大都會人壽保險 (MET) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by.

And welcome to the MetLife's first quarter earnings release conference call.

At his 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 this call, please press star then zero.

As a reminder, this conference is being recorded.

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

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

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

MetLife Incorporated specifically disclaims any obligations to update or revise any forward-looking statements whether as a result of new information, future developments, or otherwise.

With that, I'd like to turn the conference over to Tracy Dedrick, Head of Investor Relations.

Please go ahead.

Thank you, Alex and good morning.

Welcome to MetLife's first quarter 2005 earnings call.

We're delighted to be here with you this morning to talk about our results for the quarter.

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

After our brief prepared comments, we'll take your questions.

Here with us to participate in the discussion are Lee Launer, President of Institutional, Lisa Weber, President of Individual Business, Bill Toppeta, President of International, Steve Kandarian, Chief Investment Officer, Cathy Rein, Chief Administrative Officer, and Stan Talby, Finance Officer for the Revenue 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 on our Investor Relations page.

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

With that, now I'd like to turn the call over to our chairman and Chief Executive Officer, Bob Benmosche.

Thanks, Tracy, and good morning to everyone.

As you can see, our Company continues its strong earnings growth this quarter with record operating earnings.

As a result of this strong first quarter earnings and our prospects for the remainder the year, we are announcing new guidance for 2005, increasing our EPS to 390 to 405.

And also for 2006, we're going to be looking at a preliminary operating earnings per share guidance of 4.25 to 4.5.

By the way, these include our expectations for the Travelers and Bill will give you a little bit more detail in just a minute.

But you'll hear throughout the morning, what is behind this earnings momentum because it's strong.

And I'd like to just highlight a couple.

First of all it is top line growth.

It's also good expense management and it is an increase in investment income but it's all three.

Four of the five revenue businesses grew earnings at a double-digit rate year-over-year.

It's not just one or two, it's four out of five.

And the strong earnings really come from multiple sources as well.

First of all, it is a disciplined approach to underwriting which can not begin in the quarter.

This is an underwriting approach we've talked to over the last five or six years that we're going to be very disciplined as we build our book of business going forward so that we will continue to see these earnings improve from underwriting in particular.

It's also a very close focus on pricing, make sure we get our pricing right.

And the last spread management.

So it's not just about once source of earnings, and it's not just for one business.

And the way we run our businesses from an operational point of view is sound with the investment we made in our common platform as well as our re-engineering of our business process.

But I'm going to let Rob bring you up to more information and more details on that as he talks this morning.

We also continued to execute the acquisition of Citi and Travelers Insurance businesses as we've achieved a number of milestones over the last couple of months.

First we received Hart-Scott-Rodino clearance in March.

We reached a satisfactory understanding of jobs in the state of Connecticut with the Governor of Connecticut and we've also completed a number of asset sales, which you've already seen.

We've also announced, because of our enormous capital flexibility, we've just announced that we do not need to sell RGA and Bill will talk about the why's in just a few minutes as he talks about the financing plans overall.

We've also recently announced some management changes.

As you know, Lee Launer has moved, become President of Institutional.

Lee has got a lot of experience in working with the Institutional group from the investment side, now he has the opportunity to work on the business side.

He is being replaced by Steve Kandarian, who joined us, joined our Company as Chief Investment Officer, and Steve, prior to joining us was the Executive Director of the Pension Benefit Guarantee Corporation.

So he's got a lot of broad experience to bring to the team.

And finally, as you know, we have announced my intention to retire from MetLife in the spring of next year, after the completion of the Travelers acquisition.

And many of you had asked, you know, why now, and obviously, let me take you through that very quickly, is that about a year and a half ago, the board and I had discussions about, and we have ongoing discussions on succession, bit I told the board that they should think about succession but actual put in an expectation of May of 2005 as a date that I would like to retire.

And we were proceeding on that schedule, and in fact in February of this year, the board had a full presentation with outside advisors, one to look at the internal candidate, and that was already set in motion in June of '04 when we promoted Rob Henrickson to President and Chief Operating Officer.

So the board reviewed Rob and also reviewed what were the possibilities of external candidates as well and made a decision of whether they wanted to go outside, whether they wanted to stay inside based upon the lead candidate being Rob.

And so in April, after that full review with the board, the board had concluded that they wanted Rob to be my replacement when I retire.

Now, the board had already asked me to delay my retirement because of the Travelers acquisition, and making sure that there were no management changes within the organization during this period of time of closing, as well as this time of integration, which I agreed to do.

So the question the Company has is, do we think that all of this activity over a year and a half is disclosable when you go out to the marketplace and raise the kind of capital we're going to raise and the answer is obviously yes.

We have very a significant disclosable event and so the board concluded that we should go forward and announce this plan and announce Rob's succeeding me when I retire next year, because we have an annual shareholder meeting that morning, when the board finally voted and concluded, and the feeling is that you should announce this as part of your annual shareholder meeting and not four to six weeks later when you're actually going to the public with a securities offering.

And so that's the timing, that's what it is, and my expectation is the Company is in great shape right now.

You can see it just in the broad earnings capability of this Company.

We have a strong and deep management team.

We work very well as a partnership in this Company and how we manage this Company.

I have enormous confidence in Rob and his leadership as we go forward.

And as a major shareholder of this Company, which I am, as far as employees are concerned, that's important to me just like it is for the rest of the shareholders at MetLife, that we a good, solid succession plan in place and we do.

So I have a great deal of confidence in our future and where we are today.

So what I'd like to do now is turn it over to Rob who will take you through the business results.

Rob?

Thanks, Bob.

Good morning everyone.

As you can see, it was a record quarter for our operating businesses.

We started out 2005 in terrific shape and I am excited, quite frankly, about the prospects for the remainder of the year.

Excellent sales growth, good underwriting experience, persistency gains, and expense management clearly drove results this quarter.

The businesses continue to reap the benefit of the investments we've made either improved sales capabilities, process redesigns and technology and they will continue to make a stronger, more efficient player in a highly competitive marketplace.

Turning now to the businesses.

The Institutional business had record operating earnings last quarter of 324 million and strong sequential premium and "C" growth of 12%.

This was led by strong sales, improved persistency, and disciplined spread management that contributed to improved margins across the board.

Our Group Life segment continues to perform well with good top line growth, improved term life persistency, and a mortality ratio that compares favorably to the first quarter in prior years.

The top line growth in this line is somewhat met by a reclassification of experienced rating refunds and changes to premium stabilization reserves that relate to participating contracts.

Quite frankly, this gives me a great opportunity to once again point out, as I have in the past, the uniqueness of MetLife's Group Life business and what it implies.

A large part of our Group Life business is participating, which means we share the risk with the customer.

As a result, this participating business exposes us to less mortality risk and requires less capital.

Experienced rating refunds and premium stabilization reserves reflect the risk cushion afforded by these financial arrangements.

Bill will go into this in more detail in a few minutes.

In general, the Group Life market remains highly competitive, but we still continue to grow faster than the marketplace as we said in the past.

Retirement and Savings had an excellent quarter in sales in both structured settlements and pension close-outs.

You may recall that we mentioned a large close-out sale on our last earnings call that you are now just seeing in our results.

Given the strength of our first quarter results in Retirement and Savings, we now believe our earnings will be better in this line in 2005 than reflected in our guidance in investor day.

In Non-Medical Health, we've experience year-over-year double-digit sales growth in all product lines, including dental, by the way, something we haven't been able to say for a while.

Strong sales in this segment were also accompanied by higher persistency in the small market dental and in disability.

Finally, and item certainly worth noting, is that our disability morbidity ratio is at its lowest level since we've been public.

Now I must comment there's been a lot of rhetoric in the marketplace about pricing and competition so far this year in disability.

I want to be very clear here, we have not change our pricing discipline, we have not change our underwriting discipline, we have not changed our philosophy of using conservative discount rates.

Though we were being asked to quote on a lot more business this year, our closing ratio still remains below 10%.

In Individual, our operating earnings of 318 are up approximately 70% over the prior year, led by record results in variable and universal life and annuities.

These results were driven in large part by growth in account balances, higher spreads, and some positive one-time expense items in each of the businesses.

Year-over-year our annuities and UL separate account liabilities 19%.

In traditional life, good mortality results and some one-time expense credits helped to drive results.

In one of our key growth product segments, DLUL, operating earnings were up 113% year-over-year, and 28% sequentially from growth in the business and favorable interest spreads.

First year VL deposits were up due to a private placement sale.

This segment also benefited somewhat from one-time expense credit.

Operating earnings in annuities were up 73% year-over-year, and 20% sequentially.

Growth in account balances, high levels of variable investment income, disciplined spread management, disciplined expense management, and positive one-time expense items drove the earnings improvement.

Net annuity flows, using the VARs definition, continued to be very health and have been hovering around $1 billion for each of the last three quarters.

Our client balances grew 21% year-over-year.

While sales in the annuity line were below our expectations for the quarter, they were in line with sequential market growth results.

Overall, we're also very pleased with the persistency of our business and our lapses have been well within pricing.

In terms of our distribution channels within Individual, we continue our efforts to rationalize our distribution to improve its productivity and profitability.

MetLife remains committed to the general agency system with the New England channel as we continue to improve its efficiency.

To that end, we've organized the New England channel under common leadership, together with a MetLife career agency force, to better manage our affiliated distribution opportunities.

You'll also notice that the MetLife career agency count is up 2% year-over-year, and we continue to expect progress in building this channel, while in New England we continue to consolidate agencies, as we focus on building profitable distribution, consistent with our profitability model.

In terms of life innovation initiatives in Individual during the quarter, we rolled out QuickMet, our telewriting issued term product designed for transaction-oriented sales process to brokers, P&C agents, and independent marketing organizations.

Turning to Auto and Home.

Auto and Home had its best quarter ever in terms of operating earnings, up 65% year-over-year.

The main drivers of results this quarter were continued improvements in homeowner frequency, improvements in auto severity, and favorable cash.

You'll notice that premiums were down about 1% sequentially.

This was due almost entirely to the sale of our independent agent book of business in New Jersey that we acquired from St. Paul.

As we said on investor day, the challenge for Auto and Home this year is to begin to grow, and of course, to grow profitably.

Despite the decline in earned premium this quarter, we're pleased to report an increase in exposures in force for the first quarter and we expect this trend to continue.

Overall severity continues to improve.

Some of the gains here are driven by our new claims process instituted in 2004, and the gains will be sustainable.

However, it should come as no great surprise that at this stage of the cycle we're starting to see some rate pressure.

At this point, pricing still appears to be rational, price reductions that have been and will be taken here are supportable either through gains from the improved claims processing, the investments we've made in tiering, or in the case of New York, where the claims environment had improved in a sustainable manner.

Turning to International.

The results were better than expected in the first quarter with operating earnings of 67 million, compared to 44 million in the prior year's quarter.

The main drivers of earnings here were excellent top line growth, the improved underwriting results, higher than expected investment income, and a small amount of currency adjustment.

We are particularly pleased with the results from Latin America, especially in Mexico, where the renewal of group business continues to exceed our initial expectations.

Results in Asia also contributed to the over performance for the quarter.

Now let me spend a minute or two on the Travelers acquisition.

I'm very pleased with the progress we're making towards the acquisition and the integration of Travelers.

We've developed detailed integration plans that have been presented to our board, we've met our obligations to let the employees of Travelers know where they stand on employment, we've landed in a good place with regard to our negotiations with the Governor of Connecticut on employment in Hartford.

In the Individual Business at Travelers we've focused on retaining distribution, we've extended offers of employment to all wholesalers, established strong initial relationships with all key accounts, and have successfully previewed preliminary product portfolios with them.

Internationally, our progress is similar to the domestic operations with integration plans established for all countries, and employment offers extended to all Citi Insurance employees located here in the United States.

Additionally, we've drafted detailed distribution and transitional service agreements to insure continued and uninterrupted business post closing.

Finally, discussions with the JV partners in Japan and Hong Kong are progressing well.

So all in all, I'm very pleased with our rate of progress and I'm confident that we're on track for a successful close and a successful integration.

So as I think you'll agree the business performance is strong, and as Bob mentioned, it is broad-based.

Our revenue growth continues to emerge and our earnings drivers are strong.

We are executing on a consistent strategy that sets up the rest of the year, 2006 and beyond for top, continued top line and bottom line growth.

We're focused on completing the acquisition of Travelers and we've laid out plans to integrate Citi's insurance businesses growing and driving it into the future.

So with that, I'll turn it over to our Chief Financial Officer, Bill Wheeler.

Bill?

Thanks, Rob.

Good morning, everybody.

MetLife had a record first quarter, as I think you've heard a couple of times, earning $1.11 per share of operating income.

Obviously this is a pretty remarkable result, and what I think is interesting is that it wasn't due to any single thing, and we had excellent top line growth, great underwriting results, strong investment spreads and solid expenses management.

All of our business segments turned in good or great quarters.

So today I'm going to review the highlights of the quarter, I'm going to discuss revised guidance for 2005, I'm going to explain our guidance for 2006, and also update you on our progress with the Travelers financing.

But before all that, I'd like to first remind you that MetLife closed on the sales of State Street Research this quarter.

As you know, during the third quarter of last year, the Company entered into an agreement to sell State Street Research to BlackRock Inc.

The net gain on that sale was approximately $150 million and is included in the income for discontinued operation line of the income statement this quarter.

State Street's financial results, its revenues, its expenses for the quarter and all prior periods have been reclassified into income from discontinued operations in both our public filings and our QFS, so we won't have to explain that variance anymore.

Turing to our financial results.

Top line revenues, which we define as premiums, fees, and other income, for the first quarter were $730 million, or 11.5% higher than the first quarter a year ago, which is a very strong result.

Institutional's top line revenues increased by 14.9%.

A major contributor to that growth was Retirement and Savings, where revenues were up over 70%.

As we say almost every quarter, revenues in Retirement and Savings are lumpy, and this quarter's increase is primarily due to a large pension close-out sales and higher structured settlement sales, as Rob mentioned.

Non-Medical Health and Other revenues were up 16.1%, due to strong growth and favorable persistency across all of the major products in that segment.

Group Life top line revenues were relatively flat, as compared to the first quarter of '04, increasing by 1.8%.

As Rob mentioned, these results are net of a $102 million change in experience rated refunds or adjustments on our par life contracts, and I'm going to explain that.

Now after reviewing these contracts, we decided to reclass both dividends and changes in premium stabilization reserves into the top line.

They had been in our policyholder benefits line.

And we think this better reflects the nature of these adjustments which are driven by the mortality results in our par business.

This reclassification has no impact on operating earnings or net income, and what we've done on Page 13 of the QFS, we've included a table which backs out these adjustments so you can better understand the underlying growth trends.

And when you look at that page, you'll see the Group Life revenue actually grew at 8.8% quarter-over-quarter, which is actually a very strong result.

In International business, revenues increased by 27.6%, and the growth was split fairly equally between Asia and Latin America.

The increase in Asian revenues are due to strong sales of variable universal life products, single premium annuities, and strong renewal premiums, mainly in Korea.

The increase in Latin American revenues are due to strong group renewals in Mexico, as well as an increase in premiums in Chili as a result of the Banco Estado acquisition which closed in the fourth quarter of 2004.

In Individual Business, top line revenues increased by 6.8%.

Annuity segment revenues increased by over 47%, which was due to increased sales of income annuities, and also an increase in our separate account fees.

Now Rob mentioned this but it bears repeating, over the past 12 months, our annuity separate account balances have increased $6.5 billion, and that's an increase of over 20%.

Turing to our operating margins.

I'd like to start with our underwriting results.

It was a very strong underwriting quarter across all of our businesses.

The Individual life mortality remained favorable but relatively unchanged from a year ago quarter at 85.6%.

Group Life mortality was also strong decreasing from 95.8% last year to 94.9% this quarter.

Remember, first quarter mortality is typically our weakest.

Group disability morbidity was outstanding and it decreased from 93.3% last year to 91.1%.

In Auto and Home the total combined ratio including catastrophes was 92.4%.

This was due to a relatively low of CATS, improved auto severity, and continued improvement in overall homeowner claims.

Moving to investment spreads.

We had high variable investment income of $300 million this quarter, a 100 million more than we would normally project.

This was due to higher corporate joint venture income as well as a combination of other positives, such as equity link notes, prepayment income, and securities lending.

Annuities, retirement savings, and corporate and others were the main recipients of this additional investment income.

Because of this additional variable income, our annuities investment spread was 280 basis points.

Even adjusting for the higher income it would still have been well over 220 basis points.

Similarly the Retirement and Savings investment spread was 147 bps.

Without the additional investment income the investment spread would have been in the range of 2005 guidance of 120 to 135 basis points.

Moving to expenses.

Given our strong revenue growth this quarter, our operating expenses remained relatively low.

This is due in large part to our ability to leverage our scale and existing infrastructure as well as the reprioritization of certain internal MetLife projects to focus on the integration of Travelers.

As compared to the first quarter of 2004, our operating expense ratio, which is just simply other expenses divided by premiums, fees, and other income, declined from 27.2% in the year ago period to 25.8% this quarter.

This is also lower than the fourth quarter 2004 operating expense ratio which was 30.2%, where if you recall, I mentioned in the fourth quarter call we had a number of one-time expenses.

Turning to our bottom line results, we earned 821 million of operating income, or $1.11 a share, and that's a 42.3% increase in operating EPS over the first quarter of 2004.

Our annualized operating ROE for the quarter, excluding other comprehensive income in our equity, was 16.1%.

Our statutory net income was 376 million, and I'm going to go slow here because there's a point to make.

That's low.

But in that result was a negative $394 million after-tax adjustment, which was due to an intercompany reinsurance transaction.

We reinsured a block of life policies from one wholly owned legal entity to another, which has no GAAP effect, but it does effect our statutory accounting.

So this negative adjustment had no effect on our surplus or RBC, but it just changed reported statutory net income.

In addition, total adjusted statutory capital is now $17.2 billion at quarter end.

Now, turning to our 2005 guidance.

As Bob mentioned earlier, our original operating earnings guidance was 350 to 365 per share for full-year 2005.

That has now been updated and we are now expecting operating earnings per share between 390 and 405.

Our new guidance reflects anticipated strong results for the remainder of 2005, and our expectations that the Travelers acquisition will close this summer and be modestly accretive to earnings during the second half of the year.

With regard to, provide greater clarity to all of you, we are also providing operating EPS guidance between 4.25 to 450 for full-year 2006.

This guidance assumes normal realized capital gains and losses and no share buy back activity during that period.

It also assumes a continued low interest rate environment similar to what we described on investor day in December of 2004.

This includes a flattening yield curve and a 10-year treasury yield of approximately 4.5%.

And although we have described the Travelers acquisition, I should also say we are also assuming relatively modest variable investment income in 2006.

And although we've described the Travelers acquisition as ROE neutral to our business, I think it is important to remember that by the end of 2006, we expect that our book value per share will be approximately $3 higher than it would have been for MetLife on a stand alone basis.

Now I'd like to provide you with an update on our progress and financing our acquisition of Travelers.

As you saw in our recent press releases, we had great success with the sale of our One Madison Avenue and 200 Park Avenue properties resulting in higher than anticipated proceeds.

We have also decided not to proceed with the sale of our stake in RGA because we were able to substitute less expensive sources of cash.

The other substantive difference from our original financing plan is the issuance of perpetual preferred securities, which due to recent rating agency policy changes, have the same equity credit as mandatory convertible securities.

Obviously, we think perpetual preferreds have a much lower long-term cost relative to the manditories, and so we chose to substitute them in our financing.

Our revised financing plan is as follows.

We expect a cash outlay of between 2.8 to 3.2 billion.

We expect to issue debt of between 3.4 and 3.8 billion.

There will be mandatory convertibles of between 2 to 2.5 billion, and perpetual preferreds of between 1.5 to 2 billion, and of course we expect to issue $1 billion of common stock to Citigroup.

Again, I think this was an outstanding quarter for MetLife in terms of our financial performance.

I think we have a lot of momentum and we are obviously looking forward to enhancing our future results with the acquisition of Travelers.

So let me turn it back over to the Operator so that we can take your questions.

[Operator instructions] Our first question comes from the line of Thomas Gallagher from Credit Suisse First Boston.

Please go ahead.

Good morning.

I guess just starting with sort of the cash implications of the combined entity.

You've talked pretty extensively about the combined GAAP EPS expectations.

Bill, can you talk about what you expect in terms of stat earnings combined, where you see free cash flow going after the deal closes, and what that might mean for potential buy back and timing on potential buy back in terms of when that could be a possibility again?

Sure.

Well, I think our, we're tracking in sort of operating statutory earnings on a stand alone basis a little over 2 billion a year.

We did better than that last year we'll do roughly equivalent than that, a little over 2 billion this year, I think, that's certainly our projection.

When we obviously adjusted statutory earnings this quarter was better than that, we had $190 million realized statutory gain in that number.

That's sort of our normal financing plans.

What we told the rating agencies is that we expect to lever up to 29% on our debt to total capital ratio to do the acquisition, but we will level back down or move back down to something like 25% leverage by the end of '06.

And in the meantime, we won't do any stock buy back activity.

And we'll probably get to that leverage pretty much just through increase in retained earnings without having to buy back stock.

We might have to buy back a modest amount or delever, pay back a little debt a little bit.

Now, in terms of pro forma, Travelers legal entities have approximately, you know, 600 to 700 million of statutory earnings, obviously that can fluctuate a little bit, too, just like ours can.

Connecticut is a [greater] of state and so we will have an ability to dividend up a significant portion of that, and going forward.

And obviously, that will be going to our holding company.

The holding company's going to own these legal entities.

And so the cash flow implications of that have are going to be pretty good.

I don't think it's going to cause, so beginning in, let's say, '07, we should be able to kind of resume our capital management activities.

And I don't think there will be a see change in how we've done it, how we'll do it in the future relative to how we've done it in the past, but it should be good.

And that's about all I can tell you.

I guess you guys have talked about Met on a stand alone basis having a little north of a billion of free cash flow.

Just looking, based on the numbers you've given, and I think there's also an extra tax savings that you're getting here that's not included in GAAP numbers, that I think you've got to add back to cash flow.

That's right.

When I run through the numbers, it would seem that, you know, you get an increase in cash flow at least to the increase GAAP earnings, maybe a little bit north of that.

Am I overstating that or is that ballpark correct?

That's ballpark correct.

Okay.

So potentially, there could be a larger sustained increase in buy back?

If that's theoretically possible.

I will not commit to that.

Got it.

Okay.

Just a few other quick questions.

First is, the huge drop in Individual Business op expense was over 100 million year-over-year.

Is that sustainable or is there a noise in that number?

I think some of it is sustainable, not all of it.

As Bill or Rob might have mentioned we did have some adjustments to expense liabilities which benefited Individual Business probably to the tune of about $35 million.

Other than that, I think what you're seeing is a continued discipline expense management in ID over the last two or three years.

And I think some of that is accelerated.

There has been some delay in spending in the first quarter so it may take up just a little bit but otherwise, I think it's just a reflection of management's discipline on expenses.

Okay.

Got it.

And then last question, I know at your investor day you talked about the rollout of voluntary benefit products through the Institutional business.

Can you just give an update on how that's progressing? .

Tom, I'm not sure exactly what you're referring to, but the voluntary benefits --

Rob, I guess it was some of the specified disease-type products that you talked about rolling out.

Yeah.

Critical illnesses, as I said then and as we continue to do, we are on a pilot basis running that through all of our channels that are appropriate, both on the Individual and the Institutional side.

The first reflection from Institutional buyers has been quite positive, but the rollout to Individual participants is just, you know, beginning to go underway.

So we'll have more it talk about that in the second half of the year.

And in Individual Business, we're just working on small pilots to see what the shape of the product, how it's responded to in the marketplace, what kind of regional differences we see and so forth in terms of distribution.

So you'll hear more about that as we move through the year.

Okay.

Thanks

Our next question comes from the line of Jeff Schuman from KBW.

Please go ahead.

Good morning.

Bill, I just wondered can you conceptionally walk us through how it is you generate the $3 per share of book value accretion without the ROE impact?

Is a lot of that just driven by the fact that you're issuing stock to Citi north of book or what?

No, actually, that helps but it's fairly modest.

The gain on the equity real estate is almost 2 bucks a share.

There is some money, is book value accretion due to the issuance of a billion dollars of common and the rest of it is just higher operating earnings.

Okay.

And then on the RGA situation, I guess we can all sort of appreciate the math that was that was probably an expensive source of class cash, but it's always been classified as kind of a non-strategic asset and this would have seemed like maybe it's sort of the big opportunity you're waiting for to kind of rotate from a non-strategic asset into strategic asset.

How do we kind of think about that property going forward?

I think it's kind of back to status quo in terms of how we view it and I think we've been pretty clear.

We don't view it as strategic but we think it's a good business, we like the management team, we think they're, they have a lot of momentum there so we feel good about them.

So we're not desperate sellers.

Okay.

We, so I think it's kind of back to the way we felt about it before.

Okay.

Great.

Thanks a lot.

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

Please go ahead.

Thank you.

Two questions.

I was wondering could you go through and give us some sense of the magnitude of unusual items in each of the Institutional lines?

And I was wondering if you could just give us a little bit more of an update on some of the sort of distribution issues.

I think some people have been concerned about related to the Travelers deal and maybe some update on, some more color on that.

Thanks.

Okay.

In terms of the unusual items in Institutional, I would say it falls into two categories, underwriting and the variable on investment income.

You see some additional variable investment income particularly in the R&S segment in Institutional and just a little bit in Group Life.

In R&S, it's probably a little north of 10 million post tax and in Group Life it's maybe a couple million.

And then in terms of underwriting, in Institutional, we had some unusual gains there as well, about 9 million.

We had one large close-out customer submit data to us and allowed us to adjust the reserves and reduce our liabilities.

In terms of distribution issues, I don't, I'll just repeat what we said all along in terms of the distribution opportunities.

As you may recall, one of the things that's, there's really two things in a major way that are just sticking out in terms of the opportunities at Travelers.

One is, on the product side in terms of our leveraging our power and our platforms and all the technology we've invested in and so forth, the footprint of the liability side at Travelers and Met is virtually identical, the only difference between it is the size of the footprint is larger.

So that gives us scale the opportunities that we're interested in.

In terms of distribution, you may recall that there is very, very little overlap.

So in terms of distribution issues, I don't see any problems and lots of opportunity in terms of the lack of overlap.

And in terms of strain on our system, we actually see more power coming in because we're increasing our wholesaler power and our points of contact and points of sales out in the marketplace substantially.

So that was our view when we first looked at the opportunity.

And quite frankly, that opportunity looks even brighter today than it did then as we've gotten into really meeting with the distribution partners and so forth.

Yeah.

I would just add to that that, you know, we've obviously been extremely focused on distribution.

We just met with our board of directors to update the board on our integration activities.

Mike Farrell is really leading the way on the Individual Business side in terms of distribution and has met with all of the key relationships that we'll have going forward, has met on numerous occasions with the wholesalers, because that is really the bread and butter of this business, and you know, and our expectation when we first looked at this is that we would increase our points of sale, our distribution capacity by 40%, and that's still our expectation.

So we're very optimistic and very focused on distribution as we go forward.

Thank you.

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

Please go ahead.

Good morning.

Could you give us a little more color on two things, one is the decline in spending.

Bob, you had mentioned you're spending about a billion dollars a year on tech.

Is there a cut back in that number and what kind of areas, you know, have been cut?

And then the second question is a little more color on the variable investment income, you know, what are the various buckets and what are the potential drivers of what could drive the numbers up or down?

I'll turn it over to Stan, but, no, we're not backing off any commitment to build for the future and so we continue a very, very strong investment in technology and modernization of the Company at all levels.

So this is not let's see if we can cut IT and nobody will notice it.

That's not the case.

Stan, you might want to reiterate some of the things we said in terms of some key items that are in the expenses for this quarter.

Some of them are one-time adjustments we talked about.

Right.

I'm focused on the ongoing cuts.

Yeah.

I think that the, just generally speaking, you've got to look at the volume of business going through this place today and look at the expense levels to the volumes of business and you'll see that the technology's picking up a lot of the increases in volumes, and it's not cost.

So I think the expectations we're going to continue to invest in this Company and, quite frankly, we're going to run this Company for our lifetimes.

And so that's the way we continue to operate it.

So there's no gains going on in any quarter or any activity.

So we would see over time expenses continue to improve as Lisa has already talked about, and Rob pointed out that we're going to look at New England system and right size and get it right because it is strong capability and you know if some of the expense write-offs we had to deal with it, if you ask them, this is all going to be corrected as we go over the next couple of years, so I see slower growth in expenses as we continue to grow top line [inaudible].

Does that help?

It does, but there were cuts to discretionary items or postponements of projects and that's the color that I was looking for.

Well, a lot of the color there, Vanessa, is simply, let's put it this way, we had, as we've said all along, we have a growth story here we're pursuing with a great amount of focus.

That was at investor day prior to knowledge of the Travelers deal.

So one of the, there's two ways if you're going to grow organically or have the opportunity to speed forward that growth through an acquisition.

Obviously, the building that you would have to do to build what you had to do organically, you have the opportunity to slow that down and in fact in some ways eliminate expenditures.

So we're managing, we had been prior to that on a track of managing greater volumes, greater assets, more clients, more contracts, and so forth, with actually level to slightly declining in many areas head count reductions due to technology that Bob mentioned.

Now, that simply, the Travelers opportunity gave us a step back to look and say how much of the investment were we making in 2005 had we had in our plans that was directly related to building more distribution and building our reach.

So obviously, that cutback is substantial, and it's consistent with what happens when you make an acquisition that fits as well as this one does to leverage our IT competency.

Stan you might want to mention.

Yes.

The only other thing I would add to everything that's already said is that if you recall, all during last year we did have some what we called expense write-offs as a result of consolidating office space throughout the company, particularly in IB.

We've reduced the number of sales offices.

That goes along with reduced expenses there.

So we have less rent expense.

We've written off the fixed assets that were resident in those properties which reduces our depreciation costs.

We have focused on travel expenses and some of the other types of expenses.

So there's been a lot of focus on basically all of our spending patterns.

Okay.

Vanessa, Lee Launer speaking.

Let me take the one on the variable income.

Yeah, we're up a hundred over what we thought.

And it's a variety of things, as you know, but a lot of it's the CJV income and that's the biggest piece of that.

And that going forward is really a function of the equity markets and the amount of capital in the LBO funds which are sometimes, or oftentimes the buyers of these, of the original LBO.

So we see that I think pretty strong, at least in the short-term, but it's lumpy.

And all of that is really built into our, you know, the '05 guidance.

So it's pretty much that.

And then the only other thing driving the variable would be the shape of the yield curves so it probably goes somewhat to the extent we really, really flattened the short end of the curve.

So we should expect 200 a quarter on a normalized basis?

Yes.

Or will we go below that with a flatter yield curve?

No.

I think we're sticking with what we said at investor day which is right around that 200.

It's just a little lumpy around it.

Okay.

Thank you.

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

Please go ahead.

Hi.

Good morning.

Two questions.

First of all in terms of your '06 EPS guidance of 425 to 450.

What kind of accretion is implicit in the guidance?

It seems like you're a little bit more optimistic than the initial guidance you gave before, the 6% accretion.

And then secondly on variable annuity sales, it seems they're pretty much flatish over the last couple quarters, if you can just comment on the competitive environment there and what you need to do to ramp up sales?

I'll take the Travelers accretion.

What we said what we announced the deal was that we expected the transaction to be 4 to 6% accretive in '06.

I'm probably not going to keep updating that number.

It's a good rule of thumb.

And it's getting harder and harder to distinguish.

We're already beginning to see that a little bit between what's Met driven and what's Travelers driven.

Obviously if you slow down expenses because of the Travelers deal this quarter, it's already having a little bit of an effect and it's too complicated for me.

But I think what you should think about is, have we really changed our outlook about Travelers.

And the answer is no.

We've, there has been a couple of adjustments up and down.

Obviously not selling RGA and substituting other sources of cash is accretive to '06.

But the fact that we're putting in perpetual preferreds is actually dilutive near-term because they're a little more expensive after-tax, the manditories, in the near-term.

So in terms of what we're finding in due diligence and with regard to expense cuts and all that sort of thing, it's kind of as we expected more or less and nothing materially would be changed.

So I would say our outlook about the accretion of that transaction really hasn't changed very much.

In terms of annuity sales, you know, first quarter last year, we had very strong annuity sales.

And as you know, that was during the time that we announced the change in our accumulation rate from 6% to 5%.

And so as a result, our sales were very strong.

So quarter-over-quarter sequentially, we are up versus the industry and our expectation is we'll stay at least at that.

And we've been showing steady progress, but again, a difference from last year given the change in the accumulation rate.

You asked about the, just general industry trends and our view on that, and, you know, it's been a tough environment particularly in third-party distribution.

We've seen our major distributors experiencing declines and the market's been fairly lackluster.

The regulatory environment has impacted sales and so we're seeing all of that, as well.

But we're optimistic as we go forward here and you can see that in our results.

Okay.

Thank you

Our next question comes from the line of Eric Berg from Lehman Brothers.

Please go ahead.

Thanks.

Just a few quick ones.

First of all, in the traditional life area, closed block, I guess, mostly, you would be, you reported from December an extremely steep drop in expenses.

For what is essentially a closed block of business that you're just administering, why would expenses fall by what was it roughly 25% in one quarter alone?

Hi, Eric.

Again, we did have some expense liabilities that were established within the traditional block and those liabilities were adjusted in the first quarter.

So we did benefit from those expense liability reductions.

And then [inaudible] again, it's not just a closed block, it's all the activity associated with selling all new business of a traditional nature so there are, you know, a lot of activity and expenses there.

And again, it's benefiting from the same expense [inaudible] as the other segments are.

Thanks.

My second question relates to long-term care insurance.

Last week, Genworth, which is one of the top players if not the top player in individual long-term care, revised downward its guidance for sales expectations for this year describing a market that was in pretty sorry shape with neither agents nor customers inclined to buy the product for a variety of reasons.

Are you experiencing the same softness in Group long-term care and if not, why is the market different?

Well, there is, Eric, I would call it, you know, in some ways a disappointing sideways movement in terms of the Institutional business in long-term care.

You know, we're doing quite a bit there to focus on our positioning, working with our clients, the Institutional clients, in terms of more effective communication and rollout to the individual employees.

And so, yeah, would I say there's a softness particularly relative to what many of us in the industry, and tell us that the demographics are very strong for this need going forward.

And so it's a question of just matching the shape of the product and its deliverables to that need.

And we'll see.

We'll see where that goes.

In terms of Individual Business, our sales in long-term care are very, very strong.

And, of course, that's a reflection of obviously where the starting point is.

We are, in the scheme of things on a long-term basis relatively new at introducing long-term care across our individual distribution channels, and they have really caught on.

And so that our long-term care sales first quarter 2005 were not only above our plan, but well, well over the comparable period in 2004.

So it's a little bit barbelled in terms of answering your question.

Where there is face to face advice to the individual, our sales are very strong.

In the Institutional side, the marketplace, including our clients, understand that the product and its complexities need more than simply an enrollment program through a kit.

And so we're working there to see ways to make that work a little bit better.

And I might say we're working directly with our clients.

They're very interested in increasing the penetration, as well, to their employees because they understand the need for the product.

Final question.

Now that there is a fresh initiative in the Congress to eliminate the estate tax now as opposed to phasing it out, how is that affecting your estate planning business? .

Well, we haven't seen too big an effect, quite frankly.

So I can't give you a better answer than that.

Okay.

That's fine.

Thank you.

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

Please go ahead.

Great.

Thank you.

Just one question.

If I think about your 2006 EPS guidance of 425 to 450, is it fair to say that you kind of need to be at the high end of that range, the 450, in order to hit your 14% ROE objective for '06?

I think if we're at 450, we won't be at 14, we'll be closer to 13, a little over.

But we won't, probably in the lower part of the 13s.

So, you know, I hesitate to give, so to through out EPS, or ROE targets because I think it's going to be driven a little bit by what the capital gains and loss activity is during the period and maybe that will be modest and maybe it won't be.

But the, it's, but, and that's a little bit wide Suneet when I talk about the transaction being ROE neutral, I'm talking about low 13s being sort of neutral.

Okay.

So just a quick follow-up.

So does that mean that the 14% ROE target that you talked about at your investor day is not what we should be thinking about?

I think actually what I said on the last investor day if you really want to be careful about it, I said I think given our guidance, it's going to be difficult to get there and certainly in the current interest rate environment.

It remains our goal.

But I think we're on track probably, given the certainly the earnings ranges we've given, publicly, won't quite get us there.

Okay.

Thanks

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

Please go ahead.

Yes.

Two questions on distribution.

First on the Individual.

As I look over the agent count in the statistical supplement and look at General American, which is largely independent distribution and it just kind of seems like the agent basis has really declined pretty dramatically over the years since you acquired it.

And then I try to draw a parallel and maybe it's not appropriate, tell me if so.

But I tried to draw a parallel between that and Travelers, which also has significant independent agent distribution, and maybe you could tell me how that will or will not happen again with Travelers and why or why not that's different and what you're doing right now in terms of management, perhaps that's the most important question, who's going to be managing the ongoing independent agent distribution of Travelers Life and Annuity?

Let me make, Andrew, a couple points that I'd like to make.

I would not in terms of our starting point, with GenAm, at the time that we acquired Gen Am, they, GenAm, did not really consider as the General American Life Insurance Company those agents as being totally independent agents.

And we, upon really understanding what that business was about, started to look at not only the who the top producing agents were, they had something like 8,000 licensed agents at that time.

We certainly did not believe nor even for one moment think that we had 8,000 agents that were in any real way connected to production.

And so our initial look at things was really to try to find out exactly who those producing agents were, large footprint agencies that wanted to continue to do business with us and so forth.

So the management of and the reclassification internally here from GenAM to what I would now call from an affiliated agency base to being served by an independent platform was a conscious decision that we made.

In terms of our real independent agent business and independent producer business, i.e. through banks, through warehouses, through so forth and so forth, that from the get go was a totally different platform, a totally different management style, and a totally different platform to service those producers and their clients.

And so our movement of the GenAM agents onto more of an independent platform for service was a change here at Met and want to put it in the same position as we do our independent service and agents through that channel and consolidating that through one, we have done nothing, as you know, but grow dramatically in our independent channel business across those truly independent organizations.

And so those organizations, like the Merrills and the Edwards and UBS and the Jones and regionals, and so forth, are now going to be serviced in exactly the same way.

Oh yeah, the wire assistants, yeah Rob, the wires have been phenomenal.

I'm more interested in the independent insurance agents that Travelers has done a lot of business with, just the more insurance focused distributors.

Let me ask Mike Farrell to add some color to that.

Hi, Andrew.

Mike Farrell.

Travelers model and our model were [inaudible] running simultaneously the last 18 months or so in that we were building connectivity and relationships with the national insurance firms like the NFPs, Lifemark's [Cafatas], so forth.

And if you really look at the Travelers life production, that's where a lot of it's coming from.

You would never classify a NFP, for example, as an agency per se, but they're doing considerable amounts of business.

With regard to their affiliated agency, which is really brokers of Tower Square Securities, I just came back from their annual meeting, and they have a strong affiliation and loyalty towards the Travelers and have indicated that they will continue to do that.

They're looking forward to our relationship.

But in the independent model, as you know, we have to earn their business every day through competitive product, good service, and strong brand, which we have all of and we will continue to work to improve.

And you feel good about retaining a lot of the key managers in the distribution channel?

I feel very good about that on the, both the life and annuity side, we have strong commitments from the wholesalers, from the management on the Travelers side, I was once again with those folks last week.

And they're all very excited about this transaction.

Great.

I just want to quickly shift over to the Institutional and the work site marketing.

That was something talked a lot about at the investor conference in December.

Could you give a quick update on what kind of penetration you're getting in the small to mid case markets in the work site and what products are popular?

Is that why dental is so strong, for example?

Well, Andrew, I'd say in terms of what we call pure work site marketing, that is an example where in terms of the Travelers arrangement, we have slowed down spending on what I call the development of a pure work site marketing platform and are continuing to do some pilot work on that, in that space.

And so that's an example where spending in terms of a broad work site marketing initiative, as opposed to voluntary benefits.

The two are very different, I might add.

You know, we are simply pulling in our horns to slow down the process there and the spending because we have other things to do.

Got it.

Thanks very much.

Thank you, Alex.

I think that's all we have time for today.

Okay.

Thank you all very much.

Okay.

Thank you very much everybody for joining us.

We really appreciate it.

Ladies and gentlemen, this conference will be available for replay after 1:30 today until May 11th at midnight.

You may access the AT&T Executive Playback Service at any time by dialing 1-800-475-6701 and entering the access code of 776490.

Again, that number is 1-800-475-6701 and entering the access code of 776490.

That does conclude our conference for today.

We thank you for your participation and for using AT&T executive teleconference.

You may now disconnect.