大都會人壽保險 (MET) 2007 Q1 法說會逐字稿

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

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

Later there will be a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded.

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

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the Company's operations and financial results, the markets for its products and the future development of its business.

MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described in MetLife's filings with the SEC, including the S1 and S3 registration statements.

MetLife specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of information, future developments or otherwise.

With that, I would like to turn the call over to Tracey Dedrick, Head of Investor Relations.

Thank you, Ken, and good morning everyone.

Welcome to MetLife's first quarter 2007 earnings call.

We're delighted to be 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've reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplement, both of which are available on our web site on the investor relations page.

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

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 Webber, President of Individual Business; Steve Kandarian, Chief Investment Officer; Bill Toppeta, President of International; Bill Mullaney, President of Institutional; and Bill Moore, President of Auto and Home.

And with that, I will turn the call over to Rob.

Thank you, Tracey.

Good morning everyone, and welcome.

As you can see, we had a good start to 2007 with record operating earnings of $1.1 billion, or $1.41 per diluted common share, an increase of approximately 6% over the first quarter of 2006.

Our return on equity for the quarter was a strong 14.1%.

We had excellent top-line growth of 6% from the prior-year period, record assets under management of $538 billion, very good underwriting results in a number of businesses, strong investment income and an expected sequential decline in expenses.

The yield curve continues to present us with a headwind, but our growth initiatives are improving economies of scale and efficient capital management should allow us to achieve our objectives for the year.

In our continuing effort to actively manage capital and improve shareholder value, we entered into an accelerated share repurchase program for $750 million during the quarter, completing our share repurchase target that we discussed on investor day in December.

Now returning to the results for the quarter.

Our institutional business recorded post-tax operating earnings of $452 million during the first quarter representing a 9% increase versus the year-ago period.

The exceptional results were characterized by strong across-the-board underwriting results in each of our segments, particularly in Group Life where claims experience remains favorable and in Disability where we experienced marked improvements in incidents and favorable recoveries.

In addition to a good claims experience, investment performance remains solid.

In spite of the continued challenging interest rate environment, spreads in each of our segments remain within the guidance ranges we communicated to you at investor day.

While the earnings results are certainly quite good, it is even more meaningful to us that we've been able to consistently record results such as these on a steadily growing block of business.

In the Nonmedical Health segment, top-line growth was driven primarily by organic growth in Dental and Disability, bolstered by a large Disability reserve buyout sale.

In Group Life Insurance, the impact of the quarter's favorable experience on our participating business tempered the growth rate a bit, but we still expect to achieve our overall growth target for the segment for the year to.

In RNS, we continued to see healthy activity in the mid-sized pension closeout business during the quarter recording $83 million in closeout-related revenue.

Institutional was off to a very strong start in 2007.

We continued to adhere to our fundamental principles of sound risk selection and pricing discipline and we believe these have been the key contributors to the excellent underwriting performance this quarter.

We're quite pleased with the results and believe we're well on our way to achieving the objectives we set out at investor day.

Individual business operating earnings were $319 million for the quarter, down 22% from the year-ago period due to unfavorable write-offs and a revision to the amortization of deferred acquisition costs which Bill will discuss in more detail.

With respect to sales, while total life sales are down year-over-year, we believe our independent channel sales have stabilized at their current level and we're seeing positive momentum in our agency channel.

Our agency distribution channel, which constitutes roughly two-thirds of our Life production, grew sales 6% versus last year's [core].

Fueling this increase is the growth in our agency distribution sales power which is up 3% from the year-end 2006 level.

Both our MetLife and New England channels grew fueled by strong retention of our best agents.

In addition, based on recent industry developments, we remain very confident in our decision to emphasize quality of sales as both a manufacturer and a distributor of life insurance.

On the Annuity side, total variable annuity deposits were down slightly from the prior-year quarter.

However, once again, our agency channel showed a solid 4% growth year-over-year.

In addition, we're pleased to show strong growth in our separate account fees and a modest increase in our variable annuity net flow sequentially due to slightly higher sales and stable lapses.

With momentum in our agency channel and our Life sales stabilized in the independent channel, we're confident in our direction.

Auto and Home once again reported excellent operating earnings for the quarter at $106 million.

The strong results in the quarter were driven by favorable claims development related to prior accident year reserves and slightly lower catastrophes than expected.

Sales in the quarter were strong, up over 20% versus the prior year.

The introduction of our new metrics tiering program into 35 states has sparked strong sales of auto and has also helped boost sales of homeowners and [grand protects].

These strong sales are not reflected in revenues due to a premium accrual and higher ceded premiums during the quarter.

Operating earnings for International in the first quarter were a record $124 million, up 63% year-over-year.

This was a very strong result for International and while inclusive of some onetime tax and reserve benefits, it was also reflective of an 18% increase in total revenue along with excellent business fundamentals and good expense management.

Overall sales in international were up 28% from the prior-year period led primarily by Mexico and Japan.

Sales in Korea were down from prior year primarily due to lower production in bank assurance and direct marketing along with a slight decline in agency sales where competition continues to be a factor.

In Mexico, sales were up 22% versus the prior-year period and Japan had record sales of $1.6 billion, up 36% from the prior year period on a yen basis.

In March, Japan had record daily sales, record monthly sales and record Japanese fiscal year sales.

In fact, we've continued to grow despite the fact that the bank channel individual annuity market is estimated to be down 7% year-over-year.

So as you can see, even with the challenges in individual businesses, Institutional International and Auto and Home all performed well.

MetLife is off to a good start with top- and bottom-line growth, strong investment income and a solid ROE for the quarter.

With that, I will turn about over to Bill.

Thanks, Rob, and good morning, everybody.

MetLife reported $1.41 of operating income per share for the first quarter.

This is a record and also represents a great start to 2007.

This morning, I'm going to walk through our financial results and point out some highlights as well as some unusual items which occurred in the first quarter.

Let me begin with top-line revenues, which we define as premiums, fees and other income.

Top-line revenues were $8.4 billion this quarter, an increase of 6.2% over the first quarter of 2006.

Looking at our detailed business results, stronger sales throughout Latin America, led by Mexico and most of the Asia-Pacific region, helped International grow revenues by 17.7% over the year-ago period.

And although they're not included in our GAAP revenue results, sales of annuities in Japan were up 36% over the year-ago period on a yen basis, and as Rob just outlined to you, a very strong performance.

Another strong performance was in Nonmedical Health in our Institutional segment which includes our Dental and Disability businesses, among others.

Revenues were up 11.4% and annuities with an increase in separate account balances of 13% from the year-ago period had revenue growth of 11%.

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

In general, underwriting performance was strong and in Institutional the results were exceptional and broad-based.

Group Life underwriting results remained good.

Our mortality ratio was at the lower end of our rate target range, at 91.8%, although we generally anticipate that the first quarter is a seasonally high claims quarter.

In Nonmedical Health and Other, Group Disability's morbidity ratio improved to 87% for the quarter, well below our target range of 89% to 94%.

This reflects marked improvement relative to the fourth quarter of last year in reported incidents.

International results benefited from favorable underwriting experience in several countries as well as an $8 million after-tax experienced premium reserve reduction in Mexico.

Turning to Auto and Home, we had another excellent quarter with an 87.7% combined ratio for the quarter, including catastrophes.

Included in this result is favorable prior accident year development of $30 million after tax and lower than planned catastrophes of $4 million after-tax which were partially offset by the accrual of an $8 million after-tax premium refund related to a state regulatory exam.

Moving to investment spreads.

Again this quarter we had high returns primarily from corporate joint ventures of private equities which resulted in variable investment income of $73 million after DAC, tax and other offsets, or $0.09 per share, which is higher than our baseline plan of $295 million of variable income on a pre-tax basis.

Retirement and savings, annuities and corporate and other were the main recipients of this income.

Adjusting for the higher variable income, investment spreads were generally lower this quarter but were consistent with our general expectations.

Moving to expenses, our overall expense levels were higher than normal this quarter primarily due to several onetime items.

These include several revisions to DAC amortization and individual business which netted to $40 million after taxes.

There was also a $16 million after-tax write-off of a receivable from a real estate joint venture partner and a $6 million technology write-off.

In institutional, there was an $18 million after-tax increase in DAC amortization due to the adoption of SOP 05-1 this quarter.

In corporate and other, adjustments to legal reserves were booked, the net effect of which was to increase expenses by $7 million after tax.

The net of all these onetime items is an $87 million after-tax, or $0.11 per share, increase in expenses.

Excluding these items, our expense ratio was in the mid to high 29% range.

We are still comfortable with our investor day projection of 28% to 29% for the expense ratio in 2007.

Turning to our bottom-line results, we earned nearly $1.1 billion in operating income or $1.41 per share representing a 6% increase in operating EPS over the first quarter of the last year which in itself was an unusually strong quarter.

Our tax provision for the first quarter of 2007 includes two onetime tax benefits in International totaling approximately $9 million from operations in Argentina and Ireland.

Turning to investment gains and losses, in the fourth quarter we had net realized investment losses of $58 million after tax.

As part of our investment gains and losses we had derivative losses of $111 million pre-tax from derivatives which do not qualify for hedge accounting.

Our preliminary statutory operating earnings were quite strong at approximately $854 million this quarter.

Total statutory capital at March 31 is approximately $17 billion.

As discussed on our fourth quarter call, we adopted SOP 05-1 in the first quarter, which resulted in a $292 million after-tax cumulative adjustment to retained earnings.

I have just mentioned, the adoption also caused an increase in amortization this quarter.

We expect an additional $0.03 worth of increase in amortization over the course of this transition this year.

In addition, we also adopted FIN 48 in the first quarter, which resulted in a $37 million after-tax reduction to retained earnings.

In February of 2007, an additional 1 billion share repurchase authorization was approved by the Board.

In the first quarter, we purchased 11.9 million shares of common stock at an aggregate cost of approximately $750 million.

At March 31, 2007, MetLife had approximately $458 million remaining on its existing share repurchase authorization.

In summary, this was a solid quarter and obviously a very strong start for MetLife in 2007.

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

(OPERATOR INSTRUCTIONS).

Jimmy Bhullar, J.P.

Morgan.

I just have a couple of questions, the first one for Bill on buybacks.

You've already done your $750 million for '07 and you mentioned the $458 million remaining in your authorization.

What are your thoughts about buybacks and are you going to use a part of the $458 million this year, or are you done for this year?

So if you can just comment on that.

And then secondly for Lisa, on the variable annuity business, if you can talk about the status of the rollout of the lifetime income feature.

I think your market share has declined in the past couple of years in the VA space, if you can just talk about what your expectations are for that.

In terms of buybacks, we had on investor day said our expectation in 2007 was to do a $750 million buyback, and that is obviously the number we did in the first quarter.

When you are comfortable that that's a number you're going to do, from an accounting perspective in many ways it's best to just get it done at once through an accelerated.

It gives us the benefit of that buyback earlier than if we had sort of spread repurchases throughout the year.

So there's sort of a motive to get it done early in the year.

And by the way, we happened to initiate the accelerated when the stock had a little dip.

So I think we picked up a couple bucks there as well.

So, in terms of the outlook for the future, we have capital expectations or a capital strategy which sort of extends beyond one year.

We obviously have quite a bit of cash at the holding company right now and we have good cash flow coming from our insurance subsidiaries.

But we also have capital needs with regard to the convert and possibly some business expansion in the future and we're obviously not only looking at the remainder of '07, we're also thinking about '08.

And I don't want to hit one way or another because I'm really not hinting.

We'll just have to see how the rest of the year plays out in terms of capital needs and our outlook for '08 before we make any additional decisions there.

So I guess the answer is, it could go either way.

This is Lisa.

Just to comment, overall, we have a lot of good stuff going on in the annuity side and the story is really consistent with what we told you on investor day.

We had a solid quarter in all channels and we ended really on a high note, and that is in large part because of the progress of our rollouts.

We had -- we just rolled out our lifetime referral guarantee rider in two major accounts in February with another two at the end of this month.

We started to see a lift from our new 6% GMIB offering which is coming out later this month, and we also have -- we will also be launching a proprietary product in another major account at the very end of Q2, so those results will be more likely to show up in Q3.

So there's a lot going on from a product side.

In terms of state approvals, we did get approved in two of the four states that we were waiting for with the expectation of the final two coming up shortly.

So again, just overall, we actually had the third-highest quarter in variable annuity sales in our Company's history.

Okay.

And can I just ask a follow-up on variable income?

In the past, the upside has been some CJVs, and if you can just discuss if that's still the source of upside right now or if it's something else this quarter.

And that's it.

Thank you.

Yes, it was still CJVs that drove our variable income in this quarter in terms of out performance.

Andrew Kligerman, UBS.

Three quick ones.

Rob maintained at the beginning of the call $83 million in mid-sized closeout revenue in the quarter.

What did that mean in terms of new wins [in the] deposit size?

Secondly, Rob, you also mentioned higher ceded premiums and I noticed that it was down year-over-year.

What was the new structure of the reinsurance?

And then lastly for Lisa on Life Insurance sales being down 30%, you've mentioned that things have stabilized, but maybe you could give a little color on the IOLI and older age markets.

Are brokers just not submitting applications for those type products to MetLife?

And then how do you see that for your competitors?

Are they actually writing a lot of that?

Andrew, it's Tracey -- you cut out a bit on that very first question.

First question was on midsize closeout revenues.

Rob had mentioned $83 million.

What does that mean in terms of actual deposit size during the quarter?

The $83 million is a deposit figure.

Oh, that's a deposit, not a revenue figure then?

They're the same, Andrew.

In other words, anything in a closeout is revenue.

Got it, okay.

And as Tracey said, you were going in and out.

One of the questions about what does it maybe mean going forward is that I would say, remember in the closeout business, we talk about buyers being opportunistic.

I would just say that the needs and the service and the amount of structuring required to solve the plan sponsor needs at the small end of the market is totally different than it is in the national accounts end of the market.

So I know a lot have been asking about our billion-dollar placeholder.

The $83 million does not mean much relative to the placeholder; they're really not related.

And then on the [PFC]?

Just to comment on the life business, you asked the question of -- is the irrational pricing in some of the IOLI business, is it not even coming to MetLife?

The answer is, yes, it's not.

We have been the lonely voice out there for quite some time with respect to this and you heard Rob comment in his remarks about the quality of the business that we're putting on the books and we've had a relentless pursuit to make sure that we stay true to ourselves and to our clients and shareholders in that respect.

What we're seeing now is the competitive market environment is really working in our direct direction as we see some companies at least pulling back in this arena.

In terms of the sales comparison, it will be another quarter before the comparison makes sense really both on the Life side as well as on the Annuity side.

And again, what I would say is on the agency side on Life we're up 6% year-over-year and are seeing some real stabilization to the last three consecutive quarters in the independent side.

Lisa, just to clarify, when you said some companies (inaudible), so some of your competitors are actually writing some of those older age and IOLI policies?

I really can't comment on what our competitors are or aren't doing.

I can just say that it's clear out there, the position that we're taking in really leading the charge on quality business.

Andrew, I would add to that just a thought.

Keep in mind that people could be writing higher age type of life insurance coverage and not realize whether or not it's IOLI.

In other words, I don't think anybody says, I'm in the business of writing IOLI.

And then on that PMC question, have you gone into a new reinsurance program and could you share with us some of the details?

The additional $4 million of ceded premium was really essentially due to just cost increases in the market in our new plan.

Got it.

Colin Devine, Citigroup.

I had a couple of questions.

First on the various DAC adjustments this quarter, typically I thought you did these in the third quarter and I was wondering what sort of drove it this quarter.

Second, if we could move onto the M&A environment.

Rob, I know you have been quite closely following what has been going on in the UK and I'm wondering if we may see Met move into the UK and perhaps if you could comment on your outlook there.

And then any sort of update you could provide us on where you stand on the Pension Protection Act and what you're doing to implement strategies to take advantage of that?

Hi, Colin, it's Bill.

I will talk about the DAC adjustments.

There were actually -- they're not easy to characterize because we had four different sort of I would say DAC adjustments in the quarter and two went one way two went another.

The biggest DAC adjustment had to do with rider fees on our variable annuities in that we changed in our DAC model the amount of revenue we were getting from rider fees.

And what that did is it caused us to sort of re-estimate the profitability of our annuities over the past couple of years and we felt we needed a DAC adjustment.

We should be have been amortizing more DAC over the past year or two than we probably were and so we had a onetime catch-up there.

And that was the biggest driver but there were a number of things including little changes in mortality and lapse assumptions and stuff like that as well.

Bill, can you just explain that a little bit more as to what drove it?

And in terms of the fees, is your hedging program now costing you more?

I really want to understand what changed in your thinking that precipitated that change at this point in time.

Well the rider fees that we think are -- first of all, the rider take-up is higher and the fees themselves -- and the profitability of the riders we think is higher relative to our initial back estimates.

We were probably frankly too conservative in what we did in our original DAC assumptions in terms of how much profitability we would get from the riders, so it was really more of a true-up to actual experience.

You haven't extended out the amortization period?

No.

Okay.

I just want to get the gist of your question.

What is it that you want to know about the M&A in the UK?

Well I know that Rob has been following it pretty closely and I'm just wondering, are we likely to see Met -- is that an option you're considering right now, to go into the UK and sort of follow Hartford in there and bring your variable annuities?

Let me start with that particular question.

We have entered the UK market in a business that is similar to what Hartford has been doing, and so we are just launching.

It literally launched in the first quarter and we are doing that organically.

So we have set up an operation and we have begun the business.

In terms of whether there might be some M&A opportunity in that space down the road, I guess I will give you what is our standard answer.

We're interested in the market, we're always interested in growing and our growth as you know has been both organic and through M&A.

So we look for opportunities but I don't have anything specific to so you other than that.

Definitive, maybe, alright.

Thank you.

Colin, in terms of the Pension Protection Act, I think the best thing to say there is that it continues to be a catalyst for movement in several areas.

One is the clarification around safest available annuity has really spurred plan sponsors to start to look at the need for income protection for individuals coming out of 401(k) plan and there's quite a bit of activity going on there.

Auto enrollment interestingly enough is an open question.

A lot of the clients are asking that on the default options that guaranteed products be considered under so-called stable value labels, and that is an interesting aspect of what's going on right now.

And of course in terms of the PPA Act and what it did in terms of kind of putting a final exclamation point in terms of balance sheet and income issues with corporations is causing quite a bit of activity there.

Keep in mind that particularly at the large end of the market, all of these require long decision cycles because of the profound effect on employee benefit programs that anyone of these things may have.

No I had heard you had entered into a new relationship with T.

Rowe in the past quarter.

Is that correct; and if so, can you expand on it?

I'm sorry?

I had heard that you had entered into a relationship quarter T.

Rowe Price in the past quarter.

Is that correct?

I am not aware of it.

Okay, thank you.

Joan Zief, Goldman Sachs.

I had two questions.

The first is, this quarter was very good underwriting as you have said.

I wanted to know if you thought that it was basically unusual or if you think that this type of underwriting performance might be sustainable, particularly in the institutional business.

Are you seeing anything from the competitive marketplace that would lead you to be more cautious as you think about this going forward?

The second question I have is just on investment performance in general.

Are you seeing any changes in returns or spreads or your concern about credit in any of your major asset classes, particularly, say, real estate or the commercial mortgage-backed securities?

There was an article today in the paper.

With regard to Institutional underwriting results, I would say one of the things that was unique about this quarter was the fact that we had really strong underwriting results across all of our products and I think in prior quarters we've had some products that have done better and some that haven't.

But in this particular quarter it really was strong underwriting performance across the board.

It was also pretty strong underwriting performance across the different segments too.

When we look at our business which we think is unique in the marketplace because of the large presence that we have in the large market, clearly we had strong underwriting results there.

But when we look at the smaller end of the market, we had underwriting results that were very consistent with the first quarter of 2006.

So we provided some guidance on investor day in terms of what we felt our underwriting margins would be around our products and we expect that we're going to come in well within those ranges.

Regarding the investment question, I think it's pretty much what we have been saying for quite some time, including what we said at investor day.

We think we are past the peak in terms of the credit cycle but we don't see anything in the very near-term that gives us great pause about major credit correction.

But nevertheless, we have kept the portfolio structured in a way that is more conservative perhaps than that normally it would be, so more of a single-A tilt than a triple-B tilt.

And we have had very strong returns in areas as you know like CJVs and so on which have really helped keep our investment returns high.

As to real estate, we certainly think that it's a very heated time in the marketplace.

We have sold some real estate assets as you know.

Peter Cooper/Stuy Town was the most visible, but we've sold a number of properties over the last couple of years into this heated market.

And in terms of how we're reinvesting those monies within real estate equity, we've emphasized real estate joint development ventures and primarily looking at marketplaces where we see significant needs for space and we're putting space into the market where there is a need.

But we're really avoiding buying the kinds of buildings traditionally we buy given these kinds of cap rates.

As to CMBS, we have some concerns there as well.

I haven't seen the article you referenced, but we've shifted again from a triple-B kind of a position in the marketplace to a single-A.

The spreads between triple-B and single-A have narrowed dramatically and we're doing a lot more lending in the areas where there's lower loan to value ratios and really in prime markets with strong tenants and so on.

So we had been conservative probably for two years in this arena in real estate and we'll stay so until we see better fundamentals.

So you had no problem reinvesting what piece of the proceeds from the Peter Cooper/Stuyvesant sale that you needed to get your tax credits?

No, that's correct.

We had $1.3 billion to invest which would result in $400 million of tax deferral.

We've invested now $1.2 billion of the $1.3 billion.

The remaining $100 million will be invested, the closings will occur in the next few weeks and we anticipate investing the entire $1.3 million as we outlined earlier.

Thank you.

Eric Berg, Lehman Brothers.

A couple of real estate -- a couple of questions, one related to CJVs, the other related to real estate.

First the easy one on the real estate.

I think Bill Wheeler said in his prepared remarks that there was a $60 million after-tax write-off related to a receivable or $100 million I guess pretax from a developer.

I realize that big insurance companies like Met have write-offs all the time, that they're sort of part of the normal course of business, but $100 million is a lot of money to lose any one developer if I have that correct.

Could you elaborate?

I believe what you're referring to is the Adolphus Hotel situation which was a $24 million pre-tax/$16 million after-tax write-off.

Oh, it was 16, not 60; okay, my mistake, I apologize.

My second question relates to the guidance on variable income.

It just seems that, again, the returns from the private equity business, corporate joint ventures, has handily exceeded your expect expected rate of return.

And while I understand that you would want to have conservative guidance, I suspect you would also want to have credible guidance.

So my question is, because the returns from see CJVs have for so many quarters exceeded your expectations, at least it seems that way, and then in the most recent quarter it must have been in the neighborhood of 18% to 20% what is anomalous about what's going on here that would lead you to think that your current guidance should stick?

Thank you.

What we do in terms of the guidance we give is we look at historical norms.

We try to take into account the current marketplace and come up with an estimate.

The return numbers we've used to come up with these numbers for 2007 for CJVs is above long-term returns in this asset category.

But, obviously, it's less than the actual performance in the marketplace to date and it's a delicate balance.

You don't want to go too far out there because at any point in time, this marketplace could change dramatically.

Let me just mention a little bit about how this marketplace works.

Much of it is driven by the below invest-grade debt markets and when those markets are open and spreads are tight, deals get done and companies or funds I should say sell their investments to other funds or to corporate buyers very rapidly and regenerate in a very short period of time very high returns.

In addition, you're seeing some recapitalizations of existing leveraged buyouts where a company will be taken private and within a year, sometimes a quarter or two, they recapitalize what was a buyout a few months, a few quarters before and they will take money off the table and distribute that to investors, limited partners like ourselves.

So that marketplace can turn on a dime.

It has historically.

So for us to kind of go out there and say we're going to anticipate 30% IRRs in an asset category that has enjoyed more like 14%-15% returns, is really maybe going out a little too far from our perspective.

But I agree, it has gone on now for quite some time and there's nothing on the immediate horizon that looks like it's going to change.

But again, any kind of event or a major blow up of a major highly publicized LBO can change those marketplaces very quickly and very dramatically.

Last one quickly.

What is the assumption that is baked into your guidance?

You said it's higher than what it has historically been, but lower than what you're getting.

So what is that assumption please?

It's in the high teens.

We're assuming high teens returns on our portfolio and right now, we're enjoying things -- returns closer to 30% currently.

Thank you very much.

Tom Gallagher, Credit Suisse.

Three questions.

First is for Bill Wheeler.

I believe you have around $3.5 billion of cash at the holding company.

I'm just curious how you kind of view that from a burning-a-hole-in-your-pocket standpoint.

If the pension closeout market doesn't reap any large transactions in the next couple of quarters, is that the kind of timing we should be thinking about in terms of considering alternative uses for that cash, or are we thinking about a few quarters?

That's question number one.

Question number two, Group Life premium growth was pretty slow this quarter.

Was that on weaker sales, was it lapses?

Maybe you can discuss a little bit about the competitive environment there.

And last question on International earnings.

Can you elaborate on why those results were so strong?

Was it in particular Korea, Japan, Mexico, any kind of clarification on what is happening there?

Thanks.

With regard to the cash at the holding company, which is north of $3 billion, it's -- I guess you have to take a step back here and let's talk a little bit about our capital and what we intend to use it for.

We know we can go into the stock market and buy back stock obviously at anytime, and that produces a certain return and everybody can do that math.

So when we evaluate alternative uses of that cash, that is always what we're looking at is -- and, by the way, buying back that stock of course is risk-free.

So we have to look at when we want to do deals, if we want to use that money for something else, we need to use that as sort of a hurdle rate, if you will, about how we expect to perform.

Now with regard to things like acquisitions or frankly very large closeout deals which are what almost like an acquisition frankly, they're very much a one-off transaction.

We can evaluate them as one-off transactions versus an alternative use for the capital.

So that is an easy analytical decision to make.

In terms of timing, we have -- we know we have some capital events that are out there that are not trivial, which is we have a $2.1 billion convert coming due, half of which will come due in the middle of '08 and the other in early '09.

That conversion helps book value per share, but it is dilutive to EPS and it is dilutive to ROE.

So we know that's out there and we know we're going to have to deal with it.

And it is my expectation that I will deal with it, but that's sort of an early '08, early '09 kind of event.

In terms of timing of closeouts, I think we've tried to be as clear as we can, which is to say, not too clear.

We view the pension closeout business as burgeoning I guess maybe, or if there's going to the activity we cannot tell the timing, we can't tell the volume.

We might be a little smarter in two quarters than we are today, but I would only say a little in terms of how that market is going to develop.

And so I think our patience level is going to be a lot longer than two quarters, frankly.

So those are sort of what's out there in terms of how we evaluate the use of that cash at the holding company.

But it will -- our expectations, we're going to put it to good use and make sure it creates value.

And I guess I will let Bill Mullaney talk about Group Life.

Tom, as it relates to Group Life, first of all relative to sales, we have actually seen a pretty significant increase in life sales in 2007 relative to 2006 when we talked about at investor day was the fact that 2006 sales in general for institutional were low due to some marketplace activity.

They've bounced back nicely in 2007 across the board, but significantly in the Life segment.

What I would say in terms of looking at top-line growth, one of the things that impacts our top-line growth is our mortality rate.

And as we said, our mortality rate was good in the first quarter and in our participating business, that translates into lower premiums.

So if you were to look at our plan for instance and look at the mortality rate that we had in our plan, we would have been seeing top-line growth in the Life segment closer to 3%.

And so our expectation is over the course of the year and going forward we will see growth in the 3% to 4% range from the top-line perspective for Life revenue.

And there was no change in terminations of a material nature?

No, our persistency rates in our Life segment are very close to what we have in our plan.

Got it.

And then just on the International?

I would say a couple of things.

One, in terms of strength of the earnings, we saw strong earnings on a country basis from several countries, and so I would say it's attributable to, certainly on a year-over-year basis, to results in Latin America and results in Asia-Pacific.

Specific strength I would say in Latin America and in Mexico and in Argentina, strength in Asia-Pacific in Korea.

And I think in all of those places, including some other countries that I'm not talking about, it really is business fundamentals.

It's strength of the core business along with very strong expense management.

So I would say, the one exception I would make to the strong business fundamentals, not exception really, the business fundamentals are strong in Argentina.

But I would also say that what's accounting for some of the earnings there are higher premiums and fees paid in the pension business which is directly related to higher participant salaries in the country, and therefore, higher contribution rates along with higher investment income.

All of those things contribute to the results in that particular instance.

Is that being responsive to your question?

Yes.

Thanks very much.

Saul Martinez, Bear Stearns.

A couple of questions.

One on variable investment income.

Would it be possible to break out the $425 million by type of contribution?

And secondly, just to follow up to Tom's question on International, the results were obviously exceptionally strong, even excluding the one-timers.

Can you just comment on the sustainability of those results, Bill?

On the variable income, we don't break that out, I'm sorry.

Oh, you don't, okay.

Is it fair to say that the majority of it comes from corporate joint ventures?

Because that's only one part of the assumption, right.

I mean, you have [sec] lending, you have prepayments, you have real estate joint ventures.

And obviously, even if the market turns on a dime as you said, that might suggest other parts of that will -- could substantially outperform relative to what you've been seeing.

So there are certainly some offsets there which would seem to imply that the $295 million still may be conservative.

The other categories, other than LBO funds, have been pretty much on target, securities lending a little bit light in terms of against plan.

But overall, it has really been driven by the CJVs.

What is the size of your segmenting portfolio?

It's $48 billion quarter end.

And what kind of spreads do you kind of target on that?

I'm curious.

We don't really disclose that because a lot of sort of proprietary aspects to our program that we don't disclose.

Alright.

Can you just talk a little bit, Bill Toppeta, about the International results and just with regards to the sustainability of the results?

Sure.

I think it's not possible to make a general statement about sustainability.

So let me be -- so I guess one way to say this is some of it is sustainable and some of it is probably not.

So first to go to the question of investing in the business because that relates directly to the expense situation.

I would say that we are going to -- our plan is to continue to invest in the growth of the business in various places.

And so as a result of that, I would expect that throughout the remainder of the year the expenses will ramp up to some extent, and therefore, that the earnings in that respect would not be sustainable.

I do think that there is a lot in the fundamentals of the business in several places which is sustainable.

So for example, the good results we have seen in the Mexican business I think are, all other things being equal, are sustainable.

As I mentioned a minute ago, in Argentina, a lot is dependent upon the macroeconomic picture in the country.

So if the country continues to do well, there will be continued salary growth, continued growth in contributions, and therefore continued growth of the -- and sustainability of the earnings.

So I think it's a mixed picture, and so I guess the bottom line is, some of it is sustainable.

Okay.

I think Mexico is still your biggest market (inaudible) from an earnings standpoint.

Outside the U.S., yes.

What is the driving the improved fundamentals there?

It's just the fundamentals of the business.

The underwriting has been good, the claims management has been good, the expense control has been good.

So I think it's fundamentals.

Great, thanks a lot.

Tamara Kravec, Banc of America Securities.

A couple of questions.

First, just going back to the Independent channel, I know you had said that you have you expected that to stabilize, but what gives you the confidence that the Independent channel sales have stabilized?

And then just to follow up on International.

Specifically, what are you seeing in Japan, what's your business outlook there and how are things progressing?

I will start and then just ask [Mike] (inaudible) if you want to add any color to it.

But the question that you asked on the Independent side, we have had stability the last three quarters.

And when I commented that the comparison will make more sense after next quarter, it's because of the timing of the Travelers -- of the switchover in terms of products.

I will tell you that we are very actively managing the expense side.

We're seeing that our investments in technology and service are paying off and we have been very much looking at our own underwriting practices to make sure that they make sense from a competitive standpoint and from a profitability standpoint.

Mike, I don't know if you want to add anything?

It's still a story about prudent underwriting.

We're seeing our [app] count continue to go up, which is a good measure of activity, but we've go to make sure that the deal works for both parties.

Also, we have been renewed by all of our major focus firms, so it's about relationships.

Those firms want to see us succeed and we're working together to grow our share in those firms.

On the Japan outlook, I would say it's quite good.

You have heard all of the statistics from Rob and from Bill in terms of sales and I would say, it's very solid from an earnings perspective and a market share perspective.

In terms of growth, we have been growing distribution and expanding into more regional banks.

We have grown -- over the last let's say 18 months, we have grown the distribution network from about 48 corporate distributors up to 67, so that continues to go well.

I would just say a very solid performance.

As far as future prospects are concerned, you probably know that we're competing to be able to distribute annuities through the Japan Post, but there are many competitors in that, so we are waiting to see if we would be selected in the first wave.

But that is a prospect for increasing distribution and I would say overall a good story.

When are those selections being made?

I believe we're expecting to hear something within the next couple of months in terms of the first.

Now, remember if you recall with the Japan Post, they did this awhile ago with mutual funds and they selected I think three companies in the first wave.

So this would be the selection for the first wave of annuity distributors, and I think we will hear something probably by the end of this second quarter.

Okay, thanks.

Just one follow up on Auto and Home.

Premiums were light in the first quarter.

I know you're looking at closer to 2% top-line growth in premiums in '07.

Do you think that's still a reasonable assumption going forward?

We actually do.

We feel very good about where we are with our sales and activity.

Obviously in the quarter with the premium refund accrual and premiums, earned premiums being down about 1%, if you make the adjustment for the premium refund accrual, net earned premiums are up almost 1% and some of leading indicators that we're paying a lot of attention to are the exposures in force, which grow about 2.2% for the quarter and then the net written premium adjusted for the premium refund accrual netted us out at about 2.5% as you suggested.

But if you look at sales, which we're very encouraged about, sales were up over 20% for the quarter and driven by our metrics program and about 35 states in our Grand Protect product.

And we really see continuation and a pretty robust sales activity for the organization and that will start to spill over into earned premium growth.

Okay, thanks a lot.

Ken, we have time for one more question.

Ed Spehar, Merrill Lynch.

Good morning.

I have 10 questions and then a couple of follow-ups.

I'm kidding.

Could you please tell us, Bill, the expense ratio, it was in the mid to high 29% I think you said in the quarter.

Is that adjusted for all of the unusuals that you talk about that may be added up to a net of $0.04 or $0.05 in the quarter?

Yes, Ed.

The gross number one was 31.4%, which is high.

Just to put that in context, all of 2006, the expense ratio was 30.7%.

And when you normalize, it's not just $0.04, it's more like $0.11.

I'm sorry, I just meant all of the unusuals that you talked about today, last night.

With all of those unusuals, a lot of which obviously hit the expense line, the expense ratio would have been sort of in the mid to high 29s.

We had talked about on investor day having a goal of being between 28 and 29, and so when I kind of net out through the noise, I say we're on track.

I guess then the question is typically, the first quarter expense ratio, how does it compare to the full year expense ratio?

You know, if you look at the last couple of years, you would say, gee, first quarter expense ratio was relatively low.

That was not quite the case this year.

And it has to do a little bit with just a little bit better accrual of expenses throughout the year, a little less of the first quarter seasonality that we often get.

What should happen this year is, given our current expense levels, we'll obviously get revenue growth throughout the year.

That is our hope anyway, and that will sort of be what drives the expense levels down -- or the expense ratio down from here.

It won't be because we're -- though in a few pockets, we will be producing expenses, it will be more about holding the line on expenses sort of at more less from this level and then seeing top-line growth.

I guess is it fair to say, I think the last couple of quarters you've talked about the opportunity to get results that maybe accelerate some spending plans.

It seems like maybe there was some of that also in the first quarter, or no?

Not a lot.

A little, but a lot of that frankly has to do with IT, and of course that IT gets capitalized.

So even though we have pushed some IT activities from '07 into '06, late '06, I think from sort of an earnings perspective, the shift isn't all that great.

Okay, thank you.

Did you have any closing comments from the management team?

No, just want to thank everybody for joining us today, we appreciate your interest.

Thank you very much.

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