大都會人壽保險 (MET) 2012 Q4 法說會逐字稿

Welcome to the MetLife fourth-quarter 2012 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.

As a reminder, this conference is being recorded.

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

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

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

MetLife 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 Mr. Ed Spehar, Head of Investor Relations.

Thank you, John, and good morning, everyone.

Welcome to MetLife's fourth-quarter 2012 earnings call.

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

Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the Investor Relations portion of MetLife.com, in our earnings press release and our quarterly financial supplements.

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 net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.

Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John Hele, Chief Financial Officer.

After their prepared remarks we'll take your questions.

Also here with us today to participate in the discussions are other members of management including Bill Wheeler, President of America's; Steve Goulart, Chief Investment Officer; Michel Khalaf, President of EMEA; and Chris Townsend, President of Asia.

Before we get I'd like to highlight that we will be including additional disclosures in our 2012 10-K on our variable annuity business and the sensitivity of earnings to a sustained low interest rate environment.

With that I would like to turn the call over to Steve.

Thank you, Ed, and good morning, everyone.

We are pleased to report fourth-quarter 2012 operating earnings of $1.4 billion, up 10% over the fourth quarter of 2011.

Operating earnings per share were $1.25, above the guidance range of $1.12 to $1.22 provided on the December 2012 guidance call, and 7% over the fourth quarter of 2011.

For the full year 2012 we reported operating earnings per share of $5.28, up 21% from 2011, and the operating return on equity of 11.3%.

We are very pleased with these results given the challenging macroeconomic environment.

John Hele will discuss our financial results in detail; I would like to highlight a few items.

First, despite growing pressure in the US from low interest rates, our investment spread margins were up in three of our four US business lines.

The strength of our investment spread margins reflects our prudent asset liability management and the benefits of our interest-rate hedge program.

We continue to manage the risks of low interest rates and take actions as appropriate.

Second, we continue to execute on the strategy that we outlined at our May Investor Day.

One of our cornerstone initiatives is to refocus the US business, which includes shifting or business mix away from market sensitive capital-intensive products to our protection oriented lower risk products.

On February 4 we introduced a new living benefit variable annuity product, GMIB Max V to replace GMIB Max IV for which is no longer being sold.

The biggest change between the two products is a reduction in the roll up rate from 5% to 4%.

We believe that the new product will improve the risk profile of our VA sales and generate a higher expected return on economic capital.

These changes are important components of our plan to reduce US variable annuity sales from $17.7 billion in 2012 to $10 billion to $11 billion in 2013.

Consistent with our strategy to grow emerging markets another significant development is our agreement to acquire AFP Provida, the largest pension provider in Chile from BBVA for $2 billion in cash.

MetLife is the number one life insurer in Chile and the Provida deal will further strengthen our market position.

Employees in Chile are required to contribute 6% of their salaries to a mandatory pension system.

Pension companies such as Provida charge an administrative fee on contributions, not assets under management.

As a result fee income does not fluctuate with market changes.

Provida is the number one player in the market with a 29% market share.

With this acquisition MetLife's operating earnings for emerging markets are expected to grow from 14% today to approximately 17%, which brings us closer to our 2016 target of at least 20%.

Also as a fee-based business Provida is consistent with our strategy of increasing our earnings from low capital intensity product offerings.

In addition to being an excellent strategic fit, the Provida acquisition is very attractive on a financial basis.

As I've said before, we strive to strike the right balance between growth, profitability and risk.

We are acquiring Provida for approximately 10 times projected forward earnings of roughly $200 million and anticipate that the transaction will be accretive to operating earnings by approximately $0.05 per share in 2013 and $0.15 per share in 2014.

While accretion from a cash acquisition is one metric to consider, it is not necessarily determined if the transaction creates shareholder value.

Therefore we modeled the long-term EPS impact of Provida assuming we finance the transaction using a mixture of 75% equity and 25% debt.

On this basis we forecast that the transaction would be essentially neutral for EPS during the first few years and then become accretive.

This analysis gives us comfort that the return on this transaction is likely to exceed our weighted average cost of capital.

In addition, I have also discussed our goal of improving the free cash flow generation of our businesses.

We estimate that approximately 70% of Provida's earnings will result in free cash flow available to our holding companies.

I think the merits of this transaction are clear.

It's important to note that the current regulatory restrictions on our ability to repurchase shares was not the motivation to acquire Provida.

We are doing this deal because it makes strategic and financial sense for our shareholders.

I want to close my prepared remarks with a few comments on the regulatory environment.

We are pleased that our de-banking process has progressed with the closing of the sale of MetLife Bank to GE Capital Retail Bank and we look forward to no longer being a bank holding company.

However, even after the de-banking process is complete, substantial uncertainty will likely remain on the regulatory front as we face the possibility of being named a non-bank systemically important financial institution, or SIFI.

As we've said in the past, we do not believe that our Company poses systemic risk to the financial system and we will continue to make that case to policymakers.

However, if MetLife is deemed to be systemically important, it is imperative that the final [prudential] rules be tailored to the life insurance business model, which differs dramatically from that of banks.

While it is our strong desire to return capital to shareholders, we will need to assess the regulatory environment before finalizing any share buyback program.

The assumption of no share repurchases in our 2013 guidance reflects this regulatory uncertainty.

We were asked on our December guidance call about our confidence in the share buyback assumption built into our plan through 2016.

As I stated on the call, I am not completely confident that we can do all of the assumed $8 billion of gross share repurchases through 2016 since it is dependent on external factors that are beyond our control.

During our May 2012 Investor Day we provided our goal of achieving an ROE of between 12% and 14% by 2016.

I want to provide some guidance on the sensitivity to this range of share repurchases.

If we were at to assume no share buybacks through year-end 2016 our estimated operating ROE target range for 2016 would be approximately 100 basis points lower than it is today, all other assumptions held constant.

Although we cannot predict what the future holds in terms of regulation and interest rates, we will continue to execute on our strategy and strike the right balance between growth, profitability and risk.

Finally, I want to assure you that our 64,000 employees around the world are working hard to deliver on our promises to our customers and to create value for our shareholders.

I am confident we will succeed.

With that I will turn the call over to John Hele to discuss our financial results in detail.

John.

Thank you, Steve, and good morning, everyone.

Today I will cover our fourth-quarter results, including a discussion on insurance margins, investment spreads, expenses and business highlights; I'll give you some color on the interest-rate disclosure Ed referenced and then conclude with some comments on our cash and capital.

To begin, MetLife reported operating earnings of $1.4 billion, or $1.25 per share, up 10% over the fourth quarter of 2011.

This quarter included a few notable items which I highlighted during our December guidance call.

These four items dampened operating earnings by a net $13 million, or $0.01 per share, better than the net $0.07 estimated in December.

Let me give you some detail on the four items.

The first was in our P&C business, higher than budgeted catastrophe losses of $70 million after-tax, primarily due to Superstorm Sandy, were partially offset by a favorable prior-year reserve development of $13 million after-tax.

The net impact was $0.05 per share.

The gross loss due to Sandy was approximately $150 million.

Adjusting for reinsurance recoveries and taxes the impact to operating earnings was $90 million.

Both the gross and net loss were within the estimated ranges provided in December.

The second notable item resulted from our annual assumption review.

The portion related to operating earnings was a net unfavorable $13 million after-tax or $0.01 per share.

In December we had estimated the assumption review would reduce operating earnings by $0.05 per share.

We had a net positive of $37 million from DAC unlocking and reserve changes.

The favorable unlocking related to our lower lapse assumption for VA was partially offset by negative unlocking for reductions in our general account and separate account return assumptions.

Also included is a one-time $50 million after-tax write-down and group voluntary worksite benefits of an intangible asset representing the value of customer relationships acquired, otherwise known as VOCRA, related to a small acquisition of a dental business in 2008.

I will provide an update of the below-the-line components of the assumption review in a few moments.

The third notable item was $23 million or $0.02 per share of reorganization costs.

Finally, pre-tax variable investment income was $376 million reflecting strong private equity returns.

After taxes and the impact of DAC variable investment income was $242 million which was $80 million or $0.07 per share above the top end of our 2012 quarterly guidance range.

It is also $0.02 per share better than our estimate provided in December.

Turning to our bottom-line results, fourth-quarter net income was $96 million, or $0.09 per share, and included net derivative losses of $855 million after-tax.

The net derivative loss in the quarter was primarily due to the mark-to-market impact of our VA program, including the update to our lapse assumptions of $342 million after-tax.

Additionally, the tightening of Met's own credit spreads during the quarter and the rise in long-term rates also contributed to the net derivative loss.

The net derivative loss was higher than we had estimated in December, but this is a difficult item to forecast as it's highly sensitive to capital market movements.

As a reminder, most of this impact is non-economic as a large portion of the liabilities that are being hedged are at essentially book value.

The total impact on net income for the DAC and other assumption review was $752 million after-tax, which was within the $600 million to $800 million range provided in December.

Most of the charge, or $739 million, was outside of operating earnings.

As noted in our December call, the charge relates primarily to changes in VA policy holder behavior lapse assumptions as well as general and separate account return assumptions for fixed income investments.

Book value per share, excluding AOCI, was $46.73 at year-end, below our December estimate largely due to the higher derivative losses and essentially flat year over year.

Operating ROE was 11.3% in 2012, up 120 basis points from 10.1% in 2011 and better than our 2012 plan of 10% to 10.6%.

Turning now to margins, underwriting was mixed but generally unfavorable this quarter.

The mortality ratio in retail life was elevated at 99% due to unfavorable experience in both V and UL and traditional life.

This result was higher than the target range of 85% to 90% and worse than the 81.1% ratio in the fourth quarter of 2011.

The mortality ratio in group life was 84.6% in the quarter, slightly favorable to the prior year quarter of 85.2% and below the target range of 85% to 90%.

Excluding a positive reserve adjustment, group life mortality was in the middle of our target range.

Group health morbidity experience was unfavorable in the quarter and I will provide more detail on this line shortly.

As you heard from Steve, investment spreads remained strong in 2012.

In the fourth quarter our investment spreads increased year over year and sequentially in corporate benefit funding, annuities and retail life and were down only modestly from the sequential quarter in group voluntary and worksite benefits.

You can see in our QFS that the spreads in the US business increased in 2012.

While variable investment income was strong last year our spreads excluding VII were mostly higher as well.

Spreads excluding variable investment income are not evident from our QFS, so let me provide some detail.

Deferred annuities was 284 basis points for the full year of 2012 versus 258 basis points in 2011.

Variable and universal life was 167 versus 105.

Group voluntary and worksite benefits was 237 versus 250.

Finally, corporate benefit funding was 112 versus 105.

While we expect investment spreads will decline in 2013, the resilience of our investment margins in 2012 illustrates that this is a manageable risk factor.

As Ed referenced earlier, there will be a new disclosure in our 10-K on the anticipated impact of sustained low interest rates on our financial results.

The low rate scenario in the 10-K is based on 1.69% 10-year treasury yield for 2013 and 2014.

This scenario contrasts with our plan which assumes the 10-year treasury gradually rises to 2.38% by the end of 2013 and then remains flat through the end of 2014.

The difference between the 10-K scenario and our plan translates to an estimated negative impact on operating earnings of approximately $45 million in 2013 and approximately $150 million in 2014.

The results for the 2013 low rate scenario are consistent with the guidance we provided on our December call and the new disclosure on 2014 highlights the relatively small incremental impact on earnings next year if rates remain low.

Turning to expenses -- the operating expense ratio was 22.4% for the fourth quarter and 23.8% for the full year of 2012.

This was better than our plan of 23.9% to 24.5% and our estimate in December.

Excluding the impact of pension and post retirement benefits and close outs the operating expense ratio was 24.5% for the fourth quarter and 24.1% for the full year of 2012.

This compares to the fourth quarter and full year of 2011 of 24.6% and 24.1% respectively.

I will now discuss some of the business highlights in the quarter.

Rather than go through every segment, I want to focus on areas where our results may differ from your expectations.

Therefore why comments will be on -- number one, retail annuities; two, group voluntary and worksite benefits; and number three, Asia.

Retail annuities had operating earnings of $462 million, an increase of $253 million from the prior year quarter.

Normalized earnings were $320 million in the fourth quarter after adjusting for a positive DAC unlocking of $133 million from our annual assumption review and variable investment income that was $9 million above plan.

On a normalized basis retail annuities earnings were up 30% versus the fourth quarter of 2011 due to growth in the business, interest on economic capital, lower DAC amortization and lower operating expenses.

Higher interest on economic capital reflects the increased amount of capital we are allocating to this business line.

Group voluntary and worksite benefits reported operating earnings of $167 million, down 30% year over year.

After adjusting for above plan catastrophe experience of $33 million, the Volker write down of $50 million and $36 million of other favorable items, normalized operating earnings were $214 million, down 11% versus the prior year.

The decline on a normalized basis was primarily due to an elevated group health benefit ratio of 91.6%, which was 89.7% in the prior year quarter and the targeted range of 86% to 90%.

The primary drivers of the higher ratio were long-term disability and long-term care.

In disability we saw higher average reserves on new claims and lower net closures partially offset by lower claim incidence.

In long-term care the benefit ratio was above plan due to higher average reserves on new claims, lower net closures and reserve adjustments.

Although long-term-care earnings are under pressure we believe this suggests only a couple of pennies risk to our 2013 EPS guidance.

While the group health benefit ratio was elevated for the quarter, the full year 2012 ratio was 88.6% and within our plan range.

With regard to statutory results, we completed our asset adequacy testing for 2012 and we will have no reserve strengthening in long-term care.

New York requires us to have a segregated account for long-term care was standalone cash flow testing.

This is a more stringent approach relative to other states and should provide comfort to our investors regarding the balance sheet for this business.

Turning to Asia, operated earnings of $198 million in the quarter were down 24% year over year.

Asia had negative DAC unlockings of $62 million, higher than we had estimated in December primarily due to changes in long-term lapse assumptions in Japan.

Adjusting for this normalized operating earnings were $260 million, down 1% year over year.

I know analysts and investors have concerns regarding the recent earnings for Asia.

The current environment for the region, most notably in Japan, has some challenges.

Since we developed our 2013 plan the yen has weakened materially and interest rates are lower than we had anticipated.

Based on those two factors our current operating earnings expectation for Asia will be close to the low end of our 2013 guidance range.

Specifically with regard to currency, we have hedges on our 2013 projected yen exposed operating earnings at strike prices above JPY90 to the US dollar.

These hedges are currency options which provide protection against the yen weakening above 90, but allow us to participate in the upside should the yen strengthened.

However, we are unhedged for the yen between 90 and our average plan rate of approximately 82.

It's worth noting that we remain disciplined in Japan.

There are more questions today on the profitability of various products and distribution channels in Japan with concerns relating to savings products and the bank channel.

In the fourth quarter our total Japan sales were down 1%, and this was driven by a 34% decline in our bank channel sales.

Our decline in the bank channel resulted from a conscious effort to maintain margins.

Finally, let me discuss our cash and capital position.

Cash and liquid assets at the holding companies were approximately $5.7 billion at year-end, slightly above our guidance call estimate due to the timing of certain cash flows.

We plan to use $2 billion from our existing cash and liquid assets at the holding companies to fund the Provida acquisition period, which was not contemplated in our guidance call out [look] for 2013.

Moving to our capital position, while we have not completed our risk-based capital calculations for 2012, we estimate our RBC ratio will be in the 450% to 475% range, which is above the 425% to 450% range we provided on our December guidance call.

We estimate that our Japan solvency margin ratio will be at the high end of our guidance range of 800% to 900%.

Our preliminary statutory operating earnings and statutory net income for our domestic insurance companies for the fourth quarter of 2012 were approximately $1.5 billion and a loss of approximately $200 million respectively.

Fourth-quarter operating earnings benefited from a favorable market, while the net loss resulted from a new statutory accounting treatment for certain partnerships and joint ventures.

This accounting change caused a shift from an unrealized loss to a realized loss and was neutral for capital and surplus.

For the full year 2012 statutory operating earnings were approximately $4.4 billion and statutory net income was approximately $2.8 billion.

Our total adjusted capital is expected to be approximately $29 billion as of December 12, up 5% compared to the prior year.

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

(Operator Instructions).

Jeff Schuman, KBW.

I was wondering if we could get a little bit more color about the international growth outlook.

If we look at the fourth quarter for 2012 as a whole, I think Latin America premium growth was pretty modest relative to your normalized expectations and yet I think you forecasted pretty big acceleration in 2013.

I'm just wondering if you can remind us why that is.

And I guess you did touch on Asia a little bit, but even before the recent devaluation your outlook there was I think for premium growth to decelerate quite significantly relative to what we have seen recently.

So maybe you can remind this kind of what the factors are there, please.

Hi, Jeff, it's Bill Wheeler; I will talk about Latin America.

So, revenue growth on a constant currency basis was about 4%.

We are forecasting -- I guess on a constant currency basis too -- 10% for next year.

We had very good sales volumes.

Our sales volumes in Latin America were up 26% year over year.

What held back the overall PFO growth rate was there's a couple of group cases that we have lost, one in Mexico, one in Chile, that are large, they weren't terribly profitable and so that has affected our top-line growth.

Now I think we have said this before on other calls, especially in the third quarter, the comparison, especially the one in Mexico, we lost at the beginning of this year, so that comparison will go away next year.

And Latin America, except for noise like these group cases, is I think more like a 10% grower.

And with regard to Asia, this is John, our bank channel was down, which is a large premium -- these are generally single premium product, so it is quite an impact when you look at the premiums, but we are seeing growth in the independent agency channels and other areas across Asia.

So we are pleased that we are remaining disciplined as we grow all of our channels.

That's helpful, thank you.

Mark Finkelstein, Evercore Partners.

Just a couple questions on Provida.

Should we assume that the 70% of GAAP earnings, which I think you characterized as $200 million, would you expect that to be fully dividended into the holding company?

We expect that to be a good distribution it may go to the international holding companies because it's in the international operations.

But we expect that to be available.

Okay and then just a few quick questions.

I think you characterized the returns on this as at least equal to your weighted average cost of capital.

I mean how should we think about the IRRs on this trade?

I would assume it would be above your weighted average cost of capital.

Should we look at this given growth, et cetera, as low-teens, mid-teens, high-teens?

How did you -- what is at the IRR that you are projecting on this?

We are looking at this at a mid-teen return.

And we think given -- that is a good return given the Chilean economy and environment, it is one of the best places to be investing in, if you call it an emerging market.

It is a very stable government and economy.

So we are very pleased with that type of return.

Okay, and then maybe just -- I guess just going back to the comment about -- that Steve made on buybacks and an impact going out to 2016 if there were zero buybacks.

Obviously the difference between zero and $8 billion is a very wide range, and I think it's helpful to frame out kind of what I would hope to be kind of a downside scenario.

But is there any feel for how we should be thinking about or moderating capital deployment expectations out to 2016?

I assume the answer isn't zero, but is there any feeling for maybe what management is kind of thinking about as a reasonable range?

I can't give you a lot of guidance at this very moment.

As things unfold here in the coming months I think we will be able to provide more clarity.

But we are still doing our analysis; we're still trying to understand the regulatory environment and what the capital rules may be going forward for us.

Unfortunately I can't give you more than that.

Okay and then just one final question if I may.

With the Provida acquisition and the free cash flow generated from that, is there any change in your view on the deleveraging that you are expecting as part of your capital model looking out to 2013?

No not really, I mean Provida will close sometime later on this year.

And it's uncertain when that might close, so it is hard to predict exactly the cash and earnings impact it would have in 2013.

Okay, all right, thank you.

Ryan Krueger, Dowling & Partners.

First question was could you just remind us of your operating EPS sensitivity to the equity market because I think that market is probably running 4% to 5% better than in your original assumption at this point.

For a 1% change in the S&P 500 it's about $0.01.

$0.01 in your (Technical difficulty).

In our EPS?

Yes, EPS, yes.

Okay, and then back to the group nonmedical health business.

When you gave the 2013 outlook were you fully -- did you kind of have all the information on the fourth quarter and some of the weakness that occurred -- was that factored into the outlook for 2013?

In terms of the group, the full year was within our targeted range.

So we still believe our targeted range is appropriate for 2013.

Okay, thank you.

Suneet Kamath, UBS.

First question just on the long-term ROE target, without buyback, the 11% to 13%.

I guess I'm pleasantly surprised that that is up from what you are doing -- what you did in 2012 at the midpoint.

So two questions on that.

First, what is the interest rate environment that is predicated in that 11% to 13%?

And then the second, in terms of the $8 billion of capital that you would not be buying back in this scenario, what is the return that you are getting -- or be assumption for the return that you are getting on that capital?

Thanks.

Let's go to the first question.

I think we have said that should rates remain generally flat we expect to be the lower end of that 12% to 14% with the buybacks and now without the buybacks your 11% to 13% range would be at the low end of that range.

And could you say the second question again, I didn't get that?

Just on the $8 billion of capital that you would not be using for share buybacks, what is the return assumption in this scenario?

Or how is that capital being used?

That is in a series of investments, so, it would be high-quality liquid investments (multiple speakers).

But it is like a bond return as opposed to like a --?

Yes, shorter term bond returns.

Okay.

And then I guess the other question on the VA DAC.

I think at the guidance -- on the guidance conference call you characterized half of the roughly $700 million impact being related to a change in your fixed income return assumption, your separate account growth model from I think it was like [7.5 to 7.25].

So I guess first is that accurate?

And then second, how does that return compare to your assumption for equity?

And then I guess related to that, if that 7.25 maybe has to come down again and because interest rates are rising and bond returns are falling, could we be looking at another sizable DAC hit at some point down the road?

Thanks.

So of the total charge about half was lapsed and a quarter returns and a quarter for other.

And with regard to this -- that is a separate account assumption, which is a blended assumption, which is an equity bond assumption weighting.

But people also have the opportunity to switch to a general account if bonds rise.

So -- if interest rates rise and bond funds go down.

So we are comfortable with this return.

Okay, and then just lastly on the comments that you made, John, about the year-end stats, net income versus operating income -- does any of that change the cash flow roll forward that you guys provided to us in terms of your outlook, the $3 billion to $3.5 billion of [superior] dividends, is that still in place or is this affected somehow by that net income loss?

No, this is within our range that we had expected.

Okay, thanks.

Jimmy Bhullar, JPMorgan.

I had a few questions, first on the Latin American business.

The reported earnings seemed close to level that they have been in recent quarters.

You didn't call anything out, but it seems like there was a tax benefit because on a pre-tax basis the earnings were a lot weaker than they have been in recent quarters.

And then for Steve, could you just discuss how Alico is tracking versus your initial assumptions?

Because if we look at Asia earnings, they have been weaker than expected the last few quarters.

You ended up taking a reserve charge this quarter as well.

And then finally on just your capital deployment for losses.

Assuming that you are able to do that just sort of as a bank holding company, would you want to wait for SIFI guidance before you do something with the dividend or buybacks?

Or could you raise the dividend even before the SIFI guidance comes out?

How would you view that assuming that you are able to (inaudible) just as a bank holding company over the next few months?

Thanks.

I hope I got all these questions, Jimmy.

On the Latin America business there was an $18 million tax benefit, it is in Latin America but it is offset in corporate, so it is not a total change to our normalized earnings.

If you could repeat the second question?

The second, just views on like how the Alico business is tracking versus initial assumptions -- given the weakness in Asia earnings recently.

So overall Alico is tracking well.

There are ups and downs and there are some of the markets that we are in in Alico that are tracking a little bit below our expectations, some of their markets were above.

So overall the Alico transaction is still very much on target for what we assumed going into the transaction.

We are very happy that we did the deal and think it is a very attractive transaction on many bases, strategic as well as financial.

In terms of our dividend, Jimmy, it's the same issue that we have around share buybacks.

We're going to assess all these factors, regulatory factors, we are going to talk to our Board obviously and get Board approval before we make any changes on our dividend.

So that still is to come.

Okay, and then just following up on Latin America, on a pre-tax basis what drove the weakness there in earnings?

Well, we have been growing direct marketing and a lot of the new business channels moving to more multiple distribution channels throughout Asia -- throughout Latin America.

And that has had some higher costs associated with that; direct marketing doesn't get DAC'd as much, so you have just higher fixed costs in the year.

Okay and I did notice that you added the P&C income statement, so I guess we could thank Ed for that?

You can definitely thank Ed for that.

Thank you.

Tom Gallagher, Credit Suisse.

A few questions for John.

Can you just explain again what was the driver of the statutory loss for the quarter and why with the loss RBC came in higher than expected?

Was there something going on -- some moving parts there?

Sure, so this was for an investment that we had that had unrealized losses and that was deducted from capital.

And there is a change in statutory accounting or an interpretation of statutory accounting where we are now reflecting more of this through net income.

So we moved from an unrealized loss to a realized loss through net income, but it was just a geography change to the income statement and had no impact on capital.

And did you say that -- was that limited partnership investments or what type of investments were those?

It was a joint venture and limited partnership type investment.

Got it.

And was that $1 billion or how big was that?

It is a series of them and it was about that amount.

Okay, thank you.

And then how -- why did the RBC go up?

Just from core favorable markets and good operating earnings.

Got it.

So the impact of the loss was I guess -- was that already being factored in when it was an unrealized loss and so it wasn't much of a change on the RBC?

I'm just a little confused as to why that wouldn't have --.

Yes, because it is not in your capital, it is not counted as part of your capital, it's an unrealized loss.

Understood, thanks.

The other question I had for you was on the variable annuity policyholder behavior charge, $342 million.

I guess just a general question on it.

How do we get confidence that you have taken enough on this?

We don't have any parameters to really measure this around, just that I guess you got more conservative, you lowered the lapse rate.

Because we have seen other competitors of yours with similar product structure take multiple charges.

So is there any way you can give us confidence that we are not going to -- this isn't the first of a series of charges?

Okay, well this was done after several years of study as customers who are in or close to the money get off their surrender charge period.

And we've had a few years of experience now.

We also participated in an industry study of almost -- many of the major players and our experience is tracking very well or almost exactly to that industry study.

So I think we are pretty comfortable with where we are now both -- we've had a few years of experience of this and how people behave as they get close to the money.

When we looked at this our assumptions were pretty good when people are well out of the money and well in the money, the curve or this dynamic lapse function where we had to adjust it was how people react when they get close to being in the money.

And people are in little more sensitive than we had all initially assumed.

We had benchmarked our original assumptions somewhat 10 years ago against people and we were pretty close to what others had done.

But we have now adjusted I think to be what the experience is truly coming out.

We had to wait until people got off their surrender charge period and also see people who might be closer in the money so you could really see the experience of how to calibrate this loss function.

But we have had not only our experience of a few years but also industry experience.

But, John, hasn't the progression been worse, meaning lapses just continue to decline on sort of a consistent basis?

And are you assuming continued shrinkage of the lapse rate or how should I think about that?

Well, it depends how people move in and out of the money and what happens to the equity markets and interest rate.

So it is quite dynamic in how we price this and reserve for it.

So it's not a simple answer that I can give you.

But we have reflected our experience and I think we are comfortable right now with where we stand on this function.

Okay, thanks.

John Nadel, Sterne, Agee.

A question for Steve.

I'm just curious if you could give us any color around what the process was like gaining approvals from -- in particular from the Federal Reserve for the Provida deal?

John, we weren't required to actually get an approval from any federal regulator on this, but we certainly talk to our regulators when there is any significant transaction we are engaged in.

So there was communication but there was not an approval process.

Yes, I understand that, I guess I am just wondering if there was any real back and forth, real questions about -- or any indication maybe as part of that dialogue as to what specific capital levels or specific ratios or items were of most concern to the Federal Reserve around this deal or around your capital levels?

Yes, I don't wish to speak about confidential conversations with federal regulators (multiple speakers) probably not a good thing to do.

I figured I had to give it a shot.

The incremental disclosure around rate sensitivity, in particular I guess around the annuities business, I understand -- so the impact on an operating earnings basis when we look out the next couple of years is relatively modest.

But you didn't really speak to anything below the line as it relates to DAC charges or reserve adjustments or any such thing.

I was wondering is there any help you can provide there, because I assumed we would see some impacts as well there.

Well, below the line if rates stay lower derivatives are going to be higher so we would have gains from where we are now.

So it is hard to predict what -- because a lot of this is noneconomic when you get to the net income side.

So, I guess we should just assume that below the line impact is at a 1.69% 10-year for the next couple of years of being essentially immaterial relative to your base plan?

No, the net income is quite sensitive to how markets move.

And most, the vast majority of this movement is noneconomic in nature.

The dynamic lapse function change we did to VAs, that was an economic change.

But the rest of it is really noneconomic in nature and I can't predict how this is going to move quarter to quarter.

Okay, last question is just thinking about the annuity segment in the core earnings.

If I look back at the last several quarters and then look at fourth-quarter, you are suggesting to us that the core earnings level for this segment has increased from the first three quarters of the year somewhere around $240 million average rate -- average quarterly earnings level to now $320 million in the fourth quarter.

And if we were to run rate off of a $320 million, that puts your guidance for the annuity segment for 2013 at -- I think it clearly indicates that guidance would be very conservative.

So is there something still inside the fourth-quarter core number that we should be thinking about as not something that is going to recur as we move forward?

Well, the retail annuity business has a lot of ups and downs; it is sensitive to the marketplace and what goes on in that business.

So we are not updating our guidance on that at this time.

Well, sorry to -- I mean the first three quarters of the year though on a core basis, the volatility in those earnings was not nearly as severe.

I guess to the extent that there is any help you can provide it would be appreciated.

We are not going to update our guidance at this time.

Thank you.

Chris Giovanni, Goldman Sachs.

I guess you guys are doing a good job slowing down the run on of VA sales, but curious if you are considering any strategies to accelerate the runoff of VAs either through buy out programs or if there are any structures or vehicles out there that you would explore?

Hi, Chris, it's Bill Wheeler.

We aren't -- I think our strategies about VA is obviously we are driving down GMIB sales and we're making product changes to do that.

I think you will see us make some announcements about new product introductions later this year and that will -- as we sort of change the character of that business.

In terms of buying out in-force -- we have examined that, we have looked at what others have done.

I don't think that is an option we are considering at this time.

Okay.

And are you still committed to GMIB product or would you consider other living benefit features?

Well, I'm not sure this is well appreciated.

We sell more than a GMIB today; we sell a healthy amount of lifetime withdrawal benefit.

And I think what you're going to see going forward is a much more diverse annuity new business model going in terms of what we are going to sell.

Okay, and then just one quick follow-up just on the returns of the new 4% rollup rate versus what you were selling before.

How much different are your expected returns?

Well, so, GMIB IV with the 5% rollup rate with the lower dollar for dollar had an ROI in the fourth quarter of about 15.8%.

And GMIB V with the 4% rollup rate has -- our ROI modeled is over 18%.

So it is a meaningful jump.

Okay, thanks.

And then one just quick question for John.

I guess book value ex AOCI is up just $0.04 year over year and it has grown I guess just 3% since 2008.

So what can be done to accelerate the growth in book as your hedging strategy to protect economic capital versus maybe smoothing GAAP results really just put you at the mercy of below-the-line charges that are kind of out of your control?

Well, clearly it moves around a lot and we just have to continue to focus on it.

And it's one of those metrics I think that it's even hard year over year to look at; you have to look at it over a long-term time horizon.

But we want to make sure that you know that we have it in our sight and we are -- we will -- slowly over time we believe that this can improve.

Okay, thanks so much.

Sean Dargan, Macquarie.

Following up on the notion that book value ex AOCI is not growing much, your long-term ROE target, is that impacted at all by book value perhaps being lower than where people were thinking about at the time of your Investor Day?

No, other than for the adjustments we have already announced in terms of the goodwill.

Okay, just thinking about long-term care, are we correct to think that if interest rates stay where they are and mortality and utilization is consistent with what you saw in the fourth quarter, in that scenario there would only be a couple of penny impact to 2013 EPS?

Yes.

Thank you.

John Hall, Wells Fargo Securities.

This question is for Steve.

And as I think about the de-banking process, I guess the way we think about it it's ultimately going to occur and then you must also be planning in some fashion for it to occur.

So I guess the question has to do with do you have sort of a series of contingency plans about the de-banking process that when you get actual word of it you can move quickly depending upon when that word comes, whether it is perhaps two weeks from now or six months from now?

We are obviously planning for it and there is still some work being done on our side in terms of assessing the regulatory landscape.

We do get insights on an ongoing basis, that is why I'm reluctant at this point in time to make any pronouncements around share repurchases, dividend changes and the like because the landscape does evolve.

And until we get to that point when we are able to take capital actions we don't think it is prudent for us to make pronouncements that may end up changing over time.

Understood, but say you got word in two weeks; do you have a contingency plan to roll forward to the Board on whatever your decision would be?

We have ongoing conversations and have for many quarters with our Board on these issues.

So it is not as if we are going to start with them in a few weeks to have this discussion.

But we are doing a lot of analysis internally around all kinds of measures that can impact us from a capital perspective and that has to be taken into account as we decide how we address the issue of capital.

Okay, great.

Thank you very much.

Eric Berg, RBC Capital Markets.

Two questions.

First, admittedly the Europe and the Eastern Europe or Europe, Middle East and Africa business is the smallest of your three international units.

But there too there seemed to be a revenue issue in the quarter on a constant currency basis.

I think the revenues were flat or down very, very -- essentially flat.

What is happening there?

And then my second question relates to Japan.

I'm just hoping you can provide additional detail on the nature of the products that are subject to this intense competition that you referenced, is it -- and the nature of the competition.

Is it pricing, is it terms?

And who is proving to be the troublemaker here?

Is it indigenous companies, is it foreign competitors?

Thank you.

Let me answer the question on Europe.

We stopped selling in the UK annuities so we are down $57 million year on year in PFOs and that in sales, so that makes a difference.

We also have weakness in Western Europe, but that has been offset by strong growth in Russia, Turkey and also the Aviva acquisition.

So it kind of balanced out some negatives with some positive and that is why you are seeing it sort of flattish.

Actually before we go on to -- I appreciate that.

Just one quick question about those premium fees and others that you referenced.

I am just wondering, given the transition that Met is affecting away from high capital intensive products -- let's just say given the transition that you contemplate and that you are beginning here towards more say insurance products, you continue to publish the statistic and highlight it which suggests to me that you think it is important.

But I am just wondering whether you are giving thought to and whether you might go in the direction of looking at total operating revenues if investment income figures -- if in fact it will be the case that investment income will figure increasingly prominently in your revenue mix.

I just don't know and I would like to know how you are thinking about that.

Well, we'll take that under consideration, but I think we are comfortable now with how we record our revenue.

Okay, and if you could just talk about Japan a little bit I would be grateful, thank you.

Actually I missed your question, could you repeat Japan?

Sure, so earlier in the conversation that was the discussion about -- I think there was reference to certain competition in the bank channel, and I was just looking for a little bit more detail about the specific products that are subject to competition.

Is it explicit pricing, is it other terms on the contracts that are the subject of the competition and who are proving to be the troublesome competitors?

Is it indigenous companies or is it your foreign competitors?

Okay, what is sold in the bank channel are mainly single premium style products both in yen, US dollar and Australian dollar and some other currencies.

And of course as interest rates move throughout 2012 these products can become more or less attractive.

And you have to be very careful with these product lines; you have to adjust your crediting rates quickly and if you don't you can get a large volume of lower ROE business.

And so we have been diligent in ensuring that the business that we do sell to the bank channel meets our profitability hurdles.

Let me just answer (inaudible), it is Chris Townsend here.

So as John referenced the minus 34% in the bank channel earlier, I think the way for you to look at Japan would be look at the breadth of distribution and product that we have.

So while the bank channel is down I assure you that we are growing very fast in terms of the A&H product through the bank channel.

We grew that at 76% for the quarter and we are selling A&H through 40 different banks at the moment in Japan.

And also our independent agency grew at about 26% for the quarter.

So we have got different levers to pull to make sure we are adhering to the discipline that both Steve and John referenced earlier.

Thank you.

Eric, let me just make one other comment, this is Steve.

When we did our Investor Day in May of last year we did not give guidance on the top line and that was very intentional.

And that was a signal of a shift in thinking at our Company about what we should be focusing on in the near-term as we look at our strategic initiatives, as we try to refocus our business on markets that we think will create shareholder value for us.

So, it is not that we don't have internal targets on top line, but we are trying to signal -- we are not going to run this Company based up on the top line, drive sales that may end up being sales that come back later and with low ROEs for us.

And that is I think a cultural shift here.

And again, we are looking to grow our business, but we are looking to grow it profitably.

We are looking to get business on the books that is in excess of our cost of equity capital and that really is the driving force here for us.

That's a helpful addition, thank you, Steve.

Steven Schwartz, Raymond James.

If I could just quickly and then go into some other things.

Chris, maybe you could touch on the A&H business in Japan.

I think AFLAC came out and said April 1 they are going to hold their rates steady.

I think Sumitomo said that they were going to lower rates 3%.

What is Met doing come April 1?

We priced a 15% (inaudible) ROI and that is consistent across all of our product range including A&H.

Okay, so no change there.

If I may, Steve, a little bit of a conflict I have here in my thinking.

Most companies would say I've got $8 billion to deploy; I'm going to deploy that through either acquisitions or through share repurchase.

You don't -- is it fair to say you don't see it like that?

That you don't think that $2 billion for Provida comes out of that $8 billion?

I think it does.

I mean we have X amount of capital available to either make acquisitions with or to do share buybacks or to raise our dividend, yes.

Okay, so I guess I don't -- I guess I don't get the downside guidance of if we don't do this $8 billion; shouldn't it be if we don't do the $6 billion?

What we did have baked into our guidance for 2000 -- through 2016, the plan, some acquisition activity.

Some was in there, it wasn't any super large deals but there was some ongoing acquisitions that we assumed in that plan.

Okay.

John, if you could, I don't know -- you guys haven't done this before, I don't think, but it might be worthwhile in this case if you are willing.

A point on the actual to expected in individual life, what is that equal to in earnings?

I think the one point is about $2 million.

One point is about $2 million, okay.

And then finally, the guidance that you gave -- it was a little unclear, the guidance that you gave on the interest rate assumption, that was cumulative?

So it was [45] in the first year going up another [95], so that was a cumulative thing, that wasn't another [150]?

[150] is the combined number.

Okay, great.

That's what I wanted to know.

Thank you very much.

Okay, thank you very much for joining us.

Have a good day.

Ladies and gentlemen, that does conclude your conference.

Thank you for your participation.

You may now disconnect.