大都會人壽保險 (MET) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife fourth-quarter earnings release conference call.

(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 statements 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 fourth-quarter 2008 earnings call.

We're delighted to be here this morning to talk with you about our results.

We will be discussing certain financial measures not based on generally accepted accounting principles or 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 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 to 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, and 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 Henrikson.

Thank you and good morning, everyone.

In both the fourth quarter and full-year 2008, MetLife generated strong top-line results amid the current backdrop of broad weakness in the economy and market uncertainty.

While operating earnings are being impacted, our core operating fundamentals remain strong as premiums, fees and other revenues grew 6% this quarter over the fourth quarter of 2007 and are up 11% year-to-date.

In this environment we're benefiting from a well-balanced mix of businesses, and without question, we are experiencing a flight to quality and a flight to safety.

Let me highlight a few examples.

Institutional business continued to generate significant top-line growth across all of its segments as premiums, fees and other revenues for the year grew 19% to reach $16.6 billion.

Driving this was a top-line increase of 7% in group life and 14% in nonmedical health, driven mainly by organic growth, especially in dental.

In retirement and savings, we doubled our revenue due to a strong demand in structured settlement sales, as well as significant pension closeout sales in both the US and the UK.

Individual business continues to be impacted by the declining equity markets; however, variable annuity deposits remain strong at $3.4 billion in the fourth quarter.

In addition, we saw significant demand for our fixed annuity products with deposits of $4.1 billion.

Annuity net close remain positive by almost $1 billion in variable annuities and $3 billion in fixed annuities.

In international we continue to see strong growth across all regions as premiums, fees and other revenues for the full year grew 11%.

Latin America, our largest region, grew 11%.

Asia-Pacific grew 7%, despite the challenging equity markets, and our emerging European region, which includes India, grew 38%.

Like our domestic businesses, our international operations continued to grow in a diversified and well-balanced manner.

In a few moments, you will hear from Bill Wheeler and Steve Kandarian, but let me just say I'm very pleased with the strength and composition of our balance sheet.

Our investment portfolio is well-balanced and defensively positioned, and our excess capital provides us with tremendous financial flexibility and positions us well for the future.

Looking ahead to 2009, we will remain focused on fundamentals, including underwriting and expense management, and let me just say through our Operational Excellence initiative, we have already achieved in excess of $150 million of annualized pretax savings, and I remain confident that we will reach our stated goal of at least $400 million of total future cost savings.

As we continue to do what we do best, I believe we will set ourselves apart in the marketplace as the strong, trusted and valued Company we are.

With that, let me turn it over to Steve.

Thanks, Rob.

With the continued volatility in the financial markets, I would like to spend a few minutes reviewing variable investment income for the quarter, realized and unrealized losses, and certain asset classes that have been receiving attention in the news.

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

Pretax variable income was approximately $540 million lower than planned for the fourth quarter, primarily driven by negative hedge fund and real estate fund returns.

We expect the income from these sectors will remain weak at least through the first half of 2009.

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

As of December 31, our securities lending book was approximately $23.3 billion, down from $26.8 billion on November 30 as discussed at Investor Day.

As of December 31, the amount of assets unopened has been reduced to $5.1 billion from approximately $15.8 billion on November 30.

Of the $5.1 billion of securities unopened, about $4.5 billion were treasuries and agencies securities, which if put to us can be immediately sold and satisfy the cash requirements.

While the demand for securities lending from our counterparties has stabilized for now, we're maintaining sufficient liquidity to meet any further reductions.

Now let me cover investment losses for the quarter.

Gross investment losses were $664 million.

Of this amount $176 million were credit-related sales.

Write-downs this quarter were $546 million, including $444 million of credit-related impairments.

These impairments were experienced across a variety of sectors, primarily driven by corporate credit, increased mortgage reserves and commercial mortgage-backed securities.

No single issuer accounted for more than 10% of total impairments.

Noncredit-related write-downs of $102 million consisted of certain equity-related holdings which were impaired because of length of time and the extent to which the market value has been below amortized cost.

When added together, total credit-related losses from sales and write-downs were $620 million before tax or $403 million after-tax.

Net unrealized losses for fixed maturities were $21.3 billion at December 31, down from $26.9 billion on November 30.

This consisted of $28.9 billion of gross unrealized losses and $7.6 billion of gross unrealized gains.

The decline in net unrealized losses since November 30 was driven by both tighter spreads and lower interest rates.

For example, CMBS spreads declined more than 280 basis points from November 30 to year-end.

Interest rates also declined across the curve with 10-year rates dipping 71 basis points below -- between November 30 and year-end.

Next I would like to discuss our real estate related holdings.

As of December 31, we held Alt-A residential mortgage backed securities with a fair value of $3.4 billion and an amortized cost of $5.3 billion.

Recently rating agencies have downgraded a number of Alt-A securities.

As of December 31, 59% of our Alt-A portfolio was rated AAA, 4% was AA, 3% A, 13% BBB, and 21% was below investment-grade.

We expect that Moody's will be downgrading virtually all 2006 and 2007 vintage Alt-A securities to below investment-grade.

If this occurs, obviously the percentage of our portfolio that will be rated below investment-grade will increase.

Our analysis suggests that Moody's is applying essentially the same standard to all bonds regardless of underlying collateral.

As I discussed at Investor Day, we believe our portfolio has superior structure to the overall Alt-A market.

For example, 88% of our Alt-A portfolio is fixed rate versus 35% for the market.

Furthermore, we hold no option ARM mortgages as compared to 29% for the market.

Fixed-rate mortgages have performed far better than both option ARMs and hybrid ARMs and expect this trend to continue.

In addition, 83% of our Alt-A holdings have super senior credit enhancement, which typically provides double the credit enhancement of the standard AAA rated bond.

At year-end MetLife's commercial mortgage portfolio was $36 billion.

We have been concerned for some time that the commercial real estate market was getting overheated.

During 2008 we sold approximately $650 million of higher risk commercial mortgages from our portfolio, resulting in a pretax loss of $85 million.

As of December 31, we had only $3 million of delinquencies, which represents less than 1 basis point on this portfolio.

Approximately $2.6 billion of our commercial mortgage portfolio is scheduled to mature in 2009.

We are very comfortable with this level of roll-over and expect to refinance and hold the vast majority of these mortgages at market rates.

Finally, let me say a few words about our hybrid holdings, a sector which has been in the news recently.

Lately, non-US perpetual hybrid debentures, also known as Tier 1 and upper Tier 2 securities, have come under pressure due to concerns regarding the potential nationalization of UK and Irish banks and a possible deferral of interest payments.

At December 31 our Tier 1 securities had an amortized cost of $3.6 billion and a fair value of $2 billion, and our upper Tier 2 securities had an amortized cost of $2 billion and a fair value of $1.3 billion.

It is important to note that MetLife's hybrid portfolio is highly focused on top tier banking institutions.

Moreover, our entire hybrid portfolio remains current on all interest and principal payments.

As I have stated before, while a portfolio of our size will not be immune from losses, we believe the portfolio is defensively positioned for the current environment.

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

Thanks, Steve, and good morning, everyone.

MetLife reported $0.19 of operating earnings per share for the fourth quarter and $3.67 for all of 2008, which is consistent with our Investor Day estimates.

As I think you can see, our business has performed well in the quarter, but our investment margins narrowed considerably and our DAC amortization significantly accelerated due to the decline in the equity markets.

This morning I will walk through our financial results and point out some highlights, as well as some unusual items which occurred in the fourth quarter.

In the fourth quarter, we had topline revenues, which we define as premiums, fees and other income of $8.2 billion.

This represents an increase of 6.3% over the fourth quarter of 2007.

For the year our top-line revenues totaled $32.9 billion, a 10.7% increase over 2007.

By the way, all results and comparisons exclude RGA, which was split off near the end of the third quarter.

In institutional top-line revenue growth of 18% over the year ago period was driven by strong increases across all its major product areas.

High pension closeout sales during the quarter increased retirement and savings revenue by 80% to $689 million.

Nonmedical health and other had a 13% increase in premiums over the fourth quarter of 2007, driven by dental, which was bolstered by a recent dental HMO acquisition.

Growth in group life resulted in an increase of revenues of 8.7% over the year ago period.

International had reported revenues of $1 billion in the fourth quarter compared to $1.1 billion in the year ago period.

Changes in exchange rates had a significant impact on reported revenue.

On a constant dollar basis, revenue actually increased by 11% compared to the fourth quarter of 2007.

Turning to our operating margins, let's start with our underwriting results, which were in line with our expectations.

In institutional the group life mortality ratio for the quarter was 93.3%, bringing the full-year ratio to 92.3%, consistent with our estimated range of 91% to 93%.

Disability's morbidity ratio for the quarter was 92.9%, bringing the full-year ratio to 89.7%, also consistent with our estimated range of 88% to 90%.

The morbidity ratio is being driven by lower recoveries and a modest increase in incident rates.

Auto and Home turned in a very strong performance this quarter.

The combined ratio, including catastrophes, was 84.9%.

Included in this result is a prior accident year reserve release of $27 million after-tax compared to a $25 million after-tax release in the prior period.

Catastrophe losses came in slightly more favorable than planned, and the combined ratio, excluding the impact of catastrophes and prior year development, was 88.6%, which is clearly an excellent result.

Moving to investment spreads, with regard to veritable investment income as Steve explained, we again saw mixed performance of certain variable alternative asset classes this quarter.

We experienced losses in hedge and real estate funds, but securities lending margins were strong.

For the quarter veritable investment income was $317 million or $0.40 per share after DAC, tax and other offsets lower than the 2008 plan.

If you recall, on Investor Day Steve explained that our 2009 plan for veritable investment income is $150 million per quarter, which is obviously a lower baseline than the 2008 plan.

Compared to the 2009 baseline, veritable investment income this quarter was lower by approximately $175 million after DAC, tax and other offsets or $0.22 per share.

Another important factor with regard to investment spreads are cash levels.

During the fourth quarter, we held much higher levels of liquidity due to market conditions which adversely affected investment spreads.

Moving to our expenses, our overall expense level was higher this quarter, but that was driven by a high DAC amortization, as well as some onetime expenses.

The equity market decline of over 20% in the fourth quarter reduced its earnings in individual business by approximately $335 million after-tax or $0.42 per share.

Most of this reduction was due to higher DAC amortization, which shows up in operating expenses.

Also this quarter we incurred $24 million after-tax in Operational Excellence charges, which consisted mainly of severance payments.

We also had some onetime real estate expenses and made a contribution to MetLife's foundation in this quarter.

All of these expenses appear in the corporate and other segment.

Turning to our bottom-line results, we earned $148 million in operating income or $0.19 per share.

With regard to investment gains and losses in the fourth quarter, we had net realized investment gains of $768 million after-tax, DAC and other adjustments.

Included in these results were credit losses and impairments of $403 million after-tax, which Steve has already explained in some detail.

We also had significant derivative gains of $1.6 billion after-tax, which arose primarily from the decrease in interest rates in the fourth quarter, as well as other factors.

Remember that we use derivatives as economic hedges, so there is an offset to these derivative gains, which is not necessarily showing up in the income statement.

For the full-year 2008, we had statutory net income of approximately $1.1 billion.

Total adjusted statutory capital at year-end is approximately $24.3 billion.

We have not finished our RBC calculations for year-end 2008, but based on our work to date, the range of 365 to 400 from Investor Day is still valid.

Therefore, we believe that our excess capital position is still between $3.6 billion to $5.7 billion.

In summary, the fundamentals of our business remain strong, and I believe we are successfully dealing with the challenging market environment.

And with that, I would like to turn it back to the operator for your questions.

(Operator Instructions).

Suneet Kamath, Sanford Bernstein.

Two questions if I could, first for Rob.

Just on the M&A environment, I know you've talked at length about your interest in doing deals, and it has to be the right deals.

But just generally we have not really seen anything in US life insurance across the sector despite the market conditions and the attractive pricing.

I'm just wondering what you are seeing in terms of opportunities?

And perhaps any thoughts in terms of why we have not seen anything.

Are the prices too high, or are people waiting for the capital markets to open up?

Just any thoughts on that.

And then second for Bill, there has been a lot of talk about impairment of securities on a stat basis versus a GAAP basis.

Can you just talk about your approach and any lags that may exist between the two?

I will take the M&A question.

I mean, and I have said this publicly as recently as last week in a broad meeting, we are in a very unusual position relative to our capital strength and our position and so forth.

I would say as good a position as anyone to take advantages of M&A opportunities.

Having said that, I'm very focused as we all are on running our own business and making sure that any steps we take do nothing to in any way weaken our position or cause us to change even slightly what our strategic movement would be.

That, coupled with the economic conditions, led me to say something that was picked up I noticed on Bloomberg, which was rather nice I thought, where I said I'm really not interested in stepping into a lily pond if I do not know how deep it is.

So we see no reason to be in a hurry.

There is no M&A fever here, let me put it that way, and we will continue to watch the markets.

It is Bill.

The answer to your question about impairments, the difference between stat and GAAP, is very simple.

There are no differences for us.

As far as I know, there have never been any differences between stat and GAAP for us.

And so there is no lag where our true-up, if you will, sometime in 2009 we are going to have to true-up our stat impairments because they have always been the same.

Just one quick follow-up on that.

Just as it relates to these hybrid perpetual debentures, I guess there is another bank in Europe that is not redeeming a security.

As you think about the statutory capital implications of that, is there any change in how you treat that security from a stat perspective, meaning moving from debt-to-equity if an issuer decides not to redeem?

I think you're probably referring to Deutsche Bank, which back in December had an implied call date on one of their hybrid securities, which they did not call in, and that resulted in an extension of that security and the potential for reclassification by the rating agencies.

So when you look at those securities potentially being downgraded, obviously there would be some RBC impact.

We did sort of a worst-case analysis.

What if the entire portfolio were downgraded to a below investment grade, and we don't think that is the case, but just take the worst-case.

We think it is roughly 5 RBC points.

But again, we don't think we will get anywhere close to that.

Thanks, Steve.

It was actually a different bank, Banco Sabadell, I guess a Spanish bank.

But thanks for the clarity.

Yes, I guess we did not hold that one.

Andrew Kligerman, UBS.

Let me ask one question and then a follow-up.

With regard to the DAC, it looked like there were about $376 million in unlocking in the quarter.

But you did not put out a prospective DAC unlocking number.

Could you give a little color around what might tip that?

What might generate a prospective DAC unlocking and what the potential magnitude is, and then I will follow-up.

Andrew, you kind of came in and out.

I think I understood your question, which was that I'm not sure everybody on the phone heard it, which was that there was a lot of DAC amortization and some unlockings this quarter.

Is there some kind of big perspective DAC unlocking that might be coming?

I assume you're relating to whether or not what that would be -- obviously we do have DAC unlockings based on changes and assumptions.

Right.

It is 376 in the quarter.

But this is based on the market, right?

Right.

I don't know if we really do this any differently than everybody else, but we do explain it differently.

So we obviously adjust DAC for market conditions every quarter, okay?

So whatever the stock market performance quarter that was we always adjust DAC accordingly.

Some companies do not do that.

They wait and do it sort of annually.

We don't; we do it every quarter.

That said, we have this mean reversion formula that allows us to sort of smooth results, if you will, for up and downs that you might have in any given year.

And our mean reversion formula is we are clearly at one end of the spectrum in terms of because the stock market has declined so much.

So it is not really -- so the formula is no longer smoothing results.

So changes in the stock market are just flowing right through.

There is no smoothing over some period of time.

So as of now, that is how that is working.

So we are -- and currently anticipating any additional DAC -- or some one big time adjustment because of where the current market conditions are.

I cannot say that we will not ever do that.

I mean I guess if the S&P environment got bad enough, we may have to consider that.

But obviously that would be a significant down from here.

So we're not anticipating any big DAC unlock.

If we were, we would tell you.

Got it.

And then just shifting over to the credit, you have about $600 million in realized investment losses in the quarter.

You mentioned no credit had greater than a 10% hit.

But maybe just -- and I know you said it was broad too -- but just maybe more color on this.

Maybe what were the two biggest credits that were hit even if they were not 10%, and how much of it related to RMBS versus CMBS?

Maybe a little more granularity would be helpful in getting a feel for this.

It really is very, very equal across a whole bunch of different asset sectors.

We do not give out names of issuers unless they go bankrupt or something, but CMBS was in there.

I would say most of it was really in the corporate bond side, but a variety of different industries, including media, noncable was one of the larger ones.

There was some real estate related stuff, but really nothing jumps out.

If it did, I would tell you.

But maybe the most would be financial institution related.

But nothing really jumps out.

There's no big numbers.

And it was primarily corporate debt?

Yes, primarily corporate debt.

Some CMBS, some Alt-A, a little bit of subprime, but we don't hold very much.

It really was scattered this quarter.

In the previous quarter, it was not way, but this quarter was scattered.

And then just operationally, the big pickup in pension closeout activity in the UK.

What is the big driver there, and with regard to fixed annuities, it is the last question, what type of returns were you generating on that large uptick in fixed annuity sales?

It is Bill Mullaney.

I will just comment on the pension closeout activity.

We saw strong closeout activity in the UK in the fourth quarter.

As you know, we have been in business in the UK for about a year and a half, continuing to build our business there.

The pipeline continued to be strong in the fourth quarter.

There were a lot of opportunities to write business.

We were pretty selective about what we wrote making sure that we got the appropriate return for the deals that we do.

So we have been very happy with our foray into the UK market, and we think the pipeline is going to continue to be strong there in 2009.

Any particular reason why it is just picking up so suddenly?

Well, I think there may be a couple of reasons.

The first is having been in the market now for over a year, we're getting more well-known, and our expertise is starting to show.

I cannot say for sure whether some of the competitors in the UK maybe pulling back and not being as aggressive quoting on some deals, but we have been seeing a lot of deals.

We have been putting our prices out there to get the returns that we want, and we were able to write some deals in the quarter.

Andrew, it is Bill about fixed annuities.

Lisa will embellish in just a second.

With regard to returns, you know because spreads have widened so much and obviously the fixed annuity business has picked up a lot I think for the industry, not just for us, but because spreads have widened so much, we now have an ability to earn a pretty respectable double-digit ROE in fixed annuities.

And that is -- and so the stuff we sold this quarter, we really are ultimately even though we have not got it all fully invested yet, we do expect to get double-digit returns on it.

I don't know if you add anything to that.

Yes, let me just add a little color to what Bill said.

The industry has more than doubled, and we are pleased to see that the flight to quality has largely been to us.

And so as spreads widen, we kept our consistent pricing discipline and picked up market share as some of our competitors faltered.

The other piece that happened here is that we got footing into the bank channel, which was something that we did not have really up until towards the fourth quarter.

And so that momentum has really picked up.

And for the last seven rating cycles, there were only two where we were at the top in terms of competitiveness.

The rest we were competitive, but we were not at the top, and yet the applications and the money continues to flow in.

So we have seen great momentum far exceeding our obvious Investor Day forecast, and that momentum we expect will continue here as the flight to quality and consumers go with the flight to safety.

Tom Gallagher, Credit Suisse.

A few questions, first on liquidity.

Bill, can you just comment on how much you would define as excess liquidity?

Any plans to put that to work?

And timing point question two, I noticed there did not appear to be much of a shadow DAC writeup this quarter to partially offset the impact of unrealized credit losses.

And the last question for Steve.

Any risk of impairments to private equity in real estate partnerships because I believe there is a lag of returns there.

Can we expect any major impairments prospectively there?

I will take your first two.

With regard to liquidity, I'm sure you have noticed between cash and short-term investments, we have $38 billion of short-term liquidity on our balance sheet right now.

That is a lot.

Now that number is sort of a little high.

There are some unusual reasons why that is high.

Some of that is with regard to collateral balances with regard to some of our derivatives contracts.

Just quickly before somebody asks a lot of questions about that, when we have counterparties on derivatives, we true-up the contracts everyday, and their money, therefore, sits in a trust account.

And so that shows up on our balance sheet as ours, but it is really collateral that is owed to us on a derivative.

So you have to kind of take that $8 billion off the top.

So we're really talking about $30 billion of cash and liquidity.

How much is excess?

Well, it is funny; you can define that a lot of ways these days.

In a normal world, certainly a year ago, we would have held maybe $10 billion of liquidity on a normal basis.

So you could say, well, the excess, therefore, is 20.

And that might be right, but we're not going to go back down to $10 billion anytime soon I don't think.

We are going to hold higher levels of liquidity for a while here until things get calmer.

We have been building a lot of liquidity mainly because we wanted to make sure the securities lending balances have stabilized, which it appears they have, and we also just wanted to make sure that things were okay generally.

You can see across our balance sheet all our insurance liabilities in terms of lapse rates and stuff, things are very stable, so we feel good about that.

So we will take the liquidity cash balances down.

I'm not sure exactly how much we will take them down in the first quarter, but we will be investing some of that money out.

I would also just add obviously holding this much liquidity hurts earnings, operating earnings, and it clearly had an effect in the fourth quarter.

We should get some pickup from that in the first.

So I don't -- we're not going to invest all $20 billion next quarter, that is for sure.

We're going to stay really liquid here in this environment.

So hopefully that gives you a little color.

With regard to shadow DAC you know that you might write up, we do obviously have -- when we adjust AOCI for unrealized losses, there is a small shadow DAC offset, but it is just small.

And I think we have been doing -- there is no change there in policy.

We have been doing it consistently.

A lot of our businesses, you have to appreciate most of the DAC in MetLife is in the annuity business or individual life and annuity business.

And although we have obviously unrealized losses across other -- from bonds across a lot of different product areas where we, frankly, don't have a lot of DAC.

So I don't know if that is sort of wise.

Maybe our business mix says that's why we do not have much of a DAC offset.

We do recognize shadow DAC, but it is just a modest number.

I will take the question about the impairments on private equity and real estate partnerships.

As you pointed out, there is a lag there.

The year-end statements are not yet in from these LBO funds and real estate partnerships, but we will be getting them over the course of quarter.

I think that it is probably fair to say that there will be some marks on those portfolios and some impairments taken by them, which under the equity method will flow through to us in the first half of 2009.

And I would say that the biggest area where we will see the harshest marks will be the large LBO funds, and we have been picking up some market intelligence on that, and that is where we think we will see some of the more severe marks.

I don't have a number in terms of dollars, but I think it could be -- percentagewise in terms of what kind of marks they might take, I'm hearing things in the marketplace of 10%, maybe as much as 20%.

It depends upon their deals.

And that has driven the large LBO space because of a lack of exit opportunities for them certainly in the IPO market right now and even in terms of selling businesses in this environment, the lack of credit being available.

So that is the sort of thing we're anticipating.

We do not have the numbers yet, so I cannot be specific.

But generally speaking, that is where the pressure is coming from.

And Steve, just to follow-up.

Rough carrying value of allocation of large LBO funds for MetLife?

Our overall portfolio is $3.1 billion, I believe, and large I think is around 40% of that.

I got a number here, let's see.

I don't have it broken down in terms of large in terms of dollars, but let's say about 40% or 3.1 would get to you about $1.2 billion, $1.3 billion, somewhere in there.

Ed Spehar, Merrill Lynch.

Steve, I was wondering if you could talk about the nonagency prime RMBS, the size of that portfolio and some of the concern in the market about this cramdown legislation that could cause first losses to be spread across all tranches?

I guess the issue is, would do you think the impact would be on your portfolio from both a potential loss standpoint and ratings downgrade standpoint?

And then I have one quick follow-up.

Okay.

The size of the nonagency prime is $10.5 billion market value at year end.

And in terms of the legislation, without going into all the details, the effect would be that the stack would not be treated the same way as we were anticipating from the point of view of where those losses would be first absorbed.

So normally if we're holding AAA rated securities, the securities below us would absorb the losses first.

This would make some of that loss, not all of it, pro rata across the entire various tranches.

So that would impact us in a way that we and others did not expect since this legislation obviously is still pending and was not contemplated when we bought these securities.

In terms of economic impact, we have done some analysis.

We think it is small, in fact, quite small, maybe less than $30 million to us in terms of ultimate lack of cash flows coming into our securities.

So from a pure economic point of view, it does not have a large impact.

The larger potential impact would be the ratings downgrade, but even that is relatively small in terms of RBC points if you want to translate to that.

We're thinking it is just a couple of RBC points on a worst-case basis.

And what does that assume in terms of downgrades?

Like how far -- do you assume that if rating agencies see that there is going to be $1.00 of principal loss, where do they take securities under that scenario?

Yes, I looked at that analysis a little while ago.

I don't have the exact detail how much gets downgraded to lower investment-grade and below investment-grade and all the rest, but we did do sort of a worst-case analysis, and that is how our numbers came out.

But we're assuming legislation goes through -- I'm not predicting that -- but we will run the numbers to see what does it mean to us.

So the economic losses and even the RBC impact is not terribly significantly.

By the way, it is not on the entire portfolio.

Some of these securities would not be impacted by the legislation.

The other thing I would mention to you is my understanding is that this bill came through the house and was passed and now it was in the Senate and will probably go to conference before it finally gets passed and signed by the President.

And I'm told that there is a fair amount of conversation now within the Senate about the unintended consequences of this legislation.

So the intent of the legislation obviously was not to single out owners of these securities and penalize them.

It was to give relief to homeowners to prevent them from having their mortgages foreclosed upon and losing their homes.

I think that people in Washington now are becoming aware of these ancillary and unintended consequences, and our hope is that the legislation will take into account those kind of issues and perhaps come out in a better state than it went into the Senate.

Okay.

Thank you.

One quick one for Bill.

Could you tell us -- I might have missed this -- statutory operating earnings in the fourth quarter and full year and any -- is there any reason to think that will change in '09?

Well, statutory net income with -- I will do the numbers now -- statutory net income for the full year was $1.1 billion.

Statutory operating earnings for the full year were $1.3 billion.

For the fourth quarter, we had pretty big losses in both categories -- in both areas.

And obviously that is because of the decline in the markets and stuff like that and how it affected certain of our liabilities and certain reserves we set up.

We would normally -- in a normal year, so in 2007, for instance, we had about $3 billion of statutory net income, which I was I would think a very normal year.

And my expectation is that we will end up in 2009 somewhere between those two numbers.

So the $1.1 billion in net income for '08 and the $3 billion in '07.

And so it will be -- it will not be quite as weak as it was in' 08 because of certain reserves that we set up, but it should be a little better than -- or it will not be as bad as '08 -- but it should be -- it will not be back to normal, that is for sure.

So can we assume roughly that the impact of the equity market decline on the variable annuity guarantee business from a statutory standpoint last year was something in the neighborhood of $1.5 billion to $2 billion?

No, it was not that big.

It is a little unusual.

We have obviously other equity exposure, not really, but we have in our institutional business, we have some equity exposure, which is not really a guarantee or anything like that.

But we are forced because of the oddities of the statutory accounting to set up additional reserves whether we think we're going to need them or not.

And we don't have -- so it really was not these very much -- there were some modest increases in reserves in something called separate account carve-out.

So we had to put up for variable annuities.

But most of that actually came from other parts of the Company.

Mark Finkelstein, Fox-Pitt Kelton.

A few questions.

I guess just firstly thinking about earnings a little bit, Steve talked about some pressures on variable income.

I mean obviously the S&P is down.

The core earnings number, $0.82 I guess really no commentary on the outlook, $3.60 to $4.00.

Can you just kind of talk us through the $0.82 core number and how to think about that in the context of the $3.60 to $4.00 guidance at the Investor Day given what we have seen since that point?

Sure.

Well, we obviously reported $0.19.

Now the two big adjustments would be the equity market impact, which we estimated at approximately $0.40, and then also the variable investment income mix, which we estimated at sort of in that $0.82 number we said was worth $0.22.

So those two big things should get you to 80s, and then there's a bunch of other pluses and minuses which are small and as always sort of net to zero or near zero.

So I would just focus on those two big things.

You had a 20% drop or a 20% plus drop in the S&P 500 in the fourth quarter that caused very high levels of DAC amortization obviously.

But the quarter actually ended up with an S&P 500 of 900, which was where we estimated it would be when we built our 2009 -- sorry for the static -- when we built the 2009 plan.

So I guess I would say so that sort of makes sense to me.

Obviously the S&P 500 is down so far in the first quarter.

That obviously will put pressure on reported earnings.

But we do not make -- we don't do earnings projections for quarters.

We are only assuming for 2009 the stock market goes up 5%, so we are -- so we kind of feel like that is still a number that makes sense.

With regard to variable investment income, and I tried to give you a hint of this in my prepared remarks.

You know, in coming up with the $0.82 run-rate, we did not really try to normalize back to the '08 plan, which is, of course, very still now.

We really normalized it versus what we thought the '09 baseline would be.

You got a little color from Steve already about where certain alternative asset classes might come out.

I'm not going to try to kid you.

I think variable investment income will be very volatile this year.

But again, we're not necessarily trying to project quarters, we project the year.

And again, so $00.82 sort of relative to our full-year projection, I think that is sort of ticks and ties and makes sense.

But it is going to be a volatile year.

I don't think that is a big surprise to anybody.

The only other thing I might add that is not in that normalization, and I addressed it in a couple of questions ago, is liquidity.

Liquidity is a pretty big drag.

I think it probably cost us at least $0.10 in the fourth quarter, probably more.

We are not going to get it all back in the first, but over time I do expect that we're going to -- our liquidity situation -- we will not be quite so liquid.

So we will be earning a little bit more on that money, and that should help the numbers as well.

So hopefully that gives you a little color about projections, run-rates versus earnings plan and that sort of thing.

Okay.

And then Steve, in your comments on the nature of the credit losses, I missed the number, but you mentioned some mortgage-related impairments.

Can you just walk through those and what specifically they were?

Those were an increase in our reserves for the commercial mortgages we originate and hold on our balance sheet.

Okay.

And what was that number again, please?

We don't give out the number, I'm sorry.

It is part of our overall number.

Jimmy Bhullar, JPMorgan.

I have a couple of questions.

The first one is, if you can talk -- it is for Steve -- on the aging schedule, the losses on securities that are down 20% or more for six months increased by about I think $1.7 billion.

In the past you have been pretty proactive about writing stuff down that is across a certain threshold for a certain amount of periods.

Should we expect more write-downs of these securities as they enter that bucket, or is it going to be different this time around for whatever reason?

And then secondly, I just had a question on your strategy for the variable annuity business.

You have mentioned in the past you are raising prices, but have you reevaluated your strategy and commitment to that business given the balance sheet uncertainty and the perception of risk that this exposure presents over all for the Company?

Okay.

I'm going to reverse myself in the last question and give out that number.

It is $83 million we increased the mortgage reserve by.

(inaudible).

Turning now to the six months and 20% or more bucket, the same standard applies, which is we take a look at those securities very closely if we cross that threshold of six months and decline in value of 20% or more.

But we look and determine whether or not we're still receiving all of our contractual cash flows, the status of the company that is the issuer,, meaning their ability to meet these cash flows going forward in the future, and essentially we don't write-downs securities only to turn around and write them back up again if they are good securities.

So that is a double-edged sword.

We are very mindful that if we have a real issue in terms of the ability of the borrower to pay us, then obviously we're going to impair those securities and take it through the income statement in the quarter.

So --

So you would sort of be doing that regardless of what category they fell in, right?

So what is the distinction as the amount that has been depressed for a longer period increases, or is there one?

Well, there is a distinction between debt securities and equity securities.

There is a much more stringent approach on equity securities largely driven by the SEC rules.

So you will see oftentimes equity securities kick over to the impairment bucket pretty quickly.

But debt securities can stay in that unrealized loss position if it is still in an, for example, investment-grade related company, maybe it is interest rate partially driven, and it is other factors.

So again, the extreme example is, if you had treasuries and interest rates swung wildly and the treasuries were worth less because you bought them a few months ago at the all-time lows and interest rates rose, we would not impair those securities.

So that's just an extreme example, but that gives you some flavor as to why you would not just go and automatically impair securities you believe are money good securities because they are in a bucket that says they are down for 20% or more for six months.

Jimmy, you asked a question I think about the verbal annuity business.

Let me start on that and then pass it over if Lisa has other comments.

I have been for a long time very vocal on the fact that we love the variable annuity business.

One of the reasons we love it so much is because of the solid mix of businesses we have across MetLife.

It is a way to do two things by the way -- tell you that we're committed, and secondly, to point out and get into other areas that people don't naturally ask a lot of questions about, like institutional business.

Right now I would argue that the need for the product both in terms of downside protection for the consumer and the increasing focus on need for retirement income, the need is as great or greater and probably the current economic situation drives -- is probably the most significant catalyst toward understanding what the need for this product and service is.

We are very focused on both the design, the pricing, and the distribution of these products.

We have been very comfortable with our continuing organic growth.

We continue to be comfortable with that.

I have said sort of as an aside that if someone said, would you want to with a slice of pen double the business on one they, I have always said that might be another issue relative to the mix of our business.

So we're comfortable with the variable annuity business.

We particularly -- we're known as the GMIB shop.

We have gone over at both meetings and investor day about what the -- both the strength of the guarantee to the individual is, but the prudence of the guarantee from MetLife's position is, and we continue to be pleased with the business.

And I would say, by the way, we have, of course, exported our expertise to other countries, and we hedge and manage that business in the same way as we do domestically.

Lisa, you might have additional comments.

Yes, let me just add a little bit to what Rob said, although I think you covered most of it.

Which is that in addition to making the changes that we have announced in terms of our fees for our writers, we will be making other structural changes as well.

The good news is that what we're seeing is that clients are really valuing our guarantees, and we have the pricing power, they are willing to pay for them, and we're going to be making those changes.

The good news also is that as the market moves up, which it will at some point in time, we will get a tremendous profit kick here as well.

We're pricing at good solid ROEs.

We are seeing competitors drop out.

We are seeing ourselves benefit in the flight to quality.

If you look just in the month of December alone, the industry was down somewhere around 25% or 26%, and we were actually slightly up.

So we will continue to pick up share as we did in the fourth quarter where while the final numbers are not out yet, but it does look like we will end in the number one position here.

The diversity of distribution plays in in a big way here both in terms of product and distribution itself.

So when the market was moving a little bit away from fixed annuities because the fear -- from variable annuities because of fear, we saw, we moved it into fixed.

So it is about having diversity of products and also our distribution as the dislocation in the market in third-party distributors, we have a very solid career channel and are performing excellently at this point in time.

Randy Binner, FBR Capital Markets.

I just had a quick question for Rob regarding TARP and CPP funding.

Do you have any updated thoughts on that as it relates to Met and maybe the industry in light of more restrictive terms that are being laid out by the government?

Randy, I have absolutely nothing to say relative to updating on TARP.

You know what my general position has been all along in terms of commenting on it.

It is a very interesting topic from an intellectual and political point of view, but beyond that, I do not have anything to add.

Fair enough.

Thanks.

Colin Devine, Citigroup.

Just a couple of quick ones.

On the RBC numbers you gave, Bill, what impact did the Reg 128 change have on that is question one?

Question two was liquidity.

If I look at how much the short-term investments and the cash ramped up in the fourth quarter, I guess to about $37 billion, $38 billion, when you're talking about liquidity, is that the kind of position you are going to continue to run here for the foreseeable future?

That is number two.

You broke out for the first time these mortgages and consumer loans held for sale.

I was wondering if we could just get a little bit of clarification as to what those are.

Obviously they are at $2 billion at the end of the year, up from essentially nil the year before.

And then finally, you mentioned you set up a bunch of reserves on a stat basis.

Was there any spillover to what you're doing on a GAAP basis, and perhaps you could just elaborate a little bit on what the liabilities were in question?

I think I get the first three, and I will pass last one to (inaudible).

I will be tired by then.

With regard to RBC, Reg 128, if you will remember, on Investor Day we talked about that the New York State allowed us to kind of change the formula a little bit for calculating your Reg 128 reserves.

$2.3 billion or $2.1 billion probably more than a little -- (multiple speakers)

I think it was actually 1.8, and then obviously that got reported in the press a lot as we got this relief.

We had -- it actually -- the fact that we got this relief, and we like getting it, but obviously because the market did not get any worse.

We had it covered from a hedging point of view anyway, so it probably had very modest impact.

The fact that we got the relief had a very modest impact on our RBC because we had a hedging cover.

But the amount of stat reserves we had to put up for that was lower, but we still had the hedging cover to deal with it.

(multiple speakers) -- your stat capital by the $1.8 billion if you dropped the reserves?

Right.

Because the reserves -- because we hedged those reserves, we effectively moved them to our reinsurance captive.

They were hedged.

The other thing to just always keep -- so the flip side of that is since you have the hedging asset, you must have gotten -- you must have got, therefore, because of the reserve award, you must have got credit for that.

We do not count the fact that our hedging assets or hedging values are higher than our reserves and our reinsurance.

That does not help our RBC ratio.

Okay.

That is not necessarily true for others, but it is the way our reinsurance program is set up, it does not help.

So you are not using your hedge to write up your RBC?

Bingo.

Thank you.

You said that much better than me.

So now with regard to liquidity, yes, it is $38 billion.

That is very high.

No, we do not expect to run it that high.

We do it expect it to come down even in the first quarter.

But going back to the idea of on a really normal -- in a normal environment, we would only always have sort of $10 billion of short-term liquidity.

We're going to be running quite a bit higher than that.

We're going to keep excess liquidity on our balance sheet for a while.

With regard to mortgages held for sale, you're right, that looks funny.

But there is a good explanation.

We own a little bank, MetLife Bank.

We bought a mortgage origination business from First Horizon Bank.

That business, that transaction closed in September on September 1, so in the third quarter of this year.

And this mortgage origination company, we did not get -- just so it is clear -- we did not buy any legacy business whatsoever.

We bought assets and the distribution -- or we bought a factory and a salesforce that originates mortgages.

Consumer or residential just to --?

All residential, all prime, all high quality and we hold those for sale.

We inventory them for a month, and then at month's end, we sell them to Fannie or Freddie.

So that is the kind of one month production, if you will, that you are seeing on the December 31 balance sheet.

Thank you.

Now with regard to the stat reserves --

It is [Dan].

I will just add one more comment on Reg 128.

The changes that were made actually resulted in a reserve that was slightly more conservative than the VA carve-out requirements will be at the end of 2009.

So even though it helped RBC, going into 2009/2010, it is actually still slightly more conservative than the VA carve-out requirements, which New York will adopt at the end of 2009.

Didn't Bill just say it did not help RBC?

(multiple speakers)

It did help a little bit.

Okay.

In terms of the additional reserves on a stat basis, that was actually related to Reg 128, too.

One of the changes that New York approved was the ability to move from 104.5% of treasury rates in valuing liabilities to the greater of 104.5% of treasuries and LIBOR swap curve.

At the time they approved that, the LIBOR swap curve was quite a bit higher, so we expected to get some relief there.

In the end what happened is the LIBOR swap curve actually dropped, so we wound up holding the reserves at the treasury curve, which in terms of value and liabilities was in the 2% range in terms of discount rates.

So that kind of bumped the reserves up quite a bit on some of our separate account businesses.

Given those changes and perhaps the earnings, do you still expect to take roughly the same level of stat or dividends out of the operating company this year, or is that going to be down as well?

You know, I'm not sure what we will do yet.

I think, frankly, at the end of the day, it will depend a lot on how big credit losses are.

We have to manage to a 350 RBC ratio, and obviously depending on what happens to the overall equity market this year and what happens to the debt markets, we will probably be managing our stat dividends accordingly.

So it is not clear to me how much we will take out or not to be quite blunt about it.

And I think we will just have to play it -- you know, we generally only take dividends out once a year, and we generally do it towards the end of the year.

And that concludes our call.

Thank you very much.

Thank you.

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