MetLife, Inc.
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the MetLife First Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of 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 developments or otherwise. With that, I would like to turn the call over to Ed Spehar, Head of Investor Relations.

[Edward A. Spehar:]

Thank you, Greg, and good morning, everyone. Welcome to MetLife's First Quarter 2013 Earnings Call. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the Investor Relations portion of metlife.com, in our earnings press release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John Hele, Chief Financial Officer. After their prepared remarks, we will take your questions. Also here with us today to participate in the discussions are other members of management, including Bill Wheeler, President of the Americas; Steve Goulart, Chief Investment Officer; Michel Khalaf, President of EMEA; and Chris Townsend, President of Asia. With that, I'd like to turn the call over to Steve.

[Steven A. Kandarian:]

Thank you, Ed, and good morning, everyone. I know that capital management is of great interest to our investors, and I trust you saw last week's announcement of a 49% increase in our common stock dividend, the first increase since 2007. Our new dividend results in a payout ratio of approximately 20%, which is in line with our peers. The dividend increase, as well as our plan to internally fund the $2 billion acquisition of AFP Provida, illustrates our commitment to making effective use of capital. Nevertheless, given prevailing regulatory uncertainty, we continue to assume no share repurchases in our 2013 plan. Turning to our quarterly results. We are pleased to report that the year is off to a good start. The first quarter 2013 operating earnings were $1.6 billion, up 12% over the first quarter of 2012. Operating earnings per share were $1.48, an 8% increase over the prior year period. And operating return on equity was 12.7% on an annualized basis. Our operating earnings were aided by strong equity markets, favorable investment margins and good performance on expenses. Net income for the quarter was $956 million. The difference between net and operating income is primarily explained by derivative losses related to asymmetrical accounting treatment and noneconomic factors. The first quarter included $411 million of after-tax derivative losses from economic hedges, where the associated risk does not have the same GAAP accounting treatment, as well as $269 million of after-tax derivative losses related to MetLife's own credit spread. John Hele will discuss our financial results in further detail in a few minutes. As I said on our December guidance call, MetLife faces external headwinds that we cannot control, such as low interest rates and regulatory uncertainty. However, we are focusing on mitigating the impact of these headwinds and executing our strategy in the areas we can control to create shareholder value. A good example of this is our effort to reduce expenses. We have said that the bulk of our expense saving opportunities are in the U.S., and our results reflect solid progress in this market, with total fixed operating expenses down 3% year-over-year. We are extremely pleased with this performance, especially considering that premiums, fees and other revenues in the U.S. were up 4% year-over-year and up 5% excluding pension closeouts. This expense margin improvement contributes $0.05 to earnings per share on a year-over-year basis. Expenses will fluctuate from quarter-to-quarter, but it's clear that our cost-saving initiatives are translating to improve bottom line results. Going forward, we remain focused on achieving the full $600 million of annual pretax net expense savings discussed at our May 2012 Investor Day. The consolidation of our U.S. real estate footprint announced in March is an example of these efforts. By moving 2,600 retail and technology jobs to North Carolina, we are reducing labor and real estate costs, enabling better employee collaboration and driving efficiencies. Sales growth in emerging markets is another area of strategic focus to drive shareholder value. First quarter results showed continued momentum on a year-over-year basis, with sales in Latin America up 20% and sales in the emerging economies in Europe, the Middle East and Africa up 40%, driven by strong results in the Gulf, Turkey and Russia. The sales increase in emerging markets, combined with a 29% decline in U.S. variable annuity sales in the quarter, reflects substantial progress on our efforts to shift our business mix away from capital-intensive, market-sensitive products. We remain on track to sell $10 billion to $11 billion of variable annuities this year, which will be a decline of approximately 40% from last year. Now let me turn to the current interest rate environment. With the 10-year Treasury yield falling back to below 1.7% and the 10-year Japanese government bond yield at less than 60 basis points, we recognize that investors and analysts are concerned about the potential impact of low rates on our business. However, our analysis suggests that a sustained low-rate environment is a manageable risk. The current rate environment in the U.S. is very similar to the interest rate stress scenario discussed in our 2012 10-K filing, which assumes, among other things, a 1.69% 10-year Treasury through the end of 2014. Based upon these assumptions, operating earnings per share would decrease by $0.04 in 2013 and $0.13 in 2014. In addition, we see incremental earnings risk if rates remain at current levels in Japan, but the estimated impact would be immaterial this year and less than $0.05 per share in 2014. Next, I'd like to spend a few minutes on the regulatory environment. MetLife faces the possibility of being named a nonbank, systemically important financial institution, or SIFI, which would place us under Federal Reserve supervision. To date, MetLife has not been notified by the Financial Stability Oversight Council that we have been moved to Stage 3 of the process for designating SIFIs, although the conventional wisdom holds that we will be at some point. That is why I am spending time in Washington, participating in the debate on this important issue. At a speech delivered at the U.S. Chamber of Commerce last month, I stated that the traditional business of life insurance does not present systemic risk to the U.S. economy and that MetLife should not be named a SIFI. My 3 main points were

[John C. R. Hele:]

Thank you, Steve, and good morning. Today, I'll cover our first quarter results, including a discussion on insurance margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash, capital and guidance. To begin, MetLife reported operating earnings of $1.6 billion or $1.48 per share, up 12% year-over-year. This quarter included 2 notable items. The first was in our retail annuities business. We had a nonrecurring benefit related to our assumption review for variable annuities, and some of the models required adjustment to reflect the full impact of the lower lapse rates. This increased operating earnings by $29 million after tax or $0.03 per share. Second, pretax variable investment income was $337 million, reflecting strong private equity returns and higher bond prepayments. After taxes and the impact of DAC, variable investment income was $217 million, which was $22 million or $0.02 per share above the top end of our 2013 quarterly guidance range. Turning to our bottom line results. First quarter net income was $956 million or $0.87 per share and included net derivative losses of $410 million after tax. As Steve mentioned, the net derivative losses in the quarter included a $680 million after-tax loss, which is explained by 3 items

[Edward A. Spehar:]

Thank you, John. Before we start Q&A, [Operator Instructions]. With that, Greg, if we could please take the first question.

[Operator:]

[Operator Instructions] Your first question comes from the line of Suneet Kamath from UBS.

[Suneet L. Kamath:]

I wanted to start with Steve, if I could. Yes, I thought your comments around the presentation you made in Washington were helpful. Could you provide any color on how the response has been and what the feedback was?

[Steven A. Kandarian:]

Yes, indeed. I would say that the policymakers, people in the Hill, others in Washington are listening carefully to the arguments. There is a lot of debate going on. I think it's healthy. I think having these views on the table is important to make sure we get it right. This is an important industry. It affects millions of Americans across our country. And it's just really important that these financial protection products are still going to be available and affordable to people going forward, especially at a time when the social safety net's under a lot of pressure in our country. So I think people are being very thoughtful about the discussion, are listening carefully, and I'm hopeful that when things finally transpire here, that we'll get a solution that makes sense.

[Suneet L. Kamath:]

And anything on the timing of when things may transpire?

[Steven A. Kandarian:]

We don't have any clarity on that, Suneet. Having statements coming out of FSOC that they think that the first designations of nonbank SIFIs will be coming, and the word they used was soon. But obviously, that word doesn't have really a great deal of specificity to it. So we have to wait and see how that sorts out.

[Suneet L. Kamath:]

Got it. And then just a follow-up for John, if I could, on the holding company cash. I think you said $4.8 billion, down a little bit from year-end. If we think back to that cash flow roll-forward that you provided in December, and I know you had some items in there that were like placeholders, for example, the Dodd-Frank collateral. I'm not sure if we had real clarity on what the run rate holding company expenses were. But just sort of big picture, is that cash flow roll-forward pretty much the same based on where you sit today? Or has there been any changes to it other than the dividend, I understand that.

[John C. R. Hele:]

Sure. The -- in the $4.8 billion is where we plan to be given the timing of our expenses and sub-dividends, how we get them in the flows in and out. We did have a placeholder, as we mentioned, for Dodd-Frank derivative collateral rules. Those are still a bit influx. The original rules that were specified last year in the U.S. were somewhat onerous. However, the international rules had a longer phase-in period and were not as onerous. There's still a discussion going on between which ones are going to be adopted. I believe they're leaning very much on the international, less onerous rules with a longer phase-in period. But for now, we're going to keep the placeholder in, and we'll have to see how things develop throughout the year.

[Operator:]

Your next question comes from the line of Tom Gallagher from Crédit Suisse.

[Thomas G. Gallagher:]

First question is, of the $600 million of cost saves that you're targeting, can you tell us where you're at on that? How much is in this quarter's run rate to date, and how much is still on the come-through? I think, Steve, you guys had said the $600 million should be realized by the end of '14. How much is still to come on that?

[John C. R. Hele:]

We've gotten net, and this is mainly heading to the U.S. There's about $115 million, but we have some onetime costs of about $40 million. So the net to the bottom line is about $75 million.

[Thomas G. Gallagher:]

And John, is that $75 million per quarter is hitting the bottom line right now?

[John C. R. Hele:]

Yes.

[Thomas G. Gallagher:]

Got it. So you're not -- sorry, go ahead.

[John C. R. Hele:]

So it's really $115 million, but there's a onetime cost of $40 million.

[Thomas G. Gallagher:]

And you're not stripping out that one -- or are you stripping out that onetime cost from operating?

[John C. R. Hele:]

No. No, it's included.

[Thomas G. Gallagher:]

Got it. Okay. So -- and that would be restructuring cost, I presume?

[Steven A. Kandarian:]

Yes.

[John C. R. Hele:]

Now the -- yes, some -- but some of our reinvestment, yes, the $600 million is a net number. So we plan to get to $1 billion with a $400 million reinvest over time when we get out there. So the -- we'll start to have some more reinvest heading then in future periods as well.

[Thomas G. Gallagher:]

So should I view that, that you guys are more than half of the way there? Should I be netting that against the full year $600 million pretax number? Or should I be netting that against $1 billion? I just want understand how you're thinking about that $115 million in the context of your goal.

[John C. R. Hele:]

Yes, I'd say we're about halfway there, maybe 1/3 to 1/2. The reinvestment timing is still going to be phased in, but we've made good progress here.

[Thomas G. Gallagher:]

Got it. And then the -- my follow-up is I just want to understand the yen sensitivity a little bit better at a higher level. Can you tell us what percent of your Asia earnings are actually Japan because, obviously, Korea is a pretty big contributor. So I want understand, of the $330 million, how much is Japan? And of the Japan, how much are yen-denominated earnings versus U.S. dollar-denominated earnings?

[Christopher G. Townsend:]

Let me wait in that. It's Chris Townsend. Let me just wait in and give you the number in terms of the Japan proportion of the $333 million. The Japan earnings, overall, for the quarter of $303 million part of $333 million, and I think we're about 65% yen-based earnings on that.

[Thomas G. Gallagher:]

Chris, that's 65% yen-based of the $303 million?

[Christopher G. Townsend:]

That's correct.

[Operator:]

Your next question comes from the line of Nigel Dally from Morgan Stanley.

[Nigel P. Dally:]

With capital, it's good to see the dividend increase last week. With buybacks, I know said your plan doesn't include any buybacks for this year. That said, you do have the dilutive equity units coming up later this year. Should we take it from your comments that offsetting the impact of those units is off the table? Or is that something you could still consider over the course of the year? Also, I know you noticed that currently, you didn't need the approval from the Fed. But would it be correct to assume that you did consult with them before going ahead with the dividend rates?

[Steven A. Kandarian:]

Nigel, we think a strong dividend and buybacks are both important to our shareholders. Those are 2 goals of ours going forward. As you've seen, we've increased our dividend by 49% for the second quarter and going forward. And we've also mentioned today that there are no buybacks planned in 2013. That's what we're working with as an assumption. Clearly, the regulatory environment is a key factor in terms of what we do in regard to buybacks, and we're waiting for more clarity around that topic right now. So I think it's as prudent on our part to take a wait-and-see attitude around how the regulations sorts out here over the course of the year before we make commitments about buybacks.

[Nigel P. Dally:]

And with the dividends, did you actually talk to -- with the Fed?

[Steven A. Kandarian:]

No. In terms of talking to the Fed, as you know, we sold our bank in January. We legally de-banked in February. We're no longer regulated by the Federal Reserve. It wouldn't be appropriate for us to go to them at this point in time, although I'll tell you that, certainly, we went through the stress test exercise in late 2011, early 2012. We had $1.10 dividend request in that test, and we already made that public. Back in 2012, we made that public. So the Fed certainly is aware of our desire to have $1.10 dividend.

[Nigel P. Dally:]

Okay. Great. And then just a second, with annuities, as you mentioned, you had a positive impact this quarter from lower lapses on your DAC for variable annuities. I guess my concern is that lower lapses can actually be a sizable problem for guaranteed minimum income benefit products. Accordingly, can you discuss what sort of lapse assumptions you're seeing in your statutory accounting for variable annuities and how that compares to the lapse activity that you're currently seeing?

[John C. R. Hele:]

Well, the -- this is John. The lapse assumptions are consistent with what we communicated at the last quarter in terms of the changes to the lapse functions. We had a slight model refinement in the calculating of the impact on operating earnings. It had no impact below the line and statutory assumptions are the same as we used for GAAP.

[Operator:]

Your next question comes from the line of Seth Weiss from Bank of America.

[Seth Weiss:]

Just a question on the pace of VA sales. I know $3.5 billion is probably a little bit outsized considering that you still have the old product for the first month. Could give us a sense of old product versus new products mix between that $3.5 billion?

[William J. Wheeler:]

Yes, most of the first quarter sales were old product because even if they actually stop taking new apps, there was a lot of throughput that got processed ultimately through the quarters. So most was old product. The old products, by the way, still had an attractive ROI this quarter because, obviously, hedging costs have come down. But now, new -- sales for the remainder of the 9 months should be all GMIB Max V, the new product. And in terms of our ability to hit our run rate, we're currently tracking at a weekly sales rate that we think we'll still be able to hit that sales goal comfortably.

[Operator:]

Your next question comes from the line of Jimmy Bhullar from JP Morgan.

[Jamminder S. Bhullar:]

I had a question. You mentioned -- on interest rates, you mentioned the EPS impact of lower rates through 2014. Could you talk about potential for DAC or reserve charges over the next few years if rates remain at these levels, especially in products like long-term care? And then also how should the impact of lower rates compound beyond 2014 if we're sort of in this environment for more than a year or so?

[William J. Wheeler:]

Jimmy, it is Bill Wheeler. With regard to long-term care, a couple things to keep in mind, that we've added to statutory reserves over a long period of time, which is, of course, where any likely reserve impact would be. It would be a long ways away from GAAP adjustments. The -- and I think we feel that with regard to what we're doing, with regard to long-term care in terms of price increases, as well as on the in-force, as well as the fact that we've really built up reserves over time prudently, make us feel that the likelihood of adjustments even with the low [ph] level of interest rates is pretty low.

[Jamminder S. Bhullar:]

And that goes for other products as well?

[John C. R. Hele:]

Yes, so we have given you some guidance here. Steve gave you some operating earnings sensitivities to lower rates. We still have a meaner version assumptions on very long-term contracts that do gear up over time, and we are comfortable with that now and are comfortable for the foreseeable future. We still have the Federal Reserve doing extensive bond-buying in the markets. We're not certainly in normal situations. I think we have to wait and see for some period of time how that would resolve, and we would rethink about our long-term assumptions. But for now and for '13, certainly, and going into '14, we're comfortable with our long-term assumptions, which is what drives the GAAP and DAC.

[Jamminder S. Bhullar:]

But you'd review on like -- and then you're assuming a slight increase in rates over time and it does not materialize over the first -- or it has an extended period of low rates than you just look at those on an annual basis, I guess?

[John C. R. Hele:]

We kind of look at this -- we look at this on an annual basis because we have very long-term contracts. Long-term care is probably the longest of the liabilities, so we have long liabilities. The pension business, the life insurance is all very long-term liabilities, and you have to really think carefully about how you set these long-term assumptions given we're still in the aftermath of '08, with a lot of activity by federal governments looking at and working on interest rates. So we will take it year by year and think it through carefully.

[Jamminder S. Bhullar:]

And then just on SIFI, have you done any internal studies that would just assess what the -- what your balance sheet would look like if it was subjected to like a Basel-type capital standards? Because just if you do a big picture analysis, it seems like as the insurance companies were subjected to bank-based standards, they would be significantly short on capital. Is that a correct assessment?

[Steven A. Kandarian:]

Jimmy, it's Steve. The questions of being what Basel standards, and we've heard from officials in Washington, is it going to be Basel I for insurance companies? Will it be some other form of Basel? Will it not be Basel? It's really very much up in the air right now, and that's why we continue to make the argument in Washington that whatever rules come forward for nonbank SIFIs should be tailored to the industry they're regulating and not relate to a bank or bank-like approach for regulation.

[Jamminder S. Bhullar:]

Yes, but under Basel III, the insurance companies' statements that have just given the capital charges on the various investments seems like the large insurance companies, if they are subjected to SIFI, they would be significantly undercapitalized. I don't know if you've done an analysis of that internally.

[Steven A. Kandarian:]

A straight Basel 3 regime, it would be a very difficult capital regime for us to operate under. There's no question.

[Operator:]

Your next question comes from the line of John Nadel from Sterne Agee.

[John M. Nadel:]

I have a question on Japan sales. I think, John, that you mentioned that sales were down about 13% year-over-year, but that was driven heavily, I guess, by the bank channel, which was down 60. I was wondering if maybe -- whether you or Chris could give us maybe a little bit more of a breakdown. I'm unclear on what percentage of overall Japan sales actually come through the bank channel and maybe what some of the third sector and non-single premium whole life sales, what kind of growth rates were you seeing there?

[Christopher G. Townsend:]

Okay. Let me have a shot at this. First of all, the bank business overall in Japan makes up about 15% to 20% of the total AMB for Japan. Of that, the fixed annuity foreign currency product that John referenced make up about 50% of the total there. So overall, we've seen that bank channel down 60%. So a rather significant reduction. And I think in terms of the surrenders you're seeing that John referenced, you'll see those continue for all the way through the second quarter. And we expect the channel -- the bank channel to be down about 30% to 35% for the full year. In terms of the A&H business, we're down 6% for the quarter, which is in line with the market. And we expect to be flat on A&H overall for the year. So with all of these moving parts, we would expect sales in Japan probably to be flat year-on-year. And overall, for Asia, given all the other countries you got in the region, we expect sales, the AMB number for the year to be about 5% up year-on-year. I would just caution you in terms of the bank sales. The -- a good portion of our earnings in Japan come predominantly from the A&H business and second from the life business, which are in reasonably good shape. And the big benefit of what we got there is the bundling capability on the A& H, where we intend to get about 60% to 65% of the life sales bundled with an A&H product, which gives us a good edge in that market overall.

[John M. Nadel:]

That's very helpful. And then I guess, just thinking about interest rates a little bit more, I was wondering if you could give us some sense for how much portfolio overall turnover you're expecting this year and next?

[William J. Wheeler:]

Well, I don't know that we've historically talked about portfolio turnover a lot, John. But I think our activities, we make projections on what we expect. I think the first quarter, we probably had a little more portfolio turnover than normal just given the rate environment and some of the [indiscernible] and interest rates and the like. But overall, if we look at -- historically, we look at the last several quarters, I mean, our turnover is pretty much in line with what we see for typical industry statistics.

[John M. Nadel:]

And then just real quick, any sort of outlook commentary you can provide with respect to variable investment income for the remainder of the year? I mean, you've got a pretty wide quarterly range and always want to be careful about trying to model all the way at the upper end of the range, which is what you adjust against. But any commentary there would be helpful.

[William J. Wheeler:]

Sure. Again, there is a reasonable correlation between equity market performance and a good portion of our variable investment income, so you have to take into consideration what happened in the first quarter. We saw a very strong equity market, so I think, certainly, the near term, meaning the second quarter have to be strong. And as we look forward for the rest of the year, we're not projecting necessarily continued -- the continued same performance in the markets. So we're back probably comfortable with the plan. And overall, I think that means we are -- we feel very comfortable with the VII plan right now. We probably think we'll be closer towards the top of the plan. But obviously, anything can happen in the second half of the year.

[John M. Nadel:]

And then, Steve, just around that. A lot of private equity firms, the distributions are quite elevated and appear to be -- it appears that it's going to remain that way. Are you reinvesting such that we ought to expect private equity investments in total to remain relatively stable as we look forward?

[William J. Wheeler:]

Yes. Yes, we have ongoing commitments to private equity. We like the sector, and we'll continue to at least maintain our investment level.

[Operator:]

Your next question comes from the line of Mark Finkelstein from Evercore Partners.

[A. Mark Finkelstein:]

Can you just talk about the strategy on hedging the yen in Japan and maybe just give thoughts on an endgame? I mean, you obviously kind of layered into the first quarter of '14, you layered into the second quarter of '14 at JPY 95. Where do you expect to get to and what is kind of the longer-term strategy?

[John C. R. Hele:]

Right. This is John, Mark. Currency is always an interesting thing to think about. We have decided, we take it quarter-by-quarter. We meet and decide, do we want to take a position on the yen or not? We did so far with input from our investment group and thinking about our business there. But again, it is a quarter-to-quarter plan for us in terms of how we think about it. And we've got the protection that we've told you about.

[A. Mark Finkelstein:]

I guess would you expect to kind of build hedges that get you through '14 based on kind of current conversations?

[John C. R. Hele:]

We haven't decided.

[A. Mark Finkelstein:]

Okay. And then just, I guess, a follow-up question on Asia earnings and just thinking about the higher lapses, maybe going back to kind of -- I think it was Nadel's [ph] question. The -- should we infer from the commentary that the higher lapses that you've seen and that you are going to continue to see into to see into this quarter are not material to the overall earnings? Or should we be thinking about an earnings strain? And if so, how much?

[Christopher G. Townsend:]

It's Chris Townsend, again. Let me -- I guess the way you should think about this overall is that the surrender fees we're getting -- or the surrender penalties we're getting at the moment are the net of DAC and variable amortization in the market value adjustment. So that $29 million you've got in the first quarter is effectively a prepayment to the profit for the life of the contract. So what you're seeing is, economically, we're being made whole for our profit. If the contract just stayed in place, you'd probably see those earnings spread over, over the life of the -- probably, it's around 7 years, the average amount of the contract. So I think for the first 2 quarters of the year, what you'd expect to see is earnings deficiency of about $2 million to $3 million per quarter for the life of the 7 years of the contract.

[A. Mark Finkelstein:]

Okay. And then I guess just would you expect the second quarter to kind of look like the first quarter in terms of that $29 million?

[Christopher G. Townsend:]

We would. As I said before, we'd expect the same sort of surrender fee income at the moment.

[Operator:]

Your next question comes from the line of Chris Giovanni from Goldman Sachs.

[Christopher Giovanni:]

I guess first question regarding the Provida transaction. So one of your competitors did a large-claim pension deal, pointing to better-than-expected earnings partly attributable to more customers that actually stayed in the plan post the deal announcement than what was expected. So I'm curious if you can provide any insight around what you're seeing in terms of retention since the deal was announced,

[William J. Wheeler:]

Chris, it's Bill Wheeler. So remember, we won't close until sometime in the third quarter. That's our expectation. And I would tell you, I think Provida's performance in the first -- for the first part of this year has been right on track. And in terms of profitability and ongoing business, I haven't seen a fluctuation one way or another. So it's looking good.

[Christopher Giovanni:]

Okay. And then I guess regarding VA policyholder behavior, there's certainly a lot of focus around lapse assumptions. But I wanted to ask about sort of annuitization trends. So your GMIB product, I guess, it's really at a point where you're likely starting to see some policyholder behavior trends on annuitization take-ups. So I wanted to see if you can comment on those trends sort of relative to maybe your original expectations and then your current assumptions for reserves.

[William J. Wheeler:]

Yes, sure. My guess is we'll talk more about this at Investor Day, but I'll give you some sense of what we're doing. A very small portion of our GMIB block is available to be annuitized today, so I think roughly 5%, maybe even a little less than that. So there's not a lot of data yet on the experience in terms of people deciding to annuitize. That said, the level of annuitizations right now is very low, and even for even for products that are in the money, they -- so we're seeing a quite low level of annuitizations. But I think we haven't decided to react to that yet because it's very early days and not many people have had the opportunity to annuitize yet.

[Operator:]

Your next question comes from the line of Sean Dargan from Macquarie.

[Sean Dargan:]

Just getting back to the policyholder surrenders in Japan. I'm just wondering, if the yen is weakening, why the policyholders would want to give up their exposure to policies denominated in foreign currencies?

[Christopher G. Townsend:]

Yes, what we're seeing there is the people are taking advantage of the significant rise in the equity markets in Japan and lock it in some of the foreign currency gains. So you've seen all of these [ph], that most of them, it's about 60/40 in terms of Australian dollar versus U.S. dollars, the mix of these fixed annuities. But it's effectively taking the benefit and putting it into mutual funds in the equity markets.

[Sean Dargan:]

Okay. And then just is there any color on what's driving the sales growth in Latin America? You call out Mexico in direct marketing. Is there anything to note there?

[Steven A. Kandarian:]

No. It's very consistent with our plan in terms of 20-plus percent sales growth year-over-year. That was our expectation. Look, we're -- and a lot of that is driven by direct marketing, but it's really coming in a lot of areas of the business as well.

[Operator:]

The next question comes from the line of Steven Schwartz from Raymond James.

[Steven D. Schwartz:]

I want to follow up on -- I think it was Chris' question. Bill, while you haven't seen a whole lot of annuitization yet, have you seen any changes in the usage of dollar-for-dollar withdrawals on the GMIB?

[William J. Wheeler:]

No. But we -- when we designed the product, we assumed that there would be a certain level of dollar-for-dollar usage, and there is, and it has not changed. Remember, though, that now in the new products, the -- or the new GMIB, the dollar-for-dollar benefit, though it still exists, is much less attractive.

[Steven D. Schwartz:]

Okay. And then, Steve, if I can follow up in your discussion about the dividend, were you saying that you had basically run through the current dividend through the CCAR test that the Fed found you deficient on?

[Steven A. Kandarian:]

No. That -- that's not what I was saying. I was asked a question earlier if we informed the Fed or ran by the Fed our decision to raise the dividend to $1.10 before announcing that. So I said was because we're no longer regulated by the Fed, it would be inappropriate for us to go them seeking approval or something of that nature. But I noted that when we went through the stress test, that was our -- part of our submission was having $1.10 dividend. So they're certainly aware of our desire to raise the dividend to $1.10 for the common shareholder.

[Steven D. Schwartz:]

Okay. Got it. And then one more, if I may. There was a -- I think, there was a reference to a yen loss -- a currency exchange loss, and I think it was the yen, with regards to net investment income. Is this akin to what prudential has reflected over the last couple of quarters with liabilities being treated differently from the asset?

[John C. R. Hele:]

No. We don't have that issue that prudential does. We have multicurrency reporting and that we avoid that volatility that prudential has.

[Operator:]

Your next question comes from the line of Jay Gelb from Barclays.

[Jay Gelb:]

With regard to the share buyback, many of us are expecting that Met can resume share buybacks in 2014. Is that a reasonable assumption?

[John C. R. Hele:]

I honestly don't know. We'll see what happens in 2013 in terms of regulation. We'll have a much greater clarity. It is our goal, as I mentioned earlier, to provide a good yield on our stock through an appropriate dividend and also to have share buybacks as part of our capital management process going forward. But we have to see how things sort out here in the current year around regulation coming out of Washington.

[Jay Gelb:]

Okay. And then switching gears for John, just so I understand that normalized run rate of operating earnings in the first quarter. If you normalize for the items you outlined, we get to a range of around $1.30 for the first quarter. Am I thinking about that the right way?

[John C. R. Hele:]

Jay, you're good at math. That's exactly what I would think.

[Jay Gelb:]

I can still subtract.

[John C. R. Hele:]

You're still doing a good job, I guess.

[Jay Gelb:]

And then for Bill, what implied volatility assumption are you using for variable annuities?

[William J. Wheeler:]

Well, you mean when we price, is that what you're referring to?

[Jay Gelb:]

Yes.

[William J. Wheeler:]

Right around 100%. Or excuse me, not the implied volatility. The implied volatility is the hedging cost in total, we're assuming at about 100% when we priced. Right now, of course, they're running at about 115%, I think, or that's where they were for the first quarter.

[Jay Gelb:]

Okay. And what duration liability do you use for implied vol?

[William J. Wheeler:]

I think it's the 5-year.

[Operator:]

Your next question comes from the line of Yaron Kinar from Deutsche Bank.

[Yaron Kinar:]

Just to make sure this was really is that. With regards to the dividends, when I listened to the last quarter's call, it seemed like it was very cautious on any capital deployment before there was additional clarity from regulators. So what exactly changed since that call and into the point that the dividend was increased by 50%?

[John C. R. Hele:]

Yes, I know that some people wanted me to make some statement as soon as we sold the bank. But we're not at the point where we're going to declare the dividend for the second quarter yet, and we have a process, of course, under normal corporate governance to go to our board and get approval for any sort of capital action of that nature. So the timing just wasn't right for us to make any declaration at that point in time.

[Operator:]

Your next question comes from the line of Joanne Smith from Scotia Capital.

[Joanne A. Smith:]

Yes, I just -- most of my questions have been asked and answered, but I wanted to go back just to the capital management topic one last time, understanding that there's no expectation for share repurchase in 2014, you've already taken action on the dividend, you have a $2 billion Provida deal to close. Where do you stand in terms of capital deployment with respect to additional acquisitions? Because it seems that there has been some increased activity in that market right now. So could we look for potentially another deal this year? I mean, we don't want to build it into our expectations, but would that be a possibility?

[John C. R. Hele:]

So I just wanted to make one correction. I think you said 2014 may be you meant 2013.

[Joanne A. Smith:]

2013. Sorry.

[John C. R. Hele:]

Yes, okay, so just to clarify that. So no expectations of share buybacks in 2013, although, as I mentioned, the Provida deal, $2 billion approximately, will be a cash transaction, so we'll be using capital in that sense. I think that, as a practical matter, regulators look at acquisitions differently than share buybacks. Acquisitions should be generating earnings and have assets involved and so on. So we certainly will be looking at transactions over the course of this year, as we always do. There's nothing we can talk about at this point in time about a deal on the horizon, but we certainly look at most anything that comes in the market that could make sense from us strategically. And at that point in time, we'll make a decision about how we finance it if there were to be another deal going forward.

[Edward A. Spehar:]

Thank you, everyone, for joining us, and we look forward to speaking with you on next -- at our Investor Day. Thank you.

[Operator:]

Ladies and gentlemen, this conference will be available for replay after 10