MetLife Inc Earnings Call Cheat Sheet: Variable Annuities and International Business

MetLife Inc (NYSE:MET) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Variable Annuity Business

Suneet Kamath – Sanford Bernstein: My first question is on the variable annuity business, obviously you guys have added a lot of business in the second half of the year, but even as we go back to the earlier part of 2011. This business had guarantees that were richer than what you’re currently comfortable with. So, I think back to last quarter, I think you talked about ROIs 14% to 15%. I’m just wondering given the environment that we’re in, how are you feeling about those returns on a go forward basis.

William J. Wheeler – President, the Americas: Suneet, it’s Bill Wheeler. I think the ROIs that we’ve talked about on previous call, I think those are still consistent, even in the fourth quarter, obviously we had a – I would say a little bit lower than 15% ROI on our VA sales. The cost of hedging is still relatively high and so that obviously depressed the number a little bit. We don’t consider those returns adequate so obviously, that’s why we changed the roll up rate at the beginning of January, back down to 5% and we’ve also changed a number of other features. I guess I would say by the way, just keep in mind when we talk about ROIs, we are talking about fully allocated expenses here, not marginal expenses, and that’s always important. That’s how we look at it and we think that’s the right way to look at it. So we feel – the sales clearly we had in the fourth quarter and in the latter part of the year were above our cost of capital. We created value through those sales, but we think we need to improve. So therefore that’s why we’ve changed our pricing.

Suneet Kamath – Sanford Bernstein: I guess I am a little surprised to hear you say that they are not adequate, so where should we –or where do you think the ROIs on the 5% product would put you?

William J. Wheeler – President, the Americas: Well, obviously it depends on market conditions, but we want to be 15% plus in terms of ROIs. The risk profile of that product is such that we think we need to earn 15% plus.

Suneet Kamath – Sanford Bernstein: And then, my last question also on VAs is, during your interest rate call you talked about perhaps using the strategy of going back to your legacy book and using some of the asset allocation techniques in the GMIB Max and sort of rolling those out, and I guess I am wondering, if you are successful in doing that, could that have a significant impact on the ROIs of that back-book?

William J. Wheeler – President, the Americas: We are still pursuing that strategy, but it’s one of a, I would say, group of strategies we are doing to improve the performance of the inforce book. So, as a whole – as a group, I think they will have an impact that’s measurable, but that one technique is, it will depend on the adoption and the investment in those new funds, which by the way have performed very well. So, it’s nothing to do with how the funds have performed, but you’ve got to change policy holder behavior a little bit to want to invest in those new funds under existing annuities. So, I would say they weren’t pursuing a number of strategies to improve the profitability of the inforce block, and that’s one of them.

International Business

Andrew Kligerman – UBS: With regard to the international business. So, OIR was up 2% premium fees and other, Japan was down 2%. Could you give us a sense of where you expect that PFO to go in 2012? And then secondly, why do you think the margins are comparable as you increase your allocation of sales to investment products? I understand with Aflac, their margins are about two-thirds or less, the more traditional medical type products that they are selling.

William J. Toppeta – President, International: Andrew, it’s Bill Toppeta. In terms of where we think the PFOs will go next year, the total for international as we gave you on the Investor Call in December would be approximately 6%, and the breakdown on that is Japan would be a little bit above 5%, and then the other regions would be 6.7%. So, I think that there are a couple of things that will drive that going forward. The first thing I would say is a big emphasis, pretty much, in all regions on the accident and health business. We expect that there’s going to be a strong emphasis on A&H growth in all regions. In fact, we just came back from Latin America where there’s very strong growth in A&H. In a number of countries we’re seeing very strong A&H growth in Korea. So I think the trend is very good. Another point I think would be related to persistency. There are a number of management actions being taken around persistency, particularly in Japan, but also in other places. I think what we saw this year was a little bit of a delay in getting that started and that was related to the earthquake. So we’re probably, and I’ve mentioned this before, we’re probably about 3 to 4 months late on the persistency initiatives. Nonetheless, the trend is very good. The trend this year in Japan has improved persistency by about a percentage point and that’s going to benefit premiums and fees next year of course and we expect that there’s going to be continued growth with that. So I think those are a couple of the factors that make us confident that we can achieve the premium fee growth that I outlined going forward.

Andrew Kligerman – UBS: To that second question, Bill, about margins, will the earnings get moved in sync with these revenues?

William J. Toppeta – President, International: Yeah, the margins, actually the margins – this is related to the shift between FAS 60 products and FAS 97 products, the margins are – and we’ve looked at several of these products. The margins are every bit as good on the FAS 97 products. So while you may get a lower PFO number, your profitability is going to hold.

Andrew Kligerman – UBS: Just to give a little more color on the persistency number, you got one point in Japan, how many more points do you think you can get going forward?

William J. Toppeta – President, International: Well, I think we probably will be looking at something like that for next year, something between, say 0.5 to 0.7, maybe up to a full point of improvement depending upon how successful we are, but I think it’s in that range.

Andrew Kligerman – UBS: Then just one lastly. On Japan, the A&H business, do you expect some growth in that area as well or is it more other regions?

William J. Toppeta – President, International: No, we absolutely expect growth. In fact, I think that A&H sales growth in Japan is expected to be strong and I think the reason for that is a focus on distribution. So, there is going to be a lot of focus on A&H in all three channels. I would say in face-to-face, we certainly are doing very well with respect to the independent agency in Japan. I think we’ll get good strength there, but we’ll get even bigger emphasis in the Korea agent force, sale of A&H through the banks is another emphasis and then in DM, but DM with sponsors. So, I think that we’re going – in all those channels we expect to get a very good growth in A&H sales in Japan.