大都會人壽保險 (MET) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MetLife first-quarter earnings release.

At this time all lines are on a listen-only mode.

Later there will be an opportunity for questions; instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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

Except with respect to historical information statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws including statements relating to trends in the Company's operations and financial results, the market 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 S-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'd like to turn the call over to Tracey Dedrick, head of Investor Relations.

Thank you and good morning.

Welcome to MetLife's first-quarter 2006 earnings call.

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

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 website 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.

Joining me this morning are Rob Henrikson and Bill Wheeler.

After our brief prepared comments we, along with the rest of the executive management team, will be happy to take your questions.

Now I believe that you all know that in March Rob Henrikson assumed the title of Chief Executive Officer.

This week he also assumed the additional title of Chairman.

And though he's not new to MetLife, I'd now like to turn the call over to our new Chairman and Chief Executive Officer, Rob Henrikson.

Thank you, Tracy.

Good morning and welcome to everyone.

I'm going to talk about the performance for the quarter which was outstanding.

But before I do, I want to spend a few minutes sharing with you how I viewed the transition from Bob to me the last few quarters.

I've said this to employees, the Board, our business partners and to some of you that we have a solid foundation that we've built here at MetLife and that we will leverage that foundation going forward.

My goal is to continue to stay the course with a new generation of financial solutions.

This means we will continue to adhere to the principals of solid management and financial discipline we've established over the past few years while emphasizing focused, innovative and profitable growth.

As we enter a new phase in our evolution it's imperative that we extend our lead among competitors.

This takes teamwork, passion and, most of all, an unwavering focus on our customers.

I'm very excited about the opportunities ahead and this quarter is a good indication of the kind of performance of which MetLife is capable.

Turning now to the first quarter; this was an outstanding start to the year.

MetLife earned over $1 billion in operating income and our topline growth was quite good.

This quarter again validates the success of the Travelers acquisition.

It has clearly been accretive to earnings and we are gaining sales momentum in a number of Travelers' channels.

As a result of the strong earnings and our confidence in the near-term outlook, we are revising our full-year 2006 earnings guidance to $4.55 to $4.75 per share.

As always Bill Wheeler, our CFO, will provide you with a detailed overview of our quarterly financials in a moment.

I'd like to offer some performance highlights and talk about some of our initiatives.

With that, turning to the businesses.

Institutional business delivered exceptional results in the first quarter.

Topline growth remained strong with group insurance premiums, fees and other revenue up 12% versus the year ago period.

The operating environment in this marketplace is challenging.

Quote activity for 2006 business is relatively low and pricing is aggressive in certain markets.

Having said that however, our revenue growth is still quite robust because our retention rates are excellent, especially in group life and group disability.

We are also particularly pleased with the continued growth of our small market group channel.

Our local market strategy, which focuses on under penetrated geographic areas, and our concentration on slightly larger average cases in this sector has been successful so far.

We've also made significant investment in improving our service to customers in this channel which has clearly helped retention.

Overall, even with the relatively difficult sales environment, we believe we are continuing to compete effectively while maintaining pricing discipline.

In retirement and savings the sale of a large pension closeout in the first quarter of last year caused revenues to decline by comparison.

However, sales of structured settlements and income annuities were up year-over-year.

Institutional's first-quarter operating margins were marked by expected seasonal underwriting results.

The investment spreads narrowed a bit again in the first quarter, as we had anticipated, but they remained consistent with the expectations we set with you at investor day.

We also experienced favorable expense results across our business.

Overall institutional delivered record operating earnings of $416 million, up 28% over the prior year period.

Clearly the Travelers acquisition contributed to these results but, as you can tell, we have substantial growth in our underlying businesses.

In individual business it was also a record quarter.

The performance in the annuity business was exceptional.

Total deposits were $3.8 billion which is a 51% increase year-over-year primarily due to the addition of Travelers.

Sequentially annuity deposits were up 8% with strong results in all distribution channels.

We saw an increase in sales through the key relationships and the rollout of existing and replatformed products to the former Travelers distributors has been very successful.

In June we expect to introduce a lifetime GWB rider which will support future variable annuity sales growth in all channels.

Total life first-year premiums and deposits were up nearly 50% from the year ago quarter and this was also driven by the Travelers acquisition.

Sequentially sales were down about 14% due to normal seasonality and an anticipated dip in sales as we transitioned to new enterprise products.

I would add that the life insurance marketplace remains competitive and, while we are committed to growth, our focus remains on appropriate and profitable growth.

I am particularly happy with the performance of affiliated distribution.

Agency distribution sales power grew 3% in the first quarter.

Both our MetLife and New England channels enjoyed solid recruiting in the first quarter and we continue to grow through improved retention.

Our management team has worked very hard to improve the efficiency and productivity of this channel.

In this quarter that hard work has paid off, distribution revenues exceeded distribution expenses for the first time.

This improvement in distribution expense was a key contributor to the overall lower expense in individual in the quarter.

With regard to our other operating margins, investment spreads remained strong.

However, individual mortality increased this quarter.

Bill will get into more detail about this in a minute, but we don't believe this represents any sort of trend.

Instead this appears to be normal volatility that we sometimes experience.

Individual reported record operating earnings of $408 million for the quarter, up 27% over the first quarter of 2005.

This story is the same as it was in institutional.

The Travelers acquisition contributed to this growth, but the underlying businesses performed very well.

Auto and home reported a very strong performance this quarter.

Topline revenue was essentially flat.

We are growing earned exposures in both auto and home, but this is being offset by an increase in our reinsurance premiums as well as slightly lower pricing.

Auto pricing for the industry continues to become more competitive but overall remains reasonable.

As we mentioned at investor day, one of our strategies for competing in this market is to leverage our product innovation.

To give you an update on this, the rollout of our Grand Protect product, which combines auto, home and umbrella coverages into one convenient package, is going well.

To date it has been rolled out to 27 states.

Also our ID Theft Resolution Service, which we were first to introduce to the market through our homeowner’s product, is being expanded next week to our auto product in 22 states at no additional cost to customers.

The strong results in auto and home were driven by excellent underwriting results primarily in the auto business.

The mild winter in both the Northeast and Midwest contributed to a low level of claims frequency and moderate severities in auto.

However, our catastrophe experience was slightly above plan.

Overall the combined ratio, including CATS, was 89.6% and operating profits were $93 million, a 22% increase over last year.

On a final note in auto and home, we recently completed the restructuring of our CAT cover.

In 2006 the reinsurance program has a $30 million deductible with a $450 million upper limit versus a $25 million deductible with an upper limit of $280 million in 2005.

MetLife's auto and home's participation in the reinsurance program for the layer from 30 to $225 million is about 10%, and for the layer from 225 to 450 is 50%.

While reinsurance this year is more expensive, dampening our premium growth, we feel that this new structure will provide better earnings protection against larger storms.

Finally, our international business continues to show strong performance led by Mexico, Korea and Japan.

First-quarter sales in both Mexico and Japan showed strong gains over last year.

In Korea agency sales were up but overall sales were down slightly versus the prior year due to lower bank assurance sales.

We expect that sales in this channel will recover during the year.

We recently launched variable annuity products with GMWB riders in Japan and Korea that are expected to boost sales going forward as well.

While annuity posits in Japan were $1.2 billion in the quarter, we're seeing the competition intensifying in that market.

We are expanding our distribution network and increasing sales support to drive additional sales in Japan.

In addition, persistency in Mexico in both institutional and individual businesses remains strong.

While expenses lagged in the first quarter due to timing issues, we expect to be on track for the full year with our plans for investing in international's growth.

For example, we're enhancing support for product development globally.

In addition, we've dedicated resources to work closely with Citigroup to deepen and expand our distribution relationship.

Integration efforts continue to proceed on track for the newly acquired businesses.

Operating earnings in international of $75 million were up 10% year-over-year, a good solid quarter.

Looking ahead the key for MetLife is continued strong execution.

We continue to work hard to be a thought leader in the marketplace, to add value to our clients and to create value for our shareholders.

We are confident that we will continue to deliver superior long-term results.

Now I'd like to turn the call over to Bill who will walk you through the numbers.

Bill?

Thanks, Rob and good morning, everybody.

MetLife reported $1.03 billion of operating income for the first quarter or $1.33 a share.

This is a record and represents a great start for 2006.

It is also a 19.8% increase over the first quarter of 2005, which itself was an unusually strong quarter.

This morning I'm going to walk through the highlights of the quarter and also discuss our revised guidance for 2006.

In the first quarter we had topline revenues, which we define as total premiums, fees and other income, of $7.9 billion.

This is an increase of 12.4% over the first quarter of 2005.

Obviously the acquisition of Travelers helped this increase, but the underlying growth trends in many of our businesses are excellent.

Individual business topline revenue grew by 23.5% this quarter with strong performances from annuities up 86.5% and variable and universal life up 47.9%.

Institutional business topline revenue was up 5.1% this quarter.

Solid performances from non-medical health and group life were partially offset by a decline in retirement and savings revenues due to a large pension closeout sale in the first quarter of last year.

International topline revenue grew by 39.3%.

Again the Travelers acquisition caused some of this growth, but our Mexican and Korean operations also turned in strong performances.

Turning to our operating margins, let's start with our underwriting results.

Group life mortality was solid and essentially unchanged from the first quarter of last year at 94.2%.

As I've said before, mortality is seasonal and the first quarter is typically our highest.

In addition, group disability morbidity was in line with our expectations at 90.7%.

In retirement and savings there was a onetime interest rate adjustment to the structured settlement block as well as several other smaller liability adjustments which caused underwriting margins to improve by $28 million or approximately $0.04 per share.

In individual business our mortality was 94% which is higher than normal.

We experienced higher mortality in a number of different products and channels and saw both an increase in frequency and severity.

For example, almost half of the increase in mortality occurred in MetLife's closed block, which means it did not have any bottom-line impact.

In addition, much of the adverse mortality was offset by reinsurance.

The overall impact was an $8 million after-tax reduction in our underwriting margin.

In addition, there was a onetime adjustment to pending and ceded reserves to eliminate duplicate claims.

These adjustments caused underwriting margins to improve by $9 million after-tax.

Turning to auto and home, we had an excellent quarter with an 89.6% combined ratio which includes CATS.

This was due to lower than expected auto claim frequency and severity as a result of the dry weather and favorable road conditions this winter in the Northeast and Midwest.

In addition, auto and home had a prior accident year reserve release of $9 million after-tax due to favorable claims development.

Moving to investment spreads, we again had higher than expected variable income this quarter.

Remember, at investor day in December, we said that our baseline expectation for variable income in 2006 would be $275 million a quarter.

For the first quarter variable investment income, after DAC, [after] tax and other offsets, was $95 million or $0.12 per share higher than our baseline.

This result was driven by higher corporate joint venture and securities lending income.

Corporate and other, retirement and savings and annuities were the main recipients of this income.

Both the retirement and savings in group life investment spreads declined sequentially and year-over-year; however, they performed within the guidance we had previously given.

The annuity investment spread was very strong at 263 basis points and above our targeted range.

Moving to expenses, our operating expenses were significantly lower this quarter as compared to the third and fourth quarters of last year.

Included in these results are $13 million of after-tax Travelers integration expenses.

Also, due to the new accounting guidance for stock options, we have expensed all unvested options for retirement eligible employees resulting in a $16 million after-tax charge.

There were a number of other onetime adjustments in individual and institutional businesses which reduced operating expenses by $18 million after-tax.

Turning to our bottom-line results.

We earned $1.03 of operating income or -- $1.3 billion; excuse me, or $1.33 per share which, again, represents a substantial increase over the first quarter of last year.

In the first quarter we had net realized investment losses including offsets of $311 million after-tax.

If you look at the bottom of page 36 of the QFS, you will see that as part of that result we had $252 million pretax of derivative losses.

We use derivatives to hedge economic factors such as interest rates or currency risks.

In a quarter like this, with a significant change in interest rates, we will see a fairly significant mark to market impact on derivatives that do not qualify for hedge accounting.

It is important to remember that these are economic hedges, so there are corresponding offsets elsewhere on our balance sheet.

We also incurred realized investment losses due to the continuance of the portfolio repositioning program which began in the fourth quarter of last year as we continued to take advantage of rising interest rates.

Finally, our preliminary statutory operating earnings are approximately $860 million and statutory net income is approximately $710 million this quarter.

Total statutory capital is approximately $16.6 billion.

As Rob mentioned earlier, our original operating earnings guidance of between $4.25 and $4.50 per share has been updated and we are now expecting operating earnings per share of between $4.55 and $4.75 this year.

Embedded in this guidance is our expectation that we will increase investment spending in technology, marketing and advertising over our original plans.

We expect that these incremental expenses will be offset by higher than planned variable investment income.

These expense plans are currently under review and we will give you more details as we report earnings later this year.

In summary, this was a strong start for MetLife in 2006 and we are well-positioned for the rest of this year.

And with that let me turn it over to the operator so we may take your questions.

(OPERATOR INSTRUCTIONS).

Ed Spehar, Merrill Lynch.

Thank you.

Two questions on variable net investment income.

The first is -- Bill, I think you said that securities lending was one of the reasons for the good results.

I guess that's surprising just because I thought in a flatter yield curve environment that that's a tougher business, so maybe you could explain that a little bit.

And then, in terms of the guidance when you talk about the excess Sec marketing and advertising spending funded by higher variable net investment income, is that funded by the higher variable net investment income that was booked -- or that was realized in the first quarter or an increase in the plan in subsequent quarters?

Thank you.

This is Steve Kanderian, the Chief Investment Officer.

I'll take the first question on Sec lending.

It was a good quarter for Sec lending and, as we've mentioned in previous calls, we have hedged a lot of our Sec lending program over the last couple years and those hedges go out through 2007.

About 60% of the program is hedged either using derivatives or using floating-rate assets that match up against the floating-rate liabilities.

So the program continues to produce very good results.

And Ed, it's Bill.

With regard to your second question -- I'll restate it for everybody because it's important -- is that are we counting -- to cover these increased expenses are we relying on the out performance in the first-quarter variable income or do we think we'll get some more in the future?

The answer is -- it's the future.

I think we've said many times that we have limited visibility with regard to variable income in the future, but we have enough confidence in how things are turning out this year that we do think we will outperform above our baseline somewhat.

Hard to quantify how much, but we would think somewhat.

And so that's what I'm pointing to when I talk about that we'll cover some of this incremental investment spending later this year.

Bill, just one follow-up.

To the extent that the variable net investment income is not as good as you think, are you able to dial back on those other items or is that higher spending going to occur no matter what?

No, this is fairly discretionary.

It's always a matter of timing because we can pull back -- obviously if you have a fall advertising run, for instance, on television you can pull back on the scale of that, but you have to have some visibility about variable income.

So we have some ability to manage this, it's not perfect, but we have some.

Thank you.

Jimmy Bhullar, JPMorgan.

Just a question for Bill on spread compression.

I think in the past you've mentioned $100 million as your maximum exposure to spread compression in '06.

How do you feel about that given where rates are right now?

And then second, just what was the rationale on the portfolio repositioning?

Did you get a lift in portfolio yield from that?

And if you did then if you could just give us a number on that?

Sure, Jimmy.

I'll take the first question;

I'll let Steve talk about the portfolio repositioning.

How do I feel about the $100 million?

You know, I'm not sure because it's not something that can easily be kind of recalculated and refined in terms of how I would gauge that number today.

But obviously I think we feel better about the interest rate environment today and how we're positioned than we did four months ago or five months ago when we had investor day.

Long-term rates obviously have moved up a lot, that helps us.

The yield curve is flat, which isn't great, but it's not inverted which is -- so we actually -- we're feeling pretty good and obviously that's reflected in our guidance adjustment.

So with regard to the portfolio repositioning.

As to the portfolio repositioning, the work we've done over the last quarter should add about 1 to 2 basis points to the portfolio yield going forward.

And just as a reminder, the last call we had for the last quarter's reported earnings, we talked about 2 to 3 basis points increase from that repositioning effort in Q4 of 2005.

And the duration on this was extended by about a tenth of the year, is that right?

This time it was about a tenth of a year, yes.

Okay, thank you.

John Nadel, Fox-Pitt.

Good morning, everybody.

Two questions.

One is really about excess capital, your debt to capital position.

Could you update us on where you stand on the Moody's calculation of debt to capital?

And then also, what your specific plans are that get you from where you are at the end of the quarter to your 25% target?

Is it just a matter of equity growth or do you have to actually pay down some debt?

And then a follow up.

With regard to our leverage ratio, we publish a leverage ratio in the QFS -- I think it's 28.5% this quarter.

That's sort of I would say our simple calculation.

The rating agencies obviously have their own leverage ratios which are a little bit more complex.

Under the Moody's -- well, under a rating agency leverage ratio, not a paid advertisement, is a -- we would say our leverage ratio today is 26.7%, that's down from 27.2% at the year end.

I'll take this opportunity to mention that that rating agency is in the process of redefining its leverage ratio and I'm not sure how well publicized that is.

They're going to start incorporating some things with regard to pension under funding or pension issues.

It will cause I think everybody in America's leverage ratio to go up a little bit, ours will go up a little bit too.

That doesn't really change our targets or how we feel about our ability to get to the leverage ratio that's appropriate by year end, but we are redefining the numbers a little bit.

With regard to how we get from -- let's keep on the old number, the 26.7% to below 25, we'll get there a couple different ways, but most of it will frankly just be through retained earnings.

It's possible that as we -- there may be some slight reduction in debt -- debt balances in the remainder of the year, but most of it we'll just get through retained earnings.

Okay.

And then my follow-up question would be just be on risk-based capital.

At year-end Metropolitan Life Insurance Company's RBC I think was 320, Travelers Insurance Company was a little over 430%.

Can you give us a sense for where those two ratios can move?

I imagine the Travelers ratio can move down.

And I think, if I'm not mistaken, that you're not writing much new business out of that entity.

And then where does the MetLife ratio need to move up to?

I assume the rating agencies would like to see that slightly higher.

You answered the question.

Do you have a number, though?

Yes, I would -- we will write some business out of the Travelers legal entities, but it will be lower than it has been historically.

And so that RBC -- and we do expect to take dividends out of those legal entities.

We do need this year to get the Connecticut Insurance Department's permission to do so, and that permission has not yet been given, but we haven't asked for it yet either.

So we do expect that RBC ratio will probably start coming down a little bit.

With regard to Metropolitan Life Insurance Company, which -- right -- at year-end 2005 had an RBC ratio of 320%, we will manage that over time to something north of 325%.

The rating agencies would like to us to be at 325% as sort of a target.

I don't know if you'd call it a target or a floor, but we're effectively viewing it as a floor because we'll obviously manage to a number above that to give ourselves some cushion.

Okay.

And one last real quick question.

Reinsurance or use of reinsurance, are you retaining more risk today than you were maybe a year ago or two years ago and how has that changed?

We are retaining some more risk in our individual businesses, life sales, but only some.

Thanks very much.

Great quarter.

Eric Berg, Lehman Brothers.

Good morning to everyone.

Two questions.

Bill, I suppose it's the case that a company could revise its guidance when there wasn't a surprise, but it sure sounds like in this case things turned out in the March quarter to be different from what you had originally forecast.

If that's the case, could you tell us what exactly was it in the quarter?

Could you sort of zero in on what exactly it was in the quarter that is leading to the revised guidance?

And then I have one follow up.

Eric, I think I know what your question is, but if I don't get it quite right you'll clarify.

I just want to know where the surprise was (multiple speakers).

Or so why the beat?

Yes.

Well, why the beat relative to your expectations?

Because presumably if you're raising your guidance it's because whatever assumptions underlay your guidance at the start of the year turned out to be a little bit too conservative.

I'm guessing that something happened that was better than you thought just a few months ago and that's prompting the increase in the guidance.

Yes, there's a couple things.

So in a way to kind of crack that nut is sort of to say well why did we really beat in the first quarter and does that have implications for the broader year?

And I would tell you that we -- obviously there were some -- we've highlighted and in my speech I highlighted a number of what I would say are more variable items.

We always have some one timers.

I'm glad you asked this because it gives me a chance to talk about variable income a little bit.

We have had higher variable income every quarter for the last year and a half, higher than what was baked into our plan.

And I will tell you -- I'm kind of tired of using the word 'excess'.

And as we've thought about this more and we look at it we sort of say this is an asset class that is cyclical, it is obviously linked to the interest rate environment and so when we have a tougher interest rate environment we would expect this -- or lower interest rates being tougher -- we would expect that asset class to perform well.

I think all things being equal, the leverage buyout business works pretty well when interest rates are low and the equity market is doing okay.

So it's -- effectively it's a counterbalance.

When we have a tougher or more difficult interest rate environment with low rates and possibly even an inverted yield curve it's a natural offset to us.

Now we've had that beat for -- we're going to have that beat for the next year and a half.

And I think if I suggested to all of you that even though that I think with confidence we can say we're probably going to over perform in that asset class for the rest of the year.

So again, the visibility there is often difficult to have, but we have enough confidence to say we'll do somewhat better.

So that's part of it.

Just variable income is strong.

I'm tired of characterizing it as one time because it's obviously not, but it's just an asset class that's cyclical.

That's part of it.

Two is the interest rate environment today, Eric, is I think -- for us is better than it was.

I think somebody else asked me that question.

It's clearly better and we feel better about it and we have a better confidence about it than maybe we did four or five months ago.

And then number three in terms of our performance, obviously our expense levels this quarter were very good and they're -- seasonally generally they're good and we would normally have lower expenses in the first quarter and they tend to build over time, that's what happened last year and that will happen some this year too.

But we went into this year knowing that we were going to have to tighten our belts with regard to expense levels and we did and you see that in the first quarter.

So that shows you that's a lever we can pull.

Now I think because of our confidence regarding the year we're probably going to back off and say let's start investing some more money in terms of doing the things we'd like to spend money on this year because, you know what, it's going to be a good year, we can afford to do that.

So I don't know -- the expense levels are going to creep up, and I'm not going to be shy, they're going to for the remainder of the year.

When I think about what's different now than what was different four or five -- when I set this -- we set this guidance in early December, that's what I'd say the big picture items really are.

Other than the fact that nothing's gone -- our businesses are doing well.

We thought they would do well last December, but now we've confirmed it.

Just one quick follow-up.

What is -- having provided a forecast -- realizing it's just a forecast, it may be right, it may be wrong -- of $275 million for variable income per quarter, right, back in December and now saying that it's going to be higher based on your forecast, what is your new guidance for variable income?

I don't have one.

I know that's kind of a cop out -- I don't have one because there's just not enough visibility to put a number out there.

We know it will be -- we're pretty confident it will be a little better.

It could be a lot better, but I don't know.

I don't have a new number for you, I'm sorry.

Thank you.

Tamara Kravec, Banc of America Securities.

My question is really on the annuity environment.

It seems like Hartford posted stronger annuity sales and you guys are posting very strong annuity sales as well.

So can you just talk about what you're seeing there in terms of competition and product features, any changes that were notable in the quarter?

Hi, this is Lisa Weber.

We're really pleased with our annuity sales results.

We view our performance in terms of Travelers as really getting the momentum that -- in fact better than the momentum we expected.

As you know, we rolled out our new productline, which is across all of the retail distribution including the affiliated channels as well as independent, and that's really gone well for us as well.

So we are very bullish in terms of annuities.

Our net flows remain positive and I'm really pleased with the business.

In terms of the product feature that Rob spoke about, the GWB for life, that will be rolling out in June.

That really plays to our brand strength just in terms of people really looking for guarantees and who to better get that guarantee from than MetLife.

Specifics about the product, just to kind of highlight a couple -- it's really our response to what's out there in the marketplace on this type of product.

And what we're going to have is an annual step up where you can lock in market gains each year and that's really huge.

In addition, there's a compound interest rate on the principal and middle of the road cost from a client perspective.

So we expect a lot there as well.

Thanks.

And Lisa, also on the UL, are there any significant changes you're seeing already in the first quarter just given the capital requirement changes and just some of what's going on that we heard from the [Limmer] conference?

I'll just continue to say that the environment is really challenging on the life side, particularly with respect to UL.

There is competitive irrational, I'll call it, pricing out there; underwriting decisions that are really puzzling to us that we see in the marketplace and we maintain a competitive position on the UL side.

But I will say that it continues to be a challenge for us.

I'll also say that in this environment if there's anyone who can succeed in the life business and in that business it's us.

And I have spent probably 25 hours with my senior leadership team across the retail business talking about the dynamics of the business and what our life strategy is as we go forward here.

We had a series of three strategic meetings and, as a result of that, we'll have some changes as well in terms of using the Swiss Re manual; we're going to have some changes to foreign travel and so on.

But basically we continue to forge forward in this environment.

So then you would say that the pricing environment has actually become incrementally more irrational in the last quarter or would you say there's really not much change, that it just remains irrational?

I don't know that I'd comment on changes in pricing in the last quarter, but what I will say is that what we see in terms of what differentiates us again from many of our competitors is that we will only do business that is profitable and appropriate.

And I want to stress appropriate.

So you won't see us in the IOLI business -- you won't see us in those kinds of businesses.

And it's tough, but we continue to take the long view here and the high road and we'll continue to do that.

Great, thank you.

Tom Gallagher, Credit Suisse.

One for Rob and then two quick ones for Bill.

Rob, I think you had referenced increased competition in group life and disability.

Can you elaborate a bit more on that in terms of where you're seeing it kind of by case size and is it more and intense on one side or the other in terms of life or disability?

In general -- and I'll pass it over to Lee.

But let's just say in general in terms of the group insurance businesses -- I kind of say this periodically when people ask the question.

You have people in the group life and to a lesser extent disability, but certainly in the group life business, who come in and out fairly frequently because they see the group life business as being relatively simple, that's relative to the other businesses.

They can come in without a lot of infrastructure and a lot of support and simply come in, price the business and try to pick up larger cases.

It does tend to happen in the upper case market.

And that I would guess will never change.

That's going to happen all the time.

Keep in mind at the same time, as I mentioned, we're seeing less quote activity in that business and that is something that goes hand-in-hand with retention.

So in other words, and I wouldn't suggest this would happen, but I've often been asked about the group life business.

That it's a business that goes out to bid every year, how does that happen?

And I always say well -- oh, and how can you make any money?

My answer to that is -- view it as permanent business where the customer can fire you at any time.

And so we look at it as permanent business.

There's less of it going out in the marketplace.

That plays to our strengths.

Our retention goes up and we continue to be more profitable.

In the disability business there tends to be some companies that rely very heavily, of course, on disability.

They tend to be more dependent on that product and service for their financial health and their top line.

And so we see always blips of irrational pricing here and there.

Other than that, I'll pass it to Lee, he may have some specifics.

Well, we'll have more data in three or four months.

We're really going into the bidding season for '07 effective right now.

So I would just say what Rob did, group life, very competitive especially at the very large end.

Group disability seems to be most competitive around the 5000 to 10,000 life kind of zip code, right around that area; more people are involved in bidding heavily.

And again, I think really we'll know a lot more going into the -- a quarter from now when we go into the '07.

I think last year -- it was pretty jumbled up with the brokers.

Two years of really kind of broker -- large broker dislocation which is a somewhat bread and butter business for us.

So we hope a lot of that is out of the system and we can have a more rational season.

Got it.

And Lee, in terms of Rob's comment on the group life side about less cases coming out to bid, would you also expect something similar on the disability side or not necessarily?

It's really hard to tell.

Not necessarily.

I mean that was certainly the phenomenon in the last year -- really last year in particular.

So again, ask me this time in a quarter.

Okay.

And then just one quick follow-up for Bill.

Any update on the actuarial review on the aggressively underwritten Travelers life business and any kind of perspective on whether we could see a large adjustment or should we expect something small?

Thanks.

There isn't an update.

When we set up this reserve -- which inside of it was an embedded estimate regarding some of the cases while we filled in our case review.

We said we'd true it up and talk about that in the second quarter.

That's still the timing.

So there's really nothing to report now.

Okay, thanks.

Vanessa Wilson, Deutsche Bank.

Good morning.

Could you talk a little bit more about the derivative losses and what was the economic purpose of the derivatives and have they achieved what you were trying to achieve?

The ones that created the realized losses, are those related to the derivatives that defended the securities lending program?

Vanessa, it's Steve Kendarian here.

The derivatives that were put on achieved their intended purpose and, as Bill mentioned in his opening remarks, elsewhere in our financial statements are offsets that aren't recognized from a GAAP perspective in the same quarter.

So for example, we had some losses related to the dollar weakening again the euro.

We had some losses related to floors we had in place that were put there to hedge against some of our minimum guaranteed products.

So those are some of the examples of things that factored into the numbers that you see for this quarter.

And the derivatives used to defend Sec lending?

Could you please repeat that?

The derivatives that you used to defend the returns in the Sec lending program, how did those perform?

Did those produce losses or how are those working?

Vanessa, I think as we've talked about it before, those were interest rate caps that we put on to help preserve our securities lending margins.

And they performed extremely well, needless to say.

So the increase that the Fed took in the short-term rate was what you were defending against?

Yes, that's correct.

And so that worked.

Those are not related to these below the line derivative losses?

No.

Okay, thank you.

Joan Zief, Goldman Sachs.

I just have a question or two.

The first thing I just wanted to ask you about was the auto and home business.

When we think about that diversification originally and thought about the need to expand, a lot of it had to do with your belief that from a voluntary standpoint group, auto and home was really important and you just needed scale.

Are you changing your view of that marketplace?

Do you now think it is really a positive area for you to be in on a broad based way?

Joan, it's Rob.

Let me just comment briefly and then pass it over to Bill Mullaney.

You are absolutely right, at the point in time when we -- going back a few years ago, people said why the auto and home business.

And I talked about it's a strategic value and by the way, auto and home on a group basis continues to be the lead voluntary benefit at the worksite.

It is an extremely strong product and our customers are quite frankly delighted with it.

Having said that, I mentioned then and I would say again that auto and home is like no other -- it is like every other business we have.

It must stand on its own in terms of its financials.

And as you know, going back a few years ago, we had some tightening to do and we did that.

And the way we are managing that business, we are very, very pleased with the financial result.

It continues to be a strong earner for us, but I will pass it over to Bill Mullaney for a little more color.

Joan, I would just add a couple of points to what Rob said.

The first thing is that the group business is a significant business for us in auto and home.

It represents about a third of our revenue, and so it does help us from a cost perspective and from a scale perspective, and so it is critically important in terms of the overall performance of the business.

Then secondly, from a sales perspective, auto and home, because it is a voluntary product for us, does allow us to get into customers that we have no relationship with.

So oftentimes auto and home becomes the first product that we create a relationship with the customer and that often leads to the sale of other voluntary products as well as other core institutional products.

So we continue to add new corporate customers.

We have close to 2,000 employers that offer auto and home to their employees with over 13 million eligible employees for that business.

So it's a strong business for us and we're very excited about what we think it can do for us in the future.

Great.

And my follow-up question really relates to how we should be looking at book value.

We've traditionally looked at book value excluding realized gains and losses, excluding the AOCI, and that was because for years it was pretty simple.

It was just the unrealized gains and losses on the bond portfolio.

But things have really gotten a lot more complicated these days and you've got these big derivative swings and potentially you're going to have pension swings coming in as well through AOCI.

And I guess my question to you is are we really looking at a balance if we exclude AOCI to your balance sheet, or are we giving credit in one space because of the assets and the benefit on the assets and liabilities that the hedging is offsetting, but taking away the cost of that balance or that benefit because we ignore the AOCI?

And can you just tell me why you think we should or should not continue to look at book excluding AOCI?

That's a heavy question.

I'll give you my two cents.

You guys obviously can look at what you want to look at, but most of our -- I think that's kind of a natural question to ask given what's happened to us or what we've done the last two quarters.

But remember, the last two quarters are pretty aberrational.

We've done a lot of repositioning -- we normally don't do that.

We normally -- I don't want to say we're just buy and hold guys, but I would say the turnover in our portfolio in the last two quarters has been high, higher than we would normally expect.

So with regard to realized gains and losses and letting those kind of flow through and so that's a little unusual.

Most investors buy a bond -- or most insurance companies buy a bond, they hold it against the liability and they hold it for the duration more or less.

So fluctuations in interest rates should affect both the liability and the bond.

The problem with AOCI of course is we only mark to market the assets, we don't mark to market the liabilities and that's not my fault.

That's U.S.

GAAP accounting.

So that's probably why I would ignore it.

The other thing too, Joan, to just put it in perspective, we did have a large derivative loss and we've talked about it and we always point those things out to people this quarter.

You don't have to go back very far to really I think the second quarter of last year when we had a $350 million pretax -- I think it was about that -- pretax gain in the derivative portfolio.

These things do swing and from time to time and of course some quarters there's nothing.

So my own opinion is we're looking at it the right way which is pull it apart.

We just live in a world today where some parts of our activity goes through the P&L, some parts of our activity goes through AOCI and some parts don't get marked to market at all, including, by the way, our equity real estate.

So I guess you'd say that's why this is how you would add value, you get to puzzle through all this with us and try to make it clear for investors.

Thank you.

Saul Martinez, Bear Stearns.

I wanted to drill down a little bit on the decline in expenses in the quarter.

The decline was pretty dramatic on both the individual and the institutional side.

And you highlighted some of the non-recurring items of higher Travelers integration costs of $13 million, I think you highlighted $16 million of other non-recurring items there.

But if I look at the direct and allocated expenses in institutional it declined $70 million in the quarter, 430 to 360; the individual declined about $65 million from 410 to 334.

Can you talk a little bit about -- more explicitly about what drove that?

Is it really just seasonality or is there something else there?

And just kind of on a related question, does that say anything about how you're doing relative to the initial cost save guidance you gave with regard to the Travelers acquisition?

I'll start with that and then I don't know if maybe some of my colleagues may want to jump in and opine as well.

It's hard to generalize about our expense performance because obviously there's a lot of different things that go into it.

Yes, there's seasonality.

Yes, when you do a comparison versus the fourth quarter, not only did we have higher Travelers integration expenses in the fourth quarter versus the first, so that causes a thing.

But we also just had generally high expenses in the fourth quarter.

We did a lot of spending in the fourth quarter and I think I highlighted some of that last quarter, especially in areas like international.

And we did that spending, frankly, because we thought it was appropriate and the timing was good, but it just makes the comparison a little -- but it was somewhat discretionary last quarter and so it makes the comparison even more stark.

I would just say if you look at our efficiency, we are realizing the benefit of the Travelers efficiency and that's showing up in the numbers.

Is it greater than it was before?

That will just be a hard thing to prove one-way or another.

It's going well, I can tell you that.

And we still have some former Travelers employees who are in the process now.

They worked with us through the transition and we paid them for that, but now they're eventually going to be moving out.

And so that's a large part of it.

I don't know, anybody else want to add to that?

Not really?

Okay.

Sorry, I wish we could give you a little bit better color than that, but it's --.

But I guess, Bill, if I look at it compared to the third quarter, it's a pretty similar kind of decline, the third-quarter direct and allocated expenses aren't that dissimilar from what you had in the fourth quarter.

So I assume there was more discretionary spending, but even compared to what we've seen in the second half of last year it seams like it was a pretty steep decline.

It is.

I will tell you, you've got to unpack that analysis a little bit.

There's a lot of Travelers spend in the third quarter, a little less in the fourth, a lot less than the first.

There was a lot of fairly discretionary spending in the third and fourth quarter of last year, especially a lot in the fourth, not too much in the first.

And then so that's swinging it a lot and then there's seasonality.

And then yet another real reason, which I think I alluded to before, is when we plan -- we built our plans for '06 we said we've got to tighten up spending with regard to people, with regard to IT spending, with other things.

We knew we were going to do that and we built that into our plan.

So, I will tell you just to make sure it's clear to everybody, we've said this a couple of times.

We do see expense levels growing later this year and we would normally have seen that in our plan.

And now I think we're contemplating some additional spend over and above plan because of how we feel about the year generally.

I don't know, does that help?

Yes, that's helpful.

Thanks a lot.

Suneet Kamath, Sanford Bernstein.

I just wanted to go back to the universal life sales and the IOLI issue.

I just want to understand, is it pretty obvious to you when you see a policy that it's destined for the IOLI market and is it just the kind of thing that you know right off the bat or how do you figure that out?

And then second -- I don't know if you can do this -- but I was just kind of curious if you can give any kind of a sense in terms of how much of this business is being done.

Is it out of ten policies that you see do you think it's five or two or eight, just to get a sense of is it getting much bigger of an issue for the industry?

Thanks.

This is Rob.

I would say the first part of your question, it's only obvious if you're looking for it through a microscope every single day.

So that when you're underwriting business you're looking at where it's coming from, the characteristics, the age, the way it's financed, so forth and so on, and so you look at it very, very closely.

And relative to our business, as Lisa had said earlier and so did I, we're only interested in writing business that's appropriate.

We think there's some danger out there in terms of business that is written for the purpose of subsequent sale and we don't want that on our books.

I think generally out there in the marketplace there's increased activity in this area.

All I can say is there may be carriers who may not have picked up on this.

It's conceivable it can get into your business and you're not even recognizing that that's occurring to you.

So we're very, very strong on our feelings and our opinion about this.

We're here to add value to policyholders that are concerned about their obligations and their families and not particularly interested in really being set up for subsequent arbitrage by third-party investors.

I hope that answers your question.

Yes, it does.

Can you reject a policy based on how the premium is paid, meaning if it's financed or if it comes from the actual individual?

Is that a reason to cancel a policy?

There could be any number of reasons to reject a policy.

We make decisions whether we're going to accept this business every single day.

And as I know you know, we have an intense compliance process here that looks at every single piece of business that we put on these books because that's what we need to do and that's what we'll continue to do.

I think that's it.

Thank you very much, everyone, for calling in.

We appreciate your interest and we will talk to you next quarter.

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