Ladies and gentlemen, thank you for standing by. Welcome to the MetLife second quarter earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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 statement, whether as a result of new information due to developments or otherwise. With that, I would like to turn the conference call over to John McCallion, Head of Investor Relations. Please go ahead.
Thank you, Ernie. Good morning, everyone. Welcome to MetLife's second quarter 2011 earnings call. We'll 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 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 MetLife Auto & Home, and DonnaLee DeMaio, President of MetLife Bank. With that, I'd like to turn the call over to Steve.
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. 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 U.S. and Japan. As you know, I became President and CEO of MetLife on May 1st. 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 improvement, 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. They have also sharpened 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 in 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 specific reasons vary from political uncertainty to asset-liability mismatches to integration costs.
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 environment. 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 through its branch network.
PNB, the second largest bank in India, gives MetLife access to 60 million customers through 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 the strong international sales we experienced in the second quarter. Total international sales for MetLife Alico were 25% higher than they were for the companies 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, they were 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 on our 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 solution that significantly reduces our hedging costs and we believe will provide customers with more consistent returns over time. Given our goal of 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 strong underwriting results and higher net investment income.
We believe our strategy of maintaining discipline in underwriting and pricing is the right one and is starting to pay off. 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 and technology to brand and culture. Our goal is to create a high-performance organization marked by clear decision-making, innovative thinking, and a 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 one year of car insurance with every new vehicle purchase.
If this highly innovative pilot is successful, we believe a broader program could drive significant growth in our auto and home business. What won't change at MetLife is our commitment to financial strength and risk management. Faced with the threat of low interest rates pressuring earnings, we did 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 the 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 a highly competitive global insurance marketplace, it is imperative that we be able to operate under the same regulatory framework as other insurance companies. Even if we are designated a systemically important financial institution, it would 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%-15% by 2015 assumes 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.
Thanks, Steve. 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 six 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. As Steve mentioned, the record catastrophe activity in the U.S. during the second quarter resulted in $174 million of losses in our auto and home business, which was $137 million, or $0.13 per share after tax above plan.
As you may recall, our Japan operation is reported on a one-month lag, therefore the impact of the earthquake in Japan that occurred on March 11th 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 six months of the year. A strong result. 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 and 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%-93%. This result represents 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%-90%.
In dental, better claims activity combined with our pricing strategy resulted in favorable underwriting. Our disability results continued 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 unusually heavy storm activity, but still a good result. Turning to our auto and 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 unusually heavy storm activity. The combined ratio excluding catastrophes 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 premiums, 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 fluctuate from quarter-to-quarter, and strong structured settlement sales. Insurance products revenue was essentially flat year-over-year, reflecting the challenging macroenvironment 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 is 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%-24.1% and 21.2%-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 added 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 31st. 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 have 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. 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 six 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 to the holding company 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.
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 Steven 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. With that, I'll turn it back to the operator for your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touchtone phone. You'll hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please for the first question. Our first question will come from the line of John Hall with Wells Fargo Securities. Please go ahead.
Good morning, everyone.
Morning, John.
Yeah. 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? Is it possible for the regulatory authorities to just say no?
Hi, John. The timing that we anticipate is second quarter 2012. A sale would have to be approved by the Fed. Obviously, we'll be very mindful of that as we think of the purchasers who have this business.
To the extent that capital deployment were to occur before Q2 2012, then the Fed has to be clearly on board?
Yes. As we have said, a couple of times in many places, all our capital management activities towards the end of this year will need Fed approval.
Okay, great. Just around the international business, you've been very active around this optimization program. I was wondering, after this flurry of activity, is there more to come?
Well, 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 ourselves as MetLife, and also we picked up in the Alico transaction. 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. I can simply say that we are constantly assessing our businesses across the entire portfolio, both internationally and domestically.
Is the guiding principle, it sort of seems so far, get big or get out? Is that a fair way to look at things?
I think size isn't the only measure here. Size can be a factor, it depends on the marketplace, profitability is really the key. Return on equity, delivering shareholder value is what we're really focused on.
Okay. Then just finally, real quick, how do the losses out of the auto and home business this quarter relate to whatever your one in 100 PML might be?
Let me turn that over to Bill Moore.
John, it's Bill Moore. Yeah, the losses in the second quarter were actually equivalent to a one in 100 year event for us at Auto & Home. Obviously, when we make those determinations, it's based on one event as opposed to the 12 events that occur in a quarter. The actual dollar amounts were about exactly the same.
Got you. Was there any reinsurance coverage on these losses?
No.
Okay. Thank you.
Bye.
We have our next question from the line of Andrew Kligerman with UBS. Please go ahead.
Oh, great. Craig, good morning. Hey, Bill, real quickly, I missed the end of that comment about the timing of the Federal Reserve discussions where you could redeploy capital. When are you going to finish that up?
The discussions with the Federal Reserve and our board, which we think will conclude or we'll have something more to say after the October board meeting, which is the end of October.
After. Okay, great. 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 two, three years out, would you expect earnings to track with those revenues? What kind of earnings outlook can we expect two, three, four years from now in the long term?
Well, Andrew Kligerman, it's Bill Toppeta. I guess, 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. I think what our future outlook would be would 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 you add in 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. Making a prediction three or four or five years out on earnings, I think would be perilous at best.
Yeah. 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 four years from now, can you achieve Double-digit earnings growth. That's where I'm kind of disconnected because the sales were good this quarter and the revenue same store were not. Just quick answer, I don't know, can you correct me where I'm missing something?
Yeah, you're breaking up a little bit, so I'm losing little bits of your question. I don't want to-
Yeah. Just the bottom line, sales were robust and yet revenues were not. What might give me that confidence down the road that you could still do double-digit earnings or even higher revenue growth down the road?
Well, I don't know if I can add much to what I just said.
Okay.
I think the products are priced correctly, the margins are in the products, and the sales are coming in very strongly.
Okay. Yeah, with that terrific sales growth, about 25% combined, Japan and other countries, what were some of the strong products that you saw out of Japan and some of the products in some other countries that drove these sales?
Well, I think there are a couple of things. One is, I think A&H sales are very strong, they're not just strong in Japan, where they continue to lead. The A&H sales in Japan are up 10%, 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, we are doing that successfully. A&H sales are up strongly in Latin America, in places like Chile and Argentina. In Mexico, A&H sales are good, I think will get stronger in Korea. I think places like the Middle East and China are also showing strength in A&H, these are very good margin products. I think that should add to your confidence.
The other thing that I would say is it's not quite a product, I think one of the stories that will evolve here over the next several quarters is bancassurance. Our bancassurance business is very strong with the major bank distributors like Citigroup growing strongly, the mega banks in Japan. Overall, the bancassurance sales on second quarter are up 81% year-over-year. That's not even putting in things like what Steve mentioned about Turkey and the acquisition there, the new deal in India. I would say keep an eye on bancassurance sales going forward because this is a very strong area for us.
Great. Just one last one for Bill Wheeler. It looks like ING sold its Latin American business to another player. 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?
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. A lot of it is smaller, sort of like our deal in Turkey. There's a lot of activity. In terms of our interest, look, as I think we've said many times, many places, we want to focus on growth businesses with good ROEs. The cash that we use for these businesses, we have to make sure that we get a good return on and that we feel builds shareholder value, and compare that return to other uses for that capital. I think our track record there is pretty good. There's a lot going on, and we'll continue to look at it.
Okay. I think the Turkish deal off the top of my head was about a quarter billion dollar deal. That's the kind of activity, if something were to happen, that I should be focused on?
I think that would be typical.
Okay. Thanks a lot.
We do have our next question from John Nadel with Sterne Agee. Please go ahead.
Hi, good morning, everybody. A question for Steve. Steve, as you look out at the potential for a 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?
Hi, John. Yes, we have been obviously quite focused on this. Let me just say that, maybe at a higher level first, that while this is a very difficult time as everyone is following this very critical issue closely, I'll just mention that it's beyond just raising the 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. As painful as it is to watch this, it is kind of democracy at work. The hope is that not just will 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. I am hopeful. It's hard to watch.
It's difficult to see it every day, but I am hopeful that there will be action in Washington that will be appropriate, that'll address these long-term problems in a sensible way. We have been working very hard at this internally. I'm going to turn it over in a minute to Steven Goulart to give you some specifics. Let me just say at a high level that we feel that we are well-positioned even if there happens to be a one-notch downgrade of the U.S. Treasury at this point in time. I'm not saying that will happen, but we have to at least take that into consideration as the contingency.
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's at catastrophic levels yet, but what we clearly are seeing it on a daily and hourly basis. Look at different indicators like treasury bills. Treasury bills have cheapened for August. They're actually trading at bigger discounts than September bills at this point. We've seen haircuts increase on RMBS, on treasuries, on many asset classes. Then probably most importantly, everybody's building cash. Look at the money market fund outflows. I think they have reached record levels. It's a period of uncertainty. What most people do is really try and liquefy in those markets. As Steve indicated, we've looked hard at the implications of a U.S. government and treasury downgrade.
Within the realm of possible downgrades, there really is no impact from a capital perspective on our investment portfolio. 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 ensured 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. The second, like I mentioned before, is we have been building cash. We've added $several billion of excess cash, which we think is a prudent thing to do in an environment of uncertainty that exists today. What it does is a couple of things. Certainly, to the extent there are any market liquidity issues developing, I think we'll be well positioned for those.
Secondly is to put a little bit of an opportunistic hat on as well. To the extent that there are investment opportunities that become available, we want to be positioned to take advantage of them. I think we're very well positioned at this point and obviously are staying on top of what's happening in the markets.
Just as follow-up to that. Five or more years ago, you guys started to buy hedges in a higher rate environment against a low or a 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.
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 and certain sectors of buying interest rate caps when it makes sense, we'll continue to do that.
Okay. Just to 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, October's only a few months away. In the scheme of the long term, it's not that big of a deal. Your capital position, Bill, as you laid it out, is frankly better than I think most on this conference call would have expected. Your stock's 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.
John, it's Steve. Let me start, Bill can add other comments. We spoke to our board when we did this, our largest transaction in our history, Alico, about how we would proceed for the coming year after the close in November of last year. 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, before we start thinking about capital redeployment. That was something that we agreed to with them. The timeframe that William 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 uncertainty still remain in the marketplace around regulatory issues.
It's unclear at this time how that will impact all of us in the industry. 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 clarity on this issue of capital redeployment. Still, we think it's prudent to wait along the lines we talked about with our board last year to make a determination in late October about what the right strategy would be going forward.
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 say that even for management, capital's in a better position?
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 with Alico will continue on track as we mentioned. Overall, we're quite optimistic.
Okay. Thank you very much.
Thank you. We have our next question from the line of Nigel Dally with Morgan Stanley. Please go ahead.
Great, thanks. Good morning. You mentioned with international that you expect to hit all of your targets. At the beginning of the year, you provided guidance for that division, and at least based on our calculations when using core results, you'd need about a 9% pickup in average results in the back half of the year to hit the midpoint. My question is whether the midpoint is still achievable, and if so, what are the factors driving the solid expected improvement in the back half of the year? Are we now looking at the lower end of the prior guidance? If so, what changed relative to your assumptions at the beginning of the year? Thank you.
Yeah, Nigel, it's Bill Toppeta. You were breaking up a little, so if I get the question wrong, you'll correct me. 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. There's no change with respect to any of those targets. The one thing I might add, because I know that some people take every number and divide it by four, that's not exactly the way we do our plan. 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.
We believe we will be in the ranges that we gave you.
Okay. Just also a question on international JPY. Clearly it's appreciated, so any update with regards to currency hedging plans for 2012?
I'm going to pass that to Mr. Wheeler.
Well, just to review the betting, we did talk about, we put on a hedge to protect some of our earnings or really, we bought a floor. Obviously, the exchange rate has moved away from that floor. We're a long way away from that target. I think today, the JPY is 77, 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. We haven't done anything since then, but we do continue to look at it.
Okay. Thanks a lot.
Thank you. We have our next question from the line of Colin Devine with Citigroup. Please go ahead.
Good morning. I've got three hopefully fairly quick things. First, with respect to the favorable group life mortality, was the benefit from that about $0.03 a share? If so, shouldn't we really be taking that out of sort of the quarterly run rate, since I would assume you expect that's going to reverse in future quarters? Second, and I really, I think I'll direct this to Steve. The VA sales, I think, set an all-time industry records for the quarter for a single company. How comfortable are you at this sort of $7 billion clip? Or are there some future revisions that might be coming to sort of take sales down a bit? Then lastly, for William Wheeler. If the DAC change is coming under GAAP, what impact does that have for your business?
Thinking both with respect to how you run your career agency here in the U.S., but also internationally where you do have some big agent forces and you may be forced to expense more immediately now than DAC is. Thanks.
Colin, it's William 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. A 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. It was, like I said, quite a good quarter. I would think more toward the low end of the range for the balance of the year. We gave a range at Investor Day of 88-93, I think modeling toward the low end of the range is probably the best way to think about it.
Is about $0.03 the right number?
Roughly, I'd say that's right.
Okay.
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. Let me just kind of say at a general level to the question that, like all of our products, all of our businesses, we look for balanced growth. We have a real broad portfolio of products, of markets we're in globally. One of the reasons we performed so well this quarter in the face of significant headwinds related to natural disasters, related to issues in the economy in Europe and the U.S. and elsewhere, is that we have a very balanced portfolio. We're very mindful of that. It's part of our strategy. It's something we focus on all the time. We wouldn't want any one part of our business to overwhelm other parts of the business.
We are mindful of that. We meet as a team regularly on these kinds of issues. As I mentioned, we do have a filing in with the SEC which we anticipate will sort through in August. We'll have some adjustments to the features on the VAs. I'll just add that when we put out GMIB Max, we had 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 helped 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 have gone on, and we reassess these things all the time. You'd expect that, and you'll see that we'll be making some adjustments in the VA space soon.
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?
I think that's right. This is William Wheeler. That's a good way to think about it. Colin, the one thing I would say is, it's a very dynamic marketplace in 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 five players. Today, VA sales for the top five are over 50% of total sales, where a few years ago it was in the low 30s. The level of sales that you have in any given quarter is a function, obviously, of the product that you have in market, but it's also a function of what happens in the competitive environment.
We want to build products to make sure that we can react quickly to changes in the marketplace so that we can 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. As Steve said, we just want to manage it well in the context of our overall portfolio of businesses.
Great. Thanks.
Colin, finally, it's William Wheeler about DAC changes. Obviously, DAC policy's going to change regarding what kind of marketing and sales expenses can be capitalized next year. That's true for both domestic and 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. That may very well result in a one-time write-off of DAC sometime in the early part of next year. A non-cash charge, obviously, but a change to book value. I think some people have focused on the idea that, well, gee, if the agent's an employee of the company versus if he's a third party, or that may change your DAC policy and what can be capitalized.
Unfortunately, even though that may end up being true, 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 saled in that way and pay them as such, accounting should not be the decision about whether or not, or certainly whether an expense gets capitalized or a 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 in how people's income statements work.
Our peculiar issue happens in Japan, or really with regard to Alico, where in purchase accounting, our DAC is replaced with VOBA, 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. That could cause some anomalies in some of our earnings for our international operations as well. There's lots of little wrinkles. We're not in any position yet to kind of size these issues. In a quarter or so, we might be able to, and obviously by Investor Day, we think we'll be able to. I guess stay tuned.
Bill, just to follow up on that thought, this shouldn't impact your capital management decision since, of course, there is no DAC on a statutory basis. Is that fair to say?
That's right. There's no DAC on a statutory basis. It's not a cash charge. It will affect GAAP book value.
Okay. Thank you.
Okay, next we'll go to the line of Thomas Gallagher with Credit Suisse. Please go ahead.
Thanks. First one on capital management. Bill, earlier in the year, I think the comments that you all had made suggested a buyback plan that you would announce at the end of this year would probably be something less than $2 billion. It sounded also like when you were evaluating different opportunities, buyback seemed 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 two?
Probably not. I guess I feel that, I think we're committed to doing both. When we talk to investors and we say, "What's most important to you, dividends or buybacks?" Guess what? We get both answers. To some investor groups, they really focus on the dividends. Others want to see buyback activity. Our expectation is that we'll do both, and we'll try to do both in a balance that makes sense. In my mind, it's just too early to speculate about size of deals, size of programs, 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, it'll obviously depend on where our stock price is. There's a lot of variables, I'm not sure I can shed much more light on it.
Okay, fair enough. I also just wanted 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 at least as it was laid out after the Alico deal was announced, this was sort of a high single-digit revenue grower, if I remember correctly. 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 2012 and 2013? Is this still kind of a high single-digit in aggregate revenue growth business?
Is there just a bit of an anomaly here based on how sales will progress, or can you help us think about that and how that would progress? Thanks.
Yeah. It's Bill Toppeta. I would say the answer is absolutely yes. You're talking about a business that will grow high single digits. 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. Our persistency is improving generally but not improving as quickly as we would like it to. 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 orphan policyholders and the management of orphan 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 business.
Those programs were all delayed by about, I would say 45 days as a result of the earthquake. 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 said before, is Europe, and I think those two things are the explanation. They are I think a bit of an anomaly. I hope that helps.
That does, yeah. That explains it. Just one last question, if I could, Dee. 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 is showing any signs of hardening too?
Yeah, 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. I've talked about on earlier calls and at 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. 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 that some of our peers are struggling in that business.
While I will tell you that the claim results in 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. Our loss ratios have held up pretty well during that because of the fact that we increased our denominator because we raised our prices. We've 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.
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.
Thanks, Bill.
Thank you. Our final question will be coming from the line of Suneet Kamath with Sanford Bernstein . Please go ahead.
Thanks very much. Also, 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. 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?
I didn't. To give you a sense of it, our combined RBC ratio at the end of 2010 was 458%, 56%-58%. My expectation is that that will decline by the end of 2011. I'm not quite sure. Well, we have an internal projection of where that will go to, but it will head south, because we don't need that much capital at the insurance subs. As I sort of said in my remarks, the excess capital that's sitting in our insurance subs, it doesn't really become deployable until it gets to the holding company. That's our expectation, is what we're doing this year, is we're bringing a lot of that capital up to the holding company so it then can be used for other things.
Got it. Second follow-up is just on the math. You'd mentioned a couple of uses of that capital. I think debt repayment, the common stock dividend, and obviously anything you want to do in terms of M&A. Just so I have the numbers, you said $750 million of debt repayment, 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?
No.
Got it. The last question is just on the dividend philosophy. You'd mentioned you kind of listen to investors in terms of what they want. Would you consider moving to more of a quarterly common stock dividend? I know in the past there was some reluctance because of the additional costs given your large shareholder base, but I think they're somewhat nominal. Is that something that you would consider if investors were interested in that type of payment frequency? Thanks.
I guess the short answer is maybe. When we set this policy over 10 years ago, the additional expense was kind of made it prohibitive in our minds. I think things have changed, the costs are not as significant as they once were. It's something that we'll likely examine. Other people have kind of given this feedback, too, that maybe a quarterly dividend makes more sense. It's something we'll think about.
Okay, great. Thanks very much.
Thank you, everyone. Ladies and gentlemen, this does conclude our conference for today, and the conference will be available for replay after 10:00 A.M. today until August fifth, 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 169215. International participants may dial 1-320-365-3844 using the same access code, 169215. Again, those numbers for the replay are +1 800-475-6701. International participants may dial 1-320-365-3844 using the 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.