MetLi Fe, Inc. Q4 2007 Earnings Call Transcript

Feb. 7.08 | About: MetLife, Inc. (MET)

MetLife Inc. (NYSE:MET)

Q4 FY07 Earnings Call

February 07, 2008, 08.00 AM ET

Executives

Conor Murphy - Head of IR

Robert C. Henrikson - Chairman of the Board, President and CEO

Steven A. Kandarian - EVP and Chief Investment Officer

William J. Wheeler - EVP and CFO

William J. Toppeta - President, International

Analysts

Tamara Kravec - Banc Of America Securities

Nigel Dally - Morgan Stanley

Thomas Gallagher - Credit Suisse

Edward Spehar - Merrill Lynch

Suneet Kamath - Sanford Bernstein

Eric Berg - Lehman Brothers

Operator

Ladies and gentlemen, thank you for standing by and welcome to MetLife fourth quarter earnings release. For the conference today, all the lines will be in a listen-only mode. However, there will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions]. As a reminder, today’s call is being recorded.

Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities laws, including statements relating to trends in the company's operations and financial results, the markets for its products, and the future development of its business. 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 in MetLife Inc.'s filings with the SEC, including its S-1 and S-3 registration statements. MetLife Incorporated 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'd like to turn the call now to Mr. Conor Murphy, Head of Investor Relations. Please go ahead.

Conor Murphy - Head of Investor Relations

Thank you John. Good morning and welcome to MetLife's fourth quarter 2007 earnings call. We're delighted to be here this morning and talk about our results for the quarter. This morning, we'll be discussing certain financial measures not based on Generally Accepted Accounting Principles or so-called non-GAAP measures. We've reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplements, both of which are available on our website 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... with the net investment related to income losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Just to let you know, we had the typo on page five of the QFS attached to the earnings press release. It had no aggregate effect. It has been corrected and it's the revised QFS that's on our website.

Joining me this morning on the call are Rob Henrikson, our Chairman, President and CEO, 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 Bill Mullaney, President of Institutional, Lisa Weber, President of Individual, Bill Toppeta, President of International, and Bill Moore, President of Auto & Home.

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

Robert C. Henrikson - Chairman of the Board, President and Chief Executive Officer

Thank you, Conor, and good morning everyone. MetLife had another outstanding quarter. We generated record top-line results across all four of our major business segments. This broad-based growth drove total premiums, fees, and other revenues to $9.1 billion in the quarter. More importantly, we continued to convert that revenue growth into earnings, increasing our fourth quarter operating earnings by 15% year-over-year. Without questioned, MetLife is winning in the marketplace every day and we are delivering shareholder value. I want to share a few specific highlights from the quarter.

Our Institutional Business continues to outperform. We grew our operating earnings 20% over the prior-year period and produced an operating ROE of 21.8% in the fourth quarter. I’ve said it before and I'm going to keep saying it, MetLife’s Institutional Business is a unique franchise that stands alone in the industry. And despite the current economic environment, our leadership position is solid. We continue to grow and retain customers; leveraging our expertise in the group benefits business and we continue to enhance our product offerings.

Last quarter, for example, we announced a strategic acquisition of SafeGuard Health Enterprises to expand our dental offering. And I'm pleased to report that that transaction closed last Friday. Following on a theme we stated before about being opportunistic relative to acquisitions, SafeGuard gives us expanded capabilities in fast growing markets that we expect to fuel continued growth in our highly profitable dental business.

In Individual Business, our focus on the fundamentals is driving our results. Our new product offerings and service enhancements initiatives are working and we're leveraging our distribution strength to grow sales. We grew fourth quarter variable annuity statutory premiums and deposits 13% over the prior-year period. And that growth was consistent both across our agency and independent distribution channels.

On the Life side, we increased total Life first year premiums and deposits by an impressive 19% over the prior-year period. This is our best result in nine quarters. We have remained disciplined in our pricing and our underwriting and now the market is coming back to MetLife.

We continue to see substantial momentum in our international segment. In the fourth quarter, we achieved record top and bottom line results. Premiums and fees and other revenues grew 14% over the prior-year period and exceeded $1 billion for the third consecutive quarter. Our operating earnings grew 26% on a normalized basis, a significant increase over the prior-year period.

MetLife's business in South Korea continues to be a highlight, driven by a combination of new product launches and our productive agency sales force that now numbers more than 4,000 sales professionals. In Mexico, we announced our strategic acquisition of AFORE Actinver. This is another great example of MetLife being opportunistic with regard to acquisitions.

The AFORE Actinver expands MetLife’s distribution power and adds more than 1 million customers to our growing pension business in Mexico. Also in the fourth quarter, our Japanese joint venture MSI MetLife was selected by the Japan Post to be the sole provider of GMWB annuity products. This is another great opportunity for MetLife.

Turning to our investment portfolio, we again produced very strong results. For the first time our quarterly net investment income exceeded $5 billion. Steve Kandarian will provide a more detailed update on our portfolio in a moment. But, first let me just reiterate a few overarching principles.

MetLife is focused on risk management. We conduct our due diligence and underwriting to drive our investment decisions. We start with a liability, a promise to our customers, and then we invest in assets that [inaudible] those liabilities. For all these reasons, MetLife continues to focus on a high quality and well-managed investment portfolio.

As I look back on full-year 2007, I'm pleased to report another record year for MetLife. We improved both our top and bottom line results, growing each measure by 7% and 18% respectively. We continue to expand our operating ROE and grow our book value at the same time. We also repurchased $1.7 billion in common stock and increased our annual dividend by 25% and we’re also pleased to have finished the year with Forbes Magazine naming MetLife as the Best Managed Insurance Company for 2008.

Looking ahead, I'm confident MetLife is well positioned to achieve further success. We will keep winning in the marketplace and building value for our shareholders.

And with that, I'd like to turn it over to Steve.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

Thanks Rob. Given the continued volatility in the financial markets, I wanted to update you on our portfolio and its performance over the quarter. The fourth quarter was a record for MetLife reaching $5 billion of net investment income for the first time. In short, we remain comfortable with the overall strength and diversification of our portfolio. Due to our focus on fundamental analysis, risk management, and proactive portfolio management, MetLife has fared very well in this environment of great volatility.

First, let me cover variable income. In this quarter pretax variable income continued to be strong and was approximately $270 million higher than plan. This performance was driven largely by higher corporate joint venture and securities lending income.

At Investor Day, we projected that our 2008 average variable income would be $305 million per quarter. This included corporate joint ventures, security lending income, bond and commercial mortgage prepayments, and real estate joint ventures. Beginning in the first quarter, we will move hedge funds into variable income and increase our 2008 average plan variable income per quarter to $350 million. We feel this adjustment is appropriate given the growth of our hedge fund program and the variability of returns.

Now let me give you an update on our subprime holdings. We remain comfortable with both the amount and quality of our subprime residential mortgage backed securities. These holdings continue to represent less than 1% of our $345 billion portfolio and were approximately $2.2 billion as of December 31, including our holding through RGA.

There were no write-downs and less than $1 million of realized losses on MetLife's subprime holdings during the quarter. The total unrealized loss increased to $222 million at December 31, due to continued spread widening. It is important to remember that these unrealized losses are only recognized if we sell the security or write-down its value. 97% of these holdings are at rated AAA or AA, consistent with last quarter. The 3% of these securities rated A or below are all from early vintages benefiting from stronger underwriting and greater housing value appreciation.

Our holdings of CDOs backed by subprime mortgages remained very small and declined to $48 million as of December 31. Virtually all these holdings are rated AAA and AA. The unrealized loss on our remaining subprime CDOs was $15 million at December 31.

Our Alt-A RMBS exposure also decreased during the fourth quarter to $6.4 billion. These holdings appear in the residential mortgage backed securities line on page 39 of the QFS. All of these investments are rated AAA and 86% are super senior AAA. These super senior tranches have approximately doubled the credit enhancement of the standard AAA tranche.

We have no holdings of Alt-A RMBS backed by second liens or option arms. During the fourth quarter, spreads in our holdings widened significantly less than a Alt-A market overall, reflecting the conservative nature of our portfolio. The unrealized loss on these Alt-A holdings was $142 million at December 31, up from last quarter’s $37 million, again due to spread widening.

I'd like to take a few minutes to discuss our commercial mortgage holdings. We owned approximately $17.7 billion of commercial mortgage backed securities at December 31. Two-thirds of our holdings are from the 2005 and earlier vintages, which benefit from better underwriting and price appreciation. In response of aggressive underwriting and declining credit enhancements in the market, we limited our purchases in 2006 and 2007 primarily to AAA and AA tranches. Overall, 94% of our CMBS portfolio is rated AAA or AA. As of December 31, our CMBS portfolio had an unrealized gain of approximately $49 million, reflecting its high quality.

In addition to CMBS, we also hold approximately $35.5 billion of commercial mortgage whole loans, which we view as a competitive advantage for MetLife, utilizing our network of 11 domestic and international real estate offices. When we first observed signs in 2005 of aggressive lending in this market, we shifted our new production to focus on lower loan-to-value mortgages that provide greater protection from default.

The average loan-to-value on our portfolio is now below 60% and less than $2 billion are in the high loan-to-value bucket of 80% or greater. We are maintaining our disciplined underwriting approach in this market and continue to focus on lower risk, high quality mortgages.

Now, let me briefly discuss current developments relating to monoline insurers. We hold only $48 million of securities issued by monoline insurers. In addition, approximately $6.7 billion of our holdings are guaranteed by monoline insurers. This includes $2.5 billion of municipal bonds, $2.5 billion of private placements, which are primarily military housing transactions, and $1.7 billion of structured finance securities.

When we purchase these types of assets, we underwrite the underlying collateral and do not rely solely on the wrap providers. As a result, we are generally comfortable with owning these assets with or without a guarantee. The average underlying credit quality of these holdings is A, and 95% of holdings are investment grade.

Finally, credit related losses in the fourth quarter were relatively modest at $49 million dollars after-tax. This includes six maturity write-downs, a real estate reserve adjustment, and losses on credit related sales. I realize you may have questions regarding these and other topics, which I'll be happy to answer in the Q&A session.

With that I'll turn the call over to Bill Wheeler.

William J. Wheeler - Executive Vice President and Chief Financial Officer

Thanks Steven, and good morning everybody. MetLife reported a $1.60 of operating earnings per share for the fourth quarter, an increase of 17.6% over the fourth quarter of 2006. We also earned $6.25 for all of 2007, an increase of 19.7% over 2006. This was another outstanding year with top-line revenues of $34.8 billion, operating earnings of $4.8 billion, net income of $4.2 billion, total assets of nearly $559 billion, and an operating return on equity of 15.2%.

Maybe I should just read that sentence again. Okay, I won't. This morning, I'll walk through our financial results and point out some highlights, as well as some unusual items, which occurred in the fourth quarter.

In the fourth quarter, we had top-line revenues, which we define as premiums, fees, and other income of $9.1 billion, a record. This represents an increase of 5.8% over the fourth quarter of 2006.

Many of our businesses turned in a strong performance this quarter. International’s revenues increased by 13.7% over the year-ago period, and that was driven by strong sales throughout the Latin America and Asia-Pacific regions.

In Individual Business, annuity revenues increased by 13% this quarter and Institutional's revenue growth was only 3.5% this quarter, which is below its normal growth rate.

Strong growth in non-medical health of 11.7% and an increase in Group Life revenue of 5.8% were offset by a decline in retirement and savings revenues. As I've said many times, retirement and savings sales can be lumpy and we did have fewer closeouts in structured settlement sales this quarter in a challenging environment.

Turning to our operating margins. Let's start with underwriting results. In general, underwriting results were solid and in line with our expectations. In Institutional, Group Life mortality of 93.2% for the quarter reflect an expected seasonal uptick, but was well within our guidance range of 91% to 95%. Disability's morbidity ratio for the quarter at 90.6% is a significant decline from the prior-year period and is reflective of our continued underwriting discipline.

In Individual Business, our mortality ratio of 82.3% for the quarter was within our expected range, but net underwriting results were less favorable than in prior year due to low reinsurance coverage on certain claims, and also a $25 million after-tax increase in our reserve for unreported claims. In addition, there were a number of DAC adjustments in both Institutional and Individual Businesses that came out of our annual review of DAC assumptions and experience.

These adjustments are reflected in our DAC balances, which flow through expenses in our income statement. The net result was an after-tax $7 million favorable adjustment in Individual Business and an after-tax $13 million unfavorable adjustment in Institutional.

Turning to Auto & Home, the combined ratio, which included... including catastrophes, was 91.1%. Included in these results is a prior accident year reserve release of $25 million after-tax compared to a $52 million after-tax release in the prior-year period. Catastrophe losses were right on plan.

As for International, changes in Argentine pension regulations caused us to modify certain liabilities and make tax adjustments. The net effect was an after-tax $105 million increase in earnings.

Moving to our investment spreads, this quarter we had high returns primarily from corporate joint ventures and securities lending, which resulted in record variable investment income of $143 million after DAC, tax, and another offsets or $0.19 per share higher than our base line plans Retirement and savings, annuities and corporate and other were the main recipients of this income.

We also benefited from significant spread improvements in the quarter in some of our short-term liability products, as liability crediting rates fell quickly with a sharp drop in short-term rates.

Moving to expenses. Our overall expense levels were up this quarter, but there are a number of one-time items, which contributed to the increase. In connection with the Argentina pension business, a $128 million pretax liability was accrued to cover an obligation to administer certain accounts. Implementation of SOP 05-1 increased expenses by $11 million pretax in Institutional. In corporate and other, we made a $12 million pretax contribution to the MetLife Foundation. And finally, there were a number of litigation reserves and other non-recurring expenses this quarter, which also increased our overall expense levels.

I appreciate that the expense line on our income statement was noisy this quarter, but we are actually very comfortable with the underlying expense activities. At Investor Day in December, we projected that the expense ratio would decline to 28% to 29% in 2008 and we are still comfortable with that projection.

Turning to our bottom line results. We earned $1.2 billion in operating income or $1.60 per share and that again is a 17.6% increase in operating EPS over the fourth quarter of last year. Also, in finalizing our tax provision in 2007, we decreased our separate account dividend received deduction estimate. And therefore, it trued up our annual estimated tax expense by $28 million this quarter.

Turning to investment gains and losses. In the fourth quarter, we had net realized investment losses of $180 million after-tax, DAC, and other adjustments. As Steve mentioned, our credit related losses for the quarter were $49 million after-tax. The remainder of the net realized investment losses was primarily driven by net derivative losses related to positions that protect economic value, but do not qualify for hedge accounting.

Our preliminary statutory operating earnings were approximately $540 million this quarter and $2.9 billion for the full-year. Certain adjustments relating to our closed block securitization reduced operating earnings in the fourth quarter, but these adjustments do get added back into our statutory capital balance. So, total statutory capital at year-end is approximately $20.3 billion.

In the fourth quarter, MetLife repurchased 11.6 million shares of common stock at an aggregate cost of $731 million under an accelerated share repurchase agreement. For the full-year 2007, the company repurchased 26.6 million shares of common stock to $1.7 billion. For 2008, year-to-date, MetLife has repurchased approximately 7.7 million shares of its common stock at an aggregate cost of $450 million, pursuant to an accelerated share repurchase agreement signed in December. Currently, MetLife has roughly $1 billion remaining on its existing share repurchase authorization.

In summary, this was a solid quarter and obviously a very strong 2007 for MetLife.

And with that, let me turn it over to the operator so that we can take your questions.

Question and Answer

Operator

[Operator Instructions]. Our first question is from the line of Tamara Kravec with Banc Of America. Please go ahead.

Tamara Kravec - Banc Of America Securities

Thank you, good morning. I have a couple of questions. First for Steve, the hedge fund program that you are moving, can you remind us what size that is and what the average returns have been there over the last couple of years? And in your CMBS, have you seen any stress there? You gave us a rundown of what your book looks like? And then one the $6.7 billion guaranteed exposure. If you could by chance tell us who that is specifically to, and what would the... what would the right credit write-down be given that some of these are going from AAA to AA and the underlying is A? So, have you thought about what that would look like? Those are my questions from Steve.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

Okay. The size of our hedge fund program is $1.9 billion. That program began in the year 2004 and has grown overtime. It's a diversified group of funds over 20... actually 25 funds in total, diversified as style and approach to the marketplace. We seek to get kind of LIBOR plus 400 to 500 times of returns on that portfolio, kind of, inception to date we've gotten those kinds of returns. Obliviously, right now the markets are a lot bumpier than have been the past. So, we'll see how things turn out over the course of this year in terms of returns. And, again, we are making that part of the now $350 million per quarter variable income number, and we put those items into a category of variable income because of the uncertainty of quarter-to-quarter returns, and also because to some degree they are really meant to bounce each other out. So, we have a lot of diversification not only within these asset classes, but among them. We look very closely at things like correlations between these alternative asset classes and that's really helped us overtime. As to CMBS, as I mentioned, we actually had a gain on this portfolio overall as of December 31. Now, since that time, as you may know, the spreads in that marketplace overall have gapped out fairly significantly. So, we'll see where that goes in the coming quarters. But, we do feel very comfortable with those securities we own. They are high-quality securities. We don't rely purely upon the bond rating agencies to make a decision as to whether to buy these securities, we underwrite these securities ourselves. The $6.7 billion of guarantees by the monolines are really earlier across a variety of different securities and also with a variety of different monoline insurers. You can guess which ones they are, I'm not going to lay out specifically in this call how much we have with each one of them. But, there is diversity in terms of our exposure to monoline insurers as to guarantees. Regarding credit write-downs, we do look at that every quarter in terms of both write-downs, losses, and obliviously, if we sell something at a loss that gets reflected in the numbers I've already given you. But, that is taking into account all the comments I've made in my prepared remarks. And, as I mentioned, overall we're still very comfortable with these securities because we underwrite them notwithstanding these guarantees. In other words, we still buy these securities without the guarantees. The guarantees are an enhancement for us. Spreads obliviously have widened because the guarantees now are not viewed as being as solid as previously thought. But, again, those are reflected in our numbers we gave you about unrealized losses and credit write-downs.

Tamara Kravec - Banc Of America Securities

Okay. And then, I guess my questions for Bill would be, you given that the challenge in the loan markets right now. LIBOR is basically collapsed and what the acceleration in the Fed fund… Fed fund's rate being cut. Has your outlook at all changed? You're looking for a steeper yield curve in the second half of '08, but I know you are more predisposed to the spread between the LIBOR and the two-year treasury. So, if also you could just talk about that, that'll be great.

William J. Wheeler - Executive Vice President and Chief Financial Officer

On Investor Day, I showed this really clever graph that showed the spread between two-year treasuries and one-month LIBOR and I said that's what you should look at to, assume how profitability, sort of, our short-term spreads. And in hindsight, I think, well, experience has proven that that was probably inaccurate, because when we do sec lending, our any sort of short-term lending... or short-term investing, we're not buying to your treasuries, okay. So, even though the treasury yield curve is still sort of inverted because of the two-year solo, even after all the rate cuts, credit spreads have widened and they've sort of compensated for that. So, when we think about our sec lending activity or our investing in the short-term liabilities related to Group Life or retirement and savings, we're already at what I would say kind of a normal shaped yield curve and that's what sort of happened in the fourth quarter. So, our spreads clearly widened and we clearly benefited from the drop in LIBOR and Fed funds. So, we're less tied to the treasury curve than I probably appreciated in December, because the credit spreads have clearly compensated for that, that's good news. In terms of our outlook, we had assumed that short-term rates would come down sort of in the second half of 2008, and of course they have come down a lot in January. I think Fed fund rates have been cut 120 basis points so far, and people think they are more to come. This is clearly going to help our short-term investment spread margins, and that's a nice big thing. Now, we did expect that these spreads would widen over the course of the year and that was built into our plan, but clearly, spreads are going to be wider and that's good thing. That in my mind kind of compensates for this relatively poor equity performance that’s happened so far this year, and in many others ways we really have. So, the short-term interest rate environment and what's happened is clearly a positive for us and has given us a lot of confidence.

Tamara Kravec - Banc Of America Securities

Okay. My last question is just on... in Japan. I know it has only been 2 months since you commented on the Japan Post. But is there any update there, in terms of an outlook on distribution sales or anything?

William J. Toppeta - President, International

Hi, Tamara, Bill Toppeta. No, there's really no update. We continue to work with the colleagues at the Post and to get ready for the commencement of sales. Sales will begin around the middle of the year. But, nothing further that I have to add beyond what I told you on Investor Day.

Tamara Kravec - Banc Of America Securities

Okay. Great. Thank you.

William J. Toppeta - President, International

Okay.

Operator

Over next question is from the line of Nigel Dally with Morgan Stanley. Please go ahead.

Nigel Dally - Morgan Stanley

Great. Thank you. Good morning. Just a follow up on the progress and you said spreads are clearly going to be wider. Is it possible to put the numbers around the earnings impact from what we've seen from the bid? Second on the monolines. Can you provide a little more color on the $1.7 billion, I think it was of the structured finance investment, what's included in that and what are the underlying ratings on that bucket? And then just lastly on the excess variable income. If you can provide us with an update on the outlook for that... the mix, a quarter or two, given the turmoil in the equity markets, you said $350 million of quarterly earnings still achievable in the near term? Thanks.

William J. Wheeler - Executive Vice President and Chief Financial Officer

I'll pick the first and the third and I'll let Steve comment on the monoline exposure in a minute. Nigel, can you just repeat your first question a little more clear, I want to make sure I heard it correctly and it was the little clipped?

Nigel Dally - Morgan Stanley

Yes. Sure. You mentioned that spreads are clearly going to be wider given the aggressive Fed easing. Just hoping to get some numbers around what kind of earnings impact we would likely see from that? if it is possible to put kind of like a range around the potential earnings impact?

William J. Wheeler - Executive Vice President and Chief Financial Officer

I think it’s a little too early to say, yes. I can't give you a specific number. Remember in a lot of... the kind of size it for you and for everybody on the phone, remember we've said many times and I think I said it in last December, the inverted yield curve costs us about $200 million a year after-tax. So, that means we're going to have $200 million, which is about $0.30… it's not quite $0.30 a share. That means we're going to have, we are going to... this environment is going to swing back a full 30 this year. I don't think so. It will be some... it will be some fraction of that, but probably a healthy fraction. So, it's a little bit about how fast it comes back, and how quickly we get the portfolio repositioned, it doesn't... though it seems to have happened in the fourth quarter, the transition doesn't happen all overnight. But, that gives you sort of a feel for the order of magnitude of this phenomenon. You want to do the monoline?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

The monoline guarantees, the $1.7 billion in the structured assets, really cover a lot of different asset categories. A lot of it is in the ABS segment, auto loans, some of that is also subprime, as well as a little bit in credit cards.

William J. Wheeler - Executive Vice President and Chief Financial Officer

And then finally, we are going on with excess variable income. Remember now, just to sort of repeat. We had a record variable income quarter, why? Well, private equity returns were good, they weren’t the best we've ever had, they were good. But, really… what really was probably that we had the best sec lending quarter I think we have had in a long time. So, that sort of what drove the bottom line there. In terms of the outlook, on Investor Day, we said, look we don't expect private equity returns to be this good, and in fact in terms of our return assumptions in our base plan we're lowering them from the 2007 plan. Okay, now the question is this… and I think that's probably true. The question is did we lower them enough, and I really have no idea. I do know this however, we do have some insight into... some visibility into the first quarter results in private equity, and I think it's going to be okay and consistent with sort of our plan assumptions. So, now second quarter, I have no idea. The other thing you have to keep in mind is, and this relates the variable income, securities lending is in our variable income calculation and securities lending spread we are going to widen and we're going to make more money there. Will it compensate entirely for any short fall in private equity, I cannot say, but it's going to be a positive thing. I mean, I don’t know, in the middle of February, we are pretty [inaudible] okay, in terms of how we feel right now. And that is about as much insight as I can give you.

Nigel Dally - Morgan Stanley

Okay very helpful. Just one follow-up, equity markets down, can you just provide us an update on how sensitive your core earnings are outside of the private equity in the Life to changes in the equity markets?

William J. Wheeler - Executive Vice President and Chief Financial Officer

Yes. The real of thumb is, a 1% change in the S&P 500 is a $0.01 change in our earnings per year.

Nigel Dally - Morgan Stanley

Great. Thanks a lot.

Operator

The next question is from the line of Tom Gallagher with Credit Suisse. Please go ahead.

Thomas Gallagher - Credit Suisse

Good morning. Bill, I just wanted to follow-up on Nigel's question about equity sensitivity first, the $0.01 impact from a 1% decline, does that contemplate any change in the net investment income yield in the $12.2 billion of equity securities and other LP interests?

William J. Wheeler - Executive Vice President and Chief Financial Officer

We have to think about redefining that category because it's causes a lot of confusion. By the way, one other thing I thought of while you were asking your question, Tom, before I get to that is, in our base plan we assume a 5% return to the equity markets when we figure out our profitability. By the way, we've done that forever… or ever since we've been public and we've assumed 5%. So, we are not too hopeful, in terms of... when we set out our base expectations. With regard to the equity securities and I'll let to Steve go, he will wink at me if I say some something incorrectly. There is a lot of stuff in there. All of our alternatives are in that category, that $12 billion or so bucket. There is very little real common equity in there, there is a little in there. Most of the rest of it is sort to preferred that’s got an income yield. So, that's what going on there a little bit. Anything else you'd add to that?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

By preferred, we are also talking about hybrids, okay, which obviously have an income that are little lower on the capital structure. Sometimes those get classified as preferred or equities and sometimes they get classified as that and all this depends on the terms of their indenture. So, that's a little bit of... that gives you a sense of that. So, almost… I would say virtually none of that category is factored in 1%, $0.01 equation. What I am talking about, when our equity exposure is really fees on the various separate accounts and variable annuities and now that's most of it and then a little bit is related to our pension plan.

Thomas Gallagher - Credit Suisse

Okay. So, the variability in that line is… we should isolate separately if that's going to move around at all?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

That's right.

Thomas Gallagher - Credit Suisse

Okay. That's fair enough. Can you remind us how big the pool of liabilities that you have or that reset with short-term crediting rates and exactly what those are? I believe some of those are behind the Group Life business in MetLife Bank, but anyway I was just curious on that.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

You can pick it right off our balance sheet that the securities lending activity was just under 45… footings are just under $45 billion at year-end. It is a pretty big number. The Group Life, we put in two buckets, $10 billion of short-term liabilities, which reset practically weekly are in something called the total control account and there is another, what $5 billion or so? $8 billion or $9billion that’s sort of in the other bucket that also is tied to Fed funds rates. So, they reset, so that's another in totaling Group Life about $18 billion, and then retirement and saving, short-term liability are roughly $20 billion. So, that gives you… so $20 billion, $38 billion, $45 billion, that's $83 billion. It’s a lot. The total general account is $335 billion, I think, at the year-end. So, almost a fourth of our entire general account is tied to short-term rates. So, you can se the kind of leverage that a decline in short-term rates has for us, it’s a good thing. So, this is important.

Thomas Gallagher - Credit Suisse

Okay. So, bottom line there is $80 billion or so of your liabilities really do benefit from the steep bidding curve almost virtually immediately?

William J. Wheeler - Executive Vice President and Chief Financial Officer

Virtually immediately… it can take a couple of quarters.

Thomas Gallagher - Credit Suisse

Okay.

William J. Wheeler - Executive Vice President and Chief Financial Officer

That being the longest it takes. But, yes, that benefits.

Thomas Gallagher - Credit Suisse

The last question I had for Steve. I think some of the private equity concerns that are coming up right now are centered around kind of '06, '07 vintage investments. So, just curious if you could give us any kind of reconciliation in terms of your total portfolio? How much of your commitments [inaudible] have been made '06, '07 versus prior?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

About 31% of our outstandings in the LBO category are '06, '07 vintages. So, that will have some impact obviously depending on how those deals turn out. At the same time, I would say that the good news is the ability to buy things at lower prices today certainly, it’s more attractive in that way. Financings is tough, so we'll see what kind of deals end up getting done here. But, as we said before, this is a category that has some cycles to it. We've had a lot of wind to our back the last few years. We benefited from that. We were mindful, and we’ve called this out for quiet some time that this is not going to last forever, these kinds of 30%, 40% returns would not last forever. So, we have anticipated and we reflected in our guidance a softening in this marketplace and as Bill has mentioned, I think I have mentioned as well, we anticipate that other categories of our alternative investments may do better, and there could be some offsetting here. We are still comfortable overall.

Thomas Gallagher - Credit Suisse

Okay. Thanks.

Operator

Our next question is from the line of Ed Spehar with Merrill Lynch. Please go ahead.

Edward Spehar - Merrill Lynch

Thank you, good morning everyone. A couple of questions on commercial real estate, and then one on short-term liabilities. First, could you give us a comparable number perhaps to the 60% or less than 60% loan-to-value today, back in say the late '80s, early '90s period? I don't know if you have that. And then, related, could you tell us how to think about or your thoughts on the percentage decline that you could see in commercial real estate that could be absorbed by the AA or AAA type tranches of CMBS, so we can get some sense of sort of how to think about comparable loan-to-value type of approach? And then finally, Bill, on the $83 billion of short-term liabilities, if you just looked at a 100 basis point decline in rates, I think you needed… sort of tax affecting, you get a fairly big number. So, I'm wondering is there some offset when we think about, kind of, spread widening for those businesses? Thanks.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

I will take the first couple Ed. In terms of commercial real estate markets, we mentioned our portfolio is overall below 60% loan-to-value, and the we backed up in the '06, '07 timeframe in terms of how we are lending in terms of our risk levels. So, let me kind of back up a little bit and tell you what we really issue mortgages on. We really have pulled back from a lot of secondary markets, really for several years now. So, virtually everything we have now in portfolio is what I call A markets and A kinds of properties, fully leased out kinds of properties. So, it's really a very low risk, low loan-to-value portfolio overall. And we felt that was prudent to do. In fact, if you remember the last couple of Investor Days, I talked about not being paid to take risk. This is one of the parts of the portfolio where we felt we are not being paid to take risk. We are mindful of… you just brought up the late ‘80s, early ‘90s period where the real estate market got sideways and there were significant losses. I should point out though that this market probably has to be distinguished form that late ‘80s, early ‘90s market place, where people were building buildings with oftentimes little or no equity in the deals, and there was great over supply in the marketplace in that point in time. That is not what we are seeing today. What we are seeing today I think is a decline in market values because cap rates have become so compressed, people start saying to themselves just doesn't make sense, I can’t make a reasonable return, there are other I can make returns than in this asset category, given current market conditions. So, as of now, we feel very comfortable with our overall standing in our own whole loans. As to the CMBS marketplace, again, well over 90% we hold is AAA, AA. There is loss subordination in those structures. We underwrite them ourselves. As I mentioned at year-end, at least, there was a gain in that portfolio in the marketplace, which is traded mark-to-market day-to-day. So, I think that demonstrates even with the spread widening I mentioned since December that the portfolio overall is very, very high quality and we really feel good about what we're holding right now.

Robert C. Henrikson - Chairman of the Board, President and Chief Executive Officer

This is Rob. This is one of these things where I think Steve’s answers are right on. I'd like to crawl a little bit, if I might, about our real estate operations. Keep in mind, we have been and continue to be a very complete real estate organization and so that when you're looking at say 60% loan-to-value ratios, people like to focus on the 60%, we kind of focus on 60% of what. So, in other words, when we value the properties to which we are lending and the owners and the operators and so forth and so on we value that property in the same way we would as if we were buying it as an equity investment ourself. So, I think, this is an area in terms of those high quality properties, in terms of their locations, the diversification, the operators of them, the quality of the location themselves, and so forth, I think it might be helpful to view that in the context of MetLife as a real estate investor in a broader way and as you know our track record on the equity side would certainly indicate that we are pretty good at estimating real estate values in such a way that we take into account recessionary pressures, real estate changes in the marketplace, and so forth that have much greater effect on the secondary markets than they do our portfolio. Right now, where the competition for this lending tends to be… for example, banks at this area of the business, we actually have more opportunity now to do deals at that 60% loan-to-value ratio. So, it's a very, very nice position to be in. Just thought I'd add that thought.

William J. Wheeler - Executive Vice President and Chief Financial Officer

Your last question about math on spread widening, you said $83 billion. If the short-term rates go down a 100 bips, that's a lot of money that seems like a lot more money than what you've been discussing, just to do the math there everybody, hopefully, I can do this in my head. The $83 billion, 100 bips, that’s $830 million pretax. Okay, I talked about $200 million after-tax adjustment that's about $300 million pretax, so what's the difference between $800 million and $300 million? You have to remember that in our short-term portfolios, we're not... what are the assets that back those short-terms liabilities that float. Well, there are short-term assets that float, that's what a lot of it is. So, even though our crediting rates will also come down, so will a lot of the assets, in terms of their yield, they will also come down, okay, that's asset liability matching, that's what insurance companies do. The reason why we'll get spread widening is because we do run in these short-term liabilities, we do run a mismatch. We talked about the softening for a long, long time, where sometimes we'll increase duration and we'll use fix rates and the mismatch isn't dramatic, it maybe one year or one and half year sort of mismatch, when you get a good steep yield curve. But, that sort where that spread widening comes in and so it's only a part of the 830... the liabilities are $83 billion, but obviously the mismatch part of the asset portfolio is smaller than that. So, yes, there is a big offset to sort of just 100 bips times $83 billion. Again, so, the order of magnitude, $300 million pretax that's for a full year and a full steep curve, that's not a bad number.

Edward Spehar - Merrill Lynch

Thank you very much.

Operator

Our next question is from the line of Suneet Kamath with Sanford Bernstein. Please go ahead.

Suneet Kamath - Sanford Bernstein

Hi, good morning. Just two questions. First, can you just walk through your methodology for other than temporary impairments? Just wondering if you go by the rule of thumb, $0.80 on the dollar for six months or longer is there another level of subjectivity in there where you may or may not take the write-down or is it pretty formulated? And then second in terms of the buybacks, you mentioned the accelerated share repurchase program in the first month of the year. Any thoughts in terms of executing another one in the near-term and is there an issue around having to wait for that other program to expire before you do another one? Thanks.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

I will take the impairment question first. The first thing we look at his whether we are receiving all contractual payments and whether we plan to hold the security to maturity, and then we do use rules of thumb related to six months and 80%, but they are just rules of thumb. So, we have laid out for you in the QFS movements in those numbers for the six-month category, which you can see. Obviously, with spread winding in certain asset classes and fairly dramatic in the marketplace, that number has gone up. We will continue to monitor that, we will see what the market brings to us in terms of spreads up or down from here on. But, that's the standard we use as I just laid out.

William J. Wheeler - Executive Vice President and Chief Financial Officer

Suneet, in terms of the buyback activity, this is worth talking about just a minute. In December, before we went into blackout, we executed an ASR and the terms of it were... we paid the investment bank the money and they started buying back stock in early January and they bought back 7.7 million shares, that program is done, okay. They have already executed it. But, we are still in blackout obviously and will be in blackout until we file our K and then we can consider our options for buying back more stock and whether will do another ASR or not. ASRs don’t not necessarily mean you get stuff cheaper, but it just helps you especially... it helps you sometimes in terms of flexibility in terms of during buybacks in more challenging periods. We have put out a goal or an objective on Investor Day of day buying back $2.2 billion worth of stock this year. Remember, that was in two buckets, that was $750 million of sort of a general buyback and a $1.45 billion buyback related to effectively defuse [ph] the converts. I don't think by the way that... because the stock price has comedown, I don’t think the cost of defusing the converts is $1.45 billion anymore, it’s a little less than that. With the stock we're it is now, without commenting on the stock price, I think we'll be aggressive buyers, in the near term We have a lot of stock to buyback this year and I see no reason to hesitate in terms of moving forward. But, we got to get out of our blackout first.

Suneet Kamath - Sanford Bernstein

Okay. Thank you.

Operator

Next we’ll go the line of Eric Berg with Lehman Brothers. Please go ahead.

Eric Berg - Lehman Brothers

Thanks very much and good morning to everyone. Few questions. With respect to variable income, you normally have changed your pre quarter forecast or full-year forecast. Does this reflect only the inclusion now of hedge funds or have you really upped your forecast? If you sort of see what I mean.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

Eric, it's Steve. We've simply layered in the hedge fund component of our returns.

Robert C. Henrikson - Chairman of the Board, President and Chief Executive Officer

So, it's just a matter of… we've redefined it a little of bit. We haven't really changed the underlying investment return forecast. It is worth to spend just a second on this. We have this concept of variable income for a while now. We didn't include hedge funds when we first defined variable income because we had very well hedge fund investments. And since that time, the category has grown and if... certainly, in the past year, 2007, we have had some quarters where... we had one quarter where it really outperformed and two quarters where it under-performed and we realized… I don’t think it was any shock to us, but it’s material enough now that it has... it should… the variability in the performance is starting to matter. So, we said, this is just like any of these other alternative asset classes, it really should be redefined and put it variable income. It makes sense to do it that way. So, we're just saying in... our plan, we assume will hit about roughly $45 million or so from hedge fund returns and we are going to just redefine variable income. So, there is really no chance in our bottom line forecast because of that. I hope that was clear.

Eric Berg - Lehman Brothers

Very clear. I guess my follow-up question. The only thing that has changed here since we last left you is that it seem… this is my impression is that you’ve become much more optimistic than you had been about the outlook for securities lending income, a big and important earner for MetLife. If your views on private equity haven't really changed, you’ve ratcheted down your expectations from 2007. But, it doesn't sound like you're any more optimistic or pessimistic than you were in December. Your views basically haven't changed I think. On the other hand, you are much more optimistic about securities lending. I was thinking you'd be raising your outlook for variable income? That’s why you said I should be a lawyer, maybe I should be.

William J. Wheeler - Executive Vice President and Chief Financial Officer

Exactly. You are in the wrong profession, Eric. I think what you say is true. But, I guess, I would…. because I don't know… we obviously assume the private equity returns are going to come down in 2008. We just don't know exactly how much. There is no really clever refined way to assume what private equity returns are going to be. We know they were going to come down. We revised our plan accordingly versus our '07 performances or even our ‘07 plan. Did we bring them down enough, I just don't know. Again, we have some insight that the first quarter is going to be okay. But, the rest of the year is just a great unknown. So, in my mind, I'm not ready as to kind of revise '08 guidance because, I mean, it's just too early. But, I think you sort of captured the spirit of our thinking pretty well.

Eric Berg - Lehman Brothers

Okay. I understand that. Helpful answer. Last question relates to use yields in your portfolio. I think you said today that because of the widening of credit spreads, even though there has been a decline in interest rates, yields are going up. Is that the right take away, because we looked last night at what has happened on BB tranche is over time… not tranches, BB bonds, BBB bonds, A and so forth. And it looks to us like the decline in interest rates, the sift down in the yield curve has in most instances overwhelmed by a wide margin the widening of credit spread. Meaning, it looks to us like, in general, investment yields, our new investments, have come down not gone up. Maybe this question is best directed to Steve. What are you investing your new money at today and how does it compare, given these cost currents to what the rates were just a few months ago?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

It is moving a lot, Eric, and depends upon the asset class as well. So, overall rates have come down more than probably spreads in certain categories, but then other categories, for example, commercial mortgages, as Rob saying, the banks have basically stopped lending, some CMBS kinds of structures have really slow down because that market is kind of ceased up. So, we're now issuing commercial mortgages at 55% kind of loan-to-value situations with very low risk at very, very wide spreads, and we're taking advantage of that in the marketplace that more than offsets the interest rate declined. So, really is asset category by asset category. And also I had mentioned that, we really were in a defensive posture in 2007. Again, we had signaled back to you in our Investor Days in our comments then, but not being paid for risk. And now we're able to go into things thanks to our high quality, A and above, but the spreads have really widened out because of dislocations in the capital markets. So, I’d say overall our new money yields are about flat, maybe down slightly, but very, very slightly.

Eric Berg - Lehman Brothers

Thank you very much.

Operator

Our final question will be from the line Tom Shinoki [ph] with Goldman Sachs. Please go ahead.

Unidentified Analyst

Okay. Thank you. I’d really try to make two quick questions here. One, Steve, if I just follow up, just a little bit more clarification on the commercial real estate, of this approximate $36 billion, how much of that would be in the '06 and '07 vintages. Can you distinguish between loan-to-values in those years versus kind of the average for the whole portfolio and what kind of the min and max is? And I have got a second question. Do you understand that?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

I'm trying to find the data to give you a specific answer. You're referring to the whole loans?

Unidentified Analyst

I guess say the $35.5 billion is what we've been focusing on it in terms of the commercial real estate loans.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

Yes, the commercial real estate loans that we generate ourself is $36 billion, roughly.

Unidentified Analyst

Right. I was just wondering in the '06, '07 then it's roughly… how much would be in those years?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

There is about $20 billion in '06 and '07, which is why you saw that number go down in terms of loan-to-value because, as I mentioned, we became very conservative. We got to a point where we said we are not being paid to take risk. So, we got into big markets, major buildings, loan-to-value and so on.

Unidentified Analyst

So, your loan-to-value actually went down. I just wanted to clarify, I thought that’s what I heard.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

It went down because, as you may remember, a lot of refinancings got done that period. So, so of our mortgages from the past got refinanced away from us in some cases because we didn't want to play and risk your things. And we can find CMBS structures at very tight spreads and they were refinancing away from us, but the loans we put in the books were again very conservative.

Unidentified Analyst

Right, Okay. And then I just wanted to just clarify one other thing. I know we have been over this a couple of times. It’s the whole interest rate sensitivity because in your Investor Day, you had a chart in there where you ran a variety of interest rates scenarios with Federal Reserve cuts rates aggressive and you seem to imply that’s worth about $115 million. Should we assume that what the Fed has done thus far is not aggressive or it is aggressive, and does the $115 million still hold?

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

I am try to remember exactly those models how far down we took Fe funds and the discount rate and all the rest. But, it was some pretty aggressive declines. I am sorry I don't have that data with me right now, but I will...

Unidentified Analyst

Would you characterize what the Fed [inaudible] it seems to be what the Fed has done is pretty aggressive.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

It is pretty aggressive and we anticipate more as well.

Unidentified Analyst

Okay.

Steven A. Kandarian - Executive Vice President and Chief Investment Officer

The numbers you saw in Investor Day, I don't think will change very much at all.

Unidentified Analyst

Okay, terrific. Thank you.

Operator

And ladies and gentlemen, this conference is available for a replay. It starts today February 7 at 10 AM Eastern will last until next Wednesday, February 14 at midnight. You may access the replay at any time by dialing 320-365-3844 and entering the access code 904277. The number again, 320-365-3844 and the access code 904277. That does conclude your conference for today. Thank you for your participation and you may now disconnect.

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