大都會人壽保險 (MET) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MetLife third 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 any assistance on today's conference please press star then zero and an AT&T operator will assist you offline.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Tracy Dedrick, Vice President of Investor Relations.

Please go ahead.

Thank you, Shelly and good morning.

Welcome to MetLife's third quarter 2004 earnings conference call.

Joining me this morning are Bob Benmosche, Chairman and CEO, Bob 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 Lisa Weber, President of Individual Business, Bill Topetta, President of International, Kathy Ryan, President of MetLife Auto & Home, Lee Launer, Chief Investment Officer, and Stan Talby, Chief Financial Officer for the revenue producing businesses.

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

We've reconciled these non-GAAP 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 in not accessible, because MetLife believes it is not possible to provide a reliable forecast of net investment-related gains and losses which can fluctuate period to period and may have a significant impact on GAAP net income.

And with that now, I'd like to turn the call over to Bob Benmosche.

Good morning to everybody and as you can see we've had another very good quarter for our Company with net income up 23% which is about 92 cents a share and this is just another strong quarter this year.

We've had a good year and we'll talk about that in terms of the fundamentals of our business.

We've had a good year both at the bottom-line and also our top-line growth continues to be strong.

And while we've had a good year, this quarter like some of the other quarters still had some tough wind that we had to face in that we had flat equity markets, we continue to have a low interest rate environment, and quite frankly we had some pretty tough weather to deal with in this quarter with the hurricane season down in Florida.

And I must comment that the Auto & Home Company, we've talked to you about this over the last several years, we've said that this is a strategic part of our Company, it provides strong value and other product lines, and we also said that we would manage the volatility by really looking at where our exposures were and managing that book of business very effectively.

And while we had strong reinsurance that did not come into play this quarter, and I will tell you that if you look at the results of the Auto & Home Company, you can see that this is a strong part of our Company as we go forward.

I must also tell you that even though we had a tough quarter to come through, the Auto & Home Company did an absolutely outstanding job in working with our clients, and we're the only Company reflected in our results this quarter, we're the only insurance company that we're aware of in the state of Florida that had a seasonal deductible, so that our clients only had to pay one deductible, because part of our value proposition to our clients is we want to be there for them when there are difficult times.

And so that activity is also reflected in this quarter.

But the strong quarter is really a result of the diversity of our earnings.

We've talked about our breadth and depth as a Company, and you can see that all of that is coming to bear in the three quarters so far this year and so we have a great deal of confidence towards our annual goal of 322 to 330 earnings per share for this year.

Also, because of our strong earnings and our capital flexibility, we've been able to achieve, but we did raise the dividend, and it's an annual dividend, keeping in mind, of 46 cents.

And we're also continuing to focus on our shareholder value.

And we're going to do that through growing our earnings per share.

You're going to continue to see us improve our ROE, and one way to do that is to look at the amount of excess capital we have and you see that the board has just approved a $1 billion addition to our share repurchase capability so we'll continue to bay back shares and of course, we've already announced the $200 million share repurchase for this coming quarter.

So all in all we're going to do this and continue to maintain our strong AA rating.

I look forward to your questions and I also look forward to seeing all of you on investor day.

Please keep in mind that will be December 6th.

We have changed the hotel so please make a note, we're going to be at that time Marriott Marquis this year.

Look forward to your questions and seeing you at the meeting in December.

What I'd like to do now is turn it over to Rob Henrikson who will bring you up to date in a little bit more detail of how we achieved these results this quarter.

Rob?

Thank, Bob and good morning everyone.

Turning to business I'm pleased to report on what is another good earnings quarter for MetLife.

In a few minutes, Bill Wheeler will talk about the financial results for the quarter but first I'd like to comment on the business results.

The top-line, defined as premiums, fees, and other revenues, grew at 12.9% versus the third quarter of 2003, and grew at 10.4% year-to-date.

The growth rate is currently above our projection of 4 to 8% for 2004.

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

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

Turning to Institutional operations, we had another strong quarter.

Group Life premium fees and other revenues were up 8% this quarter.

This growth is primarily due to continued sales growth and favorable persistency as well as the acquisition of the John Hancock Group Life business.

We continue to grow faster than the overall market by leveraging our broad portfolio of products in all market segments, and by differentiating ourselves through our service capabilities.

In addition, mortality experience was quite favorable with the incurred loss ratio improving from 93.3% in the previous quarter to 91.3%.

Retirement and savings premium fees and other grew66% year-over-year as a result of strong sales in the quarter, particularly in our structured settlement and pension close-out businesses.

As I mentioned last quarter, we are having a strong sales year in structured settlements.

And year-to-date we have exceeded 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 401(k) product. 401(k) sales for the first nine months were up 20% driven by robust sales in our agency channels.

Finally, our total client balances in retirement and savings, on which we earn a spread, have increased by approximately 11% year-over-year.

Non-medical health premiums and fees and other revenues increased 16% over the prior year quarter.

The increase in this segment is due to continued growth in all products in this segment aided by the strategic acquisition of the TIAA-CREF long-term care business.

Sales through the small business center have been favorable, continuing to reflect our efforts as I've previously discussed, to expand this channel by opening nine additional metropolitan locations in the last four years.

As you may recall last quarter, we announced the consolidation of our Georgia disability claims office into our other claims operations.

This quarter reflects additional expenses associated with that restructuring.

As I said before, our dental business remains challenging, particularly in the middle market segment due to the trend toward administrative service only business.

In addition, our claims experience in the third quarter was still not where we'd like it to be, but we expect it to improve in the fourth quarter.

Finally, group disability's morbidity ratio improved to 92% sequentially, due to the anticipated lower long-term disability claims incidence.

Turning to Individual operations, premiums, fees, and other for the individual operations were up 3.4%, and operating earnings were up 18%, both over the same period last year.

In traditional life, operating earnings were down 17% from the prior year's quarter, due primarily to adverse mortality, lower investment income, and slightly higher expenses.

Operating earnings in variable and universal life were 30% higher than the previous year's quarter, primarily due to favorable mortality and improved spreads.

Universal life deposits remain strong, up 52% over last year, largely driven by high initial premium sales, while variable life deposits remain at recently relatively depressed levels.

In the annuity segment, operating earnings rose 46% year-over-year due to the growth in the business and improved spreads.

As you will notice, annuity deposits are down 16% sequentially, and down 15% year-over-year, as variable sales are down due to lackluster equity markets.

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.

And though we introduced our guaranteed minimal withdrawal benefit rider, in the beginning of August sales in GMWB have not grown fast enough to offset the decline in GMIB sales.

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

Moving to Auto & Home, as you know, last quarter was pretty tough on the population of the Southeastern United States and on our customers that live in that area.

Four hurricanes in one quarter is less probable than a one in 100-year event.

As Bob mentioned, after the second hurricane hit Florida, MetLife made the decision not to charge customers who suffered multiple losses more than one deductible, even though we have the contractual right to charge a deductible for each event.

MetLife has always tried to do the right thing by its customers.

We believe that this approach will pay for itself many times over in customer loyalty and goodwill, and in the end is the right decision.

That being said, hurricane losses at Auto & Home in the third quarter were approximately $66 million after tax.

Excluding all catastrophes, however, the combined ratio declined to a very favorable 84.8%.

The best results ever for MetLife Auto & Home

This improvement, in the combined ratio was driven primarily by continued reductions in claim frequencies in both Auto & Home and declining auto severities.

Our refined segmentation models used to price our Auto & Homeowners lines have allowed to us grow in the most profitable risk segment.

Auto results were excellent coming in with a 92.3% combined ratio, due to a reduction in claim frequency and a small favorable swing in prior year reserve development.

Homeowners results were impacted by heavy catastrophic losses coming from hurricanes and other storms, and as a result, the combined ratio came in at 123.6% in the third quarter.

However, these losses were partially offset by a reduction in the non-catastrophic claim frequency.

And excluding CATS, the Homeowner's combined ratio was 68.2%, down 10 points from a year ago.

In our International segment, operating revenues were up 13% from the prior year's quarter excluding the impact of the sale of our operations in Spain last year.

This is due to robust sales in Korea, where the new VUL product is selling extremely well, and in Chile, where sales of annuities were strong in the third quarter.

Mortality experience in Mexico has also been favorable and operating earnings are unusually strong.

Regarding Mexico, approximately 80% of the 2004 premium renewals for the government contracts are done.

The retention of business continues at expectations so far this year, and we remain optimistic about the remainder of the year, but I want to remind you that we still have a number of contracts that come up to bid in 2005.

And finally, in the two other countries where we are investing, India and China, I'm pleased to report that sales growth in India is robust and hiring is going very well in China.

As you recall we're in the process of selling our asset management operations to Blackrock, and that is still on track to close in early 2005.

In the interim, operating earnings returned to normal in the quarter as expected.

Operating earnings were 7 million versus 16 million in the second quarter.

By the way, we continue to be pleased with our new building relationship with Blackrock.

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

We're 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'll turn it over to our CFO, Bill Wheeler.

Thanks, Rob.

Good morning everyone.

I'm going to walk through our income statement highlighting the key issues for the quarter.

I'm also going to briefly mention some capital and other issues which have also come up this quarter.

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

Fees totaled 6.8 billion for the quarter which is, as Rob mentioned, is an increase of 12.9% over the third quarter of last year.

Now there two are significant items that drove this higher revenue growth that are sort of one-time in nature.

First, we had a high level of structured settlement and other sales in our retirement and savings segment.

Structured settlement and closeout sales can be very lumpy, okay, as it appears we seem to have a great quarter every three or four quarters, and so when we look at retirement and savings we focus more on asset balances as a better indication of growth in that particular segment and so far this year, our asset balances on the general policy holder account balances, in the general account of R&S are up over 10% since the beginning of the year.

The second unusual thing which drove revenue growth this quarter was RGA's acquisition of Aliance's life reinsurance business in the fourth quarter of last year.

That caused our revenue growth in our reinsurance segment to be very high.

If you adjust for both the high level of sales in R&S and the Aliance acquisition, our revenue growth for this quarter was approximately 7.4%, which is in the middle of our expected range of 7 to 8%.

The strongest segments in our business in terms of revenue growth were annuities, which were up 57%, non-medical health and other, up 16%, and Group Life which was up 8%, reinsurance, excluding the Aliance acquisition was up over 20%.

Through nine months, our total revenues are up 10.4%.

Now, turning to our key operating margins, let's start with underwriting results.

Group Life mortality results were excellent at 91.3%, which is also the ratio in the year-ago period.

Group disability morbidity was also excellent at 92%, versus the year-ago period of 99.8%.

Individual life mortality was 78.8% this quarter which is relatively flat compared to 2003, but when you look at the individual product lines, mortality and traditional life declined, but it was effectively offset by better mortality in variable and universal life.

Now turning to Auto & Home, this was obviously an interesting quarter due to the Florida hurricane activity.

The combined ratio, including catastrophes, was 100.1%, and without catastrophes, it was a very impressive 88.4%.

In the third quarter we planned for a significant amount of catastrophes, and we estimate that the actual catastrophe experience this quarter was approximately 50 million after taxes higher than our normal budgeted levels.

That works out to be approximately 6 cents per share.

Offsetting that somewhat was our very strong non-CAT underwriting experience.

Frequency levels in both Auto & Homeowners were very low and severity is also moderating.

We don't believe this level of non-CAT underwriting results is sustainable going forward, though we still expect it to be very good and estimate that the unusually strong results benefited us about two and a half cents or so.

Now, I'd like to discuss our investments results and spreads which were strong this quarter.

The overall yield on general account was 6.38% this quarter, as compared to 6.59% last quarter, and 651 for the year-ago period.

Even though the level of unusual income was down substantially from last quarter, we still experienced a slightly higher level of corporate bond and commercial mortgage prepayment income.

We estimate that this income was approximately 25 million above what would we would judge to be a normal level or about 2 cents a share.

Meanwhile, with regard to crediting rates on our products, they were essentially flat in Group Life and down 4 basis points in retirement and savings.

Higher interest rates at the short end of the yield curve is beginning to have an effect on our shorter liabilities in Institutional, but keep in mind that our current investment spreads are still higher than we normally expect.

In Individual Businesses, our crediting rates continue to move down significantly in both annuities and ULVL, as those liabilities continue to be repriced in this low interest rate environment.

Now let's move to expenses.

Our expenses were up substantially this quarter, even after adjusting for the legal reserve release of $44 million in the third quarter of last year, expenses are still up over 14% for the quarter.

So what happened?

Well, there isn't any one big reason why they're up.

And, frankly, there's a lot of little reasons, and at the risk of getting kicked out of the room, I'm going to give you five of them.

Okay?

First, expenses were unusually low in the third quarter of last year, even after adjusting for the legal reserve release.

For those of you who look at our quarterly financial supplement, you can turn to page four and you can quickly eyeball our sequential quarters and see that the expenses in the third quarter of last year were low.

There were a number of small adjustments to our expense levels in the third quarter of last year, including, for example, a lowering of our incentive compensation accrual.

So that's one.

Two, commission expenses in Institutional Business this quarter are very high relative to last year, and you can see that on page 23 of the QFS.

Remember, we don't capitalize most of our acquisition costs in Institutional Business and higher commissions, which mean higher sales, are generally a good thing.

Third, we had higher than normal DAC amortization levels in Individual Business.

We had minor DAC unlocking events in both UL VL, and annuities.

Four, we consolidate RGA's income statement onto our own as we own 52% of the company.

RGA settled a dispute this quarter for $24 million, and the full amount of that expense is reflected in our financials.

The effect of this charge on our reinsurance segment's operating profits is approximately 8 million, and that's the reason why profits are down from last year in this segment.

And fifth, as Rob mentioned, we began the consolidation of one of our disability claim centers this quarter.

In the long run, this move will save money and improve our effectiveness, but we did incur additional expenses this quarter.

Okay.

So that's five quick examples of why our expenses increased so significantly this quarter, but I think I should put this in context for you.

Our operating ratio, which is defined as total operating expenses divided by total revenues, was 28.4% for the first nine months of 2003, 28.4%.

The comparable measure in 2004 is 27.7%.

Okay?

So, so far this year, we've improved our expense margin by 70 basis points.

So despite this quarter, which was a tough comparison versus the third quarter last year, our overall expense margin is still improving year-to-date.

Before I turn to our net income I need to mention one other thing.

In the third quarter of 2003 we received a 36 million tax refund from the prior year's tax return.

This year we recorded a $9 million tax refund from our 2003 income tax return, and this shows up in the corporate and other segment.

Okay.

Turning to our bottom-line results, we earned $695 million, or 92 cents per share in net income this quarter.

This includes 74 million, or 10 cents per share in after-tax net investment gains, and so our operating EPS is 82 cents.

Through nine months our operating EPS, adjusted for certain one-time events which are footnoted on the front page of the QFS, is up 19.1%.

We also received new guidance from the accounting authorities on how to interpret SOP 03-1, which we had adopted in the first quarter of this year.

The revised guidance had to do with revenue recognition in individual UL products.

We had taken a very conservative approach to this accounting regulation and recorded a cumulative charge of $158 million in the first quarter.

With the new guidance we reduced this charge to $86 million.

In addition, our operating profits from ULVL increased by $3 million in the first quarter and $7 million in the second quarter.

Because of rounding, earnings per share increased by one penny in each of the first two quarters.

So our operating earnings per share through nine months is actually $2.50, not 248.

Okay?

And I'm excluding the 14 cents from the tax release which we recorded in the second quarter.

Okay.

Turning to statutory profits.

On a statutory basis, for all combined statutory entities we produced $476 million of net income in the third quarter.

Through nine months statutory net income was $1.859 billion.

So it's been very strong.

Total adjusted capital at the end of the third quarter was 16.5 billion.

Also, during the third quarter we repurchased approximately 6 million shares of our stock for a total of $221 million.

We have now repurchased $496 million of stock through nine months.

As we announced on Tuesday, our board has authorized a new $1 billion stock repurchase program.

In addition, we announced that we would repurchase up to an additional $200 million in the fourth quarter.

So to quickly sum up, it was quite a good quarter, and we are generally pleased with how our business is performing.

And with that I'd like to turn it back over to Tracy.

Thanks, Bill.

Shelly, we'll start to take questions now.

Thank you.

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.

To remove yourself from the queue press the pound key.

Once again, if there are any questions or comments at this time, please press star one.

We have a question from the line of Ed Behar with Merrill Lynch.

Please go ahead.

Good morning.

I had one question for Bob.

I'm wondering, do you have any, is there any change in preference if the right acquisition opportunity came along as a result of the recent regulatory events?

Could you narrow that down just a wee bit for me, Ed?

I'm not sure what you had in mind.

Just broadly based.

There are a lot of things going on.

A lot of things going on.

Look, right now I don't see anything on the horizon, quite frankly, but if, in fact, as we look at any acquisition, what I've said before, it has to be right for us and right for our shareholders.

It has to make sense for our Company and be meaningful enough that we would want to do that and disrupt the kind of progress we're getting right now from what we have on our plate already.

So I don't see any unbelievable opportunities out there, and I don't think this is the right way to approach it.

In M&A right now, it should be a smart transaction.

And so I don't see anything right now that says, wow.

And just to follow-up.

In terms of all the stuff that's been going on, in terms of the regulatory issues and, et cetera, do you see any fundamental changes in any major lines of business that you participate in?

I don't see any major changes.

I think that the regulators are now working through how they deal with clarifying any issues that might exist regarding disclosures and making sure that those are clearly understood, and I think there's enough regulation on the books, but I think they have to look at it and make sure that all of us have very clear instructions about disclosures, and that's the only thing I can think of at this point in time.

Okay.

Thank you very much.

Yep.

We go to the line of Nigel Dally with Morgan Stanley.

Please go ahead.

Great.

Thank you.

Good morning.

First, just on spread income.

Even if you exclude out prepayments, seems like spreads were generally above the level you got [inaudible].

With interest rates coming down, hoping you can provide some color on how sustainable those spreads are.

And on a similar topic, with fixed annuities, how much room do you have to reduce down your crediting rates before you hit the guaranteed minimum floors on average?

And also what percentage of your total business is already at those floors?

Thanks.

Maybe I'll start with the general question about spread income, and I'll turn it over to Stan Talby and he can talk about fixed annuities more specifically.

Our spreads still are very good across the board.

And it is, yields, Nigel, it's also crediting rates, you know, especially in the annuities and the ULVL, you know, we've move our crediting rates down nicely, they continue to tick down as that business repriced and so that's why spreads are strong.

We, look, you know, we are worried about interest rates, and we're worried about the level of where they're at now, and, you know, we think that we have some breathing room yet in terms of holding spreads, generally through probably the next 12 months, or through '05, possibly.

But we're going to need relief eventually or we're going to have margin compression, you know, and I think as we analyze our business, we think that will probably, if nothing changes, that will probably start in '06.

Stan.

Nigel, at the end of the third quarter we still had some room relative to our minimum guarantees.

In the annuity block we're roughly about 50 basis points over the minimum guarantee in terms of the average credit rate versus the average minimum guarantee, and there's about 30% of the block that's already at the minimum guarantee.

In the UL block, we're about, I'd say about 40 basis points over the minimum guarantee.

And there, too, we're probably about 30 or 40% of that block is at the minimum guarantee.

So as the portfolio rate still comes down, as interest rates either stay level or start declining, we still have some margin to renew at lower rates, and we are, in fact, getting very close to our minimums and probably start being at our minimums later this year.

Very helpful.

Thank you.

And next we go to the line of Vanessa Wilson.

Please go ahead.

Thank you.

Along the same lines, could you talk about your spreads and minimums in your Institutional Business, Group Life retirement, and non-medical?

And in addition, on retirement you grew the assets this year selling structured settlements and annuity close-outs.

Could you talk about what kind of spread or what kind of interest rate exposure you have on those new sales?

In the Institutional segment, starting with Group Life, the only minimums that are in there are on our TCA account, and we've been at the minimum for quite a while so the spreads that you see there is after the effect of those minimums, and you did see the spread come down but, again, at 143 basis points, it's still within our targeted range of 130 to 150, I'm sorry, 160 to 180.

It should be in that range.

Or 187.

I'm sorry.

In terms of retirement and savings, the spreads there are still very strong at 156.

If you take out the prepayments, the excess prepayments, we're probably about 145, which is at the high end of our range.

There are really no minimums there.

Those, most of that business is written on a non-participating basis, so it is what it is, and, you know, there's no rate resets in there.

The non-medical health business has both our long-term care and our disability, long-term disability business in it primarily, and our individual disability business, and again, those interest rates are based on the reserve discount rates.

And again there, that's where the spread is about 143, and that's within our targeted range of 130 to 150.

In terms of our structured settlements and close-out pricing, the margins on, the interest margins on those business are less than what we're actually achieving on the in-force business.

So just the, you know, the business that we put on the books will tend to drive that spread down overall.

But I will say that that business is priced at a 15% ROE overall, so we're not looking for the kinds of spreads that we have on our in-force business.

And Lee, could you just talk about new money rates?

Sure.

Well, new money rates have stayed essentially the same for the last few quarters, so I think if you include everything, everything, all the short-term roll that's around, 330 to 3.5, if you exclude some of the shorter term stuff it's around 4.5%, and it's been like that for a few quarters.

Come up a little bit on the very short end.

You broke up a little bit, Lee.

You're investing on average at 3.5%?

When you rollover everything, and we have a very large short-term roll, as you know, we have a sizable short-term portfolios, it's about 3.30.

But if you exclude the very short-term, the under one-year material and you look a little bit longer it's in that 4.5 range.

Thank you.

In essence, Bob Benmosche again, we all have to keep in mind that you can't generalize these broad numbers as we think about how we invest for portfolios and our asset liability match.

So it's tough to deal with averages here with the size and breadth of product and the Company.

So I just want you to keep that that in mind.

Thank you very much.

We have a question from the line of Joan Zief with Goldman Sachs.

Please go ahead.

Thank you.

Good morning.

I have two questions.

The first question is, when you have an extra 2 cents just from the restatement, and, you know, the earnings, as you say, are very, very solid this quarter, I want to ask why the guidance didn't change for this year to adjust for the, you know, those extra earnings, and is there something going on as you look into fourth quarter that we should be thinking about relative to the, sort of the run rate and earnings power of the third quarter?

So that's my first question.

And my second question is, could you just review what your expectations are for statutory earnings going forward?

You know, what would you expect the Company to be able to generate, say over the next year on a statutory basis, and, again, what are your, you know, sort of known uses of, you know, your cash flow?

Sure.

Well, no, we didn't revise our earnings guidance.

I think we had talked about last quarter being at 322 to 330.

Obviously we're probably going to be bumping up against the top end of that range, bit I think we're okay.

There isn't any fourth quarter surprise that we think is going to really change our outlook.

So, you know, that's about where we feel we should be.

With regard to statutory net income, I think we've talked about being at 2 billion or 2.2 billion or so.

Obviously through nine months we're at 1.86 billion.

We're having a very good statutory earnings year.

And there's some one-timers in there, but even when you adjust for that, they're very good.

That's, I think, a sustainable number, and, frankly, we expect it to modestly grow.

You know, in the future.

Sort of in the same sort of trajectory that our GAAP numbers will grow.

In terms of major uses, well, I don't think I'll name them all, but the way I think it's possible to look at it is, having this kind of statutory net income is consistent with the idea of having a billion dollars of free cash flow.

So after, you know, capitalizing, you know, our internal growth that we experience, and in paying, you know, a healthy dividend up to the holding company and paying interest expense and common stock dividends, we still have a substantial amount of cash flow, roughly a billion or so, and that's what's available to utilize for either further dividend increases, stock buy backs, or possibly acquisitions.

So I think that thesis still holds, Joan.

Okay.

Thank you.

Next we go to the line of John Nadol with Fox-Pitt Kelton.

Please go ahead.

Thank you and good morning, everyone.

I have two questions for you this morning.

One is just back to the press release from about a week and a half ago about the broker compensation issues.

And I just wanted to get your sense as you thought about the process that you went through to get the confidence to make the statements that you found no issues related to fictitious bidding, if you could describe the process that you went through and then I'll follow-up?

John, very simply, the process is an ongoing process where we have used external auditors, our internal auditors, interviews with, extensive interviews with the staff that were involved in the sales process, and as a result of that review and our continuing review, we're satisfied that we've not had any wrongdoing at this point in time.

Great.

And second question, moving to Individual Business, Bill, I think you mentioned about 3% top-line growth, yet 18% bottom-line growth this quarter.

And I just wanted to get a sense, shaping up for '05, what needs to happen there to continue bottom-line growth at the double-digit rate.

Does the top-line need to improve the growth rate to get there?

Well, maybe I'll let Stan follow-up on what I'll say.

Remember, the top-line growth rate, if you look at what's really going on here, is obviously we have a closed block which is shrinking, okay, we have, you know, good UL and life sales, but of course obviously, those are mainly FAS 97 products so a lot of the money that's coming in the doors and coming through as premiums, it's coming through as a deposit, which doesn't show on our income statement, and obviously that's really true in the annuity business where all we're recording is the fees, which are growing fantasticly, but the money coming in the door is coming in as a deposit.

So that's why you will have this discontinuity between what the top-line growth rate is and the bottom-line growth rate is.

So, our annuity sales, even though they've come down a bit, are still very strong and we're at a very high level and so we expect to have a very high level of annuity growth going forward, and we expect to have in outside of our closed block good earnings growth in ULVL.

So I don't think there's any magic, it's just going to be sort of more of the same of what's going on this year.

Would you add anything?

I think you've got it, Bill.

I mean it's, the top-line growth rate is premiums and fees, and the annuity business, which is a part of the business that's growing rapidly is recorded as fees which tends to be a lot lower.

And I tell you, the challenge for us in Individual Business is to cap our growth rate and expenses, and that's how we'll improve our earnings going forward.

Thank you.

We have a question from the line of Thomas Gallagher with CSFB.

Please go ahead.

Good morning.

Just a question on your Institutional Business.

If you strip out the John Hancock acquisition and the TIAA-CREF acquisition, can you just talk about what the premium growth was in the Group Life and the non-medical health and other?

This is Rob, Tom.

I think in terms of the Group Life business, if you take out John Hancock and actually, you know, other, you know, non-standard kinds of deals, we're at the top end of our stated growth corridor between, at about 6%.

In terms of long-term care, the TIAA-CREF acquisition was about, comes in at about 11% of our long-term care premiums.

So that's the effect of those two.

And, Rob, can you just break it out a little further?

Within non-medical health and other what kind of premium growth are you getting in dental and disability?

In terms of health and other in general, as you know, we're up 14.3.

In the dental business, it's in single digits this year.

One, because of tough comparisons going back, but the compression that I've mentioned in terms of the middle market where things are moving towards ASO.

Disability continues to grow at a double-digit rate for us.

Disability sales, by the way, are up substantially year-over-year, and so we're quite pleased with that.

Okay.

And can you just comment broadly speaking, and if you care to comment on any of the individual segments within Institutional, where do you think your marginal ROE is on new business?

And I know existing ROE has been around 20%, and with margin pressure on dental, has that come down?

Did you say Institutional, Tom?

I'm sorry.

Right.

On Institutional, can you just talk about what you think you're writing new business at from an ROE standpoint, given that you have had margin pressure on dental which I've, the way I've always thought about it is that's been your highest ROE business.

Yeah.

Well, our businesses, literally across Institutional Business with the caveat that Stan mentioned about spread compression in R&S, which would in some areas we're still writing over 15% but not over the 20% level, but virtually in everything else we're up at the 20% level.

Total Institutional across the board over 20%, Group Life substantially higher than that, substantially and continues to do well.

In terms of the dental business, let me see if I can --

It's still very strong.

Yeah, it's strong.

I don't know what the --

If I could just add to that, I mean, in terms of, you know, the Group Life segment continues to perform, you know, above 20%, and our new business is priced, you know, to help us maintain that level.

If you look at non-medical health, where the earnings are down this quarter, even at 50 million, that's about a 16% ROE, and we expect that to go back up in the fourth quarter.

So we expect that, again, it's a mixture of business.

The dental ROE is fairly high as a stand-alone product, and we expect that to continue to help us build that ROE back up again.

I mean, the dental business, even at extremely competitive margins, has a very high ROE.

It's probably misleadingly high, and it's because of the lack of the E.

Gotcha.

And then just one last follow-up.

The long-term care and disability, the marginal ROE on those businesses, would they be also as high as 20%?

Well, long-term care is a newer product, and it's an evolution.

As you know, we're spending quite a bit of dollars there to increase sales and so forth, particularly in individual channel, individual long-term care sales are up more than 100%, for example, and so, no, it doesn't have currently the same kind of ROE as the rest of our business but we're pricing it above 15%.

Okay.

Thanks very much.

You have a question from the line of Liz Werner with Sandler O'Neill.

Please go ahead.

Good morning.

Thank you.

Just a couple of quick ones.

On the expense front, I think in the past you've said the expense ratio should improve as a function of kind of holding expenses steady as the top-line grows.

Is that still the case, or is there anything on the horizon with respect to expense initiatives?

And then secondly, in terms of the portfolio yield going forward, I think last quarter we mentioned that on the portfolio yield in the current environment declines about 5 to 7 basis points a quarter.

Is that still the case?

Yeah, okay, I'll take the expense, and then maybe Lee will comment on portfolio yield.

Yeah, Liz, I think the story is still the case.

Our expectation is that we'll be, look, we're a growing Company, so expenses are going to grow, as general rule.

So, you know, and the goal for us, as a management team, is to make sure that the top-line grows faster than the expense line grows.

And I think we've done a pretty good job of that, frankly, ever since we've been public, and that continues this year as well.

That's not to say that we don't have expense initiatives.

We have them all the time.

The disability claims center which is being merged into other ones is a small example of that.

There are discrete, smaller initiatives all around the Company all the time to try to drive down expenses, but at the same time we're growing the business and so our expense levels will generally go up.

That's why that operating expense level ratio is very important to watch.

So Lee you want to talk about premiums?

Sure.

Liz, yeah, I mean we do a lot of work on this.

And I think with rate down a little bit more over the quarter we're probably looking at more in the 8 range in terms of the portfolio [inaudible].

Okay.

Great.

Thank you.

We have a question from the line of Jimmy Bhullar with JP Morgan.

Please go ahead.

I have a question on your 14%, the 2006 ROE target.

If you could talk about how a sustained low interest rate environment would affect that, and what sort of a rise in rates would you need for you to be able to hit that number, and how much of the weakness, if rates stay low, could you offset by share buy backs or by additional expense savings?

Those are hard questions to quantify, but I will tell you that if, that as I think we mentioned before when we talked about interest rates in the previous question, if interest rates don't get higher, and I'm really talking about now mid and longer-term rates, if they don't get higher we're going to have a challenge in terms of holding our current spreads, and I think that will affect us as quickly as 2006.

I don't think we'll be alone, okay, in that environment, in terms of having challenge holding our spreads.

So I think that makes hitting a 14% target difficult.

Okay?

I think we need to have good spreads to do that.

I think the 14% ROE is a challenge, and I think we've always characterized that it way.

It's a good goal, and our goal is to constantly improve our ROE, and we're doing things to drive to a better improved ROE but 14% will always be challenging, and we can't control interest rates, obviously.

In terms of quantifying how much they have to go up, and how much we can offset, you know, I don't know, to be honest, off the top of my head.

Maybe we can give you a better sense of that a little bit on investor day, but the, but I wouldn't hazard a guess now.

Okay.

That's good enough.

Thank you.

By the way this is Rob Henrikson.

I wanted to, one of my associates corrected me.

I think it was Tom Gallagher's question relative to growth and premium fees quarter-over-quarter for total group health and other, and I guess the operative word there is "total."

I had stated 14.3%, the answer was 16.

Thank you.

Okay.

Next question, please.

We have a question from Saul Martinez with Bear Stearns.

Please go ahead.

Hi.

Good morning.

Two questions.

First an additional question on spread guidance.

As has been mentioned, if you adjust the spreads in the annuities and retirement savings for prepayments in corporate joint venture, you've been running either at the very high end or above guidance that you gave in the investor day in December, last December.

Is it fair to say that that guidance has been conservative that we should be incorporating into our projections something that's a little bit higher than that going forward?

And my second question is on Mexico.

Rob, you mentioned that, you gave some color on what's going on with the renewal of cases, but you've mentioned in the past two specific large cases of government entities, and if you can just provide a little bit of color as to where you are with those as well, that would be great.

Okay.

I'll start with the spread question.

If you look at the two largest segments, it would be deferred annuities and retirement savings, as Bill mentioned in his remarks, if you take out the excess prepayments, those spreads would come down a bit.

In the case of annuities, you know, probably down to around 2.25 from the 2.44 that we reported.

Our guidance for the year was 205 to 210.

We probably will stay closer to the 225 in the short-term, but I think longer-term we'll probably be back in that range, the 205 to 210 range.

In terms of retirement savings if you take out those excess prepayments we're down at around 145 spread.

And that's at the top end of the range of our guidance for this year.

It was 130 to 145.

And I think, you know, that's probably sustainable for the rest of this year.

Okay.

Saul, regarding Mexico, on the specific cases, I'll turn it over to Bill Topetta.

Saul, I think what you're referring to on the specific cases would be Policy Number One.

Is that correct?

Does that ring a bell with you?

That's the Federal --

Yeah, I think it was the Federal, it was the Federal Government entity.

I think there were two cases.

One involving life insurance, and one involving health insurance contracts.

I may be wrong, but it was at the Federal entity.

That's right.

Okay.

So this is what we refer to as Policy Number One, and you're exactly right, it is the Federal Government life and related coverages and also major medical.

Those cases, or that policy is the policy where there was exclusivity as part of the acquisition that we made, and that exclusivity ran through the end of 2004.

So it does expire at the end of this year, and we anticipate that that case will go to bids.

What we don't know at this point, and I would emphasize that we really don't know, is whether it will go as one case or whether the government will choose to split it up and bid it in different ways.

So all I can tell you now is, we haven't received any bid specifications yet for the case.

It is possible it will come as one case, and it is possible it will be split up, and, you know, but that's all I really know at the moment.

Okay.

Can you remind us what the size of that is relative to the entire Mexican business?

Well, yeah, it's in terms of a percentage, I would say, it's probably, Charlie, you want to comment?

I'm going to let Charlie Symington, who's our CFO, comment on that.

Okay.

Great.

It's a billion six in pesos, so I guess it's about 30% of the government institutional business.

30% of the government institutional business in Mexico.

Okay.

Terrific.

Anything else?

No, that's it.

Terrific.

Thank you.

Yep.

We have a question from Suneet Kamath with Sanford Bernstein.

Please go ahead.

Great, thanks.

Two quick questions.

First if we could just follow up on Mexico, Bill, can you provide the ROE of the Hidalgo acquisition, sort of where you're running year-to-date?

And then second, a broader question, with everything that's been going on with respect to the Attorney General, there's been some talk about, you know, the insurance industry moving to national regulation.

Just wanted to get your thoughts on how you might view that, how it might affect your business.

Thanks.

First or me?

Okay.

Well, I would say with respect to the, this is Bill Topetta.

With respect to the ROE on the Mexico acquisition, we had expected that the acquisition would yield 15%, and I would say it is certainly meeting that expectation.

Just as far as regulation is concerned, we have been a strong proponent of clearly when it comes to individual agents, I think it's essential that what we have for the securities, or registered products, I think we should think about registering all individuals who interface with the public in any way relating to financial matters broadly.

And that's a tough challenge for a federal agency to do.

I think it's important that we all keep track of agents from a central repository.

There are efforts underway to do that at the state level by linking the states, but I think it's still, I don't think it works as well as would it if it were centralized.

Also, there's a lot of efforts that federal regulation would help in terms of policy forms, simplifying the process in somewhat greater consistency across the states, but I think there's a lot of work going on in Congress right now.

What's important is to find the right balance between having strong federal support to simplify the administration and monitoring activities of individuals, while at the same time the states are going to want to retain some control over the approvals of certain aspects of their products.

So that's about all I can give you as an update right now.

Okay.

Thanks.

We have a question from the line of Al Capra with Oppenheimer.

Please go ahead.

Good morning, everybody.

I was just hoping to get a little additional color on your UL sales growth.

I was curious to know the type of product that was driving it, I assume it might be no-lapse guaranteed products.

And more specifically, the color I was looking for was in relation to any particular age groups that your sales happen to be driven by, or perhaps even give some color on your lapse assumptions being used on those products.

Hi.

This is Lisa Weber.

I'll just comment, and then I'm going to turn it over to Hugh.

So with respect to universal life, as Rob commented, we're up 52% which includes single premiums and we manage on a LMRA bases.

So year-over-year we're up 11%, and sequentially down 12%.

We actually benefited from an early decision to focus on the UL market, and our sales, as you know, for 2004, have significantly outpaced 2003 as the secondary guarantees caught the attention of our clients.

We have flowed somewhat this quarter as has our competitors, have been aggressively competing, mostly at the large estate planning end of the market.

What I would also say is that UL is a commodity product, there's a lot of price pressure, and it's constantly undergoing a lot of change.

Hugh, do you want to comment further?

Hi.

Specifically on the universal life products, approximately 75% of our sales involve a secondary guarantee, so that's a large part of our business.

Competitively, we are a little stronger and our sweet spot's 55 to 65 in age so we're getting a lot of business in that arena with a little bit less business at the older issue ages 75 and above.

We've tried to stay very, very strong in that 55 to 65 range.

It's a good question on the lapse rates.

We've spent a lot of time analyzing our in-force business that we've had over the years.

We run our lapse rates, we really vary them by age, again, [getting] them very low at the older issue ages because we do believe that these products will stay in-force because, as Lisa mentioned, these are estate planning tools.

The lapse rate's [be] very, very low.

On average, we're probably [inaudible] isn't a good number but 3 to 4%, but, again, higher lapse rates at the younger ages and very, very low lapse at the older ages.

That puts us a little bit less competitive at the older issue ages because we've taken a stance that we believe these estate planning products will stay in-force and will be used to ultimately solve that estate issue.

That's helpful.

Just as a follow-up to that, have you seen any changes in your mortality experience in the 65 and older age group?

No, we haven't really seen any changes.

I would say the change that we do see emerging is in, our mortality [inaudible] is about the same but reinsurance rates appear to be increasing at the older issue ages as we're having treaties renew, so we're seeing some upward pressure on the reinsurance charges at the older issue ages.

We're going through a complete review of our reinsurance treaties now.

I would say there's a general increase at those older issue ages.

Thanks very much.

You're welcome.

Our final question today will come from the line of Eric Berg with Lehman Brothers.

Please go ahead.

Thanks very much, and good morning.

I have a couple questions on dental, and one question for Lisa on the annuity business.

In the dental area, should we think of this squeeze on margin, in your best judgment, as temporary or permanent?

In other words, are we looking at sort of a permanent decline in returns in the dental business?

And relatedly, is there a claims issue that we should know about?

I'm thinking that you grew the business rapidly, and now underwriting margins are coming under pressure.

And then for Lisa, I'm hoping she can answer the question, if you're, I'd like to know what's going to allow the annuity business to turn around in terms of new business growth again on a sequential quarter basis?

You fairly recently introduced your GMWB.

It's a crowded marketplace.

What is going to give that business fresh momentum, especially since the market has said that it is kind of disappointed by the decision to lower the crediting rate on the GMIB?

Thank you.

Eric this is Rob.

I'll comment on the dental.

One of the things about the dental business, going back, if you go back a year ago or so ago, I think the first thing we have say is that Met, due to its unique coverage products, excellence of service, so forth and so on, we had been able to reap what I would call extremely attractive margins in the dental business.

The margins are attractive today, they're just a little less attractive than they were a year ago.

In terms of underwriting, there's nothing fundamentally troublesome about dental underwriting at all.

We're quite strong there.

So I guess the correct answer to your question, using your terminology, would be temporary.

Okay.

So we feel good about the dental business.

As you may recall, there was some of the reasons for pressure were in certain areas of the marketplace where we were not able to compete with a, what I'd call a low-cost stripped-down product.

We've developed one, and that's starting to rollout as we speak, in considerable volume.

So we feel very, very strong about our dental business.

Thank you.

Hey, Eric.

Good morning.

On the annuity side, let me just start by saying that the really hard work that the team has put in over the past two years has obviously paid off.

We are now sharply focused on how to keep building assets in a profitable way in 2005.

On the variable annuity front, I mean, variable annuities are here to stay.

It's a retirement planning vehicle.

Year-over-year, we are down 19%, and sequentially down 10% in sales.

The industry, as you know, is down as a whole.

And, you know, the New York Stock Exchange listed firms had a really rough quarter.

We reduced our GMIB rates, which Rob commented on, our crediting rates, from 6% to 5%.

Now, we introduced a GWB on August 1st, and that has been, it's been a slower start.

Now, I have to say, in the last couple of months, each month we pick up on the GWB side, but it has not made up for the shortfall on GMIB.

Having said that, where I see opportunity going forward, particularly on this front, is really two areas.

One is that we are not licensed in certain key states for GWB.

So we expect that licensing to come through, and I believe that you will see results as a result of that happening.

The second is that we are about to roll forward in Q4 with another national firm.

So I think that we'll see the benefits from that as we go forward.

Eric, I would just add something to that.

Another way to look at it in terms of the marketplace in general, the marketplace is, as Lisa mentioned, is down.

It's of course because equity returns in general.

One of the ways we'd look at how we stand relative to the industry is whether or not we're maintaining market share with our distribution systems, and we are.

So in independent distribution, for example, we're maintaining our market share with our distributors.

Very good.

Thank you.

And we'll take a final question from Thomas Gallagher with CSFB.

Please go ahead.

Just a follow-up for Lee on the new money yield, which you said X the short-term is about 4.5%.

Is the reason that's so low because you're matching it against bullet GICs, which it appears that you've been growing that quite rapidly?

Or what would the reason be that you're, I'm guessing you're going shorter duration on new money, but why is that?

What's the underlying liability you're supporting?

Well, it's the same underlying liability that we've been supporting for awhile.

I guess you're thinking that it should be a longer liability.

Our liability durations are really in that three and four-year range.

I mean, when you add them all up.

There's a lot of very short liabilities, securities lending liabilities, even our annuity rollover liability, rate reset liabilities.

So a number of them add up to quite a sizable number which is why the average investment is probably shorter than would you think it would be.

I think what you all keep doing is going back to the average.

And I think what you need to think about is this is a spread business and with [matched] assets and liabilities, we have a lot of different pools that one gets averaged in.

So it's very tough to predict this Company on an average rate.

Okay.

Fair enough.

Thanks.

And there are no additional questions.

All right, then.

Well, thank very much everyone, for joining us today.

We look forward to speaking with you during the quarter and then again next call.

The investor meeting, don't forget, December 6th at the Marriott Marquis.

Thanks very much.

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