MetLife, Inc. (MET)

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MetLife (MET)

Q3 2011 Earnings Call

October 28, 2011 8:00 am ET

Executives

William J. Mullaney - President of the U.S. Business organization

William J. Toppeta - President of International and President of International - Metropolitan Life Insurance Company

Steven J. Goulart - Chief Investment Officer and Executive Vice President

Steven A. Kandarian - Chief Executive Officer, President and Director

William J. Wheeler - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Metropolitan Life and Executive Vice President of Metropolitan Life

John McCallion - Head of Investor Relations and Vice President

Analysts

Andrew Kligerman - UBS Investment Bank, Research Division

Colin W. Devine - Citigroup Inc, Research Division

Jay Gelb - Barclays Capital, Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Suneet Kamath - Sanford C. Bernstein & Co., LLC., Research Division

Randy Binner - FBR Capital Markets & Co., Research Division

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Joanne A. Smith - Scotia Capital Inc., Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Nigel P. Dally - Morgan Stanley, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife's Third Quarter Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results, and the business and the products of the 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 U.S. Securities and Exchange Commission. MetLife specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise.

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

John McCallion

Thank you, Greg, and good morning, everyone. Welcome to MetLife's third quarter 2011 earnings call. Before I start, let me briefly outline the logistics of today's call. We have a 2-hour call today divided into 2 sessions. The first session will focus on our third quarter 2011 results, which will end promptly at 8:55 a.m. We will take a 10-minute break, at which time the phones will be placed on musical hold. Then at 9:05 a.m., we will host a discussion to address market concerns about the potential long-term, low-interest rate environment in the U.S. Presentation materials for this interest rate discussion are currently available at MetLife.com through a link on the Investor Relations page. Now let's get started.

We will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures may be found on the Investor Relations portion of MetLife.com and our earnings press release, our quarterly financial supplements and in the other financial section. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative in 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, President and Chief Executive Officer; and Bill Wheeler, Chief Financial Officer. After their prepared remarks, we will take your questions. Also, here with us today to participate in the discussion are other members of management, including Bill Toppeta, President of International business; Bill Mullaney, President of U.S. Business; Steve Goulart; Chief Investment Officer; and Donna DeMaio, President of MetLife Bank. With that, I'd like to turn the call over to Steve.

Steven A. Kandarian

Thank you, John, and good morning, everyone. Before I discuss this quarter's results, I'd like to comment on our recent annual dividend declaration. Earlier this week, we declared an annual common stock dividend of $0.74 per share for 2011. As we announced, we recently submitted a capital distribution plan to the Federal Reserve for approval that included both an increase in MetLife's annual dividend, as well as the resumption of stock repurchases. The Federal Reserve has concluded that the company's planned capital actions should be tested under a revised adverse macroeconomic scenario, which is being developed for those firms that will participate in the 2012 Comprehensive Capital Analysis and Review.

As a result, the Federal Reserve did not approve the company's planned dividend increase and other proposed capital actions at this time. We are disappointed that we cannot commence increased capital actions now. Our analysis shows that the company's current capital level and financial strength support capital action increases. Moreover, we believe increasing our capital actions in this time of high unemployment will prove beneficial to the economy as our shareholders redeploy these funds in a productive manner. We look forward to seeking and gaining the approval of our capital plan from the Federal Reserve early next year.

We are firmly committed to creating shareholder value and returning capital to our shareholders. In addition, we continue to move forward on our plans to explore the sale of the depository business and the forward mortgage origination business conducted at MetLife Bank and to take that then necessary steps to no longer be a bank holding company. As I have previously noted, this will ensure that MetLife is able to operate on a level regulatory playing field with other insurance companies.

Now let's discuss this quarter's results. Despite some significant economic headwinds during the quarter, MetLife delivered earnings per share of $1.11, up 3% from the prior-year quarter. As noted in the 8-K we filed on October 6, MetLife recorded a number of onetime charges in the third quarter. Absent these charges and some other onetime items, MetLife's earnings would have been $1.28 per share, which we believe is closer to the company's true earnings power. In addition, our annualized operating return on equity of 10.9% for the first 9 months of the year would have been 11.5% without onetime items.

Now let me turn to some of the broader issues facing the market. First, while Europe remains unsettled, we believe our exposure is manageable, especially given the number of actions we have taken over the past year. Out of a general account asset pool of $493 billion, our exposure to peripheral Europe sovereign debt was $571 million on a book value basis as of September 30, down from $1.6 billion as of December 31, 2010. And our exposure at quarter end to European banks was $6.9 billion, down significantly from year end. In addition, our total $42 billion of European exposure, more than 90% is investment grade. We have provided greater detail on our exposure to Europe in the appendix to the presentation deck for our call at 9:05 a.m.

Second, the variable annuity market continues to experience strong growth. While the market in our sales grew substantially in the third quarter, we are taking a proactive approach to managing growth of our variable annuity business. As you know, we recently adjusted our GMIB Max offering to reduce risk and improve returns, and we will be making further adjustments in January. While we are comfortable with the pricing and returns on our third quarter VA sales, we continue to seek opportunities to reprice and improve the risk profile of our product offerings. As of January, the roll-up rate on a GMIB Max product will be reduced from 5.5% to 5%.

We are closely monitoring sales, and if they rise above plan, there are steps we can take and will take to bring sales in line. You can be assured that we are reviewing all of our product features to maintain a disciplined balance between customer value, risk and return. As a matter of sound capital management, we will only pursue growth that we believe maximizes long-term shareholder value.

And third, while interest rates have rebounded somewhat since the announcement of operation twist, they still remain at low levels. While long-term low interest rates have an impact in our earnings, we have taken proactive steps to mitigate this impact. We will talk much more about this topic during the special one-hour teleconference following today's earnings call.

For now, I would simply note that even if a 10-year treasury remained at 2% for the next 5 years, MetLife would still expect to grow earnings and generate excess capital. One reason is our focus on risk management. For example, as Steve Goulart will discuss in the second hour, we purchased $18 billion of notional interest rate floors in 2004 and 2005 to protect against sustained low-rate environment.

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