大都會人壽保險 (MET) 2014 Q2 法說會逐字稿

Welcome to the MetLife second-quarter 2014 earnings release conference call. (Operator Instructions).

As a reminder this conference call 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.

Including in the risk factors sections of those filings MetLife specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of new information, further developments or otherwise. With that I would like to turn the call over to Ed Spehar, Head of Investor Relations. Please go ahead, Sir.

Thank you, Stephen, and good morning, everyone. Welcome to MetLife's second-quarter 2014 earnings call.

We will be discussing certain financial measures not based on generally accepted accounting principle, 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.

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

I would like to remind you that during the Q&A session we request you limit yourself to one question and one follow-up. With that I'd like to turn the call over to Steve.

Thank you, Ed, and good morning, everyone. Last night we reported second-quarter results with operating earnings of $1.6 billion. Earnings benefited from strong investment margins and a favorable market environment but were negatively impacted by weak underwriting results.

Operating earnings were essentially flat relative to the second quarter of 2013. Operating earnings per share were $1.39, a 3% decrease from the prior-year period. Performance on a per-share basis was dampened by the conversion of equity units issued in 2010 to fund the acquisition of ALICO.

The final $1 billion tranche of equity units will convert in October of this year. Operating return on equity was 11.4% in the quarter.

Investment margins were favorable in the second quarter. Variable investment income was strong driven by bond prepayment fees. And recurring investment margins were stable even though interest rates were 50 basis points below what we had assumed at the beginning of the year.

Despite low interest rates investment margins had been resilient for three main reasons -- effective asset liability management, good variable investment income and income from derivatives many of which were purchased in the mid-2000s to protect earnings in a low interest rate environment. Second-quarter operating earnings were also helped by above-average equity market returns. Results this quarter highlight the value of our balanced business mix as strong investment margins in outperformance and market sensitive lines of business help offset unfavorable underwriting result in certain protection lines of business.

I'd like to comment specifically on disappointing underwriting margins in our group, voluntary and worksite benefits and retail life and other segments. Second-quarter earnings for group, voluntary and worksite benefits were below expectations. The shortfall in the segment was primarily driven by results in disability and dental.

In disability claim severity and an operational issue at one claims management center location led to the underperformance this quarter. Claim severity was 3% above expectations.

As for the operational issue we have brought in new leadership and additional resources to improve claims management. We expect the issue to be corrected by yearend.

In dental we believe that above-normal utilization in the second quarter reflected the rescheduling of first-quarter dentist appointments that were canceled due to the unusually harsh winter. Please recall that we noted low utilization on our first-quarter earnings call.

On a year-to-date basis dental utilization is in line with plan. Weak underwriting margins were also an issue in retail life and other. While the second quarter was characterized by adverse mortality the recent trend illustrates that mortality fluctuations can generate both positive and negative surprises to earnings.

For example, retail life and other exceeded our plan in the third and fourth quarters of 2013 when mortality was favorable but fell short of our plan the past two quarters due to unfavorable mortality after adjustments. The timing of large life claims can create earnings volatility in the segment. In the second quarter we had one large claim associated with the death from a tragic accident that reduced earnings by $13 million after-tax, or $0.01 per share.

Moving to capital management. I would like to provide an update on MetLife's program to repurchase up to $1 billion in common stock which we announced on June 10. Through yesterday we have repurchased $135 million of stock at an average price of $55.46 per share. Share repurchases were insignificant in the second quarter given the commencement of the program in late June.

As mentioned when we announced the repurchase program, we will be an opportunistic buyer of our shares. Finally, I would like to comment on the regulatory environment. Uncertainties surrounding potential new regulation is the biggest issue facing MetLife today.

However, policymakers in Washington are increasingly aware of the need to tailor the prudential rules for insurance companies. Our position on whether MetLife should be designated a non-bank systemically important financial institution, and if so what rules should apply, has been consistent.

First, MetLife should not be named a non-bank SIFI by the Financial Stability Oversight Council because we do not meet the Dodd-Frank Act's criteria for designation. While MetLife is a large financial institution, financial distress at the Company would not pose a risk to the financial stability of the United States. We are simply not interconnected enough with the rest of the financial system.

Second, for any insurer designated as a non-bank SIFI or otherwise regulated by the federal reserve the related rules should be appropriate for the business of insurance. I am encouraged that members of Congress have shown broad bipartisan support for a legislation to accomplish this goal.

On June 3, the U.S. Senate unanimously approved a targeted amendment to Dodd-Frank clarifying that the Federal Reserve has the authority to tailor capital rules for insurance companies. Companion legislation in the U.S. House of Representatives already has 182 co-sponsors, 103 Republicans and 79 Democrats.

In addition, in a congressional hearing earlier this month, Federal Reserve Chair, Janet Yellen, called the legislation useful and said that it would, quote allow us greater latitude in tailoring appropriate regulations. We are hopeful that legislation will be enacted into law this year. Imposing bank-centric capital rules on life insurance companies would make it more difficult for Americans to buy products to help protect their financial futures.

At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, public policies should preserve and encourage competitively priced financial protection for consumers. In closing, I would reiterate our view that MetLife's second-quarter results highlight the benefit of the Company's diverse business mix. Strong investment margins and a favorable market environment helped mitigate the impact of a challenging underwriting quarter.

We are also pleased to be repurchasing shares again, something MetLife had not done since early 2008. We understand that returning capital is a key driver of shareholder value over time.

And while we continue to take a conservative approach to capital management in light of regulatory uncertainty, I am encouraged by the growing appreciation that the Federal Reserve should have rules that are appropriate for the business of insurance. 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. Today I will cover our second-quarter results including a discussion of insurance margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash and capital.

Operating earnings in the second quarter were $1.6 billion, essentially flat year-over-year, and operating earnings per share were $1.39, down 3% year-over-year. This quarter included three notable items.

First, in retail life we had a reserve adjustment to correct the treatment of the disability waiver writer in a number of term life contracts. This benefited operating earnings by $56 million after-tax, or $0.05 per share.

Second, in our PNC business, we had higher-than-budgeted catastrophe losses of $28 million after-tax, which is partially offset by favorable prior-year reserve development of $7 million after-tax. Therefore the net decrease to operating earnings was $21 million, or $0.02 per share.

Finally, pre-tax variable investment income was $342 million reflecting higher bond prepayment fees. After taxes and the impact of DAC variable investment income was $221 million, which was $11 million, or $0.01 per share above the top end of our 2014 quarterly guidance range.

Turning to our bottom-line results, second-quarter net income was $1.3 billion, or $1.17 per share. Net income was $255 million below operating earnings in the quarter. Notable items that explain most of this difference are number one, charges of $104 million after-tax associated with asymmetrical accounting treatment for insurance contracts; number two, net investment losses of $81 million after-tax; number three, a loss of $62 million after-tax related to certain variable annuity guarantees where the hedge assets are more sensitive to market fluctuations than the GAAP treatment for guaranteed liabilities; and number four, partially offset by derivative net gains of $71 million after-tax and other adjustments which reflects the decline in interest rates in the quarter.

Book value per share excluding AOCI was $50.14 at June 30, up 2% from $49.34 at March 31.

Turning to second-quarter margins, underwriting in the Americas was less favorable than the prior-year quarter and plan. The mortality ratio in group life was 87.3% versus 86.5% in the prior-year period. Severity was up year-over-year but improved 6.3 points sequentially.

We believe results this quarter were within the range of normal quarterly fluctuations and are in line with the second-quarter results over the past several years. Retail life also had an unfavorable mortality quarter due to severity. The interest adjusted benefit ratio in retail life was 48.9% reflecting the 6.3 point benefit as a result of the disability waiver reserve adjustment.

Excluding this notable benefit, retail life's interest adjusted ratio was 55.2%., unfavorable to the prior-year quarter of 53.6%. We believe second-quarter results reflect normal earnings volatility for this business. While the first two quarters of 2014 were characterized by poor mortality the last two quarters of 2013 had favorable mortality.

As a result, our fourth-quarter average is in line with our long-term mortality results. Non-medical health interest adjusted loss ratio was 82.6%, unfavorable to the prior-year quarter of 80.0%. Disability underwriting results were unfavorable to the prior year due to the lower net closures of existing claims and slightly higher severity.

Dental margins were unfavorable to the prior year driven by higher utilization. On a year-to-date basis we remain on plan for the dental business.

Underwriting in long-term care improved year-over-year primarily driven by premium rate actions. In our PNC business, the combined ratio including catastrophes was 107.5% in retail and 96.4% in group. The combined ratios excluding catastrophes were 83.6% in retail and 86.8% in group.

Despite the higher catastrophes overall PNC underwriting results were favorable to the prior-year quarter primarily due to the lower non-catastrophe accident year losses and prior-year development. Finally in Latin America, underwriting results were unfavorable due in part to notable items including the reserve, a reinsurance true-up and litigation reserve as well as some higher claims experience in Mexico worksite marketing. Year-to-date our Latin America business remains on plan.

Moving to second-quarter investment margins, the simple average of the four US product spreads in our QFS was 221 basis points, which was down 23 basis points versus the prior year. Product spreads excluding variable investment income were 195 basis points, down 20 basis points versus the prior year.

Our investment margins have remained at attractive levels despite a multiyear period of low interest rates. The current rate environment has been relatively consistent with the low rate stress scenario we discussed in our 2013 10-K. However, the negative impact on operating earnings in the first half of 2014 has been modestly smaller than what we would have anticipated.

With regard to expenses, the operating expense ratio was 23.2% in the second quarter as compared to 23.4% in the year-ago quarter. Gross expense saves were $211 million in the second quarter and net saves were $149 million, after adjusting for a reinvestment of $15 million and one-time cost of $47 million.

We were pleased with our expense performance and remain on track to deliver gross saves of $830 million to $860 million in 2014 and $1 billion in 2015 with net saves of $600 million in 2015. I will now discuss the business highlights in the quarter. Retail operating earnings were $652 million, up 12% versus the prior year and up 6% when adjusting for notable items in both periods.

The notable items include the reserve adjustment in this quarter as well as excess variable investment income, higher catastrophes and favorable prior-year development in both periods. Retail premiums fees and other revenues were $3.3 billion, up 8% year-over-year due to separate account growth and higher income annuity sales. Life and other reported operating earnings of $253 million, up 19% year-over-year and up 1% after adjusting for notable items in both quarters.

The primary drivers were lower expenses offset by less favorable underwriting. Annuities reported operating earnings of $399 million, up 8% versus the prior year. The primary driver was higher fees from separate account growth due to favorable equity market performance.

Group, voluntary and worksite benefits, or GVWB, reported operating earnings of $205 million, down 25% year-over-year primarily due to less favorable results in disability and dental. GVWB premiums, fees and other revenues were $4.3 billion, up 6% due to business growth and experience-related adjustments on participating group life contracts.

Corporate benefit funding reported operating earnings of $374 million, up 8% year-over-year driven by higher investment margins as well as favorable expense margins. Premium fees and other revenues were $816 million, up 29% year-over-year due to increased structured settlement sales and pension closeouts.

Latin America reported operating earnings of $160 million, up 28% year-over-year and up 40% on a constant currency basis. These results reflect the ProVida acquisition, which continues to perform well.

Operating earnings for ProVida were above expectations this quarter primarily due to favorable Encaje returns. Adjusting for ProVida, operating earnings were down 10% year-over-year on a constant currency basis due to one-time items and unfavorable underwriting partially offset by growth in the region.

Looking ahead we expect tax reform in Chile to be passed in the third quarter. As discussed at our June Investor Day, the proposed tax rate change is an increase from 20% to 25% phased in over a four-year period. As a result, we anticipate a one-time charge related to the reduction of a deferred tax asset.

This one-time charge is expected to reduce Latin America operating earnings in the third quarter by $40 million to $70 million. In addition to the one-time charge, we believe that 2014 Latin America operating earnings will be dampened by approximately $10 million with most of that reduction in the third quarter.

Premiums, fees and other revenues were $1.1 billion, up 16% year-over-year, 27% on a constant currency basis and 18% excluding ProVida on a constant currency basis. The strong growth was due to higher premiums related to a government group life policy sale in Mexico, higher annuity sales in Chile and direct marketing in Argentina.

Turning to Asia, operating earnings were $319 million, down 3% year-over-year and down 1% on a constant currency basis primarily reflecting the weakening of the yen. On a constant currency basis lower surrender fee income from foreign currency denominated fixed annuities in Japan essentially offset business growth in the region and favorable one-time tax items in the current quarter.

Premiums, fees and other revenues were $2.3 billion, down 5% year-over-year and down 2% on a constant currency basis also due to the lower surrender fee revenues in Japan. Asia sales were down 12% year-over-year as pricing actions in Japan that we've noted on prior calls caused a decline in life sales and a related decline in accident health sales as A&H is often packaged with life products.

Sales were strong elsewhere in Asia primarily driven by A&H sales in Korea and China.

In EMEA, operating earnings were $93 million, up 37% year-over-year and 41% on a constant currency basis. The key drivers in the quarter were business growth across the region and one-time favorable items including taxes of $7 million and a $5 million benefit to operating earnings as a result of eliminating an accounting lag to adjust our businesses in Poland and Slovakia onto a calendar year basis.

We would expect a comparable benefit to EMEA operating earnings over the next couple of quarters as we eliminate the lag accounting in other countries. Premiums, fees and other revenues were $712 million, up 3% year-over-year and 1% on a constant currency basis driven by growth in UK, Russia, Turkey and the Gulf. Excluding divestitures, mainly Belgium and the negative impact from the Poland pension reform, PFOs were up 6%.

Sales for the region increased 3% with emerging markets up 10% driven by growth in Poland and Turkey. Finally, the loss in corporate and other was $213 million after-tax. This line is volatile and we think that the second-quarter loss was above a normal level.

As you model our results for the balance of the year I would suggest you consider the average of the second-quarter loss of $213 million and the first-quarter loss adjusted for notable items of $156 million. I will now discuss our cash and capital position. Cash in liquid assets at the holding companies were approximately $5.5 billion at June 30, which is up from $4.7 billion at March 31.

The increase from prior quarter was driven by approximately $900 million of subsidiary dividends. We issued $1 billion of 10-year senior debt in the quarter to fund debt maturities and redemptions. Also in the quarter we paid our quarterly dividend and funded the closing of the Malaysian joint venture as we discussed at our June Investor Day.

Next I would like to provide you with an update of our capital position. As you know, we report US RBC ratios annually so we do not have an update for the second quarter.

For Japan our solvency margin was 966% as of the first quarter of 2014, which is the latest public data. For our US insurance companies preliminary second-quarter statutory operating earnings were approximately $1.1 billion, up 72% from the prior-year quarter and net income was approximately $900 million, up five fold.

The year-over-year increase in statutory operating earnings was primarily due to changes in reserves including a portion related to the disability waiver, higher separate account fees and favorable interest margins partially offset by lower underwriting results. In addition to higher operating earnings the increase in statutory net income year-over-year was also due to lower derivative losses.

Our total US statutory adjusted capital is expected to be approximately $28 billion as of June 30, up 7% compared to December 31. In conclusion, MetLife had a solid second quarter. Investment margins remain healthy, expenses are well-controlled and we continue to focus on generating profitable growth.

While operating earnings were dampened by weakness in underwriting, we believe results reflect the normal volatility in our business. In addition, our cash and capital position remain strong providing us with the flexibility to be opportunistic in managing capital as we seek to maximize shareholder value. And with that I will turn it back to the operator for your questions.

(Operator Instructions). Ryan Krueger, KBW.

Hey, thanks. Good morning. I wanted to touch on the group underwriting results.

I think for a variety of reasons they've been a bit soft for a few quarters now. Certainly heard your comments about looking to fix the claims management in disability.

I guess the question is, at this point do you still feel comfortable with the intermediate-term outlook that you provided in December, which I think called for the midpoint of your underwriting target ranges? Or should we be revising that to be slightly weaker going forward?

We forecasted an improvement in underwriting results year-over-year, 2013 to 2014. And we gave those guidance ranges for group life and nonmedical health. And my -- and obviously group life this quarter reverted back to the middle of the guidance range.

My expectation is that with nonmedical health, while it was at the top and just above the top end of the guidance range of 77 to 82, that it too will fall in the second half of the year and move back inside the guidance range. Will it get all the way to the midpoint? I'm not sure yet but I do expect the ratios to improve in the latter half of the year.

Okay, great. Thanks. And then a few weeks ago there was some proposed backstop capital requirements that were released for global insurance SIFIs, which I know doesn't have direct supervisory authority but would appreciate any reaction you had to those.

I think those proposed rules are encouraging. They reflect the insurance business model and they dealt with the basic capital requirements that IAIS was proposing.

And our hope is that that approach is taken up as well in the United States in terms of putting together an approach that provides the right kind of capital standards for insurance companies using an insurance framework, not a bank framework. However, I think I would still caution people that there are other aspects to this capital regime that is being -- which is evolving right now.

And there are these higher loss absorbency standards that will apply for globally systemically important insurers. And we haven't really seen a lot on that yet. So really more to come.

Okay, great. Appreciate it. Thanks.

Nigel Dally, Morgan Stanley.

Great, thanks. Just a question on Latin America, I understand you had the adverse mortality in Mexico but it still seems like our results this quarter are still under some pressure, so hoping you can provide some additional detail as to what is driving that.

So question on Latin America, I understand you had the adverse mortality in Mexico but still seems like result even excluding that were under some pressure. So hoping you can provide some details as to what is driving that. Is it a reflection of the more volatile markets, spending on growth initiatives, any color there would be helpful?

Sure, Nigel, so a little color on Latin America in terms of the underperformance. So as John Hele mentioned, we had both relatively weak underwriting in our Mexican worksite marketing business.

Now this is a business we have obviously been running for a long time and it's actually very steady. But we do see some movement in volatility and mortality volatility. And we had a blip up this quarter.

So that obviously was a big portion of the difference versus expectations. As I think was also mentioned, we had just a group of I would say smaller, one-time adjustments, things like a reinsurance true-up, a litigation reserve, in total they would have been something in the order of $10 million to $15 million after-tax in terms of results.

So I think when you kind of reflect both of those variances in the quarter, you realize that otherwise Latin America had a relatively good quarter, or recorded near expectations. And obviously a big part of that is ProVida and ProVida obviously is doing very well and had a very -- I don't know how unusual I would call it, but certainly a strong quarter with Encaje performance.

Great, thanks. Then just a question on long-term care.

One of your peers saw a sharp increase in severity. I know that you actually had improvement in underwriting results from the previous year. But any shift that you are seeing with regards to severity trends, which potentially could emerge as a concern for your operations?

Nigel, could you repeat the last part of that question, please?

Sure. Any shifts in severity that you are seeing across your operations which potentially could emerge as a concern?

According to long-term care we have not seen any major changes other than what we have been expecting as we have seen an increase in earnings. And we are getting the rate increases that we had assumed generally that we had hoped to get. We don't get it in every state but it is according to our plans that we have laid out so far and so it's really where we had expected it to be.

Great. Thanks.

Tom Gallagher, Credit Suisse.

Good morning. First just a quick question on the disability claims handling issue.

Steve, you had mentioned that you would expect that to be corrected by the end of the year. So does that imply that we are going to see margins overall in the group business remain on the soft side, meaning are we likely to see disability loss ratios remain high there for the next couple of quarters here?

I do think disability results will improve even in the third and fourth quarter. Again they probably won't get back to our original expectation that we laid out last December though we didn't obviously mention disability specifically.

But I do think disability will probably improve in the third and the fourth mainly because of some IBNR reserves we put up in the first and second quarter and those won't reoccur in the third and fourth. And so given everything else that should see some improvement our way. But I think it's right that in terms of the operational issue and then its impact on our financials you won't see an improvement really until 2015.

And Bill, how material were those odd IBNR reserves you put up in 1 and 2Q for disability?

Well, they only explain a part of the variance in our disability performance. I would say if you think of the other reasons that Steve laid out with regard to claim severity and also our operational issue, it would be the third of the three reasons.

Okay. And then just my follow-up is, on the corporate side the loss this quarter was above the high end of guidance if you just spread it out and looked at it on a quarterly basis. So I guess for John, should we still take the initial guide that you put up on corporate other to be a reasonable range, meaning are we likely to see the corporate other experience in the loss shrink meaningfully from current levels, any help with that?

Sure, so corporate is a very hard thing to forecast, obviously, and there's a lot of pieces in there. This quarter we said was above what we think is a normal run rate. We had some one-time expenses with various cost-saving programs.

We had a tax booking in there that was more a timing issue. So what I said in my text was that if you take this quarter the $213 million and the first quarter adjusted for notable items we talked about in the first quarter, that would be $156 million, and just sort of average at we think that would be the more appropriate run rate.

Okay, that's helpful. And actually if I could just sneak in one more for Bill Wheeler, a competitor of yours reported exceptionally strong sales in their group business last night. Can you talk a little bit about what you are seeing on the sales front in the group business whether it's life insurance, disability or dental?

I would say that the environment is okay and is constructive. I would not say it was very aggressive. Our sales levels in group have been good so far this season.

And we are -- where we need to get a renewal increases we have been able to get them. So I would view the overall environment as pretty good.

Okay, thanks.

Seth Weiss, Bank of America.

Great, thank you. I wanted to just ask about Latin American sales and I know there was a big one-timer in terms of group contract sold, I believe in Mexico. But outside of that can you give us a sense of how sales growth looked like in Latin America?

Sure, Seth. So we obviously had very high reported sales growth. Well north of 50%, or I think the number actually might have been close to 80% sales growth.

But that was really driven by a very large government group contract in Mexico. If you just adjust for that and nothing else then sales growth looked pretty flat. It increased 3% year-over-year.

And so a couple other data points I would give you. Because that's obviously 3% is not our normal expectation but we didn't try to smooth sales for any other lumpy sales we might've had either in this period or the year-ago period. In the first quarter, for instance, we had sales growth year-over-year of 13%.

And if you look at our revenue growth in Latin America year-over-year, it is obviously very good. And even when you take out things like ProVida and adjust for currency, it is still double digit.

And that's our expectation in terms of top-line growth in Latin America, both sort of for sales and for revenues is that we would have double digit. And even though this quarter this sales level was a little low adjusted for the big contract, I think double digit is sort of the right level that we should we get going forward.

Okay, thank you very much.

Joanne Smith, Scotia Capital.

Yes, good morning. Just in terms of the corporate expenses, I just want to go back to that for a minute. What are you doing in terms of regulatory and compliance spend and in terms of gearing up to potentially meet the challenges of being a non-bank SIFI?

Within some of these numbers are some of our costs for this. Right now of course we are still in stage 3 with the FSOC and they have asked us for a lot of information. We have been providing that to them.

But that's really the extent of it. We have a lot of planning underway, of course, if we are named. But it's still early days right now for us to really understand the true cost impact over time.

We also have costs in there for FATCA and some other renew regulations that are taking effect right now as well. So it is included but as I said, the $213 million is above a normal current running rate for this year.

John, have you looked at some of the spending at the bank to comply with the new capital regime? Because it seems to me that the expenses have been a lot higher than I think anybody has anticipated and they continue to go up. So when you are doing your planning have you taken that into consideration?

We are taking a wide range of thought into consideration. It is unclear as to how much regulatory burden it will be for insurers compared to some banks. We are in different businesses, it's different I think for banks even if you are in retail versus wholesale and it varies from bank to bank and from place to place.

So it is still a learning experience, I think, for all insurers who are SIFIs or who may be designated as SIFIs.

Okay thanks. I just wanted to go back to the disability issue real quick. Have you determined that there are any pricing or other underwriting changes that need to be made? I understand the claims issue but is there a pricing issue as well?

Joanne, I wouldn't say there's a pricing issue per se. But we are obviously -- in this renewal season where we have cases that are underwater and not performing at expectations we are seeking renewals that will alleviate that issue. And I would just say in general we are being more aggressive about disability pricing this sales season than we have been in recent years.

Okay. Thanks, Bill.

In our last call we had I had mentioned that we were putting through selected price increases in the disability line.

Okay. But nothing beyond what you said in the last call?

I think that's right.

Yes.

Okay, thank you.

John Nadel, Sterne Agee.

Hey, good morning, everybody. Just a question -- I hate to beat up on corporate this much on your call, but if we are averaging the first half of the year it looks like the full year is going to be at the upper end of your range in terms of loss. I just want to clarify, does that still include $160 million to $200 million of after-tax one-time costs related to expense initiatives, is that still your expectation for 2014?

I think your calculations seem to be correct. It's within the range. It's why we gave a large range.

Corporate and other does vary from quarter-to-quarter from year-to-year. And it is the total inclusive of all the expenses and information that we put into corporate. So the answer is yes.

I just wanted to confirm that the $160 million to $200 million is still a reasonable number in terms of those one-time costs.

It's in that ballpark and it's within the total range of what we had said.

Okay. And then maybe a bigger picture question coming back to the regulatory front. The Wall Street Journal ran an article, I think it was earlier this week, might have been late last week, that discussed maybe a hang up as it relates to tailoring rules for insurance companies that Dodd-Frank is essentially would prevent the use of ratings, or rating agency ratings as a means of determining the risk associated with fixed income holdings.

I'm just curious whether you guys think that that is a real issue. And if so, what kind of workaround that issue has been discussed with regulators?

Dodd-Frank does limit the use by the Fed of third-party rating agencies. We do think that risk weighting of assets is likely to be part of the model they use when they regulate insurance companies, and we think there will be some sort of a workaround.

The banks have internal rating systems. The Basel committee is looking now at harmonizing these kinds of systems across the bank regulatory regimes. And I think there will be an evolution in this area that will occur over some period of time that will take into effect the risk weighting of assets. It would surprise me if regulators didn't take into effect, as they regulated entities for soundness and safety, the riskiness of the assets that they were holding.

So I think there will be some way to address this issue that was raised in the article you noted.

Okay, we did see during the financial crisis, Pimco and BlackRock were used as a third-party source for some of the asset-backed securities. So it seems to me this can be worked around, too.

And just a last quick one, I don't suppose there's anything to announce on the conference call, but there was speculation that FSOC was going to vote on MET either yesterday or today. Is there any update you can provide?

John, we don't know when FSOC will vote. They don't tell us that.

Okay, thank you.

Suneet Kamath, UBS.

Good morning. John, in your prepared remarks I think you mentioned an earnings benefit from a true-up of a lag. I think some of your operations were on a -- I don't know if it's a one-month lag or whatever. So just wondering if you can go through that again. And then also are there any other significant operations that are still reported on a lag basis that might be trued up in the future?

So some of the businesses actually from ALICO are driven on a reporting on a lag, a one-month lag. It's small, it's immaterial for the whole group.

We are working to move these through and we are seeing it here in EMEA. This quarter there's a $5 million benefit and we expect the benefit in the next few quarters as we take more countries in EMEA off the lag.

Okay, but there's nothing major in terms of regions that still on a lag that could be trued up?

These ones are small so it's just a flow through operating earnings because it's immaterial to the whole Company. The one remaining group that still is on a one-month lag is Japan. We expect that will be off for 2016 but that will flow through the balance sheet that change because it's a large amount.

Okay, got it. And then I think in your prepared remarks also, John, you mentioned that the impact from low rates was smaller than what you would've expected in the first half of the year. Is that simply because variable investment income was better, or what were some of the drivers behind that?

I think our sensitivity we published in the 10-K was 2.5% flat for the year and rates weren't 2.5% on average in the first quarter, they were a little about that. And so it wasn't quite as bad as we had put in our sensitivity.

Okay. And have you changed your outlook for rates in the balance of the year? I think your original expectation was that the 10 year would be, I forget with the number was, but three-something by the end of this year. Have you changed your thoughts around that?

You are right, I think our original plan was based on Bloomberg consensus at the time, which I think was 336 on the 10 year. Obviously consensus has come down during the course of the year and we sort of reflect that as we go through our projecting process.

Our view has been that the consensus was probably a little bit more aggressive on rates rising than we thought would happen anyway. So I would say that we have been operating as we expected for most of this year and our outlook continues to reflect that.

Okay, great. Thanks.

Randy Binner, FBR Capital Markets.

Thank you. I want to go back to the disability issue. I guess I may have missed this but the claims management operational issue that was referenced, could you expand on exactly what that operational issue was and kind of what can be done to turn it around?

It sounded like from the commentary that things should turn around pretty quickly. So just trying to get some understanding of what that operational issue was.

Sure, Randy. We manage group disability claims out of four locations. And in one of our offices we have seen a real slip and I would see our claims management metrics.

And we feel that this is operationally driven, not underwriting driven or anything else. And so what we have done is we have brought in our best claims management people in the Company, changed the managerial structure there.

And I think you are going to see a focus in terms of our procedures regarding claims management over the next six months. It's a manageable issue and our expectation is that it can be adjusted pretty quickly.

Okay. So nothing outside of just folks not following the best procedures, so just kind of standard claim stuff, nothing outside of that?

Yes, that's right.

I want to try one just on buyback real quick, if I can. I heard the equity units commentary in the opening script and there's a billing authorization I think that is ostensibly to kind of offset that dilution.

But imagining that we continue to have regulatory uncertainty, which seems to be a good assumption, can Met operate a buyback program beyond just offsetting equity unit dilution? Is this capital management in the form of buyback something that can be explored assuming there is continued regulatory uncertainty?

Randy, as you know we were cautious and remain cautious in terms of capital management because of the uncertainty. And we give the reasoning behind the program we have currently, the $1 billion which we think is a modest program because of the delay in both the ruling around designation in MetLife potentially as a non-bank SIFI and also seeing a draft of the rules.

And at this point we really can't say much more because we again have not seen the rules, we've not been designated as of yet. And until we have more information it has been difficult for us to answer that question.

I will simply say that as I noted in my prepared remarks, returning capital to shareholders is a high priority for us. We have to do that consistent with the regulatory environment in which we find ourselves. And as we learn more about that we will have more to say.

All right. Thank you.

Sean Dargan, Macquarie.

I had a question about the Japan sales outlook and the impact of the pricing increases.

Sorry, the Japan sales increase in what? I didn't hear the last part of the question.

I'm sorry. The outlook for Japan sales, was there a reference to the impact of a pricing increase in the prepared remarks?

Yes, there was. And this is Chris Townsend for Asia. So the reference that John made was just some repricing of our yen life-based products which the actions were taken at the back end of last year.

And that will drag through this year in terms of the sales impact going forward. So what you see in there is that sales for Asia are down about 12%. We have had pretty good growth in non-Japan Asia, particularly areas like China which is up about 30%.

But in Japan itself the actions we have taken at not only the pricing but we've also changed some of the commissions to make sure that the behaviors we want our representative in terms of long-term persistency of relationship with our clients. So as the life sales are impacted because of that repricing there is an impact opportunity under the packaging, which we have spoken about before.

But going forward what you will see, and this will be about September time of this year, we will relaunch one of the yen-based life products which will be more competitive and will be very much in the acceptable return area and also a range of A&H products and medical products which will help the competitiveness and help some of the features and benefits. Sales will drag through third quarter but they will rebound by the end of the year and give us a good fast start into 2015.

Thank you. And then just a question about EMEA. Has there been any noticeable impact from the conflict in Ukraine and Russia?

So we have seen a drop in sales in Russia. That is primarily due to the slowdown in the economy. And that is reflective of the fact that our overall growth for the region is below the level that we expected to be at.

So we are obviously -- we have a diverse business in Russia, multiple channels and multiple product lines. We are seeing an impact but we are also able to adjust our expense structure.

So as long as the impact is short term it is not impacting our bottom line in Russia. We are obviously monitoring the situation very closely.

Thank you.

Chris Giovanni, Goldman Sachs.

Thanks so much. Good morning.

PFG earlier talked about suggestions or proposals they are making on pension reform in Chile. Wondering what your views are and what you are communicating to regulators on that topic?

So we are engaged in a very big -- along with Principal and the other members of the industry down there we are engaged in a big dialogue with the Chilean government. They have convened I guess they would call it a blue-ribbon panel of experts both Chileans and from the rest of the world to study issues regarding the pension system there, which has really been a success.

But they are looking for ways to make it better and do things like improved coverage and making sure that all members of Chilean society participate and things like that. And so this blue-ribbon panel is in the middle of -- they are holding hearings. We recently testified before the panel giving our opinion about what should happen and what we think works and needs to improve.

And I think Principal did, too, as well as other members of the industry. They are going to release a report in the fall with observations. And then in January the expectation is that they will then release a report with recommendations which will form the basis of what the government might do in terms of making changes to the pension system.

So I think it's a thoughtful process. And I think the Bachelet government based on the discussions we've had with them, they want to make sure that the pension system continues to be successful but at the same time want to make sure that they're improvements.

I would not call this the Bachelet government's highest priority in terms of what they want to get through legislatively. They have a number of other agenda items they want to work on. So this isn't a centerpiece of what they are focused on but that is the process that is going on.

Okay. Thanks. And then for Steve, when you were a bank holding company you obviously were subject to stress testing and bank capital ratio metrics.

I know at the time you disagreed a bit in terms of where your internal ratios maybe came out versus the Fed. But wondering if you still update those estimates and if so how those bank ratios have maybe changed over the past few years?

We have our own internal stress testing system that we run from a governance point of view. We used to have to provide this information when we were governed under the New York Fed when we had a bank. We don't have a bank anymore, we don't provide anything to them.

Basel I calculations don't make any sense for an insurance company and not only that, Basel I isn't even used anymore. So we have our own internal system but we have not done things in sort of a bank sense for the Basel III.

And we don't know what the capital rules will be that the Federal Reserve will be introducing, nor when they might introduce them. So we will have to wait and see when they come out with something. Obviously if we become a SIFI we will start to do those calculations and see how all that works out but it is still way too early to understand what is going on there.

Thanks so much.

Okay, we are just about 9 o'clock. So thank you for your participation. Have a good day.

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