大都會人壽保險 (MET) 2006 Q2 法說會逐字稿

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  • Operator

  • Welcome to the MetLife second-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 and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

  • As a reminder, today's 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 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 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.

  • Tracey Dedrick - Head of IR

  • Good morning, everyone.

  • Welcome to MetLife's second-quarter 2006 earnings call.

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

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

  • We've reconcile these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplements, both of which are available on our website at www.MetLife.com 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 investments, related gains and losses which can fluctuate from period to period and may have a significant impact on GAAP net income.

  • Joining me this morning are Rob Henrikson and Bill Wheeler.

  • After our brief prepared comments the executive management team will be very happy to take your questions.

  • And with that I'd like to turn the call over to Rob Henrikson.

  • Rob Henrikson - President, COO

  • Thank you, Tracey.

  • Good morning, everyone, and welcome.

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

  • We're very focused on the opportunities ahead and this quarter is a good indication of the kind of performance of which MetLife is capable.

  • In the second quarter operating income was $982 million, up approximately 13% over the second quarter of '05.

  • In addition, the growth in our top line was 11%.

  • This quarter again validates the success of the Travelers acquisition; it has been nicely accretive to earnings and we are maintaining the annuity sales momentum in the Travelers' channels that we saw in the first quarter.

  • As always, Bill Wheeler, our CFO, will provide you with a detailed overview of our quarterly financials in a moment; but first I'd like to offer some performance highlights and talk about some of our initiatives.

  • This quarter institutional business once again delivered exceptional results setting another record for earnings.

  • Institutional recorded $453 million in post tax operating earnings, up 31% over the prior year period.

  • Favorable results in our group life and non-medical health segments, continued strong investment results and growth from the Travelers acquisition in retirement and savings, and excellent persistency across all products were the main drivers behind the results.

  • In addition, we continue to manage our expenses well across all segments.

  • In the group life segment where we continue to grow market share performance was particularly strong.

  • Second-quarter claims experience was exceptional.

  • In fact, we recorded our lowest mortality ratio since becoming a public company.

  • While we typically expect second-quarter results to be seasonably better than the first quarter, results were even better than our expectations.

  • I would point out these results were achieved despite further yield curve flattening with somewhat depressed interest spreads.

  • Earnings in our non-medical health segment were also excellent.

  • We recorded post tax earnings of $93 million, up 72% versus the year ago period and a record for non-medical health.

  • We are particularly pleased that the result was based on strong performance across all products in the segment.

  • As I mentioned last quarter, the operating environment in non-medical health for 2006 business has been challenging, given the relatively low quote activity and aggressive pricing in certain markets.

  • As you know, we manage our business for the long-term, affectively growing our business in this competitive marketplace while maintaining pricing discipline.

  • The results of this focused discipline can be seen in our record earnings and reasonable topline growth.

  • Looking forward to 2007 we are seeing new business quote volume return to more normal levels.

  • While it is still early to tell how 2007 closing ratios will develop, we're encouraged by the level of prospect activity.

  • While discussing 2007 I thought I might take a minute to mention a notable voluntary insurance program sale with you.

  • During the quarter MetLife was named one of the national carriers for the new federal employee voluntary dental program.

  • That program will be effective for 2007.

  • We are thrilled to be able to further extend our relationship with federal employees.

  • Turning to retirement and savings, operating earnings were strong at $221 million, up 6% versus the year ago period.

  • The results reflect continued asset growth, including growth from the Travelers acquisition, and solid investment performance, although spreads were below the extraordinary level in the prior year quarter.

  • Our investment spread, however, compared to the first quarter improved to 150 basis points and this was the top end of the range we discussed with you last December at investor day.

  • During the quarter we sold what remained of our 401(k) recordkeeping business made up of various small business blocks.

  • We expect that this transition will close in the fourth quarter of 2006 subject to regulatory approval.

  • The transaction will allow us to even more affectively focus our resources on the greater market opportunities to help companies and individuals plan and manage investment and longevity risk.

  • Results in the retirement and savings segment reflect a charge for certain costs associated with this transaction which Bill will discuss with you in a few moments.

  • Individual business recorded another excellent quarter.

  • Operating earnings were $353 million for the quarter, up 22% over the second quarter of 2005 mostly as a result of the Travelers acquisition.

  • Investment spreads have remained strong and mortality was slightly better than expectation.

  • The performance in the annuity business was exceptional with earnings once again surpassing $200 million.

  • Total annuity premiums and deposits increased nearly 70% from the prior year period to a record $4.2 billion.

  • Annuity sales through the affiliated channels have been growing steadily since the third quarter of 2005 while annuity sales through our independent channels during the first six months of 2006 were very strong.

  • I'm happy to add that when looking at MetLife and Travelers' combined sales in the year ago quarter prior to the acquisition, our total annuity sales were 14% higher, demonstrating our successful integration of the acquired distribution channels and the timely introduction of new products and riders.

  • Sequentially our annuity premiums and deposits increased 10% as productivity continues to increase in our key independent relationships and in our agency salesforce.

  • As expected, we introducing a new lifetime GWB rider in June and anticipate growing sales in the second half of the year.

  • Life first-year premiums and deposits were up 35% from the year ago quarter primarily driven by the Travelers acquisition.

  • Sequentially life first year premiums and deposits were down 7%.

  • As I mentioned in the first quarter, the life insurance marketplace remains very competitive and our results reflect that environment and our commitment to appropriate and profitable sales.

  • Auto and home recorded very strong performance this quarter.

  • The strong results were driven by excellent underwriting results including lower auto claim frequencies; lower than expected catastrophe claims and a favorable development of prior year reserves.

  • While we are growing earned exposures in both auto and home, this is being offset by an increase in our reinsurance premium causing our top line revenue to be slightly down from the prior year.

  • Auto pricing for the industry continues to become more competitive.

  • Overall operating profits were $99 million, just shy of last year's second-quarter record earnings of $101 million.

  • Finally, our international business continues to show strong performance led by Latin America and the Asia-Pacific region.

  • Operating earnings in international of $62 million were up almost 22% year-over-year -- a good, solid quarter.

  • Sales were up 5% over the previous quarter led by Japan which had strong sales once again of both variable and fixed annuities.

  • In addition, deposits for the quarter were $1.3 billion, about a 4% increase over last quarter.

  • While we're seeing the competition from domestic insurers intensifying in Japan, we are maintaining our 12% marketshare and, as we mentioned previously, we are expanding our distribution network and increasing sales support to drive additional sales in Japan.

  • Persistency in Mexico in both institutional and individual business remained strong.

  • Expenses in international are moving toward budgeted levels now and we expect to be on track for the full year with our plans for investing in international's growth.

  • Looking ahead we continue to focus on even stronger 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 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 Wheeler - EVP, CFO

  • Thanks, Rob, and good morning, everybody.

  • MetLife reported $982 million of operating income for the second quarter or $1.28 per share.

  • This is our second-best quarter ever and a 9.4% increase over the second quarter of 2005.

  • For the first half of 2006 our operating EPS is $2.61 and our return on average equity is 15.5%.

  • Because of our strong performance in the first half of the year, we expect to exceed our previous earnings guidance of $4.55 to $4.75.

  • However, given that we revised guidance just last quarter, we do not intend to update guidance at this time.

  • As a matter of policy we don't want to get in the habit of truing up guidance every quarter.

  • Now I'd like to turn to our detailed financial results.

  • Starting with topline revenues, which we define as total premiums, fees and other income, they were $8 billion in the second quarter; this is an 11.3% increase over the second quarter of 2005.

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

  • Individual business topline revenue grew by 22.1% this quarter with strong performances from annuities up 72% and variable and universal life up 40%.

  • Institutional business topline revenue grew slightly this quarter over the prior period.

  • Solid growth in non-medical health was offset by slower reported growth in group life and the decline in retirement and savings revenues due to lower structured settlement sales.

  • Group life revenues were up 3.4% this quarter reflecting the impact of favorable experience on participating business.

  • Adjusting for these experience based changes in participating business, revenue growth would have been approximately 6% which is quite good.

  • International topline revenue grew by 47%; again, the Travelers acquisition caused some of this growth, but our Mexican and Korean operations continue to turn in strong performances.

  • In reinsurance RGA's revenue grew by 14.7% which is an excellent result.

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

  • In institutional, as Rob mentioned earlier, group life mortality was at a record low of 88.1%.

  • In individual business mortality was 85.1%, relatively flat when compared to the year ago period.

  • But if you recall, last quarter's individual mortality was 94%.

  • At the time we felt that this result was an aberration and this quarter's results bears that out.

  • Also this quarter we completed our review of certain Travelers' policies with regard to the establishment of an excess mortality reserve which we discussed in the fourth quarter of last year.

  • As a result we have decided to increase the reserve above our initial estimates and this resulted in a $21 million after-tax charge for individual business.

  • Turning to auto and home, we had another excellent quarter with an 87.9% combined ratio including catastrophes.

  • This was due to continued lower than expected auto claim frequency and a prior year accident reserve release of $21 million after-tax due to favorable claims development.

  • In international an increase in reserves due to poor mortality results in Brazil was partially offset by positive reserve adjustments in Mexico.

  • The net effect was a $9 million reduction in operating income.

  • 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 second quarter variable investment income, net of DAC, other offsets and taxes, was $64 million or $0.08 higher than our baseline.

  • This result was driven by higher corporate joint venture income.

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

  • With regard to our key investment spreads, annuities had another strong quarter at 262 basis points.

  • And although group life and retirement and savings spreads are lower than the year ago period, they are coming in at expected levels.

  • Moving to expenses, our operating expenses were up 5.6% this quarter to $2.4 billion as compared to the first quarter of '06.

  • Included in these results are $10 million of after-tax Travelers' integration expenses, an $11 million after-tax charge for costs related to the sale of certain small market recordkeeping businesses in retirement and savings, and a $12 million after-tax reduction in a post-retirement benefit liability for certain New England employees and individual business.

  • Turning to our bottom-line results, we earned $982 million in operating income or $1.28 per share.

  • A word of caution about calculating a normalized run rate for MetLife and then comparing that number to our consensus estimate.

  • It's clear that several analysts are forecasting that variable income will exceed plan and that higher levels of earnings -- and that higher level of earnings is showing up in the consensus estimate.

  • Also, as we mentioned last quarter, we have incurred some discretionary expenses this quarter and expect that to continue in the latter half of this year.

  • In the second quarter we had net realized investment losses, including offsets, of $524 million after-tax.

  • If you include the related offsets of $129 million and the $30 million gain from the sale of State Street Research which shows up in discontinued operations, the net impact on our bottom line is $365 million or $0.48 a share.

  • Two main factors drove this result.

  • First, we took advantage of higher interest rates and wider spreads during the quarter to reposition certain areas of the investment portfolio to lengthen duration and enhance yields.

  • Only $92 million of the gross investment losses were credit related losses.

  • Second, there were after-tax derivative losses of $233 million.

  • As I have said previously, we use derivatives to hedge economic factors such as interest rates or currency risk.

  • In a quarter like this, with a significant increase in short-term interest rates and a substantial reduction in the dollar versus the euro and the pound, we will see a fairly significant mark to market impact on derivatives that do not qualify for hedge accounting.

  • It's important to remember our economic hedges with corresponding offsets elsewhere in our financial results.

  • Finally, our preliminary statutory operating earnings are approximately $730 million this quarter and $1.6 billion for the first half of 2006, which is excellent.

  • In summary, this was a strong second quarter and a first half for 2006 for MetLife and we are well positioned for the rest of the year.

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

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Jimmy Bhullar, JPMorgan.

  • Jimmy Bhullar - Analyst

  • I just have a couple of questions.

  • First, Bill, on the portfolio restructuring, could you discuss how much is done or is it likely to continue in the third quarter and what sort of a list do you expect on yields or investment income?

  • And then second, you had pretty strong sales in the variable annuity business, but I think there was a special in the quarter.

  • What do you expect for the second half of the year, just qualitatively in the VA business because you did introduce the lifetime income feature in June which didn't contribute in the second quarter?

  • And that's it.

  • Bill Wheeler - EVP, CFO

  • I'll let Steve Kandarian take the investment questions and Lisa Weber on the variable annuities.

  • Steve Kandarian - EVP, Chief Inv. Officer

  • Jimmy, this is Steve Kandarian.

  • As Bill mentioned, we did a fair amount of repositioning in the second quarter.

  • We don't think there will be nearly as much in the third quarter.

  • Let me just tell you a few of the reasons why.

  • Similar to what we did in the second quarter related to credit sales, I'll give you a couple of examples.

  • Avoiding LBO risk in some cases, we're seeing some more buyouts in certain sectors of the economy.

  • Another is reducing some exposure to overheated parts of the housing market.

  • Other reasons, we did some repositioning in the second quarter related to duration lengthening.

  • The ten-year was up about 30 basis points over the quarter.

  • In addition, there were spreads that gapped out about 10 or 20 basis points over that same period of time.

  • So we made some relative value calls and did some duration lengthening in the second quarter.

  • So I think most of what we're talking about in terms of repositioning is behind us.

  • I'm not saying we won't do any in the third quarter, but I anticipate it will be less than the second quarter.

  • Lisa Weber - President, Ind. Bus.

  • To respond to your questions on the annuity side, we had a -- first of all let me just say that we are thrilled with our annuity results.

  • So we have really strong results and what we showed in Q2 is that we captured 100% of the TLA business while also growing to another MetLife investor's portion of the original business as well.

  • So we're really pleased with that.

  • To your question about bonus specials; yes, we had a bonus special that ran through mid-June on the independent side and that really went away as we rolled out the lifetime withdrawal benefit which we're really excited about it.

  • And we have begun to see sales there since we rolled out the new product.

  • We've had $60 million in sales already and we're not even rolled out in major states like New York, New Jersey and Texas.

  • So much more to come there and we're really excited about that.

  • I think the most important part of this story though is the fundamentals of this business and how strong it is because on the affiliated side we really had blowout results and there were no bonus specials on the affiliated side.

  • What we did on that side of the business is, as you know, we took a strong position with equity index annuities and really did a lot of training for our reps and really saw that business turn around and on the affiliated side pick up a lot.

  • So, more good things to come.

  • Again, I don't want to make this sound easy -- we go out there and we fight for this business every single day and we'll continue to do that.

  • Jimmy Bhullar - Analyst

  • And the $60 million [net], those are just lifetime income benefit sales, right?

  • Lisa Weber - President, Ind. Bus.

  • (multiple speakers) Yes, the $60 million is the new lifetime withdrawal benefit rider, again, that's just been rolled out in mid-June.

  • Jimmy Bhullar - Analyst

  • And then just a follow-up for Steve.

  • What sort of a pickup or how much of a pickup in yield or in investment income do you expect from the restructuring that you've done in the first half?

  • Steve Kandarian - EVP, Chief Inv. Officer

  • Let me give you the current quarter.

  • The current quarter we anticipate about 4 basis points on the entire portfolio.

  • We said last quarter 1 or 2 basis points.

  • We're talking about 5 or 6 basis points in total for the year-to-date.

  • Jimmy Bhullar - Analyst

  • Okay, thank you.

  • Operator

  • Tamara Kravec, Banc of America Securities.

  • Tamara Kravec - Analyst

  • Good morning.

  • You'll have to excuse my voice;

  • I'm fighting a summer cold here.

  • If you could talk more about the international operations and how it's going.

  • It's been a year since you've closed on Travelers and your marketshare seems to be stable in Japan and obviously commissions are getting much more competitive there.

  • But I'm curious in your thoughts on Japan and also overall -- plans on growing the business there, what you think about -- how much of the portfolio or of your earnings do you think this operation will be over time and just some strategic insight would be great.

  • Thanks.

  • Bill Toppeta - President Int'l.

  • It's Bill Toppeta, can you hear me okay?

  • Tamara Kravec - Analyst

  • Yes.

  • Bill Toppeta - President Int'l.

  • Okay, because I was having trouble hearing you.

  • So if I answer the wrong question you'll tell me.

  • Let me start with the overall picture.

  • As we've said to you before, the acquisition of Travelers' business outside the U.S. was a little different than the acquisition of Travelers within the U.S.

  • In the sense that in the U.S.

  • Travelers is a complete company -- front office, back office, finance and an so forth.

  • Internationally that was not the case and we knew that going in.

  • So for example, functions like finance, human resources, legal and other back office functions for city insurance internationally, were generally provided by Citigroup so they were integrated with the bank in the various countries.

  • So we are now in the process, as we've said before, of providing back office and middle office in many of those cases where we bought basically a front end insurance company.

  • I would say that process is going well.

  • It's going according to our plans.

  • The infrastructure and the support for customer service are being built and, of course, in the meanwhile we are on transition service agreements with Citigroup which runs for 30 months from the date of the closing, from July of 2005.

  • So we're in the process of doing that.

  • On the specific question of Japan, we do see growth opportunities in Japan.

  • Let me remind you that what we have in Japan is a joint venture in which we only sell retail annuities.

  • That's going quite well for us.

  • We had strong ales, as Rob mentioned, in the last quarter.

  • We are maintaining our marketshare there at about 12% and that's despite much stronger competition from domestic players.

  • And what I would say is we are engaged in planning and discussions now as to how we grow our business in Japan.

  • So we certainly would like to grow it beyond the retail annuity business, but we don't have anything specific to tell you at this time.

  • I hope that's responsive to your question.

  • Tamara Kravec - Analyst

  • Yes, thank you.

  • And then just a question for either Rob or Bill.

  • I guess you could talk about your capital management initiatives.

  • You've obviously put some feelers out for some real estate in Manhattan and you have strong statutory earnings, there's nothing keeping you from share buyback at this point.

  • So if you could talk about what your thoughts are on your excess capital position and share buyback and any other capital management initiatives in the hopper for this year?

  • Thanks.

  • Bill Wheeler - EVP, CFO

  • Sure, Tamara.

  • Well the capital situation is I would say rapidly improving.

  • A couple things.

  • Our is our leverage ratio -- I would say rating agent agency leverage ratio -- not the one we published in the QFS but the one -- using the rating agency formula, at least under their old methodology, ticked down again.

  • It was 26.1% this quarter, that's from 26.7% last quarter so that was a nice tick down.

  • That's right on track to where we thought it would be.

  • Statutory earnings for the first half, you heard, they're very strong.

  • I'd caution people, you shouldn't just take that statutory number, $1.6 billion times two.

  • Statutory earnings are lumpier than that.

  • But we'd expect to come in a little below $3 billion in terms of statutory earnings which is excellent.

  • And that's putting us I think in a good position in terms of generating cash flow from our businesses keeping enough capital to grow but at the same time building capital up in our holding company for other capital purposes including buyback.

  • I assume we're going to get more questions about the potential sale of Peter Cooper [Stuy] Town later.

  • We're still evaluating our options there, but I would just say that on the horizon also obviously would be a very positive capital event for us.

  • I think all these factors are sort of conspiring to make us think that where I think our previous assumption was that we would not begin buybacks until the beginning of '07.

  • My expectation now -- or I think it's certainly possible that we'll start going back into the market earlier than that depending on how things turn out later this year.

  • I would say that if we do that we'll make a public announcement before hand and that we're artificially in the buyback market.

  • But things are looking quite good.

  • Tamara Kravec - Analyst

  • Okay.

  • And any thoughts in that vein tying into the fact that it's been a year for Travelers now and obviously you keep capital for more than just buyback, the acquisition pipeline and anywhere you think you're missing scale that there might be an opportunity to be set up?

  • Bill Wheeler - EVP, CFO

  • I think I heard your question and I think it's is there anyplace else that we might want to make acquisitions to build scale.

  • I think our standard answer applies here which is that we look at everything that's available and if we think something is appropriate and can build value and make sense for us strategically we'd pursue it.

  • As Rob often mentions and maybe he'll care to comment -- financially we're very quickly getting back into that position.

  • Operationally I think we are as well.

  • Rob Henrikson - President, COO

  • Yes, I would add to that and Bill's correct in remembering, as we all do, the way we think about business in general.

  • I would just add that we don't look at M&A opportunities in a lumpy way.

  • Our office is constantly open, we're constantly having discussions between the businesses and our M&A people in terms of what our business plans are, what our desires are, the best use of capital, attractive opportunities and so forth.

  • So it's part of our ongoing management style.

  • We have demonstrated I think strong capabilities here.

  • And that covers the entire spectrum which would include, as I've mentioned many times before, certainly tuck ins in some of our businesses where we can buy blocks of business as opposed to total companies.

  • But we're constantly on the lookout for ways to grow our business in the way that makes the most sense from a shareholder point of view.

  • Tamara Kravec - Analyst

  • Great, thanks a lot.

  • Operator

  • Ed Spehar, Merrill Lynch.

  • Ed Spehar - Analyst

  • Good morning.

  • I had two questions.

  • First, on the annuity business, it looks like account values were up a little bit -- average account values were up maybe 1% sequentially.

  • But I think the earnings, if you adjust for unusuals in both the first and the second quarter, were down 10%.

  • So first of all, is my math close and, if so, could you explain why that's the case?

  • And then on the portfolio repositioning, the basis point improvement I think suggests about a $0.15 per share operating EPS benefit from your portfolio repositioning -- the number that you threw out of $0.15.

  • I was wondering if you could give us just qualitatively some sense of how much of that boost would you consider to be economic improvement versus how much of it's just a function of you realize the loss today and then you're offset by higher operating income tomorrow?

  • Thanks.

  • Unidentified Company Representative

  • Ed, it is Eric.

  • With respect to annuities, if you think about it sequentially, we had a fabulous first quarter.

  • So versus our plan we're actually ahead through the first half of the year.

  • The difference is we had very high variable income in the first quarter and in the second quarter we had almost no excess variable income.

  • In addition, in the first quarter of 2006 we had extremely low expenses which is fairly normal for us.

  • In the second quarter those expense levels are back up to where we think they usually run in the second and third quarter levels.

  • And I expect in the third quarter that those expenses will probably blip up a little bit more.

  • So that's basically the difference between the first and second quarter in annuities.

  • But the second-quarter annuity results, normalizing for the still over $200 million, is a very good result for us and ahead of our plan.

  • Bill Wheeler - EVP, CFO

  • Ed, it's Bill Wheeler.

  • With regard to the investment portfolio repositioning, how much of it is real value added -- I mean, a couple things you've got to keep in mind here.

  • One is what we're doing in many cases, you heard Steve's explanation about repositioning out of some credits into others and of course that's always good to do and prudent.

  • And that's driving some of it and it just so happens given where interest rates are today versus when we bought the bond that's a help, that's one.

  • Two is, remember, we've lengthened duration here and that really can't be discounted.

  • A couple quarters ago our assets versus liabilities, we were short a couple 10ths of a year relative to the liabilities and now we're long a couple 10ths.

  • And that in and of itself should drive higher investment income even in a flat rate environment.

  • And then finally, and I haven't really tried to quantify this but I guess we could, is remember when you take these kinds of losses because you're sort of accelerating losses, you're providing a tax shield.

  • The tax shield here is over the last couple quarters would have been on the order of magnitude of $400 million.

  • Just the float on that extra $400 million for a couple years is a lot of extra value.

  • So I think this is smart to do.

  • I think, frankly, it's right to do given where we are in the interest rate cycle.

  • I'm glad we did it because frankly long-term interest rates have now ticked back down a little bit.

  • There was a window there and we kind of moved through it.

  • So I think this was an appropriate activity.

  • Ed Spehar - Analyst

  • Thank you.

  • Operator

  • John Nadel, Fox-Pitt, Kelton.

  • John Nadel - Analyst

  • A couple quick questions.

  • One would be on the life insurance side.

  • We're seeing good momentum on the annuity side, but you mentioned continued market competition, competitive pressures on the life insurance side.

  • And I just wonder if -- is the current level of sales more an appropriate run rate?

  • And if so, is there some opportunity to continue to reduce the size and scale of the infrastructure to gain some additional operating leverage?

  • Lisa Weber - President, Ind. Bus.

  • Hi, John, it's Lisa.

  • Let me just reiterate a point that I made last quarter which is that we will continue to put the right business on our books.

  • And we're very comfortable that we're doing that and we're taking the right risk.

  • And the other aspect of that is not just with respect to the IOLI business.

  • As we all know, we've taken a very strong industry position on the fact that we believe the IOLI business isn't even the life insurance business.

  • But really in addition to that, the fact is that we are not aggressively priced in the older age market, nor do we intend to be.

  • So that's just kind of one overarching comment.

  • What I would say in terms of our life sales in addition is that, as you probably know, we sunset the Travelers product.

  • So as a result of that change in anything we always see impact our sales, at least in the shore run.

  • And it takes brokers a while to get used to new software, new applications, a new service model and so on.

  • So we believe that the Travelers aspect is behind us and now that those products are sunset.

  • What I would also say is really two other points.

  • One is what gives us a lot of confidence is the confidence that we've been given on the independent side by some of our core carriers who have reaffirmed us in terms of our four carrier status for the next 12 months and that shows a really great vote of confidence.

  • And then the final piece is that we spend a lot of time as a management team looking at our life insurance strategy as we go forward.

  • And we made a number of changes in our strategy that we will see the results of over the next several months -- we'll begin to start to see the results.

  • And some of those changes -- we went to the Swiss Re manual for substandard cases that 70% of the industry is using.

  • So before -- up until April we weren't using the Swiss Re manual.

  • The other change that we made is we've made some changes to our preferred underwriting guidelines with respect to height, weight, health, tobacco.

  • We also had as of April some new foreign travel guidelines as well.

  • So all of these changes will I believe impact our sales positively.

  • John Nadel - Analyst

  • So I guess if I could summarize that maybe to put it in my words and you can tell me if I got it right.

  • So we should see sales pick up from this level.

  • Some of it's just been sort of timing and transition issues.

  • And then, no commentary I guess around the expense level.

  • So should I expect that expense levels remain here?

  • Lisa Weber - President, Ind. Bus.

  • What I would say is, just to respond to your summary, is that I think that's all right.

  • And I would just say that this takes time.

  • This is a business that we're going to be here for the long haul and we're going to continue to see it take time.

  • But we believe that we're set up positively and we also believe, most importantly, that the fundamentals of this business are really solid.

  • Unidentified Company Representative

  • John, I would just add to your infrastructure comment.

  • We're reevaluating this business on a daily basis.

  • We've put a lot of work into figuring out the profitability over all, the mix between sales and expenses.

  • Both Mike Farrell and Mike (indiscernible) management team spend a lot of time on this.

  • So as we see the level of sales stabilize here going toward we're constantly trying to figure out the appropriate level of infrastructure.

  • You've seen our expense discipline over the last couple of years and that will not change going forward.

  • John Nadel - Analyst

  • Two quit follow-ups just on expenses sort of overall.

  • One, I believe the original target for expense saves from the Travelers organization or Travelers acquisition was targeted about $150 million.

  • Can you give us a sense for where you stand relative to that target currently?

  • The second thing just following up, Bill, on your commentary from both last quarter and earlier on this call.

  • You said that higher variable income, you would take the opportunity to accelerate some spending, discretionary spending, some of that through the second quarter we can expect a little bit more for the remainder of the year.

  • Can you give us a sense for approximately what level of higher spending you expect at this point?

  • Bill Wheeler - EVP, CFO

  • To answer your first question, we've talked about $150 million of expense saves -- I think the answer is we've comfortably achieved that.

  • We've probably done a little better, not wildly better but a little better.

  • Now it's getting very, very difficult to pull the two organizations apart.

  • That's the downside of integrating them so completely.

  • In terms of the question about discretionary spending, it's always kind of a hard call to put a number to that and so we chose not to this quarter.

  • It's clear we had some.

  • Order of magnitude I would've put it at about 10 to $15 million.

  • It's always hard to call what's discretionary versus just what you wanted to do.

  • And then second, in terms of the second half of the year, I think sort of at that same kind of level is probably -- for each quarter would be a good rule of thumb, maybe even a little higher.

  • John Nadel - Analyst

  • Okay, thank you.

  • Operator

  • Colin Devine, Citigroup.

  • Colin Devine - Analyst

  • Good morning.

  • I had a couple of questions.

  • The first is on variable annuities I guess for Eric.

  • Can you just flush out a little bit more what caused such a very large jump in the expense line for that?

  • It was obviously substantial.

  • If we could also then just get some sense -- mortality was nothing short of spectacular this quarter in both group life and individual life.

  • What sort of normalized run rate -- if you can give us any sort of updated guidance on that it would be very helpful?

  • And then with respect to the continued repositioning of the investment portfolio, is that pretty much done now or not?

  • Obviously I certainly appreciate why you're doing it, I appreciate extending the duration, but this is really starting to chew in the book value development at this point and I just wondered are we done?

  • And since nobody else has asked, maybe you can give us a bit more of an update on where you stand on selling off the real estate property in New York?

  • And lastly, just to be clear, Bill -- and I was surprised to hear you say you might be back buying in stock at the end of the year -- where do you stand -- I guess under the rating agency's measures on your debt to cap at this point?

  • Bill Wheeler - EVP, CFO

  • Okay, I'll take my share of those, but everybody can fill in.

  • Let's see, I'll start with mortality because that's kind of a big picture question.

  • Individual mortality wasn't spectacular; it was good if you ignore the excess mortality true-up or debt reserve true-up.

  • It was good but it was I would say very normal frankly.

  • Sort of a mid-80's mortality ratio and that's sort of what we normally have.

  • It's better than last quarter but I would say just back to normal.

  • Group life mortality was extraordinary; it was clearly our best quarter ever.

  • I've been pressed a little bit to say what's the normal number.

  • That's really hard to call.

  • I think we talk about in our investor day or we have at times talked about a mortality range of 90 to 95.

  • We hit 88.1 this quarter; we have been in the 89's in other quarters in the last couple years.

  • So it's hard for me to pick a number there.

  • I don't think it's going to be 88 next quarter, but it should be a -- but we generally think mortality in that book of business is trending well right now.

  • So maybe it won't be 88, but we expect it to be pretty good.

  • That's sort of the mortality question.

  • With regard to -- I'm already drawing a blank on some of your other questions.

  • I'll let Steve talk a little bit about what's going on with investments.

  • Steve Kandarian - EVP, Chief Inv. Officer

  • As to the portfolio repositioning, as I mentioned earlier, we anticipate less of this in the third quarter, but again, I can't say there will be none of it.

  • A lot is driven by our view on credit and various risks in different sectors of the economy.

  • I think I mentioned the LBO risk which is becoming a bigger factor in the bond market.

  • So if we see things happening then yes, we'll make some adjustments in our portfolio and that may result in some gains or losses based upon what interest rates are at any point in time.

  • The reason I don't anticipate as much in the third quarter is that rates did bounce up there for a while and we took advantage of that.

  • As Bill mentioned, rates have settled back down and unless rates were to turn back around and go back up appreciably I wouldn't see us making as many trades in the third quarter as we did in the second.

  • Now another caveat just so you have some comment time.

  • We do have needs for raising capital for things like dividends and so on, just normal course of business.

  • And the timing of that can get lumpy over the course of a year and there could be times within the year where we'll be making some sales based upon those kinds of capital needs.

  • Regarding Peter Cooper Stuy Town, what we said there is we're looking at our strategic alternatives and we're a buyer of real estate obviously, we have a real estate equity portfolio.

  • But we're finding it very difficult to do much buying this days because prices are so high and cap rates are so low.

  • So the flip side of that discussion is that maybe now is a good time to do some testing of the market, see where things are.

  • We don't know what we'll be doing here, it could result in some joint venturing, it could result in partial sales, it could result in a total sale.

  • There's nothing at this point on the boards.

  • We're simply exploring our alternatives.

  • And over time we'll find out what those alternatives are and we'll make a decision at that point in time.

  • Bill Wheeler - EVP, CFO

  • Before I let Eric talk about expenses and variable annuities maybe I'll talk about buybacks for a second.

  • I think we're in good shape with the rating agencies.

  • The rating agencies leverage ratio as we measure it, and this gets confusion because there's about five ways to measure it.

  • But using the formula we were basing our whole leveraging discussion on.

  • Where we thought we needed to get the 25%, at the end of the quarter we're at 26.1.

  • We've ticked down nicely; we're in good shape there.

  • And so I'm sort of making those comments as my comments about the potential for buybacks later in the year.

  • I think the way we're trending and where we are with the rating agencies we're in good shape.

  • We're back to stable with Moody's and they've sort of given us some new parameters under which they expect us to operate and I think we're going to be comfortably in those parameters.

  • Standard & Poor’s and best we're still on negative outlook, but I'm hopeful that those will be resolved positively very shortly.

  • They were sort of waiting I think to see how the second quarter turned out, which I think it turned out okay.

  • And so I think we're in good shape, Colin.

  • I feel pretty good about that.

  • And then finally?

  • Unidentified Company Representative

  • I think this is the last one.

  • It is Eric, Colin.

  • One quick comment on mortality.

  • Bill referenced on the individual side the mortality ratio that's in the QFS.

  • As you all know, that ratio includes the closed block and the vagaries of how that ratio moves can end up looking like in the first quarter very bad.

  • You saw a huge spike in that ratio and yet the net hit to earnings wasn't that much.

  • So cutting through that ratio we do in fact, as Bill said, expect it to be around the 85% level.

  • But more importantly, pulling out the closed block, what really hits earnings, as Bill said, we were slightly above so we slightly exceeded our mortality expectations.

  • But all things being equal that is where we expect that ratio, the 84 to 86% area.

  • Finally, annuity expenses.

  • As I've said many times, our seasonal expenses we usually see -- we have for the last three years seen a healthy blip up in those expense first quarter to second quarter.

  • Invariably we see a lot higher IT spending.

  • We see higher prospectus printing bills.

  • Across the board we tend to see higher travel in the second quarter.

  • And we are pretty good now at calling out all the one timers so we can understand our general spending patterns.

  • And this second quarter is very typical of what we've seen over the last three years and right where we expected expenses to be in the annuity business.

  • Colin Devine - Analyst

  • Okay, Eric, thanks.

  • One quick follow-up.

  • The VA loss rate has been steadily ticking up the last six quarters.

  • Do you have any comment on that?

  • Lisa Weber - President, Ind. Bus.

  • It's Lisa.

  • The lapse rates -- Travelers is obviously in those numbers and we're now in the -- this is the final grading in of Travelers now and so that is behind us.

  • The other is that the majority of the increase was on one big case.

  • It was as we it's active.

  • It was a case that is much like an institutional account.

  • It was in our MetLife resources 403b business.

  • And that kind of business is lumpy so that's the reason for the lapse rates.

  • We also increased our crediting rates for the third time over the last several months and so that should help as well.

  • Colin Devine - Analyst

  • Okay, thanks.

  • Operator

  • Tom Gallagher, Credit Suisse.

  • Tom Gallagher - Analyst

  • Just a couple of quick questions on capital.

  • Bill, in terms of capital management, aside from the real estate sales, should we be thinking about excess capital in the Travelers subsidiaries as a potential source?

  • That's the first question.

  • And based on stat earnings that you now expect for '06, how much of that do you view as free cash that we potentially will see deployed back into buyback or other excess capital?

  • That's the first part of the question and I have a follow-up.

  • Bill Wheeler - EVP, CFO

  • Okay.

  • Yes, excess capital in the Travelers subsidiaries.

  • The main Travelers subsidiary -- oh, I should make this important announcement, it used to be called Travelers Insurance Company, it's now called MetLife Insurance Company of Connecticut, by the way, MICC in other words, M-I-C-C.

  • That entity -- that's their main insurance entity and it had an RBC ratio in excess of 400% at year-end '05.

  • Therefore in our mind that had a meaningful amount of extra capital in it.

  • Yes, I think that should be counted in our excess capital calculation.

  • I mean overtime that will either get redeployed in terms of business growth or it will get -- some of it will probably get dividended up to the holding company or used for other purposes, but it's there and it's there to be used.

  • So yes, I think that enters into the equation.

  • With regard to kind of free -- given where our statutory earnings are and free cash flow, I think the rule of thumb is we have the ability this year to dividend up about $2 billion up to the holding company.

  • I think we'll be able to do that comfortably and still leave enough capital to the insurance operations to grow and support our growth and also have appropriate capital levels.

  • That's one.

  • So putting 2 billion up to the holding company -- I think I've gone through this exercise before -- but our capital needs at the holding company or cash flow needs at the holding company are sort of ongoing or roughly $1.1 billion, that's interest expense, dividends on the preferred and common and some other operating expenses up their.

  • So order of magnitude that leaves less than $1 billion available for other uses.

  • We'll undoubtedly use some of that money -- we'll put some of that money into our growth subsidiaries internationally, depending on the year and what we're talking about that may not be a lot of money.

  • And then I think the rest is available for other things and that might be buying back stock, it might be a potential acquisition, but it's there.

  • So that's sort of the math.

  • Tom Gallagher - Analyst

  • Okay.

  • And then I guess for either Steve or Bill.

  • In terms of the real estate properties that you're exploring selling, should we expect a lower tax rate on the gain like you've had with some past sales or any guidance you can give us on what we might expect from a tax rate standpoint?

  • Bill Wheeler - EVP, CFO

  • I think the base tax rate will be the same.

  • Maybe what you're thinking of is on the sales last year we ended up doing what's called a 1031 exchange where we did buy another building last year -- which, by the way, has turned out to be a pretty clever thing to do -- by the way.

  • And it's just like when you roll your house.

  • If you sell your house at a big gain and you roll into another house you defer the taxes; if you roll some of the proceeds here into another property in a certain given period of time you can defer taxes on a piece of your gain.

  • There will be a large tax gain.

  • There potentially will be with the sale of Peter Cooper Stuy Town.

  • And so there may be an opportunity to do a 1031, it'll just depend.

  • I mean, it will depend on making sure it's the right deal, but it effectively allows you to buy a property at a much lower price because you get the tax shield.

  • Tom Gallagher - Analyst

  • Aside from the 1031, I guess, A, there's a possibility you may do something comparable here, but I assume based on order of magnitude it's going to be much tougher to move the needle; you'd have to do a lot of investing on the back end.

  • Bill Wheeler - EVP, CFO

  • Yes, yes.

  • And I doubt we're going to do that, but we might do something if we move forward here.

  • It's all very speculative because you have to see what's out there and what makes sense.

  • There might be some potential for some sort of tax yield on a 1031 but not much else to say.

  • Tom Gallagher - Analyst

  • Okay.

  • And then just last question, given I guess the environment as it relates to M&A I guess the commentary you hear more often these days is it's a very competitive market for acquisitions.

  • It's more of a sellers than a buyer's market.

  • Given where your stock is today can you talk a bit about whether you would have a share repurchase versus acquisitions in terms of capital deployment?

  • Thanks.

  • Rob Henrikson - President, COO

  • Colin, this is Rob.

  • One of the things -- and actually the -- I'm sorry, I went out and came back in.

  • Tom, one of the things, and just as a general comment because I understand the focus on capital.

  • Keep in mind that we've moved now rather rapidly from a position of having, because of the acquisition, almost no capital flexibility to rapidly moving to a point in time that we'll obviously have quite a bit of capital flexibility.

  • That probably goes without saying, but I just want to emphasize that during this period of time and going forward we have really an intense focus on what the redeployment of capital will be.

  • It's not a sequential thought like should we do a 1031 exchange, should we buy something, should we do this, that and the other.

  • It's in our constant management of how we manage the business going forward and there are considerable opportunities for us.

  • So first, the question is what are the opportunities for us and then it gets into the finer points like what is the most efficient way to make movements in things like real estate exchanges and so forth.

  • So believe me, we are all intensely focused on this what we view as an emerging opportunity for us that we, quite frankly, haven't had for the near past time frame and you'll be hearing more about that from us.

  • In terms of the buyers or the sellers market, I think that's all over the lot depending on what the type of property is.

  • There are some areas where there's clearly probably a seller's market and others where there's more of a buyer's market because there are less capable buyers.

  • Tracey Dedrick - Head of IR

  • Kent, I think we have time for one really quick question.

  • Operator

  • Eric Berg, Lehman Brothers.

  • Eric Berg - Analyst

  • Thanks very much.

  • I'll just limit my questions to two short ones.

  • With respect to the group life business, you said that -- I think Rob said at the beginning of his comments that, excluding special items or line items that affect the comparison, the top line would have been up 6%.

  • But on page 15 of your supplement we would have a small special exhibit which I think is aimed at getting at that; it shows only 2% growth.

  • Could you reconcile that, please?

  • Again, I'm referencing page 15 of the supplement.

  • Bill Wheeler - EVP, CFO

  • Let me just look at that.

  • Are you thinking 2% sequentially.

  • Year-over-year --

  • Eric Berg - Analyst

  • I am showing 2% year-over-year, Bill.

  • Bill Wheeler - EVP, CFO

  • I see what you're saying.

  • Unfortunately that doesn't -- that's a great chart and we thought it was going to be really helpful once, it doesn't quite give the full picture in terms of -- so you can't quite get -- using that chart can't get quite to 6%.

  • But it's interesting, Eric.

  • The way it works is when we have very good mortality experience on a lot of par cases we share that experience with the customers and they effectively get a dividend on their policy.

  • And for accounting purposes we treat that dividend as a return of premium and that return of premium -- that effectively lowers our net premiums for the quarter and that's sort of what's driving the number down is because our mortality was so good.

  • And then unfortunately that chart doesn't quite capture all the ins and outs the way you'd hope it would, but effectively that's what's going on.

  • Eric Berg - Analyst

  • Last super quick question.

  • Bill, I think at the beginning of your comments -- I think you said we're not raising guidance, but we expect to beat guidance.

  • If I am paraphrasing your comments correctly haven't you in effect raised guidance, isn't' that effectively doing it?

  • Bill Wheeler - EVP, CFO

  • This is getting really deep.

  • Look, I think you could make that inference, but what I'm trying to say is I don't think the $4.55 to $4.75 is a valid number anymore, so I don't want anybody to think -- even though I'm not going to change guidance, I don't want anybody to think that's our current or I'm going to revise guidance, put in new numbers.

  • I don't want anybody to think that we think that's still the right number -- I don't want to imply that to anyone.

  • We struggle with what the right thing to do is here.

  • We really don't want to give quarterly guidance; we think that that's a terrible trap that some management's get into and we don't want to do it.

  • So that's a little bit why we're being a little coy this quarter.

  • Obviously given our first-half performance we're very comfortable that $4.75 or butter is eminently achievable.

  • But beyond that in terms of kind of giving us a new target; again, this gets into how often do you want to chew the number up and we just don't want to do this every quarter.

  • I got your point.

  • Eric Berg - Analyst

  • And I understand your response.

  • That helps a lot.

  • Thank you.

  • Tracey Dedrick - Head of IR

  • Thank you very much for joining us today.

  • We really appreciate it and your interest.

  • We'd also like to thank Con Ed for keeping the lights on in Queens during another heat wave.

  • And with that, Kent, we'll give you some details on the replay.

  • Thank you.

  • Operator

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