MetLife CEO Discusses Q3 2010 Results - Earnings Call Transcript

Oct.29.10 | About: MetLife, Inc. (MET)

MetLife (NYSE:MET)

Q3 2010 Earnings Call

October 29, 2010 8:00 am ET

Executives

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

Steven Kandarian - Chief Investment Officer, Executive Vice President, Chief Investment Officer of Metropolitan Life Insurance Company and Executive Vice President of Metropolitan Life Insurance Company

Conor Murphy - IR

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

C. Henrikson - Chairman, Chief executive officer, President, Chairman of Executive Committee, Member of Corporate Responsibility & Compliance Committee, Member of Investment Committee, Chief Executive Officer of Metropolitan Life, President of Metropolitan Life and Director of Metropolitan Life Insurance Company

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

Analysts

Thomas Gallagher - Crédit Suisse AG

Andrew Kligerman - UBS Investment Bank

Jeffrey Schuman - Keefe, Bruyette, & Woods, Inc.

John Nadel - Sterne Agee & Leach Inc.

Nigel Dally - Morgan Stanley

A. Mark Finkelstein - Macquarie Research

Colin Devine - Citigroup Inc

Operator

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, Inc.'s filings with the U.S. Securities and Exchange Commission. MetLife, Inc. specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise.

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

Conor Murphy

Good morning, everyone. Welcome to MetLife's Third Quarter 2010 Earnings Call. We are delighted to be here this morning to talk about our results for the quarter. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. We have reconciled these non-GAAP measures to the most directly comparable GAAP measures and in our earnings press release and in our quarterly financial supplement, both of which are available at metlife.com on our Investor Relations page.

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

Joining me this morning on the call are Rob Henrikson, our Chairman and Chief Executive Officer; Steve Kandarian, our Chief Investment Officer; and Bill Wheeler, our Chief Financial Officer. After our brief prepared comments, we will take your questions. Here with us today to participate in the discussion are other members of the management, including Bill Mullaney, President of U.S. Business; Bill Toppeta, President of International; Bill Moore, President of Auto & Home; and Donna DeMaio, President of MetLife Bank.

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

C. Henrikson

Thank you, Conor, and good morning, everyone. Today, I'd like to begin with some comments on the acquisition of ALICO. As you know, we expect to complete the deal very soon, and let me remind you what this will do for MetLife.

It will be rewarding to our shareholders and will significantly accelerate our strategy by improving our long-term growth in revenues, in earnings and in ROE. It will increase our global presence in both emerging and mature markets, many in which MetLife will have a top five market share, and will give us the opportunity to become the leading life insurance and employee benefits provider in the word.

Now let me share our overall MetLife results for the quarter. MetLife performed well, with continued growth in both our top and bottom lines. We generated premiums, fees and other revenues of $8.6 billion, up 2% over the third quarter of 2009. We increased operating earnings to $878 million, up 22% over the prior year period. I'm also pleased to report that our book value improved considerably, up 24% over the year-ago period and 8% sequentially, driven by our strong operating earnings and our investment performance.

Driving this quarter's growth is our continued focus on the fundamentals: disciplined growth, excellent underwriting, solid expense control and strong investment returns.

You'll hear more from Steve Kandarian in a moment, but I'd like to say that we continue to be pleased with the investment portfolio performance. Investment losses, including impairments continue to trend lower. This was partly due to our best-in-class real estate portfolio, we're loan to value's improved again this quarter. Our reserve against future losses came down further, and now our delinquencies have fallen back to just two basis points.

Turning to our Domestic business segment results, U.S. Business generated premiums, fees and other revenues of $7.1 billion, flat over the prior year period, though up modestly, excluding the impact of lower pension closeout activity which, as you know, can vary from quarter-to-quarter. Operating earnings grew by 21%, with significant increases in each of the major segments, largely driven by very strong underwriting results, as well as the benefit of ongoing expense management.

In our Insurance Products segment, premiums, fees and other revenues were consistent with the third quarter of 2009 at $5 billion. And operating earnings grew 14%, up in each product line. Group Life premiums grew 2% and operating earnings were up 6% compared with the prior year period. The Group Life mortality ratio was very good at 89% and has remained below Investor Day guidance each quarter this year.

Non-Medical Health revenues were up slightly, reflecting higher dental revenue though partly offset by lower disability revenue. Operating earnings grew by 49%, driven by improved interest and underwriting margins. The Non-Medical Health benefits ratio remained good at 88%, consistent with the second quarter.

Individual Life premiums, fees and other revenues were down due to unusual items in the year-ago period and flat when normalized. Operating earnings grew by 5%, reflecting solid mortality results.

In Retirement products, the top line to grew $738 million, up 11% on sales high persistency and higher fee income. Variable annuity sales reached a record of $4.7 billion, up 35% over the third quarter of 2009, driven by momentum in third-party distribution channels. We also are benefiting from additional distribution relationships launched over the past year. Operating earnings increased 42% due to growth in net flows and higher net investment income.

In Corporate Benefit Funding, premiums, fees and other revenues of $618 million were down year-over-year, driven by less pension closeout activity. However, structured settlement premiums grew by 2% over the prior year period and 4%, sequentially. Operating earnings increased 35% over the prior year due primarily to higher investment income.

Auto & Home had another strong quarter. Net written premiums increased 3% to $780 million. Operating earnings were strong at $81 million. The combined ratio, excluding catastrophes, was excellent at 88.2%.

MetLife Bank had a record quarter. Total operating revenues for the bank increased 8% to $410 million, driven by higher mortgage servicing revenue and more refinancing activity. Operating earnings grew 26% to $101 million.

Now turning to our current International business, we achieved another very strong quarter with growth across all three regions. On a recorded basis, premiums, fees and other revenues of $1.3 billion grew 16% over the prior year period. Operating earnings increased by 25% to $191 million due to growth in the business and a onetime tax-related benefit.

In our Latin America region, growth in Mexico, Chile and Brazil contributed to its top line growth of 21%. The Asia Pacific region grew 11% due primarily to higher sales in Korea and Hong Kong. And in our Europe Middle East and India region, the top line increased by 7%, reflecting continued growth in Europe and India.

Earlier this morning, we announced the sale of our Japanese joint venture to our joint venture partner. The agreement we have reached is in the best interest of our shareholders, policyholders and employees. Though we have enjoyed an excellent partnership and much successful joint venture, we cannot leverage our expertise and position in the Japanese market to focus on ALICO in Japan.

As we move forward, we will transition to a global enterprise through refreshed strategies, enhanced operating models, expanded global branding and engaged in a committed management. I look forward to our Investor Day on December 6 when you'll hear more about how we will deliver increased value to our customers and shareholders as the leading global insurance company.

With that, let me turn it over to Steve.

Steven Kandarian

Thanks, Rob. I would like to review some key components of our investment results for the quarter. First, let me begin with the variable investment income. Pretax variable investment income for the third quarter was $292 million, which is $92 million above the top of the planned range that I provided on Investor Day. This is primarily driven by strong private equity returns across our global portfolio. We are currently seeing similar private equity funds take advantage of improving market conditions to accelerate realizations, which is leading us to believe that barring any unforeseen market events, variable income should remain strong throughout the rest of the year.

Now let me cover investment portfolio gains and losses. Gross investment losses for the third quarter were $215 million. Gross investment gains were $212 million and write-downs were $98 million for a net investment loss of $101 million. These levels are in line with the past several quarters, and we believe are modest given the current economic environment. Gross unrealized losses on fixed maturity and equity securities were $4.8 billion, down from $10.8 billion at year end.

For the quarter, gross unrealized gains increased $5.5 billion to $19.7 billion as interest rates and credit spreads declined. For example, the 10-year U.S. Treasury note declined 46 basis points and spreads for investment grade corporate credit declined approximately 20 basis points. Overall, the fixed maturity and equity securities portfolio was a net unrealized gain position of $14.8 billion at quarter end, a dramatic improvement from a $24.4 billion net unrealized loss just six quarters ago.

As to our commercial mortgage portfolio, as Rob mentioned, the loan-to-value of our portfolio improved again this quarter to 67%, down from 68% last quarter as valuations continued to improve in markets in which we invest. Our commercial mortgage valuation allowance declined by $48 million to $573 million. Approximately $20 million of the decline was a reduction in our FAS 5 general reserve due to improved market conditions. The remaining decline is largely due to the resolution of certain delinquent loans in our U.S. portfolio. Total delinquent commercial mortgage loans decreased to $8 million from $137 million last quarter, with no delinquencies in our U.S. portfolio at the end of the third quarter.

The decrease in delinquencies was driven by one loan being paid off at 98%, and the transfer of a high-quality property to our real estate equity portfolio. I should caution that our delinquency numbers will fluctuate over time as challenges remain in the commercial real estate market. Nevertheless, we believe that we will continue to maintain relatively low loss levels and outperform the overall market.

Finally, let me comment on our cash position, which increased from $20.4 billion last quarter to $26.1 billion this quarter. The vast majority of this increase can be attributed to the cash that we are holding for our ALICO purchase. In addition, cash collateral balances relating to our derivative counterparties increased.

Excluding the impact of these two factors, our cash position remains consistent with second quarter levels and is down approximately $4 billion since Investor Day, as we reinvested into higher-yielding assets. In summary, we believe that our portfolio remains well positioned for the current economic environment.

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

William Wheeler

Thanks, Steve, and good morning, everybody. MetLife reported $0.99 of operating earnings per share per share for the third quarter. This quarter's results include a dilutive impact of $0.08 per share, resulting from the ALICO equity and debt issuance and completed in early August. This morning, I'll walk through our financial results and play out some highlights, as well as some unusual items which occurred during the quarter.

Let's begin with the top line. Total premiums, fees and other revenues which were $8.6 billion in the third quarter were up 2% from the third quarter of last year, and up 4% when adjusting for closeout sales in both periods. As we have noted before, closeout sales can fluctuate from quarter-to-quarter and have been adversely impacted by this low interest rate environment.

U.S. Business premiums, fees and other revenues of $7.1 billion were essentially flat as compared to the prior year quarter. This includes a modest decrease in Insurance Products revenue due to Individual Life's 4% decline. Adjusting for a few unusual items recorded in each of the periods, Individual Life's top line was actually down less than 1%.

Group Life premiums were up 2% from the prior year quarter. As you may recall from my second quarter remarks, growth in Group Life is being helped by a change in the financial terms in a large retrospectively rated contract, which resulted in less reinsurance ceded. As this change occurred in the fourth quarter of 2009, the benefit to Group Life top line's growth over the prior four quarters will not repeat in the fourth quarter of this year. Overall, Group Insurance revenue continues to be impacted by high unemployment and our unwillingness to chase business at below desired margins or returns.

Also, revenue in Retirement Products increased by 11% due to higher separate account fees from positive net flows and favorable separate account investment returns. Also, Group revenue and Corporate Benefit Funding was down 13% from the prior quarter, driven by lower closeout premiums, which I referenced before. Structured settlement premiums remained strong.

Auto & Homes revenues were up by 2%, and MetLife Bank's revenues grew by 11%. International's revenue was up 16% on a reported basis and 11% on a constant-currency basis over the prior year quarter, driven by growth across all three regions and led by Mexico, Korea and Chile.

Operating margins. Turning to our operating margins, let's start with our underwriting results. In U.S. Business, our mortality results were favorable this quarter. The Group Life mortality ratio for the quarter was 89% versus our estimated range of 90% to 95%, which is a good result. Our Individual Life mortality ratio for the quarter was 86.7%. This quarter's results were higher than the very favorable prior quarter of 80.4%. That said, the ratio was significantly below the prior year quarter, 91.2% and also below our plan. Overall, another good result.

At 88% for the third quarter, the Non-Medical Health total benefits ratio was up slightly over the sequential quarter of 87.8%, but favorable to the prior year quarter of 90.7% and well within our investor good day guidance range of 86% to 90%. Dental underwriting results continue to see stable utilization and favorable pricing trends. Disability margins continue to be below plan, as incidence levels remain elevated and recoveries continue to be below expectations.

Turning to our Auto & Home business, the combined ratio including catastrophes was 93.6% for the quarter, which was up over the prior year quarter's results of 91.1% due to higher catastrophes in the current quarter. The combined ratio, excluding cats, was 88.2% in the third quarter versus 87.7% in the prior year period. A non-catastrophe prior accident year reserve release of $3 million after-tax was taken in this quarter, and that's compared to a $7 million after-tax release from the prior year period.

Moving to investment spreads. We saw a continued solid investment spreads this quarter, driven in part by strong variable investment income results. For the quarter, variable investment income after-tax and the impact of deferred acquisition costs was $56 million or $0.06 per share, above the top of the 2010 guidance range. As Steve explained, this was primarily driven by strong private equity returns.

Moving to expenses, our operational excellence initiative continues to prove successful. Our expense ratio for the quarter was 22.5%, which is a solid result and was in the 2010 guidance of 21.8% to 22.5% given at Investor Day.

Turning to our bottom line results, we earned $878 million in operating earnings or $0.99 per share. Included in our third quarter results was an unfavorable market impact of $36 million or $0.04 per share, as the increase of 11% in the S&P 500 this quarter was more than offset by the impact from our variable annuity hedge program. In the second quarter of this year, we had essentially the opposite situation, where a 12% decline in the S&P 500 was more than offset by the results of our hedge program creating a $0.05 favorable market impact in that quarter.

In addition, our total operating taxes of $378 million includes a true-up in our effective tax rate for the year from 27% to 28%, as well as a net tax benefit of several onetime items in the quarter. Overall, the result of various international and domestic tax issues impacted operating earnings by $90 million or $0.02 in the quarter.

With regard to investment gains and losses, in the third quarter, we had after-tax net realized investment losses of $222 million, which includes net investment portfolio losses of $72 million after-tax. Impairments were $64 million after-tax in the third quarter and continued to trend down. In addition, as Rob mentioned, we have sold our Japanese joint venture and announced the sale to our joint venture partner and recorded an impairment, which shows up in realized investment losses.

With regards to derivatives, we had after-tax losses of $190 million. MetLife uses derivatives in connection with its broader portfolio management strategy to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. The decline in the relative value of the dollar as well as the tightening of MetLife's own credit spreads, partially offset by declines in interest rates, resulted in the derivative loss for this quarter. Derivative gains or losses related to MetLife's own credit spread do not have an economic impact on the company.

Our preliminary statutory earnings for the third quarter of 2010 were approximately $850 million, and our preliminary statutory net income was approximately $800 million which is a good result. Cash and liquid assets at the holding company at quarter end were $9.8 billion. Please keep in mind, this total includes the ALICO financing, which we completed in early August and the total was $6.5 million.

In summary, MetLife had a good third quarter. Our investment performance continue to improve. Our operating margins remain strong by disciplined underwriting and expense management, and our earnings continue to grow.

And with that, I'll turn it back to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question, we go to the line of Nigel Dally from Morgan Stanley.

Nigel Dally - Morgan Stanley

My question is on interest rates. Appreciate the commentary you provided regarding the impact for 2011. Couple of questions on that though, first, is that just your expected spread compressions? Or does it also incorporate other taxes such as top line pressure and pension expenses? Also how much of impulse that is foreign exchange going to be to the interest rate impact as we look to 2011?

C. Henrikson

So just for everybody's benefit, we filed an 8-K a month or so ago which said that in 2011, sort of given the current interest rate environment, we expected that to impact operating earnings by $0.20 a share. Now the way we came up with that calculation, most of that $0.20 is from investment spread compression. But we also did factor in at least a preliminary estimate on how our pension costs might change. And obviously, that will get trued up at year end, given where the stock market is and frankly, where the interest rates are on December 31 because that's how the math works on the pension cost. So that was factored in, Nigel. We did not consider impacts to what I would say top line issues, which are obviously a little harder to quantify. And the most obvious impact of that is where our pension closeout sales which are soft now, and I suspect we don't think we're going to get meaningfully better next year until interest rates start to improve. So that's most of the issue. FX is actually having -- you saw a varied strong decline in the value of the dollar versus the yen and the euro this quarter. And the FX impact for international is actually quite modest. I mean, it's a gain but it's less than $0.01. Now with ALICO, that will change and the FX impact will be more pronounced. And so if you think about it, what that really means is ALICO's earnings expressed in dollars are probably going to be stronger, all things considered than we originally estimated because when we announced the deal, we assumed one set of exchange rate and the dollar has weakened since then. So ALICO's earnings impact is going to be better. Now we don't really take the spot rate right now. We look at the, I guess, what we consider to be the forward exchange rate, which where the dollar I think is expected to rally a little bit. So the impact may not be as significant as you might first think. But that will obviously get -- we'll obviously kind of wrap that all up on our guidance for 2011 on Investor Day.

Operator

Our next question, we go to the line of Colin Devine from Citi.

Colin Devine - Citigroup Inc

Bill, Ameriprise, on their call yesterday, brought up the issue that they're seeing much higher persistency on their annuities than they had modeled. And had adjusted their DAC amortization period rather dramatically in response to that. And I was wondering if you've done anything at Met on that, if you're seeing those trends, if that's the sort of thing we should be expecting from you, I believe Ameriprise took their fixed annuity DAC ammortization up to 30 years and doubled their VAs to 40. That's the first question. And then the second one, and really perhaps, really, for Rob. While, I'm happy to see you get out of the VA joint venture in Japan frankly, does this signal somewhat of a change in strategic direction for Met with respect to your global appetite for Variable Annuity business?

Steven Kandarian

I'm not going to comment on Ameriprise, I refuse. But I will say this, we'll do our normal DAC unlocking study that we do in the fourth quarter. We'll obviously do that again in this quarter. And I would say the following. We do see persistency improving in our Variable Annuity business and that shouldn't surprise anybody, frankly, given where interest rates are and where the stock market is. I don't believe that's going to cause us to change our DAC amortization policy or the period of time, just for everybody's benefit. We would amortize variable annuity back over 20 years. And in our fixed annuity DAC, we would amortize I think also over 20 years. But the way that works is there's a rate guarantee in your deferred annuity contract and what we assume is a pretty big -- when the rate guarantee comes off, that DAC model would assume a pretty big shock labs, something like crudely 50%. And so most of the DAC is very -- ammortization would be very front-end loaded. But if people stay, then the rest of it would run out to 20 years. So that's sort of our policy, and I don't really expect that to change.

C. Henrikson

I agree with you and I'm glad you stated it the way you did. We're really quite pleased at the way we've been able to exit our JV in Japan, both for us and quite frankly for our JV partner. This of course from our point of view gives us, as I mentioned in my comments, the ability without any distraction to focus 100% on our ALICO business in Japan and that's a good thing. Relative to variable annuity appetite, I think everyone expects from me somewhat of the same comment about variable annuity, and it's the same worldwide as it would be in the United States. And that is we think that there is a terrific need in the savings arena for the type of products and services we can provide, both from the standpoint of the accumulation of assets and the creation of income for Life. We think that's very important. At the same time, we've always said, we do not want to become overly dependent on any one product for our financial health. And I would include variable annuities in that statement, so that the growth opportunities for us worldwide, it varies by country to country. I don't think you would see our growth being driven, for example, 100% by variable annuity sales anywhere. But we do see significant opportunities relative to ALICO. As I've mentioned, our first focus is on bringing home exactly the business that we analyzed and we love so much, the Accident Life Insurance and so forth. In addition to that of course, we bring competencies to the ALICO family that they were in some cases precluded from using because of their sister companies at AIG and so forth. And so, we very excited about it. We love the Variable Annuity business. We're not in love with it, but it is a very attractive product for our customers worldwide.

Colin Devine - Citigroup Inc

Rob, given the relatively negligible amount of money involved on this JV for a company of your size, then I'm glad you brought up your last comment because I was going to play it back to you, should we really be interpreting this as that you're a little less in love with the VA business than you were before? Then you can stay in this JV if you want to.

C. Henrikson

Well, I don't want to go to a long explanation of how in love I have been and whether or not that answer would meet major expectation. But look at it this way. We have been very, very focused on return on capital and the returns we can get relative to our breadth of products and services that can both increase our ROE, increase our margins and have the best use of capital for the company. And so that's basically the answer. I am definitely in love with anything that can deliver that kind of result to our shareholders.

Operator

Our next question comes from the line of John Nadel from Sterne Agee.

John Nadel - Sterne Agee & Leach Inc.

Any update you can provide as to the outlook for the earnings accretion from ALICO, given the changing interest rate and FX environment since the deal was announced. I was just wondering if the move, especially the move in rates has had any impact on your their estimates for VOBA or goodwill. We saw some impact across the river, and I was just wondering if we should think about any out during of the altering of the closing stream upon the closing there? Also related to ALICO, wondering if you have any update for us on the progress you're making with the regulators overseas as it relates to getting dividends out? And then finally, I had a question on your Group Disability business. Can you give us a sense for where the new claims discount rate sits and what kind of sensitivity we should think about? And is that in your $0.20 estimate for interest rate pressure, too?

C. Henrikson

I'll start with ALICO earnings accretion. Again, just for everybody's benefit, when we did our financings in August, we refreshed the guidance we gave. We said expected to be $0.40 to $0.45 accretive in 2011. Interest rates were pretty low then. I think they're actually a little lower now, and I think probably the dollar is a little weaker. I'm not sure those quite offset each other, but they obviously they're doing that. In terms of the purchase accounting, well again, we did revised purchase accounting when we did the financings in August. Now that we're going to close the deal very soon, we will put out some revised purchase accounting in an SEC filing, I guess later in November. So you'll get to see the math as it currently stands. It's interesting. It's complex, okay? But the punchline is that you will see some changes in the VOBA, in goodwill balances. A little bit more of the purchase place will end up getting pushed to goodwill versus VOBA. That has the effect of probably improving earnings accretion. So directionally, in terms of reported earnings accretion it's probably, there's upward pressure. And so that's all good I think.

John Nadel - Sterne Agee & Leach Inc.

And then any progress on the capital?

William Wheeler

John, it's Bill. You want the answer, or you want the answer on the regulatory one first? We're just about there. I mean, we had to get, as you know, a large number of regulatory approvals. We've got just about all of them at this point. And we fully anticipate that we will have all of them, and we will close on November 1.

John Nadel - Sterne Agee & Leach Inc.

I was more asking -- I'm glad to hear that, but I was more interested in I know there have been some discussion early on, maybe it was right around the announcement of capital levels in ALICO being sort of substantially higher than is sort of required under a reasonable solvency level there, solvency capital level. I was just wondering if there's any progress on timing for being able to get some of that capital back out into the holding company.

William Wheeler

Look, our expectation is, is that we will pay dividends out of ALICO in 2011, probably later in the year. And I would say that capital level -- I mean, we expressed RBC ratios -- we talk about an RBC ratio for ALICO and we talk it will be at 400 or comfortably above 400. And when we actually do the final audits of the opening balance sheet when we buy the business, we'll know exactly what it is. But I think the punchline is that the capital levels of ALICO are quite attractive. And so we'll be able to pay out a very healthy dividend out of ALICO in late 2011. The question, Mark (sic) [John], is really will we be able to give anything out of Japan in 2011 just because sort of wrinkles how the regulatory issues will work there. And I don't think there's anything new to say other than we think ALICO Japan is very well capitalized, but it could very well be a couple of years before we'll be able to pay dividends out of it. And obviously, that'll be a subject of ongoing discussions with the regulator there. The money is there. It's a matter of what would the dividend end out of in 2011. We just don't know yet.

John Nadel - Sterne Agee & Leach Inc.

Just a follow-up, Bill. I think you said you expect to pay dividends there in ALICO in 2011 later in the year. Is that from just other geographies? Or does that get to the holding company or does it get to an intermediary holding company? I'm not clear.

C. Henrikson

Well, it's a great question. Actually, yes, it's coming from other geographies, and the capital levels in those other geographies are frankly quite good. And then weather comes to the U.S. holding company or sits in some sort of international holding company, it is all about the tax regime in a given country and it's all over the map. As you know, I think Japan dividends can come back to the U.S. holding company because the Japan corporate tax rate is basically the same as the U.S. corporate tax rate, I think people know that. But in other geographies, the policy differs.

Operator

Our next question, we go to the line of Mark Finkelstein from Macquarie Securities.

A. Mark Finkelstein - Macquarie Research

I have two margin questions. I guess firstly, how should we think about this level of variable annuity sales? I mean obviously, very strong in the quarter. But just given where rates are, our margins meeting targets in the sales? I assume hedging costs are higher, and do need to reprice? That's number one. And then secondly, can you just discuss what is the strategy to improve margins in disability? It sounds like we had adverse experience both in incident levels and recovery rates.

William Mullaney

Mark, it's Bill Mullaney. I'll handle both of those questions. First of all, on VAs. The market for VAs continues to be good and I think you saw from our sales results really for the whole year that sales have been pretty strong. And we've been getting sales primarily from the GMIB product, but also from the increasingly from LWG product as well. Given where the current interest rate levels are, the margin on the products that we're selling today are below what I would say our target margins. But I think you've got to think about this business over a cycle. And so earlier in the year, when interest rates were higher, margins are good and we were writing at returns that were higher than what our target returns are. So we think overtime, as interest rates come back, we'll start to see returns improve close to the target. But we're also going to be taking some steps in 2011 to continue to improve the overall margin in the product and the overall level of return. And so we'll be telling you more about that in the coming months. As it relates to disability, obviously, our disability results continue to be challenged in this quarter. We saw higher incidence levels than we've seen in prior quarters. Our recoveries ticked up a little bit but it was very, very modest improvement in recoveries. So as a result, the overall loss ratio in disability was pretty high. It was probably one of the highest that we've had over this past cycle. So there's a number of things that we continue to do from an operational perspective to try and improve our Disability business. We're also taking some pricing actions again with both our New business and our Renewal business for 2011. So we're in the market right now. I would say high single-digit disability price increases as a way for us to bring in more revenue for the product and begin to get the loss ratios and the margins back to target.

A. Mark Finkelstein - Macquarie Research

I guess just as to follow-up on that. I mean, will that market accommodate that level of rate increase based on what you're seeing currently?

William Mullaney

Well, we have seen I think a little bit of an improvement from a marketplace perspective. I would say over last couple of years, disability pricing has been fairly aggressive. And so when we've gone to the market with price increases, we've lost some business and we haven't been as competitive on new business. It's one of the reasons why the top line in the Non-Medical Health area really hasn't grown very much. And I expect that we're going to see that trend continue to a certain degree. But I think based upon the early results, and it's still a little early in the sales cycle, pricing seems to be moderating a little bit more in this renewal season than it was in a couple of earlier years. And so we think we have a better chance of getting our pricing But what I'll tell you is if we can't, we're not afraid to walk away from business if we don't feel that we can get the right level of margin and begin to get our turns back to the right level.

C. Henrikson

Mark, this Rob. I would just add Bill's answers right on across the board. One thing I would just remind everyone because we've said before, even though on variable annuities we may not meet our target rate, we're still exceeding the cost of capital on that business. So it's not like we're writing Variable Annuity product without adding value to the enterprise. That maybe goes without saying, but I think I would have to say it anyway.

Operator

We will move on then to the line of Andrew Kligerman from UBS.

Andrew Kligerman - UBS Investment Bank

First, just on the Japan JV and the divestiture. I see over the Newswire I think you received $275 million. What was the impairment that you took? I think Bill mentioned it a little earlier.

William Wheeler

Yes, the answer is complicated but I'll take you through it. We're selling our interest at below where we have it reported on our books. But we're actually not going to close the deal until the first part of next year. So the accounting for this sale is actually sort of in two steps. And so if you collapse, maybe the most useful way to think about it is let's collapse the two steps and I'll give you sort of the net impact. We'll ultimately have to record an after-tax loss on the sale of this of about $60 million and on the sale price of $275 million. Now you'd think well, that's not good. But that $60 million really has more to do with the fact to how we allocated goodwill in the Travelers acquisition five years ago than it has with really the economics of this transaction. We actually expect this transaction to be modestly accretive from an EPS point of view, and we're very pleased with the valuation we received. So there's a little of impairment but that frankly had to do with purchase accounting five years ago than sort of the reality of the situation today.

Andrew Kligerman - UBS Investment Bank

Following on Colin's questions, just whether ALICO Japan's prospects for VA sales. Do they have good prospects? Maybe a little color.

William Toppeta

Andrew, it's Bill Toppeta. I would say the opportunity, the prospects are certainly good. And the reason for that is twofold. One is certainly, the technical capabilities that we bring from the MetLife side on variable annuities, which I think are clear to everybody. On the other side, ALICO has very strong relationships with all the banks and the distributors, plus obviously, they have strong independent and captive agency forces in Japan. So it's clear that there is an opportunity there. And as Rob said earlier, I think what this transaction with MSA indeed does for us is it gives us the ability to focus on ALICO in Japan. And that's exactly what we plan to do.

Andrew Kligerman - UBS Investment Bank

And then just shifting over to interest rates. And we all know that you'll kind of take a $0.10, $0.20, maybe a $0.20 hit to what would have been earnings had interest rates not been where they are. Can you walk us through three years from now, four years from now? What would be the incremental impact of the 10-year Treasury stays where it is? You talked about how it's based on spread compression, so I guess it wouldn't be a focus on the 5.17% yield and where that would go. More on spread. But in essence, what would happen to expected earnings three years from now? And would you be getting to your long-term goal of 13% to 15% or away?

William Wheeler

Yes, Andrew, it's Bill. That's a really serious question, and I think I'd hesitate to give an off-the-cuff answer. I think we'll do our best on Investor Day to really kind of talk through that issue with people if it stays low for a long time. But I would say a couple of things. One is, these interest rate flows that we have that we're benefiting from today, obviously, and really are quite a good hedge against this problem. Those are going to be -- the very first one of those I think expires in late in late 2014. And most of them, often they go into 2015 and '16. So those are going to help us or be there to help us for a very long time and that's a good thing. The second question is obviously, it is an earnings drag if things stay that low and for long period of time. And yes, I do think that will make hitting our long-term ROE targets much more challenging. But the other kind of a little bit of a subjective wildcard is this, if we really get convinced that interest rates are going to stay low for a long time, we will start managing the business differently. And I think the answer is absolutely. But how do you quantify that in terms of the numbers, I'm not really sure I can really do today. So I think those are two things to keep in mind as we think about this potential issue.

Andrew Kligerman - UBS Investment Bank

RBC and excess cash at the hold co post, the ALICO transaction, roughly where do you expect that to be?

William Wheeler

The cash at the hold co will be $3-plus billion at year end. I think as I've said before, we don't give out an interim RBC number. We do the full calculation once a year and that's frankly what we're comfortable with. I would say this, our RBC ratio was 432 at year end 2009. It's clearly higher today. And obviously, that doesn't in take into account cash at any holding company. So we've had good statutory earnings and at the same time, there aren't any extraneous issue which affect the RBC. We don't like to give an interim number out, but it's clearly moving north.

Operator

Our next question, we go to the line of Tom Gallagher from Credit Suisse.

Thomas Gallagher - Crédit Suisse AG

First question is for Steve. You commented on expecting strong 4Q private equity returns. If we remain in the current environment, do you think that's going to persist into 2011? Or maybe just give some overall views as to what you think is driving those returns. If nothing changes in the macro environment whether it's likely to keep seeing those continue.

Steven Kandarian

I think part of what's driving the returns this year relates to sales driven by improved capital markets around sub debt and below investment grade debt. That's allowing firms to either sell other businesses to other PE firms or industry players or do refinancings and dividending out. So those markets I think are driving a lot of that and people are searching for yield right now as yields are so low. So as of now at least, those markets are quite robust in helping returns. There's also some valuations being done, but are showing improvements based upon higher equity pricing across the board. And that's really taking some very low valuations of a couple of years ago during the crisis and kind of moving them up on the equity methods. Those two things I think are keys. The third probably is concern by people in the private equity world about their tax rates. So accelerating some profits now before their personal tax rates may go up based upon the tax treatment of carried interest. How much of that will go on into 2011? We're still doing some work on that. I'll have some numbers for you on Investor Day. We'll provide you probably a range again like we did last year. We're finalizing those numbers now so I'm reluctant to kind of give out an estimate before we finish our work.

Thomas Gallagher - Crédit Suisse AG

So if understood you correctly, maybe the one that would not be sustainable, the one piece of it would be into 2011. There might not be the same incentive on the part of the actual private equity owners to continue to monetize gains.

Steven Kandarian

It depends on policy issues around tax and what happens in terms of Congressional action on that issues. So I think that's going to unfold over the coming months.

Thomas Gallagher - Crédit Suisse AG

And then the other question I had, actually two more quick ones. One, I guess for Donna. Can you talk a bit about the bank earnings? They were very strong in this quarter. Can you talk a bit about whether these are sustainable, I think the comment was they were refi driven. Should we view these as really peak earnings that are likely to come down? Or do you think there's sort of a higher baseline of earnings we've developed here? That's one question. And lastly, in terms of the low interest rate environment, do you see any real signs of repricing yet by competitors for things like variable annuities in Universal Life or do you think that's still to come?

Donnalee DeMaio

This is Don DeMaio from the Bank. Yes, we did have a great third quarter. A lot of it is driven by refis, as well as the fact that margins are holding in the Mortgage business. That is not sustainable, as the mortgage market continues to come down. Those who have the ability to refi have pretty much tapped that out, and we don't see that continuing into the fourth quarter or into 2011.

William Toppeta

Tom, I'll answer your question about the interest environment. I just want to get back to the question we didn't answer about disability and what was happening with the discount rate there on new claims. We don't disclose that discount rate publicly. I will tell you that it's below 5% today. It has been for sometime. We continue to look at it and I would say based on -- we look at it semiannually so based on the current interest rate environment, I will tell you that we'll be looking at it again. And it is under some pressure, and so we'll let you know in the future if we decided to make any changes to that discount rate. In terms of the interest rates overall and the impact on pricing. I don't think we've started to see it a lot yet, although I think we're going to see it if interest rates continue to stay low. I think that the marketplace maybe just staying on the sidelines a little bit longer to see whether or not rates do stay low for a while. If they do, I think we're going to start to see that show up in pricing. But my own sense is it's just a little early yet to see it.

Operator

And our last question today comes from the line of Jeff Schuman from KBW.

Jeffrey Schuman - Keefe, Bruyette, & Woods, Inc.

Tax rate, you marked up the 2010 tax rate. I was wondering if you can give us any perspective on 2011. And then secondly, any updates on retained asset accounts in terms of either customer behavior or the level of sort of regulatory inquiry or where we stand there.

William Wheeler

So I'll do the tax rate. So as you heard in my remarks, we've sort of moved up the effective tax rate. We started the year with a 27% effective tax rate. Given sort of various factors, we've decided to move it up to 28%. I think for MetLife, when I think about 2011, MetLife pre-ALICO probably the effective tax rate we should be thinking more about 29%. So maybe ticking up another point. It's not just, there's not one thing which is driving that. There are couple of things. Just keep in mind though, ALICO's effective tax rate, which isn't really changing, is something like 34%. And so the blended rates for the two companies will obviously be higher, the net live stand-alone. But there is a little pressure on the margin on the tax rates.

C. Henrikson

Jeff, just real quick. This is Rob. On the retained asset accounts, there's really nothing to report in terms of change of activity relative to regulatory and that sort of thing. I would say that, as I mentioned on the last call, we have a very, very, very high level of customer satisfaction with those accounts. And our cash flows would indicate that they're even more satisfied than they've been in the past. So other than that, there's really nothing to add at this point.

Jeffrey Schuman - Keefe, Bruyette, & Woods, Inc.

So customers are continuing to utilize accounts about the same rate and there's no change in withdrawals from existing account?

C. Henrikson

Yes. Remember, to get in the account, you have to pass away. So we don't have an open account for deposits, but retention is actually drifting a little bit higher than it has been in the past.

Operator

And would you care to make any closing comments?

Conor Murphy

Just look forward to seeing you all at Investor Day on December 6.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 10 a.m. Eastern time today through midnight November 5. You may access the replay service by dialing (320) 365-3844 and enter access code 151273. That does conclude our conference for today. Thank you for using AT&T Executive TeleConference. You may now disconnect.

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