Ladies and gentlemen, thank you for standing by. Welcome to the MetLife first 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 relating 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, future development, or otherwise. With that, I would like to turn the call over to John McCallion, Head of Investor Relations.
Thank you. Good morning, everyone. Welcome to MetLife's first-quarter 2011 earnings call. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. We reconcile 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 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 Rob Henrikson, Chairman of the Board; Steven Kandarian, President and Chief Executive Officer; Bill Toppeta, President of International Business; 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 Mullaney, President of U.S. Business; Bill Moore, President of MetLife Auto & Home; and Donna DeMaio, President of MetLife Bank. With that, I'd like to turn the call over to Rob.
Thank you, John, and good morning, everyone. As you will hear in a moment, MetLife delivered very strong results in the first quarter as we remain committed to the fundamentals of the business. As you know, the board of directors has elected Steven Kandarian as President and Chief Executive Officer effective May 1 this week. Over the coming months, Steve and I will continue to work very closely together, ensuring a smooth transition of responsibilities, with Steve dedicating his time to running the business. I have great confidence in his ability to lead MetLife into a new era of global growth and outstanding performance. I will remain chairman of the board through the end of the year and will continue to focus on various functions within the organization.
Since the beginning of the year, I have visited our Japan operations in February, China in March, and the Middle East offices in April, hearing from the local management teams about their businesses. It is clear the leadership teams and employees are extremely talented and committed to a successful integration of Alico. I will continue to visit our worldwide locations, gathering input and feedback on the integration process. We are very pleased with the progress we've made and the direction we are heading as the leading global life insurance company. This morning, Bill Toppeta will provide an update on the impacts to MetLife of the recent tragic events in Japan. However, let me just say we are humbled by the humanitarian actions of our own associates in the region and inspired to see the MetLife family come together in Japan and around the world to support each other.
It is a true demonstration of one MetLife. Now Steve will take you through the highlights of the first quarter.
Good morning, everyone. As I begin my new role as MetLife's President and CEO, I am honored to have the opportunity to lead this great company. I have the good fortune of succeeding Rob Henrikson, who has been a great leader and has created a solid growth platform on which we will continue to build. We are operating from a position of strength and have many opportunities to extend our lead in the marketplace. Thank you, Rob. Now, let's get started on our results. The first quarter of 2011 was a very good quarter for MetLife. Our businesses are performing well as we continue our commitment to disciplined growth and expense management. We had record top-line performance, with premiums, fees, and other revenues increasing to $11 billion, up 27% over the prior year and 15% sequentially.
Operating earnings grew to $1.4 billion, up 64% over the prior year and 17% sequentially. Our book value per share increased 10% over the prior year, primarily due to strong operating earnings and investment results. In addition, our investment portfolio provided solid results for the quarter. As we disclosed on Monday, the board of directors has appointed Steven Goulart as our new chief investment officer. I'm confident that under his leadership, the investment department will continue to provide value for our shareholders through solid returns and security for our policyholders through a strong balance sheet. While Bill Wheeler will provide you the details of our results, I'd like to share some highlights.
In U.S. business, premiums, fees, and other revenues were $7 billion, down from the prior year and the prior quarter, primarily due to lower pension closeout sales and the impact of continued high unemployment, as well as a challenging pricing environment for the group insurance businesses. Operating earnings were up 15% over the prior year period. With a lack of growth in the U.S. marketplace is frustrating, I am very pleased with our margins, which are a direct result of our disciplined pricing and our focus on risk management. Within our insurance product segment, while group life operating earnings were essentially flat year-over-year, underwriting results were strong. In non-medical health, operating earnings increased over 50% from both the prior year and the prior quarter, mainly due to improving underwriting results in dental and group disability. While incidence remains elevated, recoveries continue to improve in group disability.
In retirement products, robust separate account fee growth driven by higher net flows and favorable market performance resulted in a 13% increase in premiums, fees, and other revenues over the prior year. Total annuity sales were $6.1 billion with record-setting variable annuity sales of $5.7 billion. Operating earnings were $212 million, up 5% year-over-year. On Monday, we launched a new GMIB Max variable annuity rider. We believe this offering is a win-win for consumers and MetLife. These solutions provide our customers better protection against extreme market swings while providing the opportunity for growth, leading to more guaranteed income over time. From MetLife's perspective, there is a significant reduction in the hedging costs of this new rider, and we expect more consistent returns over the long run. Turning to international. First quarter premiums, fees, and other revenues were $3.8 billion, up from $1.1 billion, largely due to the acquisition of Alico.
Overall sales were up 27% based on the comparison of combined first quarter 2010 MetLife and Alico results, as we witnessed continued recovery in key markets and channels. First quarter sales in Japan were up 45% with all product lines and channels showing year-over-year growth, including significant increases in the bancassurance and direct marketing channels. Japan had operating earnings of $290 million in line with plan. Bill Toppeta will provide a more detailed update on the tragic events in Japan. I want to express my condolences to the people of Japan and my gratitude to my colleagues on the ground who are working through this difficult situation. Sales in other international regions were up 21%. This increase was primarily due to solid performance in the Latin America and Asia Pacific regions.
Growth in Latin America was driven by institutional business in Mexico, the group life and dental business in Brazil, and in accident health insurance in both Chile and Argentina. Growth in Asia Pacific was driven by life insurance sales through the agency channel in Korea. Operating earnings were $277 million and in line with plan due to growth, favorable underwriting, and lower expenses. Overall, U.S. business performed well, particularly in light of the economic conditions in the United States. We are committed to remaining disciplined in our growth and maintaining strong margins and returns. As to international business, results were solid in line with expectations, and we are making good progress on the integration of Alico. I am especially pleased to see the strong recovery in Alico-related sales in persistency, particularly in Japan. As most of you know, we are working hard on the integration of Alico into MetLife.
Let me assure you that we remain focused on all of our operations. Backed by a solid financial position, strong brand, and momentum in the marketplace, we have the opportunity to create an even stronger, more profitable, and more valuable MetLife. With that, let me turn it over to Bill Toppeta to provide an update on recent events in Japan.
Thank you, Steve, and good morning, everyone. Before I begin, I would also express our sorrow about the recent tragic events in Japan and our admiration for the strength and resilience of the Japanese people in general and of our Japan colleagues in particular. Overall, the situation in Japan is challenging but appears to be improving, and it remains fluid. Our operations have responded well to the challenges and have begun to return to normal operations. We've taken many steps to aid in relief efforts. Our Japan business provided direct support to impacted employees, agents, and their families. We have made various charitable contributions and have been helping our customers in the regions hit by the earthquake and tsunami. I'm happy to report that none of our employees or career agents has been killed or seriously injured. Sadly, however, two of our independent agents are missing and presumed dead.
Under the circumstances, we decided that certain actions were appropriate. For the March 11 earthquake and subsequent tsunami, we have waived the earthquake and tsunami exclusions in our accidental death riders. In the affected regions, we have extended the grace period for premium payments and have reduced interest rates for new policy loans, while at the same time expediting the process for claims, surrenders, and policy loans. From the onset of this crisis, we have been operating our business continuity program with over 300 of our associates temporarily reassigned from Tokyo to our facilities in Kobe, Osaka, and Nagasaki. We currently expect to keep the business continuity program operating through September, and thus through the peak power demand months of the summer.
With respect to the financial implications of the disaster, as you know, we report our MetLife Alico operations on a one-month lag basis. Thus, since the loss events occurred in March, we won't begin to reflect the financial impact until the second quarter. I would, however, like to give you our current best estimate of what that impact will be. Our projections are based on the assumption that the situation in Japan, including the nuclear issue, gets no worse than it currently is and gradually improves. On that basis, we estimate that our policyholders represent about 4% of the population in the affected regions. We further estimate that the impact to the company's second quarter 2011 earnings from extraordinary claims and additional expenses due to the March 11th earthquake will be between $45 million-$65 million after taxes.
Most of the claims are on life insurance policies, with a portion arising on accidental death and hospital coverage riders and policies as well, while the largest expense drivers relate to our business continuity program. From a balance sheet perspective, our asset portfolio is holding up well. The only noteworthy investment we are monitoring is our bond holdings in Tokyo Electric Power Company, otherwise known as TEPCO, where our total exposure is presently approximately $550 million of book value. Finally, our team continues to work diligently to keep our integration efforts on track. Of course, we've had to divert and reallocate some resources, but thanks to the exceptional efforts of many people, particularly our colleagues in Japan, we're confident that we can still meet our overall integration targets, although our subsidiarization project may take longer than we previously expected.
I hope this gives you a brief summary of the situation. With that, let me turn the call over to Bill Wheeler.
Thanks, Bill. Good morning, everyone. MetLife reported $1.33 of operating earnings per share for the first quarter. As noted in the press release, our first quarter results reflect three months of Alico operations from December 1st, 2010, through February 28th, 2011. This morning, I'll walk through our financial results and point out some highlights, as well as some unusual items which occurred during the first quarter. Let's begin with premiums, fees, and other revenues. Total premiums, fees, and other revenues, which were $11 billion in the first quarter, were up 27% from the first quarter of last year and up 15% over the fourth quarter of 2010. This growth is due to having a full quarter's results from Alico, which we acquired in November of last year. To give you a better sense of international's overall growth for the quarter, our international revenues were $3.8 billion.
This is approximately 10% higher than the first quarter of 2010 on a combined basis, as if we had owned Alico in both periods. In Japan, the year-over-year pro forma increase in revenues was approximately 14%. This was driven by a 45% increase in sales, which increased in all product and distribution channels, with the strongest gains coming from the bank and direct marketing channels. Higher persistency and a favorable exchange rate also contributed to the growth. In the other international regions, the year-over-year pro forma increase in revenues was approximately 7%. Strong revenue growth in Latin America and Korea, as well as favorable exchange rates, were the main drivers of this growth. Turning to the U.S., business premiums and fees for another revenues of $7 billion were down 5% as compared to the prior year quarter.
This includes a 2% decrease in insurance products revenue, as growth in dental was offset by lower revenue in group life and disability. Individual life revenue was essentially flat. This performance is consistent with our plan forecast. Overall, group insurance revenue continues to be impacted by high unemployment and our unwillingness to chase business at below desired margins or returns. Revenue in retirement products increased by 13% from higher separate account fees due to positive net flows and favorable separate account investment returns. Revenue in corporate benefit funding was down significantly from the prior year quarter, driven by lower pension closeout sales, which fluctuate from quarter-to-quarter, and a decline in structured settlement premiums, which did have a very strong first quarter in 2010.
Auto and Home revenues were up 4% due to growth across the business, and MetLife Bank revenues were down 19%, reflecting lower mortgage refinancing activity in the quarter. Turning to our operating margins, let's start with our underwriting results. In U.S. business, overall results were generally positive in the quarter, with the exception of individual life. The group life mortality ratio for the quarter was 88.2%, as compared to 89.5% in the prior year quarter, and at the low end of our 2011 guidance range of 88%-93%. Our individual life mortality ratio for the quarter was 92.5%. This is higher than planned and unfavorable compared to the prior year quarter. This quarter's results were negatively impacted by higher claims incidents in large face amount policies.
The non-medical health total benefits ratio for the quarter was 87.7%, which was down from the prior year quarter of 91.2% and well within our 2011 guidance of 86%-90%. In dental, our underwriting results continue to improve, demonstrating that better claims activity, combined with our pricing strategy, is working quite well. Disability results also continued to improve, as our disability loss ratio was significantly better than the prior year quarter and better than planned. We continue to see meaningful improvement in claims recovery experience in the quarter. While our incidence rates have remained elevated, they appear to have stabilized. Turning to our Auto and Home business, the combined ratio, including catastrophes, was 98.5% for the quarter, which was up over the prior year's quarter's results of 94.1% due to poor weather, most of which did not show up in the catastrophe line.
The combined ratio, excluding catastrophes, was 92.3% in the first quarter versus 88.8% in the prior year period. A non-catastrophe prior accident year reserve release of $10 million after tax was taken in the current quarter, compared to a $5 million after-tax release in the prior year period. Moving to investment spreads. The yield on our general account declined from 5% in the fourth quarter to 4.69% this quarter. The decline is due to the acquisition of Alico, whose general account has a much lower yield. Without Alico, yields would have moved up sequentially. We saw continued strong investment spreads this quarter, driven by both strong variable investment income results and solid core spreads. Pre-tax variable investment income for the quarter was $434 million, which is $109 million above the top of our 2011 plan range of $225 million-$325 million per quarter.
Variable investment income after tax and deferred acquisition costs was $279 million, which is $61 million or $0.06 per share above the top of our 2011 quarterly plan range. Moving to expenses. Our operating expense ratio for the quarter was 23.1% and 20.6% 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. This is a very good result. Turning to our bottom line results, we earned $1.4 billion in operating earnings or $1.33 per share in the quarter. As we have noted in an 8-K filed yesterday in conjunction with our press release, we have changed the definition of operating revenues to exclude variable annuity GMIB fees, and we've changed the definition of total operating expenses to exclude benefits and hedging costs related to GMIBs.
This change was made to better align the directional movement of the markets with the operating earnings in our quarterly results and is consistent with market practice. This change in our accounting definition impacts our operating earnings and retirement products. For the quarter, operating earnings and retirement products would have been $34 billion lower absent this change due to the 5% increase in the S&P 500 this quarter. However, this accounting change does not trigger a revision to our earnings guidance for this business because our plan assumes only 5% growth for the S&P 500 for the entire year. With regard to investment gains and losses, in the first quarter, we had after-tax net investment portfolio losses of $29 million, which includes impairments of $59 million after tax.
With regard to derivatives, we had after-tax losses of $254 million, driven primarily by higher interest rates and the weakening of the US dollar against certain key currencies. Turning to our investment portfolio. Gross unrealized gains in fixed maturity and equity securities were $13.5 billion, down from $14 billion last quarter. Gross unrealized losses of $6.8 billion were essentially unchanged from last quarter. Overall, the fixed maturity and equity securities portfolio was in a net unrealized gain position of $6.7 billion, down from $7.2 billion last quarter. Please keep in mind that interest rate-driven unrealized gains and losses in our assets are generally offset by changes in the economic value of our liabilities. Next, I'd like to briefly discuss our commercial mortgages.
First, the loan to value ratio of our portfolio improved again this quarter to 65% from 66% as valuations continued to improve in the markets where we invest. Additionally, our delinquency rate was actually zero, which is another key measure that demonstrates the overall strength of the commercial loan portfolio. Also, our commercial mortgage valuation allowance is $532 million as of March 31st, down from $562 million at year-end. Finally, I'd like to provide you with an update of our exposure to peripheral Europe sovereign debt. You may recall at Investor Day, we reported that Alico had a statutory book value of $2.2 billion exposure to this region, and that portfolio had a market value of $1.9 billion. We also indicated that we would opportunistically manage down these holdings.
At quarter end, our statutory book value for the region was $1.7 billion, we have now moved to subsequently reduce our position to $1.2 billion. In this quarter, we sold approximately $400 million, resulting in a GAAP after-tax loss of $10 million, we have impaired the remainder of the assets that we intended to sell, resulting in a GAAP after-tax loss of $20 million. Overall, we have significantly reduced our exposure to peripheral Europe at modest cost since Investor Day. Our cash and liquid assets at the holding company at quarter end were approximately $2.5 billion. Since quarter end, Metropolitan Life Insurance Company has repaid an intercompany surplus note and also paid a small dividend to the holding company. Cash and liquid assets at MetLife Inc. now stand at approximately $3.5 billion.
Our preliminary statutory operating earnings for our domestic insurance companies for the first quarter of 2011 were approximately $600 million, our preliminary statutory net income was approximately $550 million. In addition, our international capital position is tracking in line with the analysis we provided at Investor Day. Overall, our capital position remains quite strong. In summary, MetLife had a very good first quarter. Our investment performance continued to improve, our operating margins remained strong, driven by disciplined underwriting and expense management, our earnings continued to grow. Also, the strong performance of our international business, boosted by a full quarter of Alico's operating earnings, is quite encouraging. Although we are still in the early days, the benefits of this transaction are becoming a very apparent catalyst to drive MetLife's future growth. With that, I'll turn it back to the operator for your questions.
Ladies and gentlemen, if you would like to ask a question, please press star then one on your touchtone phone. You will 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 are using a speakerphone, please pick up the handset before pressing the numbers. Once again, any questions or comments, please press star one at this time. Our first question comes from the line of Suneet Kamath with Sanford C. Bernstein. Please go ahead.
Thanks, and good morning. I have two questions. The first one is on capital management for Bill Wheeler. I think I know the answer to the when will you start redeploying capital, which I'm guessing is at the end of the year. I wanted to drill down a little bit in terms of the why, in terms of the timing. Some of the conversations I've had with investors have sort of suggested that maybe the way that we're thinking about excess capital in terms of risk-based capital might, if we looked at it under sort of bank regulatory capital requirements and some of the new Basel rules, your excess capital might be a little bit lower than what RBC would imply. Also, there's a risk of being named systemically important.
I just was hoping you could provide some color in terms of how you're thinking about potential excess capital away from RBC and maybe under some of these other metrics. Thanks.
Sure. Suneet, I think you're right. We've talked about, in a lot of different public forums over the past period of time, really including at Investor Day last December, we've talked about capital management as sort of being an end of 2011 exercise. Obviously, we pay an annual dividend, and we would declare that normally at the October board meeting. You could say, "Gee, why this timing?" I feel that there's a couple of reasons for that. One is we've wanted to make sure that Alico has gone as expected, and I would say so far it's gone very well. Secondly, we have to make sure we're in good sync with the rating agencies.
I think they have had a number of concerns over the past couple of years, and I think we've demonstrated that those concerns are unwarranted, but we felt that we would have to get into our 2011 year before some of those concerns went away. Those are really, I think, some of the big drivers. It is true that we are a bank holding company, and so we have to produce bank holding company capital ratios. Just to give you a sense of this, our Tier 1 bank holding company capital ratio is in excess of 8%. I think to be a well-capitalized bank, you need Tier 1 capital of approximately 6%. Obviously, there's a substantial capital cushion there as well. I guess I'm not sure that's really a gating factor in terms of managing capital going forward.
Okay. In terms of some of the newer Basel rules, do you have those updated statistics?
We don't. First of all, I think the Basel III capital ratios are unclear exactly what impact, if any, they will have on us. I believe we will probably not need to comply with Basel III in the way you might think. Obviously, the implementation of Basel III is more than half a decade off. I don't think that's driving a difference between capital management mid-year versus end of year.
Got it. Then on the SIFI, any comments there?
We really don't. We don't know anything more than I think the general public in terms of where the FSOC will come out on SIFIs for the insurance industry. Obviously, we don't believe the life insurance industry should be considered systemically important. We think there's a lot of good reasons why, time will tell about where that decision gets made.
Okay. My final question is just on your operating expense ratio. As you mentioned, it came in below plan. Away from what's going on in Japan in terms of the business continuity expenses, is there any thought to seeing a higher level of expenses in the balance of the year, investment in advertising or branding or anything like that? Should we think that maybe you could come in below plan for the full year? Thanks.
There are some advertising initiatives scheduled in Japan, and there's a rebranding initiative. In fact, in much of the rest of the world, we had rebranding initiatives that have already occurred in the first quarter. Those special advertising or rebranding initiatives are reported as part of our integration costs, which means they're not included in operating income. They're below the line. That's what's going on with that kind of advertising. With regard to our overall expense ratio, I fully expect we're going to have a good year, and whether we'll be actually below our plan guidance or just at sort of the bottom end of it, I can't say yet. It's probably too early, but obviously we're off to a very good start.
Thank you very much.
Our next question comes from the line of Jamminder Bhullar with J.P. Morgan. Please go ahead.
Thank you. Good morning. I had a question on Alico. I think you changed your disclosure in the supplement, but if you could maybe give some numbers around what the Alico earnings were or just talk about them. I think last quarter, the number was 114, and that was a little disappointing, even though it was just one month. Also related to that, if you could give some comments on what you've seen in terms of business activity at Alico in Japan in the second half of March maybe and into April, whether you've seen some disruption related to the earthquake. The final question, just on variable investment income, seems like private equity assets would have done pretty well, maybe even hedge funds. If you could talk about anything that would have changed.
Seems like results are poised to be relatively strong in the second quarter also as it relates to variable investment income. That's all I have.
It's Bill Toppeta, I guess I'll start. In terms of Alico, I would say it is performing at the earnings plan, and we've melded in the operations. We're not going to be reporting them separately. Its performance is quite strong, and I think if you look at the Alico plan that we had, we're just right on the button in terms of the earnings. That's also true on the MetLife side as well. We gave you the plan ranges back on Investor Day. I'd say we're on track for those plan ranges. In terms of the situation in Japan, sure, we've seen a slowdown in activity certainly during March. Remember, the second quarter there will be March, April, and May. The event took place on March 11th. Naturally, there was a suspension of direct marketing sales in Japan.
There was also an impact, obviously, in the Tokyo area, which accounts for about 30%-40% of the sales. We have a pipeline effect here, which is that there's business in the pipeline. It's a little early to make any judgments about what the impact ultimately is going to be. The three months that we're focused on now, obviously, will be March, April, and May. I'd say the situation is pretty fluid, and I'd rather not speculate on it beyond that.
Have you seen a stabilization or some improvement as we've gotten further away from it?
Well, I think what we've seen is we've seen people coming back to activity. The question is what will be the result of that activity? What we're seeing in terms of numbers is from pipeline effect, I believe. It's very hard to sort out
What's going to happen going forward? I think you just have to wait for the result.
Okay.
Next, the question comes from the line of Nigel Dally with Morgan Stanley.
Hello. I think your last question was on variable income, too. This is Steven Goulart, by the way. The first thing I'd say is all components of variable income performed very well in the last quarter. You called out private equity funds, and again, those performed very well. Remember, there's also a lag. What you saw in the first quarter really reflected the equity market performance in the fourth quarter. That was very strong. To our outlook, obviously the first quarter equity markets continued to be very strong as well. Probably not quite as strong as the fourth quarter, but we would anticipate that strong performance to continue.
Nigel Dally, you may go ahead with your question.
Great. Thank you. Question on the banking segment. Clearly a more difficult quarter. I know you reduced your expectations from where you were at Investor Day. Based on the results this quarter, it seems like maybe even your lowered expectations may be tough to hit. Perhaps some color on the outlook for that division. Also, in the hopefully remote possibility that having a bank means that you're going to be treated different from your peers with regards to required capital. Is disposing the bank a possibility? Thanks.
This is Donna DeMaio. I'll take the first part of your question. The first quarter results for the bank were largely due to the overall decline in refinancing activity across the country. The mortgage market, which approached almost $2 trillion last year, is hovering around $1 trillion, $1 trillion and one, depending on how you measure it for this year, largely due to refis, and we are no exception to that. Our refi balance, our refis were down approximately two-thirds from the highs in 2010. The first quarter is historically the lowest volume quarter due to seasonality, and we will expect that to pick up as the year continues.
Nigel, with the second part of your question, in terms of the regulation of the insurance industry potentially by the Fed, mainly really for technical reasons, we're actually a bank holding company as opposed to a thrift holding company, which many of our peers are. It's not clear to me how that will all play out. Obviously, the substance of the issue is that we should be treated the same as the rest of the industry. We are mainly an insurance company, we do have a nationally chartered bank. We're an insurance company, the substance of the issue should be that the capital requirements and stuff should be the same as our peers. It's a little early, I think, to speculate about how that'll play out and how we'll negotiate with the Fed and others regarding those issues.
Okay. Very helpful. Thanks.
We have a question from the line of Colin Devine with Citi. Please go ahead.
Good morning. I have a couple of questions. First, with respect to the auto and home business, the volatility you've seen in cats maybe over the last four or five quarters, has that given you any cause to rethink how you're using reinsurance to manage the volatility on that? Second, Bill, you mentioned, I thought it was sort of a 5% assumed market increase in your GMIB pricing. Can you reconcile that for me with the guarantees on the product, which range from 5% up to 7%? In fact, I think 7.5%, and that's net of fees. Then third, it's my understanding Met, despite obviously the exceptional quarter in terms of sales gains for your VAs, is ratcheting up the step-up guarantee on it now this month from 5% to 6%.
Why on the back of such a strong quarter for sales does the company feel the need to ratchet up the future rewards once again?
Hi, Colin, this is William Moore. Just overall, our reinsurance position is really to utilize reinsurance to cover solvency-type events. That's what we've built our models around. Our overall philosophy around how we handle our reinsurance cost or the catastrophes associated with that is through pricing. Our homeowner pricing projections for 2011 are in the 7%-9% range. About half of that is for non-cat activity, about four points, and about four points for cat activity. We are in the process now of evaluating our long-term cat projections, and we'll be making appropriate pricing changes accordingly.
Okay. Thank you.
Colin, with regard to the riders and plan assumptions, we historically have always, as part of our earnings plan projection process, assumed 5% growth in the S&P 500. I think we've acknowledged that that's conservative. That isn't quite the same as how we model out the pricing, of course, in our variable annuity products, where we assume over time, obviously over the life of those products, we assume something more like an 8% or 9% return in the S&P 500, which of course is consistent with historical performance. I think you know, I'm sure you know this, that the roll-up rate in the rider isn't necessarily sort of the investment performance guarantee that we're.
Is only one factor in the guarantee that we're making. Obviously, as a GMIB company, equally or more important is the assumptions we make regarding interest rates and the annuitization rate when people can exercise that rider. That obviously is a big factor. That annuitization rate is pretty low, by the way. That's a big factor in the underlying guarantee. The performance of the equity markets is only a piece of it.
Bill, if you can comment on the step-up, also just to be fair, I think that with your comment on the annuitization factor, it may be low, your product does offer a 5% annual withdrawal benefit, your GMIB does, a dollar for dollar withdrawal. I'm not sure, frankly, it's that conservative.
Well, we've probably reached how much we can discuss this in a public forum. Obviously, the withdrawal features in those products, though they exist, they're modestly utilized. That's obviously at a certain level of utilization is factored into the pricing of the overall product as well.
Maybe we can just go to why the guarantee is going to 6% from 5%.
Sure, Colin, it's Bill Mullaney. Let me put VA sales in perspective for the quarter and why we decided to make the announcement of a new product in March. As you said, VA sales were strong in the quarter, $5.7 billion, which was a 40% increase year-over-year. We think that there's going to be pretty strong industry growth this quarter. It's early because we don't have the full numbers, but we expect the industry growth for VAs for the quarter to be, I would say, somewhere between 20%-30%. We will pick up some market share. I will tell you that the sales that we made in the quarter, because of the level of interest rates and the product changes that we introduced in February, those returns that we expect to get on the sales for the quarter are quite strong.
We want to be an active player in this market. We've talked about the fact that we want to continue to be a top three player. We think the VA market is going to grow. Last year, we really took some time and began thinking about how we could play in this marketplace and have a product that continued to deliver good returns for us, but had a lower risk profile and provided good value for consumers. As you know, in March, we announced our GMIB Max product. We began selling that product this week. We really view this product as a significant leap forward in terms of how VAs are going to be constructed in the future. It builds off the GMIB platform that we have, and many of the mechanics that are in the new product are the same.
It's different in that there's a limited number of fund choices. There's four protected growth funds, plus a government bond fund. The way that these funds are built is they're designed to manage equity market volatility and interest rate exposure inside the funds. The goal is really to mitigate some of the extreme outcomes that you can see when there's market volatility and manage some of the risks to deliver more consistent returns. We think this provides a lot of benefits for consumers who want more stable account values and long-term performance. They also provide some benefit for us because equity market risk and interest rate risk are mitigated because the hedging is done inside the funds as opposed to outside.
Now, you did mention the 6% roll-up. We felt the 6% roll-up is important in order to get advisors and clients interested in this particular product because we expect it to be a significant part of our sales in the future. It in no way indicates that we're getting into any kind of an arms race as it relates to VAs. This new product at a 6% roll-up provides strong returns with a lower risk profile and provides great value for consumers. We feel pretty good about this product, and it's something that we're going to watch very closely over the coming months. As I mentioned, we just began selling this product earlier this week.
Thank you.
Our next question comes from the line of Mark Finkelstein with Macquarie Securities. Please go ahead.
Hey, good morning. Actually, just to go back to that point. The reason-
Mark, we can't hear you.
Can you hear me now?
Yes, we can.
Okay. Just to go back to that point, the reason that the volatility in the new VA product is lower is because the fund choices are more conservative and the hedging is done within the funds as opposed to at the higher level. Is that the right way to think about that?
That's right. There's a greater level of hedging done inside the funds, number one, secondly, there's a limited number of funds that people can invest in. When there's equity market volatility, unlike some of these asset transfer features that are in other kinds of products, the professional management of these funds, along with the hedging, is designed to really limit extreme market volatility having a significant impact on returns.
Okay. How does the margin expectation, or I should say, the return expectation on the new product compare to the legacy product?
The return that we expect to get on the new GMIB Max is a slightly better return than we expect to get on the current product.
Okay. Just changing gears a little bit. You've talked a lot about sales in Japan, obviously a very strong quarter, not affected by the earthquake. Can you just talk about Alico trends outside of Japan in terms of sales levels?
Sure. It's Bill Toppeta. I would say, in most of the regions around the world, we're strong on sales. The only exception that I would make to that is Europe. I would say Europe sales have been a bit weak compared to plan. Some of that is connected. I think most of that, it's fair to say, is connected to sales of credit life insurance in Europe, connected to less lending in the region. I think as the lending comes back, we would expect the credit life sales to come back. That's the only soft point. I think everybody else is extremely strong. Of course, overall, we're way up on sales.
Okay. Final question real quick. Do you see the spreads in corporate benefit funding as sustainable from here out on a core basis? Obviously, backing off the variable income outperformance.
Yes. If you normalize to the top end of variable investment income, obviously part of the reason corporate benefit funding did so well was the high performance of variable investment income. If you sort of normalize that outperformance, yeah, I think those spreads are sustainable. What we've also seen is our core spread has improved in variable investment income because I would say we're more fully invested and we've lengthened a little bit to, I would say, better match the liability duration. That's what's driving the margin improvement there, and that is sustainable.
Okay, great. Thank you.
We have a question from the line of Tom Gallagher with Credit Suisse. Please go ahead.
Hi. Three questions. First is, Bill, can you expand a little bit on this change in earnings definition about how you're, I guess, excluding GMIB? Is it the change in the liability? Because I didn't think those were marked. Are you trying to just get rid of the disconnect between performance of the hedge asset and the lack of mark of the GMIB liability? That's my first question. Second question is just a further elaboration on MetLife Bank. I heard the answer that directionally 1Q was weak. I didn't hear a response as to whether or not you still think you can get to a $200 million level for the full year. If you could provide more color on that. Third, can you give us an update on what's going on with how far out you're hedging your Alico Japanese earnings?
I think the last comment that I recall you making was 70% of 2011 was hedged at 86 JPY dollar. Have you added to that program, how far out are you going? Are you going out to 2012 or 2013? Thanks.
Okay. See if I get them all. With regard to the earnings definition of GMIB are changing operating earnings. We obviously hedged the GMIB rider, the change in value of the derivatives was in the operating earnings. If stock market goes up, those derivatives, those hedges actually are negative, as you might guess, because they're hedges.
Right.
That's offset somewhat by the reserve adjustments we would have to make regarding the GMIB rider. This is one of those moments where we make a good economic hedge, but the accounting hedge is not perfect. We were always explaining every time there was a big move in the stock market, either negative or positive, you'd see a meaningful change in the value of the derivatives. Because of where we are, and I would say the DAC amortization corridor, we're now below the midpoint. What that means is our DAC amortization is very stable, which is good. That's what you want. It means it doesn't react meaningfully to changes in the market in any given quarter. You have a kind of a noisy mismatch between DAC amortization and the riders.
This quarter, for example, if we had not made this change, we would have seen obviously a very positive event, a nice rally in the stock market in the quarter, but it would have actually cost us money in operating earnings because of how the hedge works. Obviously, that's not, I think, directionally appropriate. By the way, it makes us not comparable with all our peers who are in the same business, who have all now moved all this hedging activity below the line. That's why we made this change. It makes us more comparable, and I think it also just helps make our operating earnings results for any given period make more sense. That's regard to earnings definition. With regard to the bank earnings projections.
This is Donna DeMaio. On the earnings projections for the bank, we would expect our run rate more to be in the range of $30 million-$40 million a quarter, really due to the softness in the housing market. Again, when the original plan was put out, the overall mortgage market was projected to be around a trillion and a half plus. That was revised late last year to be more around $1 trillion-$1.2 trillion. Our results are a direct result of the size of the market. As long as unemployment stays high and the market stays soft, we will be impacted. Also, coupled with interest rates hovering around 5%, the refis have substantially gone down, which will also impact our business. Our run rate will be more in the range of $30 million-$40 million a quarter.
Just to add onto that a little bit, Tom. When we gave our Investor Day guidance last December, we talked about the bank earning something slightly over $200 million. Of course, what happened immediately after Investor Day is interest rates shot up. That changed the overall projection regarding mortgage originations in 2011. We revised the bank's plan pretty meaningfully, even before the year ended. I think we talked a little bit about that, though we didn't quantify the new target. We feel the bank is performing pretty much in accordance with our new plan projections.
Okay.
Finally, your question regarding JPY hedging of earnings on the JPY. We have not made any additional or nothing of substance in additional JPY hedging of earnings with regard to Alico Japan. I would say, in general, we don't intend to hedge exchange rates to protect ourselves with earnings volatility. I'm not sure, in general, that's money well spent. Because unlike some others, for instance, the JPY, which is our largest foreign currency exposure, is only 20%. It's rare that all the currencies move in the same direction in any given quarter. There will always be, some will be up and some will be down, and I think spending a lot of money trying to minimize volatility there is probably not prudent.
That said, I think there are occasionally opportunities where the market environment is such that it makes sense to put on a hedge, and of course, that's what we did this year when we had such a big tightening in the yen versus the dollar over the last nine months or so. I'm not sure we will add to this yen hedge. We might, but I don't think there's any guarantee that we will.
Okay, thanks a lot.
We have a question from the line of Edward Spehar with Bank of America Merrill Lynch. Please go ahead.
Thank you. Good morning. A couple questions. First, Bill, on the issue of systemically important financial institutions. I guess, how do you avoid being categorized as such, considering that you're one of the 19 companies in the government stress test? Then I have a couple follow-ups.
You're right. We are one of the top 19, I think by definition, that makes us a SIFI under the law. I don't necessarily believe all SIFI are going to be treated the same. I think there's obviously a good basis for that in terms of how SIFI are dealt with. I don't think there's anything that's in the law that says all the rules have to be the same. Of course, we don't know who else may be labeled as SIFI or not with regard to our peers in the industry, whether they're just because they're large or because they own thrifts. I think that there's uncertainty about that, and that'll have to sort itself out over time.
Do you have any indication, based on preliminary discussions, that there is some carving out occurring even under the SIFI proposals?
I think we hear the same rumors that everybody else does. I think the rumor of the moment is that the insurance industry may not be labeled as SIFI. I think we're months away yet from any kind of ruling from the FSOC. I think it's too early to really call this.
Okay, the final question is on cash flow and statutory earnings. Could you just remind us the typical pattern of the domestic subs in terms of the first quarter as a % of the full year? Also, if we look at the sources of cash to the holding company outside of the domestic subs, what are the relevant numbers to talk about there at this point for the first quarter or maybe thinking about the full year?
Sure. Our statutory earnings from our domestic insurance companies for the full year would be roughly $2.5 billion. Though statutory accounting is interesting at times, that number can jump around a little bit. Last year, for instance, it was more like $3 billion. The first quarter is generally a weak quarter with regard to statutory earnings, there's some reasons for this, but the biggest reason has to do with how we deal with hedging or reinsuring AXXX and XXX risk. We don't do that. To save money, we don't necessarily true up our hedging of those what I would call real straining reserves. We don't true up our hedging of that every quarter. We do it periodically over the course of a year.
That's one big reason why statutory earnings are generally lower in the first quarter, there's some others. The way to think about this $600 million of operating income is it's almost exactly the same number that we had last year. Okay? Operating earnings in our domestic life insurance subs on a statutory basis is basically flat year-over-year. In my mind, It's a good result and kind of consistent with our history. With regard to cash flow outside our domestic subs, we've talked about two things. We've talked about that we do expect dividend payments from both our newly acquired Alico businesses as well as some of our key MetLife international businesses, mainly Mexico.
We think that sort of ongoing dividends, normal dividends from those operations should well exceed $500 million a year, somewhere between $500 million-$1 billion a year, given how fast we're growing in some of these countries. By the way, our growth rate obviously, as we've shown this quarter, is quite fast. There is also an opportunity that which we discussed on Investor Day to take some special dividends out of some of the Alico subsidiaries or branches because of the high level of capitalization of those subs and branches when we acquired the company. They were carrying quite a bit of capital over and above which is needed to support the operations. We estimated that at roughly $1 billion, some of which is in Japan and not readily accessible.
We expect to pull out most of that excess dividend, a lot of it this year and maybe the rest of it over the next year or two.
Just one follow-up, Bill. On that $500 million-$1 billion of dividends from Alico and other international, how would that compare to whatever the statutory earnings type number is? What type of a payout is that from those subs?
Think roughly 50%.
Okay, thanks.
Our last question comes from the line of John Nadel with Sterne Agee. Please go ahead.
Good morning. A couple of quick ones. Just to be clear on the hedging costs and the change in the accounting. The actual cost of buying the hedges, though, is still in your operating earnings, correct?
No, not necessarily. The fees that we record from the GMIB riders, which obviously pay for the hedges, we pulled those out of operating earnings as well.
Okay.
That's all now below the line.
Okay, got it. Just to think about equity market sensitivity, obviously a substantial change in your business mix and the change in the VA hedging accounting. Can you sort of update us on what you think your sensitivity is to a 1% move up or down in the S&P?
Yes. A 1% move now is about $0.02 a share over the course of a year. That means we're not really that sensitive to equity movements, obviously, because of where we are in the back quarter with regard to amortization. We're in such a stable place that it's just not going to fluctuate that much.
Okay. Just a quick question following up on Bill Mullaney's comment on the VA sales. Just wondering if you can give us a sense for what "quite strong" means for the returns on the recently sold business, Bill.
Sure, John. We've always talked about acceptable returns for us being north of 15%. The product that we're putting in the market today meets that definition.
Okay. Finally, just on group insurance sales, can you give us some sense for what your sales looked like in the January 1 or first quarter sales, and how competitive an environment it is and what that means for premium levels in 2011 for group life and non-medical?
Sure. Well, I think you saw that our revenues were down in both the group life and non-medical health. Group life in particular, non-medical health was roughly flat year-over-year. That's pretty consistent with what we talked about on Investor Day for group life. We said that group life would be down. It's down a little more in the first quarter, but we expect that to even out more toward the back half of the year. We'll come in within the guidance that we talked about on Investor Day. Sales in general were weak, particularly in the large end of the market. There was less quoting activity for very large cases.
For the cases that we did quote on, what it would take for us to win that business, particularly in life insurance, would have been to write those cases at a level that was far below what we were comfortable with. We also lost a couple of large cases, which I mentioned at Investor Day. We are seeing, I think, some improvement in the pricing environment in certain segments of our business. Disability in particular, I think you saw that we had strong Disability results this quarter, which was a function of improving incidents, a return to more average historical levels for recoveries. Also the fact that we've been taking pricing actions over the last two cycles that allow us to get a good return at these elevated incidence levels.
We think that that's going to force the market to begin to bring their prices up to more in line with what the current performance of the businesses are. The last thing I'll just mention is, you may have seen that we were awarded the TRICARE dental business, which is a pretty significant dental contract for us, and that will be having an impact in our business in 2012.
Thanks very much. Just a quick follow-up. Bill, order of magnitude, can you give us a sense for how much group insurance sales were down year-over-year?
Yeah, I would say as a working number, probably 25%.
With most of that, I assume, driven by the large end of the market?
Yes.
Okay.
We didn't really have a large case sale in 2011, which is rare for us. We usually have one or two big case sales. We just didn't have any of those this year. That was really the difference.
Smaller end of the market, flat to up.
Yeah, smaller end of the market is performing within our expectations, so we feel pretty good about that.
Thanks very much. Appreciate it.
Sure.
Thank you, everyone. Ladies and gentlemen, this conference will be available for replay after 10:00 A.M. today running through May 12th, 2011, at midnight. You may access the AT&T Executive Replay service at any time by dialing 1-320-365-3844 and entering the access code 169214. Again, the number is 320-365-3844, and the access code is 169214. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.