大都會人壽保險 (MET) 2010 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.

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

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the Company's operations and financial results and the business and the products of the companies 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 Incorporated's filings with the US Securities and Exchange Commission.

MetLife Incorporated 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.

Thank you, Greg.

Good morning, everyone.

Welcome to MetLife's second-quarter 2010 earnings call.

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

We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures.

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

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

Joining me this morning on the call are Rob Henrikson, our Chairman and Chief Executive Officer; Steve Kandarian, our Chief Investment Officer; and Bill Wheeler, our Chief Financial Officer.

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

Here with us today to participate in the discussion are other members of management, including Bill Mullaney, President of US Business; Bill Toppeta, President of International; Bill Moore, President of Auto & Home; and Donna DeMaio, President of MetLife Bank.

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

Thank you, Conor, and good morning, everyone.

For the second quarter of 2010, MetLife has again delivered strong results across the board.

Remember last December at Investor Day, we highlighted our commitment to disciplined growth, margin improvement and ROE expansion.

Well we delivered on that commitment in the first quarter, and I believe we have done so yet again in the second.

Our premiums, fees and other revenues increased 4% over the second quarter of 2009.

Operating earnings grew to over $1 billion, up considerably from both the year-ago period and sequentially.

I'm also pleased to report that book value increased tremendously, up 48% over the year-ago period and 10% sequentially, driven not only by our investment performance, but also our strong operating earnings.

At the same time, our ROE continued to improve, and we achieved excellent underwriting results.

And importantly, we remain committed to expense discipline and risk management.

Let me share a few highlights, beginning with US Business results.

US Business generated premiums, fees and other revenues of $7.2 billion, up 2% over the prior-year period.

Excluding the impact of lower pension closeout activity, which can vary from quarter to quarter, the top line grew by over 6%.

Operating earnings grew by 39% with significant increases in each of the major business segments, largely driven by strong underwriting results.

Within the Insurance Products segment, premium, fees and other revenues grew 2% over the second quarter of 2009, and operating earnings grew 29%.

Group Life premiums grew 4%, and operating earnings were up 56% compared with the prior-year period.

Group underwriting results were excellent, with the Group Life mortality ratio at 86.6%.

Non-Medical Health revenues were up slightly, reflecting higher dental revenue, partially offset by lower disability revenue.

Non-Medical Health earnings were up over 40%, with improved interest and underwriting margins, driven by strong improvement in Dental.

Group disability incidence remains elevated, but consistent with plan, while recoveries are showing signs of improvement.

Individual life premiums, fees and other revenues increased modestly, and we had a 6% increase in operating earnings, again reflecting disciplined underwriting and expense management.

In Retirement Products, the top line grew by 34%, driven by sales and higher fee income.

And operating earnings were higher at $238 million.

Variable annuities sales of $4.5 billion were up 11% sequentially and consistent with last year's very high level.

Net flows remain strong, lapse rates continue to decline, and the success of our new fidelity product continues to contribute to our strong results.

In Corporate Benefit Funding, premiums, fees and other revenues were down, driven by less pension closeout activity, which I mentioned earlier, although structured settlement premiums grew by 9%.

Operating earnings grew to $238 million, up 54% from the prior year, due primarily to higher variable investment income.

Rounding out the domestic businesses, Auto & Home had another very solid quarter, as did MetLife Bank.

Now turning to our international business, we achieved another very strong quarter with growth across all three regions.

On a reported basis, premiums, fees and other revenues grew 21% over the year-ago period.

Operating earnings declined by 8%.

Strong earnings in Latin America, driven by business growth and expense management, were offset by lower earnings in Japan due to the challenging equity markets.

In Latin America, growth in Mexico, Chile, and Brazil contributed to its top-line growth of 23%.

The Asia-Pacific region grew 20%, due primarily to higher sales in South Korea and Hong Kong.

In Europe, Middle East, and India region, the top line increased by 13%, reflecting continued growth in Europe and India.

In a moment, Steve will comment on our investor results, but I can't help but highlight one component of the portfolio.

We continue to experience a low level of investment losses, including impairments.

This is partly due to the continuing strong performance of our real estate portfolio, where you should note that loan to values actually decreased during the quarter.

Our reserve against future losses came down, and the percentage of delinquent loans also declined.

I think you would agree, these are all positive trends.

Switching gears, obviously, the Alico transaction is attractive to us because of our focus on generating strong, consistent earnings growth, expanding ROE and increasing shareholder value.

Together, MetLife and Alico teams are working diligently and have achieved several significant integration planning milestones.

So we remain on track to close in the fourth quarter.

As we told you when we announced the deal, we continue to be impressed by Alico's people and how well the franchise has been performing.

While we cannot comment on Alico's second-quarter financial results, we are pleased with their first-quarter performance, and, together, we are working on defining how we will further accelerate our growth strategy.

Our Operational Excellence initiative remains on track to deliver the $600 million of annualized expense savings we promised.

And it has now been one year since the formation of the US Business organization.

The team identified several opportunities to take that business to the next level.

Over the past year, we have reaped the benefits of combined sales forces with increased cross-selling opportunities.

Secondly, US Business is developing -- deploying investment dollars across the business in a more efficient way to capitalize on market opportunities.

And thirdly, we have identified synergies, giving us the opportunity to reduce overall operating costs.

So we're certainly seeing big benefits already from combining the businesses.

In closing, this is a momentous time for MetLife, one that will propel us into the next phase of our long and successful history.

As I reflect on the first half of the year, I'm very pleased with our performance.

We've been enjoying strong momentum, and looking ahead, we are very enthusiastic about our future as a global company.

With that, let me turn it over to Steve Kandarian.

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 second quarter was $296 million, which is $96 million above the top of the plan range that I provided on Investor Day.

This is primarily driven by strong private equity returns.

While we expect variable investment income to trend lower for the remainder of the year, we believe it will still perform within our quarterly range.

Now, let me cover investment gains and losses for the quarter.

Gross investment losses were $253 million.

Gross investment gains were $396 million, and write-downs were $172 million for a net investment loss, excluding derivatives, of $29 million.

Results were largely in line with the previous quarter.

Gross unrealized losses on fixed maturity and equity securities were $7 billion, down from the $10.8 billion at year end.

Gross unrealized gains were substantial this quarter at $14.2 billion as widening spreads were more than offset by declining interest rates.

Overall, the portfolio was in a net unrelated gain position of $7.3 billion at quarter end.

Next, let me expand upon Rob's comments regarding our commercial mortgage portfolio.

The loan to value of our portfolio improved slightly to 68%, down from 69% last quarter as valuations have stabilized.

Our commercial mortgage valuation allowance declined modestly to $621 million.

Total delinquent commercial mortgages decreased from $162 million to $137 million.

The decrease in delinquencies was driven by the restructuring of one loan resulting in a $5 million loss.

As to the remaining two delinquent loans in the US portfolio, one is expected to be paid off during the third quarter with no loss, and the other is a high-quality property that we plan to transfer to our real estate equity portfolio.

As I have mentioned previously, we expect limited losses on these loans, as our recoveries are projected to be above the historical average of 75%.

Although some challenges remain, we believe the commercial real estate market is slowly improving, and that our portfolio will continue to maintain low loss levels and outperform the overall market.

Finally, let me comment on our cash position, which increased from $17.2 billion last quarter to $20.4 billion this quarter.

The vast majority of this increase can be attributed to higher cash collateral balances received from our derivatives counterparties.

As interest rates and equity markets decline, the value of our derivative positions increased and we took an additional cash collateral.

Excluding the impact of cash collateral from our derivative counterparties, our cash position is down $4.1 billion since Investor Day, as we've reinvested into higher-yielding assets.

In summary, we continue to see solid results in our portfolio with variable income above plan, continued low losses, and improving commercial real estate market.

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

Thanks, Steve, and good morning, everybody.

MetLife reported $1.23 of operating earnings per share for the second quarter.

As Rob mentioned, this strong bottom-line result represents solid business growth, higher investment income, strong underwriting results and the impact of our expense management efforts.

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

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

Total premiums, fees and other revenues, which were $8.7 billion in the second quarter, were up 4% from the second quarter of last year, and up 6% when adjusting for closeout sales in both periods.

As we have noted before, closeout sales can fluctuate from quarter to quarter.

US Business premiums, fees and other revenues of $7.2 billion reflect a 2% increase over the prior-year quarter.

This includes a 2% increase in Insurance Products revenue, largely driven by an increase in Group Life; Group Life premiums are up 4% from the prior-year quarter, consistent with our Investor Day guidance; growth was helped in the segment by a change in financial terms in a large retrospectively-rated contract, which resulted in less reinsurance ceded in that particular contract.

This change occurred in the fourth quarter of 2009 and was anticipated in the guidance we provided at Investor Day.

Also, revenue and Retirement Products increased by 34% due to income annuity premium growth, as well as higher separate account fees due to positive net flows and favorable separate account investment returns in prior quarters.

Also, revenue in Corporate Benefit Funding was down 17% from the prior-year quarter, driven by lower closeout premiums.

Structured settlements premiums remained strong.

International's revenues were up 21% on a reported basis and 13% on a constant currency basis over the prior-year quarter, driven by growth in Mexico, Korea and Chile.

Operating margins -- turning to our operating margins, let's talk about underwriting results.

In US Business, our mortality results were quite strong this quarter.

The Group Life mortality ratio for the quarter was 86.6% versus our estimated range of 90% to 95%, which is an excellent result.

Our Individual life mortality ratio for the quarter was 80.4%.

While higher than the exceptionally strong prior-year quarter of 74.9%, the results were quite favorable and well below our plan.

At 87.8% for the second quarter, the Non-Medical Health total benefits ratio was down from both the prior year and sequential quarters of 88.4% and 91.2%, respectively.

This favorable result was due largely to improved dental underwriting results, in which we continue to see more stable utilization and favorable pricing trends.

Disability margins continue to be below plan, as incidence levels remain elevated and recoveries continue to be below expectations.

However, we are seeing some early signs of improvement in recoveries.

Turning to our Auto & Home business, the combined ratio, including catastrophes, was 95.3% for the second quarter, which was up over the prior-year quarter's result of 93.5% due to higher catastrophes.

The combined ratio, excluding cats, was 85.5% in the second quarter versus 88% in the prior-year period.

a no-catastrophe prior-accident-year reserve release of $12 million after tax was taken in the current quarter, compared to a $3 million number in the year-ago period.

Moving to investment spreads, we saw continued strong investment spreads this quarter, driven in part by variable investment income results.

For the quarter, variable investment income after tax and the impact of deferred acquisition costs was $62 million or $0.07 per share, above the top end of the quarterly guidance range given at Investor Day.

As Steve explained, this was primarily driven by strong private equity returns.

Moving to expenses, our operational excellence initiative continues to prove successful.

Our expense ratio for the quarter was 22.4%, a solid result, and within the 2010 guidance of 21.8% to 22.5% given at Investor Day.

Turning to our bottom-line results, we earned $1 billion in operating income or $1.23 per share.

Included in our second-quarter results was a favorable market impact of $43 million or $0.05 per share as gains from our hedge program more than offset the impact of lower equity markets and interest rates in both the US and international businesses.

With regard to investment gains and losses, in the second quarter, we had after-tax net realized investment gains of $767 million, which included derivative gains of $878 million after tax.

MetLife uses derivatives in connection with its broader portfolio management strategy to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies.

Movements in interest rates, foreign currencies and MetLife's own credit spread, which impacts the valuation of certain insurance liabilities, can generate derivative gains or losses.

Derivative gains or losses related to MetLife's own credit spread do not have an economic impact on the Company.

In this quarter, we refined our estimate of expected recovery rates for our insurance subsidiaries within the measurement of owned credit as of June 30.

This refinement resulted in an after-tax realized investment loss of $621 million during the quarter.

Impairments were $112 million after tax in the second quarter, modestly higher than the first quarter of 2010.

Our preliminary statutory earnings for the second quarter of 2010 are approximately $220 million.

And our preliminary statutory net income is $250 million.

Statutory operating earnings were significantly impacted by lower equity markets and interest rates in the quarter and do not reflect the benefit of gains from our hedging program.

However, statutory total adjusted capital, which is the numerator in our RBC calculation, increased by $1.1 billion.

Turning to our holding company, cash and liquid assets at the holding company at quarter end were $3.7 billion.

In summary, MetLife had a very strong second quarter.

Our revenue growth was solid.

Our investment performance continued to improve.

Our operating margins remained strong, driven by disciplined underwriting and expense management, and our earnings continue to grow.

And with that, I will turn it back to the operator for questions.

(Operator Instructions).

Mark Finkelstein, Macquarie.

Good morning.

Hopefully you can hear me okay.

There's a lot of static.

But I guess it was a good quarter.

You had favorable mortality, good morbidity, good investment results, good expense control across the board.

I think if you looked at a core number, it's somewhere in the $1.10 to $1.15 range.

I guess what I'm really interested in is how should we think about this level of earnings and whether we should be trending off this number or whether we should be thinking about a little bit lower of a number, just given the level of favorability in the quarter?

Hi, Mark.

It's Bill.

Yes, we did hear your question.

You know, it's -- you know, I -- I always hesitate to say whether $1.11 is a good run rate or not because -- but I will give you some sense of the -- kind of the pluses and minuses.

You're right, underwriting was very strong.

And, so, I think a lot of that is sustainable.

Some of it was probably just good fortune, but I also think, by the way, but like the improvements in dental underwriting margin are very sustainable.

In fact, they might get better from here.

And the other interesting fact is disability underwriting margins were roughly flat on the sequential quarter basis, but there is potential for a lot of improvement there as early -- it may be in the third quarter, maybe not.

But we're -- the guys who are very close to that business are encouraged by some of the signs they saw in the second quarter.

So -- you know, so, certainly, there are headwinds or there are things which might not be repeatable in the second-quarter results, but there are further opportunities.

I would also -- just a couple other things to keep in mind is I think the expense picture only gets better, okay, as operational excellence continues to execute.

Though, probably the drop in the equity markets at the end of the second quarter is probably a modest negative as we think about third-quarter fees in the retirement business.

And then, finally, you know, I think the low interest rate environment you know that we're in, you know, though I don't think it will be a very large impact in terms of our operating impact -- operating EPS, it will probably -- it will probably slice a little bit off of investment margin in the future quarters.

But I think it will be very modest.

So, that's sort of the color on what's sustainable and what might be in the future.

And I kind of come away from that little dialogue as, you know, current -- that kind of $1.11 current run rate is a number that I think you can think about as a reasonable projection going forward.

Could it be a little lower?

Sure, but not materially.

Okay.

Okay?

That's helpful.

And then just finally, I know there's a lot of moving parts with equity markets down, interest rates; I think you mentioned adjusted capital is higher.

Is there any update you can give on just the overall capital position?

Well, we don't give out quarterly RBC projections.

I just don't think that's a good practice, because, I think as you probably appreciate, the actual RBC projection is a very involved calculation.

We don't perform it quarterly.

We do estimate our RBC every quarter, but we don't -- so it just strikes me as that's -- until you do the real math, you shouldn't put out a number.

I think the way to think about this is total adjusted capital, as I said in my prepared remarks, went up $1.1 billion.

Well that's the numerator in the RBC projection.

You know, at $1.1 billion -- now the denominator changes, right, because the business -- the balance sheet is a little bigger and things have changed a little bit.

But $1.1 billion, you'd think $50 million to $60 million of -- per RBC point, that sort of implies 15 to 20 RBC points in the numerator just in the second quarter, never mind the first quarter, which was another $1 billion increase.

Right.

So, we are clearly building statutory capital -- reverses our RBC at year end 2009, which was 432%.

So, we feel good about our capital levels, and our cash levels at the holding company haven't changed.

So I guess I feel that capital position is in good shape.

Okay, all right.

Thank you.

John Hall, Wells Fargo.

Good morning, everyone.

Yes, just a couple questions for Steve.

I was wondering if you could just give us a sense of those gross losses on the investment portfolio that were realized.

Where they came from, and I think you had sort of indicated along the way that you might be reducing some of your sovereign holdings, and I wonder if any of that activity occurred during the quarter.

Hi, John.

Actually, we did not decrease our sovereign holdings.

We didn't have very many sovereign holdings.

You may be remembering some comments I made earlier when you talked about the Alico transaction.

And, as you know, pre closing, we don't control how they manage their portfolio.

So, I can't really comment on what is going on on that side of the ledger.

In terms of gross losses, it's a fairly varied group of sectors that are contributing to that, so there's no one item that's sort of jumping out where I can say this sector is underperforming on the realized losses.

On impairments, it was more in the area of structured financed assets, and it was some in CMBS, some in ABS, and that was the main driver for the impairments.

Great.

Thanks.

And it was clearly a strong sales quarter, building momentum around the variable annuity product.

Can you give us a sense of how much the Fidelity relationship might have contributed to that?

And are there any other, I guess, new sales relationships that could potentially keep that momentum going?

Hi, John.

It's Bill Mullaney.

First of all, yes, we did have a good sales quarter in variable annuities.

We had about a $4.5 billion level of sales, which we were very pleased with.

It continued to come from a broad range of channels.

You know the traditional channels where we sell variable annuities continues to be strong.

Rob did mention in his comments the Fidelity relationship, and that has continued to grow and to give us an alternative way to distribute the products.

We do look, and are in discussions with, other potential parties that we would partner with to distribute [RVAs] through some alternative channels, and as those things get finalized, we will certainly make you aware of them.

Great.

And then I guess just finally on capital, in a sense, have you guys made peace with S&P with the strong quarter and the strong book value growth?

We love S&P.

The -- look, I hesitate, certainly, in a public, to speak about what S&P thinks.

So they put out a research report on us, it was about a month ago I think.

I thought that was a pretty accurate reflection of where they are at.

And, so that's sort of, I would say, the current -- our current state of affairs with them.

Great.

Thanks very much.

Colin Devine, Citi.

Thank you very much.

Okay.

Just a couple of questions.

One, with respect to what's going on in the UK, I guess a couple of your more legitimate competitors have pulled out with AXA leaving and -- they're putting their business up for sale.

Is there any sort of update on your thoughts on the UK pension market and where you are at?

Second, I didn't catch what you said the sales were for the variable annuities through Fidelity, if you could just give us a sense of -- that would be very helpful.

And then also, with respect to I guess your -- two other things internationally.

Your ongoing discussions I guess with Sumitomo Mitsui and where you stand on the JV, if that is no longer going to be a JV.

And can you give us any update on your negotiations with Japanese regulators to start taking capital out of Alico early next year instead of having to wait till 2012.

It's Bill Mullaney.

I'll talk about the first two parts of your question.

As it relates to the UK closeout business, we had lower UK closeout sales this quarter than we had in the first quarter.

As we've talked about in the past, closeout sales are lumpy and they do vary quarter to quarter, so I think you are seeing the effect of that.

In addition, though, I do think the low interest rate environment in particular is having an impact on the closeout market in both the US and the UK.

I think companies that would be thinking about transferring their pension plans to us are moving more slowly here because of the fact that interest rates are so low.

And so I think that will continue to provide a challenge for us in that business until we see some improvement in the interest rate and in the longer-term interest rate environment.

So I think -- that is how we're thinking about the UK and the US closeout market.

In terms of the fidelity relationship, you didn't hear the sales number because I didn't say what it was.

And because it is a relationship that we have with another company, we don't disclose that publicly.

But it has become an important part of the overall sales story.

But I will tell you it represents less than 10% of our total [VA] sales.

And I think, then, the third question is to Bill Toppeta?

Yes, hi, Colin.

Just on the Japan JV, we are in the discussions with Mitsui Sumitomo.

I would say that the discussions are very positive and moving along well.

We don't have any conclusion yet, and as soon as we do, you will be the first to know.

Okay.

And then, with respect to Japanese regulators --

Yes, I want to give that to Mr.

Wheeler.

Toppeta only gets so much air time each call.

We have to limit it.

The -- with the Japanese -- obviously, we explained when we announced Alico that under sort of the general rules, we thought we wouldn't be able to take out regular dividends out of Japan until sort of the 2012 time frame.

There may be -- so, it's quite possible that we may get some flexibility on that from the regulator.

And we've sort of had some -- we haven't really brought that up in great detail with them yet because we've obviously been doing some other things with them about discussing other issues with them at the moment.

But I'm hopeful that we might make some progress on that front earlier.

But, there's nothing definitive to say now.

Okay.

And then I guess just a quick one for Rob.

You didn't -- you haven't said anything about the New York attorney general investigation.

I can't believe you're going to let that pass without some comment, so perhaps you can update us on your thinking about that.

You know, I just lost a bet.

I thought maybe somebody would let it go through and not mention it at all, but then I forgot you were on the call.

I knew you wouldn't.

In the first place, I can't really say anything about -- you know specifically about the attorney general because even though we've read in the press, just like everyone else, about certain subpoena activity, we haven't seen anything nor have we talked to anybody from the attorney general's office.

So I really can't comment.

Have you received it?

Pardon me?

Have you received it actually?

Not to my knowledge.

Why, do you have some other information?

No, we have not received it.

And I would comment just -- I mean I -- just generally, you know, obviously, we strongly disagree with the misleading and incorrect statements.

Certainly the initial statement is coming from the press.

Subsequent to that, of course, those with correct knowledge of the situation, including the national organization of Life Guaranty Association, the NAIC, the ACLI, we and other insurance companies have provided a lot of well-written clarifications.

And I would say that, certainly, most of you on the call have made very clear that you understand how the accounts function.

And I think it's -- you've provided a real public service, quite frankly, for a report -- putting together reports that demonstrate very ably your understanding of these.

And I think that as more comes to light, that that's the direction things will go.

The beneficiaries have full access of their funds.

They earn guaranteed minimum interest rates.

They exceed what they could in other money market type accounts.

Our account holders tell us they love it.

It's consumer friendly, you know, on and on.

One of the interesting things, as you probably know, in terms of guaranty funds and whatnot, in the course of business, we actually are prohibited from talking about guaranty funds and whatnot in the insurance industry.

I think that has to do with moral hazard issues and so forth, which we certainly wouldn't disagree with.

But, since [Nolga] did weigh in -- by the way, you may recall back in 2008, during the crisis, they clarified the Guaranty Association coverage, which in this instance goes as if it were any kind of life insurance death benefit.

And you know, most states in the US, all 50, have coverage.

Most are at $300,000.

A handful, like New York, are at $500,000.

None of them are below $250,000.

So now I can say that because I'm just commenting on a comment from the Guaranty Fund Association.

They came out with a reaffirmation of that just this week.

So, I think there is nothing better than having good, solid, clarifying, correct information when it comes to financial products.

So, that's about all I have to say, but we haven't -- I can't say anything about the attorney general's office.

Okay, thanks.

I think Bill said in the past you have about $3 billion in those accounts.

Is that still the right number?

No, there was a report -- you know, it's north of that.

I don't have the exact figure in my head, but it's north of $3 billion.

Okay.

Thank you.

Jimmy Bhullar, JP Morgan.

Hi, thank you.

Good morning.

Just to clarify on the previous question, I think it's -- isn't the amount close to $10 billion in those accounts, Bill?

Yes, it's something like $10 billion.

Okay.

And then I had a couple of questions.

One is on disability claims.

Obviously, your margins held up really well.

A few other companies have reported an uptick in claims.

And maybe -- it seems like there is a business mix issue.

But what's the possibility that if the economy stays the way it is that you actually see another uptick in claims over the next few quarters?

And then the second question is on interest rates, with rates like ten-year sitting around 3%, could you maybe quantify a little bit on, if the ten-year stays around -- at this level for the rest of the year, how much of an impact it would have on your earnings and maybe even if it were to drop another 50 basis points, what sort of sensitivity would you have on your results?

Hi, Jimmy.

It's Bill Mullaney.

I'll start off by talking about what we are seeing in disability.

As Bill Wheeler talked about in his opening remarks, we saw a modest improvement this quarter in disability results relative to prior quarters.

Incidence was down slightly.

Recoveries were up -- improved slightly.

And so that's brought the loss ratio down a little bit.

You know, you commented on what some of our competitors are seeing.

I can't really speak for them, and I'm not really sure why we saw the impact on our disability business more quickly.

As you know, we've been talking about this issue for some time.

Some of it may have to do with the mix of business that we have.

We have a book of business that focuses on large companies.

It's also got a significant percentage of those being financial services companies.

And I think when the economy started to turn down, I think those companies acted more quickly in terms of adjusting their work forces.

That may have had some impact on how quickly we saw claims coming into our operation.

We also have taken some price increases over the last couple of pricing cycles.

And I think that has helped us in terms of our overall results for the quarter.

But, what I would say just to summarize is that the performance of the quarter in disability was moderately encouraging.

And I would say as the economy continues to slowly recover, we think that will begin to see recovery in our disability business as well.

Okay.

And Jimmy, with regard to interest rates, we have run a sensitivity or done a little projection, I guess by saying if -- sort of the interest-rate environment that we're in now with sort of the ten-year roughly at 3%, sort of continues for the rest of this year and through 2011, what would happen to our results?

And I guess I would say the answer is not much in general.

By that, I mean we would see -- we would probably see a little lower earnings than otherwise expected in 2011.

But not -- it would be enough to mention, but not that significant.

I think some people have talked about impairments of DAC or goodwill or things like that, and I wouldn't think that that's likely in this sort of time frame.

You also mentioned dropping -- what would happen if we dropped the ten-year to 2.5%?

I have to admit, I haven't run that scenario.

So I can't give you any real precise answer.

But I would give you sort of a general response.

You know, you've followed us and I think most of the analysts listening to this call have followed us for a long time.

We've talked about the low interest rate issues and what we do to protect ourselves, and we've said that from time to time, well before, obviously, the current situation.

We have a history -- you know because of -- this is part of our risk management.

We've often talked about a Japan scenario, and how we protect ourselves against that risk, and we buy very long interest-rate floors, sometimes with deferred start mechanisms to push out the -- protect ourselves as long as we can.

And we have a pretty good portfolio of those.

So, you know, as the -- as interest rates continue down here, those things -- they obviously come into the money and start paying, but obviously they are increasing in value as we speak.

So we are, obviously, even in the second quarter, we saw an increase in value of those contracts.

So this is something we've thought about for a long time and have, I think, prepared ourselves pretty well for, and spent the money, frankly, over the last five years to do.

So this is a -- I think that's being smart about risk management and understanding where your real risks are.

So I think we're in relatively good shape here.

Okay, thank you.

John Nadel, Sterne Agee.

A couple quick questions.

Any update on the timing for when you guys might file those pro forma historical financials that show Met and Alico on a combined basis?

No; no, there's no update yet.

You know, well I'm not actually sure when AIG actually announces earnings, but -- for the second quarter.

But there's -- I should probably know the answer to that.

But there's no -- there's no update yet.

Okay.

So sometime after AIG reports?

Well, I said there is no update yet.

Okay.

And then, all right, so here's my bigger picture question for you.

With -- I mean your capital levels continue to grow.

The investment portfolio is clearly recovering, showing good strength, very manageable credit-related investment losses and impairments.

I guess I'm just curious as to whether we should expect the mix of your financing for Alico to maybe shift a bit from your original expectations when you announced that deal.

You know, it's a good question, John.

I think probably the right -- the prudent thing for me to say is you'll just have to wait and see.

Obviously this has been a source of considerable discussion for us.

And, we obviously wanted to see how -- we wanted to get through this quarter.

And obviously, so we'll have to just see, I think, is the the only answer I can really give.

Okay.

Fair enough.

Thank you.

Suneet Kamath, Sanford Bernstein.

Great, thank you.

I guess two questions.

Maybe both are for Bill Wheeler.

First, in terms of some of the normalization adjustments that we talked about last night, in particular, I'm not used to backing out positive earnings in quarters when the equity markets are down, and obviously, that was part of last night's drill.

So as it relates to kind of thinking about Met's exposure to equity markets, especially, considering some of the hedges, would you consider the second quarter to be particularly abnormal in that you actually did well as markets came down because of some phenomenon in terms of how the markets traded in the second quarter?

Or are you at a point where you are so overhedged right now that -- and to the extent that markets recover in the third quarter, we might actually see a little bit of earnings pressure because that hedges would underperform?

That's question number one.

Then question number two is, I guess Met has been fairly involved in the FASB IASB joint accounting project.

I think you and your team, Bill, have talked to them about some of the industry's issues and concerns there.

Any updates in terms of where we are and what things might look like as we progress through the year?

Thanks.

Okay, with regard to the -- I'm going to turn into the accounting expert here.

The -- with regard to the second-quarter phenomenon of -- that positive earnings adjustment, we had a -- we had an interesting situation this quarter.

And I'm not sure we've completely diagnosed why it came about because I think it's kind of -- it is sort of unique.

You know, you had a pretty substantial drop in both equity and interest rates, and the -- in the -- right at the end of the quarter.

And, so for most of the quarter, it was -- we were at one level and then we had a pretty big drop near the end, or in June.

And, the way GAAP works and when it reflects those sort of macro events, to put it simply, there are -- sometimes GAAP sort of smooths results -- and, with some things like mean reversion formulas and such.

And, this was one of those occasions where there was -- ended up being a fairly big smoothing.

At the same time, our hedging program, which we use to protect against these sorts of events, doesn't smooth anything.

And so, effectively, we became overhedged for -- at least, on an accounting basis; certainly not on an economic risk basis.

I think we feel our hedging worked quite well there.

And, it was meaningful enough that obviously we felt we really had to call it out in the financials and talk about it.

Because it represented roughly $0.05 overall for the Company of earnings per share.

So, now, the interesting question is -- so that's sort of what happened.

What happens if we get a reversal?

It doesn't I don't think magically go the other way, and there's been a $0.05 adjustment going the other way.

It doesn't work that simply.

I do think that these things do balance out over time because of course that's the whole point of mean reversion.

It's the smoothing mechanism that will spread out the adjustment over a longer period of time, as much as, frankly, five years.

So, that's how the mean reversion works.

So, it also has to do with the fact that we were very much in the middle of the mean reversion corridor as opposed to being at one end or the other, which is good to be in the middle.

But I think that creates -- that sort of has the smoothing impact.

So you could smooth a little bit the other way, but I think obviously if the stock market goes up, that we would live with a little smoothing.

That's okay.

Now, with regard to accounting, you know what, I'm going to introduce Pete Carlson, who is our Chief Accounting Officer.

Rather than me kind of -- I remember what he told me yesterday about what was going on on that project.

But rather than me just trying to repeat it, maybe I'll let him speak and talk a little bit about what's going on with these accounting initiatives.

Thanks, Bill.

Suneet, I think you referenced the insurance contracts project that is a joint project between the international accounting board and the US board, the FASB.

What's happened, the international board, actually, overnight, did release an exposure draft.

They had a June or July 30 goal, and they have released their exposure draft for this project.

That would apply to people under International Financial Reporting Standards, which obviously is not what we currently follow.

The US board, because there already are existing standards for insurance contracts -- we have much more industry-specific guidance here in the US -- actually is on a little bit slower path and is not expected to release an exposure draft for another month or two, and actually may not even do it in an exposure draft and still do -- so the stage of the discussions are much more preliminary on the US side.

That being said, the boards have recently, in discussions, reached a general consensus between both boards that acquisition costs actually would be considered in cash flow, so there would be some deferral of acquisition costs.

And that's been one of the two key issues we've been monitoring as an industry.

Thanks.

But I guess the bigger issue, at least for me, is this whole marking to market of liabilities, which I think it would cause your earnings to swing around pretty dramatically for noneconomic reasons.

Is that still kind of where their heads are?

Or has there been enough communication with investors or perhaps they're taking another look at whether or not that makes sense in terms of improving transparency?

Any thoughts on that would be helpful.

Thanks.

Yes, I'm pretty sure they're going to do -- so there's going to be some -- this IFRS insurance contracts provision -- exposure draft is going to include some marked to market of liabilities.

The key is not whether or not they're going to do that.

It's how they do it, and the kind of discounts rates they use.

There was some discussion of that they might consider using a risk-free rate.

We think that would be a bad idea.

We think that the discount rate should really mimic as closely as possible sort of what's going on with spreads or the marked to market of the assets.

So you have them -- so ergo, if you are a well-matched company, which we think we are, and others, that that would minimize the volatility of marking both sides to the balance sheet together.

You know, I think they are a lot more aware of that than they used to be.

I would also say, you know, I think -- I'm not necessarily -- there's this whole interplay between what goes on in AOTI and the movements there and also net income versus operating income.

And I think those sort of distinctions, a lot of I think the marked to market in AOCI is -- obviously including, now, liabilities, is not just going to flow through our real income statement.

But we are going to have to look for -- looking at operating income and being able to call that out is just only going to get more important in terms of -- as opposed to sort of the marked to market and the balance sheet that goes on every quarter.

So it will probably confuse newspaper reporters, but I think the analyst community will get it.

Also, one last thing on this, since we're on this topic is, our expectation is this isn't going to be sort of the law of the land until sort of 2013 or '14.

And, they have pushed this date back a little bit.

So I'm not -- we might not be done pushing it back.

So this is quite a ways out before this is going to hit us.

Thank you.

Andrew Kligerman, UBS.

Good morning.

Wanted to just kind of color in around the edges of some of the questions that we just heard.

For example, on the net nonmedical benefits rate ratio, you have an improved 87.8%.

And then I looked back to the good old days which are back in '06 and '07, and the ratios were slightly under 85%.

So the first question is just -- is that where we get back to as things improve?

And do you kind of have any time trajectory for that?

Hi, Andrew.

It's Bill Mullaney.

Let me comment on that.

First of all, the improvement that we saw in the nonmedical health benefits ratio this quarter, as Bill mentioned in his comments, was primarily driven by Dental.

We saw the increase in utilization in dental claims early in 2009.

But we took some steps as part of our 2010 pricing, both for new business and renewal pricing, to adjust our prices to make sure that they reflected the higher cost of claims.

And so, I think you are starting to see the impact of those pricing changes working into our financial results, and as a result, the loss ratio in Dental has come down.

And that is the primary driver of the nonmedical health benefits loss ratio.

And that's one of the reasons why we created the new ratio, because the Dental business has grown significantly over the past few years, and so -- relative to the disability business.

So when you think about comparing the benefit ratio today versus the benefit ratio a few years ago, we have seen a change in the mix of the products that are there with Dental becoming much more significant.

And that's one of the reasons why we adjusted that ratio in the first place.

We still think that we have some opportunities for us to bring that ratio down.

As I talked about before, I think the Dental -- or the disability ratios continue to be high, reflecting the downturn in the economy, though we are seeing some improvement there.

And we haven't yet seen the full impact of the dental pricing changes working through into the benefits ratio.

So over time, our expectation is that that ratio will continue to trend down.

Great color.

And you want to give a little specifics or quantify that, or --?

You know, I think there's a number of things that will factor into that, including how quickly the economy recovers and how that will impact disability.

So at this time, I don't think I will get any more specific than what I said before.

Okay, fair enough.

Then just shifting over to operational excellence -- and Bill mentioned an expense ratio of 22.4%.

And then the low end -- I guess the guidance is 21.8%.

Maybe, Bill, just -- I guess you had got an additional $200 million of savings.

I think that's all done and maybe give us a sense of when you could get to that 21.8%.

Yes, you bet.

Well, we were actually at 21 -- in the first quarter, I think we were at 21.7%.

I think that's right -- so -- or we were right at the bottom of the range.

So, -- obviously it's a ratio, right, so you've got to look at the numerator and the denominator.

In terms of expense control, we are ahead of our plan and we are doing better than our budgets and our plans this year.

So we're very good about that.

Of course, what we can't control very well is the denominator, which is revenues, and obviously what kind of popped -- made the ratio go up a little bit this quarter is not because expenses went up -- it's because we had less closeout sales, which are obviously lumpy.

And, you know, that smooths over, you know, a year period, but in the short run, you can have lumpy quarters like the one we just did.

So in terms of real expense control, you know, we put out guidance that we raised our operational excellence guidance to $600 million at Investor Day 2009 last December.

And we're going to exceed that number.

You know, we're -- it's -- it's hard for me to say how much, but we're going to -- as you would hope, we would -- a number we put out, we would like to beat.

So, we're going to -- we're doing very well there.

And now, of course, you know, it's -- after this year, I think we start shifting our focus onto the Alico acquisition and taking costs out of there.

But I -- we won't -- I don't know if we'll have an OpEx [2] necessarily, but we're going to be continuing to drive expense control around here.

I think that's not just only through Alico, but through the rest of the Company.

So, I think there's more good news there to come in the future.

That's interesting.

And then just fastly, Steve -- Steve seemed a little -- somewhat optimistic about the outlook for commercial real estate.

I would love to hear a little color on just the overall environment for that and where you see that affecting Met's ratios that you discussed earlier.

Sure.

We've seen, I would say at a minimum, a bottoming out of certain sectors of the commercial real estate market and even a slight improvement.

And certainly, there are far more lenders going back into the arena right now, and mortgage rates are coming down fairly significantly.

So you are seeing activity pick up.

You are seeing improving lease-up rates and so on of buildings.

So I don't want to overstate it.

I'm not saying that there won't be other problems coming down the road because there's always a lag in this sector regarding a borrower who eventually can't pay off a mortgage.

But so the fundamentals of the business itself have improved slightly.

And I think that where things go from here will be largely driven by what happens in the overall economy.

So if we do have a slow recovery here, which I think is our position in terms of the most likely outcome, then you would anticipate that the market overall will improve along with the economy.

Were we to go into some sort of double dip, which we are not predicting, then, obviously, things could get worse.

Okay, thanks.

Andrew, this is Rob.

I always -- it's hard for me to be quiet on this topic.

You know, Steve is absolutely correct in everything he said.

I would say though that he's reflecting -- because the question is about our portfolio and our mortgage holdings and so forth -- I wouldn't -- I just wouldn't want to hasten to say that our experience is necessarily reflective of the entire marketplace.

It hasn't been in the past, and it won't be in the future, and I say that because we have very high quality properties, an extraordinarily strong real estate history and team, and so he's -- I think he's being a little modest.

So I would just put it that way.

Don't project that as a proxy to the entire marketplace, which is full of a lot of secondary market problems still, and might even trend a little bit worse in some of those markets.

So it's a reflection of market (technical difficulty) quality of properties as opposed to just a general -- thank you.

Exactly.

Randy Binner, FBR Capital Markets.

Thanks for letting me on.

Just interested in any thoughts we could get on Dodd-Frank bill specifically related to Volker.

And then derivatives -- on Volker, there was a broad carve-out for the insurance industry, but at least we're still not clear on whether or not your holdings of hedge funds in private equity might be affected.

And then just more broadly, kind of how you think derivatives might carry a higher cost going forward.

Let me sort of provide a little color and commentary, Randy.

You know, I -- last call, and I think the one before that, I talked about at least it was helpful for me to kind of differentiate thoroughbred racehorses from camels.

I made that comment, and at least some of the people down in Washington kind of liked it and said it was actually reflective of what it was all about.

So whether or not that's helpful for normal people I don't know, but it seemed to help the people in Washington.

Let me just give you a little flavor -- I mean the -- as I've said all along, the bill passes and now, relative to the insurance companies, the work is far from over, which is a good thing because the bill is full of bank language, full of bank processes and so forth.

And so the clarifications then work to differentiate the insurance marketplace.

And so, it's literally hundreds of rulemaking and regulatory projects that are going on.

To give you an idea, there are 199 separate rule-making initiatives.

There are 68 studies underway.

There are 355 issues on which lawmakers have given regulators the authority to issue the regulations, even if the regulations are not expressly required.

And keep in mind that some of the studies are done by agencies that do not even now currently exist, like the Financial Services Oversight Council, the Consumer Financial Protection Bureau, etc.

etc.

So, there's a lot of work to be done in the details, and because it is so important to us, other people may think that we would relax a little bit, and this is a time that we really have positioned ourselves both as a company directly and through the ACLI as a resource to all of these rule-making initiatives and wordings and so forth.

And so when it comes to things like, and this covers the Volker rule.

It covers derivatives.

It covers things like resolution authority fees, taxes, this and the other.

We are all very, very focused and very active here at MetLife in Washington.

So that's probably the best way to answer that question because it's very difficult to be more clear than that.

But we're not discouraged.

We're not discouraged.

We like this kind of slogging through.

That's kind of what we do very well.

But, I mean the Volker -- the Volker issue is a real issue, right, with the holding?

Well, you know, maybe Steve or -- might want to comment on that.

But the Volker issue is interesting because keep in mind where it started.

It starts with proprietary accounts.

The language in the original proposal did not, of course, contemplate nor think about insurance companies.

Therefore, the definition of what a proprietary account was, was not clarified.

And of course, if you left the language alone, it would have given us problems relative to the general account itself because a proprietary is everything other than an account owned by an individual.

As you know, individuals own contracts and policies with us in the general account; they don't own a specific investment.

So that was a starting place, and I will let Steve comment beyond that.

There is carve-out language in the Volker rule component of the bill.

It's somewhat vague.

And there's a six-month study that's been ordered by the bill.

But, we think that when people really work through the analysis here, they will realize that for us to invest in private equity funds, for us to invest in hedge funds with the capital requirements that are imposed upon us through our existing regulatory regime, certainly, it still makes sense.

So there's certainly no evidence to suggest any problems during this last crisis we went through related to these kinds of investments for insurance companies in their general account, again, given the risk-based capital rules that we live under and so on.

So my guess is that it will not affect us, but we'll have to wait to see how the six-month study sorts out, and we will certainly be involved in providing input into that process.

Very good.

Thank you.

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