大都會人壽保險 (MET) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife's third-quarter earnings release.

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 products of the Company and its subsidiaries.

MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife Inc.'s filings with the US Securities and Exchange Commission.

MetLife Inc.

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

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

Please go ahead.

Thank you, Greg.

Good morning, everyone.

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

We're 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 Accepted Accounting Principles, or so-called non-GAAP measures.

We've reconciled these non-GAAP measures to the most directly comparable to AA the measures in our earnings press release and in our quarterly financial supplements, 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 morning on the call are Rob Henrikson, our Chairman and Chief Executive Officer; Steve Kandarian, our Chief Investment Officer; and Bill Wheeler our Chief Financial Officer.

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

And here with us today to participate in the discussion are Bill Mullaney, President of our U.S.

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, and good morning, everyone.

During the third quarter, MetLife continued to perform well, as our diverse mix of complementary businesses and our solid fundamentals yielded a strong result.

We generated premiums, fees and other revenues of $8.5 billion, consistent with both last quarter and the prior-year period.

Operating earnings this quarter were $718 million, an increase of 18% over the third quarter of 2008.

And book value also improved, rising 27% over the second quarter 2009 and 10% over the third quarter of 2008.

The results we've achieved are noteworthy, especially given the challenging economic environment.

They also reflect our unwavering focus on growing our business while also maintaining our pricing discipline.

Let me highlight a few examples from each of our businesses.

Institutional generated solid top-line results, as premiums, fees and other revenues were $4.2 billion for the quarter.

Excluding the impact of lower pension closeout sales compared to this period last year, the top line grew by 3%.

Group Life grew by 2.3% versus prior year, and Non-medical Health was up 3.2%, due mostly to our continued organic growth in the dental market.

Disability premiums are down year over year, but this reflects our continued strict pricing discipline in both new business and renewals.

In addition, we continued to capture market share in structured settlements as sales increased significantly this quarter.

From an underwriting perspective, Group Life mortality was right in line with our expectations.

Our disability morbidity ratio rose above the target range for the first time this year.

While it is too early to tell whether or not this is a trend, we're watching it closely.

Dental results, which continue to be impacted by higher utilization, did improve sequentially, so we may be seeing signs of a peak here.

In individual business, the top line grew 4.8% over the prior year.

Much like last quarter, we increased sales of our whole and term life products.

In our annuity business, total deposits remain strong, at $4 billion, with variable annuities at $3.4 billion and fixed annuities at $600 million.

Annuity net flows remained positive for the sixth consecutive quarter.

We were very pleased with both the amount and the quality of the annuity business we wrote in the quarter.

In international, premiums, fees and other revenues increased 9% year over year on a constant currency basis, as we had solid growth across all three of our international regions.

Latin America's top line grew 6%, driven by increased sales in Mexico and Brazil.

In Asia, our top line grew 11% due to higher sales in Korea and Hong Kong.

In Japan, total annuity deposits were $1.3 billion, with fixed annuity deposits up 27% and variable annuity deposits down 39%, reflecting current conditions in this market.

Finally, our European region, which includes our business in India, had top-line growth of 12%.

Our Auto & Home business also had another solid quarter, delivering earnings of $86 million and producing a strong combined ratio of 91.1%.

Turning to investments, Steve will provide you with a detailed update in a moment.

Let me just highlight.

In addition to experiencing higher net investment income, the value of our portfolio recovered considerably this quarter, as net unrealized losses dropped to $1.6 billion.

This amount now represents less than half of 1% of our general account assets and is actually lower than net unrealized losses as of June 30, 2008, before the deepening of the crisis.

The results we've achieved this quarter are due to a number of attributes that define MetLife, not the least of which is our financial strength.

As you know, we have maintained a very strong capital position throughout this period of uncertainty.

We kept our common stock dividend at $0.74 per share in 2008.

And this year, our Board has declared another annual dividend, again, of $0.74 per share.

In addition to revenue growth and capital strength, maintaining a focus on efficiencies and expense discipline has been a priority for us.

With our operational excellence initiative, we're not only improving the efficiency of our organization, but we're also on pace to exceed our goal of $400 million in annualized savings.

And of course our newly formed US business organization is progressing very well as we finalize its strategic and operational plan.

We will share more strategy updates with you at Investor Day on December 7.

This time last year, I told you that we were entering a period during which MetLife would set itself apart due to its stability and strength.

I believe the performance we have delivered since then has demonstrated that our focus on long-term success is what has made MetLife the kind of company that customers and shareholders want to be associated with.

No doubt there are challenges that remain, but looking forward, it is our discipline in growth, pricing, expenses and allocation of capital that will allow us to remain financially strong, further sets us apart in the marketplace and grow this Company profitably.

I'm confident that MetLife will continue to build its leading market conditions as we remain focused on long-term success.

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 investment income for the third quarter was $105 million, which is below plan by $45 million, primarily driven by negative real estate fund returns.

Real estate fund returns were negative given the continued decline in property values.

In total, we believe the overall property values have declined 30% to date and could decline another 10%.

Income from our corporate joint ventures, hedge funds and securities lending program outperformed plan.

However, we expect that variable income will remain below plan in the fourth quarter, primarily due to continued softness in real estate funds.

Now, let me cover investment losses for the quarter.

Gross investment losses were $491 million, down from the previous quarter.

Write-downs this quarter were $661 million, also lower than the second quarter.

These write-downs were experienced across a variety of sectors, including $146 million of corporate securities, $139 million from the strengthening of the mortgage valuation allowance, $77 million in structured finance securities, and $46 million in a real estate partnership.

Write-downs also included $215 million of hybrid securities and $38 million of partnership and equity securities, which were impaired because the length of time and the extent to which the market value has been below amortized cost.

Overall, net investment losses for Q3, excluding derivatives, declined to $853 million from $1.1 billion for Q2.

We expect this favorable trend to continue going forward.

Losses from derivatives that do not qualify for hedge accounting were $1.3 billion.

This was primarily attributable to an $895 million pretax loss, driven by an improvement in MetLife's own credit spread and its impact on the valuation of certain insurance liabilities.

MetLife's average credit spread decreased 315 basis points over the quarter.

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

The remaining loss was caused by several factors that negatively impacted the valuation of our derivatives, including the weakening of the US dollar against certain currencies, which reduced the value of our foreign currency swaps used to hedge foreign-denominated assets; and the decline in general credit spreads, which decreased the value of credit default protection we purchased for our corporate bond portfolio.

Gross unrealized losses of fixed maturities were $11.4 billion at September 30, down substantially from $19.5 billion at June 30, as spreads declined across all sectors.

Total net unrealized losses showed an even more remarkable decline to $1.6 billion from $14.6 billion at June 30.

Next, I would like to discuss the ratings migration within the fixed maturities portfolio.

As of September 30, below investment grade fixed maturity holdings increased $3.1 billion based upon estimated fair value, of which $1.5 billion was due to market value improvements and $1.6 billion from ratings downgrades.

The downgrades [are] primarily attributable to our non-agency residential mortgage-backed portfolio, which we've discussed with you previously.

However, we expect that for purposes of risk-based capital, the proposed plan, endorsed by a committee of the NAIC, will result in capital charges that are more aligned with the risk of loss than the current methodology.

We anticipate that our portfolio, which is a higher percentage of super senior and senior tranches and fixed-rate collateral, will perform better than the overall market.

I would like to briefly touch upon our commercial mortgage holdings, where delinquencies and losses remain minimal.

We had no defaults in our US portfolio during the third quarter and the current delinquencies are only $3 million or 1 basis point on the overall portfolio.

The current portfolio loan-to-value is approximately 67% based on a rolling four-quarter valuation process.

In addition, our current commercial mortgage valuation allowance is $542 million.

I look forward to speaking with you at the 2009 Investor Day, where I'll provide additional detail on our portfolio in expectations for 2010.

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

Thanks, Steve, and good morning, everybody.

MetLife reported $0.87 of operating earnings per share for the third quarter.

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

Let's begin with premiums, fees and other revenues.

Institutional's revenues declined 7.7% as compared to the third quarter of 2008 due to lower closeout sales in the current period.

As I have said many times, closeout sales can vary significantly by quarter; sometimes we say that is lumpy.

Excluding the impact of pension closeout sales, Institutional's revenues were up 3% versus the prior year.

Individual's revenues were up 4.8% in the quarter, due mainly to a 15.2% increase in annuity revenues.

This result was driven by increased sales of income annuities, strong variable annuity sales and net flows as well as the 15% increase in the S&P 500.

International had reported revenues of $1.1 billion in the third quarter compared to $1.2 billion in the year-ago period.

A stronger dollar relative to currencies such as the Mexican peso and the Korean won depressed International's reported revenues in the quarter by $152 million when compared to the third quarter last year.

If you look at it on a constant dollar basis, revenue growth was 8.9% compared to the third quarter of 2008.

Another important contributor to our revenue growth is MetLife Bank, which is part of our corporate and other reporting segment.

The bank's revenues have increased $232 million over the year-ago period, due to the acquisitions of both the forward mortgage and reverse mortgage operation in 2008.

Also, forward and reverse mortgage origination volumes have increased substantially this year.

It is our intention to break out financial data concerning the Bank in the fourth quarter QFS, and we'll also be discussing the Bank's results at our Investor Day in December.

Overall, we had premiums, fees and other revenues of $8.5 billion, which is a 1.2% decline compared to $8.6 billion in the third quarter of last year.

If one excludes pension closeout revenues and adjusts for the currency fluctuations, our revenue actually grew 6.6% year over year, which we think is an excellent result in this environment.

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

In Institutional, Group Life mortality of 92.2%, was well within our guidance range of 91% to 95%.

In Non-medic Health & Other, group disabilities morbidity ratio was 96.4% for the quarter.

Disability claims incidents has ticked up in the third quarter after several quarters of stable experience, although there was a similar uptick in the year-ago period.

Recoveries, which have been lower than anticipated all year, remained below expectations.

Dental claim utilization remained high and our 2010 renewal pricing has been adjusted to reflect higher levels of claims activity in that product area.

Individual's mortality ratio was high this quarter at 91.2%, due mainly to several large face amount claims.

However, reinsurance coverage offset the high direct mortality ratio and the net underwriting results were relatively normal.

Turning to Auto & Home, the combined ratio, including catastrophes, remained strong at 91.1% versus last year's combined ratio of 89%.

Catastrophe experience was much lower this year due to the absence of significant hurricane activity.

Also, included in this combined ratio result is a non-cat prior-accident-year reserve [reflief] of $7 million after-tax compared to a $27 million after-tax relief in the same period of 2008.

Moving to investment spreads, investment spreads generally improved this quarter as some funds were shifted from cash and government securities to higher-yielding investments.

In addition, variable investment income increased sequentially, although it was still down versus the year-ago period.

With regard to variable investment income, as Steve has explained, we again saw a mixed performance in certain variable alternative asset classes this quarter.

Negative returns in real estate were offset by strong results in securities lending, hedge funds and corporate joint ventures.

For the quarter, variable investment income after-tax and the impact of deferred acquisition costs, was $32 million or $0.04 per share lower than the 2009 quarterly plan.

Our earnings in the annuity portion of Individual business were negatively impacted by a significant drop in interest rates this quarter, and I want to take a minute to explain why.

The accounting pronouncement, SOP 03-1, requires us to reserve for expected future GMIB claims by estimating a future annuitization rate on account balances and comparing it to our guaranteed annuitization rate on the customer benefit base for all contracts.

In general, when interest rates fall as they did in the third quarter, the reserve model calculates higher expected GMIB claims in the future, which increases our GMIB reserves.

This phenomenon mainly impacts our older GMIB block, and we have reinsurance on this business, which partially offsets the interest-rate movements.

However, the reserve impact this quarter more than offset the positive impact from equity market increases.

The net result was a decrease of $46 million after-tax or $0.06 per share.

Moving to expenses, our overall reported expenses were higher this quarter versus the year-ago period, but that was driven by much higher expenses at MetLife Bank and higher pension and post-retirement benefit costs, partially offset by continued progress in our operational excellence initiatives.

As Rob mentioned, we are confident we will exceed our $400 million goal and intend to announce a new target at the December Investor Day.

Also, we incurred $47 million pretax in operational excellence charges this quarter, which consisted mainly of severance payments and real estate-related expenses.

Turning to our bottom-line results, we earned $718 million in operating income or $0.87 per share.

With regard to net investment gains and losses in the third quarter, we had net realized investment losses of $1.4 billion after tax, which of course seems like a big number.

But you have to keep in mind our derivative losses were $857 million after taxes.

And as Steve mentioned, the largest portion of that result was a $582 million after-tax loss caused by the tightening of MetLife's own credit spreads.

Most of the remaining derivative losses were due to changes in currency rates and a decline in CDS spreads, generally, which were substantially offset in our strong AOCI improvement this quarter.

Now I would like to take a moment to talk about cash and capital.

Let me start by telling you that our cash and liquid assets at the holding company stood at $5 billion as of September 30.

As you know, MetLife's Board of Directors has declared an annual common stock dividend of $0.74 per share, which amounts to a little over $600 million.

We will pay that dividend from the holding company in the fourth quarter.

Turning to capital, our preliminary statutory operating earnings for the third quarter of 2009 are approximately $1.3 billion after tax.

And our preliminary statutory net income is approximately $900 million after tax; that is positive net income.

You'll note that these figures are significantly higher than our GAAP results.

Many of the statutory reserve adjustments, which we made six or nine months ago in a more difficult environment, are now being reversed.

So statutory earnings strength and its effect on capital is quite good.

Steve spoke a bit about ratings migrations in our investment portfolio and the potential impact that a change in methodology being proposed at the NAIC may have.

While we are optimistic that there will be an adjustment on the risk-based capital charges, it is too soon to say how much that will be.

Therefore, we may need to move some capital down to MLIC, our main life insurance company, to cover increased capital requirements.

Because of all the moving pieces here, I hesitate to give you a dollar figure, but I'm confident that it is an amount that the holding company will be able to comfortably afford.

In summary, the fundamentals of our business continue to be strong, and we are continuing to succeed in this challenging market environment.

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

Thanks.

(Operator Instructions).

Tom Gallagher, CSFB.

Good morning.

First, just, Bill, a follow-up on the interest rate-related charge in the annuities.

Would you describe this as something that is more accounting noise related to specifically the way the GMIB is accounted for?

Or is this something that you think suggests you need to alter something on the hedge back in that product?

That's my first question.

Yes, I think I got that.

You're breaking up a little bit.

Hopefully we can fix that with the -- I think that's a problem on our end.

Is it accounting noise?

It is a little bit of both.

I mean think what happened this quarter.

We had pretty low interest rates in general to begin with, and then we had a 50 basis point decline in what we would call new money [spear] rates, which are sort of income annuitization rates in the quarter.

So you start from a low base and then you have a big move downward, which is pretty unusual.

But there's been a lot of unusual events over the last year.

So, that is really what triggered it, but I think what it highlighted was that sort of some of the assumptions we're using regarding annuitization rates may need to be adjusted in the future because these income annuities or these GMIBs, the first ones don't even become available for an annuitization for a number of years yet.

And so we're a long ways away from having a what I would say a real impact on our business.

So, probably some sort of smoothing makes sense here.

And we'll obviously be examining that over the coming weeks.

In terms of hedging now, this is really an issue more for the old GMIB block as opposed to the new product.

And so of the old GMIB block, we use sort of a combination of delta hedging of the equity exposure and then some reinsurance cover to handle things like GMBB and other issues.

So there is some interest rate protection here.

I don't think we feel the fix here is to change our hedging strategy on this old block.

This has not been, historically, a very material -- had a very material effect on our financial statements.

We've had this hedging strategy in place.

We've had this accounting in place.

And it has not triggered a very material move historically.

So, we've had -- so weird -- fairly extreme interest rate move from a low base, combined with sort of highlights, maybe, and a change we might need to make to some of the assumptions.

Got it.

Okay, that's helpful.

And the other question I had is just since we've had a pretty extreme tightening in the credit market, I guess you've got two issues going on there.

One is, I guess it becomes more difficult to put out new money; that's sort of the negative.

But the positive is I assume the potential financing markets for any possible transaction, in terms of M&A, suddenly looks more attractive.

Can you address both of those issues?

In particular, do you think this environment makes things more likely or interesting from an M&A standpoint?

I think you were talking a little about putting money out.

Spreads are in dramatically from where they were in the fourth quarter of last year and the first quarter of this year but still above sort of normal spread levels in a growth economy.

The issue in terms of yields is really interest rates are so low.

So that is what is really driving, of course, this unrealized loss number down dramatically, is timing spreads and very low interest rates.

So, that does make it challenging in terms of getting yield, but on the other hand, the spreads coming in show you that the markets are far less dislocated than they were a couple of quarters ago, so that is obviously good news.

And with regard to, it's a great time to do financings for deals.

You know, unfortunately, our spreads have come in a lot, so it's better than it was, certainly, but I wouldn't call it -- I'm not sure I would call it ideal yet.

I still think we -- I think still if you look at some of the spreads in our fixed income securities, I still think they are inappropriately wide, but what do I know?

I think the equity -- the thing you have to keep in mind here of course is if this is a transaction of any size, it's not only going to have a debt component; it will have a fixed income compounded or a hybrid component, it will have an equity component.

And valuations are not really stellar here.

So in terms of -- so it all kind of depends on prices of potential targets and what sellers' realistic expectations are, because we're still in a relatively low valuation marketplace for insurance stocks or financial services generally.

So, yes, it's a little better than it was; that's for sure.

But I wouldn't call it ideal.

Great.

Thanks.

Eric Berg, Barclays.

Two questions.

First, in the variable annuity business, I would love to get, Bill, sort of your perspective to build on that of the IR teams.

With companies pretty much everywhere raising prices and reducing the strength of guarantees, and my sense is that has happened not only in the withdrawal market but also in the income market.

In short, with the deals seemingly -- not seemingly, just in fact -- not nearly as good as it had been for (technical difficulty) what is happening with demand for variable annuities?

And where do you think demand is headed?

And then I have one follow-up question.

Eric, it's Bill Mullaney.

I will respond to your question on variable annuities.

If we look at the market quarter over quarter, it appears that even though it is early, sales will probably be flat industry-wide.

They may be might be down a little bit quarter over quarter.

And so we think it is probably a good level of demand to think about from a marketplace perspective going forward.

So, we had a good quarter in terms of our level of sales; they came down a little bit over where we were in the year-ago period.

But we are writing business at good margins.

And I think the marketplace is coming back to the kind of products that I think not only provide good returns for the insurance companies but also provide good guarantees for consumers.

So, we think the marketplace is settling out in the right spot.

Okay.

Then my question is along the same lines in the life insurance area, I noticed that you had a big tick-up in sales of what you caption as traditional, which includes not only of course whole life but also term.

As others, your Universal Life sales were down.

It feels like for many, many months now the American public has been buying fewer policies, more term policies, smaller face-amount policies.

That is how it seems to me; that's how it feels to me.

What is your sense?

And more importantly, where are we headed in terms of the future of sales in this industry over the next two years?

What will be the complexion of the sales?

Eric, I think on life insurance, your assessment of what is happening in the market is right.

There's been more of a shift away from Universal Life and variable life into more traditional products, like whole life and term, and the face amounts have been down.

It will be interesting to see what happens going forward.

As the economy begins to pick back up, we may see a pickup in life insurance sales.

I'm not sure you will see the same level of growth in the Universal Life markets.

As you've seen in the past, a number of companies, including us, have made changes to that product.

And I think that for the people who are buying life insurance today, they are looking for protection at a lower price, and I think term insurance provides that.

And I think in addition to that, we're starting to see a greater level of interest in whole life insurance, which I think is just a move away from equity-based products.

And I think that you're going to see that continue to be the mix for the foreseeable future.

Thank you.

Suneet Kamath, Sanford Bernstein.

Again on the variable annuity business, I think, Rob, in your opening remarks, you said you were happy with the quality of the business that you're writing.

Can you perhaps, to mention, how you're pricing this product from a return perspective and what sort of market environment you're assuming?

Is that sort of our standard 2% equity market depreciation for the quarter?

Or what would happen on the returns in this business if we kind of went through something similar to what we went through over the past 12 months?

And then I will have another question.

In terms of the pricing on the current V.A.'s, we've got the changes that we made in our product -- we made a couple of changes earlier this year in February and in May.

And so for our GMIB product, which comprised the vast majority of our sales in the third quarter at the 5% rollup rate, the returns are good.

The returns are in excess of our hurdle rate of 15% ROI.

So we feel pretty good about the level of business that we are writing.

The assumptions that we've used in this product are very similar to the assumptions that we've used in the past as it relates to equity market growth.

So we were pleased with the level of sales that we had in the third quarter in our V.A.

business, given the fact that we are using the product with the 5% rollup rate.

And the fact that a couple of the companies that we compete against were out there with pretty hot products in the third quarter.

Now some of them are making some changes to their products to reduce some of the levels of their guarantees.

But we felt that we got a very good market share.

Our market share -- we don't have the exact numbers -- but it will probably come in north of 10%, probably in the 11% to 12% range.

And we think that that's a pretty good market share, given the level of returns we were getting on the product and the market environment.

That's helpful.

I guess I want to come back, if I could, to that 15% hurdle rate that you talked about.

Because clearly if we assume 2% market appreciation, I think most people would feel that's a pretty good environment versus what we've seen.

So I'm assuming when you price the product or re-price it, you've stress tested it for a down market, kind of what we've been through or something like that.

I'm just wondering if you're doing 15% plus in a kind of decent market, what is the downside risk to that return based on the new product?

Thanks.

Hi, it's Stan Talbi.

You know, the 15% is not the assumed equity market return.

What Bill was talking about was a return on capital.

The equity market returns assumed is kind of like a more normalized level.

That's what he was saying was kind of consistent with last year.

It's above 5% but it is under 8%.

All right, I got that, Stan.

I guess I understood that he was talking about the return on capital.

I guess my follow-up question was how bad could that return on capital get if we go through this market environment that we just saw?

Obviously, it would go lower.

It could go into the high single digits.

But I would say that the market turning down and then back up again doesn't mean that we have locked in a lower return.

It really depends on the longer-term rates.

So for example, the business that was sold in 2006, 2007, where the market ran up and then came back down again, it's back up again.

So the returns are looking much better on that business today.

Okay.

And then my second question I guess is on the comments about the RBC and the potential change to the residential mortgage-backed security calculation of capital.

I guess my question is, how material of an event is this?

I know you're not going to quantify it, but just based on what I've been reading from the rating agencies, it seems like a lot of them are going to look through this anyway.

And so from their perspective or from a capital redeployment perspective, if they're not going to give you credit for it I'm not so sure that it changes things.

I'm just wondering if that is the correct interpretation or am I missing something?

Thanks.

This is Bill.

If you look -- Moody's put out a release on this, and what they said was this doesn't change our view about the economic fundamentals of those securities, you know, and which I would totally agree with.

The question really is, is are those good securities, are they going to be money good or are we going to see defaults or impairments.

And that is of course the real fundamental question, and I think that was what they first wanted to get their point across.

If you read in the Moody's release down further, it did also say that we view this is going to provide capital flexibility to certain companies because they are not going to have this RBC charge.

So if you had for instance any kind of test-related RBC, it will be a good thing for you.

So, I found that to be a fairly benign public statement by Moody's.

You know, if you just take a step back from this a minute.

The rating agencies have -- they've taken a bunch of securities which were rated AAA and they have now kind of just, in a blanket sort of way, in a kind of a back up the truck kind of way, rated them single B.

Now, that is not very impressive.

And I think -- and I think frankly -- I would suspect that if you ask the people who cover the insurance industry and the rating agencies as opposed to the structured credit people, they weren't probably terribly impressed by that either.

So, that's, I don't think, an indication of economic reality about the basis of those securities.

And I think that was Steve Kandarian's point.

So, this triggers, effectively, this phenomenon of going from AAA to single B, a capital tax.

Okay?

And the regulators have recognized -- jumped on this immediately with I don't think a lot of prodding even before they got any kind of commentary from the industry and said, you know, this just doesn't make sense.

And you know what, we should maybe do something which reflects reality a little bit better.

So, I think the rating agencies are going to understand this.

And I don't really -- the idea is not whether they get credit or not because I totally agree with the idea that look, the economic risk of these securities has not changed no matter what somebody says they are rated.

But it is causing kind of this arbitrary, somewhat false capital issue, and that is really the issue, and I think they kind of get that.

So I'm actually kind of hopeful that they'll treat this the way it should be done.

Okay, thank you.

John Nadel, Sterne Agee.

Good morning, everybody.

I had a couple real quick ones.

First, just to clarify, the impairments and credit losses this quarter, even those that you took on the hybrid side, both are running through statutory and GAAP similarly?

Yes.

Second one, Rob, I was interested -- you sort of, I think you sort of changed your inflection when you talked about the quality of the variable annuity sales during the quarter, and I wanted to come back to that.

Obviously, a lot of competition in the variable annuity space, especially, has come in and out and in out of the market here.

Over the past couple of quarters, you guys have been obviously stable players.

Can you maybe expound on your comment there?

I know you're not going to necessarily take shots at a particular company, but can you give us a sense at what is going on in the marketplace and why you highlighted the quality of the sales that you are making?

Well, sure, John.

And yes, you're right, I don't like to take shots at people, and I really don't need to, other than focus on what the fundamental business is all about.

You know, you probably -- lord knows I've been public enough about my feelings about business in general, even the market share horse race measured by sales and who is hot this quarter and so forth and so on.

You know the sales are at one end of the spectrum.

We've had a flight to quality, quite frankly.

That has helped us with market share.

That, connected with disciplined underwriting with our very strong retention track record and our positive net cash flows, tells me that on top of a strong financial base -- and I might say all this business being written on a platform that has much better operating leverage because of what we're doing on the expense side -- tells me that I feel very, very good about the health of our business.

I've said over and over again I love the variable annuity business; I'm not in love with it.

And I think people that come in and out, they are in love and they're out of love, and they've got other things they've got to worry about.

We see it sometimes on aggressiveness in other product lines, when somebody has a little bit of an adjustment on their variable annuity business, all of a sudden we see them popping up in Institutional, writing literally unsustained business, unsustainable business.

So, we're here for the long run.

We're looking at the health of our business.

We are focused on our customers, and we're focusing on our shareholders, and I feel good about that.

So, quality is a word that sometimes gets discounted as kind of like that's mom and apple pie.

But if you peel back the onion and you look at the quality, you have to look at all of these issues, the growth in the assets, the positive flows, the retention possibilities, how you're pricing for it, what you're reserving is, and so forth.

With all of that, I feel great.

So other than that -- and the Yankees won last night.

I feel great about that too.

One last quick one, if I could.

Bill, the tax rate appeared to be unsustainably low this quarter.

I'm not sure if I'm reading that right.

It's a little bit more difficult when you're looking at it on a segment-by-segment basis, but maybe you could go through that?

No, we don't think that effective tax rate is normal.

It requires a little bit of explanation.

We just filed, I forget which tax return was it?

I can't keep up.

We just filed -- yes, it was last year's tax return.

And when we did that, we had a true-up of our DRD credit.

And DRD is something we take every quarter and adjust for in our tax provision every quarter, but sometimes we have to true it up occasionally.

So it's I would say real earnings obviously that we would take credit for, but it's a little lumpy this quarter.

And so when you think about sort of the effective tax rate going forward, yes, I don't think 18.5% is the right number.

But that's because of the lumpy DRD credit we took.

Yes, and understanding that a lot of things move around on a quarterly basis, is the longer-term rate better, look at the last couple of years to get a sense for that?

I mean the business mix hasn't really shifted that meaningfully, and maybe international is a little bit bigger now?

Yes, I wouldn't say -- the problem with it is of course if you go back to 2007 we earned a lot of money in 2007.

And so on every incremental dollar of profit the tax rate is higher; it's 35%.

So as our earnings levels get restored here we'll unfortunately enjoy a higher effective tax rate.

But I don't know if it will go quite all the way back to where it was in 2007 until we get to that level of earnings again.

Got you.

Thank you very much.

Jimmy Bhullar, JPMorgan.

Thank you.

I had a question first on ratings migration and capital.

If we look at your below investment-grade bonds, those have actually, obviously, gone up a lot.

And specifically within that, your CCC's are up about $2 billion -- or CCC's up about $4.5 billion, actually, single B is up about $2 billion.

On that basis alone, if you're using a 350% RBC as sort of a target the capital charge would be significantly over $5 billion.

So, obviously, there are other offsetting factors whether it is stat income or something else.

But I was wondering if you could address -- you mentioned you can't precisely give us the amount -- but if you could adjust the amount of capital that you would need to put into the subs with or without NAIC relief.

And if you can't quantify it just give us the range, is it $1 billion to $2 billion, is it $3 billion or $4 billion?

Is it higher than that, just so people have an idea on how you'll go about using the money that is sitting at the holding company.

And then I have a follow-up after this.

Yes, I'm not sure I quite agree with your $5 billion, but I don't want to downplay it; it's material.

Ratings migration is a material issue for us.

That I'm basing on just on the B and CCC's going up by about $6.5 billion, if you apply the charge and assume a 350% RBC.

If you separate that out, it does give you a decent size amount.

Yes, so, fair enough.

But it's a big issue.

Our numbers are south of that, but they're not that much south in terms of the overall impact.

In terms of, obviously, we start with a -- remember, Jimmy, last year, we had a total RBC balance of 391% sort of our consolidated RBC ratio across all of our insurance companies.

So we started the year at a pretty substantial cushion relative to 350%.

And even though we've had some realized losses this year, we've also had, obviously, pretty good stat earnings.

And certainly the second and third quarters were quite good.

So, I think there are other factors going on in terms of the RBC balances.

So to go back to your more specific question about well, come on, tell me how much it is that you might have to put down in cash.

So let's just go through the math.

We talked about $5 billion of cash at the holding company now'; we're going to pay a $600 million common stock dividend.

So, certainly, the RBC or certainly the cash at the holding company now is $4.4 billion, call it.

There are some other ins and outs in the fourth quarter; they're not all that material, you know, the holding company cash.

You know, I said this a month ago publicly and I wouldn't mind saying it again.

I don't see how -- I don't think we would put up half the cash even in kind of what I would say a fairly worst-case scenario going down on the insurance stubs, half the cash at the holding company.

So you could say, okay, half, now that is $2.2 billion.

Okay.

I actually, my expected number is it's going to be quite a bit less than that.

But I hate to get more precise than that because we don't know how effective this relief will be or how extensive it will be.

So we'll see it from there.

So when I go back to my statement I made in my prepared remarks, which is we think that we're comfortable with that the holding company is going to be able to deal with this issue and make sure that the insurance subs stay -- keep their RBC ratios above 350%.

Okay.

And then, secondly, I just had a question on your ROE.

Obviously, the returns are very high when variable investment income was peaking.

But if you could talk about what you believe your long-term ROE is based on your business mix?

And also what type of capital you will hold longer-term versus what you held in the past.

And then secondly what you believe it will be or the range it will be in over the next couple of years?

Because it would seem like in 2010, 2011 the return might be depressed even worse as your lower long-term potential.

Yes, so, let me start with the short term and then we'll think about the long term.

The, I think we've said previously that when we look out at 2010, even though we're just now finishing our 2010 plan, financial plan, we've sort of -- my estimate is that we'll end up at something like a -- I said in shouting distance of 10%.

And I think that still sounds right.

But partially the reason it's that number is we don't think we're going to have any spring-back recovery in things like variable investment income.

We're not assuming that's going to bail us out next year.

First, it is hard to predict; and second is, that's not -- we don't really see those alternatives recovering that quickly.

Our current earnings plan or the 2009 earnings plan of $600 million variable investment income included $600 million of variable investment income.

Implied in that $600 million number is basically a 1% return on all our alternative asset classes.

So, that is pretty weak, okay?

We did try to call the bottom here.

We just didn't quite get right about how severe it was.

We're not assuming, I think, that that is going to recover much in 2010 really if at all, versus that assumption.

And I think, so, that is probably going to continue to hold down the ROE.

The other thing of course is, and we've talked about this a lot, is we've been holding lots of liquidity in terms of cash.

And if you look at our treasuries and agency holdings, they are also very healthy.

So, and we have gradually been moving back to a fully invested state, but I think that is gradual.

And I don't think that is going to necessarily reverse itself for awhile yet until we really get what I would call fully invested.

So that is going to take a while, but more to do.

So that is probably going to hold down ROE in the near term.

I don't think there's any -- but if you think about what has really changed fundamentally about our business, I would say not much, okay?

We're still --

Although the capital you'll hold going forward will probably be significantly higher than what you have held?

Well, you say that; I'm not sure why you think it.

And I'll start practicing my speech with you guys.

I think that if you look at the capital levels in the life insurance industry, never mind us -- but the capital levels in the life insurance industry, through what is the biggest financial crisis anybody can remember in living memory here that we have ever gone over last 12 months -- I think the insurance industry has held up incredibly well.

In terms of solvency ratios and tests, and then, certainly we have.

And I think I would say that in general, I don't necessarily think -- by the way I don't know if I would say that about the banking industry.

I think banking capital levels may change a lot.

I'm not so sure I would go look at what the experience here and say oh, well, obviously, the insurance industry needs more capital.

I think there will be a healthy discussion about this between regulators, rating agencies and the industry.

But I personally think when you kind of parse through it and you look at underlying capital levels and performance, I think we hold the right amount of capital given the risks we take.

And that is sort of what our economic capital and value risk models tell us.

So, will we have to hold a lot more capital going forward?

That is not my expectation, but we'll see.

But certainly -- so I'm not going to try to predict that in terms of how the effect it might have on ROE because I think it is a very uncertain thing.

In terms of long-term ROE goals, I don't think they've really changed for us.

We hit a 15% ROE in 2007.

Obviously, that was a very strong variable investment income performance.

We've been I think more aggressively managing expenses.

That is obviously going to also help margins and help returns a little bit over the coming years.

Will the industry buy back stock like it used to?

Probably not.

But will they maybe increase dividends more in the next three or four years?

Maybe they will.

So I think there other ways to kind of think about how you manage capital levels going forward.

So I guess that is kind of a long-winded rant way of saying I'm not sure much has really changed in terms of what we'll have to hold for capital; what our -- the amount of profitability we can enjoy going forward.

It's going to take us a while to get back to what I would say full speed ahead, operating at 70 miles an hour again in terms of earnings power.

We're a good 12 months away from that, I think, but --

The one thing I would add to that is obviously, I think companies would want to have a little bit more of a cushion so that -- the industry went through this okay but a bunch of companies ended up raising equity on a significantly diluted basis.

A couple of them needed government help.

So they might -- don't you think management teams would hold a little bit more capital so that in a bad scenario they don't have to go out to the market again?

Or at least pull back on buying back stock as aggressively, as you saw in '06, '07?

Yes, certainly I think on the margin, those things are going to be true.

Will that really fundamentally alter ROE expectations in the industry a lot, you know, really move it?

I'm not sure.

It might on the margin affect it a little bit.

And how long will those sort of sentiments last about how much capital cushion people should hold over and above what they would normally think is appropriate?

That is hard to say.

Okay, thank you.

Colin Devine, Citigroup.

Sure, just a couple quick questions.

Bill, you had touched on the cash, and I certainly was surprised to see the cash balance rise this quarter when I thought you'd been saying you were going to be spending it down.

Have you just changed where you're going to keep that?

Secondly, on some of these possible NAIC RBC charges, it certainly strikes me that your bond department is pretty sharp, and I think you knew the risk of what you were buying.

So I would be surprised if you need that to help favorably boost your RBC.

You certainly model those things as well as anybody.

But there's something else that I think they're looking at as well, and that is a possible bright line for impairments on structured credit products.

I was wondering if you could comment on that and what possible impact that may have on, because I'm assuming that could also go the other way.

And then lastly, Rob, you made the comments on the somewhat irrational variable annuity competitors, but it is certainly our view that Met probably offers one of the most aggressive products on the market today, with a dollar-for-dollar withdrawal feature on the GMIB.

So, and that is really what has been a key part of driving your strong sales.

So how much have you really derisked the products?

I know they are down from 12 months ago, taking a 6% step-up down to 5%.

But aren't they still considerably riskier than they were two or three years ago?

Okay, I'll start with cash levels.

We're -- cash, just for everybody's benefit, to level set here, we had $22 billion in cash in short term.

It was actually up $1 billion in the quarter versus the June 30 number.

That's a little deceiving.

It just so happened right around year end, there was some sort of cash coming in the door that hadn't quite -- or quarter end I mean -- that had been coming in the door that hadn't got quite reinvested.

It got reinvested within a week or so of the -- in what I think are pretty good spread assets.

So, and that was roughly worth about $2 billion.

So instead of cash being up $1 billion, it really, when you take into effect the quarter-end move, it was really down $1 billion.

Now, we hold about -- so let's call it adjusted $20 billion cash and short-term balance.

We have $3 billion that are backing -- that are collateral that are backing derivative positions.

So that is obviously not what I would call true cash.

So sort of real cash balance is more like $17 billion.

We think normalized cash levels really here are really probably closer to $13 billion, so something like that.

So we still have quite a bit of excess cash cushion.

And our expectation is we will get that reinvested.

Now, I don't think it's going to happen necessarily in the fourth quarter; there's some reasons why, where some of the cash is tied up right now in certain portfolios, and it's not worth getting into why.

But our expectation is, is that will get reinvested, and we're not going to stay at sort of a net $17 billion cash forever.

Where do you think it will bottom out?

Well, again, I think -- I'm not talking about next quarter now.

But if you kind of look at history and maybe how the business has evolved a little bit over the past year or two, I think $13 billion is a good -- is a decent kind of bottom-out target.

Colin, this is Rob.

Let me just start off by saying that in terms of the irrational -- was trying to remember what I said in terms of irrational pricing.

I said I thought I thought some people doing things on an unsustainable basis.

That comment was directly related to what we were seeing in the Institutional side of the business, as you may recall.

When I said we're seeing people that are in both lines of business that are being somewhat conservative and put all of a sudden on the other side, grasping for market share via sales.

So, and in terms of the variable annuity business, my point there is that people fall in and out of love with a product.

We've been here, we're going to be here tomorrow.

And the book of business is quite sustainable and also quite healthy, as I look at everything other than just a market share horse race from quarter to quarter measured by sales only.

In terms of the more specific question, I'll pass it to Bill Mullaney.

Just to follow up on the point you made about the product changes.

Yes, we did change the rollup rate from 6% to 5%.

But you know we've done some other things around asset allocation and making the investments more restrictive, so that people have to keep a fairly high percentage of their money in fixed.

We've also increased pricing on some of the riders.

We understand the dollar-for-dollar issue.

We've looked at that very closely and we model that out.

And I make a couple of points.

First of all, we have got a pretty large, stable block of GMIB business.

And what really influences dollar for dollar, as you know, is policyholder behavior.

And we've watched policyholder behavior very closely over the last several years.

And even during the economic crisis, policyholder behavior really hasn't changed.

And it would have to change fairly dramatically in terms of people opting in for the dollar-for-dollar feature for it to have any real material impact.

When we do hedge this product and when we do charge the fees for the riders, we model policyholder behavior to a certain extent into our strategy.

So we feel as though we understand that risk fairly well.

And the structure of our product will give us the right level of protection.

Okay.

And then I have a question for Steve Kandarian or Bill on the NAIC proposal for impairing structured credits?

Yes, Colin, it's Steve.

I'm not quite sure what you're referring to.

I know, obviously --

They're looking at a bright line impairment once the structure breaks that you've got to write it down to market value.

I have not seen that, so I really --

Just to follow up on that, under GAAP, obviously, the rules regarding GAAP impairments of structured products have really been refined to kind of deal with this issue.

That if you break the buck, if you will, even on a structured product, you don't necessarily have to write it down to what people think the market is; you have to write it down to where you think the loss is.

Or, and obviously adjustments for interest rate losses versus real capital losses.

So there is a lot of -- so our attitude is of course that GAAP has really led the way here.

And then of course in our minds, GAAP, when we take an impairment for GAAP, we take it for stat as well.

So the GAAP guidance has really been refined and I think reflects good common sense now.

So my expectation is that will -- stat will stay consistent with that.

So there's no plan to sort of run a two-tiered impairment methodology, one for stat, one for GAAP?

It is all the same for Met?

That's correct.

Thank you.

Mark Finkelstein, Fox-Pitt Kelton.

Hi, good morning.

I guess just one clarification.

Bill, I know you didn't want to go too far down this route.

But the way I interpreted your comment was if the NAIC relief did happen that you might not need to put capital from the holding company down?

Did I characterize that correctly?

I mean, that's possible.

It depends on the extent of the relief, obviously.

So, and it may not be a very material amount.

Certainly at year end, there's always some moving pieces and we obviously have to do our -- a lot of these RBC calculations are pretty complicated stochastic modeling and we have to do cash flow testing in our reserves, and so there's a lot involved.

That's sort of why we don't publish an RBC every quarter is because it is really quite an involved calculation.

That, and so there is a lot of moving pieces.

But we've tried to estimate what the relief might be, and there is a range.

And if you're at the top of the range, I think you can squint your eyes and say we may not need to put anything down.

But I don't think that is my middle of the road expectation.

Okay, fair enough.

I guess the question I would ask is I think that there is a fair assumption that something does get past.

But if it doesn't, would you go down the re-remic route?

And if not, why not?

I'm looking at Ken Barrett and see if he'll answer that question.

I guess it's on me.

We certainly get pitched on a lot of people who would like to help us re-remic a bunch of stuff.

There's problems with it.

One, it is expensive to do.

Two we're not sure that the accounting really hangs, okay, in terms of re-remic-ing certain securities.

I mean, investment bankers love to tell you, no, no, don't worry about that.

But of course that's the whole point, is we do have to worry about it.

So I think we're not sure re-remic-ing is really a solution which works for us.

Though people do disagree about this, about the accounting impact.

So I'm not sure that re-remic-ing is the answer.

Okay.

And then just a final question.

Oh, was there another comment?

It's Steve.

Also remember in these re-remics, there is a loss oftentimes taken up front, so there is some offset there in terms of the benefit.

Right.

Final question, just the reserve adjustments that you mentioned, Bill, were those purely equity market-related, or were there other adjustments that were made that are kind of more permanent in nature and maybe not specific to equity markets or even interest rates?

I guess what I'm getting at is if we have another turn down, so we give back what we gained in stat income this quarter?

Yes, if we have another 40% decline on the stock market, we'll have to set up those reserves again.

So, I would say, I mean you know, a small downturn has no material impact.

We're talking about -- remember what was going on with the S&P in December and at March.

What, it dropped as low as, what, 660.

So, yes, I mean, yes.

The answer is when you have that kind of extreme move, these stat reserve adjustments will have to be adjusted again.

Okay, so no revisions to kind of underlying assumptions that are above and beyond macro assumptions?

No.

Okay.

That is all I have.

Thanks.

Okay, everyone.

Thank you.

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