Manulife Financial Corp (MFC) 2002 Q1 法說會逐字稿

Ladies and gentlemen, thank you for your patience. Please remain on the line for the John Hancock conference call.

Good day, ladies and gentlemen. Welcome to the John Hancock investor relations first quarter conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the call, please press star then zero on your touchtone phone. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Jean Peters, senior vice president of Investor Relations. Ms. Peters, you may begin your conference.

Thank you, Denise, and good morning, everyone and welcome to our earnings conference call for first quarter 2002. As know, our first quarter press release and financial supplements, which were released last evening after the market closed, are available on our website, www.jhancock.com. This morning, Tom Moloney, John Hancock's CFO, will take you through the results of the quarter. Also on hand are members of senior management, who will be available for Q&A. They include David D'Alessandro, John Hancock's chairman and CEO; Mike Bell, senior executive VP for retail; John DeCiccio, our chief investment officer; Maureen Ford, president of JH Funds; and Jeanne Livermore, head of G&SSP. Before we begin the discussion of the quarter, I'll make the traditional cautionary remarks regarding forward-looking statements. During the course of this call, management may make statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act. These statements may include projections, estimates and descriptions of future events. These statements are subject to a variety of risks and uncertainties which may cause actual results to differ materially, and in this regard, we refer you to the cautionary statements contained in our press release and in our 10K and 10Q's and other filings with the SEC. With that, I'm pleased to turn the call over to Tom Moloney.

Thank you very much, Jean. Thank you all for joining us this morning. As you have seen, first quarter net operating income was 68 cents per share. Up 11.5% from 61 cents per share last year. A solid quarter that puts us on track to achieve our 10 to 12% operating earnings per share growth in 2002. Consistent with our previously disclosed guidance, the quarter was right in line with our overall operating plans. And as we continue to demonstrate solid sales and asset growth in 2002, coupled with the full effect of last year's growth and ongoing expense and capital management, we expect to post solid year over year improvements in each quarter. As we in our said last quarter's conference call, 2002's guidance assumes a modest five to 6% increase in the S&P 500 Index for the full year and continued economic recovery. We also said the elimination of goodwill amortization would add about 4 cents per share to 2002 operating earnings per share, spread evenly across the quarters. Results in the most recent quarters offer an outline of how we intend to achieve our 10 to 12% growth in target off a 201 -- off a 2001 base of $2.62 per share. The flat equity markets in the first quarter restrained growth of variable and third-party assets and fee income, and adverse mortality and non-traditional lines reduced operating income by 2 cents per share, but strong sales of retail annuities and institutional GICs and funding agreements drove higher spread based earnings. As we did in the first quarter, we will continue to drive expenses down and deploy capital efficiently. On the retail side, sales of our core life products, which include -- which exclude COLI and BOLI, rose a strong 25% over the year-ago period of $50 million. Sales of our single life products were up 66% over last year's first quarter. More than offsetting the decline in state planning sales. Let me note that the $6.1 million or 2 cents per share in adverse mortality we saw in the variable universal lines in the first quarter was the result of higher than expected death claims paid on large cases, which we define as more than $1 million in face value. After a thorough case-by-case review, we're fully satisfied that there are no pricing or underwriting issues or trends. Of the 11 large cases, only three were issued within the past two years, and of those, one was a homicide during a store robbery and was a COLI policy which was issued on a guaranteed basis. In April, mortality returned to a more normal level, with one large claim filed. This has been the pattern we've observed over the past 20 quarters. After a spike in adverse mortality, many times in the first quarter, the following period has been a return for lower mortality. The same pattern has also been observed in broader population studies that is not just ensured populations that done over the years. In addition, the general population studies also continue to indicate that mortality is improving. In addition, over the long term, mortality in our total book of life business has been very good, running at 90 to 95% of pricing. This -- thus, it's way too early to jump to any conclusions from one quarter's results. We'll continue to monitor the entire area very closely as we always do, as part of our overall risk management. In retail fixed annuities, our Essex wholesaling subsidiary boosted sales by 58% to $557.5 million. And its percentage of Hancock sales to 51% from 25% in the year-ago quarter. Meanwhile, direct fixed annuity sales through financial institutions jumped 53% to $127.6 million, driven by proprietary bank deals. As you may remember from our annual investors meeting in February, boosting sales through Essex and proprietary products is the core of our fixed annuity strategy. Total fixed annuity sales including annuities were up 142% from the year-ago quarter to $761.3 million. With this showing, we're are raising our total annuity sales guidance to 25 to 30% for the year. This growth will be driven by fixed annuity business as we have not yet seen any strengthening in the VA market. In the variable annuity line, we have several distribution initiatives that should help VA sales growth in the second half of the year, with new bank agreements including one with our Revolution preferred VA. Revolution offers a full range of innovative options, and we're well positioned if consumers preference switch back to an -- to a variable based products. We're also not changing our 12 to 15% growth guidance for core life because we are concerned about the continued threat on survivorship life sales from ongoing efforts in congress to fully repeal the federal estate tax. For long-term care sales, our guidance remains 6 to 12% growth. The big increase in first-quarter group long-term care sales was driven by a few large cases, which tend to be established at the beginning of a calendar year. Year-over-year, long-term care pre-tax income was down $700,000, to $27 million. The small decline was driven by higher expenses from state taxes, licenses and fees, and slightly unfavorable morbidity in the group business in the first two months of the year. Group morbidity has since returned to normal levels in March and April. Excluding these two items, earnings would have been up about 13% over the year-ago quarter. On the institutional side of the company, strong GIC and funding agreement sales contributed to a 15.6% increase in average spread-based assets to $23 billion. During the quarter we launched through Maritime life a Canadian version of our successful U.S. funding agreement program, and two deals worth a total of $220 million U.S. were well received. As a point of reference, the earnings and sales from the Canadian transactions will be recorded in the guaranteed and stable value products segment. Later this year, we expect to start issuing signature notes, a fixed income product sold through the retail broker dealer networks. In the corporate and other segments, we expect Maritime Life's purchase last year of Royal Sun Alliance to be accretive to earnings. Company-wide expense controls will continue to be a top priority. We're on target to meet our previously stated goal of reducing costs this year by at least $20 million, and we will continue our aggressive, competitive positioning project on expense controls into 2003. Since we lost -- launched our stock repurchase program in October of 2000, we bought back 21.1 million shares for about $774.4 million. We still have more than 200 million remaining in the current purchase authorization. Of course, there are obstacles to reaching our overall 10 to 12% operating earnings growth rate. I've already mentioned potential changes in the form of the equity market, the economy, and the estate tax repeal. The biggest challenges, however, will be spread management. In both the fixed and annuity and the institutional spread business, margins continue to hold during the first quarter due to management's focus on adjusting crediting rates as well as managing investment activities to meet required returns. The 200 basis points interest margin on the fixed annuity block improved by 32 basis points from the fourth quarter and was down 17 basis points from the year-ago quarter, which was strong comparatively. G&SFP's interest margin was 145 basis points, up from both the 4th quarter and from the year-ago quarter, when it was 141 basis points. It should be noted that about 45% of the G&SFP liabilities and assets are floating. With spreads locked in as part of our asset liability matching process. The gains reflect both our ability to tightly manage assets and liabilities and the good spreads we have been able to book on new assets. Nonetheless, in today's credit environment, it takes a great deal of analysis and review to source assets of the quality and performance he we require. So we continue to monitor new business levels very carefully to ensure that the assets can be acquired on a timely basis, with appropriate spreads. However, given what we have invested to date, as well as what we see in the pipeline, we expect interest margins to remain fairly even. Given our current expectations for business growth. Like the equity markets impact in the fee business, our outlook on spreads is based on the business recovery building over the rest of the year. To wrap up, we are pleased with our product sales growth and are focused on managing spreads to maximize our return. Hancock's investment story is simple and strong. We continue to leverage diversified products and distribution. We are a product innovator. We have a large and growing institutional spread business, backed by a superior investment operations. And we are fully committed to increasing shareholder value with all the tools available to us. With that, I'll open the call for your questions.

Operator, we're ready to take the queue for questions and answers, please.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touchtone telephone. If your question is answered or if you wish to remove yourself from the queue, please press the pound key. Our first question comes from Jason Zucker of Banc of America Securities.

Good morning. A couple quick questions. One, in general, can you give us any theories as to why you think five companies so far this quarter have reported adverse mortality? And the second question I had was, could you give us some more color for the gross gains and losses during the quarter and then perhaps, too, what percentage, if any of those losses came from privates?

Jason, this is Barbara Luddy and I can try to take your question on mortality. Um, I can't really speak to anyone's statistics but our own but what I can tell you when we look at our own statistics is that we have seen going back over the past five years a couple of other calendar quarters that had mortality a about the levels we saw in this calendar quarter. It happened twice, in the last five years, in both cases they happened in first calendar quarters. The -- the prevailing theory is that it's wintertime, which tends to be very hard physically on people, and that it's post-holiday season, so there could well be psychological let downs. That's not to say that every first quarter is a bad calendar quarter, but certainly when we've seen spikes, they have occurred in first calendar quarters.

Jason, the only thing I would add is that in addition to kind of the statistics that we've -- Barbara just talked about is the general population studies that have been done actually show in a broad basis increases during the first quarter. Kind of excess winter deaths is a -- there's a piece you can read on the internet that talks about that as well. So I think it's statistically been validated. I talked to our corporate actuary several times, and so and we'll continue to look at those broader studies and come back with kind of a little more detail too as we go along. I think we'll turn it over to John now.

Hi, Jason. John DeCiccio. In terms of the gross losses, we had $87 million of gross losses in the quarter, 37 of that from CBO equity, write-downs, and the balance coming out of the bond portfolio about three-quarters of that, in privates.

Great. And do you have a figure for us on unrealized gains?

Yeah, I can get back on you on the unrealized gains in terms of equity portfolio. We have $180 million of unrealized equity gains, over a hundred -- a million of which are [collared].

Great.

and that's up from $170 million in the last quarter.

Great. Thank you.

Our next question comes from Ed [Beohar] of Merrill Lynch.ED [BEOHAR]: Thank you. Uh, I would like to follow up on the mortality question. I guess -- I think Tom, you said the overall book, the mortality, has been around 90 to 95% of pricing over time, and I'm just wondering is there any reason that in your mind that we should see that gravitate up toward your pricing assumption? Um, especially I guess given the focus on the higher end market and given that there seems to be a fair amount of competition for that customer base, is mortality something over time should creep up to the 100% level? And if it did, you know, how significant would that be?

Let me answer your question from my perspective. And then Barbara will add a little bit more color to it. But overall,you know, I did talk about the 90 to 95% mortality. Um, right now we're not -- there's nothing systemic in the book of business, nothing systemic in any of the studies that we have done. All of the general broader studies that have been done including the more recent ones, um, both on our own book of business but general and broader bases all indicate that mortality is improving in all. Just from a pure basis of, you know, the way we live, the healthier nature of the better medical and everything else. Um, so I think that, you know, anything that's is here, if it were to develop, would only develop over a very, very long period of time. So again, nothing we've seen really should see any real spiking versus that 90 to 95%. So let me have Barbara give you the actuarial answer.

Just to add a little bit more information to what Tom said, Ed. We actually have also looked specifically at our high face amount book of business, which is, you know, relatively newer business. And, you know, maybe some of the competitive business that you're concerned about. What we actually see in that business is that we also are running at about 90 -- 95% of pricing. So there's -- there's nothing particular in the high face amount book of business that's out of line with pricing either. And we feel very comfortable that we can maintain that.ED [BEOHAR]: Thank you.

Our next question comes from Joanne Zef of Goldman Sacks.

Good morning. Um, I have two questions. First, could you just review with us your reinsurance, um, strategy in the life business, what your retention is and what your co-insurance is? And the second thing, I was hoping that David would talk a little bit about the investment -- the asset managements businesses, and if, David, you could talk about sort of philosophically if you believe you can -- you need both investment management or asset management and asset accumulation in the same company, or if you can actually do them different -- if they're completely different disciplines that can be separated.

John, I'm going to take the first part of the question. On the kind of what the reinsurance coverages that we do have. Um, on a broad basis, starting with the M financial group, we do reinsure 50% of all policies they write to their own reinsurance company, which they then reinsure out to other companies. Um, then 80% of the term insurance, uh, including new business, is reinsured, primarily with uh, Lincoln and [INAUDIBLE] now. Uh, the individual place -- uh, placed reinsurance on policies in excess of our retention limits of 10 million for single lifes and 20 million for survivorship lifes, um, we have policies in place that would cover exposures up to $2 million per policy and in other areas $3 million per insured life over and above our, you know, -- up to the retention limits that I just talked about. And we do have catastrophic stop-loss coverage for our group policies that is in place through June 30th. Um, he current catastrophic coverage that we have on the retail side expired as of 1/1. But we do have in place and in this negotiations another alternative to that -- that coverage, Although it will clearly be a little bit more expensive, um, but baked into our numbers from an assumption perspective.

Joanne, this is David D'Alessandro. We need a little bit of clarification before I answer your question about what you mean by asset management and investment management.

Right.

well, distribution driven approach.

Well -- Right -- Well -- Yeah, We we've looked at -- first of all, we've always looked at combining some of these activities, and there's not a great deal of, uh, cost savings in combining any of them first. Second, we do share the investment management expertise among the groups. So we don't see any need to have a combined organization. At the same time, I think your first question was, a polite question about what will you do with these organizations?

Did I do it polite enough.

It was very polite. I just -- make sure we understood it. And, so let me answer what -- what your question was. That is I can't think of a worst time to be considering selling such organizations for a number of reasons. Obviously, the equity markets are terrible. Uh, what we're worth at this stage would not be anywhere near what they would be worth in a different equity market. The ROEs in those businesses are excellent. If we -- if we indeed sold them, which some people have suggested we do we wouldn't know what to do with the cash and how we'd get the right earnings on it at this stage. And we look at these companies as still very strategic to us in some of our retail businesses. Uh, what it looks like in the turned around equity market, Uh, you know, we'll -- we review it. But there's no intention at this time of doing anything except running them to their best efficiency and hopefully over the next year we'll see the markets return.

Are you -- are you, um, comfortable with the structure right now? And who's in place and what the expense levels are for those businesses?

Well, if I look at what we've done, over the last year and a half in our expense cuts, both IIA and the mutual fund area in particular have contributed greatly on the expense reduction side. And I have utmost confidence in the management teams. And would point out that there are few companies today that aren't having trouble in their asset management organizations. And as far as I'm concerned, our reviews which we do quarterly while it's a struggle, I believe primarily the struggle is the equity markets and the fact we've been caught out of place in a couple of funds in particular.

Okay. Thank you.

Our next question comes from Nigel Dally of Morgan Stanley.

Great. Thank you. I've got a couple of questions. Um, first on the expense side. Um, as you said, obviously, the difficult equity market poses challenges for you. In the past, when you've had a challenging environment you've been able to dig deeper in terms of expense reductions to insure you hit your targets. I was wondering whether you can assess whether this still the case, and if so, which areas you begun wrapping up your expense reductions? And secondly, with regards to the investment portfolio, losses appeared focused in the small number of specific investments. That being the case, I was wondering if there's any change to the 75 to 85 -- 80 basis point gross loss expectations on your investment portfolio now that we've got the first quarter behind us?

Uh, this is David D'Alessandro. I'll answer the first question and ask John DeCiccio to answer the second one. Uh, yes, as we said in the past, as we said at our meetings in February, we still believe we have expense room. And those areas again will be in the areas that least affect our revenue. And our investment management areas in terms of our expertise. They will affect the corporate areas of the company. They will affect the staffing areas. They will affect out of pocket expenses. And we're currently in a review to see what we believe we can do to affect this year. But if the equity markets stay flat or go down slightly, we expect to still make our guidance at this stage, based on what we believe we can do on the expense side. Uh, I'll turn it over to John.

Hi, Nigel, John DeCiccio. We remain very comfortable with our guidance that we shared with you in February in terms of our outlook on credit and the 70 to 80 basis point of total losses for the year.

That's great. Thank you.

Our next question comes from Tom Gallagher of Dresdner Kleinwort Wasserstein.

Morning. Two questions. First is for Jeanne. Just if you can help me understand what was driving GIC spreads higher in the quarter. Was it on the asset side in terms of better supply in the private market? And where are you putting business on the books for? I would assume it's well in excess of the 145, assuming you're existing book of business the prior quarter had been running at 130 basis points.

Hi. It's Jeanne Livermore. And the reason for the increase in the spread, from the fourth quarter, there are several things that affected it. But three that are notable are good acquisitions of investments at very favorable spreads. That helped a lot. Also, cash was less of a drag than it had been for a good part of last year. And the third thing is that we were refined the way managed our swap portfolio to tighten up and improve the match with our floating rate on liabilities. And I think those were contributors to the increased spread. In terms of where we're putting or writing liabilities we actually did see good costs of funds, especially in the funding agreement markets, which is why we wrote more funding agreements. And in terms of spreads, we expect the portfolio to be between the 120 and 145 range. And we may have been writing business at the higher end of that range.

Okay. Thanks. And then just a follow-up on the fixed annuity side. Just looking at your total percent -- or your share of sales of fixed annuities through Essex now over 50%, can you just give us an indication how high a percentage you could become of their sales, given that they are technically a third-party organization? Is that an issue for them when you go above the 50% range, and where do you expect that sort of to level off?

Hi, Tom. It's Mike. I actually think that Essex would probably stay somewhere in the neighborhood of where they're at now, maybe a little bit higher. Uh, you're correct, they're third-party, they like to show -- and continue to show alternative products. I think that -- that as we talked about in Salt Lake by changing the way they get compensated internally, we got them to focus more on our sales. So I think that they're -- they're continuing to have a good year. We have a higher share of their business and that's what we're seeing in the numbers, but I don't expect it to go up dramatically from here.

Okay. Thanks.

Our next question from Todd Jonas of Lazard Asset Management.

Yes, good morning. It's actually Ken Zuckerberg and Todd Jonas of Lazard. Two questions.

Todd, we can't hear you. Could you speak up to the mic.

You can hear us okay now?

Yes.

Okay. It's actually Ken Zuckerberg and Todd Jonas of Lazard. Two questions, if if we could. The first is just wanted to get an update on uni-cover. There's been a lot of rumbling out of the London market in the past couple of months about personal accident business. Just wondered if you've all had any recent dealings with Sterling Cook and if there's anything to update us on in that regard. Secondly, wondered on a year-to-date basis, whether or not there's been any material change in terms of inside ownership and if so, I wondered if you could break it out between option-related and non-option-related. Thank you.

Todd, Tom Moloney. Um, in reference to the question on uni-cover and I think it's really a broader question really covering workers comp, as you know several years ago we established an after-tax reserve of $134 million. We've continued to be very active in all fronts. Uh, working with the original writers, brokers and everything else, to work through this particular area of concern and issue. And I think overall we're still very comfortable with the reserve. We continue to update it and work on it on a constant basis and all. And so rather than trying to comment on each of the different points of litigation that we have and or negotiations, I would leave it at that.

Hi. This is David D'Alessandro. We don't have in front of us our -- our latest stock grants. But I can give you a general commentary. The -- our stock grants in -- were primarily options. They happened in February. And the senior people in the company were granted options at the price of 41 -- I think it was about 41.32 -- 41.52, something like that, and they were approximately three-quarters or so of what they were granted the previous year. I'd have to look at the actual numbers to -- to give you a better understanding. But we don't publish them until we issue our next proxy. But essentially, I think those are pretty good guidelines. There was an increased ownership from the insiders, and it was primarily options with about three or four people getting some smaller amount of restricted shares.

Thanks very much.

I think that --.

Our next question comes from [Sunit Kumas] of Sanford Burnstein.[SUNIT KUMAS]: GOOD MORNING. Two questions. First of all, um, if you could comment on your remaining exposure to equity [INAUDIBLE] and CDOs and Argentina, and then I hear your point on estate taxes. Obviously the other issue that's come up recently is COLI, including an article in the 'Journal' today. Wondering -- or the "New York Times" today. Could you comment on what you're hearing in terms of legislation related to the COLI product. Thanks.

Hi, this is John DeCiccio. We have 66 million dollars of CDO equity remaining, and three-quarters of that is with John Hancock related CBOs that we're very familiar with. Uh, in terms of Argentina exposure, the total amount of Argentina exposure that we have is a total of $155 million. Uh, -- about 110 million of which -- 120 million of which is in structure deals. Basically, they're dollar receivables, either oil, and gas, or structured with dollar receivable. And the balance would be receivables that are peso-based flows, where we have written them down severely, most of them, at 30 cents on the dollar.

Hello. This is Michelle Van Leer. I'm going to take the question on the COLI market. First, a lot of the articles you're seeing in the publicity and the focus on the COLI has been in the -- what's been referred to as the Janitor COLI Business, COLI written on lower rank employees and so forth, and it was business written between 86, 96. First of all, I can let you know Hancock did not write any business in that market. And secondly, our COLI business is focused on the high -- end on executive benefits on deferred compensate planning. So a very different market than what's been focused. And in addition in the guaranteed issue arena, we always get a consent to insure from anybody that is being insured where they acknowledge they know they're being covered, or considered for coverage by their company. We certainly are also monitoring the legislative front. There's been, you know, different discussions back and forth but we don't really see anything right now coming along focused on the type of COLI business that we write.[SUNIT KUMAS]: Great. Thank you.

Our next question comes from David Lewis of Sun Trust.

Hi, good morning. Couple of questions. One, can we have a little further color on the spreads? You indicated that on the on the institutional business and the [INAUDIBLE] spreads would hold fairly steady. If -- if interest rates rose a hundred basis points, would you anticipate that to still be the case?

Uh, it's Jeanne Livermore, David, and in the institutional business, we manage our duration very, very carefully. Essentially, we have a target mismatch of zero. And only allow ourselves a tolerance of .05 years, which is an 18-day mismatch. Because of that, we are largely indifferent to interest rates moving either up or down. So a hundred basis point movement in interest rates shouldn't have a big effect on the spreads.

How about a refill side?

Hi, this is Michelle Van Leer, again on the fixed annuity business, on the renewal side, um, our renewal rates are tracking a portfolio rate. So the portfolio would move more slowly to react to an increase in new money rates, and again we set our renewal rates to track the portfolio rate and, like Jeanne's business, maintain our target pricing spread. And on the new money side, again, we have a target pricing spread and we would adjust rates as new money rates moved up.

Okay. Two final questions. One maybe David could talk about the acquisition environment. I understand there's another property or two out there. Is it something that you are taking a look at? And finally, Tom, maybe give me guidance on the rest of the year's tax rate, please.

Hi, David. It's David D'Alessandro. We -- there are actually a few properties around that we have looked at and our continuing to look at. I can't comment what we're going to about it. But we continue to look at them, and uh, there's -- there's -- it's an interesting environment because in my view, there's a certain pricing or rationality to it all still. And the lawyers want me to give you no comment at all. But I'll tell you that we continue to look at everything as well as try to stir some people out of their caves.

That's helpful.

David, I won't have as entertaining a comment or tax rates as that, but the tax rate guidance that I would say is that it will continue at about the relative rate it is, about 30% for the rest of the year. There's nothing there that indicates that it should go higher or lower.

Thank you.

Our next question comes from Bob Glassbeagle of Langdon.

Good morning. Two questions. One, your stock market call of five to 6% for the full year with the market down five and a half percent sort of implies from a 14% annual last eight-month movement in is -- is that driven by your strategist or just the fact that was the call you started the year with? And you're not going to switch it quarter to quarter, just seems aggressive to -- end your [INAUDIBLE] guidance on. Uh, second question is maybe you could expand a little bit further on what is going on in protection margins. It looks like even ex-mortality and the long-term care group hit in the quarter margins were below what I have been using in my model. Maybe I had a bad model. But -- with expense cuts and some of the sales gains you've had there, I was looking for a little bit more out of that division this year.

Hi, Bob. It's David D'Alessandro. I've answer the first question and give the second to Barbara Luddy. Uh, in terms of the stock market, we ask -- we have been asking the questions in our reviews of our economists as well as others around here whether or not they're ready to change their guidance on the five to six on the market and no one is ready to go yet. So we're not just sticking to what the plan said in January. At the same time, though, we have sent out the initial alerts that we will be looking at expenses in the coming weeks. And be prepared to move on some expenses if this market doesn't show a little more liveliness over the next 30 to 60 days. So we're not dealing with simply being locked into what we said would happen in January. We're very, very clear on what we're going to have to do and are taking all the cautionary steps in the event that the market stays flat or even goes the other way. And if it continues the way it did the last couple weeks weeks, we would certainly move faster.

So we should not read that as a failed earnings guidance cut, in the paragraph by the fact you may have potentially optimistic S&P numbers to have as an excuse down the road?

No, we're prepared at this stage to weather a flat market. But if the market were to go negative, the S&P were to go negative and be sustained, let's say it went negative next month, I think we'd have to review it at the end of next quarter. But we're ready to move now on the assumption that the market may indeed continue to go sideways.

Got ya.

Now to Barbara.

Bob, it's Barbara Luddy. In terms of your question on the margins, I think in terms of the life insurance business, we certainly have talked a lot about the mortality. I think aside from that, we're seeing pretty healthy margins on that business. And then on the long-term care business, which is the other big piece of the protection segment, Tom mentioned in his opening remarks that there was a little bit of expense disruption year-over-year, plus a small morbidity loss, claims loss, on the group business. Looking at year-over-year, that was prompted by some adverse experience in the first quarter of this year. In the months of January and February, the open claims book grew a little bit faster than we had expected. The growth rate on the open claims book resumed normal growth rate levels in March and maintained normal growth rate levels through April. But certainly other than that, we're seeing healthy growth in the business, and we believe healthy margins.

I guess what I was asking is if I spot you the mortality, the GIC and expense disruption as sort of one-time disruptions in the numbers, would your earnings have grown 10% without those three factors? It doesn't seem like that to me.

I'm not aware of anything else, Bob, that you should be looking at, other than -- the expense issue in long-term care is a taxes, licenses and fees issue. The morbidity issue in long-term care and then the mortality issue in life, those are the three big ones I would be looking at.

Let me pursue this further with Larry and Jeanne, thank you.

Our next question comes from Vanessa Wilson of Deutsche Bank.

Thank you. Good morning. On the -- your success in the single life market, could you talk about what your competitive advantage is there, and could you give us some color, were there any individual large cases in that number that made it maybe an unsustainable number? And then, separately, Tom, you're cautious on the spreads, sounds like that's your biggest caution with respect to your guidance. And maybe you could just go over for us one more time how you feel -- where the caution is coming from, is it on the asset side, or the investment side, or is it on the liability side?

Hi, Vanessa, it's Mike, I believe the question was about single life and what the competitive advantage is. We talked a little bit about this in Salt Lake. There are a couple of things happening. One is that, Michelle, has introduced a set of new products through the course of last year and early this year, which are being well received. And secondly, we're doing a very good job penetrating the direct brokerage business that we talked about it Salt Lake. So I think that you're seeing a combination of a new products wave, which is well received, and a fairly effective distribution program, which seems to be yielding early returns.

And were there any large individual cases in that big number?

Not really, no. I mean it's a good, solid, higher band growth but there's no -- 10, $15 million case in there. There's nothing like that.

Thank you.

Hi Vanessa, Tom Moloney. In reference to the question kind of on the spreads and all, I think it's really more on the asset side. Right now, we are looking at an overall volume, and managing that accordingly. But if the economy doesn't really come back and continue to grow like we said in our opening remarks, that is where we want to watch how much we're selling in the fixed arena and everything else. So it's really more around the economy than anything else, when you kind of put it into a few words.

Okay. And if I could ask just one more mortality question: Did you see any adverse trends in your closed block that we might not see looking at the numbers of the public company? Or was it exclusively concentrated in your higher end variable life COLI type product.

Vanessa, Tom Moloney. That's a very good question. And we have -- because we've probed all of our businesses and everything else and yes, we did see increase in mortality within the closed block. But as you know it gets picked up with the PDO and all. So it doesn't show up in the bottom line. But it really is across the whole business, so that's why we don't believe in reality that it is anything that's going to be sustainable.

Thank you.

Our next question comes from Peter Monaco of Tudor investments.

Good morning all. Thanks for your time. Tom, could you please just update us on where the risk based capital ratios are? What, if any, debt capacity you believe you have at this point? And what all that implies for prospect of share repurchase activity? In other words, can we reasonably expect that at a minimum, the pace of share of repurchase in this quarter would be maintained absent some truly compelling alternative use for the funds?

Peter, let me answer some of your questions very specifically and others more on a broader basis. But where we see the RBC ratio, at the end of the third quarter, of the first quarter, excuse me -- is around 345% mark. And that's on the new basis. And then the old basis it would be around 260. We don't have perfect data on a quarterly basis, but generally that's the directional movement that we have been seeing and everything else. I think that from a debt capacity point of view, we looked at $150 million of long-term debt. And we have also preferred stock capacity that we could utilize, and of course as I'm sure you know and others, that there are closed block debt opportunities too to be looked at. So I think from an overall financial capital management perspective, there's a lot of flexibility to be used here. As far as kind of the utilization of capital, this is where I won't get overly specific. But we continue to look at all options that we have available to us, stock buy-back is one, certainly the growth in our business with what we're seeing on the fixed annuity side, and also on the funding agreements and GICS side. Those are all -- require additional capital to be deployed. So and then stock buy-backs are always the one option along with acquisitions. So we continue to look for the best place to put our capital. We're also managing to maintain our overall ratings, because they are strategically important to this company in all of its businesses that it plays in.

Thank you.

Good morning. You just mentioned some comments relating to your capital position. I wasn't sure if you'd mentioned what your free cash is, and if there have been any changes to what you be your statutory earnings to be this year and then I'll have a follow-up.

Al, overall, kind of looking at it, we still are expecting to have statutory earnings of 6 to $700 million a year. I would say at this point in time, we have 3 to $400 million of excess capital. It's in different places in the corporation. Some of it is in the holding company, and some of it is downstream in the life company. And so all of those kind of abilities to move them around are based on a lot of regulatory issues but we still feel as though we can move most of that up to the holding company, if we were -- if it was needed at that level.

Okay. And I had two additional questions. One was on distribution front, I was hoping that Mike could expand on some of his comments as it relates to potentially the raised guidance on your annuity sales. And then lastly, I was just hoping you could address Enron exposure. I think last quarter you were holding Enron bonds at 150 million. I was just wondering if there's any change to that.

Hi, Al, on the annuity guidance we feel pretty good right now about raising the number primarily because of the early success of the switch we made in the our Essex relationship, as well as the direct bank deals we have and the things that we have working. I think that we're keeping it at that level because we think that's the prudent way to go. We had very some early significant returns and we talked about earlier with Essex but it could be impractical to project those over the whole year. But we will do our own math here and we think that's the right balance and we think that's achievable, as we said here today.

Hi, Al. This is John DeCiccio. On the Enron exposure, we have a total of $175 million and that's unchanged from the prior quarter. As you can well appreciate, this is going to be a very long story in the workout and we have a lot of that exposure is with private transactions.

Okay. That's all. Thank you.

Our next question comes from Eric Berg of Lehman Brothers.

Good morning. I have a few questions. First of all, getting back to this now dreaded mortality issue, why would the winter and holiday blues explain anything? Because after all, there's winter every year. Presumably there are holiday blues every year. Presumably it's baked right into your pricing. Presumably therefore you expect it every year. Why would that explain anything in terms of surprise that took place? My second question is in your fixed annuity area in the income statement, I noticed that there was a pretty steep decline this year versus last. I don't have the numbers in front of me but I believe that was the case in earned premiums. Not net investment income, not the interest credited, not FAS 97, I guess you'd say, fixed annuities but FAS 60 annuities. What would cause such a swing? And then my final question is, John DeCiccio talked about equity charges of CDOs but what is the total size of the CDO portfolio, equity and other charges combined, and what's your sense about the recoverability, John, of the carrying amount of other charges that you have besides equity charges? Thank you.

Eric, David D'Alessandro. I'm going to take the first question. I've been if this part of the business for 12 years. And every time there's an adverse mortality, I have to agree with you, there's usually not a rational explanation, and everyone in the industry gropes, it can be anything from what we're hearing now from other people in industry about the post-holiday blues, more suicides, more people killing each other, depression. I have to tell you, I don't believe any of it. And what you have to look at is the fact that one gets worried in this business when you get three-quarters in a row of adverse mortality. We did price to have first-quarter mortality a bit higher. We usually do. It was just outrageous this quarter, as Barbara pointed out. We've seen quarters like this before. What we look for, as I just said, is to make certain we're not seeing this trendline continue. When you consider that you have $70 billion in our company of face value, it doesn't take very much, 20 basis points, to have the kind of shifts we just saw. So I'm with you on this one. I don't believe anything except that you get these aberrations from quarter to quarter, and business at the actuaries price over 30 years. And again, those people out there that are worried about, is this an underwriting problem, is this a pricing problem, is this a problem of trying to squeeze too much business on to the books? When you start to examine the claims, one by one, which we've done, methodically, over the last couple of weeks,and you see that the aberrations and claims were one-offs for the most part, and they were -- 85% of them were over two or three years being on our books, you worry a lot less.

Sure.

between you in me. But I do think that Ed [BEOHAR] had an excellent point, when he pointed out that your corner of the business is extremely competitive, and we all know or anybody who studies this business hopefully deeply, knows that one of the ways that companies get business is by bending a little bit, just a little bit, on that underwriting, in a very competitive market. And it's a natural concern.

Sure. As a matter of fact, if you guys recall, since it appears we're having a bit of a conversation, if you'll recall, we -- we're the ones over the last couple years that have been pointing this issue out over and over again, and we refuse to sell business on that basis. But again, if you look at the claims, we generally don't underwrite for homicide and we don't underwrite -- one of the claims was a claim that was actually four or five policies, where it ended up being two and a half million dollars or so from a guy that's been on the books for 10 years, who is 42 years old who decided to commit suicide. We didn't underwrite for that. So are we seeing -- so the question is are we seeing recent underwritings since we've gone to the high-end market, where people are dying prematurely because of bad underwriting? The answer is no. But I think the trend line and we watch this carefully by picking apart all of the claims that were sizable and above our expectations. So I think the concern of the street is absolutely correct. But when you looking at the fact in our company, there's nothing that indicates that it is an underwriting problem or a problem of squeezing business on to the books that we shouldn't.

You've inspired me. Thank you.

Eric, John DeCiccio, getting to you on the CDO exposure. Our total CDO portfolio is 1.3 billion. A billion of which is in double-a, triple-a securities, extremely -- extremely secure. And the balance of the holdings have not been downgraded. The risk portion of the portfolio is the 66 million of the equity CDOs and even some of those are not backed by [INAUDIBLE] grade bonds, they're backed actually by investment grade bonds. So we're getting down to the point where we're very comfortable with that.

Great. And with respect to -- the [INAUDIBLE] premiums in your fixed annuities going down as much as they did?

This is Barbara Luddy. I can address that for you. In the fixed annuity line, there's an immediate annuity product, single premium immediate annuity, that the revenue does get booked at premium. Last year we were selling quite a bit more of that business. We were working with a particular distribution partner that was selling quite a bit of it for us. That distribution partner is no longer selling our product and total sales have dropped quite a bit. Now, do keep in mind when you're looking at a total income statement that there's an offset to the premium in the benefit to policyholder line. When the single premium comes in, we actually have to set up a reserve against it so that we're holding money to make all of the future benefit payments to do the people who buy the contracts.

Thank you very much.

Our next question comes from Colin Devine.

Good morning, everybody. A couple questions, and I promise not one on mortality. First, can we talk about what's driving the growth in your bank annuity business? Trace what your average crediting rate for the quarter was. Did you have any specials on -- what's happening with commissions there? Second, over to John DeCiccio, if we could talk a bit about your telecom exposure, any WorldCom for example, but any other major positions there? And then, third, Michael if you could give us a bit of an update from a strategic vantage as to sort of how your transition is going to Signator, away from their survivorship orientation. And then lastly, I'm not sure who this goes to, but with respect to independence, maybe you could just give us a bit more of an update as to what's happening strategically there because obviously, the flows continue to be problematic.

Hi, Colin. It's Mike. I'm going to start with the Signator question just so I can make a clean transition to Michelle on crediting rates with annuities and then I'll get off. {INAUDIBLE] One of the things we're doing pretty aggressively is we've moved the survivorship percentage of the business down quite a bit over time, and I think over a two-year period, it's less than half of the mix, that it was before. And that's primarily due to the strong single life products we have, and as you know we're doing quite well on that. Additionally, in the core Signator channel, we've added six new agencies and 24 experienced agents who actually have a slightly different bias than perhaps some of our historical people do and are a little more comfortable selling the core life products that were more fond off. In terms of overall annuity in the bank channel and, again, I'll let Michelle deal with the crediting rate question, I think that what we're seeing here is our success in servicing the channel. I thing Essex has a very long history of doing that. I think our direct people tend to be very, very service friendly and we have redirected service resources and reorganized service to be more friendly to that channel. It's a little bit of an acquired taste, if you will, and I think we've had good success in proving to them we can meet their needs.

Just a quick follow up, are there any specific banks that are really key for you and what percentage of your total sales might be represented if that's the case?

Yeah, the banks that are significant here are CalFed, [INAUDIBLE] and maybe an Amro. And I think that we're also doing some pretty decent work with HSBC. So overall, it think that those -- that group of banks well over 50% of the increase of the mix.

Colin, John Deciccio. I'm sorry.

Colin, this is Michelle, just a comment on where our rates were during the quarter in the bank fixed annuity. On our one-year product, our base rate held fairly stable throughout the quarter at about -- at 4.5%. Kicked up about 10 basis points at the -- near the end of March as treasuries went up, actually more than that. And our five-year product, the base rate was at 4.3%. And that position, and we review the rates and the pricing every week, was pretty much a middle of the pack throughout the quarter, competitive ranking didn't change very much. And our new money spreads remained within our pricing targets during the quarter. We didn't make it, do any specials or adjust spreads or anything to generate sales. We really benefited from the Essex relationship and the proprietary relationship that Mike -- relationships that Mike's talked about.

Thank you.

Hi Colin, John DeCiccio on the telecom exposure. We've been pretty cautious in the telecom sector as I think you know and we've invested primarily in companies that have proven stable cash flows. So as a result, we've pretty much avoided the below-investment grade segment of this part of the market. And the major blowup's such as Global Crossing. That being said, we have about 1.1 billion in telecom, only 70 million of which would below investment grade. And in terms of WorldCom specifically, a $4 million private lease that is paid out in July of this year, and a 23 million of an 8% holding in '06. In terms of your other question about the independence and how independence is moving and the concern about net flows, in the institutional business it's a three-year performance number business before you can really crank up your sales. And we have now two solid years of performance and the -- this current year we're doing very well, well above our benchmark. So we're on target to deliver a very solid three-year record by the end of this year. I think you may recall it was '99 we had a very, very bad performance year, and we're working out of that now. So the three-year numbers are turning around. And we feel strongly that once we have that, we will be out there with good gross sales.

Great. Thank you.

Our next question comes from Michelle Giordano of J.P. Morgan.

Good morning. I had some questions on the funding agreement business. I was wondering if you can give us more color here. I understand that the good sales are primarily driven by the good cost-of-funds you're seeing in the quarter. It seems you have a lot of control over how much sales you're going to generate here. So you can tell us what your appetite is for future sales in the business? And then secondly, could you talk a little bit more about the demand in this market? What's going on in the funding agreement environment vis-a-vis competition and demand?

We didn't catch the first part of your question. It was too soft. Could you repeat it.

Sorry. I was hoping we could get some more color on the funding agreement market. I understand that you have a lot of control over the sales you're likely to generate in this market, and is seems the cost-of-funds are good so you've generated quite a bit of sales here. So I was wondering if you could talk about what the appetite you have for putting on significantly more sales in the funding agreement environment and then, secondly if you could give us more color on the demand, competitive environment and what is driving the demand from the consumers.

Hi, Michelle, it's Jeanne Livermore. And we did find that the funding agreement market was very attractive in the first quarter, with a lower cost-of-funds than the GIC market. And so we did, as you noted, place a lot. We see very strong demand in that marketplace, there have been new entrants, but the demand has grown faster than the new entrants. And if we look at our position in the marketplace, just looking at the global market, we're the number two issuer and have been a 12 1/2% share. So we see continued, very strong demand in that marketplace. It comes from pension funds, from banks, from insurance companies, both here and abroad. Especially in Europe, they're moving to a credit-based market from a currency-based market, so there's a lot of demand there. So we do see good opportunities. We will continue to place business and to grow our book of business as long as we think that we can invest the money at appropriate spreads to make our -- our return objectives. We are thinking that -- I think last year we sold about 4.6 billion of combined GIC and funding agreement business. This year we're looking to sell at least 5 billion, maybe more than that, but that will depend on the market and the opportunities on the investment side.

Thank you. And on the adverse mortality side, I understand there was $9 million of adverse mortality in the quarter. But what was the total amount of claims paid on the 11 claims that occurred in the quarter that were adverse?

Michelle, it's Barbara Luddy. We paid about gross 15, and that would be before the [DAC] offset. So actually, the adverse mortality was almost entirely due to the large claims. So the excess payment on the large claims was pretty much in line with the 9 million that we're quoting.

Great. Thank you.

This concludes the question and answer session. Please continue with any closing remarks.

Thank you, operator, and I hope we have put a stake in the heart of the mortality question for now. Other than that, we look forward to talking to you throughout the quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's program. This concludes the program. You may now disconnect.