大都會人壽保險 (MET) 2006 Q4 法說會逐字稿

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  • Operator

  • Welcome to the MetLife fourth quarter earnings release conference call. For the conference, all of the participant lines are in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. (OPERATOR INSTRUCTIONS).

  • As a reminder, today's call is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information (technical difficulty) 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 S1 and S3 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 being said, I would like to turn the call over to Tracey Dedrick, head of Investor Relations.

  • Tracey Dedrick - IR

  • Thank you, John, good morning, everyone. Welcome to MetLife's fourth quarter 2006 earnings call. We're delighted to be of here this morning to talk to you about our results. This morning, we will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. We reconcile these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplement, both of which are available on our web site.

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

  • Joining me this morning on the call are Rob Henrikson, our Chairman and Chief Executive Officer and Bill Wheeler, our Chief Financial Officer. After our brief prepared comments, we will be happy to take your questions. Here with us today to participate in the discussion are Lisa Weber, President of Individual Business; Steve Kandarian, Chief Investment Officer and Bill Toppeta, President of International. Joining us today for the first time in their new capacities are Bill Mullaney, President of Institutional and Bill Moore, President of Auto and Home.

  • I just ask one favor, please. When you're asking questions today, normally we can tell by content who you're referring to specifically, but since we now have four gentlemen named Bill who are on the executive committee, if you could be specific with regard to which one it is that you want to talk to, we would greatly appreciate it. And what that, I will turn the call over to Rob. Thank you.

  • Rob Henrikson - President, COO

  • Thank you, Tracey. Good morning everyone, and welcome. Our fourth quarter operating earnings set another record of met MetLife of $1.1 billion. These excellent results contributed to an overall record year for 2006 of just over $4 billion in operating earnings, representing a five-year compounded annual growth rate of approximately 19%. Results were driven primarily by growth in the business, a higher asset base, strong investment income and a relatively quiet year for catastrophes.

  • 2006 was also a year of active capital management. As a result of our record earnings, we were able to delever the Company, return our ratings to a solid AA, increase the dividend on our common shares and execute a $500 million share repurchase. In addition, we harvested approximately $3 billion of capital gains from our real estate portfolio by selling Peter Cooper Village and Stuyvesant Town into the hottest market in real estate history. It has been a terrific year and I'm very pleased with our results, but I also want to remind you that as we said on investor day, we're doing great but you should not think that this management team is satisfied with where we are today. We're not complacent and we are focused on improving our results in 2007 and beyond.

  • The yield curve presents us with a headwind in 2007 but our growth initiatives, our improving economies of scale and efficient capital management will allow us to achieve our objectives.

  • Now turning to the results for the quarter. Institutional business recorded its second-best earnings results ever this quarter with $441 million in post-tax operating earnings. The excellent results topped off a record year for institutional with total 2006 post-tax operating earnings at $1.7 billion. The quarter's results were marked by sound underlying fundamental performance in each of our business lines, bolstered across the board by favorable investment experience. Top-line growth was also quite good. Total premiums and fees and other revenues grew by 13% versus the year-ago period.

  • In our Group Life business, underwriting fundamentals were solid and consistent with our seasonal expectations. The mortality ratio remained well within our target range and investment margins widened again in the quarter. Premiums, fees and other revenues were also up nicely, and regarding our 2007 new business, already committed sales are up substantially versus this time last year. This is a strong result for us and a strong indicator after a particularly challenging environment in 2006.

  • In addition, we're confident that we've been able to place this business at our desired margins consistent with our historical pricing discipline.

  • Retirement and Savings delivered record earnings of $272 million in the quarter powered by favorable investment experience. Our spread improved to 176 basis points in the quarter. Sales of pension closeout business and structured settlements improved by almost $200 million versus the year-ago period and general account liability balances grew by over 7% year-over-year. The fourth quarter capped an exceptional year for Retirement and Savings with record operating earnings of $955 million and record general account balances of $84 billion.

  • Nonmedical Health earnings were $74 million in the quarter, up 21% versus the year-ago period. Our dental product performed especially well in the quarter, but both disability and AD&D underwriting results were weaker than both the comparable year-ago and sequential periods. Higher incidence and disability pushed the morbidity ratio to the upper end of our targeted range, while an unusual number of larger AD&D claims impacted that product's results. Top-line growth in the segment remained very strong in 2006 with premiums, fees and other revenues growing again by 8%. In addition, we completed a very successful enrollment of the federal dental program during the quarter. We're quite pleased with the results and believe MetLife's strong brand was among the key contributing factors in the successful enrollment. Looking at 2007, total Nonmedical Health sales were up almost 10% versus the same period last year, and I point out that that 10% increase does not include the federal dental program because its effective date was the last day of 2006.

  • Individual Business posted record fourth quarter earnings. Operating earnings were $415 million for the quarter, up 33% over the fourth quarter of 2005 due to excellent spreads, good investment performance and favorable underwriting margins. Total operating earnings for 2006 were over $1.5 billion, also a record. Operating earnings in our Individual Life business is almost doubled year-over-year, driven by strong investment results and favorable onetime items this quarter. In addition, you will remember the fourth quarter of 2005 was depressed by the establishment of the Travelers underwriting reserves. Consistent with what we have seen through 2006, Life first-year premiums and deposits were down from the year-ago quarter, but we are pleased to see a modest sequential growth in the fourth quarter.

  • Annuity earnings hit a record $230 million, up 10% over the prior year, primarily driven by favorable investment results, growth in the business and favorable onetime items. Total annuity premiums and deposits were $3.7 billion for the quarter, up 3% over year and 4% sequentially. However, total annuity net flows dropped sequentially as a result of higher fixed annuity lapses. Net flows associated with variable annuities were relatively flat.

  • Auto and Home once again reported record earnings for the quarter at $115 million and for the year at $414 million. The strong results in the quarter were driven by favorable claims development related to prior-year accident reserves and lower automobile claim frequencies, offset somewhat by higher than planned catastrophes. Sales in the quarter were strong, up 12% versus prior year, driven by successful rollouts of our new auto rates segmentation program and an increasing percentage of sales coming from our new brand protect products.

  • Operating earnings for International in the fourth quarter were $15 million, down 69% year-over-year and slightly below what we had forecast on investor day. This was caused by the unusual charges we took in Taiwan, about which Bill will speak in a moment; that is Bill Wheeler. I would like to emphasize, there are three things to keep in mind about International's performance this quarter. First, the underlying businesses in International produced strong results with record full-year and quarterly premiums and season revenues. Full-year sales for the segment also set a record and full-year operating earnings records were established in Korea and Australia.

  • Second, the Taiwan restructuring represents our continuing strategy of disciplines evaluation of operations and either divesting, consolidating or restructuring those that do not meet our profit target.

  • Third, record full-year sales in Japan, Mexico and the EU, as well as total International, lay a strong foundation for future profitability. You should expect to see quarterly earnings in International return to normal levels in this current first quarter.

  • In Japan during the fourth quarter there were record sales and MSI MetLife became the second-largest sellers annuities through the bank channel with $1.6 billion in sales. That is up 20% year-over-year in a Japanese market that is down 5% to 10% over the same period, an excellent performance.

  • All-in-all, the results for International were excellent this year with full-year earnings of $224 million, right in the middle of the range we gave you at investor day 2005. We took several actions to better position International during 2006 and we expect earnings to grow substantially in 2007 in accordance with our 2006 investor day guidance.

  • In conclusion, I think this was a great quarter and a great year. I feel good about our ability to execute on the plans we shared with you on investor day in December. And with that, I will turn it over to Bill Wheeler.

  • Bill Wheeler - CFO

  • Thanks Rob, and good morning, everybody. MetLife reported $1.36 of operating income per share in the fourth quarter, an increase of 30.8% over the fourth quarter of 2005. We also earned $5.21 for all of 2006, an increase of 20.3% over 2005. This was a record-setting year almost any way you care to measure it with top-line revenues of $32.6 billion, operating earnings of $4 billion, net income of $6.2 billion, total assets of nearly $528 billion and an operating return of common equity of 14.8%.

  • Although 2006 was a terrific year, as we look forward, we see many opportunities to continue to grow both the top and bottom lines. I'm going to walk through our financial results this quarter and point out some highlights as well as some unusual items which occurred during the quarter. In the fourth quarter, we had top-line revenues, which we defined as premiums, fees and other income, of $8.6 billion; it's a record. This is an increase of 10.1% over the fourth quarter of 2005.

  • Turning to our detailed business results, stronger sales in Korea and Mexico helped International grow revenues by 20.1% over the year-ago period. In Institutional Business, revenues were up 13% this quarter. Group revenue growth was solid at 7.1%, Retirement and Savings revenues were up 65.8% as a result of higher structured settlement sales and several pension closeouts. As I have said many times, sales here can be lumpy and the best way evaluate growth in Retirement and Savings is to look at the balance sheet, not at GAAP revenues. In this quarter, Retirement and Savings general account liabilities grew by $2.6 billion, which is a 12.7% annualized growth rate.

  • For all of 2006, revenues grew by 8.7%. Because GAAP revenues are sometimes on a clear indicator of where the business is heading, we also look at our total assets as a measure of business growth. In 2006, two total assets grew by 9.6%, which is an excellent result.

  • Turning to our operating margins, let's start with our underwriting results. In general, underwriting results were solid and in-line with our expectations. In Institutional, group life mortality was good at 92.1% for the quarter. Favorable underwriting results in dental, long-term care and individual disability were offset by weaker disability results as disability continues to be impacted by higher-than-expected incidents and lower than planned recoveries. Disability's morbidity ratio was 95.2% for the quarter, essentially at the top of our target range.

  • In Retirement and Savings, underwriting results included an $8 million after-tax charge due to an intercompany reinsurance accounting adjustment, and in Individual Business, mortality was 78.7% for the quarter, reflecting favorable experience for the quarter and a $13 million after-tax disability waiver reserve adjustment.

  • Turning to Auto and Home, we had another excellent quarter with an 85% combined ratio, including catastrophes. Included in this result is a prior accident year reserve release of $52 million after-tax. Even though catastrophe losses were lower than the year-ago period, they were still higher than our plan by $21 million after-tax due mainly to wind and storm events in the West and Midwest this quarter.

  • Finally in International, a $50 million after-tax reserve increase in Taiwan due to loss recognition was offset by a $38 million after-tax decrease in reserves as a result of the implementation of a more sophisticated reserve valuation system in Korea. Long-term interest rates are very low in Taiwan and after completion of our normal loss recognition exercise, we felt compelled to make an adjustment to a particular block of older policies which have relatively high minimum interest guarantees. The Taiwan and Korea adjustments are reflected in our DAC balances which flow through operating expenses in our income statement.

  • Moving to investment spreads, this quarter we had high returns primarily from corporate joint ventures or private equities which resulted in variable investment income of $123 million after DAC, tax and other assets, or $0.16 per-share higher than our baseline plan of $275 million. Retirement and Savings, Annuities and Corporate and Other were the main recipients of this income. Because of this strong performance, investment results were up across the board.

  • Moving to expenses, our overall expense levels were relatively high this quarter. There were a number of onetime items which contributed to the increase. In institutional, a regulatory settlement and the costs associated with the rollout of the federal dental program increased expenses by $32 million pretax. In International, startup expenses associated with our UK annuity operations and restructuring in Taiwan increased expenses by $41 million pretax. In Corporate and Other, we made a $30 million pretax contribution to the MetLife Foundation and also incurred $7 million pretax of external Travelers integration expenses. Offsetting these onetime events were $54 million pretax of favorable DAC adjustments in Individual Life and Annuities due to our annual review of assumptions, as well as an annuity system conversion.

  • The net of all of these onetime events is a $56 million pretax, or $0.05 per-share increase in expenses. In addition, as we have been discussing with you for several quarters now, we have been increasing our investment spending in areas such as technology and advertising. To give you a sense of the order of magnitude of this activity, we estimate that the incremental spending in these areas this quarter was approximately $100 million pretax.

  • I appreciate that the expense line on our income statement is kind of noisy this quarter, but we're actually very comfortable with the underlying expense activity at MetLife, and let me give you an example why. Compensation, or people, is our largest operating expense. Our total nonsales headcount, both domestic and international, increased less than 2% in 2006. In the fourth quarter, total nonsales headcount actually declined to due mainly to a small divestiture. Our overall operating expense ratio was 30.7% for all of 2006. At investor day in December, we projected that the expense ratio would decline to 28% to 29% in 2007 and we're still very comfortable with that projection.

  • Turning to our bottom-line results, we're nearly $1.1 billion in operating income, or $1.36 per share, representing a 30.8% increase in operating EPS. For the full-year, operating income was $4 billion, or $5.21 a share, an increase of over 20% for -- over 2005. In finalizing our tax provision for 2006, we increased our dividend received deduction estimates, thereby lowering our estimated tax expense by $28 million this quarter.

  • Turning to investment gains and losses, in the fourth quarter, we had net realized investment gains of $2.8 billion after-tax which included the gain on the sale of Peter Cooper Village Stuyvesant Town. As part of our investment gains and losses, we had derivative losses due to a mark-to-market of $103 million pretax. This was mainly due to slightly higher interest rates and a weakening of the dollar versus the euro. Our preliminary statutory operating earnings were quite strong at approximately $880 million this quarter, and they were $3.1 billion for the full-year. Total statutory capital at year-end is approximately $16.2 billion.

  • Finally, based on our most recent interpretation of SOP 05-1, we estimate that an after-tax cumulative effect adjustment of between $275 and $350 million will be recorded as a reduction to retained earnings in the first quarter of 2007. In addition, the estimated impact of 2007 is a reduction to operating earnings of up to $35 million after taxes. Amounts are based on our interpretation of proposed guidance that has not yet been issued. Final guidance could change the impact.

  • In the fourth quarter, we repurchased 8.6 million shares of common stock at an aggregate cost of approximately $500 million. At December 31, MetLife had approximately $216 million remaining on its existing share repurchase authorization.

  • In summary, this was a solid quarter and obviously a very strong 2006 for MetLife. And with that, let me turn it over to the operator so we may take your questions.

  • Operator

  • (OPERATOR INSTRUCTIONS). Tamara Kravec, Banc of America.

  • Tamara Kravec - Analyst

  • Just a couple of questions. On your VA sales, your deposits are up about 2% year-over-year, and the industry average for the fourth quarter seems to be closer to 25% to 30%. And I was wondering if you could delve into really what you are doing there and if you can get that growth rate up a little bit. And then my second question is on EPS guidance for 2007. It's now just about 10% earnings growth off core earnings of 470, so why not maintain your previous 12.5 earnings growth rate assumption, and have you gotten more conservative?

  • Lisa Weber - President, Individual Business

  • On the variable annuity sales front, let me just give you some context. The industry is up just under 11% sequentially, and on a VARS basis, which is different than you look at it as sales, what you're looking at is the QSF -- on a VARS basis, our sales are up 10% sequentially. And what we feel especially good about is this really comes from growth across all of our channels, even factoring in seasonality. And on the agency side, really led to growth year-over-year. The agency side, MetLife was up 17%, New England was up 23% in total sales. In variable annuities, sequentially, MetLife was up 14%, New England up 21%, and our independent channel was also up by 8%. So that just gives you some context.

  • In terms of what we see moving forward there, as I mentioned on prior calls, we recently rolled out our lifetime withdrawal guarantee, and that rider is the fastest-growing rider in really our Company's history. And I would share with you that we still see a lot of opportunity there because we have either just gotten approved or have yet to roll into four of our major distributors which account for 27% of our sales on the independent side. And there are four states, two of which we just got approved in, so we have not seen the benefit of that yet, which account for just over 20% of our market share from that standpoint. So we're optimistic as we go forward and we also have some other product rollouts on the independent side coming.

  • Bill Wheeler - CFO

  • Tamara, this is Bill number one. Can you tell me -- can you do your EPS question one more time?

  • Tamara Kravec - Analyst

  • Sure. At your investor day, you had said that your guidance for 2007 from midpoint to midpoint was about 12.5% earnings growth, and now you have ended 2006 on a stronger core basis and I came to about $4.70. So my question is, why not maintain that 12.5% growth rate assumption, because now you're really down to 10%. So is there anything that has made you more conservative or should we look at the guidance in more of a static frame?

  • Bill Wheeler - CFO

  • I guess I would say that, the way we build the EPS guidance is really a bottoms-up sort of thing which we do ever year, and obviously what is not driving it is the 12.5% growth rate. It's what our bottoms-up output delivers. We feel good about 2007. We've talked a lot about the trends that are causing 2007 to move around, and Rob alluded to it a little earlier, the inverted yield curve, our assumptions regarding variable income, and you know, obviously our underwriting results and stuff like that. I guess we feel very positive about the growth rate, even though the fact that the fourth quarter ended up coming in a little stronger than we might have otherwise thought. And then of course, never mind SOP 05-1, which will have to get factored into the guidance in the future. I should maybe mention something about that SOP 05-1 while I have the microphone. We really view it as, it could be up to a $0.05 charge in 2007, it also frankly might be zero, and that will depend on the final guidance from the AICPA in terms of how to interpret the reg. So when we get that factored in, and then also -- and then obviously we see how the first quarter turns out, then we will think about the rest of the year.

  • Lisa Weber - President, Individual Business

  • Tamara, let me just clarify one piece on the year-over-year sales on the VA side, which is that, we also -- one of the things I mentioned on one of the prior calls is that we discontinued two former major Travelers accounts, which accounted for a good part of the business. The other piece to keep in mind is that we had from September of '05 until year end, we had a transition bonus in taking over the Travelers business, so that's what you see in the year-over-year numbers and why you see the number is up 4% instead of higher.

  • Tamara Kravec - Analyst

  • And my last question is just on the expense ratio that you mentioned. You were so comfortable with the 28 to 29% in '07. Can you just remind us how you're going to get there?

  • Bill Wheeler - CFO

  • Part of the way we'll get there is lessening these discretionary investments which we've been making in 2006, and you can sense, if you just take my number at face value, $100 million pretax this quarter, and it wasn't that high in the previous quarters, but there was clearly some spending, if you eliminate some or most of that and the business continues to grow, you're virtually there. So that's a lot of what is going on.

  • Tamara Kravec - Analyst

  • All right, thank you.

  • Operator

  • Andrew Kligerman, UBS.

  • Andrew Kligerman - Analyst

  • Good morning. Variable investment income, very strong, [SS] being under $123-$124 million. Can you give a little color on what areas of that variable investment income have generated the excess, and whether you think some of this is sustainable? Your spreads, every one of them I think pretty much beat guidance, and perhaps you could talk about where you see the spreads going as well. And then I have a quick follow-up on UL.

  • Steve Kandarian - EVP, Chief Investment Officer

  • It was a very strong quarter. In fact, it was the best quarter we've had in our history in terms of variable income. And in particular, the CJV portfolio was a strong performer. Again, it was the high water mark for us in terms of historical returns for CJVs in our portfolio.

  • Andrew Kligerman - Analyst

  • The C before the JV -- that stands for?

  • Steve Kandarian - EVP, Chief Investment Officer

  • Corporate joint ventures -- I'm sorry -- it's our LBO funds. So the LBO market as you've read is very, very hot right now. Returns are strong, the capital markets are very favorable to LBO investors. They do buyouts, they refinance deals quickly, they take out money, they pay dividends. Sometimes they make sales that companies are taking them public. It's just a very hot market and it has been for a couple of years. I guess the question is -- how long will that go on? We've given your guidance for 2007 at $295 million per quarter, up from $275 guidance we gave in 2006, so we're trying to measure it in terms of our expectations about this asset category, but to date, it has been a very, very strong performer.

  • Andrew Kligerman - Analyst

  • So then in terms of the overall spreads and the different segments, sticking with the guidance assuming that base variable investment income that you specified a moment ago?

  • Bill Wheeler - CFO

  • I think so, Andrew. I think we should -- I guess the good news is, the fourth quarter was so strong, we feel pretty good about variable income in 2007, but I don't think we're going to change our estimates.

  • Andrew Kligerman - Analyst

  • Okay, and then just quickly a little color on the universal life, the sales were down year-over-year materially. A little color on why down right now, and what you're looking forward to seeing in '07. Do you think there might be a nice pickup?

  • Lisa Weber - President, Individual Business

  • Yes. UL sales were down for us by 40% year-over-year. The big drop was in our independent distribution channel, and there, there's really the same story, which is because we will not be in the IOLI business, in the life settlement business, irrational pricing with respect to older age underwriting, we have seen a hit there. Now what we have also seen is that UL is really is slowing for the industry, and so our market position is challenging. But, what I would also tell you is that the benefit of such broad distribution is we have had strong growth on the agency side.

  • Andrew Kligerman - Analyst

  • And why do you think UL is slowing for the industry, ex the ALOI and factors like that?

  • Lisa Weber - President, Individual Business

  • I will tell you, yes, those are the factors, and many of our competitors are following in our footsteps as evidenced by -- if you look at total life sales for the industry, what you would see is that it really started off with a bang and ended with kind of a whimper in that first Q sales were up by 15%, Q2 the industry was up 8%, Q3 the industry was up 2% -- I mean, only 1%. And so what you can see is that many of our competitors are getting out of this business and we can actually see a time possibly a year from now when there is no more IOLI business. So we see the market is coming back to us over time, and we are going to continue to stick to strong fundamentals of the business and doing the business in the right way.

  • Andrew Kligerman - Analyst

  • So Lisa, maybe a little bit more pressure in '07, but not a lot -- is that what we should look for?

  • Lisa Weber - President, Individual Business

  • Yes. What I would say is that, again, consistent with our plan, we see only modest growth in '07 and we don't see the industry having the growth kind of growth rates that it had in '06.

  • Andrew Kligerman - Analyst

  • Excellent.

  • Operator

  • Saul Martinez, Bear Stearns.

  • Saul Martinez - Analyst

  • Good morning. A couple of questions. First, in terms of your outlook for M&A, what are you seeing out there, and is there any change in terms of assets available, pricing trends? And is some of your competitors have suggested that private market valuations kind of remain rich, does this man that the $750 million in buyback guidance could be conservative? And then secondly, Lisa, on your VA business, can you talk a little bit about why variable annuity withdrawal rates have been picking up so much over the last year? They've gone from 9% to 10.5% in the last year, and I think it has to do with the seasoning of the Travelers block. But what should we expect in terms of withdrawal rates going forward? Is this kind of the norm going forward?

  • Rob Henrikson - President, COO

  • Could you just do the first part of your question again? We're in a funny, room and we have a bad echo.

  • Saul Martinez - Analyst

  • Just in terms of M&A, what are you seeing out there? Any changes on the margins in terms of assets, available pricing trends? And as a follow-up to that, some of your competitors have suggested private market valuations kind of remain rich, and if that is the case, should we think that the $750 million in buyback guidance could prove conservative, if you cannot find anything?

  • Rob Henrikson - President, COO

  • Saul, let me take a crack at that. I will speak more strategically, and I'll ask Bill to comment on what he thinks the valuations are. And the reason I start strategically is that, keep in mind that I think we are in an excellent position now as we have been, but particularly now in terms of our capital, to be in a position to take advantages of consolidating forces in the marketplace, both in the United States and outside of the United States. Having said that, as you know, and we mentioned this on investor day, we're not scattered all around the place in what we view as competencies and capabilities. We would look to expand our strengths in the businesses we are in, either in terms of moving to a different market or perhaps a broader base of manufacturing capabilities. So the story has not changed there, except that one might say that the opportunities going forward might become more clear in terms of pricing, which Bill might comment on. And certainly on a relative basis, I think we are stronger than we ever have been, and so we keep our eyes open. Our desire is to make sure that we are aware of anything in the marketplace that would help us expand our reach and our power in the businesses that we are currently in.

  • Bill Wheeler - CFO

  • And obviously, yes, valuations for the publicly-traded companies are up. I'm not sure M&A valuations or up, but there's not maybe enough data to have an opinion about recent trends. But I guess I would feel that the -- in terms of our own outlook, obviously, we want to do accretive deals, it's something we're focused on. We want to do good strategic things, but we want to do deals that are going to be accretive, and we look for that as a focus.

  • In terms of whether or not, whether M&A might slow down, and we may not see an M&A opportunity and would that change our buyback outlook, that is certainly a good thesis, that is certainly possible. We're not holding a pile of money waiting for another M&A deal. We have talked before about, we have some plans, we have this convert which is going to convert in '08 and '09. We have some other potential needs in terms of business growth, our own business growth which we might need to fund. And then I would just say that, the final thing is, we always look in terms of, depending on how the stock is going and how cash flows are going and what's the company at the holding company in terms of what our buyback activity will be throughout the year. So we said 750 on investor day, that's our current plan, but obviously it's just a plan.

  • Saul Martinez - Analyst

  • Okay, thanks. And on VA withdrawals?

  • Lisa Weber - President, Individual Business

  • Yes. On the VA lapse rates, you look at the roll-forward QSS, we are actually pleased with our current level, and the reason is that we had Travelers withdrawal rates were high, which is as we expected, and so you see that in the numbers. We also had some of MetLife Resources, which is institutional type business lapse, which again, we expected, and also, some of our mature block of business in what's our PPA in the fixed part, which is in the variable account. And so they are consistent with what we expected to see, and what I think you will continue to see is really relatively flat lapse rates.

  • Saul Martinez - Analyst

  • Okay, that's great, thanks a lot.

  • Operator

  • John Nadel, Fox-Pitt Kelton.

  • John Nadel - Analyst

  • I have two questions, one on the interest rate environment and the other on pension closeouts. I think Rob that you mentioned in your opening comments that top line in Retirement and Savings in the quarter was at least somewhat driven by pension closeouts. And I was wondering if you could just give us an update on recent conversations, where the dialogue is at this point, any changes in your outlook over the past couple of months since your investor day. And then the second question on interest rates is just, maybe Steve could sort of talk to the pressure that is on earnings at the short end of the curve. Is that where the biggest pressure is? And sort of if we see the Fed cut yield curve maybe normalize, is that -- how much pressure is on earnings today and how quickly can that sort of alleviate?

  • Rob Henrikson - President, COO

  • John, let me address your questions on the closeouts. I would say, if I were having an investor day today, I would say the same thing that I said in investor day in December. So I don't think there is any change there. I would say this -- the closeout activity that we have seen that was a nice uptick in 2006 is not necessarily reflective of what opportunities may emerge in 2007 or 2008, because as you look at the marketplace, the types of solutions to address these issues vary quite a bit. So the closeout business at the smaller end of the market is not necessarily reflective of a trend that might occur at the larger end of the market, nor is it reflective of what kind of arrangements might be underwritten.

  • John Nadel - Analyst

  • And Rob, is the issue at the upper end of the market? Is the issue more of just the underfunded status and how companies can deal with what the charge might be or what the pricing might mean to close that gap?

  • Rob Henrikson - President, COO

  • Well, those plans that obviously, because of underfunded status, literally, this is an area, if you are in a particular position, you simply do not have options available to you, that you would if those lines are either close for in fact crossed. So, again, our way of going would be to be in the rifle shot business, not to wait until the marketplace simply develops and then have a massive bidding frenzy, is not something we would want to participate in.

  • Bill Wheeler - CFO

  • With regard to the shape of the yield curve and where's the pressure, yes, the pressure is mainly at the short end, and obviously that affects us a couple of places, mainly securities lending, but also a little bit in Group Life and in Retirement and Savings where we have some quite short liabilities. You remember now, when we built our 2007 earnings projection, we said that we expected the yield curve inversion to start easing in mid-year, okay? And everybody has their own opinion about the Fed -- I think Bernacke is actually going to speak again today about whether or not that's going to happen or not. I think it's very much up in the air obviously whether it will happen. So baked into our projection is that we're going to get a little relief for towards the end of the year. The yield curve, before it starts a normal shape, it will go flat. That will help, but obviously, so we expect the yield curve shape, as it goes to a more normal slope, it will take time. It won't all happen in a month. And so, obviously, let's just play it out. If they do start easing in mid -- towards the end of the year, you will not see a real normal sloping yield curve until probably sometime in '08, and that is when commissions are going to be obviously the best. We aren't really seeing a lot of pressure at the long end of the curve. The 10 years, a little over 480 I think right now. That's okay. I wish it were higher, but that's okay in terms of pressure. We're not crediting at our interest rate minimums by and large, and so we are not feeling that sort of long end of the curve pressure.

  • John Nadel - Analyst

  • And then maybe just a quick follow-up to that. I just want to clarify again, your expectations in your guidance using the S&P for your fee-based equity-sensitive businesses is 5%, right?

  • Bill Wheeler - CFO

  • That's right.

  • Operator

  • Joan Zief, Goldman Sachs.

  • Joan Zief - Analyst

  • I was just interested in thinking about the momentum in '07 and '08, and how you look at your businesses. We talk a lot about earnings, but I guess the question is -- should we really be thinking more about your balance sheet and your balance sheet returns? And the reason I say that is, you have had really exceptional earnings growth for the last several years, and I'm trying to understand what's -- other than -- I understand the variable investment income does not always happen, and you have the yield curve inversion, but we have had issues with interest rates for a long time now. So what is it that is actually slowing that is giving you pause for your 2007? Or to put it more in the positive, what do you see as the momentum, that -- the specific momentum, other than just I guess expenses, that could add $0.08, $0.09, $0.10 a share to incremental earnings, that you're looking at for '07 and '08?

  • Bill Wheeler - CFO

  • I will take a first cut at that, then maybe some others want to join in. I would say that, if you think about -- we ended up with reported earnings per share this year of $5.21, and I think one of your peers suggested that normalized was more like about $4.70, and I would not disagree with that. And then we're obviously forecasting $5.05 to $5.25 in '07, and then '08, we are silent, but we are hopeful.

  • So what is going on? Why when you report $5.21 are you only going to have guidance of $5.05 to $5.25. I would say there are really two big things. One is that we very much overperformed on variable income, and that's a bit portion of the difference, and we are not forecasting that overperformance in 2007, as Steve alluded to earlier. That said, we don't see it slowing down. And I would admit, our visibility at times is not great, but we view the fourth quarter as not sort of a last hurrah of great returns, but actually just that it was very robust. And so, that's sort of -- I'd just drop that out there. You alluded to expenses. Obviously, we're going to have some -- I think we're going to have some expense momentum in 2007.

  • And then finally, the other thing which we haven't talked about is, we did have about $100 million after tax of reserve releases in Auto and Home this year. You cannot forecast that going forward, so we do think Auto and Home is going to have a good '07. In terms of '08, what is different? I think you're going to see continued good performance out of a lot of our businesses. The other thing that's going on -- International going to continue to grow very strongly. I think you're going to see Group pick up a lot in terms of both top line and earnings growth. And I think also, we're probably going to get a more favorable interest rate environment in '07, and I think that's going to be a little accelerator to earnings, or in '08 I mean, and that will be a little accelerator to earnings. So there's no -- I think there's good, solid continued performance. I'm not sure there is a magic bullet, I think we're just going to have nice trends going up.

  • Joan Zief - Analyst

  • Are you thinking that you're going to see finally a slowdown in your revenue growth and a slowdown in your growth in assets then that you earn off of? Should we be thinking about that?

  • Bill Wheeler - CFO

  • Well, you know, we have been public now for since 2000, so I can say this with a lot of authority. Even though we are almost not quite was a big as we were in 2000, our growth rate has not slowed down one bit. And you would think as we get bigger that we would start to slow down; we really have not. And why is that? Well, international has helped drive that a lot, but frankly, our core businesses in the United States have grown as well. Because it isn't just, well by the way, the reason we haven't slowed down is not because of Travelers. Travelers has been both -- our growth rate was 10% this quarter, Travelers was in both periods. So we're not really slowing down.

  • Now, that said, GAAP revenues because of we have a send one big in dollars or so close out in 2007 we are actually projecting GAAP revenues are actually going to accelerate. And then if we pulled that out, they would be more normal. And so I don't -- it's possible we might slow down very modestly, never mind the closeout business. But if the closeout business comes to pass, I would guess we probably aren't going to slow down at all. So this isn't sort of like, oh my God, we've reached the top of the mountain and it's going to be hard to grow from here. We really are not slowing down.

  • Rob Henrikson - President, COO

  • John, I might even -- and I won't use -- I was going to use the word bullish, but that it might get quoted somewhere out of context, so I don't want to be too bullish. But keep in mind that over a period of time, from my point of view, I have been rather surprised because of the shape of the yield curve that we have been in some of our businesses able to grow revenue as attractively as we have. And I am not suggesting there is -- and on the question that was asked earlier about -- in several ways about CJVs and what not, there may not be a correlation, a fine correlation between CJV opportunities and this relatively unusual yield curve shape and the level of interest rate. But if one goes away, I'm thinking that revenue growth might actually pick up in some of our products and services, which quite frankly, if you had told us before this period if we had this kind of extended flattened yield curve, I think we would have been a little more cautious about what we thought we could do on the revenue side. And I am not even talk about the closeout business, but if you think about opportunities there in terms of what people are looking at in terms of solving problems, a little bit of a change in the yield curve could cause some people to be able to take opportunities that they are waiting for because of the interest rate scenario. So we're in a lot of businesses, we've talked about this, we have many different ways to see earnings coming into this Company, and some of our businesses are I think as strong as they have ever been. I know we don't talk a whole lot about the group insurance business relative to others, but that's a business that in most conversations around our business, we don't talk about interest rates at all.

  • Joan Zief - Analyst

  • Great, thank you.

  • Operator

  • Eric Berg, Lehman Brothers.

  • Eric Berg - Analyst

  • Thank you. Two questions -- one for Bill Wheeler and one for Lisa. Bill, when you talk about not feeling, if I heard you correctly and understood you correctly, not feeling as much pressure at the medium or long-term end of the yield curve and feeling more pressure at the short end, I just was hoping you could explain -- what I am thinking is that you're trying to tell us there are certain products that are more affected than others by conditions on the short end certain products that are more affected than others by conditions in the medium end. Is that sort of the concept you're trying to --?

  • Rob Henrikson - President, COO

  • Absolutely, absolutely, because obviously, our liabilities have all different duration lengths, and so -- and, obviously, the investments are linked to that. So the idea that -- you know, [sec] lending is obviously one at the short end where the liability duration is very short, and obviously very -- and floating. But a couple of years ago when the 10-year Treasury was at 4%, and at times it actually dipped below 4, and I would say our typical minimum interest rate guarantee in an annuity is 3%, we were at the minimum guarantees a couple of years ago, 18 months ago or so, and we sensed -- we started to feel actually a little spread compression. Now before that got too serious, interest rates moved back up. But that is when we talked about sort of the long end. And so now, we're not crediting at minimums anymore, we're off minimums, so we're not feeling that same sort of spread pressure that we did 18 months ago. So that is a good example at the long end.

  • Eric Berg - Analyst

  • Great. My question for Lisa is sort of a follow-up to the earlier question I think by Andrew regarding the life insurance business. There definitely were some companies that showed improvement in universal life sales, and we won't focus on them, we're here to talk about MetLife, but my question is, would it be your sense, Lisa, that if companies are selling a lot of universal life contracts today, there's probably a good bit of IOLI in there, or are you not trying to suggest that?

  • Lisa Weber - President, Individual Business

  • No. I would say that there probably is a good bit of IOLI in there.

  • Eric Berg - Analyst

  • Just one quick follow-up before going to the next questioner. The industry has worked very hard to try to defeat this by getting agents to sign agreements, that they won't submit such applications and through other means. What is your sense of how these applications are getting approved, since just about everyone says they are trying to thwart the IOLI?

  • Lisa Weber - President, Individual Business

  • You know, Eric, I think some have said it and meant it as evidenced in their sales numbers, and then others have said it and we have not quite seen it work out that way. Of course, I don't know for sure, but you can just tell by the way that the numbers have gone. But sales are flowing from an industry perspective, and I think that there is a different direction and companies are now looking more towards products that have higher cash values, and there is just a bit of different strategic direction from the traditional UL business.

  • Eric Berg - Analyst

  • Thank you very much, I am all set.

  • Operator

  • Tom Gallagher, Credit Suisse.

  • Tom Gallagher - Analyst

  • My first question is just on the discretionary expenses. Bill, I just want to get a better handle on what kind of expense momentum we may actually be looking at here. You used $100 million this quarter. When you look at kind of what is embedded in your guidance of going from what was at 30.7% this year to 28% to 29% next year, or rather 30.7% in '06 to 28% to 29% in '07, what kind of bottom-line EPS impact would that be? If I'm doing the math here correctly, that could get us just from the expense leverage $0.30 to $0.35 of an EPS lift. It is that about right order of magnitude? That is my first question.

  • Bill Wheeler - CFO

  • It's probably a little high. There are some reasons why, you have to be careful about -- this goes to the point of, all our revenues are different. Some of them are premiums, some of them are fees, the mix shifts a little bit every year. So it probably would not be quite that high. And oh, by the way, remember, we're going to row. So I would say it's probably a little less than that.

  • Tom Gallagher - Analyst

  • The other question is just on Taiwan. I assume Taiwan has been headwind for International earnings. Now that you have taken the impairments, I would assume all else being equal that your outlook for International has probably gotten a bit better. Is that a fair characterization? And I guess a related question is, what exactly did change in the environment in Taiwan to cause this impairment, or was this really just a MetLife-specific charge?

  • Bill Wheeler - CFO

  • Remember on investor day when we gave our guidance, we also mentioned that we were going to be doing a restructuring in Asia-Pacific, so this was sort of contemplated in our guidance. Taiwan wasn't a headwind -- we were making money there -- but the ROE was very low, and that is what sort of caused us to focus on it. In terms of the -- what was the other question? I can't remember now.

  • Tom Gallagher - Analyst

  • Was it something in the environment (MULTIPLE SPEAKERS)?

  • Bill Wheeler - CFO

  • Right, the overall environment. Yes, it is definitely something in the environment. Obviously, if you go back 15 years, a lot of Asia had relatively high inflation and relatively high interest rates, and obviously we sold products in that environment, and some of those products had like, for example, 6% minimum interest rate guarantees, which at the time, seemed like no problem. But in hindsight, we obviously are. Today, interest rates -- long-term interest rates in Taiwan I think are 2.2%. So the pressure there is obvious. And so, yes, I would call this a macro problem, not necessarily a Met problem.

  • Tom Gallagher - Analyst

  • Was this a macro problem that crept up on you in the fourth quarter, or has this kind of been an ongoing reg that has been there for the last year or two?

  • Bill Wheeler - CFO

  • No, it has been going up for quite a bit longer than that. In the summer of 2003, we took a loss recognition charge in Taiwan I think of a little over $30 million pretax. And at the time, long-term interest rates were 3% in Taiwan. So here we are, over three years later, 3.5 years later, and what has happened? Long-term interest rates have gotten worse, and we felt compelled to take another loss recognition of that, this time bigger. And so this has been out there for awhile in terms of a situation.

  • Tom Gallagher - Analyst

  • Okay, thanks.

  • Operator

  • Darin Arita, Deutsche Bank.

  • Darin Arita - Analyst

  • A couple of questions here. The first one is for Bill Toppeta. With respect to MetLife's Japanese variable annuity sales, can you talk about which products or features are driving the sales growth?

  • Bill Toppeta - President, International

  • Sure, Darin. As far as our sales growth, it is being driven by the product we came out with in 2006, which is the GMWB for life product, and that is our strongest seller by far.

  • Darin Arita - Analyst

  • And MetLife's share has certainly grown, but are there any signs that the industry sales growth rate may be reversing back to the positive territory?

  • Bill Toppeta - President, International

  • You know, the sales growth in the industry actually in Japan has been negative, and so we are doing quite a bit better than what the marketplace would suggest. As far as the go-forward is concerned, we are looking at, and I think we gave you guidance back on investor day of a 10% sales increase for 2007, and we are sticking with that, as far as our sales are concerned.

  • Darin Arita - Analyst

  • And the next question is for Bill Moore. The Auto and Home business has been benefiting nicely from favorable reserve development. Can you talk about what is driving this?

  • Bill Moore - President, Auto and Home

  • If you look overall in at the performance of the organization, you can see over the last several years obviously the improvement in automobile frequencies. You continue to see improvement in severities or severities growing at a much slower rate than we would have anticipated in the past. Also, we're seeing the benefits of some of the distribution of our business, moving out of more coastal markets, moving out of more highly concentrated markets, in terms of the demographics.

  • Darin Arita - Analyst

  • And when you think about your pricing for '07, what are your assumptions for frequency or severity?

  • Bill Moore - President, Auto and Home

  • I think for frequencies, we're assuming pretty flat frequencies for 2007.

  • Darin Arita - Analyst

  • And on the severity side?

  • Bill Moore - President, Auto and Home

  • And on the severity side, mid-single digits.

  • Darin Arita - Analyst

  • Great, thank you very much.

  • Tracey Dedrick - IR

  • Thank you very much for joining us today. We really appreciate it and we look forward to speaking with you throughout the quarter, and then again with the first quarter results. Thank you very much.

  • Operator

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  • That does conclude your comments for today. Thank you for your participation. You may now disconnect.