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Operator
Ladies and gentlemen, good day.
We thank you for standing by, and welcome to the MetLife fourth-quarter earnings release conference call.
At this time, all lines are in a listen-only mode.
Later, there will be a question-and-answer session.
Instructions will be given at that time. (OPERATOR INSTRUCTIONS).
And as a reminder, today's conference call is being recorded.
Before we get started, I would like to read the following statement on behalf of MetLife.
Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the Company's operations and financial results, the markets for its products and the future development of its business.
MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described in MetLife Inc.'s filings with the SEC, including its S-1 and F-3 registration statements.
MetLife Inc. specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
With that, I would like to turn the call over to Tracey Dedrick, Head of Investor Relations.
Please go ahead.
Tracey Dedrick - Head of IR
Thanks, Barb.
Good morning, everyone, and welcome to MetLife's fourth-quarter 2005 earnings call.
We are delighted to be here this morning to talk to you about our results for the quarter.
Joining me this morning on the call are Bob Benmosche, Chairman and Chief Executive Officer;
Rob Henrikson, President and Chief Operating Officer; and Bill Wheeler, Chief Financial Officer.
After our brief prepared comments, we will take your questions.
Here with us today to participate in the discussion are Lee Launer, President of Institutional;
Lisa Weber, President of Individual Business;
Bill Toppeta, President of International; and Steve Kandarian, Chief Investment Officer.
This morning, we will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures.
We reconcile 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 website at www.metlife.com on our Investor Relations page.
A reconciliation of forward-looking information to the most directly comparable GAAP measure is not accessible because MetLife believes it is not possible to provide a reliable forecast of net investment-related gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.
And with that, I'd now like to turn the call over to our Chairman and Chief Executive Officer, Bob Benmosche.
Bob Benmosche - Chairman and CEO
Thank you, Tracey, and good morning to everyone.
As you can see from the fourth quarter of 2005, we continue to produce very strong operating results, which have led to another record year for our Company on an operating basis, as well as full earnings basis.
And I want to remind everyone that this has been achieved by not by one or two parts of our business, but across the board, from our institutional business, our individual business, auto and home -- which had to face some catastrophes this year, as you all know -- as well as in our international segment.
So strong results across the board.
And this is at a time when we had to achieve our plans for 2005, acquire and integrate all of the Travelers Life companies as well.
And that, as you know, was completed in November of this year.
And in fact, because of that effort and the speed of that integration, we did have an opportunity to look at some of the things within Travelers.
I know Bill will talk about that in just a few minutes in terms of some of the accounting charges we are going to take in this quarter.
But we really have built a very, very strong foundation for the future.
It is a solid base.
It is a solid base of people who have accomplished incredible things during 2005, which is the strength of the MetLife employees.
And we've also gone through a smooth transition.
So in addition to not only all this business, but it has been a transition from myself to Rob Henrikson.
That has gone extremely smooth.
I step down as CEO at the end of this month.
I step down as Chairman on April 25.
So on the next call, it will be Rob who's picking up the ball for me.
I look forward to his leadership.
He is the right guy for our Company going forward.
And I, quite frankly, am looking forward to my retirement.
I will miss these calls with all of you.
But I'm sure that Rob will continue to do well.
So let me turn it over to Rob.
Rob Henrikson - President and COO
Thanks, Bob, and good morning, everyone.
Today, I am going to cover our operating highlights and provide some outlook on the markets.
Then, before we move to Q&A, Bill Wheeler will summarize other significant items that impacted our results for the fourth quarter.
Starting with institutional business, the business ended 2005 on a strong note, with record quarterly operating earnings completing a full year of record operating earnings.
Full-year 2005 operating earnings grew by more than 15% versus 2004 to 1.455 billion.
Institutional's topline growth in 2005 remained robust, with full-year 2005 premiums, fees and other revenue up over 12% versus 2004.
Overall fourth-quarter premiums, fees and other revenues were down a bit versus third quarter.
But this was primarily due to the impact of experience writing refunds on certain experience-rated group term life contracts and lower single premium product sales in retirement and savings.
As we have said before, sales in the retirement and savings segment can be lumpy from quarter to quarter, and you can see that clearly in reviewing the last two quarter's results.
Institutional's fourth-quarter earnings were marked by generally favorable underwriting results, particularly in the group life insurance segment, and by continued favorable investment performance.
Spread narrowed a bit in the fourth quarter as the interest rate environment remained challenging.
But they remained consistent with the expectations we discussed in December at Investor Day.
The group life segment performance was particularly strong this quarter, with operating earnings at 118 million.
The result was driven by excellent underwriting results across the products that comprise the segment.
Our mortality ratio dropped to 89.3%.
And the good results were broad-based, with favorable loss experience across all of our institutional market segments.
We believe our results in the segment continue to reflect our disciplined approach to new business pricing and favorable persistency experience.
Sales of core group life products are seasonally slow in the fourth quarter and were flat versus the year-ago period.
Retirement and savings operating earnings were 210 million, up 34% versus the year ago-period.
The results continue to be characterized by strong investment performance and the contribution from the Travelers acquired business.
General account asset growth was 64% versus the year-ago period.
Excluding the impact of the Travelers transaction, underlying general account asset growth was a solid 8% versus year-end 2004.
As we mentioned before, 2005 was an exceptional sales year in retirement and savings for our single premium product.
Excluding the impact of the acquisition, retirement and savings premiums, fees and other revenues were up over 17% versus 2004, driving our underlying growth rate.
Earnings in the non-medical health segment were up 61 million, up 7% versus the year-ago period.
The results reflect strong underlying performance, led by excellent underwriting results in AD&D and dental.
In fact, our dental result was the best we've seen in a number of quarters.
We generally expect dental results to be seasonally high in the fourth quarter, but the effect was a bit stronger this year as we experienced lower claims on major dental services and procedures.
Underwriting results were also solid in our group disability business this quarter, as shown by our morbidity ratio.
Overall in group disability, we experienced record sales, record earnings and excellent persistency in 2005.
The strong underwriting results in the non-medical health segment this quarter were tempered somewhat by a DAC unlocking in long-term care, as Bill will cover in a few minutes.
Moving to individual business, operating earnings were 314 million for the quarter, up 52% over the fourth quarter of 2004 as a result of the Travelers acquisition, improved mortality and growth in the business.
General and separate account policyholder liabilities grew by 41% year over year, also aided by the Travelers acquisition.
Traditional life operating earnings were up nearly 50% from the year-ago quarter, due mostly to improved mortality and lower expenses.
I should point out that sequentially, earnings were down due to unusually high variable investment income in the third quarter.
Variable and universal life operating earnings were down year over year and sequentially, due mainly to the reserve for excess mortality on certain large cases in the Travelers block of business.
Bill will talk further about this in a few moments.
Total life first-year premiums and deposits were up over 60% from the year-ago quarter, driven by the Travelers acquisition.
Sequentially, life first-year premiums and deposits were essentially flat, while traditional and variable life sales were up sequentially.
Universal life sales declined 7%.
As we stated last quarter, we expected single premium sales through former Travelers channels to decline, and we are satisfied with this quarter's recurring life sales run rate.
Annuities turned in record operating earnings in the fourth quarter, up 70% from the prior year and up 21% sequentially.
Deposits were flat sequentially at 3.6 billion in a highly competitive annuity market.
We are pleased to point out that net flows remained positive at approximately 600 million.
In third-party distribution, we retained our top wholesalers, maintained solid annuity run rates, and were pleased with production from key relationships.
In addition, sales remained strong in our agency channels.
Our new annuity rider, GMAB, was rolled out to a limited number of distribution points starting in November and is off to a good start.
We are still waiting for a number of major state approvals for the new rider.
However, once approved, we expect stronger results, particularly for our East Coast accounts.
Sales power grew 6.5% year over year.
While sales power at MetLife increased due to the higher agent retention levels, sales power at NEF declined 9% as a result of further agency consolidations and earlier end-of-the-year removal of those not meeting minimum production requirements.
For 2006, we have implemented programs that will improve the success rate of new agents and further increase productivity of our existing sales force.
Turning to auto and home, 2005 was a record year for operating earnings, which is remarkable when you consider 2005 was also a record year for catastrophes.
Competition in personal lines is intensifying, particularly in auto.
Claims costs continue to increase.
However, investments in claims process improvements, excellent risk selection and industry frequency trends have offset these impacts on total claim costs in 2005.
We are pleased to say that sales of GrandProtect, our new bundled product, met our targets in 2005.
For the year, new business sales are up 16% and retention is up 1%.
On our Investor Day in December, we highlighted our personal line's 2006 initiatives in pricing, product, distribution and catastrophe management.
These initiatives should enable us to continue to grow profitably in spite of increasing competition, and we believe we're well-positioned for 2006 and beyond.
International completed a record operating earnings year, with quarterly earnings of 48 million.
Revenues grew 35% over the prior-year quarter and continued to exceed the $1 billion per quarter milestone achieved in the third quarter.
Sales for the year set another record for the business, reaching 4.6 billion for the full year 2005 and approximately 2 billion in the fourth quarter of 2005.
This was led by continued excellent sales in Japan and Korea, along with improvements in other countries.
Japan's annuity sales continued to be strong in the quarter at 1.4 billion.
So as you can see, this was another excellent quarter for operating businesses.
And now I will turn it over to Bill.
Bill Wheeler - CFO
Thanks, Rob, and good morning, everybody.
MetLife reported $1.04 of operating income per share for the fourth quarter and $4.33 for all of 2005.
It was a good end to a terrific year.
I'm going to walk through our financial results, and as we go along, I will point out some of the unusual items which occurred in the fourth quarter.
And as we parse these topics, I think you're going to see that the underlining earnings power of MetLife is strong and possibly a little higher than our reported figures this quarter might indicate.
Before I get into the financial results, I'd like to point out something with regard to our purchase accounting adjustments concerning the Travelers acquisition.
As I mentioned last quarter, we expected to make further adjustments to the original purchase accounting, and in fact, under the accounting rules, we have a full year after the acquisition to do so.
After performing reviews and certain actuarial analyses of Travelers' underwriting criteria, and in an effort to refine our estimated fair value for the purchase price allocation, we have decided to establish an excess mortality reserve on a specific group of policies.
This has resulted in an adjustment to the purchase price allocation, which increased goodwill by 234 million, and also as a charge of 20 million after tax for the fourth-quarter earnings of individual business.
We will complete our reviews during the second quarter of 2006 and expect that there may be a true-up to these figures at that time.
I think this might be a good moment to mention that we are generally satisfied with the underwriting experience in the Travelers Life block, but believe that this is the right thing to do for this specific group of policies.
We are also very satisfied with the performance of the Travelers acquisition to date and believe that we are still on track to achieve MetLife's financial goals in 2006.
Now I'd like to turn to our detailed financial results.
In the fourth quarter, we had topline revenues, which, remember, we define as total premiums, fees and other income, of 7.8 billion.
This is an increase of 13.5% over the fourth quarter of 2004.
For all of 2005, topline revenues grew at 14.1%.
Obviously, the acquisition of Travelers helped this growth, but a number of areas turned in strong performances this quarter as well.
Individual business topline revenues grew by 21% this quarter, with strong performances from annuities, which almost doubled, and variable and universal life, up 40%.
Institutional business topline revenues were up 5.1% this quarter.
Solid performances from non-medical health and group life were partially offset by a decline in retirement and saving revenues of 16%.
And as Rob mentioned, that is due to lower structured settlement sales.
However, total retirement and savings premium and deposits, which show up in the roll-forward on page 16 of the QFS, by the way, were up 20% from the fourth quarter of last year.
And as we have said many times, sales here can be lumpy, and the best way to evaluate the growth in retirement and savings is to look at the balance sheet, not GAAP revenues.
Other strong performers this quarter include international and reinsurance, with topline revenues up 44% and 15.2%, respectively.
For the full year, it was much the same story.
Individual was up 15.9%, and it was led by an outstanding 82.5% increase in annuity revenues.
Institutional was up 12.4%, with solid growth in all major product areas.
International increased by 35%, while reinsurance was up 15.4% year over year.
However, auto and home's topline revenues declined by 1.3% due to a reinstatement premium for its catastrophe reinsurance program.
Turning to our operating margins, let's start with our group underwriting results.
Group life mortality was excellent at 89.3%, while group disability mortality was solid at 91.1.
In individual business, mortality was also excellent at 84.9%.
However, as I mentioned a moment ago, we recorded a $20 million after-tax charge this quarter as part of the establishment of an excess mortality reserve on certain Travelers policies.
Consistent with our acquisition plan, Travelers' underwriting policies and practices were not completely brought onto MetLife's common platform until the fourth quarter, and as a result, we have included the third quarter's activity into these underwriting reviews we spoke about.
Auto and home had a strong quarter, with a 91.5% combined ratio.
This included higher-than-normal catastrophe experience of $24 million after tax, due mainly to Hurricane Wilma in Florida.
This was partially offset by a prior-year reserve release of $18 million after tax, due to lower-than-expected severity in both auto and homeowners' claims.
Moving to investment spreads, we again had higher-than-expected variable income this quarter.
Interestingly, the Travelers investment portfolio produced approximately $60 million of variable income this quarter, even though our expectations were for a modest amount of income there.
At Investor Day in December, we said that our baseline expectations for variable income in 2006 was $275 million a quarter.
This increase over the 200 million we used in '05 was mainly due to the addition of Travelers' variable income.
Because of the results this quarter, we have decided to use the 275 million baseline to evaluate our overperformance and derive the appropriate run rate.
On this basis, we estimate that our excess variable income, after DAC, tax and other offsets, is $94 million after tax or $0.12 per share.
Turning to specific spreads, in group life, higher investment yields were more than offset by increasing crediting rates due to high short-term interest rates, which caused us a sequential decline in spreads.
In retirement and savings, crediting rates were also higher, but higher investment yields helped to keep the normalized spread flat sequentially.
In individual, crediting rates were relatively flat, but yields declined, which also caused a sequential decline in spreads.
The good news is that all of these spreads are still comfortably within our expected range.
Moving to expenses, our overall expense levels were relatively high this quarter, and you can see that in the QFS.
There were $42 million of after-tax Travelers integration and incentive expenses this quarter, which mainly appear in corporate and other, international and individual.
There was a $14 million after-tax DAC adjustment in long-term care due to the current low interest rate environment.
In addition, there was a number of other one-time items in international and corporate and other, the effect of which was to increase expenses by $40 million after tax in those two areas.
With regard to our taxes, we recorded a $13 million tax benefit this quarter related to a dividend from our international businesses.
Turning to our bottom-line results, we earned $799 million in operating income, or $1.04 per share.
That represents an 18.2% increase in operating EPS over the fourth quarter of last year.
For the full year, operating income was 3.27 billion or $4.33 per share, an increase of 23.7% over 2004.
For the full year, our operating ROE was 14.4%.
So you can understand how good we feel.
In the fourth quarter, we had net realized investment losses of $146 million after tax.
If you look at the bottom of page 38 of the QFS, you can see that as part of that net result, we had gross realized investment losses of $721 million.
Almost all of these losses occurred as a result of a portfolio repositioning we undertook this quarter.
I would just ask you a couple of questions -- do you remember when longer interest rates spiked up last November, when the 10-year yielded over 460?
During that period, we took the opportunity to lengthen in certain portfolios, triggering these losses.
We estimate that the overall general [account] portfolio duration increased by approximately a quarter of a year as a result of these actions.
Finally, I want to briefly mention our preliminary statutory financial results.
We have not quite finished our year-end activities necessary to complete our filings.
But I can give you an estimate of how the quarter turned out.
Our estimated statutory net income is approximately 900 million this quarter.
This is actually higher than our GAAP net income.
And the main reason for the difference is that our interest-related investment losses are not part of statutory net income and instead are applied against our interest maintenance reserve or what we call the IMR.
Total statutory capital at year end is approximately 16 billion.
In summary, this was a strong quarter for MetLife and obviously a very strong year.
Importantly, as we head into 2006, we think we are well-positioned and have a lot of operating momentum.
And with that, let me turn it over to the operator so we may take your questions.
Operator
(OPERATOR INSTRUCTIONS).
Tom Gallagher, CSFB.
Tom Gallagher - Analyst
I guess, Bill, if we could start on your comment about the stat net income, given that you had a pretty strong quarter there, can you talk about capital adequacy, your deleveraging plans, whether you look now a little bit ahead of schedule or you're just on schedule for kind of beginning of '07 that you might be able to start buying back stock?
Bill Wheeler - CFO
Sure.
Good morning, Tom.
In terms of our capital adequacy, we haven't finalized our RBC ratios, obviously, but our preliminary estimates is that they are solid, and we are fine.
I think in terms of leverage, I believe I guided the analyst community on Investor Day that we would be sort of in the mid-27s on sort of what I would call a rating agency leverage ratio, where it may be slightly below that, maybe the low 27s.
We are -- I would call it on track in terms of our sort of deleveraging plan, in terms of where we are with regard to capital adequacy.
But we feel very comfortable.
Tom Gallagher - Analyst
Next question I had -- Rob, you had talked about, I guess, one of your variable annuity product launches.
Maybe can you discuss a little bit any other products you have in the pipeline on either the variable annuity or the life insurance side?
And then also, does this fact that you took this reserve charge suggest you need to pull some of the more aggressive Travelers life insurance products?
Rob Henrikson - President and COO
On the product rollout, let me hand it over to Hugh to give you the answer on that.
And then I'll come back on the other.
Hugh McHaffie - SVP
Hi, Tom, it is Hugh McHaffie.
On the variable annuity line, as we have discussed previously, our focus was to re-platform all of the major Travelers products onto MetLife paper.
And we have successfully done that, bringing new products to Smith Barney, adding our GMIB benefit there.
We have rolled out two products there, our Marquis and Vintage.
We also rolled a new product out at Citibank.
Lastly, just rolled out a new product at Morgan Stanley, our MetLife Investors' Morningstar product.
And the GMIB is doing very well.
They are initially already gathering 28% utilization, we have made it available.
We do have a couple of states still to get approved where we just got the State of New York approved.
So once we get new York approved, that is going to give us some momentum in the wirehouses.
The next step is we're just rolling out a new guaranteed withdrawal benefit for life in our Pioneer wrap product that we distributed through the broker-dealers, so it will be our entree into the guaranteed withdrawal benefit for life.
That will be happening -- just happened this week.
And finally, at Primerica, we are adding some living benefits, primarily a standard sort of guaranteed withdrawal benefit into the Primerica product, which we will roll out at the end of February.
We're still not done.
We continue to evaluate our GMIB, and we will be looking at potentially adding different step-ups there, going from three-year to one-year, and last but not least, looking at some guaranteed withdrawal benefits later midsummer, and most likely doing that across all of our product lines in the middle of the year.
So we are pretty active on the variable annuities side of the fence.
On the life side of the fence, we have, again, looked at the Travelers products and replatformed primarily the universal life products, both the single life and joint life with secondary guarantees.
To your question of pricing, these products are probably a little bit stepped back from where the Travelers products were priced, in particular, at older issue ages, a pullback in the competitiveness.
But I think is an industry trend, that we've seen five or six of our competitors pull back at the older issue ages.
Those products are up and running, and we'll be switching over to those products beginning March 1 for the independent distribution, and have already begun selling those products through our affiliated distribution.
So, from a product perspective, we are well integrated and moving forward.
Rob?
Tom Gallagher - Analyst
And I guess, Rob, before you comment, just on in terms of the change in product, and particularly related maybe to older age UL, have those products -- were they changed prior to 4Q?
Or might we see kind of a sales dip when those get repriced and changed this year?
Rob Henrikson - President and COO
We have already -- Travelers, prior to the integration, made some changes at the older issue ages back in April of 2005 on compensation and guarantees available to older issue ages.
That combined with our review of sales of those ages.
We have already seen a pullback there.
So I think that we'll be in about the same position we've been over the last little while.
We could have a slight pullback in the older issue ages, but I think that is going to be an industry trend at that age group.
Rob Henrikson - President and COO
Does that cover your question, Tom?
Tom Gallagher - Analyst
It does, yes.
Thanks, guys.
Operator
Eric Berg, Lehman Brothers.
Eric Berg - Analyst
My question is actually sort of a follow-up to Tom's.
First of all, why does there need to be this [major build]?
Why does there need to be further examination of the Travelers block in the sense that you have owned it for six months -- I would think the way it would work is July 1 comes, you own these policies legally.
Your actuaries have the right thoroughly to study the underwriting, and you make a decision fairly quickly from an accounting perspective as to what needs to be done.
Why does it take I guess nine months to a year to get this sorted through?
Bill Wheeler - CFO
Well, I guess if you could -- depend how many people we have looking -- you could say how many people we have looking at it.
But we are literally going through this case-by-case.
So if you take a step back, Eric, we looked at the overall underwriting experience or mortality experience of the Travelers block, and it is pretty good.
But then when we look at specific cases, we see -- and as you know, a block is filled with thousands and thousands of cases.
When we look at specific cases, we look at the underwriting and say, gee, we're not comfortable with that.
So what we've discovered, as we looked over production over the past five years, is that we are -- there's a small group of cases, and they are large face amounts, where we are not comfortable with the underwriting.
And therefore, we're setting up this reserve specific for those policies.
What we have done -- and it was important, now, when we realized in the fourth quarter that we were going to probably need to do this adjustment -- it was important to be able to book the adjustment this quarter, and so we've looked through some of the policies, not all of them, and we needed for the rest of the blocks to come up an estimate using sort of actuarially derived methodology to come up with that estimate.
And so, over the next three or four months, we will finish looking at the remaining blocks case-by-case, and we will true up that estimate.
But it is just a -- we are looking at -- we are going to be looking at a lot of policies to make sure that we have caught everything.
So that's a little bit why it takes a little time.
Eric Berg - Analyst
The other question I had is this -- a number of companies have talked about -- I think Protective Life the other day talked about an issue in the pricing of old age mortality -- maybe it was Protective, I think it was.
In any case, my question is this -- in terms of the economics of your business, and indeed of the life insurance business in general, is it just more important that pricing be correct when you sell a life insurance policy to an older person because that person is, by definition, closer to the end of their life, and therefore there is less time to correct mistakes?
Or is underpricing equally problematic whether you're selling to an older person or a younger person?
Lisa Weber - President, Individual Business
Eric, it is Lisa Weber.
I just want to add on -- I'm going to comment on the follow-up question, but I just want to comment on Bill's remarks to the earlier piece about the underwriting and the time that it takes.
You commented in terms of us owning Travelers as of July 1.
That is true.
But as part of our acquisition process, which we talked about, it was always intended that Travelers would not come onto our underwriting platform until the fourth quarter.
And so it was not until November that that actually happened.
And so the whole process takes time.
I just wanted to give you a sense of it.
In terms of the follow-up question and the older age market, the older age pricing is clearly more complicated and has more implications.
If you think about -- one, if you think about an error at the age 70 or older in terms of a table error, it's equal to 15 times an error at somebody at age 40.
So that just gives you a sense of the scope and the significance of it.
The other piece is that we have taken an industry lead and have really made a statement out there in the marketplace that we will not be in businesses like IOLI and stranger-owned life insurance and life settlements and CHOLI and all of those markets.
So we are going to establish solid run rates that are sustainable and that really make sense for who we are as a company.
Eric Berg - Analyst
That helps.
Thank you to Bill and thank you to Lisa.
Operator
Vanessa Wilson, Deutsche Bank.
Vanessa Wilson - Analyst
First of all, I wanted to say congratulations, Bob, and we all wish you well in your retirement.
Bill, when you did the turnover of the general account portfolio and lengthened the duration, could you give us a sense of what economic benefits beyond the duration increase you might have gained?
Was there any kind of pickup in yield or anything like that?
And could you also have your people talk a little bit about where you are in terms of asset liability management, given where the yield curve is right now in terms of, like, the short end and the long end?
Bill Wheeler - CFO
Yes, it clearly was a benefit for us, and even though, remember, we did it mid-quarter, so the full effect of it won't be felt until later.
But maybe I will have Steve Kandarian give you a little color on the rest of that.
Steve Kandarian - Chief Investment Officer
Vanessa, it was about a 2 or 3 basis points pickup for us -- the duration as to quarter year.
We did it right around the early part of November, when rates went around 460.
It actually peaked on November 4 at 466.
And much was done within a week of that.
Vanessa Wilson - Analyst
But 2 to 3 basis points across the entire general account portfolio?
Steve Kandarian - Chief Investment Officer
Yes.
Vanessa Wilson - Analyst
So that is big.
Bill Wheeler - CFO
It is a big, and that is the effect in the fourth quarter.
So it is obviously annualized.
For a full quarter, it might be a little bigger.
I would also just point out, obviously this is tax-efficient to do this, okay?
So there's the tax benefit.
And in terms of ALM, we would be -- we think we are relatively matched now.
We probably were a little short on the general account before relative to our liabilities.
Vanessa Wilson - Analyst
And somewhat similar question, given the Fed tightening, what is going on with your crediting rate side of your liabilities in terms of upward pressure on your cost of funds?
Bill Wheeler - CFO
Well, it's really hard to generalize among all the MetLife liabilities, because they're all a little different.
But you saw that in the fourth quarter.
You saw, as the short-term rates went up, where we have what I would say very short-term liabilities -- and that would mainly be in retirement and savings and group life -- those liabilities, you saw the crediting rates move up on those investment spreads.
We obviously would expect that to continue in the first quarter.
But as I think we've talked about on a number of occasions, we anticipated this and have tried to protect ourselves as best we can through the assets we've chosen, floaters and such, and also the hedges we have put on.
Vanessa Wilson - Analyst
And my last question relates to the lapsed rate in annuities in the individual segment.
Those are at a higher level now.
Is that sort of a new higher level because of the addition of the Travelers mix?
Or is there a merger fallout here or is interest rate-related?
Lisa Weber - President, Individual Business
I am going to have Hugh comment in more detail.
The only thing I would just like to say is that we were actually really very clear about this, that we expected our lapsed rates to go up as a result of Travelers.
They have and had higher lapsed rates than we do.
So Hugh, can you comment in a little more detail?
Hugh McHaffie - SVP
Yes.
Hi, it's Hugh McHaffie.
To your point, we show rolling 12-month lapsed rates, so we will be continuing to see an increase in our variables and fixed lapsed rates through the second quarter of 2006.
So that's a financial consequence of slightly higher lapse rates in the Travelers book relative to the existing book at MetLife.
I would add that we have seen on the fixed side a slight increase in our fixed lapse rates.
And that has a little bit of pressure with the interest rates with the flattening of the yield curve in some of the traditional MetLife blocks and some of our independent blocks.
We are seeing longer duration liabilities roll off the books to shorter duration-type instruments, either with MetLife or outside of MetLife.
So the flattening of the curve is pushing our lapse rate up a bit.
Right now, I think we're still very comfortable with the balance of that.
And you will see us move our rates up marginally on our portfolio rate-type products.
That's just the balance that we mix every day.
So I hope that answers your question.
Operator
Colin Devine, Citigroup.
Colin Devine - Analyst
A couple of hopefully fairly quick questions.
Bill, can you give us an update on your securities lending program right now, first?
Second, also on the investment side, have you given any more thought to selling down some of your larger real estate properties?
I guess Stuyvesant would be the one that comes to mind, particularly.
On risk-based capital, I did not catch you mentioning a ratio, and I was wondering if you had some idea of where you think it is going to end the year.
If we can also perhaps get a bit of an update on your international extension activities.
You may have certainly raised that when you acquired Travelers, and I guess particularly I'm thinking Japan and where you might be there.
And then, if you could also a give us just a bit of a breakdown of where the excess variable income fell during the quarter by business line.
And lastly, on the variable annuity risk management hedge program, you mentioned before you were -- I guess had engaged Tillinghast to sort of design a second program to complement the first one -- where you stand there.
Thanks.
Bill Wheeler - CFO
Okay, I am trying to keep up with that list.
I will start with a couple of these questions, and then I may pass it to Steve Kandarian to talk about investments for a second.
RBC ratio -- no, we did not give one.
It's just -- it's not final yet.
So I'd just as soon not give the final number or give that number out.
It is fine, though, in terms of where we are relative to where we've kind of guided the rating agencies and all of you.
So it is in good shape.
In terms of -- before I hand it over to Steve and talk about sec lending and real estate, maybe I'll let Bill Toppeta talk about international expenses a little bit.
Colin Devine - Analyst
Expansion, expansion.
Tracey Dedrick - Head of IR
I'm sorry, did you wane talk about expansion or expenses?
Colin Devine - Analyst
Yes, expansion.
Where you're going with Japan and things like that.
Bill Toppeta - President, International
Well, I would say going back to [audio drop-out]
Operator
Is everybody still online?
Colin Devine - Analyst
I'm here.
I think you guys --
Bob Benmosche - Chairman and CEO
I can't hear anything.
Colin Devine - Analyst
Neither could I.
Bob Benmosche - Chairman and CEO
I can't hear anything, so I was just wondering if it was just me or you, Colin.
Colin Devine - Analyst
No, I guess they locked us both up, Bob.
Bill Toppeta - President, International
I apologize.
My mike was not working.
It's Bill Toppeta, Colin.
What I was saying was if you go back on the issues of expansion to Investor Day, the first area that we would talk about is Japan.
In Japan, as I mentioned at that time, we have a joint venture with Mitsui Sumitomo which is focused exclusively on individual annuities.
So currently, we are in discussion with our joint venture partners as to potential ways to expand our operations in Japan.
But I would say it is at a very early stage, so I can't give you much color as to what we might be doing, except to say we would like to do more.
That is one.
A second one, in terms of expansion, again, we talked about this a little bit on Investor Day.
We are entering or planning to enter the wealth management business in the UK.
We have just established an Irish subsidiary to -- and it was just literally just established within the last day or two to do that.
And we expect to begin operations in that business in the second quarter of '06.
In addition to that, we have just entered into the group pension business in Korea.
That's literally just beginning.
And as you also know, we opened, I guess at the beginning of -- end of '04, beginning of '05, an [AFRA] business, a pension, individual retirement saving business, in Mexico.
So I think those are the primary ones -- Mexico, Korea, Japan and the UK -- that we would look forward to growing in '06.
Is that being responsive to your question?
Colin Devine - Analyst
That's great, thank you.
Bill Wheeler - CFO
Colin, now just maybe I will have Steve Kandarian talk a little about sec lending and real estate.
Steve Kandarian - Chief Investment Officer
Colin, can you hear me?
Colin Devine - Analyst
Sure.
This mike works.
Steve Kandarian - Chief Investment Officer
Is it working?
Okay.
Good.
The sec lending portfolio is healthy.
We are hedged above 60%, with hedges through 2006 and 2007.
And this quarter's variable income was driven by a couple of things.
Our corporate joint ventures, also, very strong quarter for sec lending.
So we think that the year coming up, 2006, will remain strong for sec lending.
As to variable income, other than a couple of joint ventures in sec lending, we also had some bond and mortgage pre-payments that drove those numbers.
It was the second-largest quarter for the year, after the second quarter.
And as to real estate equity, we actually had been bringing that number down as a percentage of our assets for some time.
Over the last five years, it has dropped by about 50% as a percentage of our assets -- about 3.6% of our assets to 1.5% of our assets.
However, that's not to say we don't like the category.
I think right now, we find real estate equity prices pretty strong and we are more of a seller than we are a buyer.
But if that market shifts, we certainly would adjust accordingly.
As to Peter Cooper's Stuyvesant Town, it performs very well.
And the income continues to rise year to year on that property.
So as of now, we have no plans to dispose of that property.
Tracey Dedrick - Head of IR
Colin, it is Tracey.
As far as the excess variable income by business, on an after-tax basis, 33 million was in institutional, 19 in individual and 42 in corporate and other for a total of 94, as Bill said.
Bill Wheeler - CFO
And then finally to talk about hedging --
Stan Talbi - SVP
Is the mike working?
Hi, Colin.
It is Stan Talbi.
Yes, Tillinghast has variable annuity hedging program.
Let me just point out in all of our actuarial processes, when we use external software, we like to independently check those with a different software.
We do it with our reserves, we do it with our back models, and we just extended that with our hedging program.
So the Tillinghast models really aren't to extend our hedging programs; they really validate the decisions we are making on the external software we are using today.
We are not quite there yet with the validation.
We probably will be within the next quarter.
Colin Devine - Analyst
Is the New York minimum scenario causing you any problems with the products?
Stan Talbi - SVP
No.
Operator
John Nadel, Fox-Pitt.
John Nadel - Analyst
I only have 12 questions.
If we could go through -- Bill, if you could give us an update on the dividend capacity at the end of the year from both Metropolitan Life as well as Travelers Insurance Group up to the holding company?
Bill Wheeler - CFO
Yes, that number is -- that number really doesn't fluctuate very much.
With both Travelers and the various MetLife entities, as well as international, I think our normal dividend capacity up to the holding company is 1.9 billion.
And we don't think there's going to be any issues with that.
John Nadel - Analyst
Maybe Rob or Lisa, on the wholesaler headcount, I guess on last quarter's conference call you said that the restructuring at that point, I guess in late October, early November, was complete.
But I don't recall you indicating that headcount in the wholesaler sales force was going to come down so much sequentially.
Can you just comment on that?
Lisa Weber - President, Individual Business
Sure, I can comment on that.
We actually have a total of 229 wholesalers.
We kept all of the -- in large part, we kept the wholesalers that we wanted to keep.
What you see in the numbers is a reclassification of 20 wholesalers who had just been wrongly classified.
So it's actually an administrative error which has now been corrected.
In terms of the wholesalers that we did lose, since the acquisition, we've only lost eight wholesalers.
And of the eight, three were regrettable and two of the three actually left the business.
So we are really pleased with the retention of wholesalers and our overall retention strategy overall.
I would also just comment that in January, we had a national wholesaler meeting where we brought together all of the life and annuities wholesalers.
And as you know, we have already integrated Travelers and MetLife so they are all just one group of wholesalers.
And we brought them together for three days of what was spent in large part on product training and really on inculcating those wholesalers into MetLife and with each other.
So we are really satisfied with how it is going.
John Nadel - Analyst
And maybe last question, Bill, if I heard your remarks correctly, or maybe it was Rob's, you talked about the underlying earnings run rate this quarter being probably better than you guys have expected or you're budgeting.
Does that alter your view for '06 guidance at this point?
Or are you just unwilling to kind of reflect that higher earnings run rate in '06 yet?
Bill Wheeler - CFO
I think what I said was that the underlying earnings power was probably greater than the reported numbers.
And I think on Investor Day, we had talked about the earnings range of $0.99 to $1.04, and obviously we actually reported $1.04.
So I'm not sure we were terribly surprised by this result.
So I guess I feel that it's very early into the year.
There's a lot of uncertainty.
And I think we are still comfortable with our earnings guidance.
John Nadel - Analyst
And one more.
On the reinsurance transaction with Societe Generale, I think the release had mentioned that there was an opportunity to perhaps over time expand that program to cover other riders on the VA product.
So I was wondering if you could just give us a sense for if you have any expectations to do that, especially on the GMIB?
Bill Toppeta - President, International
There are no immediate plans.
What [Phil] said on Investor Day was that we look at all of these riders and we look at either retaining some of the risk, reinsuring it or hedging it.
And we opportunistically look at those things.
Some of our riders are hedged 100%.
We have reinsurance and GMIB -- I'm sorry -- we hedged GMIB to a certain extent.
And for the GMDB, what we have done is taken the riskiest rider that we have, which has been issued since 2001, and have entered into this reinsurance arrangement.
The other GMDB riders are pretty benign, and we feel pretty comfortable retaining that risk.
John Nadel - Analyst
How much of that block that you were uncomfortable with is actually reinsured now?
Bill Toppeta - President, International
I wouldn't say we were uncomfortable with it.
It was just opportunistic to be able to reinsure it.
It was about $7.5 billion of account balance.
Operator
Joan Zief, Goldman Sachs.
Joan Zief - Analyst
I have two questions.
The first is about the hedging of the living benefits.
It looks to us as if the cost of the hedging has been rising pretty dramatically -- cost of long-dated options are up dramatically.
It is not a very liquid market, not a lot of opportunities there.
So I was wondering if you are seeing that and how you do with that, and how you deal with that when you think about the profitability of the business -- that cost of hedging and where we see it.
The second question is really just a general question for Rob.
The competitive landscape is changing.
Products are changing.
You are really a big company.
Where do you really see the greatest opportunities for growth in the long run?
Do we have to continue to wait for acquisitions where you ratchet up your growth rates?
Or is there really certain areas where there's enough growth that it makes a dent in the growth rate of the total Company?
Bill Wheeler - CFO
Joan, it is Bill.
I will start with the hedging costs.
I don't think we believe our hedging costs are really rising.
I mean, it's not necessarily cheap.
It is obviously cheaper than what we charge for these riders, for instance, on our annuities.
And so in terms of its rising or not, I don't really think it is.
In fact, this most recent deal with Societe Generale, we really -- I think we got a fair price, in that we are actually pretty satisfied with the pricing there.
So I don't think the costs are necessarily rising.
And just remember -- and it's obviously not affecting the profitability of our annuity line.
The profitability there is excellent and has been growing rapidly over the past year or so.
So no, I guess I feel like we're in good shape.
Rob Henrikson - President and COO
Joan, on the growth rate, there are substantial opportunities for us, first on a generic basis.
But let me just mention a little bit about acquisition activity.
As I said at the end of the year and continue to say, this marketplace is going to consolidate even more.
And there are opportunities for us, as you know, across the board, both in individual and institutional, to look at blocks of business in particular that are becoming more and more a hobby for some of our competitors as they cannot make the type of investments they need to make.
So even in relatively slow growth markets, we still expect to grow faster than the market growth.
And that's, we think, very attractive for our shareholders.
So all of the cylinders we can talk about, I would start off probably by talking about distribution.
We are in a position today, if I look back when me first introduced ourselves to the public marketplace, we were strong then, relatively speaking.
Today, we are so much stronger on a relative basis when it comes to distribution that the opportunities are considerable for us.
As you know, we have streamlined our product portfolios.
At the same time, we have a broad proliferation of products and you have a population that is beginning to understand, particularly as they age, that there are some risks that they simply cannot invest against.
And so it is not invest or insure; it is invest and insure.
And we are seeing that on the individual side, of course, through all of our annuity products.
In the institutional side, we are seeing it in a major way as employers are looking for ways to cut down their costs of funding and financing some of their long-term liabilities.
And they're offsetting that by looking at ways they can offer voluntary benefits to their employees that's attractive from the employee point of view, low cost from the employer point of view.
And we continue to grow there.
As you see additional consolidation in other industries, as you know, we tend to be a net winner across the board there.
So when we look at our growth, for example, on the group insurance side, we don't talk about this too much, but a good sale to us is one that really could be called an extension because of activities within our corporate client marketplace in terms of their mergers and acquisitions and so forth.
So even as some industries are starting to decline on their population growth, we actually see growth opportunities in terms of covered lives for us.
So I see strong, solid growth, as I have continued to say, across the board, both on individual and institutional, because of our breadth of distribution, because of our product set and because of our relative strength.
And on top of that, and I've talked about continuing double-digit growth going forward -- double-digit, if I do my math right, is anything 10% or more.
And I don't see any problem with that from a generic point of view.
I would also add that international business is in a different place today than it has been in the past.
We have critical mass so that we can really focus on regional growth -- Latin America, Europe and Asia.
And we see terrific opportunities there.
And there are people who -- organizations that are looking to partner with us more and more as the MetLife brand name continues to strengthen not only here, but abroad.
So I am very bullish.
It is a tough marketplace.
But we are positioned well to deliver in a tough marketplace, again, on a relative basis.
And some of our competitors are going to have some tough sailing.
Joan Zief - Analyst
Just one follow-up on the international side.
What is your time horizon to getting the ROE up to your targeted range?
Rob Henrikson - President and COO
Well, Bill, you might want to answer that.
From the standpoint of timeline, I'll just say first in a general way that our growth varies, and therefore, our targets toward ROEs vary greatly from country to country.
So I believe back a couple of quarters ago, when I mentioned something about group insurance in China, you were the one who said, well, you mentioned that, Rob.
When am I going to see the bottom line?
And I said, maybe 10 years would be okay.
Obviously, the ROE in China is not going to be anything to write home about anytime soon.
But if you look at Mexico and Korea and Chile, and, for that matter, some of our business in Brazil and so forth, we see very attractive ROEs, some of them already here, others growing over the near-term horizon.
And by that, I would say two to three years.
Do you want to add to that, Bill?
Bill Wheeler - CFO
Yes.
Joan, if I could just take you back to Investor Day.
Remember Investor Day, even in my slides, we put all the countries into three buckets -- the current contributors, the medium term and the long term.
And what I said at that time and what I would say is still the case is the current contributors, and Rob mentioned Mexico and Korea, they are meeting hurdle rates now.
The next group is the medium term in the plan period -- that is within the next three years, those people will be up to meeting our standard as well.
Those countries will meet our ROE standards as well.
And the outliers really are just the brand-new operations.
So what I said at that time and continues to be true -- India in China for meeting ROE hurdles are well beyond the plan period.
They are investments in the longer-term future.
And that is going to be the case.
Joan Zief - Analyst
Can you just remind me about Japan?
Is that now long or medium?
Bill Wheeler - CFO
No, Japan is a current contributor.
Japan is meeting our standards.
Japan is fine.
And as I said before in answering Colin, we'd like to make it bigger.
Tracey Dedrick - Head of IR
Thank you very much, everyone, for calling in today.
We really appreciate it, and I'm very sorry if we didn't get to your questions today.
We look forward to working with you over the next quarter and reporting again next quarter at the end of April.
Operator
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