyone.

First let me say I am very excited about my new responsibilities.

In my mind there is no question that our opportunities to leverage our competencies and capabilities across all of the businesses and focus on driving growth are greater than they ever have been.

Over the past several years as you know we have accomplished much in building infrastructure, transforming the organization and improving efficiency.

Now there's a greater focus on creating growth, growth that will come both organically and through acquisitions, through creative innovation, next-generation products, and service offerings and by leveraging the enterprise in everything we do.

Importantly we now have the right team with the right talent and experience to execute our strategies.

As you know in addition to my other key direct reports, Lisa Weber has been appointed President of Individual Business.

Lisa's experience as our Chief Administrative Officer and her expertise in human resource management is extremely valuable.

It will help the individual business leadership team leverage the enterprise resources and execute on our strategy to grow earnings and ROE by recruiting, developing, retaining talented agents and continuing to recognize the structure of individual, consistent with our profitability model.

Turning to the second quarter results, I am pleased to report on what is a record quarter for MetLife in terms of operating income and I thank Bob for the credit for that.

Bill Wheeler will talk about the financial results of the quarter in a moment but first I'd like to comment on the business results.

The top line, defined as premiums, fees and other revenues, grew 6.2% versus the second quarter of 2003.

When you adjust for the divestiture of the international segment Spanish business earlier this year the growth rate was 7% in line with our 2004 projection.

Also boosting the quarter were very strong underwriting results in almost every business as well as strong investment margins.

Now I'd like to touch on a number of the highlights in each of our segments.

Turning to institutional.

Group life, premium, fees and other revenues were up 7.6% this quarter.

As we have said we continue to grow faster than the overall market by continually growing in multiple markets from national accounts down through small business, leveraging our unusually broad portfolio of products and differentiating service capability.

In additional as we indicated last quarter our group term mortality moved back down to a more typical 93.3%.

Nonmedical health premiums fees and other revenues increased 11.7%, over the prior year quarter, with the highlights being strong growth in our long-term care product line and continued strong growth in the small business center distribution channel.

Continuing growth in small business is a direct reflection of continued growth and maturity in our sales power which you may remember has trickled over the last four years while we have opened local offices in nine additional metropolitan locations.

In group disability we are pleased with our morbidity ratio of into 92.7.

The significant investments we have made in our disability operation over the past year quite frankly are really paying off.

As part of our continuing improvement we also recently announced the consolidation of our Georgia claims office into our other claims operations which would even further increase our effectiveness and efficiency.

I should point out that our growth targets in our dental business remain challenging.

While second quarter last year was so strong we do expect our claims experience to improve over the next two quarters.

We do not expect meaningful premium growth however over the remainder of the year due to the trend toward a higher percentage of administrative service only business that we discussed before.

Beyond that period however our network growth strategies new voluntary offerings and new core offering should bode well for future growth in dental.

As always retirement and savings, premiums and fees and other revenue premium tend to vary from quarter to quarter.

More importantly our business on which we earn spread as measured by client balances has increased by approximately 12% year-over-year which of course drives our earnings power.

We are having a strong sales year in structured settlements.

We should match or exceed the 2003 sales activity.

We are continuing to leverage the individual agency channels in the distribution of our improved and replatformed small and mid-size retirement savings 401K product. 401 K sales for the first six months were up 25% driven by robust sales in our agency channels which are double what they were last year.

Turning to individual operations.

First year premium and deposits for variable and universal life segment were up 35% year-over-year largely driven by single premium universal life sales.

Our UL with secondary products have been well-received in all channels.

Annuity deposits are down 2% year-over-year.

As we said last quarter we changed the accumulation rate on our GMIB benefit from 6% to 5% and it's clear it's had an impact on sales.

We expect annuity sales to rebound following the introduction of our guaranteed minimal withdrawal benefit, GMWB, in the beginning of August.

We feel this benefit will be attractive to those at or near retirement looking for a fixed stream of requirement income guaranteed by MetLife.

Going forward we plan to continue to offer both the GMIB and the GMWB.

A quick note on sales headcount.

We are pleased with the quality of new hires in both the MLFS, MetLife, and New England financial sales channel, and with the productivity gains in those sales forces.

I also want to point out that we will continue to stress quality in the current base and in our move hires.

Moving on to auto and home.

Auto and home has had a terrific quarter; driven by continued reductions in claim frequencies in both auto and home and moderating auto severity.

Our refined segmentation models used to price our auto and homeowners line have allowed to us grow in the most profitable risk segment.

Overall I continue to be impressed with the quality of our management team that I partnered with over the years and their performance.

Auto results were excellent coming in with a 91% combined ratio.

Homeowners results were impacted by heavy catastrophic losses coming from midwest storms however excluding cats. homeowners results were in line with prior quarters coming in at non-cash combined ratio of 80%.

Even though this was a very strong quarter we expect frequencies to continue to be favorable for the remaining of the year.

With the renewed focus on growth we've begun to achieve top line momentum with sales up 16% over prior year.

Importantly and our in force retention is up by 1.4 points further driving profitable growth.

In our international segment revenues were up 2% from the prior years quarter, excluding the impact of the sales of Spanish operations revenues increased 13% as a result of core business growth.

Sales are currently running ahead of 2004 plan especially in Korea, where the new VUL product is selling extremely well.

Regarding Mexico the retention of business continues at or above expectations for the first half of the year and we remain optimistic about the remainder of the year.

Regarding Asset Management operations, operating earnings jumped in the quarter as State Street Research earned significant performance fees relating to certain institutional products.

In addition assets under management climbed 12% or 5.6 billion, 51.7 billion, from the previous years quarter and asset slows were positive for the second quarter in a row.

So before I turn it over to Bill I'd like to reiterate we've had a very, very strong quarter overall.

We are continuing to focus on improving profitability while growing across each of our major product lines.

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

With that I'd like to turn it over to our CFO, Bill Wheeler.

Bill?

Good morning, everyone.

As Rob mentioned this was a record quarter for MetLife in terms of operating earnings and net income.

I'm going to walk through the income statement, highlighting key issues.

I'm also going to explain the unusual items which hit this quarter to give you a little color there and finally I'm going to give you a sense of how we think the rest of the year is likely to play out.

Well, first let's talk about top line revenue which are premiums, fees, and other revenues.

These totaled just over 6.4 billion for the quarter, an increase of 6.2% over the second quarter of last year.

As Rob mentioned this is slightly below our expected pace of 7 to 8% and there are two areas which slowed us down a little bit.

First in retirement savings we had an unusually strong level of structured settlement sales last year which did not repeat this year and second we divested our Spanish operations as Rob mentioned, in January of '04.

You know, if you adjust for the sale our international operations grew 13 and adjusting for both of these items MetLife actually grew at almost 9%.

We had a number of strong performances this quarter among our various businesses.

Annuity top line revenue grew at 54% while reinsurance which benefited from RGAs acquisition of Alliance's life reinsurance business in the fourth quarter of last year grew at 37%.

Our nonmedical health top line revenues grew 12% and group life revenues turned in a solid 8% growth rate.

Through six months, we have grown our top line revenues at a 9.1% rate and even though that may moderate slightly in the second half of this year we are very pleased with this result.

Turning to our key operating margins let's start with underwriting results which were generally excellent.

Auto and home had an outstanding underwriting quarter posting a 93.1% combined ratio and excluding cats. and 88.1% combined ratio.

Claims frequency is down significantly for the whole personal lines industry but we also believe our auto and home management team has done a great job competing for customer segments where they believe underwriting profits will be the largest.

And even though the results here may moderate a little we believe that a very favorable environment will persist in the second half of the year.

Turning to group disability we had another outstanding quarter with the morbidity ratio of 92,7%.

Our approved incidents rates are substantially below the year ago period and we also are pleased with our claims management results.

However despite strong group disability results the overall profitability of the nonmedical health segment was down this quarter.

We had relatively weaker underwriting results in dental, individual disability and in the small business center.

We expect all of these areas to post better results in the second half of the year.

Turning to individual life we had good mortality results in the traditional open block and this was somewhat offset by below offset in the ULVL block and as we expected group term life residence a more normal mortality ratio of 93.3$ for the second quarter.

Now I'd lake to discuss our investments results which we think were obviously outstanding.

Our investment spreads were generally higher and as you can see from our financial supplement crediting rates continue to tick down across the board.

A number of items contributed to higher returns in our investment portfolio.

For example, our corporate joint venture income was higher than our expected range by about $40 million pretax.

I should probably spend a moment just to, on corporate joint ventures, or CJVs they are private equity investments, you know, when we made investments in things like LBO funds.

By their very nature their results can be uneven and are somewhat cyclical as well.

The second quarter was obviously strong but more importantly we now believe that that class is recovering and we expect it to return 10% this year.

We believe that the remaining excess return this quarter is about $20 million it's a combination of a bunch of stuff including equity link notes, bonds and commercial mortgage prepayments and securities lending activity which all performed favorably.

Now let's discuss our expense management results for the quarter.

I have to give you a little history.

In the second quarter of last year there were two, one time events, the reductions specifically of litigation reserves and a write off of some previously capitalized expenses at New England which had the net effect of lowering our reported expenses by approximately $49 million.

When you adjust for these items our operating expenses this quarter increased by only 2.6% over 2003.

This compares to our top line growth rate of over 6% for the quarter.

So our expense ratio continues to move down and it improved approximately 100 basis points year-over-year.

We also had two unusual items which affected our operating expenses this quarter and they essentially cancel each other out but I will explain both of them in a little more detail.

First we released $49 million from our group life premium tax accrual which shows up as an offset to other expenses in that business segments income statement.

As part of the review of certain balance sheet accounts, we felt that our accrual here was simply too conservative and that we could no longer justify it and we made the release.

This has the affect of increasing group lifes operating earnings by $31 million after tax.

Now, the other unusual item for this quarter was that we gifted $50 million of appreciated stock to the MetLife foundation.

This shows up in other expenses in our corporate and other segment and has the effect of reducing operatings in that segment by $32 million after tax.

Now let me explain about the MetLife foundation for a minute.

We are under no obligation to contribute any money to the foundation.

It is purely voluntary.

The last contribution we made to the foundation was in 1997 when we donated $25 million.

We felt that given our strong results this quarter now was an appropriate time to make another contribution.

Turning to our bottom line results we earned 842 million, or $1.11 per share in net income this quarter.

This includes $174 million, or 23 cents per share, in after tax investment gains and so our operating EPS is 88 cents.

On a statutory basis for all of our combined statutory entities we produced 659 million in net income and that compares to 150 million in net income in the year ago period.

We are still on track to achieve approximately 2 billion in full year net statutory income.

During the quarter we purchased -- repurchased approximately 6.1 million shares of stock for a total of $210 million.

Because of our strong results this quarter and because of the fundamental ongoing strength of our businesses we have raised our EPS guidance for 2004 to $3.22 to $3.30 per share and that compared with our previous estimate of $3.08 to $3.18.

In addition we had previously expected our ROE would be essentially flat for 2004 as compared to '03 when it was 12.4%.

We now expect our ROE will likely range from 12.7 to 12.9% in 2004.

Let me take just a minute to explain the announcement of our IRS audit for the 1997 to 1999 tax used in the press release because that probably confused a little some of you.

We believe that our IRS audit may be resolved between now and the time that we actually file our 10(Q) for this quarter.

If this is the case the effect of the audit will have to be reflected in a revision to our second quarter financial results and we'll do that by filing an 8(K) and we'll also have to reflect those results in our second quarter 10(Q).

We believe that if the audit is concluded as expected second quarter financial results will be favorably impacted and we will revise our second quarter '04 earnings to reflect that impact.

Again we are very pleased with the quarter and we feel we've got a lot of momentum moving into the second half of the year as well as in to 2005.

And I'd now like to turn it back over to the operator to take your questions.

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

You will hear a tone indicating you have been placed in queue, you may remove yourself from the queue at any time by pressing the pound key.

If you are using a speaker phone, please pick up the hand set before pressing the numbers.

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 Jason Zucker from Fox-Pitt, Kelton.

Please go ahead.

Great.

Thank you and good morning.

A couple questions.

First, Bill, does the increased guidance include any expectations for increased share repurchases?

And is there a chance that the '05 planned repurchases could be higher than originally expected?

Then I just have a follow up.

Well, I think we're still thinking that overall stock repurchases for this quarter will be $500 million and I think through the first six months we've purchased 275.

For the year, excuse me, for the year we are going to repurchase 500 for the first six months we'll repurchased 275.

So we have a little bit to do in the last half of the year and I don't -- there are no plans to accelerate that now.

In terms of '05 repurchases frankly, we haven't put out a target.

But, you know, we do generate a lot of capital in this business and I think we all know that and my expectation is that the repurchases will be meaningful.

I should just also mention, I'm glad you brought that up, Jason, because I wanted to make clear, you know, I talked about this IRS tax audit in the release we might have.

That isn't included in our operating earnings per share guidance in case anybody thought that.

It is not included?

It is not.

Good.

And then the follow-up question I had, was on the individual business it was the first quarter where earnings were over $200 million.

I guess given your outlook do you think that is a level now that's sustainable on a quarterly basis?

Hi, Jason, this is Stan Talbi.

At least for the next few quarters we do expect earnings, you know, to be in the 200 range, in 2005 we'll give you guidance for December.

Great.

Thank you.

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

Please go ahead.

Good morning.

I had a couple of questions.

Can you give us any sense of approximately how much dental earnings were off from recent periods?

And then related to that, what's your confidence that we have just, this was a bad quarter for dental versus a return to a more normalized results in that line?

The second question is on the GMWB, I was wondering if you could talk about what the price is going to be?

And it sounds like you are looking at a little bit different target market.

I mean, saying that you are going to target those that are at or near retirement looking for income, that would suggest that, you know, the utilization rate of the feature would be very high, potentially early on and I know that that's a risk factor with the product.

So I was wondering if you could talk about that, thanks,.

It's Stan Talbi again.

You know, in terms of dental let me just point out that we did not have a bad quarter, it's just that the underwriting earnings were below the excellent performance that we had last year.

If you recall last year we said we had made some changes in our claim reimbursement Met practices and that resulted in extraordinary underwriting gains and we said that going into the renewal year that some of the fees would have to be given back in the form of price reduction to customer.

So we did, you know, we had less underwriting earnings in the first half of this year than we had in the first half of last year.

Dental experience is generally seasonal and in the second half of the year we generally see an improvement in underwriting results.

So we do expect that to happen in the second half of this year.

To quantify the effect of the reduced underwriting earnings, from 2003, 2004 current quarter it's about 9 million post tax.

Ed, you want me, I'm sorry, did that answer your question?

Yes, and then the WB.

Let me just mention about the new option.

The first place, we are going to introduce the option in August and one of the things about the industry variable annuity sales now that involve systematic withdrawal writers represents about 50% of industry sales.

So in the first place it's a very, very attractive offer in the marketplace and we will be offering both and it allows us and our sales representatives and those independents that work with us to have a broader spectrum portfolio to meet the suitability requirements of their clients.

Obviously if you sell this option relative to the suitability you would expect that it would be huge.

And so certainly that's in our pricing.

It's in the way we invest the assets.

So we are very comfortable in looking forward to the roll out.

Now when you say it's consistent with how you invest the assets, are you suggesting you are going to have some control over the allocation, the asset allocation decision of the individual with your WB product?

No, no, but the way the offerings are packaged.

For example when we look at our annuity business in general, one of the things, the first starting place that I look at certainly is the usage, the type of options coming in from our different distribution channels and so forth.

So, you know, we'll be monitoring that as we do with all of our annuity products.

But, no, the choice is with the consumer and the option is an attractive one.

Any chance you'll give us what the pricing will be?

Yeah.

The -- we have filed it's a 50 basis point annual charge and optional charge.

The product will be very competitive with some of the leaders in the marketplace as Rob has pointed out.

And to the point of pricing, we do anticipate a fairly high utilization rate of the product and will price it appropriately with that.

We are not counting on low utilization of this writer to support the price.

Thank you.

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

Please go ahead.

Great.

Thank you.

Firstly is international, do you think you can give us an update on your progress entertaining the various blocks of business in Spain and (INAUDIBLE) and if there's been any news on the Federal Government case.

Second with asbestos.

Some of the property casualty companies have reported reserve additions this quarter.

So I was wondering if you could give us an update on trends you are seeing in your own block and your accompanying reserves.

And then just lastly on the withdrawal benefits, just a couple of days out as to how you plan to hedge the risks with that part as well.

Thanks.

Nigel let me start on Mexico and then maybe I will pass it over to Bill for additional comments.

You know, the Mexican, as I mentioned in my opening comments, the business in Mexico including the Federal Government business is going actually above expectations at this point.

Both in the group insurance area and what we call work side marketing.

So we are feeling, you know, right on target there.

Bill, you want to add anything to that?

No, the only thing I would say on the second part of the question is that we do expect that the Federal Government group insurance business will come to bid towards the ends of this year for an '05 renewal.

I guess just to follow up on that, out of the total number of blocks of business which are coming up a bit, how many have already come and gone?

How many have passed you now?

Yeah.

We are actually 50, about 55% of the way through the for the year and that's about what you would expect.

That's on about 30% of the business.

The other 70% doesn't actually renew but has persistency that's higher than we had to have been

Coming back to asbestos and what we've been saying all along and as I'll say it again, we are very comfortable with the reserves we've set up.

We still have an additional 275 million in our insurance contract with high net reserve.

We also said that we believe that there was an acceleration of claims because of the talk of legislation.

That is bearing out in the claims.

So if you look at what would be reported at the end of this quarter you will see that our claims are down substantially from last year at this time.

You will also see that we are on track to have the lowest level of claims submitted in the last six years that I have data on.

So we are really heading down to a very low level of claims well within our reserves.

So we are very comfortable with where we are and we have been comfortable as we go forward.

So I don't see that as an issue going forward.

In terms of our hedging, we did put in place our hedging program for our GMIB the guaranteed minimum income benefit program on July 1, and as this product rolls out next week we do have a program in place as well for that.

Okay.

And, I guess a delta hedging strategy at this (INAUDIBLE HIGHLY ACCENTED)?

Primarily.

Yeah.

Okay.

Are you covering the full risk to your earnings or are you just covering the potential capital hedge.

Well we are doing it smartly.

We are looking at the accounting volatility, we are hedging that.

And we are looking at hedging the rest of it with a corridor because the benefits are really half of the money right now so we don't want to spend a lot in hedging the rest of it and creating volatility earnings.

That's great.

Thank you.

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

Hi.

Good morning.

Two questions.

One on loss rate and fixed annuities.

The loss rate has been coming up over the last few quarters.

Can you give us a little bit of color on what's driving that?

Is that a function of rising rates and what do you expect going forward in terms of the loss rates there.

And just secondly if you can provide us a little bit more color in terms of corporate joint venture income and prepayment income, specifically where those gains are being booked and if there are any segments that are disproportionately benefiting from those gains.

Hi, it's Jim McCaffey, I will take for fixed and elapsed rates, we did see a slight increase in our lapse rate, I believe 8% this quarter.

It primarily came from our old Copa business.

We had a block of annuity business coming up for renewal and we saw a little bit higher nonrenewal than we expected.

So that was in the second quarter, sort of a blip there in fixed annuity renewals.

We do anticipate that it will slide back down to the 7.5 the 7.6% range next quarter.

We really don't feel it's a function of rising rates.

Our rates still are at or above our minimum rates and current credit rates will still be lower so we don't see that pressure at this point in time so we will see it return back to normal next quarter.

With regard to the corporate joint venture prepayment income, there's really no, another thing, they are spread out all over the company.

So everybody has got a little piece of it and so that effected it, if you had to say which benefited disproportionately more or less I think there's sort of two things.

One is that a lot of thesis in corporate and other.

Okay?

Which isn't really surprising.

The second thing is interestingly retirement and savings actually benefit a little less, especially from the CJV income.

They had some of it but disproportionately they benefited a little less so that gives you a little better feel.

Okay.

Just to follow up on the fixed an annuity lapse rate.

If I look at it going over the last I guess six quarters it's trended upwards from about 6.5%.

What's sort of a normalized lapse rate?

Is it the 7.5% rate or should we expect it to be lower than that?

Yeah, it's Hugh again, I would say it's in the 6.5 to 7.5 range.

You know It bounces around as we have blocks of business coming up for renewals but I would have it in the 6.5 to 7.5 range at the current level of interest rates.

Remember, lapse at the (INAUDIBLE).

Okay.

Great.

Thank you.

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

Please go ahead.

Thank you, good morning.

I just have a couple questions.

I was wondering if you could talk about what you are expecting for the competitive environment in employ benefits going into this next renewal seasons as companies are essentially looking at a bit higher interest rate and maybe improving employment numbers.

And then the second question was about acquisition opportunities.

I mean you've got a lot of money.

You've got a lot of excess capital.

Do you believe that acquisitions are just not available at this point in time?

And then I guess my third question is, you've got such a strong earnings growth target for this year.

What does it mean for 2005?

Joan, it's Rob.

Let me take them in sequence.

In the first place in terms of competitive environment, I'll sound like an old war-horse here but it's always competitive in the employ benefits marketplace.

It comes from different places at different times but it's competitive.

And we continue to differentiate ourselves across the board in institutional business, not only with the broad proliferation of products we have but because of the service capabilities around it and what I call demands drivers from the buyers?

So you have even in products that have been deemed to be commodity products in the past, the buyers need, that is the planned sponsor, drives a whole set of demand requirements and quite frankly we are one of the few carriers that can even begin to answer those questions for them certainly across a broad book of business.

So it continues to be competitive.

We continue to see at the very upper end of the market what we think are some irrational pricings.

After certain sort of large trophy cases.

We see all those, of course, and we are happy with the ones we've not been successful with in terms of writing this year because there have been some oddities in pricing.

But in spite of that we are growing very, very strong in our national accounts marketplace as well as we are across the board.

So we feel good about that.

In terms of better employment, we've demonstrated in the past when employment is down we are insulated more than most.

I think you will find when employment is up we will grow faster than most.

So that's how I feel about those.

In terms of acquisitions, you know, I think here at Met today versus maybe some time in the past almost everything we do we run through the thought process of build, buy or rent.

And in terms of acquisitions, we look at it in terms of what we will, in terms of weaker competition, what we'll absolutely win in the marketplace versus buying blocks of business versus buying companies.

And you have to understand what you're buying.

There are some opportunities out there.

We've taken a look at some things.

And you know, there are some negatives in terms of what's been available.

We've made a couple of small purchases as you know.

But I would say tune in because we continue to look.

In terms of 2005 earnings, maybe Stan would want to?

I would prefer that -- wait till December.

We still think we are going to be in a 10 to 15% range, that's what I said before, so that would be our expectation going forward based upon the three-year plan we talked about in December.

And just to comment a little bit about acquisitions that Rob talked about, we do have a lot of people who love to sell sometimes but the price they are asking is the issue.

And we believe we should continually grow our market cap.

We are going to grow our market cap.

And we're going to do that by improving our earnings, the quality of those earnings, the ROE is going to continually improve.

We have targets we feel pretty confident about in the planned period and if there's an acquisition that makes sense for our shareholders then we are going to go ahead and do that.

But, if it doesn't then we are going to continue to do what we've been doing which is growing our earnings 10 to 15% and continue to move towards a 14% ROE at the end of 2006.

Thank you.

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

Please go ahead.

Good morning.

Looks like everything was real solid in the major areas.

I want to ask a few questions about some of the smaller items.

Number one, State Street, what's the commitment long-term and how are you feeling about that business?

Two, with regard to dental, just to get a little more clarity, can you give us a benefits ratio on that business?

And lastly and thirdly, with regard to your property casualty business, the combined ratio looked phenomenal at 93% after a lot of catastrophes.

What are you doing differently than your competitors that might sustain good numbers like when the industry gets irresponsible and I suspect that might not happen in the -- it might happen in the not too distant future.

Andrew, I will just comment on the State Street research management.

First of all I think the team has done an outstanding job of improving their performance.

You look at our equity performance in particular.

It was done well.

We are turning around, doing our best to get that turnaround rapidly on the fixed income side.

But it's a business we are in.

I've said in the past that it's not a strategic business per se as you think about open platforms across the management.

We've said it's not a core business for our organization but it's a business we are in and they are doing well and as you can see the performance in the second quarter of the organization.

So for now we are going to continue to be in the business unless a better alternative comes along.

Great.

-- dental, we don't really report to that level.

It obviously varies by market segment, you know, it's higher at the small end -- lower at the small end of the market because of the higher distribution cast and extremely high similar to our term life loss ratio at the national accounts end of the marketplace.

But I would say a lot of our dental earnings are also driven by expenses.

You know, the fact is that at the large end of the market a lot of our business is administrative service only and doesn't include any underwriting.

So Stan, what kind of return business would you say your non-administrative services only business would be?

I think I'd say at the level of earnings that we are producing in the second quarter it's still well in excess of 20%.

Okay.

Andrew, let me take a shot at the, at your auto and home question then I will pass it to Cathy if she wants to make any additions.

You know, the auto and home business in general is, in the first place, there's sort of the business climate is driven in any business in what I call a demographic trends.

The demographic trends in the auto business in particular are quite attractive.

Lower frequencies and that has to do with ratio of vehicles to drivers, safety laws, you name it.

And in that climate the question is, you know, how do we differentiate ourself particularly when people might do some things on the pricing side that puts some pressure.

I would say we are one of a handful, maybe if you identify handfuls as maybe the number of fingers on your hand, we are about one of a handful of companies that has the sophistication, what I call pricing segmentation or tiering and the technology to drive that.

We've spent quite a bit of time, effort, and manpower, and money developing that technology and now it should really pay off.

So as I mentioned you will get more preferred risks.

You will have improved retention in that business.

And I can't emphasize how much we leverage auto and home going forward by multiple distribution opportunities.

So we have direct marketing.

We have our own agents, of course.

We have independent agents.

And a very unusual group insurance franchise as you know.

So it's sustainable.

We think on a relative basis we will probably become more competitive in terms of bottom line earnings than other companies.

And the only other thing I would mention is remember the volatility measure we put in.

So I don't know if there's anything else, Cathy, might want to add.

I think that as Rob said, we've spent a lot of time in the last several years getting our earnings to a level that's appropriate for our business and cleaning up our reserve division.

But during that time we have invested significantly both in volatility management and we continue to be very disciplined in the geographic risks we take.

And in technology.

Our claims operation is probably second to none in technology.

And in risk segmentation we are one of very few companies that can do the sophisticated rate to risk matching that allow us to really rifle target our best prices to the very best customers.

And moving into this kind of a tiering program is very expensive and very complicated.

So it makes the gap between those companies which do it and those that don't that is a major competitive disadvantage.

And we are continuing to invest in widening that gap for our company.

This kind of a tool is particularly effective in a soft market because it allows you not only to drive the best risk to your company but you drive the worst risk to other companies and that helps us in many ways.

I'm also very proud to say that the auto and home team while making these investments and improving our bottom line has kept very extremely favorable expense ratios in our business which should help us continue to be very competitive.

So what differentiates us is the combination of our sophisticated pricing, our unique product differentiation because we really do have differentiated products in both auto and home, and our highly energized multiple distribution channels that are very anxious to keep going at accelerated growth.

So we are very confident for both 2004 and beyond.

Thanks.

Our next question comes from the line of Liz Werner from Sandler O'Neil.

Please go ahead.

Good morning.

Just a couple of follow up.

Most of my questions were asked.

But with respect to the acquisition environment, do you have any sense that there are more or less players in the market in terms of the number of companies looking at transactions?

And as a follow up to your comment on looking at buy, billed, or rent, have you ever considered looking at maybe teams of people at companies that you would target?

Then I have one quick follow up.

Okay.

In terms of more or less, you know it's one of those things.

If you believe the banker community there's 20 people looking at everything with a hot pencil so I don't know if there are more or less out there quite frankly.

But I think in terms of the way we look at something, we look at it fundamentally, we look at how it would integrate into our operations as Bob mentioned the worst thing you can do is, or implied, the worst thing you can do is bring people in an operation in that messes up something that's already running efficiently.

So in terms of targeting people we just don't do that.

We don't think it's good business practice out there in the marketplace.

The only place that you hear about it frequently in all the businesses that I've been involved in is in the money management business where people will target people, but I don't think it's a good practice.

So, no, we do not do that.

Okay.

That's helpful.

And then as just a reminder in terms of your excess capital levels, if I remember correctly you generate about 1 billion a year in excess capital.

Is that number right or has it changed at all given the current growth prospects and how much of capital is actually dividend from the insurance of theories to the holding company?

Yes. $1 billion in a normal environment is certainly, and I would say I don't think it's changed meaningful from given our second quarter results and so that's still a good number to think about but it's a little crude.

In terms of dividend capacity, well, we haven't made any dividends yet this year we -- in almost every state that, you know, where we have a domicile insurance company the dividend lawsuit are fairly specific about the max dividends we can pull up.

And I just off the top of my head think it's about $900 million okay, so on ordinary dividends.

Obviously we have the ability with permission from insurance departments to do more than that and we have gotten permission to do that in the past.

So that's sort of where we are at.

All right.

Great.

Thank you.

Our next question comes from the line of Thomas Gallagher, CSFB.

Please go ahead.

Hi.

A few questions on annuities and then another one on spreads.

The first question is, as you transition off of your old GMIB product really and get more focused on the GMWB., A., is that the right characterization and, B., are we going to get kind of a V shape in sales?

In other words have you seen sort of a deceleration and do you think there might be a little bit of weakness as you transition to the new product?

Let me start off with the first question within your question, I wouldn't characterize it that way.

We essentially feel that if we have a product out there that we are supporting we'd like to see it sell and we'd like to see it grow.

So we are not trying to emphasize one over the other.

There are different market segments that have different needs.

Hugh you might want to--

Yeah.

I think the positioning for GWB is clearly income now.

We've seen the market place move more towards that of some of our competitors.

So I really see that we are just looking for incremental sales from this benefit as we get into that part of the marketplace as Rob said.

So, you know, we've seen a little bit of, you know, slow down in our revenue sales while it's still very strong we do anticipate that this will put us in a marketplace we just haven't been in right now.

And some forget too, that the first quarter did see the benefit, a lot of you on Wall Street know that a fire sale does generate more sales.

And when we changed our rate in the latter part of the first quarter that did cause a little bit of uptick in sales that can't be replicated in the second quarter.

So that's a little bit of what you see when you look at sequentially quarter over quarter.

Okay.

And just a follow up on that, can you just comment on what the percent of your annuity sales that have the GMIB benefit and how that's been trending?

And when -- and kind of where you would expect that to go?

It's Hugh again.

The percent electing GMIB across the enterprise between 55 and 58%.

We would anticipate that GWB will pick up some of those sales.

We don't believe they will cannibalize them.

I think these are incremental sales.

So you know, we would hope that the GWB will probably get in the 25 to 30% range of election and be truly incremental sales.

Okay.

Gotcha.

And then just I guess a broad question for either Bill or Stan.

Can you just comment on where you stand with regard to crediting rate flexibility across the board for the company and your game plan for likely movements on that end as you think about managing spreads?

Thanks.

As you know we have had and continue to have flexibility on both our preferred annuity and our Universal life segment.

Yeah, you can see in the crediting rates that they continue to trend down.

And in both segments the average crediting rate is still about 55 to 60 basis points above the minimum.

So there's still more room to move, obviously it depends on which way your rates go whether we continue to move those down or whether we cease and reverse.

But, you know, as you've seen, you know, these spreads were very strong this quarter, you know, somewhat driven by the corporate joint venture and some of the other extraordinary income items.

But pretty much across the board we are meeting our targets, that we shared with you on investor day and we'll come in above those targets in several segments.

Just one last follow up, so, Stan, based on where rates are right now, is there a need to continue to lower crediting rates for the balance of the year or are you fine with where you're at now.

Well we probably won't lower them more than where we are right now but you will continue to see some continuing trends, you know, 3 to 5 basis points for those segments each quarter for a couple quarters.

Okay.

Thanks.

Our next question comes from the line of Vanessa Wilson from Deutsche Bank.

Please go ahead.

Thank you.

Stan, just to follow up on your comment about the 55 to 60 basis points, I'm just looking at the supplement on page 34 and the annuity average crediting rate in that supplement is 3.79.

You are saying on that in force block you have another 55 to 60, or you are saying relative to new business being written?

No, that's on the in force block, the average minimum guarantee is somewhere between 315 and 320.

Okay.

And my question relates to the investment portfolio yields.

Bill gave us a sense of I guess 40 million of unusual level of corporate JVs.

Looking at the investment yields that you gave us this quarter of 6.73%, what can we expect for the balance of the year?

Lee had given us guidance coming off of 2003 and could you just update that a little bit and give us a sense of how to think about the yield maybe for the next couple quarters?

Yeah, Lee here.

I would say we are going to go drift down one is to pull out that unusual activity that Bill and others cited.

How many basis points should we think about for that?

12 or 13, 14, around in there.

Then if you have the normal kind of rather natural drift of 7 or 8 or 9 underneath that you are going to get.

Per quarter?

I'm sorry, per quarter, right.

So you are down to 640, 635, 640, around in that area for Q3.

Then each quarter you are going to see exiting unusual items you are going to see a little bit more drift in that 5 to 7 basis point range.

Then, Bill, I'm sorry -- by the way the yield on the portfolio was 660.

Okay.

After expenses?

Sure.

Then, Bill, I just was confused, the 40 million pretax that you talked about in the corporate JV and then you talked about a $20 million number, that was in addition to or part of?

In addition to.

Okay.

So it's really a $60 million number that tracks with these 12 to 13 basis points?

That's correct.

Okay.

Thank you very much.

Our next question comes from the line of Suneet Kamath from Sanford Bernstein.

Please go ahead.

Thank you.

Two questions.

First if I go back to the analyst day I think you guys had talked about perhaps expanding a little bit in the supplemental insurance market on the group side with some of the employee benefits.

I was just wondering if there was any update there.

And then second, you know, I haven't really heard much on the whole market timing in VA and VUL.

It's obviously been kind of quiet on that front.

I was just wondering if there was any update there.

Thanks.

The question of supplemental, are you speaking about critical illness or?

Yes, that's right, critical illness.

Yeah.

We, you know, I would say in terms of product roll-out designs and administrative focus and so forth this is probably the most carefully rolled out product design we've had.

We are now in a position that in the, between now and the end of the year we are doing some very specific target marketing and we'll have some results to that which will give us an indication in terms of certain product features and certain distribution channels and so forth.

And we will be ready to go in a major way in the first -- middle -- middle to the end of first quarter of next year.

So we are very excited about that.

And the feedback from the market players that we've talked to on the sponsor side as well as individual is very, very positive.

The other is in terms of market timing, we reported previously that we have a very limited situation at General American and we continue to work with the regulators ongoing to that one particular case but we are not aware of any other widespread or any other issues that we have within the company other than what we have previously reported.

Okay.

Thanks.

Our final question comes from the line of Al Capra from Oppenheimer.

Please go ahead.

Thanks.

I think you just addressed one of my issues.

The other was does it relate to interest rates.

Many are upbeat about what rising rates mean for crediting rate flexibility and potential spread expansion.

But I was curious to know what your thoughts are on what a flattening of the yield curve would mean for both knew assets coming in the door and your existing portfolio as it reprises over time.

I can start and other people can chime in.

With rising rates we think that has a very positive impact in sourcing to the business.

As the fixed income market becomes more attractive.

I think we can sell more fixed annuities with shorter surrender periods and that would attract more business.

You know in terms of the existing portfolio, we have disclosed before that we did take a hedging position in anticipation of rising rates and a flattening of the yield curve.

So we're well positioned for that.

And then the third point I would make is that in one of our portfolios, you know, our TCA program and the group life segment, as short term rates rise it actually benefits earnings in that segment so it helps to compensate for some other areas where there might be a slight if negative effect.

That's helpful.

Thanks a lot.

There are no further questions at this time.

Please continue.

Okay.

If there's no further questions I want to thank you all for joining us on the call.

As we said we had a really strong quarter.

The team is really feeling very optimistic about the rest of the year and I thank you for your participation and look forward to speaking to all of you in the next quarter.

Thank you.

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