MetLife Management Discusses Q2 2012 Results - Earnings Call Transcript

MetLife (MET)

Q2 2012 Earnings Call

August 02, 2012 8:00 am ET


John McCallion - Head of Investor Relations and Vice President

Steven A. Kandarian - Chairman of The Board, Chief Executive Officer, President and Chairman of Executive Committee

Eric T. Steigerwalt - Interim Chief Financial Officer and Executive Vice President

William J. Wheeler - President of The Americas

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


Suneet L. Kamath - UBS Investment Bank, Research Division

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

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

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

John A. Hall - Wells Fargo Securities, LLC, Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division



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 federal securities laws, including statements relating to trends in the company's operations and financial results and the business and products of the company and its subsidiaries. MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission. MetLife specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise.

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

John McCallion

All right. Thank you, Brad, and good morning, everyone. Welcome to MetLife's Second Quarter 2012 Earnings Call. We will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures may be found on the Investor Relations portion of in our earnings press release, our quarterly financial supplements and in the Other Financial Information section.

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

Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; Eric Steigerwalt, Interim 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 Wheeler, President of Americas; Steve Goulart, Chief Investment Officer; Michel Khalaf, President of EMEA; and Bill Hogan, Executive Vice President and Head of our Japan operations.

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

Steven A. Kandarian

Thank you, John, and good morning, everyone. MetLife continued to perform well in the second quarter, particularly in light of the current environment. We delivered operating earnings of $1.4 billion, or $1.33 per share, up 18% year-over-year. Book value per share, excluding AOCI, rose to $48.60, a 12% gain year-over-year.

MetLife's story in the second quarter is one of sound execution on the fundamentals. Our underwriting results remain solid with strong performance in dental and improving results in disability. MetLife's commitment to underwriting discipline demonstrates that we will not chase sales at the expense of margins, which has proved over time to be a competitive strength. Consistent with our strategy of balancing growth and risk, we have reduced variable annuity sales in the quarter by 34% year-over-year and by 6% sequentially.

Emerging market growth, another strategic priority, was very strong in Latin America with earnings up 5% on a reported basis and by 19% on a constant currency basis. Perhaps no area better reflects the disciplined approach we take to the business than our actions to manage interest rate exposure. As you know, we provided extensive disclosure about our interest rate risk in conjunction with the third quarter 2011 earnings call. Interest rates have come down further since then. And we have done additional analysis on the impact to MetLife's earnings. I would like to share those results with you today.

The interest rate scenario we discussed last fall assumed a rate curve with a 10-year Treasury rate held flat at 2% for 5 years. We reran that scenario using a more recent yield curve with a 10-year Treasury at a record low 1.4%. The result was essentially no incremental impact on MetLife's earning per share for 2012 and 2013 and only roughly $0.05 per share in 2014.

We also examined the impact of the low interest rate environment on MetLife's return on equity. At our Investor Day in May, we said we expected to have an ROE of 12% to 14% by 2016. Even if the 10-year Treasury rate were to remain at 1.4% through the end of 2016, we would expect to hit the lower end of that range, adding roughly 100 basis points of ROE from this year's expected level despite the low interest rate environment. The impact of low interest rates on MetLife's earnings is more benign than many suspect for 2 main reasons. First, we still have room to adjust credit rates on a number of our products in response to changes in interest rates. And second, our hedging program has been highly effective. We made a forward-looking call in 2004 to start buying low rate protection when the 10-year Treasury was trading above 4%. We are reaping the benefits today, and we will continue to do so for a number of years to come.

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