大都會人壽保險 (MET) 2006 Q3 法說會逐字稿

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  • Operator

  • 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 maturely 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 would like to turn the conference over to Tracey Dedrick, Head of Investor Relations.

  • Please go ahead.

  • Tracey Dedrick - Head, IR

  • Thank you, Robert.

  • Good morning, everyone.

  • Welcome to MetLife's third-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 will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures.

  • We have reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly finance and supplement, 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's 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.

  • With that, I will turn it over to Rob.

  • Rob Henrikson - President, COO

  • Thank you, Tracey.

  • Good morning, everyone.

  • Welcome.

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

  • In the third quarter, operating income was up approximately 23% over the third quarter of 2005.

  • We are $958 million in operating income on revenues of $8.1 billion.

  • In addition to our excellent results, we recently announced an agreement to sell Peter Cooper/Stuyvesant Town.

  • We're very pleased with the price of $5.4 billion for this exceptional property and expect to close the sale during the fourth quarter.

  • Bill Wheeler will walk you through some of the details related to the sale later on the call along with a detailed overview of our quarterly financials.

  • Turning now to our results.

  • First, institutional business.

  • Institutional delivered overall good results this quarter, recording $390 million in post-tax operating earnings.

  • Across-the-board, the group insurance fundamentals were sound.

  • In the group life segment, earnings were a solid $101 million, although flat to the year-ago quarter and down sequentially as mortality returned to more normal levels from the record low last quarter, although still within the lower end of our guidance.

  • The interest margin, while declining year-over-year, improved sequentially as our spread moved back into the target range after falling slightly short the last two quarters.

  • Reported revenue growth in group life was lower from the year-ago quarter.

  • However, excluding the impact of experience-based change in participating contracts, revenues would've increased by 4.5%, again within our guidance range.

  • In addition, persistency is excellent and we continue to add new clients.

  • Earnings in the non-medical health segment were excellent again this quarter.

  • We recorded post-tax earnings of $88 million, up 29% versus the year-ago period.

  • Sound underwriting across the products in this segment and continued focus on expense management improved margins significantly.

  • In spite of the very competitive marketplace of these products, premiums, fees, and other revenues grew by more than 9% versus the year-ago period.

  • Previously, I mentioned to you that we were pleased with the level of early quote activity we were seeing for the 2007 group insurance season.

  • As you know, we have a substantial market share at the larger end of the market.

  • And because of the nature of that business, there is a long lead-time between sales and their effective dates.

  • As a result, we have insight into a meaningful portion of our revenues for the new year.

  • As we head into the fourth quarter, new business activity for 2007 in the larger end of the market and for that matter even down to 3000 lives has returned to more normal levels after a particularly challenging previous 18 months.

  • While we were still early on in the sales cycle at the smaller end of the market, we were seeing similar increases in quote activity and consequently are optimistic about expected results heading into 2007.

  • Turning to retirement and savings, the segment delivered good operating earnings of $201 million.

  • General account liability balances increased 4.5% versus the year-ago period as we continue to successfully retain and grow assets.

  • And this quarter was particularly strong as liability balances grew $2 billion.

  • Sales of pension closeouts and median annuities and terminal funding agreements improved during the quarter.

  • These results were somewhat offset by lower variable net investment income and spread compression.

  • Turning now to individual, individual business posted strong third-quarter earnings.

  • Operating earnings were $367 million for the quarter, up 11% over the third quarter of 2005 due to business growth, including market appreciation and favorable underwriting margins.

  • Operating earnings in our individual life segments were up 11% year-over-year, driven primarily by good mortality and adjustments to the Travelers excess mortality reserve that Bill will discuss with you in a few moments.

  • Life first-year premiums and deposits were down 32% from the year-ago quarter and 15% sequentially.

  • The environment for life sales in our independent channel continues to be challenging as we stay the course with respect to our stance on the investor-owned life insurance business and we remain disciplined with respect to pricing and underwriting.

  • Annuity earnings are up 11% year-over-year, driven by business growth.

  • Even though spreads are lower than the unusually high levels last year, they remain strong, resulting in annuity earnings above plan.

  • Total annuity premiums and deposits were $3.5 billion for the quarter.

  • Deposits decreased sequentially from a very strong level that was driven by enhanced product offering and seasonality.

  • Annuity sales continued to grow in our agency channel.

  • Our lifetime withdrawal rider has been well-received, both at MetLife and at New England channels.

  • Despite lower sales in the third quarter, we believe we are well-positioned in the marketplace and have excellent expectations for the future.

  • Turning to auto and home, auto and home reported record operating earnings of $107 million this quarter.

  • The strong results were driven by a favorable development of prior-year reserves, lower claim frequencies in both auto and home and lighter-than-planned catastrophes.

  • Though catastrophe losses were lighter than we had planned, we still had substantial losses from hail storms in the Midwest.

  • Earned exposures grew year-over-year with sales growth in non-coastal areas more than offsetting declines in coastal areas.

  • Finally, in international business, we continued to show strong results.

  • Operating earnings were $72 million, up 9% year-over-year.

  • The strong results were led by the Asia-Pacific and Latin American regions.

  • The top line grew 12% over the same period.

  • Annuity sales in Japan of $1.5 billion were up 12% year-over-year and up 27% over the prior quarter on a yen basis.

  • MSI MetLife assets under management climbed to $15 billion in the quarter, and the Company continued to maintain its 12% market share.

  • The results of our Japan operations are recorded as an unconsolidated joint venture, so revenues are not included in our top-line results.

  • In conclusion, this was a strong quarter.

  • We had some challenges with a severely inverted yield curve that caused variable net investment income to decline.

  • But our bottom line is excellent, and I feel good about where we're positioned for the future.

  • I will now pass it over to Bill.

  • Bill Wheeler - EVP, CFO

  • Thanks, Rob, and good morning, everybody.

  • MetLife reported $958 million of operating income for the third quarter or $1.24 per share, which is an increase of 23% over the third quarter of last year.

  • Through the first three quarters of 2006, our operating EPS is $3.85 and our annualized return on average equity is 15% over the same period.

  • Total assets were $516 billion at quarter-end and so far in 2006 have grown at an annualized rate of 9.7%.

  • Also, we recently declared an annual dividend of $0.59 per share; that's a 13% increase over last year.

  • As you know, on July 18, we announced that we were evaluating our options with respect to Peter Cooper Village and Stuyvesant Town.

  • And on October 17th, we announced an agreement to sell the properties.

  • More about this and the resumption of our share repurchase activity later.

  • But, first, I would like to begin by discussing our financial results.

  • Starting with top-line revenues, which we define as total premiums, fees and other income, they were a record $8.1 billion this quarter but only up slightly over the third quarter of 2005.

  • Last year's third quarter, which is when we acquired Travelers, had previously been our highest quarter ever and it made for a difficult comparison.

  • However, as Rob discussed, we are generally pleased with our performance this quarter and believe there are strong prospects for future growth.

  • To put this quarter's performance in perspective, MetLife's sequential growth rate third quarter versus second quarter was 7.2% annualized.

  • Turning to our detailed business results, stronger sales in Korea and Mexico helped international grow top-line revenues by 12% over the year-ago period.

  • Although they are not included in our GAAP revenue results, sales and annuities in Japan were up 12% over the year-ago period on a yen basis -- a very strong performance.

  • In institutional business, solid growth in non-medical health of 9.3% was offset by revenue declines in group life and retirement savings.

  • In group life, as Rob mentioned, underlying revenues grew by 4.5% when you adjust for experience-based changes in participating contract revenues as well as other items in the year-ago period.

  • In retirement and savings, as I've said many times, GAAP revenues can be lumpy and the best way to evaluate the growth in retirement and savings is to look at the balance sheet.

  • In this quarter, retirement and savings general account liabilities grew by $2 billion, which is a 10% annual growth rate.

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

  • In general, underwriting results were strong but were helped by some onetime items.

  • In institutional, group life mortality returned to more normal levels at 91.6%.

  • In non-medical health and other, the group disability/morbidity ratio was 83%.

  • This reflects an $18 million after-tax IBNR reserve adjustment based on the receipt of new claim data.

  • In individual business, mortality was 82.4% and includes a $12 million after-tax adjustment for the Travelers excess mortality reserve.

  • As you recall, we set up a $300 million dollar after-tax excess mortality reserve at Travelers to cover expected poor mortality experience from a group of approximately 250 large policies.

  • In this quarter, three of these policies either lapsed or otherwise changed.

  • Because of our mortality risk -- because our mortality risk therefore declined, we needed to make an adjustment to the reserve.

  • Turning to auto and home, we had another excellent quarter with an 86.4% combined ratio including cats, which was due to lower-than-expected auto and home claim frequencies and a prior accident reserve release of $27 million after tax.

  • We also had slightly better than planned cat losses in the quarter.

  • As Rob mentioned, hurricanes and tropical storms were light but there were significant hail storms in the Midwest.

  • Moving to investment spreads, recall that at Investor Day last year, we said that our baseline expectation for variable investment income in 2006 would be $275 million a quarter.

  • This quarter, our variable investment income was just over plan at $281 million, our lowest quarter in several years.

  • Returns from corporate joint ventures or private equities remain strong, but income from mortgage and bond prepayment fees as well as from securities lending was relatively low.

  • The inversion of the short end of the yield curve was quite severe for much of the third quarter, and this compressed our securities lending margin.

  • Even though the inversion has lessened somewhat this quarter, we expect to see investment margin pressure at the short end of the curve continue into the first part of next year.

  • We will discuss our outlook regarding next year's investment margins in greater detail at our Investor Day this December.

  • Moving to expenses, our operating expenses were up modestly this quarter to almost $2.5 billion.

  • Included in these results were $8 million of after-tax Travelers integration expenses and a $15 million after-tax commission true-up in long-term care.

  • As I've mentioned previously, we're making incremental investments this year in areas, such as technology and advertising, which we expect to enhance future growth.

  • Turning to our bottom-line results, we are $958 million in operating income or $1.24 a share.

  • In the third quarter of each year, we file our income tax return and true up our actual taxes versus our estimate, the difference mainly being our dividend received deduction.

  • We plan on this, and it is baked into our EPS estimates.

  • However, this year, the additional tax benefit was higher than our expectations by $18 million, which was partially offset by a $9 million negative tax adjustment in international business.

  • Turning to investment gains and losses, in the third quarter, we had net realized investment gains of $162 million after tax.

  • If you include the related offsets of $121 million, the net impact on our bottom line is $41 million or $0.05 a share.

  • Credit losses were modest again this quarter.

  • The gain is driven by mark-to-market improvements in the portion of our derivatives portfolio, which does not qualify for hedge accounting.

  • Finally, our preliminary statutory operating earnings are approximately $620 million this quarter and are $2.2 billion for the first nine months of 2006.

  • Turning to our sale of Peter Cooper Village and Stuyvesant town.

  • The gross sale price was $5.4 billion, and the transaction will result in an after-tax gain of approximately $3 billion.

  • We expect to close this transaction in the fourth quarter.

  • I would like to now give you some sense of how we expect to deploy the proceeds in the near-term.

  • First, there were transaction expenses, which mainly consist of real estate transfer taxes of $200 million.

  • Second, we expect to reinvest up to $1.2 billion of the proceeds in real estate investments, which will qualify as 1031 exchanges.

  • This will save us, if we invest the full amount, approximately $400 million in income taxes and makes the investment in these properties very attractive.

  • Adjusting for the 1031 exchange benefit, we expect to pay current income taxes of $1.3 billion.

  • We also expect to pay an approximate $2.2 billion dividend for Met Tower Life, which is the subsidiary which holds these properties to our holding company, subject to regulatory approval.

  • The remaining proceeds are being used to repay our mortgage on the properties between Met Tower Life and Metropolitan Life Insurance Company.

  • The dividend of the holding company will be invested in interest-bearing securities according to our normal investment guidelines.

  • It is not expected that it will be used for share repurchases during 2007.

  • This is not to imply that we will not buy back stock in 2007, but we expect to use other funds for that purpose.

  • We will give you more detail regarding our share repurchase expectations on Investor Day in December.

  • Assuming the reinvestment plan that I just described, we estimate that the transaction will be $0.11 accretive to our 2007 results.

  • We are also announcing the resumption of our share repurchase program this quarter.

  • As we have all said -- as we have said all year, we have been on track to achieve our targeted capital structure by the end of 2006.

  • Our strong results so far this year plus the gain on sale of Peter Cooper Village and Stuyvesant Town will allow us to resume share repurchases this quarter.

  • The Board-authorized share repurchase amount is approximately $700 million.

  • We will update you at Investor Day in December with regard to our activity this quarter.

  • In summary, this was a solid quarter and obviously a very strong nine months for MetLife.

  • I look forward to seeing you at our Investor Day event, where we will discuss with you our outlook for 2007.

  • With that, let me return the call back to the operator and to Rob, so we can take your questions.

  • Operator

  • (Operator Instructions).

  • Jimmy Bhullar, JPMorgan.

  • Jimmy Bhullar - Analyst

  • I have a couple of questions.

  • First on spreads, if you could talk about what your outlook is for spreads and especially the retirement and savings business and also UL and fixed annuities, given the decline in the third quarter.

  • Then second, just on variable annuity sales, I noticed that your sales declined a lot sequentially.

  • I think in the second quarter, you had a special in the independent channel.

  • So, maybe that's part of the decline?

  • But if you could just talk about what your outlook is for variable annuity sales and how the lifetime income feature is being accepted and that's it.

  • Bill Wheeler - EVP, CFO

  • This is Bill.

  • I will talk about spreads, and then maybe I will pass it to Lisa Weber to talk about variable annuities.

  • Retirement and savings spreads, it was low this quarter.

  • It was 125 basis points.

  • The inverted yield curve really hit us there.

  • We do expect though it will probably tick up to the low end of our guidance, which is sort of the 100 -- the low end being about 135 basis points.

  • We expect it to get close to that or move up a little bit in the fourth quarter, though still on the low side because the interest rate environment is still a little challenging for them.

  • With regard to UL and fixed annuities, I think the spreads you're seeing right now in our QFS are what we can expect in the future.

  • Those are solidly within our guidance, and you can assume that those are good numbers going forward.

  • Lisa Weber - President, Individual Business

  • As far as sales, sequentially you mentioned the special.

  • Yes, our annuity sales dropped again second quarter sequentially.

  • And that was primarily on the independent side where you see the effects of the specials.

  • The other reason for the drop is really seasonality as well as we don't have our LWG product, our new Lifetime Withdrawal Guarantee, rider approved in five states.

  • By not having that approval in five states, we expect that really to pick up again in the fourth quarter.

  • On the agency distribution side, we have continued to see strength in our variable annuity sales.

  • And while the industry was down sequentially by 11% on the agency side, MetLife was only down 4%, New England was down 3%.

  • So, what I would say is that we believe that all the fundamentals are intact, and we're very optimistic about our production and momentum into the fourth quarter.

  • Jimmy Bhullar - Analyst

  • And the five states you mentioned, are those a significant portion of your sales or are they (multiple speakers) states?

  • Lisa Weber - President, Individual Business

  • Yes, what I would say is that we are roughly live in 60% of the market for MetLife and New England and 70% for independent distribution.

  • The other aspect of independent distribution is that's a firm-by-firm sale.

  • There are three major distributors that we're not live in yet, and that accounts for 25% of our sales.

  • So again, fundamentals intact and you know we will -- we expect to get that up and running.

  • Operator

  • John Nadel, Fox-Pitt Kelton.

  • John Nadel - Analyst

  • Bill, I guess the question for you is, just following up on the redeployment of the real estate gain.

  • I know you mentioned $0.11 accretive.

  • But, it looks like at that level, it's going to be dilutive to your ROE.

  • I was wondering if you could just give us a sense for how much dilution -- obviously, that is a balancing act -- but how much dilution are you willing to accept from this transaction?

  • Bill Wheeler - EVP, CFO

  • I guess it would be really hard for us to construct a scenario in the short-term where this wouldn't be dilutive to ROE.

  • That's the problem when you have a $4 book value per share gain.

  • It's tough to overcome that in our ROE right away.

  • So, our expectation is that the ROE sort of pro forma for this transaction will drop order of magnitude -- we will give you more precision about this in a month -- but order of magnitude 100 basis points, while we're chugging along at 15% ROE so far through this year.

  • So we have a little -- we're doing pretty well.

  • But it will probably -- it will probably be a little lower next year.

  • I look at it -- I'm not -- I don't really think about things in terms of how much ROE dilution can I stand.

  • I think about, okay, this has sort of reset the formula for us and where does it go from here.

  • And I think the reality is that it will obviously -- there will be a jump -- or there will be a drop, but then we will be able to move it back up as we redeploy these proceeds over time and as well as just continue on with our normal business.

  • So, there will be a reset.

  • And then, my guess is you'll start to see ROE improvements again.

  • John Nadel - Analyst

  • And then if we could just follow up in terms of the redeployment.

  • I know you've spoken in the past about maybe the positive benefits of the recent pension reform and the opportunity maybe for an increase or a boost in pension closeout business.

  • Can you give us a sense for what you're sort of seeing at this point in the marketplace?

  • Is there any early indication of timing around this or any early indication of some good discussions that leads you to be optimistic?

  • Rob Henrikson - President, COO

  • John, I will take that one.

  • One of the things about the closeout business -- keep in mind as Bill said and we've said it over and over -- even in the rather dormant closeout business over the last several years, even there, we talk about lumpy results and so forth.

  • So, to start predicting what that's going to do to our revenue lines, we're pretty cautious.

  • I would say the discussions with clients in terms of what the possibilities are for them and the gradual restructuring of their portfolios would put people in a position where if they so decide, they would be able to move.

  • And as I have said in other forums if that happens, we will be there.

  • John Nadel - Analyst

  • Then maybe just -- maybe just one or two metrics around the pension closeout business.

  • It sits within R&S; it's hard to see it all alone.

  • Can you give us a sense for sort of premium to surplus ratios or targeted spreads typically for that sort of business?

  • Rob Henrikson - President, COO

  • Let me and then somebody else might want to comment on that, so I am sort of signaling what my thoughts are here in terms of again what we should talk about publicly.

  • So much of it is dependent on the type of solution that the client chooses to take.

  • So, for example, you could have anything from a totally separate account, participating arrangement where the customer would provide capital that would keep our ROEs high all the way to something that would be a total shutdown where we would require our normal both ROE and spread requirements.

  • And so, other than that, I wouldn't want to comment.

  • John Nadel - Analyst

  • Then last question is just, have there been any significant changes in the allocation of your assets within the general account?

  • Because if you look at the decline in the excess variable investment income, that's one thing this quarter.

  • But, ex that, it looks like your portfolio yield picked up about 8 or 9 basis points sequentially.

  • I imagine that's just mostly the benefits of the lengthening of the duration the last few quarters.

  • But, any change in asset allocation that also might have led there?

  • Steve Kandarian - EVP, Chief Investment Officer

  • This is Steve Kandarian.

  • No major changes in asset allocations, largely driven by higher interest rates and money is rolling off some repositioning.

  • Operator

  • Colin Devine, Citigroup.

  • Colin Devine - Analyst

  • I have three questions -- one on the investment portfolio, one on the Pension Protection Act and one on life insurance.

  • Starting with the investment portfolio, Rob, I was quite surprised last quarter when Met stopped disclosing in the QFS the bond quality spread.

  • And so, when I went to the second-quarter Q, you can imagine I was fairly shocked to see the below-investment-grade holdings are up 12.5% for the year.

  • Single B is up almost 20% or $1 billion in what has been a fairly benign credit environment.

  • Can you explain the decision to take it out of the QFS and also to give us an update as to where we stand at the end of the third quarter and why I shouldn't be concerned that 2002, which for Met obviously is a very difficult year for credit quality, is not starting to repeat itself?

  • The second question on life insurance sales, if you can talk a little bit about the decline this quarter.

  • Is that just you're tightening up on stranger-owned life and what was going on there?

  • And then lastly on the Pension Protection Act, perhaps you could talk a little bit about, Rob, what you see that meaning for Met?

  • We've certainly seen a couple of your competitors partner up with Fidelity, Principal and Hancock, getting their annuities into the Fidelity 401(k) system.

  • What is Met doing to take advantage of that opportunity?

  • Bill Wheeler - EVP, CFO

  • They are pointing to me why this page got pulled from the QFS.

  • I blame Tracey.

  • Colin Devine - Analyst

  • That sounds fair to me.

  • Bill Wheeler - EVP, CFO

  • But you know what, we are thinking about adding it back in.

  • So I think Steve will talk a little bit about what's going on with the high-yield portfolio.

  • And I think you will be satisfied with the answer.

  • This disclosure obviously shows up in our 10-Q.

  • I think in the spirit of trying to make the QFS a little thinner and a little more readable, we tried not to be so redundant.

  • But you know I hear your comment, and we will think about whether we want to put it back in.

  • So I will turn it over to Steve.

  • Steve Kandarian - EVP, Chief Investment Officer

  • Colin, as to below investment grade, we're still within the middle area of our range that we gave out on Investor Day last year.

  • It's true we're up from the year-end; it was about $14.7 billion.

  • I think what you're looking at is the July statement of $16.9 billion.

  • Colin Devine - Analyst

  • Right, can you update the increase to the end of the third quarter, please?

  • Steve Kandarian - EVP, Chief Investment Officer

  • Yes, I can but it's not an increase; it's actually a decrease to $16 billion.

  • So it's gone down.

  • Now, single B, you were talking about has gone up somewhat.

  • Our target is 60/40 BB to single B. We were low on single B. We're now just below our target.

  • We are at 39.7%.

  • So, within our range, almost exactly on our range of 60/40 split.

  • Where that is coming from is largely bank loans.

  • It's a part of the market in below-investment grade that we thing provides a lot of relative value in this marketplace.

  • We don't think we're getting compensated for taking BBB risks, so we've deemphasized that and gone to single A.

  • But we've barbelled our strategy a little bit and done some single and BB bank loans, which have strong covenant protections, historically low default rates, higher recoveries because of being secured.

  • And, we're very comfortable at this point in time, especially given the kinds of spreads we have seen the last couple of quarters, which are much higher than we've seen the last year or so for those kinds of issuances.

  • There have been quite a bit of issuances over the course of this year, and that has driven up the spreads and we have taken advantage of that.

  • So, if you look at things like our economic capital models we run, we're pretty much flat to slightly down over the course of the year -- again deemphasizing BBB, lightning up on that kind of credit risk, and going toward these bank loans.

  • I should mention that compared to our peers, we're light on credit.

  • You're seeing a little more in below investment-grade.

  • You'll see a lot less in BBB and even to some degree single A.

  • Colin Devine - Analyst

  • Okay, so just to be explicit, the increase in bank holdings is a result of a tactical shift of purchasing new below-investment-grade bonds.

  • It doesn't reflect credit deterioration?

  • Steve Kandarian - EVP, Chief Investment Officer

  • No.

  • In fact, our exposure to credit, as I said, is probably significantly below our peers right now.

  • It's been flat pretty much for us over the course of the year, shifting more to single A and some bank loans where we think we can get much better relative value.

  • BBB has historically run about 60 basis points over single As.

  • Right now, over the course of this year, it's been about 35 basis points.

  • So we're not getting compensated to take that kind of risk.

  • So we're not taking as much of that risk.

  • Lisa Weber - President, Individual Business

  • It's Lisa.

  • Sequentially on the life side, let me just say again that we're really very proud of the business that we're putting on our books and the quality of that business.

  • And we continue to focus on doing the business in the right way and business that is profitable.

  • And, it really -- the story remains the same in terms of what's going on with respect to irrational pricing, the IOLI business.

  • I got an e-mail yesterday.

  • It came across my desk from an independent producer that basically said and I quote, "Here's what the doctor ordered -- know-how to get chain-smoking private pilots' preferred status with various life insurance carriers."

  • So, that's just kind of a picture of what's going on out there.

  • From a sequential standpoint, we're starting to see our growth stabilizing in the agency channels.

  • As you know, we made some changes to our life strategy to get it better under control.

  • We didn't give away the store.

  • We've made some tweaks that we're starting to see impacting sales, and it does take the business a little bit of a while to respond.

  • On the independent side, we have continued to show a drop in the second quarter as a run rate on UL levels out.

  • We have seen signs of stabilization over the last couple of months, but it's still really too early to tell.

  • So, that's where we are.

  • Again, I would say on the independent side, we're also getting signals of confidence that we're continuing to improve our service and that this is a time more than ever when the MetLife brand really speaks volumes.

  • Operator

  • Andrew Kligerman, UBS.

  • Rob Henrikson - President, COO

  • Could I -- there was a question -- Colin, I believe you asked the question about the Pension Protection Act.

  • So, let me just say a few things about that.

  • In the first place, the Pension Protection Act and all of the public discussion around pension security in general has caused an entire movement in the marketplace for people to start to address these issues.

  • And I won't get into technical issues, but things like safest available annuity language being changed by the Department of Labor to take down barriers that previously caused caution and lack of movement by the plan sponsor community; that is changing rather dramatically.

  • For us, that is particularly important because keep in mind that in the annuity business on the institutional side, for example, where we have a terrific amount of direct sale opportunities, wholesale opportunities, so-called institutional price opportunities, both direct with a plan sponsor and through their employee benefits, broker consultants, that activity is really quite robust in terms of discussion about different designs and how we might move forward.

  • At the same time, our partners in the independent distribution channels on the retail side are now cranking up and asking for different kinds of design discussions with us relative to how their representatives might touch individuals who are in both pension plans where lump sums are being offered out and the of course 401(k) marketplace.

  • So, there's considerable activity there, nothing I can put a number on yet.

  • The definitive change in the defined benefit marketplace in general again from the portfolio management and the employer balance sheet perspective, the Pension Protection Act has sort of legitimized the discussion and sort of opened the door for people to say that freezing might be a better opportunity for them.

  • Once the pension liabilities are frozen, then the question gets to, what do we do on the asset side.

  • And depending on where the equity market takes the individual pension plans, surplus or deficit, along with the fact that it's frozen with the idea that no new dollars will come into the plan causes restructure opportunities for us.

  • And of course, that's a big part of our competency.

  • I just would mention one other thing.

  • Even in the plan sponsor community, where the plan sponsor is perhaps not interested in too much of a heavy hand in the design and distribution, they are opening their doors to again particularly our independent distribution channel partners.

  • And we see significant opportunity there in the future.

  • But, I would caution everyone in this area that it is from the plan sponsor point of view and from the marketplace point of view, a two-step sale.

  • So the plan sponsor may see this as something worthy of pursuit.

  • The real question will be how many of the participants choose to take that route.

  • I hope that answered your question.

  • Operator

  • Andrew Kligerman, UBS.

  • Andrew Kligerman - Analyst

  • Just a question about -- two questions about sales and then some quick follow-ons.

  • Lisa just mentioned that there was some irrational pricing in the life business.

  • Could she provide a little bit more color on that and the outlook for life sales once we kind of get through this IOLI unfavorable comparisons.

  • And then shifting over to the non-medical health and other, I think Rob indicated in the presentation that while sales -- while premiums were up 9%, again competition was tough.

  • How so?

  • And then with respect to the group life in particular, why are you more optimistic about the sales outlook after 18 tough months?

  • Lisa Weber - President, Individual Business

  • About the irrationality, what I was speaking of specifically is competitive irrationality.

  • That's with respect to pricing.

  • It's with respect to underwriting.

  • It's with respect to willingness to accept IOLI business and turn a blind eye to it when many companies are out there saying that they are not accepting that business; they are.

  • And we are not.

  • So, that is what I meant about that.

  • In terms of where I see life sales going, what I would say in terms of life sales is that I don't think that we will see industry life sales up as much going forward.

  • And so, while industry life sales are up now 11%, they are not up as much as they were.

  • And I don't think they will be up as much going forward.

  • So, I can speak more in terms of the market will start to kind of correct itself in this arena.

  • And we're going to continue to take the long view.

  • Lee Launer - President, Institutional Business

  • Lee Launer speaking.

  • I would say on the group side, we are kind of I would say three-quarters of the way through the '07 bidding season.

  • We do get in about half of our book before the year starts, so we do have a pretty good read on what is going on.

  • I would say people are telling me this is about the most competitive they've seen it in 5, 10 years.

  • A lot of competitors are back in the market.

  • So you have to pick your spots very, very carefully.

  • We have for a while.

  • In non-medical health, it's pretty much across-the-board competitiveness.

  • I would say maybe the smaller cases, certainly in the disability, very competitive.

  • Larger cases possibly less so.

  • Dental maybe less so.

  • But all the other markets are very competitive.

  • I would say in group life, we are feeling pretty positive.

  • One is quotes are up.

  • So there are -- the at bats is up.

  • And without giving away everything that we're trying to do right now because we're still bidding I would say would be we're very targeted on certain employers, certain coverages with certain features.

  • And so, that seems to be paying off for us.

  • We will give a little bit more guidance on Investor Day, but we're very encouraged about what we're seeing so far.

  • Andrew Kligerman - Analyst

  • Excellent.

  • And then just shifting over to long-term care insurance, could you give a little read through on what the loss experience looks like?

  • Was it in line, weak, positive, etc.?

  • Lee Launer - President, Institutional Business

  • Lee again.

  • Sure.

  • Loss experience in long-term care, well, not a lot is in claim.

  • So you have to look at what we're reserving for future claims.

  • But if you take that into account, no real move.

  • In fact, if you look at the numbers, I think the loss ratio -- we don't give that out -- but the loss ratio for the last quarter is actually below the average for the last 11 quarters, slightly below.

  • So it's pretty much kind of staying the same lately.

  • Andrew Kligerman - Analyst

  • Then lastly just for Bill.

  • On the appetite for share repurchase with the divestiture of Stuyvesant, I think you probably -- well, you've said you will have as much as $3 billion of capital.

  • It would be appear that most of that could be excess capital.

  • So just in terms of deployment, what would you say is your appetite for buyback versus M&A?

  • And what are the opportunities out there?

  • Bill Wheeler - EVP, CFO

  • Yes, sure.

  • Well, I think our strategy is -- I will take a step back.

  • We generate a lot -- just on an ongoing basis obviously, we generate more capital than we need to grow the business.

  • I've gone through sort of that math exercise with people.

  • Order of magnitude, it's a little under $1 billion a year that we generate that's available to do stuff with.

  • And then of course, on top of that, we've got these proceeds from Peter Cooper/Stuy Town, most of which we will be able to get up to the holding company almost immediately.

  • So, we are in a nice position.

  • So, what will we do?

  • Well, obviously, share buybacks will always be part of our plan.

  • The question is sort of how aggressively do you step on the guess, and I think we will be prudent.

  • And so that's sort of where I -- without getting out there.

  • Our capital structure is pretty much back in line, and it will probably -- assuming we don't do anything will only get a little better each year as we pick forward as we kind of grow our earnings or grow our equity and we don't significantly increase our leverage.

  • So it will only get a little better.

  • In terms of M&A, I think our philosophy is -- and Rob may want to comment is -- we can't plan for M&A.

  • We look at every deal that comes out.

  • We are in a lot of different businesses around the world, so we obviously get to look at just about everything that comes up.

  • We're not trying to be the great industry consolidator.

  • We are very -- actually strategically, I think we're very happy with our position.

  • So we don't feel this urgent need to go buy stuff to try to drive growth.

  • We think our businesses generate good growth on their own.

  • That said, we will be opportunistic.

  • And, having a little capital flexibility in order to be opportunistic is probably a smart thing to do.

  • So, I guess I hope that gives you a little sense.

  • Andrew Kligerman - Analyst

  • It definitely does.

  • Are things quiet or active right now just the market as a whole?

  • Are you seeing a lot of stuff?

  • Bill Wheeler - EVP, CFO

  • I don't know, somewhere in between.

  • I mean, there's stuff -- there is stuff, but it's not -- I mean I would say it's pretty normal.

  • Operator

  • Tamara Kravec, Banc of America.

  • Tamara Kravec - Analyst

  • Just focusing on top-line growth for a minute, it seems like your premiums were light and individual and institutional, you showed some nice expense improvement.

  • But I'm kind of wondering what will it take in your mind to get revenue growth a little bit better than just under 3% and what we saw in the third quarter.

  • And then, just if you could talk about the expenses.

  • It seems like they really showed improvement in the third quarter.

  • I'm wondering if that is sustainable.

  • And you had somewhat higher expenses in traditional versus variable universal life or expenses were down.

  • So if you could just talk I guess broadly about those two issues; that would be great.

  • Rob Henrikson - President, COO

  • I will start the conversation and others will add some more specifics.

  • One of the things about growth, I always ask people when they give me numbers, there's two things.

  • One is, what is the number of course?

  • Secondly is, how am I supposed to feel?

  • I think one of the things we always keep an eye on is what are the industry trends and where are the opportunities.

  • So in our businesses, for example, I've been -- since 2000, when people talked about group life insurance as being the slow growth business, I said, "You are right; it is.

  • And we will outgrow the marketplace."

  • We have virtually every year since 2000.

  • And so, that's one of the reasons why when anytime I mention something that is in a -- in terms of numbers what seems to be a slow growth category, the question is, can you be a leader?

  • Can you do that efficiently?

  • Can you do it profitably for the shareholder?

  • And the answer is, we do.

  • In fact, that's one of the ways we look at opportunities.

  • In the individual side of the business right now, I think we are -- this quarter, we're probably out a little earlier than much of the information that you would normally look at in terms of where the marketplace is.

  • There are some marketplace challenges in terms of growth certainly in life insurance.

  • And for that reason as well as other fundamental reasons, we are very, very cognizant of exactly what our underwriting experience is, exactly how we should price products, what distribution arms make sense for us, what kind of partners we have, and so forth.

  • So, we're focused on growth.

  • We know top-line growth is important.

  • That's the way you grow a business like this.

  • You create customers and those customers -- and treating them well gives you the opportunity to drive bottom-line growth in the future.

  • But I think there are some challenges in the life insurance space in the life insurance industry.

  • But we feel very confident in terms of what we're doing both fundamentally and the type of distribution of organizations we're both partnering and certainly the advantage we have with our continuing to not only maintain but have an upward growth pattern.

  • In terms of both affiliated distributions at MetLife, we're very, very well-positioned again relative to the market.

  • I don't know if Lisa might want to add something to that.

  • Lisa Weber - President, Individual Business

  • Yes, I would just -- I would just add that it really is all about the fundamentals.

  • On the life side, it's about our risk selection and finding the right market pockets.

  • On the annuities side, we need to get the approval in those last five states but really is about winning the guarantee wars and getting the field force to really communicate the challenges of income distribution and to be out there in face-to-face distribution advocating for clients' needs.

  • On the third-party side, it's about continuing to win a bigger share in all of our major firms on the annuities side.

  • I'm pleased to say that we are renewed in all of our four carriers.

  • We have retained our market share in 9 out of our 10 top firms as well.

  • So, that's what I would say on that.

  • The only piece I will say on expenses -- and Eric I'm sure will want to add to that -- is if you look at our numbers on the expense gap side on the agency distribution side, both on MetLife and New England, we're doing phenomenally well.

  • I mean on New England, we had a $46 million expense gap, which will be less than $10 million by year-end.

  • And yet, our sales have been flat.

  • Rob Henrikson - President, COO

  • By the way, one of the things -- well, I jumped in, and Eric has got some comments that he wants to make.

  • But one of the -- it's very difficult in terms of how to talk about fundamentals.

  • Let me give you an idea of what I mean about watching fundamentals.

  • In the annuity business, of course, we're very, very successful.

  • We've done very well there.

  • If you look underneath the numbers, one of the things that's interesting -- if you look at the [imerus] statistics/[limerus] statistics for example in the non-qualified annuity business, industry-wide 60% of the business is replacement.

  • Our number is more than half that but not much more than half that.

  • So, there is a fundamental underlying the business that I think says a lot about the quality of both your distribution and your ability to price and to be rational with things going forward.

  • So I would just mention that as a factoid.

  • Bill Wheeler - EVP, CFO

  • This is Bill.

  • I will turn it over to Eric in a minute to talk specifically about UL and [trad] and expenses there.

  • But just generally, I'm glad you brought it up about expenses.

  • We didn't talk a lot about it this call.

  • I would actually take exception with what you said.

  • This wasn't actually I think a very good expense quarter for us.

  • In certain areas of the business, we think we are running very efficiently and we're doing a good job.

  • Lisa mentioned one, and there are certainly parts of institutional that are doing the same thing.

  • But we're doing a lot of investment spending this year.

  • I've talked about that in other forms and on these calls previously.

  • We are doing a lot.

  • We did a lot last year.

  • And I think we did a lot before the year that.

  • We've had three -- this is the third now of three very strong years for Met.

  • We've done a lot of investment spending in technology and in marketing.

  • We've done a lot -- and I think we've -- we've positioned ourselves pretty well.

  • We will see how '07 turns out.

  • But I think we have -- if we need to, we can kind of -- we do have the ability to kind of pull back a little bit.

  • We've been careful about the kinds of spending we're doing too to make sure that it is stuff that where if we have to switch the lever, flip the lever and manage it -- expenses much more tightly, we can do that.

  • We're really not trying to manage this Company just on a quarter-by-quarter basis.

  • We're really trying to think about the next several years, about what kind of spending can be done to put us in a good position.

  • So, Eric?

  • Unidentified Company Representative

  • Overall, in individual business expenses -- were up a little bit second quarter to third quarter, absolutely consistent with our plan.

  • I've said many times, the first quarter is always the lowest for us, second and third quarter usually in the same range and then fourth quarter is our highest level of spending usually.

  • That being said, various expense allocations in the different product segments that you can see sometimes can be extremely confusing.

  • So what you are seeing in traditional life for instance is in the second quarter, we had an NEF post-retirement liability release that dramatically lowered expenses in the second quarter.

  • We had a similar post-retirement liability that we added to in the third quarter.

  • And so, that differential sequentially makes it look like expenses are up a lot.

  • In fact, overall expenses for IB net of DAC capitalization, as we always like to talk about them, are only up about $15 million.

  • But, in that one segment alone, they've kind of skyrocketed.

  • And it's only because of allocations.

  • The reverse is true in universal life.

  • So, there's nothing going on in any of the major IB business segments except sometimes these allocations can get in the way of a story that's relatively simple quarter to quarter.

  • Operator

  • Saul Martinez, Bear Stearns.

  • Saul Martinez - Analyst

  • Two questions -- first, I want to go back to the issue of capital redeployment.

  • Clearly, the $0.11 per share accretion number and the I guess 100 basis point dilution in ROE make certain assumptions about what you're going to do with the $2.2 billion that's going up to the holding company.

  • Can you give us a bit of a window as to what those assumptions are?

  • Are you simply assuming -- I assume you're not assuming that that capital is simply going to sit at the holding company earning a bond-like yield.

  • And secondly, question on your RGA stake.

  • Is it your policy to continue to maintain a 50% stake?

  • I think in the past, you have participated in equity raises for either deals or growth.

  • Should we continue to expect that policy, given that it's clearly a non-core asset?

  • Bill Wheeler - EVP, CFO

  • It's Bill.

  • Actually, that is exactly what we are assuming we're going to do with the $2.2 billion.

  • We're going to just -- as of right now, for '07, it's going to sit at the holding company and earn a current return.

  • Saul Martinez - Analyst

  • So there's upside if you deploy that capital?

  • Bill Wheeler - EVP, CFO

  • Well, obviously -- probably, we can beat over the long run a bond yield with our capital.

  • But for '07, that's where it's going to sit and that's what's baked in the $0.11 accretion, which is actually pretty nicely accretive just with that assumption.

  • In the RGA stake, we do not have a policy about staying over 50%.

  • Our track record with regard to participating in other capital raises is mixed.

  • Sometimes we do; sometimes we don't.

  • It kind of depends.

  • So what does that mean with regard to our stake?

  • I think we've talked about that in a lot of different forums.

  • We do believe RGA is not a core asset.

  • It's a really good investment and they are doing extremely well.

  • We think that is a great management team.

  • And we're very pleased.

  • Saul Martinez - Analyst

  • Do you see advantages in keeping a 50% stake?

  • Bill Wheeler - EVP, CFO

  • No, I don't think there's any magic to 50.

  • Actually, there is no bright line with regard to how that would -- with regard to the accounting.

  • Operator

  • Ed Spehar, Merrill Lynch.

  • Ed Spehar - Analyst

  • I wanted to go back to the capital just one more time to make sure I understand.

  • Bill, do you think sort of as a baseline assumption, should we be thinking about share buyback over the next 12 months as funded or roughly at whatever our estimated level of free cash flow is?

  • Is that how we should think about share buyback?

  • Bill Wheeler - EVP, CFO

  • The box is getting narrower.

  • I think we said in different occasions, do not plan on some extraordinary buyback activity -- some multibillion dollar kind of thing.

  • That's not what we're going to do.

  • We'll do a prudent number, and we will give you a little more color obviously in a month.

  • We are right in the middle of finalizing our '07 financials as we speak.

  • Ed Spehar - Analyst

  • I guess then the follow-up question is, why not?

  • Why not a multi-billion dollar repurchase?

  • Is it more -- is it stock price?

  • Is it dry powder for M&A?

  • If it is dry powder for M&A, how long do you sit with the money before you say we need to do something else?

  • Bill Wheeler - EVP, CFO

  • I can't answer the second question.

  • That's a pretty tough philosophical one.

  • Why not next year?

  • Because the business -- we're not going to sell the business at the end of next year.

  • We're going to actually try to manage the Company for the long-term.

  • And I will save you the long-term speech again.

  • But, just think out a little bit.

  • What is going to happen in the next couple of years?

  • I will just give you two easy examples.

  • One is, there may be a big volume of closeout business, which is going to hit us.

  • Okay?

  • That causes capital strain.

  • And that will be a great thing if it happens, but we may need some of that capital for that business.

  • We will see.

  • Rob is giving me the signal not to overhype the cat closeout though.

  • The second thing is we have a convert, a $2.1 billion convert, which is converting half in '08 and half in early '09.

  • We're going to want to manage the dilutive effect of that.

  • And so obviously, that's an easy one.

  • So there are things out there beyond one year.

  • We do actually look beyond one year in terms of how we think about the business.

  • So, how long will we hang onto excess capital?

  • I don't know.

  • We will see.

  • Operator

  • Joan Zief, Goldman Sachs.

  • Joan Zief - Analyst

  • Just to -- I actually just have a couple of questions.

  • The first is, I do want to clarify again, just make sure I understood what you said is that you said that you basically generate a little less than $1 billion a year of excess capital up to the holding company just on operating your businesses.

  • And, it's with that that we can make some sort of assumption as to what a possible buyback program might be going into 2007.

  • Bill Wheeler - EVP, CFO

  • Yes, well yes, you should take that into account.

  • That was lovely.

  • Joan Zief - Analyst

  • And that's the -- that's the excess capital you generate.

  • Bill Wheeler - EVP, CFO

  • Right.

  • We obviously -- just for everybody's benefit, our ability -- we can dividend approximately $2 billion up to our holding company every year.

  • Order of magnitude, it would be a little bit more than that this year.

  • The holding company cash needs are approximately $1.1 billion.

  • Now, we may decide to put some more capital in a place like Japan or something like that or some subsidiary that's growing very fast.

  • But, those capital requirements will probably be relatively modest.

  • And so the rest is available to do things with.

  • Joan Zief - Analyst

  • The other thing I wanted to ask you about is -- two things.

  • Just basically, your balance sheet is growing dramatically.

  • You are very diversified.

  • Is there really anything over time that you can do to really move the needle as you're thinking about organic growth?

  • Or is really the growth really does have to come from capital management which includes acquisitions?

  • And if that is the case, does it really make any sense for you to be looking at smaller acquisitions at all?

  • Really, does it make much difference?

  • Should you be looking at really large acquisitions that maybe really redefine the Company?

  • Bill Wheeler - EVP, CFO

  • I will let Rob talk about sort of orientation towards M&A and stuff like that.

  • But just to refresh everybody's memory, I know we are focused on the current quarter and the fact that we had a tough comparison year-over-year.

  • MetLife's growth rate, top-line growth rate since we've been a public company is about 8, 9%.

  • And by the way, six years ago, we were a pretty big company then too, not as big as we are now but pretty big.

  • Almost all of that growth up until Travelers was organic.

  • Okay?

  • And by the way, the organic growth rate would've been 7, 8.

  • Why?

  • Because we generally -- even though we're big, we have generally grown faster than the industry in most of our businesses.

  • Okay?

  • And when we haven't, there's generally been a good reason, like pricing -- pricing discipline.

  • So, we have a pretty good track record I think growing and never mind capital management, okay?

  • That obviously helps.

  • It helps the margins in the beginning, but it all starts with sales and revenue growth.

  • And despite the tough comparison this quarter, we think our revenue growth rate going forward is going to be pretty good.

  • And with that, I will let Rob head.

  • Rob Henrikson - President, COO

  • In terms of speaking about mergers and acquisitions, I always caution myself is that everybody may be hanging on every word, so it may be important that I just really talk more about from a philosophical point of view.

  • In the first place, small acquisitions versus large acquisitions, I would say that on a continuum if someone said organic at one end and massive acquisition at the other, keep in mind there are small acquisitions we can make -- and we've done this many times in the past -- that are acquisitions of blocks of business as opposed to companies.

  • So, for example, if you go back to let's say the John Hancock Life Insurance acquisition on the group insurance side, whether or not you call that an acquisition or just a way to tuck in about a year's worth of sales, it was an efficient way to do the latter.

  • And that block of business had gone from with another carrier who had no group insurance operations to one that not only retained all of it but cross-sold virtually all of our products into that block of business.

  • So, when I think of acquisitions, that's one thing I think about.

  • I think the analyst community may refer to those as tuck ins.

  • So I like tuck ins, if I understand exactly what they are.

  • Because as I described it, that's the way I would view it.

  • The only other things I would say is, in any kind of an acquisition -- and we are very careful about this -- I'm not interested in doing any kind of acquisition that by its definition would disrupt our ability to continue to retain and organically grow our business.

  • So, that means taking a close look at what an acquisition would mean for us, what our core competencies and capabilities are, extending our lead, growing in markets where we have particular expertise.

  • All of that is very important, but I'm not going to do anything to disrupt or ruin the service platforms to our existing clients.

  • And, other than that, I would say we wake up every morning.

  • We have a very active M&A group.

  • They are very coordinated with our businesses.

  • We wake up every day and say, "Buy, build or rent," for virtually everything we do.

  • So, that's kind of the philosophical answer (multiple speakers).

  • Joan Zief - Analyst

  • I just have one last question and it relates to distribution.

  • Is there any reason to think that going forward what you see in the market there is more or less of support at the Company or either tie distribution or independent distribution?

  • Rob Henrikson - President, COO

  • Well, I have found that keep in mind with a company that used to have nothing but tied distribution, getting into independent distribution was a big step for us.

  • We found as many of us worked on and sort of hypothesized that that could mean that all boats rise.

  • We are very, very happy and bullish about the strong affiliated distribution we have.

  • It is basically a business that you don't need to worry about getting in and out of.

  • It's not as volatile and people basically are MetLife focused.

  • Getting into the independent distribution channel, we've done an excellent job of it.

  • We continue to manage it very tightly, and there will be continuing to be distribution opportunities for us.

  • By the way, tying this to the other question, some of the organic growth that we see looks strangely like acquisitions of liabilities, including for example the closeout business.

  • So, if you want to talk about organic growth in the closeout business, it almost turns your head to saying, "Well, in effect, these are acquisitions of liabilities."

  • Whether or not it will be called an acquisition is another issue.

  • But we would look at it virtually the same way.

  • Keep in mind when we purchased Travelers, for example, we don't talk much about the retirement savings business.

  • But, in essence, we purchased a block of liabilities that look strangely like a closeout.

  • So we like that business.

  • Whether you call that organic or acquisition, that really is almost academic.

  • Tracey Dedrick - Head, IR

  • Thank you very much for joining us.

  • We look forward to seeing you on December 6 at the [Tipreoni] at 42nd Street for our Investor Day.

  • Thank you very much.

  • Operator

  • Ladies and gentlemen, that does conclude your conference for today.

  • Thank you for your participation, and thank you for using AT&T Executive Teleconference Service.

  • You may now disconnect.