大都會人壽保險 (MET) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife second-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, Mary, and good morning, everyone.

Welcome to MetLife's second-quarter 2009 earnings call.

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

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

We reconcile these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplement, both of which are available on our website at MetLife.com.

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

Joining me this call 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 US Business, and Bill Toppeta, President of International, as well as other members of management.

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

Thank you, Conor.

Good morning, everyone.

During the second quarter, MetLife generated very strong topline results.

Premiums, fees and other revenues increased to $8.4 billion, which, by the way, is one of our highest quarters ever.

Our operational earnings increased significantly over the first quarter, earning $0.88 per share.

Book value including AOCI improved by approximately 18% from the first quarter.

It is evident that our diverse mix of businesses and solid fundamentals have allowed us to perform well and to continue to grow in this challenging environment.

We are still experiencing a flight to MetLife and increased market share in many of our key businesses while importantly maintaining our pricing discipline.

Before, I share our business highlights, I would like to talk briefly about our recent decision to combine our institutional, individual and auto and home businesses into an integrated US business organization.

We have an incredible opportunity to leverage our capabilities and further drive growth as we enhance our product design and distribution and streamline our decision-making process.

This is an exciting time for our Company as we build upon our strengths and seize opportunities in the marketplace.

This realignment was a significant outcome of our strategic review that we have been telling you about since last summer.

Another element of our strategy which, we have discussed before, is operational excellence.

We are well on our way to achieving the significant cost savings that we targeted under this initiative.

Now let me provide some insight into the performance of our businesses.

Institutional business generated outstanding results as the top line grew 8% year over year to $4.3 billion.

Our group life premiums, fees and other revenues grew over 4%.

Our nonmedical health grew by 3%.

Retirement and savings business grew 35%.

We had higher closeout sales, particularly in the UK, where the market is improving.

We also experienced a significant increase in structured settlement sales as we grew market share in this business.

Our group life and disability underwriting results were strong, though dental performance was disappointing with higher benefit utilization as a result of the ongoing economic uncertainty.

Individual business after two challenging quarters generated some very positive results during the second quarter.

Life sales were strong across all channels, up 27% sequentially, though down 9% year-over-year.

Annuity deposits increased year over year by 43% with a record $4.5 billion in variable annuity deposits and nearly $1 billion in fixed annuity deposits.

Annuity net flows on both fixed and variable annuities remain positive, $3 billion in total, and both are benefiting from declining lapse rates for the second consecutive quarter.

In international premiums, fees and other revenue declined over the year ago period due to the strength of the US dollar.

Though on a constant currency basis, top line revenue was flat.

In Latin America premiums, fees and other revenues were down 6% on a constant currency basis.

We continue to have solid performance in the Asia Pacific and European regions.

In Asia our premiums, fees and other revenues were up 8% on a constant currency basis.

In Japan there has been significant growth of fixed annuity deposits, while variable annuity deposits have declined, reflecting a continuing shift in that marketplace.

Our European premiums, fees and other revenues were up 7% on a constant currency basis as our European region businesses continue to grow.

Auto and home had another strong quarter, delivering earnings of $76 million, up 46% over the second quarter of 2008.

Now I would like to shift gears for a moment and talk to you about our capital strength and some related events in the quarter.

Over the past several months, I have been telling our clients, our shareholders and all of you that MetLife's strong excess capital position, ample liquidity and leading market position set us apart in the life insurance industry.

As you know, MetLife participated in the government stress test, and we believe the assessment reinforces what we have said about our strong capital position.

Let me just mention a couple of points.

On the measure of total potential losses, ours was the lowest of the 19 participants.

Furthermore, the potential losses on our commercial real estate loan portfolio were also lowest at 2.1%, a fraction of the median at 10.6%.

I point this out because commercial real estate mortgages continue to be a topic of discussion, and we believe the stress test assessment supports our view that our underwriting differentiates us from other financial institutions.

On the measure of Tier 1 common capital adequacy, we were fifth strongest, and remember we were also the only company of the 19 that did not participate in the TARP capital purchase program.

Also, in the second quarter, we took the opportunity to further bolster our capital and issued an additional $1.25 billion in debt, which was several times oversubscribed.

All told we continue to be confident that we have the financial strength to succeed now and over the long term.

Looking forward we will continue to leverage opportunities to build an even stronger company.

We are proud of our initiatives to offer simpler, better products to our customers as they continue to seek trusted companies and quality products.

For example, we recently launched our Simple Solutions Variable Annuity, which offers easier to understand and lower cost benefits, especially to those nearing or in retirement.

These are being offered through banks, providing a new vehicle for financial advisors to help clients turn retirement assets into a stream of withdrawals they cannot outlive.

We have also commenced a co-branding pilot program with other major global financial firms.

These efforts among others will allow us to maintain our leading market position as we continue to benefit from a flight to quality and increased market share.

In summary, despite the uncertain environment, MetLife's businesses are performing well.

And with the recent realignment, we are even better positioned to meet the needs of our clients, and we have the capacity and financial strength to further solidify our leading position in the industry.

And with that, I will turn it over to Steve.

Thanks, Rob.

I would like to spend a few minutes reviewing the key components of our investment results for the quarter.

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

Pretax variable income for the second quarter was zero, which is below plan by $150 million or $102 million after-tax and DAC, primarily driven by negative real estate fund and corporate joint-venture returns.

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

We estimate that property values have declined an additional 5% to 10% during the second quarter with an expected peak to trough total decline of about 40%.

While corporate joint venture returns improved substantially from the first quarter, they still remain negative during the second quarter.

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

In addition, hedge fund returns continue to improve and were above plan during the quarter.

However, we expect variable income will remain below plan for the remainder of the year.

Now let me cover investment losses for the quarter.

Gross investment losses were $546 million, in line with the previous four quarters.

Write-downs this quarter were $846 million.

These write-downs were experienced across a variety of sectors, including $248 million in corporate credit, $129 million due to the strengthening of the mortgage valuation allowance, and $82 million in structured finance securities.

Write-downs also included $325 million of partnerships in equity securities and $62 million of hybrid securities which were impaired because of length of time and the extent to which the market value had been below amortized costs.

Losses due to derivatives that do not qualify for hedge accounting were $2.8 billion.

This was primarily attributable to a $1.5 billion pretax loss due to the improvement in MetLife's own credit spread and its impact on the valuation of certain insurance liabilities.

For example, MetLife's five-year credit spread decreased 312 basis points.

This reverses derivative gains in previous quarters that occurred when our credit spread widened.

The remaining $1.3 billion loss was due to several factors that negatively impacted the valuation of our derivatives, including higher treasury yields, which reduced the value of our interest rate swaps and floors; the weakening of the US dollar, which reduced the value of our foreign currency swaps used to hedge foreign denominated assets; and the decline in credit spreads, which decreased the value of credit default protection we purchased for our corporate bond portfolio.

As I have discussed previously, while the decline in value of these derivatives is reflected in our income statement, it is generally offset by a change in value of hedged assets or liabilities.

Gross unrealized losses for fixed maturities were $19.5 billion at June 30, down substantially from the $28.8 billion at March 31, and spreads declined across all sectors.

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

As of June 30, we held $41.8 billion of residential mortgage-backed securities, including $7.3 billion of non-agency prime and $3.4 billion of Alt-A mortgage-backed securities.

As I discussed in the last earnings call, our rating agencies have downgraded virtually all 2006 and 2007 vintage Alt-A securities to below investment grade.

As a result, 88% of our 2006 and 2007 vintage Alt-A securities and 56% of our total Alt-A portfolio is rated below investment grade at quarter end.

In addition, during the second quarter, the rating agencies downgraded non-agency prime securities.

As a result, 32% of our non-agency prime holdings are now rated below investment grade.

The remaining $31.1 billion of residential mortgage-backed securities are AAA-rated agency backed securities.

As noted on several occasions, we believe our non-agency RMBS portfolio has superior structure to the overall market.

For example, 86% of our Alt-A and 97% of our non-agency prime securities are fixed rate versus 35% and 51% for the market respectively.

In addition, 90% of our Alt-A and 51% of our non-agency holdings have super senior credit enhancement.

Furthermore, we hold no option ARM mortgages as compared to 29% for the Alt-A marketplace.

At quarter end MetLife's commercial mortgage portfolio was $35 billion.

As of June 30, the portfolio loan to value increased to 63% based on our rolling four quarter property valuation process or we estimate in the mid to high 60% range if all properties were revalued today.

In addition, the debt service coverage ratio for the portfolio is a very healthy two times.

Moreover, commercial mortgage delinquencies and losses remain minimal.

We had no defaults in our US portfolio during the second quarter and only one small default in our international portfolio in the amount of $6 million.

As I mentioned earlier, we strengthened our mortgage valuation allowance, resulting in a commercial mortgage reserve of $435 million at June 30, up from $329 million at March 31.

In addition, only $1.6 billion of the portfolio matures during the remainder of 2009 and $2.5 billion in 2010.

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

Finally, let me say a few words about our cash and short-term holdings.

As of June 30, our cash and short-term investments were $21.3 billion, down from $30.3 billion as of March 31.

Over the course of the quarter, we invested in a diversified portfolio of assets, primarily including US government securities, agency residential mortgage-backed securities, and investment grade corporate credit.

The yield on these purchases, excluding US government securities and floating rate securities, was approximately 5.65%.

In conclusion, while we have seen some stabilization in the financial markets, we remain defensively positioned and are cautiously reinvesting our liquid assets.

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

Thanks, Steve, and good morning, everybody.

MetLife reported $0.88 of operating earnings per share for the second quarter.

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

We had premiums, fees and other revenues of $8.4 billion.

This represents an increase of 3.5% as compared to the second quarter of 2008.

Adjusting for the impact that exchange rates had on international's reported revenues, MetLife's premiums, fees and other revenues would have been up by 6.2% as compared to the second quarter of 2008, and I think that is an excellent result in this environment.

Institutional's revenues were up 8% as compared to the second quarter of last year.

This was primarily due to strong UK pension closeout and structured settlement sales.

Group life premiums grew at 4.1% and nonmedical health grew at 2.9% as compared to the second quarter of last year.

International had reported revenues of $1 billion in the second 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 would have actually been flat with the second quarter of last year.

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 91.3% was well within our guidance range of 91% to 95% and flat with the prior year.

In nonmedical health and other, group disability's morbidity ratio of 87.6% for the quarter was better than our target range of 89% to 94%, driven by continued stable incidents.

We saw higher claims utilization in dental, but that was largely offset by favorable results in other nonmedical health products.

Individual's mortality ratio of 74.9% is significantly more favorable than our plan, driven by lower claim frequency.

Individual's underwriting results were favorable this quarter across all life products.

Turning to auto and home, the combined ratio including catastrophes was 93.5%, down from the 99.5% experienced in the second quarter of 2008 due to lower catastrophes in the current quarter.

Included in this result is a non-cat prior accident year reserve release of $3 million after-tax compared to a $26 million after-tax release in the same period of last year.

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

We experienced negative returns in real estate funds and corporate joint ventures.

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

For the quarter variable investment income after tax and the impact of deferred acquisition costs was $102 million, or $0.12 per share, lower than the 2009 plan.

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

Pension and PRB benefits -- or PRB expenses were approximately $100 million pretax higher than in the second quarter of 2008.

As I mentioned last quarter, we expect our pension and post-retirement benefit cost to increase by approximately $300 million in 2009, mainly due to weaker investment results.

Also this quarter we incurred $33 million pretax and operational excellence charges, which consists mainly of severance payments and some consulting payments.

Our operational excellence initiative is progressing well.

Related expense reductions were approximately $75 million in the second quarter, which annualized to a current run rate savings of $300 million.

Finally, also in the expense line, the equity market improvement of over 15% and interest rate movements in the second quarter increased earnings through lowered DAC amortization and individual business by approximately $58 million after-tax or $0.07 per share.

Turning to our bottom-line results, we earned $723 million in operating income or $0.88 per share.

With regard to the net investment gains and losses, in the second quarter, we had net investment losses of $2.6 billion after-tax.

Our derivatives losses were $1.8 billion after-tax, and, as Steve mentioned, the largest portion of that result was a $1 billion after-tax loss caused by the tightening of MetLife's own credit spread.

Our preliminary statutory operating earnings for the second quarter of 2009 are approximately $1.1 billion, which is very good, and our preliminary statutory net income is $530 million.

Our results this quarter include the adoption of a new FASB pronouncement for the recognition of other than temporary impairments of debt securities.

This is FAS 115.

Under this guidance the credit loss or the portion of the decline in value that represents a reduction of expected cash flows is included as a charge to net income.

While the remainder of the decline in value or the noncredit portion is recognized within accumulated other comprehensive income, AOCI.

As a result of the transition adjustment -- this is the transition adjustment required by this guidance -- equity as of April 1 was increased by $76 million after-tax and DAC with a corresponding reduction due AOCI.

This transition adjustment represented the noncredit portion of previously recorded other than temporary impairments on debt securities.

For the second quarter of 2009, the other than temporary impairments of debt securities in total were $566 million on a pretax basis, of which $332 million was included in realized investment losses, while the remaining $234 million was recorded in other comprehensive income.

So again, the FAS 115 adjustment would have been $234 million.

In summary, the fundamentals of our business continue to prove strong, and we continue to succeed in the challenging market environment.

With that, let's turn it over to the operator so we can take your questions.

(Operator Instructions).

Jimmy Bhullar, JPMorgan.

I had a few questions.

The first one is on your cash balances.

They went down $9 billion from the first quarter to $21.3 billion.

I just wanted to get an idea on where you think normal cash balances will be a year or two years down the road and how fast do you expect to get there.

And the second question is on your variable investment income.

I think Steve mentioned that it is unlikely to be below -- to be at $150 million run rate or the guidance for this year.

But versus the quarter that you just reported, how should it improve -- or what are the asset classes that are going to get better, what could get worse whether it is hedge funds or real estate?

And then finally, just on your derivatives losses, if you could give us an idea on how much you have left in derivative gains that could reverse over time if spreads were to go back to, let's say, where they were a year ago, and how should we think about that number repeating in the third quarter again?

I will take the first two questions you posed.

The cash balances are likely to drift down lower over time.

I don't have an exact number or a projection for you.

It really is something we look at very closely with current market conditions.

And obviously with all the changing dynamics in the marketplace, it is very hard to predict this.

So, as you know, we have been very cautious.

We stayed liquid in the first part of the year here beyond what we would normally do, and we have gone back into the credit markets gradually over the last few months.

So I don't have an exact number for you, but we certainly are reinvesting now into a more normal array of assets compared to early in the year and late last year.

Regarding the variable investment income, I think there are some pluses and minuses that are likely to occur here over the course of the year.

But that really is a guess because it is very hard to predict what is happening or what is going to happen in the credit markets and the financial markets in general.

So, for example, if the stock market continues to perform reasonably well for the remainder of the year, we would expect that our hedge fund returns would remain fairly strong, which they were in the second quarter compared to the two quarters previously.

Private equity funds in that kind of an environment would probably be going sideways pretty much.

I don't see a lot of big realizations in this marketplace in the near-term.

At least we would not see as many write-downs as we saw in the previous couple of quarters, Q4 of '08 and the first quarter of '09.

We do think that the real estate fund area is likely to remain weak.

It tends to be a little bit more of a lagging indicator than some other sectors.

So we anticipate that sector to be weak for the remainder of the year.

Again, all those comments are caveated based upon what happens in the markets in general.

If we see a real rally in the markets, even beyond what we have seen to date, then those numbers will improve.

If we see the markets sell off dramatically, then obviously the numbers will come down pretty sharply as well.

The last thing I would mention is our work securities lending program.

It is currently about $22 billion at quarter end, up from about $20 billion the previous quarter with a relatively steep yield curve.

It's a fairly attractive business once again for us.

The properties there are strong, but obviously the balances are far less than they were at one time when we saw balances in the mid-$40 billion range actually peaking at about $50 billion.

We don't see those kinds of balances anytime in the foreseeable future.

Okay.

With regard to derivatives, I'm going to answer your question this way.

If you look back at our derivative gains and losses, let's say, over the last -- well, really since the beginning of 2008, we have -- we on a net basis have derivative gains.

Okay?

And just two quarters ago, obviously we had a very big derivative loss this quarter, but two quarters ago we had an equally big derivative gain.

Now obviously a lot of that is driven by owned credit, which is not cash, and obviously that's really sort of accounting noise, if I'm allowed to say that.

And it does not affect capital or anything.

But obviously the other derivative gains, there might be a cash settlement component to it.

So if you look over the last six quarters, we have really had derivative gains, and another way to think about this in our cash balance that Steve talked about, the $21.3 billion this quarter, in that there is about $3 billion related to collateral, mainly on the settlement of derivative contracts.

So we are still way in the money on a lot of our derivative positions.

So there is room.

And, of course, remember just keep this in mind, where -- derivatives are hedging something.

And so if derivative values keep going down, some other part of our balance sheet is improving, probably AOCI, probably the bond portfolio, but sometimes it is liabilities.

And so that is something we feel good about.

And lastly, could you just give us a number on your stat income if you have an estimate for the second quarter?

Yes, it was in my remarks.

Our stat net income was $530 million.

This is an estimate still.

It is not final.

Our stat operating income was $1.1 billion, which is quite good.

Nigel Dally, Morgan Stanley.

First of all, Bill, in the past you talked about the potential EPS power of the Company being in the range of the $4.25 to $5.00, but with the caveat that it will take time, perhaps significant time with respect to alternative investments to return to that level.

Any change in your views of that longer-term EPS potential following these results?

And then the second for Steve, with realized investment losses.

Earlier in the year, you kind of talked about potential losses of 1% of general account assets.

The results in the first half of the year are certainly consistent with that.

Is that still a good number for the back half of the year and any preliminary views for 2010?

Well, I will certainly give you my opinion about the variable investment income, but it is probably Steve is the right guy to talk to.

But I think it should all recover next quarter.

But Steve might be a little more cautious than that.

So maybe I will let him comment on that.

On the losses for the remainder of the year, again as I mentioned under variable income, it is really hard to project when you don't really know quite what this market is going to be doing quarter to quarter month to month even day to day.

But the 1% number we have used I think is a pretty good guide for our estimate for the remainder of 2009.

I think it is still early days to say too much about 2010.

We will certainly talk about that at Investor Day.

But so much of this depends upon the overall economy, consumer sentiment, policies in Washington, impacts upon markets, psychologies of markets and so on.

It's just very difficult to predict, but I think we can say that the 1% number that we have used, Bill and myself, in the past is a pretty good guide here.

I'm sorry, maybe I misunderstood your question a little bit.

I don't think actually in terms -- that little exercise -- that public exercise we went through about (inaudible), I don't think that's -- I'm not sure -- that sort of assumes that eventually VII is going to recover, which obviously we think it will, and that eventually we will get fully invested and we will invest in spread assets.

And the timing of that I think as I said then and I would still say and as you obviously just heard Steve repeat, I think the timing of that is we are going to have to see.

I mean the momentum is going all the right way, but we are going to have to see about how quickly we do that.

Right, okay.

Perhaps if I can just follow up on the investment portfolio, below investment grade holdings, continue to see some adverse ratings migration.

What is the risk if you continue to face adverse ratings migration going forward that some of those assets would not be able to be admitted for (inaudible) purposes pressuring your capital?

Yes, I think we are far below any kind of limitations there with regard to the ratings migration.

I'm kind of hoping -- maybe it is just wishful thinking that the ratings migration might be over, but maybe not.

We will find out.

But I think in terms -- obviously just the mere fact that there is a ratings migration creates a capital charge.

The way to think about that or the way I encourage people to think about that, including our colleagues in the rating agencies, is obviously they have created this -- by downgrading a whole bunch of securities that we thought we were investing in at AAA, they have caused a capital drag.

But it is temporary.

You know, eventually we will work our way through that.

It will take a couple of years, and in our case, of course, as Steve just talked about, we think those securities are money good.

But they have sort of -- it is a capital tax that they have created, if you will.

But we will work our way through it.

But in terms of whether or not we are up against any statutory limitation, I don't think we are very close.

Suneet Kamath, Sanford Bernstein.

Just two questions.

First, on the variable annuity business, obviously your results there are some of the strongest we have seen so far in the quarter.

I just want to talk a little bit about risk management.

I think Rob in the past you have said that one of the reasons that you like the VA business is because you have all these other businesses that form this diversification.

How do you think about how much capacity you have to write new VA business?

It just seems like you kind of write as much as you want in this environment given your market share.

So how should we think about that?

And then the second question is just sort of some numbers questions on the capital.

Bill, you provided the stat numbers in terms of earnings, but do you have an RBC estimate as of the second quarter, and then is the $5 billion of excess capital that you have talked about in the past still a good number to use?

Let me just start off by saying -- and I know you would understand this -- just so that everyone understands, I do love the variable annuity business.

It is something that is easier to love if you are a well diversified and have multiple sources of earnings and you can spread your risk.

However, I would say the caveat there is that is under the assumption that you are properly designing and pricing your products in the variable annuity business.

So just the way you phrased the question, I just wanted to make sure that people did not think that I was ever saying that because we are in other businesses, we can have one that we don't pay attention to.

Because we are very comfortable with the way we manage our variable annuity business.

I'm happy with obviously our increased marketshare.

It is very unusual to see your market share double in a period of a couple of quarters.

Whether or not we can maintain that marketshare will be dependent on what happens to others in the market and so forth.

Am I comfortable with the marketshare we have?

Yes, I am.

And, you know, but I don't know that it would be wise to predict that you would continue to hold a marketshare of 17%, 18%.

I think that is to be determined.

Bill might want to add more specifics.

Well, obviously in terms of just the risk management point of view, we want diversification of how we make money, and we make a lot of money.

I mean obviously the VA business has a lot of earnings power and a lot of earnings potential to it, and my feeling sort of is that's probably all the equity exposure we want.

But we will see.

With regard to RBC, I think just for everybody's benefit we don't calculate the RBC every quarter.

It is only done once a year, and the reason for that is it's actually a very complicated calculation.

There's lots of stochastic modeling which gets done, and we do not do that every quarter.

We do -- I don't want to pretend like we don't think about RBC every quarter because we obviously do and we do some shorthand calculations to make sure we have a good sense of what is going on with our capital ratios.

But it's not a number that I think is ready for prime time.

And so we won't disclose an interim estimate number because that is not something I'm, frankly, comfortable with.

The capital levels -- there is a lot of tension with what is going on with capital right now.

You have got ratings -- you've got securities migration, which is obviously a drag.

We just talked about that.

You have got state regulatory relief, which is up in the air.

About which we had some state relief for some of our, for some states, not much in New York, frankly, but it happened this year and who knows what will happen later in the year when that stuff has to get renewed.

You will have -- you have got an environment, which, frankly, is much better than it was at year end in terms of where the start market is and where interest rates are, and that helps your stochastic modeling, frankly, your [C3CH2] calculations and such.

So, in general, I feel like our RBC ratio has probably come down from year-end, probably really driven by credit migration.

But, frankly, the earnings stat earnings we had this quarter were quite.

The thing where you should remember is not included in any of those calculations is the $5.2 billion of cash that is sitting at our holding company right now.

So I feel like it is hard for me to be real precise about what an excess capital number is, but I think we still have quite a bit of excess capital.

And I think we are, frankly, -- I know we all feel a little better now than we did maybe a couple of months ago -- but I think we have plenty of capital to meet any challenges which we think might be coming up over the next period of time.

So that's probably about as strong an answer as I can give you.

Just one quick follow-up.

When you used to talk about the $5 billion of excess capital last quarter, did that include any of that cash to the holding company, and if so, how much?

Yes, it did.

It would have included all of it, except we have a rule of thumb that we want to have $750 million of cash at the holding company at all times.

So I don't call that excess.

So it would be anything north of that, but we have added to the cash pile since March 31.

Rob referenced the debt deal we did in the second quarter for $1.25 billion.

We also did a hybrid deal right at quarter end.

I think it actually technically closed right after the quarter for $500 million.

We obviously burned a little cash from interest payments and such like that at the holding company.

So yes, so there's more cash at the holding company, but there is probably also a lower RBC ratio because of continued credit migration.

John Nadel, Sterne, Agee.

I had two questions.

Rob, I was hoping you could give us a little bit more color on the rationale for the organizational changes maybe specifically.

I think there has been some in the outside investor community who might believe that we should read something into that about positioning the Company organizationally for some M&A.

Any comments there?

Actually the organizational realignment had nothing to do with M&A whatsoever.

Remember it was the outgrowth of our strategic initiatives that we have been focused on for the last couple of years.

The purpose of the reorganization, if you look at it from the standpoint of you may recall that I talked about our focus was on decision-making, that decision-making and the streamlining of it has moved forward with just a wonderful pace.

And what you are seeing, if you look at our businesses and the opportunities we have, that streamline decision-making gives us a better, quicker way to enhance product design and distribution.

It gives us better ways to recognize contingent space growth opportunities.

It preserves the distribution channels we have that are so very important to us, and we are very fortunate to have a very, very strong management team that this organizational change allows to lever up even greater.

So it has nothing to do with M&A at all.

I would only say that to the point that you have better streamline decision-making and better leverage of talent, that would allow you to be clearer and smarter and more progressive in your thinking in everything you do, including analyzing M&A opportunities.

That is great.

Thank you.

And then Bill, maybe going at Nigel's question in a little bit different tact, so obviously operating earnings rebounded nicely from the first-quarter results.

But if we look at the absolute level, the ROE this quarter annualized was about 8%.

I know there are some meaningful drags on that ROE, the higher cash balances, variable investment income and the like.

But I would be interested in your thoughts assuming reasonable markets on how long it takes for that ROE to get back to the low double-digit range, and then maybe with your existing business mix and again assuming reasonable markets, where that ROE can go longer term?

Okay.

Look, you know, I would be -- it is certainly my expectation, again with your caveat of reasonable markets, we are going to be within shouting distance of a 10% ROE next year and that is not assuming any dramatic recovery.

That is just putting money to work and stuff like that.

I think in terms of -- obviously I think it can improve from there.

I think the tension -- and I don't know -- I'm not sure how this will play out.

To kind of get back to sort of I would say a midteens ROE, you have to -- in our industry you have to manage capital.

That means you have to buy back stock, and that means you have to run a relatively efficient capital level.

You don't have to be real tight, but you have to be -- you can't just stock pile capital.

You have to manage it.

And I don't see how you really get to a 15% ROE -- maybe some businesses can, but given our current business mix, I don't see how you can get there without some capital management effort.

And I think this -- and I would say this for Met but I would say this for the industry as well, I think it is going to be a number of years before we really start thinking about capital management again.

And so it could be because we are going to want that capital for other purposes.

Because, frankly, given where our growth rate is right now, we may need to deploy that capital just based on current internal growth.

There's obviously maybe other opportunities to redeploy capital other than just buying back stock.

But you cannot count on that.

So I think we can continue to move the ROE up as the economy recovers.

I feel pretty comfortable about that.

But where we are going to be three years from now when the way to move it up further is really by driving more aggressive capital management, I think that is yet an open question.

That is very fair.

I appreciate that.

And then maybe one quick follow-up on putting capital to work, maybe for Bill Mullaney.

Obviously a little bit more activity here recently in the pension closeout business.

I'm wondering what that business and the pipeline and activity, especially relative to maybe bigger transactions, might look like?

Yes, let me just put a little color on what we are seeing in closeouts.

Obviously we have two closeout businesses, one here in the US and one in the UK.

The UK business has actually been pretty active, and we did a couple of sizable deals this quarter.

I would say within the UK, a little bit farther along than the US in terms of thinking about closeouts, positioning their portfolio for a potential closeout.

So I don't think the portfolio has got as hit when the equity markets declined, and therefore, I think you have a better funding status in the UK.

And so, therefore, we have also seen some competitors pull back in the UK, which I think has made it a better pricing environment for us.

So we are able to write some good deals at some attractive returns.

We continue to have lots of discussions in the US as well with plant sponsors who were thinking about closeouts.

I would say the decline in the equity markets has certainly made everybody realize what the impact of equity market volatility has on funding status.

And so I think as funding levels recover, there will be a great interest in demand in terms of moving some of those liabilities off the balance sheet.

And so, as Bill talked about before, we do have excess capital, and we are prepared to put that excess capital to work on some deals where we can get some attractive returns.

And just real quickly as a follow-up in terms of how much capital that business takes, can you give us a sense like -- I don't know -- a $100 million closeout, how much capital needs to support that?

Yes, it is really very much a function of the structure of the deal.

So if you had true non-par deals, you might have a capital percentage that could be in the 10% range.

If you had separate account deals or par deals, the capital structure would require something less than that.

Ed Spehar, Bank of America.

Bill, I wanted to go back to the ROE question and back to the presentation you had done on your earnings thought experiment.

If we look at the second quarter of $0.88, I think that the amount that you put back to work in terms of cash balances is in line with what you had -- roughly in line with what you had highlighted as the low end in that presentation.

And so if we just assume that you only had half the benefit in the quarter, maybe you got another $0.05 from what you did, so we are up to, say, $0.93, I think you said you had $75 million of expense saves in the quarter, so a $300 million annual.

Is that correct?

Yes, that's right.

Okay.

So we're right at the midpoint then in terms of the expense save number that you highlighted in that presentation as well.

So the only thing that is not there is variable income, and conveniently it is zero this quarter versus the low to high that you have modeled.

And I guess what I'm wondering is, if you take that $0.93 and you annualize it, you are at sort of a 370, 375 number.

Is that -- what else can we do -- can you do from that number to get the ROE up other than variable income -- other than variable income and capital management?

Well, I think I would probably quibble with your ROE investing -- ROE -- have I already -- have we already shot our wad, if you will, with regard to how much cash we have invested and how much more we have to go.

We made some progress in terms of reinvesting cash, but we are a long ways from -- if you just go back, look at our QFS four or five quarters ago, we are running about a $10 billion cash balance a quarter, we are at 21 now, and you cannot just say, okay, there is 11 access there.

It is not quite that simple.

But we have a long way to go in terms of I think cash efficiency.

And then you heard Steve say in his remarks that were he put most of the money this quarter was in treasuries and agencies, which is better than yielding cash but hardly what I would say a full spread asset.

And so I think there is opportunity there as well.

In terms of the recovery on VII, I don't want to get too hung up on this because look, it is not something we can control obviously.

Private equities will come back when they come back.

But we have $8.3 billion in alternatives, and we are not making much on that today at all even in the second quarter.

So I think there is a lot of power there over and above $0.88.

And so I don't want to try to follow the math on the phone maybe, so maybe we can talk a little bit more off-line and pick and tie, but I think there is a lot of earnings power that is sort of sitting there that is not really engaged yet.

And then, of course, we are growing the business at the same time.

Yes, we are doing that as well.

I will tell you it is not just revenue growth.

If anything, the GAAP revenue growth probably understates how good this quarter was because a lot of the money is coming in as deposits.

And then I think it is -- and then the margins that the stuff is getting put on is quite good.

And just to pile on a little more, I don't know if I quite followed all your expense math.

But I think maybe you got it right; I'm not sure.

But we are obviously not done in terms of expense improvement.

Operational excellence is obviously a nice kick.

If we just -- our pension costs are really high.

If we get any kind of rally in the equity market, that just starts to come down, and obviously that will -- unfortunately all the good work that we are doing in terms of OpEx are being matched by some unusually high pension and post-retirement benefit costs.

So probably the earnings kick there is probably even a little greater than maybe we have estimated before.

That is extremely helpful.

Can I ask one quick follow-up on this?

Your comment about capital management being a number of years away, I mean share buyback being a number of years away perhaps for the industry for you, have you had any discussions or thought about the trade-off with saying maybe it makes -- would it work if we had -- if we kept $20 billion in cash balances, and when the time was right, we reduced the allocation to alternatives?

And as an offset, would the rating agencies then be comfortable with whatever now is considered to be the excess and the appropriate amount of cushion and capital to knock that down?

And can you trade-off between sort of the cash and the investments in alternatives with the potential to buy back the stock sooner?

You know, it is an interesting question.

I don't know.

I think what you are really -- your question really highlights is all that stuff is very much up in the air yet.

I don't think the industry is or really the analysts who follow this industry were really settled -- or the rating agencies who obviously cover it too -- are really settled on the way forward here.

I think it could very well be at the end of the day we are talking -- we will learn to evaluate companies, insurance companies by all the excess cash that is sitting in their holding company.

And that will be -- and they will view that as the excess capital component, and then we'll take that off the top and then think about ROEs after that.

I mean that may be how things progress.

We will see.

I just think it is -- it just feels to me like it is a little soon to be putting out new aggressive ROE targets when I really don't know if two years from now capital management is really going to be in the cards.

Colin Devine, Citigroup.

A couple of questions.

First, on variable annuities and I appreciate the very strong sales, I was wondering if you could give us a sense of what percentage of those are the GMIB products, which I think that we explored last quarter.

You don't do as much hedging because of the GAAP volatility it creates.

And also, what percentage for 1035s because it is certainly my sense that that number for the industry has come way down, and so we are actually seeing a lot of new customers come in.

On the investment portfolio, I appreciate on page 40 you break out the quality by NAIC ratings, but that is on a fair market value.

I wanted to get a sense of how much junk bonds were up sequentially in the quarter on an amortized cost basis, particularly as we look to that rapidly growing NAIC 5 category and what that may mean for losses over the second half of the year?

And then lastly, Bill, it is my recollection that you had put on several billion of interest rate hedges and that you had planned to take them off in the second quarter.

Where do they come through in earnings if that is correct?

And actually I guess the last one is what happened on the traditional lifeline?

Well, I will start on the VA question.

I would say on our sales for GMIB this quarter about 85%.

So it is pretty consistent with what we have seen in prior quarters.

In terms of 1035 exchanges, we don't have that exact information, but what I will say is we know that 1035 exchanges are down.

But we are seeing some benefit from 401(k) rollovers, which is actually helping us from a sales perspective.

On the downgrades, it is about $2 billion of downgrades on an amortized cost basis for the quarter.

Okay.

Well, I'm actually trying to get a sense, okay, if we look sequentially on an amortized cost basis, what do your junk bonds aggregate to at the end of the second quarter and what do they aggregate to at the end of the first?

I've got the fair market.

It is 14.8 and 18.3, but amortized costs would be more helpful.

(multiple speakers) Is that what is up $2 billion is what you are saying?

It is not clear.

$2 billion was the number I was giving you about the downgrades into --

Right.

I was just trying to separate how much of this, the increase is just spreads tightening as to how much is what else is going on there?

Okay.

They are looking through a folder.

While they do that, let's talk about interest rate derivatives.

Actually -- I think we're talking about the same thing -- we said that we took off some of our interest rate hedges that we have, and these, by the way, these tend to be very long-term interest rate swaps or floors that are used to hedge certain liabilities.

So, for instance, we have minimum interest rate guarantees.

We hedged to protect ourselves against a Japan scenario, and interest rates dropped a ton right at the end of the fourth quarter.

So a lot of these hedges, these derivatives went way in the money.

And that gain, that derivative gain, showed up in our income statement in the fourth quarter.

What we did is we said, certainly our feeling is that interest rates are going to go back up.

There is a ton of value here.

Are we just going to let it slip through our hands and watch the hedge move against us.

And the answer is we chose to kind of split the difference, and we took $1.5 billion of pretax gains off the table.

Okay.

Just to jump in for a second, Bill, so the mark-to-market losses we saw this quarter were net against those gains?

Well, no, the gain -- remember, just that we cashed in -- the mark-to-market occurs --

I want to know where the gain is.

Where is that -- how much was it and where is it?

Well, the gain was actually -- we took this -- by the way, we took this gain or we unwound the derivatives and pocketed the cash.

Okay?

The gain occurred in the fourth quarter.

We pocketed the cash in the first quarter.

So if we had not pocketed that cash, our derivative loss because obviously it was the right decision because interest rates moved back up, our derivative loss would have actually been greater.

So most of that -- not all of it -- but most of that $1.5 billion of gain would have shown up as a hired derivative loss both in the first quarter and in this quarter.

Okay.

I thought you were taking some off in the second quarter from what you had said before.

Yes, I think it was first and we did it.

So we did it.

So I mean it was (multiple speakers).

That was the easiest $1 billion we ever made.

So it was I think a smart thing to do.

I mean I would say that's a highly unusual event for us and not something that we would repeat on a normal basis.

And then the traditional life lines seemed to be unusually weak whether it was higher expenses, higher benefits, what was happening?

In terms of what was going on with trad life, it really was driven by a couple of things.

First of all, we had a change in our DAC modeling, so we took a pretty big charge for DAC in the first quarter on traditional life.

We actually had to reverse on variable and universal life.

So you will actually see some of the gain show up there.

Secondly, some of the earnings on the closed block going forward are going to be lower than what you have seen in the past because of some changes that we have had to make in agreement with the state and the glide path around the earnings for the closed block.

So those are really the two reasons why trad life earnings were down over prior year.

But, Bill, that is the first time I think we have seen a significant change to somebody's DAC on traditional life.

I know we are all getting tired of watching variable annuities going up and down.

But it's a whole different matter on trad life.

Was that just low interest rates that drove that?

I'm going to ask Stan to talk a little bit about some of the changes that we made around the DAC modeling.

Colin, it had more to do with our closed block.

We have a DAC model in our closed block that reflects expected gross profit.

We had been negotiating at year end with New York State on the operations of the closed block, and our pattern of earnings was changing, not in total.

That does not change.

The assets are locked into the closed block.

The future innings are the same, but the timing changed.

And we revised our models to reflect that change in the timing.

So that resulted in a one-time DAC adjustment in the second quarter.

Okay.

Was that also persistency driven?

I noticed lapses are hitting a record.

No, no, it was not persistency driven at all.

In terms of your expense assumptions, okay.

Thank you.

Let me go back to your question.

The reason we are struggling a little bit is the spread tightening is a market value number basically and another was a book value number, so we are trying to make them all tie up.

But roughly it is 50-50 of spread tightening increased that number in below investment grade, and the rest was downgrades.

There was a little bit of net selling in that category as well.

Mark Finkelstein, Fox-Pitt Kelton.

First, a clarification.

Have you updated your estimate of expense saves based on some of the recent actions, and if so, what are they?

So just for everybody's benefit, we put out a target on Investor Day -- I think it was Investor Day or maybe a little earlier -- of $400 million of expense saves related to operational excellence.

And we said $400 million pretax related to operational excellence by the end of 2010.

And there are obviously besides operational excellence, there is obviously other things going on in the expense thing.

So I thought I would give you a little color on pension costs.

We are not going to -- certainly the fact that the stock market rallies and, therefore, our pension costs go down next year has nothing to do with operational excellence.

So we don't try to take credit for that.

So that is -- so when we were throwing around maybe a number like $600 million, it counted stuff like that as well.

The number that I quoted in my remarks that we had $75 million roughly of expense saves this quarter, implying a $300 million run-rate, that is keeping score on OpEx.

So you can see that we are close.

Even though it is second quarter of '09, we are relatively close to or we are bearing down on our OpEx goal that we had for the end of 2010.

So we are way early, and things are going well.

So we have not updated our OpEx target number, and I don't expect too now.

But obviously we are doing very well, and there's a lot of momentum.

So stay tuned.

Mark, if you were asking whether or not the recent organizational change was counted in our OpEx numbers, it was not.

The reason is primarily the focus on the organizational change is one of about growth and leveraging capabilities and market strength and so forth and so on.

I can assure you, however, that that will not cause the number to slow down in terms of reaching our objectives.

So I just thought I would mention that.

I could not tell from your question whether or not that was embedded in your question.

Yes, that helps.

Okay.

A couple of other just quickies.

On the VA sales in the quarter, were those all off of the new pricing, or were there still some lingering old prices that helped drive the sales growth?

Yes, for the most part, they were off the new pricing.

We did some pricing changes in February and in May.

And so we also made some product changes, too.

And so while there may have been a little bit of run-up in the sales prior to the pricing change, we brought the guarantee on the GMIB down from 6 to 5.

By and large, it was done on the new pricing and for the most part on the new product.

Okay.

And then just one final question.

Just on the international business, can you just talk quickly about Latin America?

It looks like on a constant currency basis, premium would have been down.

I know that is kind of more Mexico-driven.

But can you just talk about the dynamics in that and how we should think about that?

I would say that Latin America is actually holding up pretty well in terms of the top line, and the reasons why we have seen some downturn, first of all, there is the FX question.

The Mexican peso drives a lot of what we do, and that has been weak compared to the US dollar.

Then when you get to the substance of it, you have got to remember that in the prior year we had the Argentina pension business, which at the end of last year was seized by the Argentine government, so all of that revenue obviously goes away.

In Chile we are in the payout annuity business.

That market has been down, total market down about 34% during the quarter.

And what drives that really is that people's accumulations that they would buy an annuity with are obviously down, and they are very reluctant to buy annuities and lock in those losses.

Now we are down a little more than the market.

We are down -- the market is down 34%.

We are down 50%.

And part of that is deliberate on our part.

We have done some de-risking of our investment portfolio down there, and therefore, we are not in a position to -- as a result of that, we are not in a position to put out some rates that would enable greater sales.

So it is a combination I think of all those things.

One last factor, it is relatively small but still had an impact, remember that Mexico is our big driver in terms of the top line.

And because of the H1N1 virus down there, we pretty much lost I would say about a month out of the quarter.

So all those things contribute to the results.

Okay.

Thank you.

That finishes our call this morning.

Thank you.

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