大都會人壽保險 (MET) 2008 Q2 法說會逐字稿

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

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

Later, we will conduct a question-and-answer session with instructions given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

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

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

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 from time to time in MetLife, Inc.'s filings with the US Securities and Exchange Commission.

MetLife, Inc.

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

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

Please go ahead.

Thank you, Julie.

Good morning, everyone.

Welcome to MetLife's second-quarter 2008 earnings call.

We are delighted to be here this morning to talk about our results for the quarter.

We will be discussing certain financial measures not based on generally accepted accounting principles -- so-called non-GAAP measures.

We have reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplements, both of which are available on our website at metLife.com, on our Investor Relations page.

A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible, because MetLife believes it is not possible to provide a reliable forecast of the 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; Steve Kandarian, our Chief Investment Officer, and Bill Wheeler, our Chief Financial Officer.

After our brief prepared comments, we will take your questions.

Here with us today to participate in the discussion are Bill Mullaney, President of our Institutional businesses; Lisa Weber, President of Individual; Bill Toppeta, President of International; and Bill Moore, President of Auto and Home.

With that, I would like to turn the call over to Rob.

Thank you, Conor, and good morning, everyone.

During the second quarter, MetLife increased its top line results by 10%, as premiums, fees and other revenues reached a record $9.5 billion.

We also generated $942 million in operating earnings.

Despite weakness in the credit and equity markets, our balance sheet continues to demonstrate its strength.

Our portfolio remains well-positioned, and I am pleased with this performance.

MetLife's strong capital position is substantial, and our book value has grown to $46.51 per share.

The fundamentals of our business are strong, and I'd like to highlight a few examples.

In Institutional, we had a strong, across-the-board top line growth.

Premium fees and other revenues in Group Life rose 8%.

Looking at Non-medical Health, our top line increased 14%, driven mainly by organic growth, especially in Dental.

Turning to Retirement and Savings, we continue to see significant activity in the pension closeout space, as we secured new business in both the US and the UK in the second quarter.

In Individual business, variable annuity deposits were up from first quarter levels.

We also saw strong, positive net flows in the second quarter.

Given the challenging equity markets, we are pleased with our variable annuity performance this quarter.

In terms of our Life products, sales were up slightly as compared with the second quarter of 2007.

We are seeing strong interest in our newly-launched Universal Life product, and we continue to benefit from the broad reach that our multiple distribution channels provide.

In International, we had record top line results and increased operating earnings by 26%.

Our market-leading positions in Latin America continued to drive significant growth in our International business.

In Mexico and Brazil, we added several new group customers and increased year-over-year sales considerably in both countries.

In Asia, we had annuity deposits of $1.4 billion in Japan, consistent with last year's levels.

And on May 29th, we began to distribute our VA product through the Japan Post.

While the current economic environment may remain volatile, we will continue to benefit from our diverse mix of related global businesses.

Looking ahead, they will continue to serve us well as we remain disciplined, focused on our bottom line and committed to providing value for our shareholders.

Let me now turn it over to Steve Kandarian.

Thanks, Rob.

I would like to provide you with an update on our portfolio and its performance over the last quarter.

First, let me start with a comment on variable investment income.

Pretax variable income was approximately $30 million lower than planned for Q2, primarily driven by lower corporate joint venture income.

As I mentioned last quarter, we expected corporate joint venture income to moderate during the remainder of the year, due to tighter credit conditions, volatile equity markets and general economic conditions.

On the other hand, income from our securities lending program outperformed plan, due to a steeper yield curve and higher spreads in the reinvestment portfolio.

As of June 30th, we had approximately $44 billion of securities on loan to 12 counterparties, which are all rated A or higher.

In return for these securities, we receive cash which is primarily reinvested in a portfolio of fixed-income securities.

Our securities lending reinvestment portfolio is somewhat more conservative than the remainder of the general account assets, with an average rating of AA minus.

We anticipate maintaining the size of our program during the second half of the year, and are comfortable with our holdings and the liquidity of the business.

Now, let me cover investment losses for the quarter.

Gross investment losses were $346 million, of which only $48 million were credit-related sales.

Write-downs this quarter were $262 million and remained modest relative to the overall size of our portfolio.

Of this amount, $221 million were credit-related impairments, including $82 million of financial institutions, $23 million of home builders and only $12 million of subprime-related holdings.

The non-credit-related write-downs of $41 million consisted of impairments of common stock holdings, the vast majority of which are held in a closed block.

When added together, total credit-related losses from sales and write-downs were $269 million before tax, or $175 million after tax.

Unrealized losses for fixed maturities increased by just under $1 billion in the quarter to $9.7 billion versus the first quarter of 2008.

While spreads generally declined from the end of the first quarter, interest rates rose across most of the curve, leading to higher unrealized losses.

While the impact of interest rate changes on our assets is reflected in other comprehensive income on our balance sheet, the corresponding impact on our liabilities is not reflected on our financial statements.

Next, I would like to review with you our impairment process.

Each quarter, our asset write-down committee -- which oversees MetLife's investment impairment process -- determines which assets will be impaired.

We consider a wide range of factors in evaluating the cause of the decline and the estimated fair value of the security and in assessing the prospects for near-term recovery.

The factors we consider in the impairment process include the length of time and extent of the unrealized loss, the financial condition of the issuer and whether we've received and believe we will continue to receive all anticipated cash flows.

We also consider our ability and intent to hold the security until its value recovers to book value.

If we believe it is likely that we will not collect all future contractual cash flows, or if we do not have the ability and intent to hold the security until recovery, the asset is impaired and the loss flows through our income statement.

Finally, let me discuss our credit portfolio.

As we've mentioned in the past, we've had concerns about the corporate credit environment for some time.

Accordingly, we've reduced our allocation to BBB credit from 15% to 13.8% of managed assets between September 30, 2007 and June 30, 2008.

Similarly, we've reduced below-investment-grade credit from 5.7% to 4.7% of managed assets during the same period.

In conclusion, we believe our fundamental analysis, proactive portfolio management and risk management efforts have positioned us well for the current economic environment.

With that, I will turn the call over to Bill Wheeler.

Thanks Steve, and good morning, everybody.

MetLife reported $1.30 of operating earnings per share, a 24% decline from the second quarter of 2007.

As I go through the quarter's results with you this morning, you'll see that the fundamentals of MetLife's business are strong.

However, our results this quarter do reflect the continued decline of the equity markets, higher-than-planned catastrophes and certain one-time items that occurred during the quarter.

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

Top line revenues were $9.5 billion this quarter, an increase of 10% over the second quarter of 2007.

Year to date, revenues are up 10.8% over the first six months of 2007, which is excellent.

In International, top line revenues increased 19% over the prioryear quarter to $1.2 billion.

Changes in foreign exchange rates positively affected revenue growth by approximately four points.

International revenue growth was driven largely by strong performance in both the Latin America and Asia Pacific regions.

In Institutional, top line revenue growth of 16% over the year ago period was driven by solid revenue growth across all of its major product areas.

High pension closeout sales during the quarter increased Retirement and Savings revenue by 65% to $553 million.

Non-medical Health and Other had a 14% increase in premiums over the second quarter of 2007, driven by Dental, which was bolstered by a recent acquisition.

Core growth in Group Life resulted in an increase in revenues of 8% over the year-ago period.

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

In Institutional, our Group Term Life mortality ratio of 91.3% was well within our target range of 91% to 95%.

However, underwriting results in Group Life were negatively impacted by an unusually high number of large claims in our specialty product areas.

The impact of these large claims was $16 million, post-tax, or $0.02 a share.

In Non-medical Health and Other, group disability's morbidity ratio of 89.7% was quite strong, and reflects relatively steady reported incidents.

In Retirement and Savings, we made a liability adjustment on a large institutional annuity which has been in force with MetLife for more than 20 years.

The adjustment was triggered by an administrative data true-up and reduced earnings by $42 million after tax, or $0.06 per share.

In Individual Business, our mortality ratio was 89.8%, which is somewhat higher than normal.

Although frequency levels were slightly higher than expected, most of the increase came from higher face amount claims.

Turning to Auto and Home, we experienced an unusually high level of catastrophes this quarter, resulting in a 99.5% combined ratio.

Catastrophe claims were $59 million after tax higher than planned, or $0.08 per share.

Partially offsetting this was a favorable prior accident year development release of $26 million after tax or $0.04 per share.

The combined ratio, excluding the impact of catastrophes and prior-year development, improved 2 points to 87.3% year over year.

This was driven by strong core operating results in the Auto line of the business.

Moving to investment spreads, with regard to variable investment income, the performance of certain variable asset classes was mixed this quarter.

As Steve mentioned, private equity returns were well below plan, but securities lending income was very high.

Overall, variable investment income was approximately $21 million after DAC, tax and other offsets, or $0.03 per share lower than our baseline plan.

Keep in mind that in the second quarter of 2007, variable investment income was $0.18 higher than planned, so the swing between the two periods in this area is large.

As to our future outlook, we expect variable income to be below plan in the third quarter, which historically has been our seasonally lowest quarter.

We currently expect a rebound of variable income in the fourth quarter, but our visibility is not as great here.

In addition, we are obviously being affected by the equity markets in our variable annuity and variable life businesses.

We estimate that the equity market performance versus our plan reduced EPS by $0.06 this quarter.

Moving to expenses, if you recall, we were projecting an expense ratio of 28% to 29% in 2008.

Our expense ratio in the second quarter was 29.4%, a little higher than guidance.

This was due to higher variable annuity and life DAC amortization caused by the equity markets.

I want to make sure that everyone understands -- we true up our annuity DAC balances based on the investment performance of the related separate accounts every quarter, not once a year, so adjusting for the unusually high DAC amortization this quarter, our expense ratio is within guidance and our expenses are well under control.

Turning to our bottom-line results, we earned approximately $942 million in the operating income, or $1.30 per share, for the second quarter.

With regard to investment gains and losses, in the second quarter we had net realized investment losses of $233 million after tax.

Steve just gave you a detailed explanation of what's included in that number.

Our preliminary statutory operating earnings are approximately $750 million after tax this quarter, and are $1.4 billion for the first half of 2008.

Total statutory capital and surplus at June 30 is approximately $21.7 billion, which is up $1.4 billion from year end 2007.

We are revising our earnings guidance for the year.

We currently expect to report earnings for the second half of 2008 in the range of $2.88 to $3.08 per share.

This projection does not include any impact from potential one-time items such as Operational Excellence.

When added to the $2.82 that was earned on an operating basis for the first half of 2008, we expect annual earnings to be in the range of $5.70 to $5.90.

Most of the reduction in earnings is driven by equity markets.

The roughly 13% decline in the S&P 500 through June 30, versus the annualized 5% increase assumed in our plan, is having a big impact.

This factor, combined with the unusual items this quarter, are causing us to revise guidance.

In summary, the fundamentals of our business are strong, and we are coping well with the volatile markets.

And with that, let me turn it back over to Rob to make some closing remarks.

Thank you, Bill.

As we announced yesterday, MetLife is undertaking an Operational Excellence initiative which will help serve as the foundation for our future growth.

Let me explain.

Last summer, we began a strategic review of MetLife.

This ongoing effort is concentrating on our strengths, opportunities and areas for improvement.

The strategic review process is a part of the Board's and my focus on preserving and growing shareholder value.

We are well-positioned to capitalize on the retirement income needs of Baby Boomers, grow our life insurance franchise and drive growth on a global basis.

Despite our tremendous opportunities and achievements, I am not satisfied.

MetLife intends to extend its leadership position in the financial services industry in the coming years.

In order to accomplish this, we must operate with ever-increasing intensity.

To that end, under my direction, I created an Operational Excellence initiative.

Since April, a team has been conducting a diagnostic review of all of our operations.

The team is focused on reducing complexities, leveraging our scale, improving efficiencies and increasing productivity.

This initiative begins a transformational change in the way MetLife operates, and I expect that within the next two to three years, it will yield both significant revenue enhancements and cost savings.

This will require investment, leadership and discipline.

Because our plans are not complete, at this time, we cannot quantify the financial impacts of this initiative.

However, we will provide more details when we announce our third-quarter results in October, and at our Investor Day meeting in December.

Throughout my career, MetLife has demonstrated a powerful capacity to get behind a bold idea and execute.

In 2000, we completed the largest demutualization in US history.

In 2005, we completed the largest acquisition in our history.

Once again, we will leverage the tremendous resources of MetLife to further transform this great company and deliver shareholder value.

Thank you, Rob.

Julie, let's open it up for questions.

(OPERATOR INSTRUCTIONS).

John Hall, Wachovia.

Please go ahead.

Thank you.

Good morning everyone.

I have a couple of questions, quick ones for Bill and then one for Rob.

Bill, at the end of each year, as we look forward to earnings, we sort of do an exercise to normalize earnings and then project growth off of that normalized base.

Over the last several years, it's been a matter of subtracting to get down to a normalized number.

It appears that this year we might be adding to get to a normalized number.

Is that a good way to think about what the base for growth in '09 should be?

Yes, I don't know if we are normalizing yet, but we are probably not subtracting anymore.

You know, we don't as a rule try to normalize for equity market performance, because it will go up and it will go down, obviously.

So we don't try to adjust for it.

We just do try to describe and understand the impact, so if you think about the earnings revision that we had here, most of that is driven by the equity market changes.

And then -- but for now, the separate accounts, they are different levels and so we will have to grow earnings from here.

So I think one other thing I would probably say is, even with this earnings revision, we are still going to have earnings growth, certainly on a normalized basis, year over year in '08.

You know, it's not as great as it was.

But I don't know if we will add back or not, but we will -- we may not do anything.

Okay, and then can I take from your comments on DAC that there's a 0% chance that we are going to see a DAC charge in a wholesale fashion in the third quarter?

Well, that's certainly -- you know, just to step back from that a little bit, we obviously review our DAC assumptions once a year.

We generally do that in the fourth quarter, but what we are looking there are things like lapse rates and withdrawals and stuff like that.

We don't really true up for market, and we wouldn't do a DAC unlocking for market.

We do that every quarter.

So the answer is no; you won't see a DAC unlocking based on market conditions in the third quarter.

Great.

And then Rob, I have a question for you on the Operational Excellence program and how it relates to the 15% ROE target that's established for 2010.

Is this program something that will either delay achieving that target in 2010 or accelerate it?

It certainly won't delay it, and it certainly will accelerate it.

Great, thanks very much.

Eric Berg, Lehman Brothers.

Please go ahead.

Thanks.

I just had one question.

Good morning, by the way.

You mentioned that there was a bit of an earnings hiccup in the Specialty Life Insurance area, I believe on the group side although you'll correct me if it was on the individual side.

What is that Specialty area -- what is its specific business?

And, I'm sure you have taken a very close look at the nature of the claims to determine what might, if anything, be going on.

Could you just sort of build on your comments?

Sure, Eric.

It's Bill Mullaney, and I will comment on the Specialty area because it was in Institutional Business.

It's our Group Universal Life and Group Variable Universal Life contracts, which are contracts that we offer primarily to higher-paid and executive people within the corporate accounts that are our customers.

And so, in this particular quarter, we had a higher number of claims in excess of $1 million than we typically see on an average quarter.

As a result of that, that was driving the higher mortality in that segment of our business.

Now, I'm equally interested in knowing obviously what we all want to hear from you, but you'll tell us what in fact is going on is that you've studied this situation thoroughly, and this is a statistical anomaly and nothing more than that, but (multiple speakers).

Right, when we look at this quarter compared to the prior five or six quarters, like I said, the number of high face amount claims was roughly double over what we've seen over that average, so we think that it's an anomaly.

We think that it's really specific to this quarter and not something that we would expect to happen going forward.

Thank you very much Bill.

Randy Binner, FBR.

Please go ahead.

Yes, thank you.

I have a question about the $0.06 per share that was identified as being related to market volatility in the quarter and how that relates to the rule of thumb we had that for every 1% change in the S&P 500 there was a $0.01 effect.

I guess the first question is, is that $0.06 -- is that just from how the market performed relative to plan in the second quarter, or is there some of what happened in the first quarter in there?

And I guess based on that, I'd be curious to know if there's a new kind of benchmark we can use for EPS relative to a 1% change in the S&P.

Yes, sure.

Well, let's kind of give you -- let's set out some details.

In the first quarter, there was almost a 10% decline in the S&P 500, and then obviously, at the same time, we have an expectation that we would have a 5% annualized but only 1.25% in the quarter return from the S&P 500, so let's say that triggered basically sort of an $0.11 swing, if you will.

Now, if you think about how that gets -- using the ratio of a 1% decrease in the S&P 500 costs us $0.01 a share, sort of plan versus reality.

So I think in the first quarter, we said that we thought -- now, the way that $0.11 gets recognized, it's over the course of the year.

Most of the impact is upfront, but some of the impact is spread out over the rest of the year, and most of that's sort of like the separate account fee income.

So $0.06 occurred in the first quarter, but then there's going to be an additional $0.05, $0.06 which hits in the latter -- second -- you know, the other three quarters, if you will.

So it does get spread out.

Now, this quarter, we had not quite a 4% drop in the S&P 500 in the second quarter, versus another expectation of another 1.25% indication, so that would say a $0.05 swing.

Okay?

But you remember, now -- so that, too, most of that hits this quarter, but some of it gets spread out for the rest of the year.

Then also I have sort of the remaining first-quarter effect.

So if you kind of run through that math, you go to okay, well, I get $0.05; how did you get $0.06?

And this is sort of your second part of your question.

You know, this relationship of a 1% change in the S&P 500 versus a $0.01 move in our earnings isn't really linear.

So when we start to see a substantial deviation from our plan, which we are starting to see now, the DAC amortization actually accelerates.

So I would say right now, changes -- further declines in the S&P 500 versus plan for the remainer of the year, the relationship is more like $0.015 and not $0.01 anymore.

So it is deteriorating a little bit.

So that's a little bit why you get something like $0.06 this quarter and not $0.05.

That said, all in, we think the overall earnings impact approaches $0.20.

I will just bore you with the other fact here is, when we built our 2008 plan it was sort of in the fall of 2007, and almost from the very moment we printed the plan, the stock market started going down.

We didn't really factor that in the guidance because at the time we didn't think -- it wasn't big enough to deal with.

But obviously that contributes as well.

So we are a full $0.20 or so, maybe even a little more, below plan in terms of impact of the stock market on our earnings, and that's what's driving down the guidance.

So I hope I didn't confuse you on that.

No, that's all very helpful.

But just to clarify, so the $0.06, when that's communicated, is what happens this quarter and that will be a rate as we go forward?

Yes, pretty much a rate.

Okay.

And is it like 60% in the first quarter and then -- I'm sorry, like 40%, 50% in the first quarter and then lagging from there?

Yes, that's a good proportion.

Ok.

Great.

Thank you.

Ed Spehar, Merrill Lynch.

Please go ahead.

Thank you, good morning.

Bill, you had made some reference to the underwriting this quarter not being as good as some prior quarters but still being an okay quarter.

I'm wondering if you could just talk a little bit about -- I know you have a range of expectations, but it seems like they've tended to be maybe a little bit on the better end and this quarter was not.

If we were more toward the better end on underwriting, do you have any sense of what kind of a pershare impact we might have seen?

You know, it's hard to quantify.

Obviously, we talked about this $0.02 adjustment in Group Life.

But our normal Group Term Life contract, I think the mortality ratio, which we print in the QFS, of 91.7% was actually pretty good.

In Non-medical Health, which also has a big underwriting earnings component to it, you know, probably the results there were just a little softer than plan, maybe $0.01 or so, which we obviously don't try to normalize for.

I would also say in Individual, the mortality -- we said the mortality was a little worse than normal.

But again, we didn't try to add that back or normalize for it, but that was probably worth $0.02.

Interestingly, Auto and Home, when you kind of -- as I mentioned on the call, when you cut through the catastrophe losses and the reserve releases, underwriting was actually quite good, and I don't know, was it a full $0.01 good?

Maybe not.

But that sort of gives you a feel for sort of the other changes.

You know, obviously we earn underwriting profits in a lot of different ways at MetLife, and almost always every quarter -- this is kind of the great benefit of being so diverse, is almost always you have something going in one direction, something going in the other and they usually balance each other out.

I would say this quarter, though, was probably on average just not quite as good as our normal quarter, in terms of results.

But we are talking a few pennies here and there.

And how about in the R&S area, anything there to say on mortality?

Well, obviously, we had this reserve adjustment which isn't necessarily underwriting experience.

That's really -- that's a data adjustment.

Underwriting there otherwise was okay.

I mean, we've certainly had better quarters, but it was okay.

Thank you.

Colin Devine, Citigroup.

Please go ahead.

Good morning.

I was wondering if we could talk a little bit more on your International businesses.

(inaudible)to now, what, about 14% of earnings this quarter and really starting to ramp up.

If you can give us some sense of what's going on underneath that -- I appreciate you don't make a lot of money in Japan, although you've got some great sales.

If we could talk about some of the other businesses where you are really starting to get some traction now.

Sure, Colin, it's Bill Toppeta.

I would say if you look at our business, the positive results on the earnings side are pretty widespread, certainly throughout Latin America, and also mostly -- in most of the countries in Asia Pacific.

If I take you back to Investor Day, we talked about four driver countries, Mexico being the biggest, and I would say there we are outperforming what we told you back on Investor Day, especially in the earnings category.

In Korea, which is our second biggest, we are pretty much hitting on the plan that we told you, so we are going to be right in that range.

In Chile, which was the third of those countries, we are going to outstrip the plan by quite a bit.

And actually, Japan is the one where the earnings are probably going to be a bit below where we told you on that range, but we are making up for that in other countries.

So I would say overall, based on what we told you on Investor Day, we are green in every category; the only category where I would say we are not green is sales, and in that category we are positive with the exclusion of Japan, but we are going to be a little bit lower in Japan than what we thought.

So I don't know if that's enough color.

If you want more detail in specific places, I can certainly provide it.

That helps.

I guess the other just follow-up is, Rob has talked about getting that to 25% over the next couple of years, and that M&A would be a big part of it.

Are you still out there looking -- certainly by my tally, I think Mr.

Wheeler there that using RGA, that still leaves them at about $1 billion worth of cash plus to do some deals here.

Are we going to see something there?

Don't encourage him, Colin.

You know, obviously, Bill can talk about the deal environment.

He and I are both -- we are both intimately involved in what's going on in International.

You know, we have closed a few deals.

They are not big ones, but -- which kind of says we are out there looking, you know, with Actinver, the Mexican AFORE, and this little Group Dental business we just announced in Brazil.

Neither of those deals is very material, I would say they kind of indicate that we are active.

I don't know what you would add to that, Bill.

I really wouldn't have anything to add.

We are very active and we are not just sitting and waiting for deals to come for us, we are out looking for them.

Having said that, I think it is fair to observe that the environment is a difficult one, especially in light of the relative strength of the US dollar to some of the other currencies, and also some of the accounting differences between us and European competitors specifically.

So we are very, very active but the environment is challenging.

Thank you.

Suneet Kamath, Sanford Bernstein.

Please go ahead.

Thanks.

Two questions, first one for Bill.

On the share repurchases, I understand that you are out of the market until the RGA transaction is completed.

If that's true, it just appears that capital is going to be building pretty quickly here, and especially given the fact that your investment losses are really not that material.

Is that going to put some pressure on your full-year ROE target?

And then I guess for Rob, in your opening comments you had mentioned the OperationalExcellence, and I think you had said you are not satisfied with the situation at MetLife and you could see that improve.

What specifically are you looking at, that leads you to comment that you are not satisfied?

Thanks.

Suneet, I will go first.

You know, in terms of capital building, that's right.

I mean, just to kind of review the bidding here a little bit, on Investor Day last year, we talked about buying back 2.2 billion of stock, and that broke down something like buy back enough stock to defuse the first convert conversion, which is happening in August, and that we estimated at the time was 1.4 billion.

It isn't going to be that; it isn't costing us that much anymore.

And then 750 million on top of that of additional purchases.

So fast forward to now, where we've bought back 1.25 billion of stock so far.

We are now in the quiet period of the RGA split-off transaction, so there's not much I can say about that.

But obviously that has -- in my mind, if that transaction is completed, it effectively sort of meets our buyback commitment for the year, but we have an extra $1 billion of cash that we hadn't originally planned on.

So capital levels -- so in terms of ROE targets, if you think about the buyback activity, it's actually essentially on plan for where we were, but instead of using cash, it's RGA shares.

But that does mean there's extra cash now that will probably end up at the holding company by year end, so that gives us a little more fuel to play with, if you will, in the future.

And obviously, it will be used for a couple of different things as it gets redeployed over the next period of time.

It will be either used to make acquisitions, maybe international acquisitions, or it will get used for additional buyback activity.

So that, in my mind, just -- it sort of helps -- if you think about the long-term ROE story, which is really what we are focused on, is sort of the 15% target in 2010.

I think that kind of helps us get there.

Suneet, on the word "satisfied," everybody who knows me I would say there are a couple of things that I would comment on.

I have been enthusiastic, I continue to be enthusiastic and I'm never satisfied.

So if you kind of put those together, this is quite a positive statement.

You know, we have -- if you look at the tremendous growth that we've achieved, and you look at the shift in the business opportunities we have in some areas, and you realize that we have a stronger management team today than we ever have had, you put those things together and say, some of our processes and some of our legacy methodologies can really be streamlined and brought up to date with where we are, to give us the capacity to grow more rapidly in the future.

So, it's one thing to be, as I am, enthusiastic about being number one in so many areas -- one, two or three in virtually everything we do, so forth and so on.

But I don't like being number one and winning by a nose when I feel like we could extend our lead.

And coming around the third quarter, I don't like to look back; I like to look forward.

So that's what this is all about.

We are very enthusiastic about it.

We have obviously, in looking at the diagnostics and whatnot, we have some very substantial opportunities and we are going to take advantage of them.

Thank you.

Mark Finkelstein, FPK.

Please go ahead.

Good morning.

A couple of quick questions.

Firstly, on Retirement and Savings spreads, they came in to 1.29% for the quarter.

Obviously, I think that was one of the areas that was affected by variable income, but what's interesting is actually how low the crediting rate had gone.

I guess what I'm trying to get at is, if the variable income had come in in line, what would have been spreads in that business and what is the spread outlook for the remainder of the year?

Clearly, you were more positive about that on the first-quarter call.

I think just to kind of give you the history there, I think on Investor Day we said that we thought spreads would be 115 to 130 basis points in R&S for the year.

Then, when they were obviously 151 in the first quarter we said, well gee, we missed that a little bit on the good side.

And what's happened of course is, sec lending income is a little better than planned in the first quarter, but also what happened is that short-term interest rates dropped much faster than we had originally anticipated in our plan, and there is an aspect of Retirement and Savings where that comes into play.

We have some insurance liabilities which are short, which have floating rates and which -- we've talked about this before -- we run a mismatch on.

So when you see a steepening yield curve like we have, that should widen spreads.

So that caused us to sort of revise our outlook for the range to this 130 to 150 basis point you talked about.

We reported 129 as you mentioned for the quarter, and if you said, well, if we had hit plan on variable investment income -- and we didn't, we were affected by it in R&S -- the spread would have been 144 basis points, which is just about in the middle of that range, a little above the middle.

But that gives you a feel for it.

So I think the 130 to 150 range is still valid, but obviously it will be impacted by -- there is a lot of those alternative asset classes which make up variable investment income in the Retirement and Savings investment portfolio, so it's very sensitive to that.

Okay.

I just wanted a clarification, going back to Suneet's question.

So after the RGA split-off transaction occurs, assuming it does occur, the plan is that you will hold the cash flow that you're building and you are not going to kind of go back into the market and execute more share repurchases?

Or is that a little bit early to suggest that?

I mean, I guess we are not going to commit one way or another right now.

I think we just have to see how things turn out, you know, at the end of the year.

Then we will make a decision then about what we do.

Obviously, just thinking about '09 for a minute, a couple of other things are going to happen.

We are going to have the other leg of the other half of the convert will convert in the early part of the year.

Obviously, if we allow that conversion to stand without doing anything about it, it's dilutive to EPS.

So obviously, and we talked about Investor Day last December, I think I gave some people a little guidance that said we are going to offset that dilution, and I don't see any reason why we still wouldn't do that.

But whether that means we do that at the end of this year or very early next year or something like that, it's hard to say yet right now.

So we certainly have the firepower, if you will, to kind of get back into the market and do cash buybacks.

So it's just a matter of thinking about our timing and the situation at the time.

Ok.

Thank you.

Steven Schwartz, Raymond James & Associates.

Please go ahead.

Good morning everybody.

I just want to nail down one more thing on the equity market guidance, Bill.

You know, the market, the average daily balance in the market was actually up for the quarter; it was up about 3.2%.

So I'm trying to reconcile the guidance vis-a-vis the market being down point to point.

Is what you're saying -- I mean, are you different from other insurers, in the fact that you are trueing up the DAC for markets on a quarterly basis?

So really the important thing here is, for lack of a better term, the mark to market on the DAC as opposed to where separate account balances are going, or the fees on separate account balances are going?

That's right.

The interesting thing here is, if you think about the impact of the market on us, the DAC adjustment far outweighs the separate account fees.

And the separate account fees -- so you are absolutely right, I mean the market ran up and then it came down.

So the average balance for the quarter was actually okay, so the separate account fees really weren't affected all that much.

But when you are doing the DAC adjustments, you are really looking at the endpoint, because you're thinking about well, given this level of separate accounts, what's the future profits we are going to earn off that annuity contract?

So the DAC adjustment -- and you know, you can see it right in our P&L -- I mean, separate account fees year over year were still up 1%, so it's not as much as we would like but it's still a positive number.

What's really going on is, the DAC adjustments were much bigger.

Okay, and that hits in the quarter as opposed to -- mostly in the quarter, as opposed to be spreading out over time?

That's right.

Ok.

Got you.

Thanks.

Tisha Jackson, Columbia Management.

Please go ahead.

Good morning.

I had a couple of questions actually for Steve Kandarian.

I was hoping you could maybe give us an update on your holdings of both Alt-A and subprime, and kind of where these are marked versus original cost.

Then also, kind of maybe update us on what's going on in your whole loan portfolio, your commercial whole loan portfolio.

And also, if you can give us any details on your holdings of CMBS, AAA, AA, and kind of what kind of subordination those things have at this point, particularly for the '06/'07 years.

Then, finally, how much credit card and auto asset-backed securities do you have at this point?

Okay, I will try and cover it all.

Sorry, there's a lot.

There's a lot there.

Let me kind of click them off one by one.

Alt-A, we had about $5.8 billion of Alt-A last quarter.

We are down to about $4.9 billion.

Some of that related to sales, some relates to roll-off.

We have not been buying in the Alt-A market over the last quarter.

Most of our Alt-A, you may recall, is super senior which means we bought additional insurance protection, additional subordination when we purchased the securities some time ago.

At the time we bought these securities, it was a very small premium to buy that super senior tranche, sometimes only 1 or 2 basis points for that insurance.

That has held us in good stead.

Overall, our average subordination on our portfolio is over 12%, which means over 12% of actual losses must occur before our tranche is impacted.

Now, historically, the high water mark for losses in Alt-A is about 2.4%.

Now, we don't think it's going to stop there this time because the market, we believe, is in a more negative position than it has been historically.

But if you look at the ranges in terms of other people's projections about losses, it ranges from about 2.5% to 10%; 10% would kind of be an outlier on the high side for losses.

And again, our average subordination in the portfolio is over 12%.

So as we run these impairment processes internally, we look on a security-by-security basis and determine if we think any one of these securities may eventually not pay the full amount of cash flows contractually promised to us.

And to date, through all of our modeling, we have taken no impairments because we believe in all cases these securities will be money-good.

Let me move on to subprime.

We are down now to about, I think it is $1.8 billion of subprime.

You know, it's been kind of rolling off and the vast majority of the course is AAA.

We bought very little kind of in the more recent 2006 and beyond vintages, and what we did buy were all sort of AAA, AA credits.

So again, as we look at the marketplace and model these things out in terms of impairments, we've taken very few write-downs in this area and really don't anticipate taking meaningful write-downs going forward.

Again, we stress these securities out pretty hard.

So let me just go back to sort of what we do when we run these models.

We've made assumptions that even from this point in time, real estate prices, residential real estate prices will drop on average 25% in the United States.

Beyond that, and for the purposes of these impairment tests -- not that we necessarily think that's going to happen but we try to stress them as hard as we think is practical.

Beyond that, we've looked at specific markets and we've assumed as much as a 40% decline in real estate prices, and that's in the especially overheated markets on the coast, places like Nevada, certain parts of Florida and so on.

So even with those extreme scenarios, we've had to write down very few of these securities.

Let me now switch to whole loans.

Our whole loans right now run about $36 billion.

We've mentioned to you in the past that we've been continuing to drop the loan to value ratio of these loans that we are putting on our books.

Most of what we're doing today is sort of in the 50% range, loan to value, and that's based upon our values, not necessarily based upon what someone is paying for the property.

So we underwrite these properties one by one ourselves in our real estate department.

And you may recall, we have 150 people in MetLife's real estate department who create these whole loans and other kinds of loans, like agricultural lending and so on.

So we've moved down -- actually, I'm sorry -- the 150 is just real estate; another 100 people in agricultural lending.

We've moved down the loan to value over time, and we pretty much have stayed at this very low loan to value ratio in the current marketplace.

I will tell you, it is one area, both agricultural lending and whole loan commercial real estate, that we view as an opportunity today, because the CMBS market really has frozen up and some very attractive properties are coming up for refinancing or, in some cases, sales; not a lot of sales going on.

And we are able to underwrite these loans on a base that's very conservative, and make very low loan-to-value mortgages that we create and at very, very attractive spreads, spreads we haven't seen in many years.

So we actually look at this as a real opportunity for us, and at this point, I believe our delinquencies are something like $3 million in our entire portfolio of $36 billion.

So it's virtually nonexistent.

I think then you asked about CMBS?

Yes.

Let me kind of flip a few pages here, to pull that up.

So, our CMBS portfolio is nearly 90% AAA-rated, and 74% are 2005 and earlier vintages, when the underwriting was much more stringent than what we saw in the 2006 and beyond period.

Our unrealized loss in that portfolio is about $800 million, but again, as we've stressed out those securities in our models, we think we will see very few impairments, even with an expectation that the market will drop from here in terms of pricing in the commercial real estate market.

We do not think that the commercial real estate market will drop as drastically as the residential market, for a number of reasons.

And I will just summarize it quickly, which is the overbuilding we saw in some earlier real estate recessions, especially the early 1990s, did not occur this time around.

And the supply/demand balance is far more attractive right now than it was back in some earlier real estate recessions.

So we are still modeling out 10% or 15% further declines in valuation.

There's been about a 10% dip in prices in that market already.

So basically, maybe a 25% peak to trough kind of dip is what we are modeling out.

And based upon that, we really think the portfolio is in very good shape.

Let's just go on to credit cards and auto.

Credit cards are about $6 billion in total, auto about $1.5 billion.

As these securities have been rolled off our books, in terms of maturing or in some cases some sales, the average rating on these securities has gone up for us now.

It's largely -- it's a way toward a AAA-rated portfolio, these securities.

And again, I would say to you that this is an area where we are actually a buyer, and what we are buying is the highest tranches, first pay tranches of AAA-rated credit cards with the strongest trust, the banks that have the wherewithal and also the expertise to manage these trusts.

Because there is some flux that goes on in these trusts in terms of how they can flex these credit card securities.

They are able to have people cut off to some degree in terms of their lending limits, the borrowing limits.

They can adjust interest rates and so on.

So we are sort of following the strongest players in the marketplace, we are buying the highest-quality tranches.

We are seeing historically high spreads.

We stress these again, the AAA-rated tranche area, at extreme levels beyond anything that people are projecting, and still we can't find a scenario, a realistic scenario that says they won't be money-good.

And given the kinds of spreads we are seeing for AAA-related assets, which is a hard place for us to live as an insurance company, but right now it's actually delivering very, very strong margins for us against our traditional business.

We are buying these securities.

And as you might guess, the rating agencies are looking hard at these newly-created structures, they are putting them through some very tough tests, the underwriting has gotten much better by the creators of these securities, and we really think this is a good opportunity for us to buy securities in these areas.

So basically, where we are putting our new money is AAA-rated credit cards, selectively in autos -- it depends upon which auto companies and so on -- low loan-to-value ag loans, and commercial real estate loans.

And those are sort of the main areas where we are investing our money today.

Great, thank you.

And if I could just follow up really quick, do you have any kind of CDO/CLO exposure?

I'd like to use your expertise in terms of when we're questioning others on their commercial whole loans.

You know, how are you calculating the loan-to-values, and what do you think are the questions we should be asking of others, in terms of to figure out whether they are being as disciplined?

I'm told there's a queue, so I'm going to have to go quickly.

Let me just kind of hit at the high level.

The CDOs, our CDOs are about $1.4 billion.

Of that, only $23 million is subprime, so some of the things you are reading about in the papers in terms of people selling their CDO exposure at $0.22 on the dollar, really are very different kinds of securities than we hold.

Ours are largely CLOs.

Only 2% is below investment-grade; well over half, over 80% is AA, AAA.

Again, we've stressed our structures and they all come out very well in terms of being able to pay off over the course of the length of these securities.

So we have a very different kind of CDO portfolio, mostly CLOs and very high quality.

So some of the things you are reading about are very different kinds of securities than what we hold.

With that, I think I'd better turn it over back to the operator.

Thank you.

Tom Gallagher, Credit Suisse.

Please go ahead.

Thanks.

Just a few quick ones for Steve also.

First is, can you talk a little bit about private equity?

And do you still think the worst-case scenario for returns in the current environment is low single-digit returns, or is it possibly going to go negative?

In particular, when Bill had mentioned 3Q outlook being softer -- is that low returns, or is that potentially going negative?

And then, just to follow up on Tisha's question on -- just overall, I guess you are seeing very low defaults on both commercial mortgage loans and corporate bonds.

Are there any signs of trouble, though, on the horizon?

Like, are your watchlist loans growing or anything like that?

Thanks.

Okay.

Private equity returns -- there are two buckets there; one is traditional LBO funds, and the other funds that aren't traditional LBO funds like mezz funds and so on.

The LBO funds actually did go negative this quarter, because of -- I think you may have heard from Bill Wheeler earlier about one large transaction that was an equity, that was publicly traded on a stub basis in a Chinese bank.

And, so that drove the numbers negative for the quarter.

We don't anticipate that for the rest of the year, because of that one kind of outlier instance.

But we do believe that those returns will be pretty low for the rest of the year.

Those kinds of returns correlate strongly with the subordinated debt market.

As you might guess, LBO players start selling properties to each other or to the marketplace, based upon financing availability to each other in the high-yield area.

That's still a pretty tough market right now, in terms of being able to even acquire debt, much less at what price.

So we anticipate third and fourth quarter will be weak on those LBO returns.

However, as you know, variable income has a number of components, and some others are balancing off.

And as we've mentioned to you, the securities lending portfolio correlates closely, in terms of how large the profits are, to the shape of the yield curve.

And right now, we have very low short-term interest rates, and relatively high -- or higher, at least -- longer-term interest rates and intermediate-term interest rates.

So, the shape of that curve does help the sec lending business offset, to some degree, what's going on in the private equity portfolio.

Let me go on to commercial loans next.

The delinquencies are very, very small.

We are not really seeing very much of an uptick in terms of problem loans.

We did have a few things out in the Midwest that concerned us; we sold those loans.

I believe it was last quarter we took them through the income statement -- there were some losses there, we had some reserves that we adjusted.

So the parts of the portfolio that most concerned us have been dealt with to date.

And, as of now, I don't really see much that would concern me in terms of that portfolio overall.

I would say the corporate bond portfolio is a different story, and we've positioned that by selling off a lot of things that are more cyclical in the economy, and increased our exposure to things that do well in a downturn -- certain pharmaceuticals, for example, food, certain other parts of the economy that tend to be pretty steady in a recession.

So we positioned the portfolio in that way, but the number of dollars we have in corporate credit is so large that if this economic situation turns into a full-blown recession, then obviously we'll have some defaults in those companies over time, and that's just the way it works in our cycles from time to time.

So I think we are as well-positioned as we can reasonably be at this point in time for what we are anticipating coming down the pike.

But having said that, the portfolio is so large, I can't sit here and tell you we are not going to have any defaults in corporate bonds, where those numbers are in excess of $100 billion on our books.

Okay, thanks.

I think that concludes our questions today; I think we are out of time and other people have to get on the calls.

So thank you very much.

Thank you, ladies and gentlemen.

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