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MetLife (NYSE:MET)

Q2 2011 Earnings Call

July 29, 2011 8:00 am ET

Executives

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

William Moore - President of MetLife Auto & Home and Senior Vice President of Eastern Zone - Individual Business

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

Steven Kandarian - Chief Executive Officer, President and Director

William 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

Steven Goulart - Chief Investment Officer and Executive Vice President

Analysts

Thomas Gallagher - Crédit Suisse AG

Andrew Kligerman - UBS Investment Bank

John Nadel - Sterne Agee & Leach Inc.

John Hall - Wells Fargo Securities, LLC

Nigel Dally - Morgan Stanley

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Colin Devine - Citigroup Inc

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second 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 related 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 statements whether as a result of new information, future developments or otherwise.

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

John McCallion

Thank you, Ernie. And good morning, everyone. Welcome to MetLife's Second Quarter 2011 Earnings Call. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. Reconciliations of this non-GAAP measures to the most directly comparable GAAP measures may be found in our earnings press release and in our quarterly financial supplements, both of which are available at MetLife.com. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it is not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.

Joining me this morning on the call are Steve Kandarian, 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, Bill Moore, President of Auto & Home; and Donna DeMaio, President of MetLife Bank.

With that, I'd like to turn the call over to Steve.

Steven Kandarian

Thank you, John, and good morning, everyone. I'm pleased to announce that MetLife had a strong second quarter. We grew earnings per share by 13% over the prior year quarter demonstrating the ability of MetLife's diverse portfolio of businesses to create value for shareholders. Overall, operating earnings grew by 45% to $1.3 billion and we generated record premiums fees and other revenues of $11.8 billion, a 38% increase. What is notable is that we achieved these results despite losses of $218 million related to the natural disasters in the United States and Japan. As you know, I became President and CEO of MetLife on May 1. Over the last 90 days, I'm engaged with many of MetLife's senior leaders to gather their views on the company's strengths, areas for improvements and opportunities for growth. These meetings have reaffirmed my belief that MetLife can achieve its vision of being the leading life insurance employee benefits provider in the world.

We have also sharpen my focus on some initial high-level priorities to help drive value for our customers and shareholders. The first is the successful integration of Alico to ensure we capture the full value of this acquisition both on the short term and the long term. Essential to this process is optimizing our portfolio of countries and businesses to ensure the best strategic fit.

Since the beginning of the year, Bill Toppeta and his team have sold our businesses in Venezuela and Taiwan and a portion of our business in the U.K. and Japan. The specifics reasons vary from political uncertainty to asset liability mismatches to integration costs. But the common thread is that we did not believe these businesses would be able to meet the return thresholds we have set for the company. These divestitures will free up roughly $1 billion of capital that can be redeployed to deliver better value for shareholders.

At the same time, we have also been pursuing strategic acquisitions. During the second quarter we signed an agreement with Dexia, to purchase its Turkish Life Insurance business and enter into an exclusive 15-year distribution arrangement. While we expect this transaction to improve our market position from 12th to fifth in Turkey, a high-growth market with favorable demographics and an attractive macroeconomic department.

In addition, we announced this week that MetLife has entered into a 10-year exclusive distribution arrangement with Punjab National Bank of India, to sell MetLife products to its branch network. PNB, the second-largest bank in India gives MetLife access to 60 million customers from more than 5,000 branches. This move will provide MetLife with the opportunity to move into the top tier of insurance companies in India.

Another sign that the integration is succeeding is a strong international sales we experienced in the second quarter. Total international sales for MetLife Alico were 25% higher than they were for the company's on a combined basis in the second quarter of 2010. In Japan, while sales fell 7% short of plan as a result of the earthquake, it was still up 28% over the prior year.

In addition, the Alico integration remains on track and we expect to meet all of our targets. The second priority for MetLife is to strengthen our ability to achieve profitable growth and value creation. When we get the formula right, the results are impressive. Under Bill Mullaney's leadership, we saw U.S. annuity sales in the quarter rise to $7.3 billion, a 48% increase, which helped drive operating earnings in the Retirement Products business to $201 million, up from $136 million in the second quarter of 2010.

Part of this growth was driven by our new GMIB Max offering, a simpler retirement income solutions that significantly reduces our hedging costs and we believe will provide customers with more consistent returns over time.

Given our goal of a balanced growth, we are making adjustments to the product that will reduce our risk and improve returns. We anticipate completing our filing with the SEC in August. Another area of strong performance is in U.S. Business insurance products, where we grew earnings by 22% in the quarter on a strong underwriting results and higher net investment income. We believe our strategy of maintaining discipline in underwriting and pricing is the right one and it's starting to pay off.

In addition, we're encouraged that more rational pricing seems to be returning to the group life and disability markets, particularly for larger cases.

A third priority I want to highlight this morning is our drive to be a world-class company in every aspect of our business from talent in technology to brand and culture. Our goal is to create a high-performance organization marked by clear decision-making and innovative thinking and results focused culture.

I will have much more to say about this at our Investor Day conference in December. For now, let me cite one example. Earlier this month, we launched a program with GM to provide 1 year of car insurance with every new vehicle purchase. If this highly innovative pilot if successful, we believe a broader program could drive significant growth in our Auto & Home business. Of course, what won't change to MetLife is our commitment to financial strength and risk management. For example, faced with the threat of low interest rates pressuring earnings, we have not sit by idly. As we told you at our last Investor Day conference, we began purchasing hedges against low interest rates in 2004. I'm not sure how many in the industry can say they have hedged their interest rate risk as successfully as we have, which we think is a good example of the forward thinking we do here at MetLife. Even if the 10-year Treasury drops below 2.5% and stays there for several years, we have in place significant protection.

Just as important, we are taking steps to ensure we remain on a level regulatory playing field with our competitors. As we announced last week, we are exploring the sale of a Depository business of MetLife Bank while holding on to our Mortgage businesses. We do not believe it is appropriate for the overwhelming majority of our business to be governed by regulations written for banking institutions.

In the highly competitive global insurance marketplace, it's imperative that we be able to operate under the same regulatory framework as other insurance companies. Even if we are designated as systemically important financial institution, it will be as an insurance company not as a bank. Which brings me to the topic I know you are eager for MetLife to address, excess capital.

As we've said before, our long-term ROE target of 13% to 15% by 2015 assume some level of capital redeployment. What I want to re-emphasize is that we will manage our excess capital with the same level of discipline that we apply to other parts of our business. Bill Wheeler will have more to say about this in a few minutes. In closing, let me say how excited I am to be leading MetLife during this time of tremendous change and opportunity. I believe MetLife is well positioned to provide exceptional value to our 90 million customers and profitable growth to our shareholders.

With that, I will turn the call over to Bill Wheeler to go through our second quarter results in greater detail.

William Wheeler

Thanks, Steve, and good morning, everybody. MetLife reported operating earnings of $1.3 billion or $1.24 per share for the second quarter, which, when added to our first quarter earnings, results in an annualized ROE of 11.8% for the first 6 months of this year. There were some unusual items in this quarter. First, pretax variable investment income was $425 million, after taxes and the impact of deferred acquisition costs, variable investment income was $46 million or $0.04 per share above the top of our investor day guidance.

This was driven by strong securities lending, private equity returns and higher prepayment fees. Also as Steve mentioned, the record catastrophe activity in the United States during the second quarter resulted in a $174 million of losses in our Auto & Home business, which was $137 million or $0.13 per share after tax above plan. Lastly, as you may recall, our Japan operations is reported on a one-month lag and therefore, the impact of the earthquake in Japan that occurred on March 11, affects our second quarter results.

We recorded $44 million or $0.04 per share, after tax, in additional insurance claims and increased operating expenses. Excluding the impact of these unusual items, normalized operating earnings were $1.37 per share this quarter, generating a normalized, annualized ROE of 12.1% for the first 6 months of the year, a strong result.

Now let's take a look at the results in the quarter by line of business. U.S. Business reported operating earnings of $908 million for the second quarter, up 12% from the prior year quarter of $813 million. Excluding the results in Auto & Home, U.S. Business operating earnings were up over 30% year-over-year due to strong profit growth in Insurance Products, Retirement Products and Corporate Benefit Funding. Insurance Products' strong performance was driven by a significant increase in Group Insurance underwriting margins and continued improvement in investment margins. The Group Life mortality ratio for the quarter was an excellent 82.1% as compared to 86.6% in the prior year quarter and well below our 2011 guidance range of 88% to 93%. This results represent Group Life's best-ever mortality quarter.

While we are naturally very pleased with this performance, we do not believe this ratio is sustainable for the remainder of 2011. The Non-Medical Health total benefits ratio for the quarter was 87.5%, which was down from the prior year quarter of 87.8% and well within our 2011 guidance of 86% to 90%. In Dental, better claims activity, combined with our pricing strategy, resulted in favorable underwriting. Our disability results continue to improve due to lower claims incidents but we saw lower recoveries in the quarter. Our Individual Life mortality ratio for the quarter was a solid 84.4%. This quarter's results was higher than the exceptionally strong prior year quarter of 80.4% due to higher average claim size and lower reinsurance recoveries but still a good result. Turning to our Auto & Home business, the combined ratio, including catastrophes was 121.5% for the second quarter, which was up over the prior year quarter's results of 95.3% due to unusually heavy storm activity.

The combined ratio, excluding catastrophe, was 85.7% in the second quarter versus 85.5% in the prior year period. A non-catastrophe prior accident year reserve release, of $17 million after tax, was taken in the quarter compared to a $12 million after tax release in the prior year period. Retirement Products operating earnings were up nearly 50% year-over-year, driven primarily by strong separate account fee growth due to higher net flows and favorable investment performance. Corporate Benefit Funding operating earnings were up 34% year-over-year, driven by higher net investment income coming from both variable and recurring income.

Turning to the top line performance for U.S. Business. U.S. Business reported premium fees and other revenues of $7.6 billion for the second quarter, up 6% as compared to the prior year quarter. The primary drivers for this increase were from Retirement Products, which increased by 15% from higher separate account fees due to positive net flows and favorable separate account investment returns and Corporate Benefit Funding, which increased 53% due to higher pension closeout sales which fluctuates from quarter-to-quarter and strong structured settlement sales.

Insurance Products revenue was essentially flat year-over-year, reflecting the challenging macro environment and our ongoing commitment to disciplined growth. Auto & Home revenue was up 3% year-over-year. Now let's move to International business. International reported operating earnings in the second quarter of $507 million, up from $142 million in the prior year quarter largely due to the acquisition of Alico and growth in the business.

To give you a better sense of International's overall growth, for the quarter, International's revenues were $4 billion. This was approximately 11% higher than the second quarter of 2010 on a combined basis as if we had owned Alico in both periods. In Japan, the year-over-year increase in revenues on a combined basis was approximately 12%, driven largely by the favorable exchange rate of the yen versus the U.S. dollar and higher persistency. On a constant rate basis, revenues were up 1%. While sales in Japan were below plan this quarter due to the crisis, they were up 28% year-over-year on a constant rate basis. Sales increased in all product and distribution channels with the strongest gains coming from the bank and direct marketing channels.

In the other international regions, the year-over-year increase in revenues on a combined basis was approximately 9%, strong revenue growth in Latin America and favorable exchange rates versus the U.S. dollar were the main drivers of this growth. On a constant rate basis, revenues were up 3% while sales were up 23% year-over-year, a very strong result.

Moving to expenses, our operating expense ratio for the quarter was 23% and 20.4% when excluding the impact of MetLife Bank and Pension and Post-Retirement Benefits. Both ratios are below our 2011 guidance range of 23.5% to 24.1% and 21.2% to 21.7%, respectively, overall a good result.

Turning to our investment portfolio. Net unrealized gains in fixed maturity and equity securities were $11 billion, up from $6.7 billion last quarter. Please keep in mind that interest rate driven unrealized gains and losses in our investment portfolio are generally offset by changes in the economic value of our liabilities. With regard to realized investment gains and losses, in the second quarter, we had after-tax investment portfolio net losses of $38 million, which include impairments of $77 million after tax.

With regard to derivatives, we had an after-tax gains of $189 million, driven primarily by lower interest rates. Our Commercial Mortgage holdings continue to perform better than expected. As of June 30, our valuation allowance is $469 million, down from $532 million at March 31. The loan-to-value ratio of our portfolio improved again this quarter to 64% from 65%, as valuations continue to improve in the markets where we invest. Additionally, our delinquency rate was only 40 basis points, the majority of which we do not expect to incur any loss.

Lastly, I would like to update you on our exposure to sovereign debt in peripheral Europe. As I'm sure you are all well aware, there've been significant recent developments around the Greek sovereign debt including the announcement of a broad outline of a new financing package. These recent events had no impact to our second quarter GAAP earnings, as our expected recoveries exceed our GAAP book value.

Now I would like to provide you with an update on our capital position. Our preliminary statutory operating earnings for our domestic insurance companies for the second quarter of 2011 were quite good at approximately $820 million and our preliminary statutory net income was approximately $715 million. For this first 6 months of 2011, statutory operating earnings and statutory net income were approximately $1.4 billion and $1.3 billion, respectively. This is a good result and in line with our full-year expectations. In addition, our international capital position is strong with Alico Japan's reported first quarter current solvency margin ratio of 1,463% and new solvency margin ratio of 868%. The new solvency margin ratio measure does not become an official reporting metric until the first quarter of 2012. We are managing to a 600% target ratio on this new basis, which implies excess capital of $1.5 billion.

Cash and liquid assets at the holding company at June 30, were approximately $3.4 billion. Adding dividends, we expect to receive from our domestic and international operations, less $1 billion of cushion at the holding company, we will have approximately $4.8 billion of excess capital at the holding company available for capital management activities in the fourth quarter of 2011.

I would define holding company capital management activities to include the annual common dividend, stock buybacks, debt management and M&A activity. Regarding debt management activity, keep in mind as we have previously discussed at investor day, our intention is to repay $750 million of debt maturing in December of this year.

In addition, while I will not provide you full details of 2012 at this time, there are some incremental dividends for the holding companies that we expect next year. We recently announced the sale of a portion of our U.K. business. This freed up approximately $500 million of capital that we will have access to upon closing of the sale, which we expect to happen in 2012. Also, we expect to complete the conversion of Japan from a branch to a subsidiary by the middle of 2012 and therefore, would expect to dividend a minimum of $700 million from Japan to the holding company at that time. Therefore, we will have approximately $1.2 billion of additional dividends to the holding company that we would expect next year above our normal dividend generation for 2012.

We spend a lot of time evaluating what investments should be made in our existing businesses, and we view getting cash to the holding company as an important step toward excess capital deployment. Overall, we expect to have nearly $5 billion of deployable capital at the holding company by the fourth quarter of 2011, and we expect to generate significant cash to the holding company in 2012 as well, all of which can be used for the capital management activities that I just discussed.

With regards to timing, we are engaged in discussions with the Federal Reserve and our board regarding our capital management plans, subsequent to these discussions, which should conclude with our October board meeting, we would expect to provide further details on our capital management activities.

Overall, our capital position remains quite strong. As Steve mentioned, we remain committed to prudent capital management to create value for our shareholders. In summary, MetLife had a very good second quarter in spite of the tragic events in Japan and the extraordinarily bad weather in the U.S. this quarter. This quarter reflects the strong underlying fundamentals of our core businesses and our focus on expanding margins through disciplined growth, underwriting and expense management.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of John Hall with Wells Fargo Securities.

John Hall - Wells Fargo Securities, LLC

Steve, I have a question around the bank holding company and the like, is there a sense of timing around when that might be fully executed and is it possible for the regulatory authorities to just say no?

Steven Kandarian

John, the timing that we anticipate is second quarter 2012, and a sale would have to be approved by the Fed. But obviously we'll be very mindful of that as we think of the [indiscernible] this business.

John Hall - Wells Fargo Securities, LLC

So to the extent that capital deployment were to occur before Q2 2012, then the Fed has to be clearly on board?

William Wheeler

Yes, as we have said in a couple of times in many places all our capital management activities towards the end of this year will need Federal approval.

John Hall - Wells Fargo Securities, LLC

And then just around the International business, you've been very active around this optimization program, I was wondering, after this flurry of activities, is there more to come?

Steven Kandarian

John, we look at our overall portfolio from a strategic point of view and we're constantly assessing the different businesses that we've owned for a while ourself as MetLife and also we picked up in the Alico transaction. So there's ongoing discussions and analysis around those topics. I don't want to announce anything right now. We don't have anything to say at this moment. But I can simply say that we are constantly assessing our businesses across the entire portfolio both internationally and domestically.

John Hall - Wells Fargo Securities, LLC

Is the guiding principle, it sort of seems so far get big or get out, is that a fair way to look at things?

Steven Kandarian

I think size isn't the only measure here. Size can be a factor. It depends on the marketplace but profitability is really the key. Return on equity, delivering shareholder value is what we're really focused on.

John Hall - Wells Fargo Securities, LLC

And then just finally real quick, how do the losses out of the Auto & Home business this quarter relate to whatever your 1 in a 100 P&L might be?

Steven Kandarian

Let me turn it over to Bill Moore.

William Moore

John, it's Bill Moore. The losses in the second quarter were actually equivalent to 1 in 100 [indiscernible] for us at Auto & Home. Obviously, when we make those determinations it's based on one event as opposed to the 12 events that were in the quarter but the actual dollar amounts were about exactly the same.

John Hall - Wells Fargo Securities, LLC

And how much -- was there any reinsurance coverage on these losses?

William Moore

No.

Operator

We have our next question from the line of Andrew Kligerman with UBS.

Andrew Kligerman - UBS Investment Bank

Bill, real quickly, I missed the end of that comment about the timing of the Federal government discussions where you could redeploy capital, when are you going to finish that up?

William Wheeler

The discussion with the Federal Reserve and our board, which we think will conclude -- we'll have something more to say after the October board meeting, which is at the end of October.

Andrew Kligerman - UBS Investment Bank

And then in hearing your comments about the revenue in Japan on a constant currency basis of 1%, same-store, other international, 3% revenue growth same-store, I'm wondering when you get done with the integration and we're, let's say 2, 3 years out, would you expect earnings to track with those revenues? What kind of earnings outlook can we expect 2, 3, 4 years from now in the long term?

William Toppeta

Andrew, it's Bill Toppeta. First of all, I would tie this more to sales. Sales are strong overall. They're up 25%. In Japan, they're up 28% year-over-year. So I think what our future outlook would be will be much more tied to our sales than to our revenues. I mean, the current softness in Japan I think is almost totally explained by the tsunami, the earthquake and the results of that and maybe adding a little softness on top of that for Europe. Those things are more macro related, and I think that they will be remedied in the course of time. But making a prediction, 3 or 4 or 5 years out on earnings, I think it would be perilous, at best.

Andrew Kligerman - UBS Investment Bank

I guess, Bill, just thinking about these revenue numbers I mean because you had the strong sales, I mean, I'm just wondering if you're doing 25% sales growth 4 years from now, can you achieve double-digit earnings? That's where I'm kind of disconnected because the sales were good this quarter and the revenues same-store were not. So just quick answer. I don't know, can you direct me where I'm missing something?

William Toppeta

You're kind of breaking up a little bit, so I'm losing little bits of your question. I don't want to...

Andrew Kligerman - UBS Investment Bank

Yes, I mean just the bottom line, sales were robust and your revenues were not. So what might give me that confidence down the road that you could still do double-digit earnings out or even higher revenue growth down the road?

William Toppeta

Well, I mean, I don't know if I can add much to what I just said. I think the products are priced correctly. The margins are in the products and the sales are coming in very strongly.

Andrew Kligerman - UBS Investment Bank

Okay. And with that terrific sales growth about 25% combining Japan and other countries. What were some of the strong products that you saw out of Japan and some other products at other countries that drove these sales?

William Toppeta

Well, I think there are a couple of things. One is, I think, A&H sales are very strong and they're not just strong in Japan, where they continue to lead. I mean the A&H sales in Japan are up 10% but we told you at our Japan Investor Day that we had, before the Alico transaction even closed, that we were going to take A&H across to other markets and we are doing that successfully. A&H sales are up strongly in Latin America, in places like Chile and Argentina, in Mexico, their A&H sales are good and I think we'll get stronger in Korea. I think places like the Middle East and China are also showing strength in A&H and these are very good margin products. So I think that should add to your confidence. The other thing that I would say is it's not quite a product, but I think one of the stories that will evolve here over the next several quarters is Bancassurance. I mean our Bancassurance business is very strong with the major bank distributors like Citigroup growing strongly, the mega banks in Japan, overall, the Bancassurance sales, second quarter, are up 81% year-over-year and that's not even putting in things like what Steve mentioned about Turkey and the acquisition there the new deal in India. So I would say keep an eye on Bancassurance sales going forward because this is a very strong area for us.

John Hall - Wells Fargo Securities, LLC

Great then just one last one for Bill Wheeler. So it looks like ING sold its Latin American business to another player. So the question is in terms of M&A, is there a lot of activity going on? Are you seeing a lot of potential deals out there? Are you interested in acquiring in Brazil, for example, what are you seeing in terms of M&A activity in the near term?

William Wheeler

I would guess I'd answer that by saying there is a lot of activity and there's a lot of activity on the international front, not a lot of it is smaller. Sort of like our deal in Turkey but there's a lot of activity. In terms of our interest, look as I think we've said many times, in many places, we want to focus on growth businesses, with good ROEs, the cash that we use for this business, we have to make sure that we get a good return on and that we can build shareholder value and compare that return to other uses for that capital, and I think that our track record there is pretty good. And so there's a lot going on and we'll continue to look at it.

Andrew Kligerman - UBS Investment Bank

Okay. So I think the Turkish deal off the top of my head was about $250 million deal. So that was the kind of activity if something were to happen that I should be focused on?

William Wheeler

I think that would be typical.

Operator

We do have our next question from John Nadel with Sterne Agee.

John Nadel - Sterne Agee & Leach Inc.

A question for Steve. Steve, as you look out at the potential for U.S. downgrade, I was hoping you could just give us your views on what you think that the ramifications might be under that scenario and how you and the management team are preparing for such an outcome? Is there anything you're doing differently over the past few months with this risk rising, whether in terms of portfolio shifts or hedging activities or otherwise?

Steven Kandarian

John, yes, we have been obviously quite focused on this and let me just say that, maybe at a higher level first, that while this is a very difficult time, is following this very critical issue closely, I'll just mention that it's beyond just reason of debt ceiling that's going on in Washington right now. It's really a bit of a turning point for us as a nation in terms of getting our finances in order long term. So as painful as it is to watch this, it is kind of democracy at work, and the hope is that not just we raise the debt ceiling in an appropriate way but that we'll be addressing these long-term issues for our economy so that we remain a strong currency, a strong environment for economic growth in the future, and I am hopeful. It's hard to watch. It's difficult to see it everyday, but I am hopeful that there will be action in Washington that will be appropriate, that'll address this long-term problems in a sensible way. And we have been working very hard at this internally. I'm going to turn it over a minute over to Steve Goulart to give you some specifics but let me just say in a high level that we feel that we are well positioned even if there happens to be a 1 notch downgrade of the U.S. Treasury at this point in time. And I'm not saying that will happen, but we have to, at least, take that into consideration as a contingency.

Steven Goulart

Thanks, Steve. Certainly if you look at what's going on in the market, there's a fair amount of stress that's starting to build up. Nothing at catastrophic levels yet but we're clearly are seeing it on a daily and hourly basis, and look at different indicators like treasury bills, treasury bills have cheapened for August. They're actually trading in at bigger discounts than September bills at this point. And we've seen haircuts increase on RMBS on treasuries on many asset classes and then probably most importantly, everybody's building cash, look at the money market fund outflows, I think they have reached record levels. And it's a period of uncertainty, and what most people do is really try and liquefy those markets. As Steve indicated, we've looked hard at the implications of a U.S. government treasury downgrade, and with any of the realm of possible downgrade, there really is no impact from a capital perspective on our investment portfolio. So we don't envision any big asset class shifts, although we continually review what's developing. We are doing a couple of things, though, on a near-term basis. First is we have insured that we've extended all of our near-term treasury maturities past August. We just don't want to be in that position of what uncertainty could develop regarding developments in Washington. And the second, like I mentioned before, is we have been building cash. We've added several billion dollars of excess cash, which we think is a prudent thing to do in an environment of uncertainty that exists today. And what it does is, there's a couple of things, certainly to the extent there are any market liquidity issues developing, I think we'll be well positioned for those. And secondly is to put a little bit of an opportunistic hat on as well, and to the extent that there are investment opportunities that become available, we want to be positioned to take advantage of them. So I think we're very well positioned at this point and obviously are staying on top of what's happening in the marketplace.

John Nadel - Sterne Agee & Leach Inc.

Just as follow up to that, 5 or more years ago, you guys started to buy hedges in a higher rate environment against the low or sustained low rate environment, I'm wondering if today you're looking out and perhaps buying protection against the potential, at least, for rapidly rising rates?

Steven Goulart

Well, we always have had a very thorough, very sound asset liability management strategy underlying all of our investment activity. We have been taking advantage in certain portfolios, in certain sectors, of buying interest rate caps where it makes sense and we'll continue to do that.

John Nadel - Sterne Agee & Leach Inc.

Okay. And then just a follow up on the capital and the timing issue, not to beat a dead horse, I assume this is going to receive some more attention, but October is only a few months away in the scheme of the long term, it's not that big of a deal, but your capital position, as Bill as you laid it out, it's frankly better than I think most on this conference call would have expected and your stocks are pretty cheap. I'm just wondering why no additional sort of urgency, perhaps, to get through this process. As many others who have had to go to the Fed and get approvals have already done so.

Steven Kandarian

John, it's Steve. Let me start and Bill can add other comments. We spoke to our board when we did this, our largest transaction our history, Alico, about how we would proceed for the coming year after the closing, November of last year. And one thing that we agreed with them on was let's make sure that this acquisition is fully integrated, that we get the results that we anticipated at the time that we struck this deal and before we start thinking about capital redeployment. So that was something that we agreed to with them and the timeframe that Bill Wheeler laid out in terms of late October board meeting relates to that.

The second thing I'd say is, over the last several months, we've seen a great deal of uncertainties still remain in the marketplace around regulatory issues. And it's unclear at this time how that will impact all of us in the industry. So we just think it's prudent to wait at this point in time, as much as we understand the desire by our shareholders and others, to get a clarity on this issue of capital redeployment. But still, we think it's prudent to wait along the lines we talked about with our board last year to make a determination late October about what the right strategy would be going forward.

John Nadel - Sterne Agee & Leach Inc.

Can I just follow up on that Steve, if we go back in time to that discussion and agreement with your board, as you think about where your capital position stands today versus where you expected it would stand at that time, is it fair to characterize, is it fair to say that even for management, capital is in a better position?

Steven Kandarian

We certainly feel very good about our capital position. We are hopeful about how things will sort out in Washington around regulation. We believe the integration of Alico will continue on track as we mentioned. So overall, we're quite optimistic.

Operator

We have our next question from the line of Nigel Dally with Morgan Stanley.

Nigel Dally - Morgan Stanley

So you mentioned with International that you expect to hit all of your targets. Now at the beginning of the year, you've provided guidance for that division and at least based on our calculations in using quarter results, you need about a 9% pick up in average sales in the back half of the year to hit the midpoint. So my question is whether the midpoint is still achievable and if they were, what are the factors driving the sort of expected improvement in the back half of the year, or are we now looking at the lower end of the provided guidance? And if so, what changed relative to your assumptions at the beginning of the year?

William Toppeta

Nigel, it's Bill Toppeta. You were breaking up a little. So if I get the question wrong, you'll correct me. But in terms of the guidance that we gave back on Investor Day, we still believe that we will be in the ranges that we gave you at that time. So there's no change with respect to any of those targets. The one thing I might add because I know that some people kind of take every number and divide it by 4, that's not exactly the way we do our plan. So there is some seasonality in our plans with respect to, particularly earnings, they do tend to be more back-end loaded. So they usually start off slower in the first and second quarters, and then pick up in the third and fourth. That is consistent with this year, so, but we believe we will be in the ranges that we gave you.

Nigel Dally - Morgan Stanley

Okay. And did you see, also a question on International, yen clearly you're depreciated, so any update with regards to currency hedging plans for 2012?

William Toppeta

I'm going to pass that to Mr. Wheeler.

William Wheeler

Well, just a review of the bidding. We did talk about we put on a hedge to protect some of our earnings really we bought a floor. That obviously, that floor, exchange rate has moved away from that floor. And so we're along ways away from that target. I think today, the yen is JPY 77, JPY 78 to the dollar. We do examine occasionally to be opportunistic with regard to hedging currency. It is not our policy, by the way, to hedge currency on an ongoing basis. But when we think there's a great opportunity at a great price, we do it. So we haven't done anything since then but we do continue to look at it.

Operator

We have our next question from the line of Colin Devine with Citigroup.

Colin Devine - Citigroup Inc

Just fairly quick things, first with respect to the favorable group life mortality, was the benefit from that of a $0.03 a share and if so, isn't that what we should really be taking that out of the quarterly run rate? I would assume you expect that's going to reverse in future quarters. And second, and I really I think I'll direct this to Steve, the VA sales, I think, set an all-time industry record for the quarter for a single company, how comfortable are you at this sort of $7 billion-plus or are there some future revisions that might be coming that sort of take sales down a bit? And then lastly for Bill Wheeler, at the back changes coming under GAAP, what impact does that have for your business, thinking both with respect to how you run your core agencies here in the U.S. but also internationally, where you do, you have some big agent forces and you maybe forced to expense more immediately now than [indiscernible]?

William Mullaney

Colin, it's Bill Mullaney. Let me start on the mortality question. Yes, we had an excellent quarter as it relates to Group Life Mortality. As Bill said in his remarks, it was the best quarter we ever had. Our second quarter tends to be a better quarter for us seasonally, historically. I think in terms of thinking about the Group Life Mortality going forward, obviously, we don't think it will stay at 82%. Like I said quite a good quarter but I would think more towards the low end of the range for the balance of the year. We gave a range at Investor Day of 88% to 93% and I think modeling toward the lower end of the range is probably the best way to think about it.

Colin Devine - Citigroup Inc

So is about $0.03 the right number?

William Mullaney

Yes, roughly, I'd say that's right.

Steven Kandarian

Colin, It's Steve on the VA issue. As I mentioned in my prepared remarks that we have a filing-in to the SEC on some proposed changes. So let me just kind of state a general level to the question that like all of our products, all of our businesses, we look for a balanced growth. We have a real broad portfolio of products, of markets we're in globally. And one of the reasons we performed so well this quarter in the face of significant headwinds, headwinds related to natural disasters, related to issues in the economy in Europe and the United States and elsewhere, is that we have a very balanced portfolio. So we're very mindful of that, it's part of our strategy, it's something we focus on all the time. So we wouldn't want any one part of our business to overwhelm other parts of the business. So we're mindful of that, we meet as a team regularly on these kinds of issues. As I mentioned, we do have a filing with the SEC, which we anticipate we'll sort through in August and we'll have some adjustments to the features on the VAs. And I'll just add that when we put out GMIB Max, we have to make a call about what would be competitive in the marketplace. We thought it was a very attractive product for our customers. We thought it also help reduce our risk at MetLife, it was kind of a win-win in our judgment, and I think that has proved out in the marketplace. The features we put in place really dated back to the December timeframe in terms of the market conditions. December to August is a great deal of time in terms of changes that's going on, and we re-assess these things all the time. So you'd expect and you'll see that we'll be making some adjustments in the VA space soon.

Colin Devine - Citigroup Inc

I should assume that you love the VA space but you're not in love with it, I think as somebody used to tell us?

Steven Kandarian

Yes, I think that's right. That's a good way to think about it. You know, Colin, the one thing I would say is it is a very dynamic marketplace in the VA space right now. You're seeing a couple of things happen. First of all, the market itself is growing dramatically. If you look at the first quarter growth year-over-year, it was up over 20%. Secondly, there's been a great concentration of VA sales among the top 5 players. And today, VA sales for the top 5 were over 50% of total sales, where a few years ago it was in the low 30s. And so, the level of sales that you have in any given quarter is a function obviously of the product that you have in the market, but it's also a function of what happens in the competitive environment and we want to build products to make sure that we can react quickly to changes in the marketplace so that we continue to grow this business at a rate that we like. It's an important part of our growth story and we're committed to it. But as Steve said, we just want to manage it well in the context of our overall portfolio of businesses.

William Wheeler

Colin, and finally, it's Bill Wheeler about the back changes. So obviously DAC policy is going to change regarding what kind of a marketing and sales expenses can be capitalized next year and that's true for both Domestic, International businesses obviously. We're also going to likely, though it's not a given, we're likely to do a retrospective adjustment regarding our current DAC balance and make that conform with sort of the new accounting policies to provide sort of consistency between years and that may very well result in a one-time write-off in fact sometime in the early part of next year. Non-cash charge, obviously the change to book value. And I think some people have focused on the idea that well, gee, if the agent is an employee of a company versus to be [ph] the third party that may change your DAC policy and what can be capitalized and unfortunately, even though that may end up being through. My philosophy, and I think the philosophy of Met is we don't let accounting peculiarities drive business decisions, okay. If it's good to have agents as MetLife employees and have them sell in that way and pay them as such, accounting should not be the decision about whether or not or certainly whether an expense that's capitalized, or cost gets capitalized, or expense should not be driving that decision. It should be business driven. That said, there's likely to be some anomalies at least in the short run. In the long run, I think this all is not much of an issue. But in the short run, the next year or so, there might be some anomalies on how people's income statements work. Our peculiar issue happens in Japan or really with regard to Alico where our DAC in purchase accounting, our DAC is replaced with VOBA and which works a lot like DAC but is not able to be adjusted for changes in DAC policy going forward or certainly not in the same way that our DAC balances are. So that could cause some anomalies in some of our earnings for our International operations as well. So there's lots of little wrinkles. We're not in any position yet to kind of size these issues and in a quarter or so, we might be able to, obviously, by Investor Day, we think we'll be able to. But so it's, I guess, stay tuned.

Colin Devine - Citigroup Inc

Just to follow up on that, it shouldn't impact your capital management decisions since, of course, there's no DAC on a statutory basis, is that fair to say?

William Wheeler

That's right. So there's no DAC on the statutory basis. It's not a cash charge. It will affect GAAP book value.

Operator

And next will go to the line of Tom Gallagher with Crédit Suisse.

Thomas Gallagher - Crédit Suisse AG

First one on capital management, Bill, earlier in the year, I think the comments that you all have made suggested buyback plan that you announced at the end of this year will probably be something less than $2 billion, and it sounded also like when you're evaluating different opportunities, buyback seems to be taking a bit of a backseat to dividends. Is that still true? Can you shed any light on updated thoughts related to sort of the balance between the 2?

William Wheeler

Probably not. I guess I feel that -- look, I think we're committed to doing both. And when we talk to investors and we say what's important to you, dividends or buybacks? Guess what? We get both answers. To some investors groups they really focus on dividends, others want to see buyback activity and our expectations that we'll do both, and we'll try to do both in a balance that make sense. In my mind, it's just too early to speculate about size of deals, size of programs. And I'm not sure we'll tell the world or we'll give a program target size. I'm not sure that's how we should manage buyback activity. I think we should be opportunistic and obviously it depends on stock prices. And so there's a lot of variables. I'm not sure I can shed much more light on it.

Thomas Gallagher - Crédit Suisse AG

Okay, fair enough. I also just want to come back to the international question about revenue growth. Sort of how sales growth eventually turns into revenue growth. As we think about Met's International business, I think as it was laid out after the Alico deals was announced, this is sort of a high single-digit revenue grower if I remember correctly. So low single digit in aggregate for International seems certainly a bit on the low side. If your sales targets that you put out there and the level that you saw this quarter continue, are we going to see a pretty quick catch-up of revenues in '12 and '13? So is it still kind of a high single digit in aggregate revenue growth business and is there just a bit of an anomaly here based on sort of how sales will progress or can you help us think about that and how that would progress?

William Toppeta

Yes, it's Bill Toppeta, Tom. I would say the answer is absolutely yes. You're talking about a business that will grow high single digits. I mean the one thing that as I reflected on the question that was asked before and now on yours, I think the one thing where we might be seeing a bit of an anomaly is in the area of persistency. So our persistency is improving generally but not improving as quickly as we would like it too. So I'll give you the example of Japan. Persistency in Japan is up a little less than 1% for the quarter. We had a persistency program to roll out in Japan, which was to address a couple of things. One would be orphaned policyholder and the management of orphaned policyholders and the other one was notifications to agents in an earlier and more timely way, so that they could work on the retention of the business. Those things, those programs were all delayed by about, and I would say, 45 days as a result of the earthquake. So there may be something in the persistency area that has a bearing on this but I still think the conclusion is that this is a high single-digit growth business in terms of revenues and I think you clearly will see that going forward. The other area where I think there is a little softness as I've said before is Europe and I think those 2 things are the explanation. They are, I think, a bit of an anomaly. I hope that helps.

Thomas Gallagher - Crédit Suisse AG

It does, yes. That explains it. And then just one last question if I could, the one thing that does stand out about Met's results is the Group results are certainly holding up better than most peers, can you comment on what's going on behind the scenes there, is it pricing, is it the results you're seeing on the claims side or just better, where do you think you're at? And if peers are struggling a bit, do you think the market may, is it showing any signs of hardening, too?

William Mullaney

Yes, Tom, it's Bill Mullaney. Let me give you some perspective on the Group market overall. The results that you're seeing, I think, are clearly reflective of the disciplined approach that we've taken to managing this business over the last several years. And I've talked about on earlier calls and at an Investor Day about the aggressive pricing that we've seen in the Group market. You've seen our Group market top line results slow as a result of our unwillingness to chase the market on price. And I think what you're really seeing now is that the earnings power of this business is really coming through because we've been very disciplined about how we price and our claim results have been very, very strong. I think a great example of that is the Disability business. We hear some of our peers are struggling in that business and what I will tell you that the results -- the claim results of that business continue to be affected by macroeconomic trends, higher incidence rates, lower recovery rates. We were very early to recognize that and began pricing that into our business as early as 2009 and certainly through 2010. And so our loss ratios have held up pretty well during that because of the fact that we increased our denominator because we raised our prices. But we paid the price for that in terms of growth in that business. What we're starting to see is we're starting to see the market harden. If we look at deals that we're quoting on for 2012, which tend to be in the large case market, the pricing seems to be a little bit more rational and we seem to be getting our share of deals at prices that we're happy with. So we think the market is starting to move in our favor and I think you're going to see the Group business grow again, both top and bottom line, at more historical rates.

Operator

And our final question will be coming from the line of Suneet Kamath with Sanford Bernstein.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Thanks for the additional color on the capital position and your thoughts going forward. I think that's very helpful. I did have just a couple of quick follow-up questions on that topic. The first, as you think about the $5 billion of cash at the holding company that you could redeploy, I guess I just wasn't taking notes fast enough, did you mention what sort of implied RBC that would leave your U.S. Life subs at?

William Wheeler

I didn't. But to give you a sense of it, our combined RBC ratio at the end of 2010 was 458% and my expectation is that, that will decline by the end of 2011. And I'm not quite sure we have an internal projection where that will go to but it will head south because we don't need that much capital at the insurance subs and as I sort of said in my remarks, the excess capital that's sitting on our insurance sub, it doesn't really become deployable until it gets to the holding company and that's our expectation is what we're doing this year and we're bringing a lot of that capital up to the holding company so it then can be used for other things.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Second follow up is just on the math, you had mentioned a couple of uses of that capital, I think, debt repayment and then the common stock dividend and then obviously anything you want to do in terms of M&A, just so I have the numbers, you said $750 million of debt repayment and then whatever you guys decide the common stock dividend will be this year, is there anything else that we should think about other than the M&A and obviously the buyback?

William Wheeler

No.

Suneet Kamath - Sanford C. Bernstein & Co., Inc.

Got it. And then the last question is just on the dividend philosophy, you mentioned you kind of listened to investors in terms of what they want. Would you consider moving to more of a quarterly common stock dividend and on the path there was some reluctance because of the additional costs given your large shareholder base, but I think they're somewhat nominal. So that's something that you'd consider if investors were interested in that type of payment frequency?

William Wheeler

I guess the short answer is maybe. When we set this policy over 10 years ago, the cash or the additional expense was kind of made it prohibitive in our minds. I think things have changed. And the costs are not as significant as they once were. So it's something that we will likely examine. Other people have kind of given this feedback, too, that maybe a quarterly dividend makes more sense and so it's something we'll think about.

John McCallion

Thank you, everyone.

Operator

And ladies and gentlemen, this does conclude our conference for today, and the conference will be available for replay after 10 A.M. today until August 5, 2011, at midnight. You may access the AT&T Executive Playback Service at any time by dialing 1(800)475-6701 using the access code of 169215. International participants may dial 1(320)365-3844 using the same access code, 169215. That does conclude our conference for today. Thanks again for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.

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