大都會人壽保險 (MET) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to MetLife's first-quarter earnings release.

(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 on 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's Inc.

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.

Good morning, everyone, and welcome to MetLife's first-quarter 2009 earnings call.

We are delighted to be here this morning to talk to you about our results.

We will be discussing certain financial measures not based on generally excepted 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.

A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not acceptable as MetLife believes it is not also 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, and here with us today to participate in the discussion are other members of management, including 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 first quarter, MetLife generated $7.9 billion in premiums, fees and other revenues, a solid result in what continued to be a challenging environment.

Obviously the pressure from unfavorable equity and credit markets had an impact on earnings.

However, our mix of business is well-balanced, and our business model and fundamentals remain solid.

In a few moments, I will talk about the actions we continue to take to ensure our financial foundation remains strong, but first I want to provide some insight into the performance of our businesses.

Institutional Business generated a solid top-line result as premiums, fees and other revenues were $3.9 billion for the quarter.

This strong result was driven by a 5% increase in both Group Life and in non-medical health premium, driven mainly by organic growth.

Our Institutional Business has been built on years of strong trusted relationships with our clients.

In tough times like these, relationships become even more important.

We are spending more time with our customers, and the advice we provide is even more valued.

Individual Business earnings continue to be impacted by declining equity markets; however, fundamentals remain strong, and we continue to benefit from a flight to quality.

Variable annuity deposits increased over both the first quarter of 2008 and sequentially to reach $3.7 billion.

In addition, we continued to see significant demand for MetLife's fixed annuity products with deposits of $3.6 billion.

Annuity net flows remain positive by almost $1.9 billion in variable annuities and $2.7 billion in fixed annuities.

Both are benefiting from the strong sales and declining lapse rates.

In International premiums, fees and other revenues declined over the year ago period, entirely due to the strengthening of the US dollar against other foreign currencies.

On a constant currency basis, revenues increased 3% over the prior year period, due mostly to solid performance in the Europe and Asia-Pacific regions despite volatile markets in a number of countries.

As I said, the underlying fundamentals of our business are solid, and we remain focused on strong underwriting and expense management.

I'm pleased with the continued progress in our cost reduction and efficiency initiatives through operational excellence and remain confident that we will reach our goal of at least $400 million of annualized cost savings by 2010.

Now I want to talk a little bit about the treasury capital programs and our own capital strength.

As you know, MetLife has been a federally chartered bank holding company since 2001, and with more than $1 billion in total assets, we are one of the top 19 US banking organizations participating in the Treasury's capital planning exercise being conducted under the Capital Assistance Program.

We are working closely with the Federal Reserve on this exercise and will share more information with you as soon as possible.

As a bank holding company, we were also eligible to participate in the capital purchase program.

However, as we announced last month, we have elected not to participate in this program.

Let me tell you why.

At MetLife we are confident that we have the financial strength to continue to succeed now and over the long term.

We are well-positioned with significant excess capital, a strong balance sheet and leading market positions in our core businesses where our revenues continue to be healthy.

We have continued to take actions to reinforce our financial strengths.

Aside from our capital raised in the fourth quarter, we have already in 2009 successfully remarketed over $1 billion in debt, which was several times over-subscribed and completed an additional $400 million debt offering.

In a moment Steve Kandarian will provide more details on our investments, but I just want to say our portfolio remains well-structured and defensively positioned.

While the credit markets continue to be challenging relative to the size of our portfolio, our loss experience remains modest.

In summary, despite the tough environment, our businesses are performing well.

MetLife remains well-positioned to continue to meet the needs of our clients and has the capacity and the financial strength to further solidify its leading position in the industry.

And with that, let me turn it over to Steve.

Thanks, Rob.

I would like to spend a few minutes reviewing variable investment income for the quarter, realized and unrealized losses, our real estate related holdings in hybrid securities.

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

Pretax variable income was lower than planned for the first quarter by $508 million or $321 million after DAC, tax and other offsets, primarily driven by negative corporate joint venture and real estate fund returns.

The losses related to our corporate joint ventures were primarily driven by 2008 year-end equity valuations which flow through our Q1 income statement.

Real estate fund returns were negative due to continued decline in property valuations.

We estimate that property values have already declined 20% to 25% with an expected peak to trough decline of 35% to 40% in total.

While we expect some moderation in these returns, we anticipate that results from these sectors will remain weak at least through the end of 2009 and that we are unlikely to achieve our variable income plan for the remaining quarters.

On the other hand, income from our Securities Lending Program continued to outperform plan.

As of March 31, our Securities Lending book was approximately $20 billion, down from $23.3 billion as of December 31.

In addition, hedge fund returns improved for the fourth quarter -- from the fourth quarter and were slightly above plan.

Now let me cover investment losses for the quarter.

Gross investment losses were $535 million, in line with the previous four quarters.

Of this amount $145 million were credit-related sales.

Write-downs this quarter were $1,041,000,000, including $754 million of credit-related impairments.

These impairments were experienced across a variety of sectors, including $358 million in corporate credit, $136 million of equity, $126 million in structured finance securities, and $134 million primarily due to our strengthening of general mortgage reserves.

Non-credit-related write-downs of $287 million included $191 million of impairments on hybrid securities.

These hybrid securities were impaired because they have been trading below 80% of amortized costs for more than 12 months and were downgraded to below investment grade in the first quarter.

The remaining $96 million of noncredit impairments related to other equity securities which were impaired because of the length of time and the extent to which the market value has been below amortized costs.

When added together, total credit-related losses from sales and write-downs were approximately $899 million before income tax or $584 million after-tax.

Gross unrealized losses for fixed maturities were $28.8 billion at March 31, essentially unchanged from December 31.

While spreads declined in the vast majority of sectors during the quarter, this was offset by an increase in interest rates.

For example, BBB and high-yield corporate bond spreads declined 38 basis points and 182 basis points respectively.

However, five-year and 10-year treasury rates increased 11 basis points and 45 basis points respectively.

As spreads have continued to tighten, our gross unrealized losses for fixed maturities have declined by approximately $2 billion since quarter-end.

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

As of March 31, we held Alt-A residential mortgage-backed securities with an amortized cost of $5.1 billion and a fair value of $3 billion, including 2006 and 2007 vintage securities with a fair value of $1.5 billion.

As mentioned on the last earnings call, we expected that Moody's would downgrade virtually all 2006 and 2007 vintage Alt-A securities to below investment grade.

Approximately 87% of our 2006 and 2007 vintage Alt-A securities and 60% of our total Alt-A portfolio were rated below investment grade at quarter-end.

As noted on several occasions, we believe our portfolio has superior structure to the overall Alt-A market.

For example, 87% of our Alt-A portfolio is fixed rate versus 36% for the market.

Furthermore, we hold no option ARM mortgages as compared to 28% for the market.

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

As of March 31, we held commercial mortgage-backed securities with an amortized cost of $16.3 billion and a fair value of $13 billion.

Based on fair value, 93% of these holdings are rated AAA and 86% are from 2005 and earlier vintages.

Of the 2006 and 2007 vintage holdings with a fair value of $1.9 billion, 87% are senior or super senior securities with 20% to 30% credit enhancement versus 10% to 15% for standard AAA securities.

At quarter end MetLife's commercial mortgage portfolio was $35.9 billion.

As of March 31, the portfolio loan to value was 59% based on a rolling four quarter property valuation process, or we estimate in a low to mid 60% range that all properties were revalued today.

In addition, we also stress test the portfolio with peak to trough valuation declines of 40%, which shows our average loan to value increasing to the low to mid 70% range.

In addition, our debt service coverage remains strong at 1.9 times.

To date real estate delinquencies and losses have been minimal.

We had one loan default during the first quarter.

In April we foreclosed on the property, taking a write-down of less than 15% of the loan balance, well below historical loss levels.

In addition, only $2.2 billion of the portfolio matures in 2009.

We are very comfortable with this level of rollover and expect to refinance and hold the vast majority of these mortgages as we refinance them at market rates.

Finally, let me say a few words about our hybrid holdings in financial institutions.

At March 31 our Tier 1 securities had an amortized cost of $3.6 billion and a fair value of $1.5 billion, and our upper Tier 2 securities had an amortized cost of $1.7 billion and a fair value of $919 million.

It should be noted that MetLife's hybrid portfolio is largely concentrated in top tier banking institutions.

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

Since the end of the first quarter, hybrid security prices have increased as the fear of financial institutions defaulting has declined and several top-tier financial institutions have called their securities at par.

Let me conclude by stating that we continue to be comfortable with our overall investment portfolio.

While we have seen some stabilization in the financial markets, we remain cautious and defensively positioned.

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

Thanks, Steve, and good morning, everybody.

MetLife reported $0.20 of operating earnings-per-share for the first quarter.

Despite the challenging economic environment, our businesses continued to have solid results.

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

Turning to premiums, fees and other income, we had topline revenues, which we define as premiums, fees and other income of $7.9 billion.

This represents a decrease of 2.3% as compared to the first quarter of 2008.

Adjusting for changes in exchange rates in international and lower pension closeout sales in retirement and savings, revenues would have been up by 4.1%.

Given the current environment, I think this is an excellent result.

Institutional's revenues were down slightly 1.7% as compared to first-quarter 2008.

This was primarily due to lower pension closeout sales which fluctuate from quarter to quarter.

Group Life premiums grew at 4.8% as compared to the first quarter of 2008, and non-medical health was up 4.6% versus the year ago period, driven by growth in the dental business.

International had reported revenues of $933 million in the first quarter compared to $1.2 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 2.8% as compared to the first quarter of 2008, driven by Europe and Asia-Pacific regions.

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

Underwriting experience was generally favorable this quarter.

In Institutional Group Life mortality of 92.9% was well within our guidance range of 91% to 95%.

In non-medical health and other, group disabilities morbidity ratio of 86% for the quarter was better than our target range of 89% to 94%, driven by stable incidence rates and strong claim management results.

Individuals mortality ratio of 82.6% is more favorable than our plan of 89%, and that was driven by lower claim activity.

If we adjust for the impact of reinsurance, our net mortality results were still favorable.

Turning to auto and home, the combined ratio, including catastrophes, was 92.4%, which reflects an update from the 90.8% experience in the first quarter of 2008 but still below our planned ratio.

Included in this result is a prior accident year reserve release of $17 million after-tax, and that is compared to a $23 million after-tax release in the same period in 2008.

Catastrophe losses for the first quarter were $8 million after-tax, higher than planned.

The combined ratio, excluding the impact of catastrophes and prior-year development, was 91.7%, and that's a very favorable result and better than the 92.4% experienced in the prior-year period.

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

We experienced losses in corporate joint ventures and real estate funds driven by significant year-end equity valuations which flowed through our first-quarter results.

Securities lending margins were strong and hedge funds performed well with both asset classes coming in slightly above plan.

For the quarter variable investment income after DAC, tax and other offsets was $321 million or $0.40 per share, lower than the 2009 plan.

As Steve also mentioned, although we expect this area to improve, we probably won't get back to our plan.

Also due to market conditions, we continue to maintain high levels of liquidity.

Cash and short-term investments totaled $30 billion at March 31.

This higher level of liquidity is also adversely affecting investment spreads.

Moving to expenses, our overall expense level was higher this quarter, but that was driven by high DAC amortization and higher pension and post-retirement benefit costs.

The equity market decline of over 11% and interest rate movements in the first quarter reduced earnings through higher DAC amortization in Individual Business by approximately $204 million after-tax or $0.25 per share.

Pension and post-retirement benefit expenses were approximately $80 million pretax higher than in the first quarter of 2008.

At Investor Day last December, we told you that pension and post-retirement benefit costs would increase by approximately $180 million in 2009, due mainly to weaker investment results.

As we finalized our pension and post-retirement benefit calculations at the end of 2008, we also lowered our discount rate assumption and made some other adjustments.

Using these revised assumptions, we now expect our pension and post-retirement benefit costs to increase by approximately $300 million in 2009.

Also this quarter we incurred $34 million pretax and operational excellence charges, which consisted mainly of severance payments and consulting expenses.

The progress we're making in operational excellence is offsetting these higher pension costs I just mentioned.

Turning to our bottom-line results, we earned $159 million in operating income or $0.20 per share.

Given the results this quarter, we don't believe the earnings guidance we provided last December is still appropriate.

We have decided not to provide updated guidance because of the volatile capital markets environment.

That said, if you normalize our variable investment income and the equity market impact this quarter, I think you can get a good sense of our underlying earnings power.

With regard to net investment gains and losses, in the first quarter we had net realized investment losses of $760 million after-tax and other adjustments, and Steve has just explained that in great detail.

Our preliminary statutory operating earnings for the first quarter of 2009 are approximately $120 million, and our preliminary statutory net income is $45 million.

In summary, the fundamentals of our business remains strong, and we continue to deal successfully with the challenging market environment.

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

(Operator Instructions).

John Nadel, Sterne, Agee.

A couple of quick ones.

Maybe a big picture one.

I am thinking about TARP and I'm thinking about the government stress test, and MetLife's sort of open comment in a press release a week or two ago, whenever that was, a couple of weeks ago that indicated that you had no intention of participating in TARP.

I know that this is a bit of a touchy situation, but what can we take away from that commentary and that decision as it relates to your expectations around the government stress test?

Should we feel more comfortable, should your investors feel more comparable about the stress test in light of your advanced sort of commentary about not wanting to participate in TARP?

I'm laughing at your question a little bit, John, because you know I cannot answer it.

But let me -- a little bit of color might be helpful here or kind of walking people back in terms of what we have said about TARP and whatnot.

I don't spend any time thinking about TARP, quite frankly.

At the beginning, when we first had out there in the marketplace this discussion of TARP, which was a new program, we were asked about it.

And we said then and we've said consistently ever since then, answers that essentially said MetLife has no comment.

There was reason for that, if for no other reason that it was our understanding that any activity relative to or conversations by anyone about anything about TARP was non-public information, and we stuck to that.

And for quite a long period of time, every time TARP was mentioned and, of course, as time went forward, the discussions on TARP started to morph a little bit, you know, as to what it was.

As announced originally, I think the nomenclature TARP was very clear -- Troubled Asset Relief Program.

Then it moved to the sense that this really could not work as quickly as the government hoped, and so it sort of changed into capital injection, capital injection into healthy financial institutions that were large players in the credit market to help unfreeze the credit market and so forth.

And if I recall, there was even discussion about encouraging consolidation.

Time went forward.

The definition and the requirements around TARP continued to change.

And during all of that period, we were asked periodically, do you have anything to say other than no comment, and our answer was no.

And I think there were a lot of reasons for us wanting to do that.

We just thought it was the appropriate thing to do.

The problem recently, however, with the new sort of rising interest in TARP relative to the insurance industry, there was quite a bit of press and discussion about TARP and who was eligible and who was not.

And at one point the people were connecting the dots, and the facts became inconsistent with the messaging in the press relative to MetLife.

And at that very point, I felt, well, this is not good, we need to set the record straight.

Because by not saying anything or saying no comment, in effect we might be sending a message that the implications were correct and they were not.

So we simply (multiple speakers) wanted to set the record straight.

So that is the whole story about TARP.

In terms of, and as I mentioned in my comments, about the stress test, there it is very specific that there is to be no discussion at all about the stress test by any of the participants.

I know there has been a lot of questions and people guessing as to who is on first and so forth.

There we simply don't know, to be quite frank with you, when the Fed will release.

So that is my comment.

Two other quick ones, and thank you, Rob, for that.

That is helpful.

Bill, you mentioned statutory net income was marginally positive for the quarter.

Can we infer from that that risk-based capital since there was only modest deterioration in the investment portfolio that risk-based capital was generally flat from year-end?

Yes, if I had to guess, I would say it is a little lower.

We did have positive statutory income.

The balance sheet shrunk a little bit because we paid off some liabilities in our retirement and savings area.

So that would have implied that RBC would have picked up a little bit.

I think the ratings migration that Steve alluded to and a lot of asset-backed classes where we had to -- you know, stuff got rerated from investment grade to junk, that is a strain.

Underneath it, there's a lot of other moving pieces.

You know, I would just kind of tell you that RBC calculation is really complicated.

And so that is why, for instance, on Investor Day last year we did not really want to guess the single point number.

I gave you a pretty wide range because it is complicated.

We don't -- we only calculate it once a year.

So I think that the number is relatively steady.

My guess is it is a little lower, but you know I don't really want to be much more precise than that because we don't do the math every quarter.

And the math is complicated.

So for instance the fluctuations in interest rates have probably had a greater impact on some of the reserve calculations we have to put up, but we don't do those calculations until we do them.

I think some of the reserves came down from year-end is what I mean.

So we don't do that math every quarter.

The only other thing I would add, by the way, since you brought it up, so RBC may be down a little bit.

Cash at the holding company is $1 billion higher than it was at year-end, and that's not coming from dividends from the insurance subs.

That is from some of the financings we talked about, and we sold a little bit and stuff like that.

So if I think about our access capital position, I think I would say the $5 billion plus number that we sort of have out there I think that is still an appropriate number.

Great.

The last one for you, if you think about -- and I'm sorry if I joined this late and missed -- maybe Steve commented on this.

But Steve, if you think about the sort of very broad and in some cases material credit improvement during the month of April, can you give us a sense for what kind of improvement in your mark-to-market or your net unrealized losses you would guesstimate if we marked the portfolio from 1Q to to the end of April?

Sure, John.

I didn't give that comment, but it was about a $2 billion improvement since quarter, driven by tightening in spreads, although we have seen a little bit of an increase in interest rates, especially long in the curve which offsets the number but nets down to about $2 billion.

Okay.

Thanks.

Sorry, I missed that.

Colin Devine, Citigroup.

A couple of questions.

First, with respect to the VA hedging bill, can you just run through us one more time specifically what you do on the GMIB and particularly how you hedge for the dollar for dollar withdrawal feature on that is question one?

Question two for Steve, if you could give us some idea of where you were putting out new money during the last quarter in terms of investments and duration?

And then for Rob, given the continued ramp-up in the pension costs, perhaps then give us some thoughts on does it still make sense for MetLife to have a defined benefit pension, or is this something you should be looking at doing yourselves closing it down next?

Okay.

I will start about the VA hedging and specifically talk about the dollar for dollar.

Yes, particularly focus on GMIB.

GMIB, Yes, well, and Stan is sitting here next to me, so he will correct me when I say something wrong.

It is -- remember now GMIB, the accounting there is SOP 03-1.

And so the ability to hedge to the counting and to the economics, it's a little looser than if it was a withdrawal benefit product where you could use FAS 123 where we can do everything much more tightly.

So in general for GMIB, we use obviously a portfolio of S&P put options in general.

We also to kind of I would say hedge the longer-term economic risk, we also buy some long dated S&P put options to kind of also hedge more of the economic risk as opposed to just focusing on the accounting.

So that is in general how the hedging works there.

You know, the hedges -- it is hard for the hedges because of the accounting convention of SOP 03-1.

It is hard for the hedges to be perfect.

But our track record is that we actually do a pretty effective job of matching off and that we have very little breakage or noise around that hedging program.

Okay, Bill.

Can we just specify though -- I just want to make sure that I'm hearing this very clearly.

Are the economics here driving your hedge program, or is it the accounting, and what here is properly hedged, the economic exposure or the GAAP results?

My smart-elek answer is yes.

It sounds to me that you're hedging the accounting, and I want to get at with these movements in interest rates and the decline and I am glad you have got Stan there, is how much is the economic exposure move for MetLife, particularly given -- and also to talk about the experience on the dollar for dollar withdrawal and how you are trying to hedge for that?

Okay.

Let me try to help answer that.

In addition to what Bill said, clearly we are direct hedging the GAAP accounting because we don't want create volatility in our income statement.

But we supplement the direct hedging with Capital Markets reinsurance, and that Capital Markets reinsurance is what protects us against catastrophic movements in the equity market and interest rates on the peace that we are not able to directly economically hedge.

In terms of dollar for dollar withdrawals, we do have models that predict policyholder behavior depending on how much the benefits are in the money, and that kind of helps us estimate what the dollar for dollar withdrawal effects would be in different economic environments.

And that is kind of built into our direct hedging program, as well as our reinsurance program.

And can you give a sense of how the economics are unfolding here versus the accounting?

Both parts are doing well.

As I said, we do have a reinsurance program which is more catastrophic in nature.

We have determined that we could absorb some losses in our income statement, but we are more worried about the tail risk, and that is pretty much what we hedge.

So in terms of the economics, we do have some noise there, but it's all very manageable, and it's all measured, and it's really the tail risk that we have hedged against.

So the tail, not the drop in interest rates?

No, it is a combination of a drop in interest rates.

You know, for the GMIB benefit to be on the money, you have to have either a catastrophic reduction in the equity market --

Okay.

We are there on that.

-- or a big reduction in the equity market and lower interest rates.

Okay.

Well, that kind of sounds like the current scenario, but maybe we can keep moving on.

Well, it is Bill again, I just don't want to leave it there.

The interest rates have to be even lower than they are now effectively, and that is a little bit about what is going on there.

Remember, too, and we did this on Investor Day, Stan is trying to cut back in, but I'm not letting him.

I'm just going to monologue this.

Remember on Investor Day we also talked about how the product, GMIB product is designed, and how we think that is a very favorable design in terms of the assumptions built in regarding mortality and stuff.

You know, a lot of times that does not get appreciated about GMIB, and I think that is part of the reason -- obviously GMIB is our most popular writer by a long way.

So that I think gives us some additional comfort about sort of the real economic risk here.

And all of that came from the actuary stuff?

If I could just remind you, at Investor Day Bill showed some slides showing how conservative the purchase rates are in the contract, and in fact, on May 1 we made some modifications to make them even more conservative.

I would say some modifications is an understatement.

But --

I will pick up the next part of it.

This is Steve speaking.

You asked for the new money for the first quarter.

Most of it went into governments and agency-backed RMBS.

So those are your low yielding assets that are quite safe, and we felt like that was the right thing to do in the first quarter to remain very liquid in safe assets.

There was some interesting into high quality corporate bonds, investment grade bonds in defensive industries.

And what about mortgages?

Mortgages went up a little bit, and the things we looked at with mortgages, we take a look at what we believe were both current market valuations today, meaning down 25% from the peak or so, and we stress test them down further to 40% from the peak, which actually means below where they started and in terms of the run-up this last several years.

And we try to do things kind of in the 50%-ish range in terms of loan to value on that basis with very strong coverages, and when we looked at the tenant rolls, very strong tenant rosters, no big tenants dominating the properties.

So again, with an eye really toward preservation of principle.

For the second quarter, you did not ask about this, but I think your question kind of begs it.

The second quarter will probably ease a little bit back into some more spread assets, but still very much with an eye toward principal preservation after taking into account again some severe stress tests on the assets before we purchase them.

So we could end up going back into things like CMBS, but only those that are trading down extremely hard, very high quality securities after being stressed, virtually no chance of losing principal.

The only question there would be, how much money you would make on the upside.

And we've modeled those things out.

We are starting to see things we think that could make some sense in terms of principal preservation, remain defensive and getting a chance to get our yields up a little bit.

Okay.

I will take the third one.

You gave me so much time to think about it.

Yes, I'll bet every employee at Met is listening to this.

I could have retired by now just thinking about it.

First, just a slight look back at those who have been following the Company, you may recall -- I know you would recall -- that when we became a public company, we did quite a review of all of our employment benefit plans, the defined benefit plan was essentially left open for people who were currently members but closed to new members.

We changed the shape and form to a cash balance plan and so forth.

So for the plan that is closed to new members, it eventually -- in other words, it does not really increase in terms of expense going forward because it is closed.

And so having said that, however, what we do each and every year is continue to review the total value proposition relative to talented employees and so forth, compensation in general, the employee benefit plans here relative to your question specifically, and we will continue to do so.

The total value proposition is very important when we look not only at certain parts of our Company but all across the board, including our sales forces.

But relative to operational excellence, relative to everything else we are doing, the employee benefit plans are definitely in scope.

Keep in mind we are in this business not only as an employer, but we give terrific advice to a massive book of business relative to employee benefit plans, mostly to public companies and we certainly go about following our own advice.

Tom Gallagher, Credit Suisse.

Let's see I wanted to start out on the commercial mortgage loan side.

Steve, can you talk about -- I know you mentioned you increased balances of commercial mortgage loans a little bit this quarter.

Is what you're putting to work there pretty much just rolling over existing loans, or are you actually putting out new money on new loans?

And can you talk a little bit about of your rollover portfolio, the loans that are actually maturing this year, can you give us an idea of overall how you are looking at that?

Are you going to just rollover the vast bulk of it?

Was there portion of it you are not?

Is there -- talk a little bit about risk of foreclosure and how things are looking there.

That is my first question.

Okay, Tom.

We have done both in terms of rollover and new loans.

But again, the new loans we are looking at and considering for extending credit to are very low loan to value after being stressed, and there's not a lot of activity because those who don't have to refinance are holding on right now.

So you have seen some decline in activity in both directions, meaning in the heated period of 2005/2007 we had a lot rolling off prematurely because they had refinanced at lower rates or more aggressive terms as to loan to value.

So we're seeing very little of that right now.

So the portfolio is pretty stable.

As I mentioned, $2.2 billion anticipated in rolloff coming up here, and we have looked at the loans that are rolling off, and in virtually all cases, we are very comfortable with those credits with the loan to values, with the tenant rosters, in those cases with the sponsors, equity sponsors, the amount of equity below us.

So we would anticipate in most or all cases we would actually extend credit on terms that we find attractive at --

Steve, can I interrupt you there?

As you are rolling these loans, the $2.2 billion, are you getting meaningfully higher yields?

So kind of how is that playing out?

Because I'm just curious if you are doing it at existing rates, is it at a subsidy, or what is going on?

We are doing it at market rates, so they are very attractive yields.

Higher yields than we have had in the past several years.

And would that be north of 8%, north of 9%?

It is generally right now in the 7s.

And you consider that market rate?

Given the loan to value of the properties we are talking about, yes.

Okay.

Hey, one other follow-up on that is, I think the comment was $134 million of commercial mortgage reserves.

I am just curious, is that related to specific delinquencies or foreclosures, and what does that imply for your mortgage experience adjustment factor on RBC?

Are you at risk of tripping that?

The number is actually $110 million.

I gave you that 134 in total for real estate.

110 of that was the strengthening of mortgage reserves.

And I'm sorry, the rest of your question?

Is that related to specific delinquencies or potential foreclosures, and would that trip you up with the (inaudible) calculation for RBC?

It relates to looking at the overall portfolio.

Certain loans we felt should have additional reserve strength against them.

And in terms of tripping up, I don't think that at this point -- this is one delinquency.

So at this point, we don't think that is going to be an issue.

Okay.

The last question I have is just on cash.

I don't know if --

Tom, let me just add one more comment before you move on to a different topic.

When you see yields in terms of new loans being written, most of the properties we are talking about here are very high quality properties kind of A properties in the top markets.

So if you hear someone else on an earnings call talk about they got an 8% yield, that could be in a B market.

That could be a property that is not very attractive.

That could be high loan to value.

There's a whole bunch of factors that go into what the appropriate yield is on these different kinds of mortgages.

So please remember that we are talking about very high quality properties with strong sponsors, low loan to value and in the top markets.

Understood.

Last question for either Bill or Eric if he is there just on cash and what happened.

It looks like cash in short-term went down by about $8 billion.

Is that because you are redeploying, or was that the $5 billion net redemption in global GICs?

And then can you also comment on what is going on with the FHLB because I think you had borrowed something in the $15 billion ballpark.

Should we expect that that is going to remain outstanding?

I will take that.

So with regard to cash, we had $38 billion of cash and short-term at year-end, and now the comparable number is down to $30 billion.

So that is the $8 billion decline.

Now of the $38 billion originally -- (technical difficulty)-- sorry, that is my other phone.

Of the $38 billion, the $8 billion of that is actually cash that is sitting as collateral for derivatives with our counterparties.

You know, a lot of our derivatives, as you can guess, are way in the money.

So that collateral sits there.

That $8 billion has declined for a variety of reasons down to $4 billion at March 31.

So if you can follow the math here, our cash balances actually declined now -- our real cash balance, if you will, has declined from $30 billion to $26 billion.

So where did it go?

It actually got -- it has been put out in investments.

So I think you get the sense from Steve that we are tiptoeing our way back into the credit markets a little bit.

I think most of that probably went into agency securities.

Now we did at the same time repay, and you see this in the roll-forward chart in retirement savings, we have repaid some global GICs and some funding agreements tax securities that matured in the second quarter, and we repaid those from the securities -- those liabilities from the securities that were assigned to them.

We have to use -- especially in global GICs, we have to have very tight asset liability matching.

It is a separate portfolio.

And so when stuff matures, there is assets that also mature at the same time to pay it back.

So I mean cash is a little fungible in some way, but that is sort of how it played out.

With regard to the FHLB, the balances really did not change very much this quarter.

Some of it rolled.

We also extended some of the FHLB balances out into 2010.

So some have rolled; some we have extended.

Our expectation is that we are going to keep drawing on those lines for probably the remainder of this year.

I mean certainly in the current environment we want to be drawn on the lines, and we want them to have that cash.

So that is my expectation.

Suneet Kamath, Sanford Bernstein.

Just a couple of questions.

First, going to the equity market exposure, I guess we are getting a sense of what that does to your earnings on the way down.

But can you just talk about how recovery in the markets if were up more than your 1.5% to 2% depreciation assumption in the quarter, how that will impact both the GAAP earnings and SAT earnings?

And then a separate question related to the VA market, I guess there were some comments earlier about some changes that you were making.

You did not get too specific on them.

I was hoping that you could do that.

Really what are you doing to the VA in terms of pricing, and how much is it going up?

And what sort of restrictions are you implementing, and how do you think about what you're doing relative to what you're seeing in the market if you have any color on that?

Well, maybe I will talk a little bit about accounting, and then I will let Lisa talk about the VA product and the changes we have (inaudible).

You know, obviously March 31 the S&P ended the quarter right about 800, and don't know it is 870-something right as of yesterday.

And, you know, it had begun the year -- December 31 of 2008 it was almost exactly 900.

So we have gotten almost all the recovery back, not all but close, and the stock market recovered a lot higher than sort our 1.25%.

So how does that affect the numbers?

Well, obviously that decline in separate account fees, which we would have seen if the stock market had stayed at pretty much 800, that decline is now going to be very muted.

So you will see higher fees throughout the remainder of the year because of that, and that will obviously get our earnings back -- help our earnings recover a little bit more than our base assumptions.

So that is good.

The second thing is you will see some DAC adjustment going the other direction.

Obviously when you have a decline in the markets, you have higher DAC amortization.

There will be some slowdown of that when you see -- when the market moves the other direction.

But you don't get it all unfortunately because of where we are relative to sort of what I would call the base case.

We don't get it all back.

So that $0.25 that I talked about, which was really an adjustment for equity markets, you will get a piece of that back if the equity markets stay where they are in the second quarter, but probably not even half I would guess.

But you will get some back.

Was that clear?

That is probably as clear as I want to make it at the moment.

Okay, that is fine.

Can we go to the VA then?

Sure.

It is Lisa.

In terms of the VA market, we continue to see that business as strong for us with the flight to quality and people looking for safe havens.

As you know, we did take pricing action in February and have commented earlier further benefit changes in May which are really very significant.

May 4 we are decreasing the step-up, which is probably the most significant change from 6% to 5%.

We are also decreasing the period certain on the GMIB annuitization from 10 years to five years, we are increasing the age setback from seven to 10 years, and we are modifying the portfolio flexibility from 85/15 equity fixed to 70/30.

No less guarantees going from age 60 to 62, and it will still be at 100 basis points.

So those are the changes.

They are significant.

We still continue to see ourselves in the enviable position because we are comfortable both with our product offering, as well as our pricing.

Our hedging, which was commented on earlier and very significantly our strong and broad distribution, which continues to bode really well for us, particularly in this market when many other firms are letting go of wholesalers.

Our wholesaler, of course, has stayed strong, has stayed loyal, has stayed dedicated as has our affiliated field force.

So, as I mentioned, we are continuing to gain market share.

So we are positive as we go forward here.

Maybe just a follow-up for Lisa or Stan.

Those are quite a few changes.

So as you think about rolling those changes through to the economics of the product, what does that do to the returns of the variable annuity in a sort of more normal equity market environment?

Let me just comment first, and then I will pass it over to Stan, which is that the price increases that we -- the fee increases that we made in February were really in response to the volatility of the market.

The benefit changes are more in response to the interest rates changes, and we are confident that with these changes we will regain profitability.

Stan, do you want to answer further?

Yes, the reinsurance we had in place was kind of like the equivalent of long dated options.

So we were protected at least on that part with the increasing volatility and changes in interest rates.

So these changes are really to restore profitability going forward at the levels that we like.

So it's really to get back up to our targeted returns.

And given the changes in the market in both interest rates and volatility -- (technical difficulty).

Got it.

And then one last quick one for Steve.

The $2 billion number in terms of the decline in gross unrealized losses, is that sort of pretax and pre-DAC, or is that net of that stuff?

That is a pre-number.

Jimmy Bhullar, JPMorgan.

I had a few questions.

First for Bill, I think this was asked, but I'm going to ask it another way.

On earnings if you take out the DAC, the DAC expense being high and normalized for investment income, I think you're in the low 80s, maybe $0.83 for this quarter.

You mentioned in the second quarter fee income should get better; maybe DAC will be a little bit lower.

But on the other hand, your variable investment income should be weaker than what is implied in that $0.83, which is probably the $150 million guidance.

So directionally should we expect the earnings to rebound with the rebound in the market?

My expectation is that they should actually be lower, but if you can comment on that one.

Secondly, for Steve I think MetLife talked in the past about realized investment losses being about 1% of the portfolio in 2009, which would imply $3 billion for the year.

This quarter I think it was $584 million pretax roughly or after-tax $900 million pre-tax.

So you are running a little bit higher than that what your expectation is for the rest of the year.

And finally, for Bill Mullaney on retirement and savings, your sales this quarter were very strong, mostly driven by structured settlements.

But I'm assuming (inaudible) activity was weak, and if you could just talk about your expectations for closeout sales given that rates are pretty low and most plans are underfunded?

So most likely I don't think there should be a pickup in sales as the year goes on basically.

That is all I have.

I will go first.

This is Bill Wheeler.

So we reported $0.20.

We talked about the miss versus plan on variable investment income being worth $0.40 and then the equity impact in the equity linked products being $0.25.

If you just take those moving pieces, you get $0.85.

Now there's a whole bunch of other noise which nets to I think sort of a negative $0.02, if you will.

So that is your $0.83.

Now a couple of things to keep in mind about that, the $0.40 miss, that is versus planned.

Now you heard both Steve and I talk about we don't think we're going to get the plan for the remainder of the year, and I don't think we will -- in the second quarter where we have some visibility now, we don't think we will get back to plan.

It is going to be a meaningful improvement over the first quarter, and I think we'll get most of that $0.40 back but I don't think we're going to get it all back.

So that would imply that sort of the run-rate isn't in the 80s, it is lower.

I mean maybe it's in the 70s.

Now where the equity markets are at, I mean obviously that will help a little bit on the margin if the stock market stays high but who knows.

You know, we have a couple of more months to go here yet in the quarter.

And the other thing that I think that is sort of out there that I just want to make sure you had mentioned, you know this -- the cash levels we are holding, and even when the stuff -- some of our money which is not in cash, it is in fairly low yielding very safe, highly liquid sort of treasuries and agencies.

This conservatism, which I think is appropriate, it is costing us money, though.

And it is always a little hard to calculate exactly how much that is costing you a quarter, but it is at least $0.10 a quarter and could be more.

We are also not going to change that situation right now.

I think we will change it eventually.

But certainly not in the second quarter or the third quarter, we are probably not going to change it very much.

So I hope that will give you a little sense of sort of what I think the run-rate might be and sort of what are the other issues around it in terms of current earnings power.

As to realized losses going forward, it is difficult to know whether the 1% number will be where we come out or not.

It could be somewhat higher.

It really depends on how things unfold here in the economy in the coming quarters.

Some of the likely places we will see some stress would be the hybrid area.

As we said, it has improved a little bit since quarter end, but let's see where that comes out.

Loans related to more leveraged corporate credit could be an area you could see some stress over the course of the year in a few of the buckets that might be under pressure.

So it is just very difficult to say precisely where these things will come out.

But I think the 1% or somewhat higher area is what we are talking about.

Just to give you a little color on closeouts, you did hit on some of the key points that we are seeing in the marketplace.

Obviously with equity markets down in 2008, the number of plans that are now in underfunded status is up, and the low interest rate environment obviously does have an impact on prices.

But having said that, there are some plans that remain fully funded, and we have been in active discussions with a number of plan sponsors around some of these opportunities.

The fundamentals of this business don't really change in terms of assessing the underwriting or the underlying liabilities and then doing the analysis around the pricing.

So I would say we still remain very comfortable with this market.

We are willing to do deals at the right prices, and we have the capital to be able to do that.

So we continue to be in market.

There are some active discussions, and we are optimistic that we may see some deals take place in 2009.

We are right up at the time here.

Can we just squeeze in one more and finish it at that, please?

Mark Finkelstein, Fox-Pitt Kelton.

Bill, first question, can you just help explain how stat earnings were positive in the quarter?

It surprised me a little bit.

I guess what I'm really getting at without wanting a reconciliation but rather were there any single, notable items that we should pay attention to?

Yes, that is a good point.

It is not obvious why we would have GAAP net losses and stat positive earnings.

So remember now when we take an impairment, we impair both for GAAP and stat, and we have always done it that way, and I think everybody else is supposed to now follow us and do it the same way we do.

That is my impression.

And the second -- but what you don't see is, remember in the last quarter we had some very big derivative gains because of some interest rate floors and swaps we had, which went way in the money.

We did -- and those are hedges.

We have used those as hedges against some of our minimum interest rate liabilities.

So while Treasury rates were so very low, overall interest rates with factoring in credit spreads were still relatively high.

But we had this gain.

So what we decided to do in the first quarter is pocket some of that gain.

Because in GAAP, of course, it is the change in the value of the derivatives that flows through the income statement.

But in stat, you know, it's when you actually sell it.

So, we sold some of those derivatives or cashed them in, if you will, in the first quarter, and we pocketed the gain, and that basically offset the $1 billion impairment that we took on a GAAP basis.

So we did have some very small realized investment losses on a stat basis, but net income was, therefore, still positive.

And I guess just following on that, what kind of risks are there in terms of interest rate changes that by selling the derivative we take going forward in earnings?

Well, it is funny.

The answers I think you want almost none, unless you get back to sort of a Japan interest rate scenario.

I mean that is what that was really -- that is what those interest rates were really -- interest rate derivatives were used to protect against.

For instance, we had a lot of 10-year floors and stuff.

So you probably won't see hardly any impact in earnings unless we have a severe interest rate scenario.

Interest rates have obviously moved up since year-end, so it is coming our way.

We will also probably at the right time we will re-strike.

I mean we want to put on some new hedges.

But we just felt here is all this value sitting in front of us, and we think probably treasuries are going to rise and are going to decline in value or interest rates are going to go up.

It would be a real shame to let that just dissipate.

Why don't we just take them off the table, and that is what we did.

Okay.

And then Steve, a lot of discussion about the commercial real estate block or the commercial mortgage loan portfolio.

I guess can you just provide some color on the fundamentals in the agricultural book thinking about performance, risks you are focused on, what is on your watchlist?

Maybe just some color in that area since it does get a little bit less attention.

Okay.

First, let me note that in general our ag mortgage portfolio has a lower loan to value than even our commercial mortgage portfolio.

They tend to be very conservative loans, historically very low delinquencies or defaults or losses.

The area where we will see some stress would be the biofuels sector, and we don't have a great deal of exposure there but we have some.

And that is the area that we are watching most closely and, if there is some stress, we are most likely to see the stress in.

But overall the portfolio still is very sound and very strong.

Okay.

And then I guess just finally, you talked about stressing the commercial mortgage loans, and I think you said you looked at it on a 40% decline and kind of what the resultant average LTVs were.

Are there any metrics you can give us in terms of kind of what percentage falls above a certain LTV range?

Maybe it is 85% after you do that stress test.

So are there any kind of metrics to look at what would be perceived as the more risky areas?

We've done -- I'm not sure I have that number right with me.

But the stress test we took things down 40% from the peak just to kind of review that means.

That's really taking a look at 2003 as sort of the beginning of the uptick.

And if you take 100, for example, and take it up 40 to 140 and you take it down 40%, it takes you down to 84%, which means 16% below where you started from.

So under that extreme scenario, I gave the numbers about low to mid-70s overall.

But obviously there will be some above the 85% range, and we have done that stress testing and have the numbers but I just did not bring that with me.

Okay.

Fair enough.

Thanks.

Thank you.

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