Ladies and gentlemen, thank you for standing by. Welcome to the MetLife 2018 Outlook 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, including in the Risk Factors sections of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise. I would like to turn the call over to John Hall, Head of Investor Relations.
Thank you, operator. Good morning, everyone. Welcome to MetLife's year-end outlook call. Presentation materials for this discussion were released last night and are currently available at metlife.com on the investor relations website. Before starting, I refer you to the cautionary statement on forward-looking statements and non-GAAP financial information beginning on slide three of the presentation materials, which you should review. The purpose of today's call is straightforward: to provide investors, analysts, and other interested parties with the tools and insights needed to understand the drivers of MetLife's financial performance. I'm going to start with our agenda on page four. We'll begin the call with opening remarks from Steve Kandarian, MetLife's Chairman, President, and Chief Executive Officer. John McCallion, MetLife's Chief Financial Officer, will provide a financial update.
Business outlooks will be provided by Michel Khalaf for the U.S. business, Kishore Ponnavolu for Asia, Oscar Schmidt for Latin America, Michel Khalaf for EMEA, and Marty Lippert for MetLife Holdings. We will finish our prepared remarks with MetLife's Chief Investment Officer, Steve Goulart, who will speak briefly on our investment portfolio. We will close with Q&A. Please limit yourself to one question and one follow-up. Now to Steve.
Good morning, everyone, and thank you for joining us for MetLife's Outlook Call. 2018 has been a pivotal year in the history of MetLife. We celebrated our 150th anniversary as a company. The U.S. government dropped its appeal of our U.S. District Court SIFI victory, and we completed the final leg of the spin-off of Brighthouse Financial. Perhaps most important, we gained further traction on a refreshed corporate strategy. Our goal has been clear: build a company with more capital-light products, shorter payback periods, and strong free cash flow. The road has not always been easy, but we are confident that the heavy lifting of our transformation is behind us. MetLife is now well-positioned in less volatile protection and fee-based businesses where we have significant competitive advantages.
Our year-to-date results, adjusted earnings per share growth of 23% and an adjusted return on equity of 12.6%, demonstrate the momentum behind our strategy. Going into 2018, we targeted an adjusted return on equity of 800 to 900 basis points above the risk-free 10-year U.S. Treasury rate. Year to date, we are exceeding that goal. As the Fed moves to a more normal rate environment, we are establishing a new adjusted ROE target of 12%-14%. The keys to achieving this new target will be continued business growth and further progress on our expense initiative, where I am confident we will achieve $800 million of net savings by 2020. MetLife's shift toward less capital-intensive products with shorter payback periods should give investors confidence in our ability to generate strong cash flow over time.
A year ago, we committed to an average free cash flow ratio of 65%-75% of adjusted earnings for 2018 and 2019. We made this commitment despite downward pressure on the ratio from tax reform, largely due to the timing of tax cash flows. We expect to meet this goal, and we are extending our target of 65%-75% on average over 2019 and 2020. It is important to note, we have stress tested our free cash flow target to hold within a 10-year U.S. Treasury yield range of 2%-4.5%. We believe excess capital belongs to our shareholders and should be used to pay common dividends, repurchase shares, or make acquisitions that clear a risk-adjusted hurdle rate.
Over the past three years, our strong cash flow has been put to good use, mostly towards share repurchases that have a positive impact on a return on equity and earnings per share. For the three years ending 2018, we will have returned close to $12 billion to shareholders through share repurchases and common dividends. Since reporting earnings on November 1st, we have repurchased $700 million of MetLife shares, extinguishing our prior $1.5 billion authorization and utilizing $230 million of our new $2 billion authorization. When I look ahead, I am more optimistic about MetLife's prospects than any time since I became CEO. We are in attractive markets, we have an iconic brand, and our product mix has been reconfigured to serve our customers' needs while generating strong returns to our shareholders.
Our focus and commitment as a management team is to run MetLife in a way that maximizes long-term value for our customers and shareholders alike. With that, I will turn the call over to John.
Thank you, Steve, and good morning, everyone. I will start on slide eight. As Steve noted, MetLife's reported year-to-date 2018 financial performance was very strong. Many of our businesses posted good volume growth, which is up 5% year-over-year. Underwriting margins in the U.S. have been favorable, most notably in Group Benefits, as well as Retirement & Income Solutions, or RIS. In addition, expense margins continue to improve as a result of our Unit Cost Initiative. Let me quickly review the key macro assumptions that underpin our outlook for 2019 and for the near term. We assume the yield curve flattens, which is a headwind for RIS. We assume strength in the U.S. dollar against most currencies in 2019.
Based on the forward curve as of November 30th, adjusted earnings in our Latin America and EMEA segments would each be negatively impacted by roughly 10%. We look for sustained strength in the U.S. economy in 2019, a positive for our Group Benefits business. Finally, we assume a 5% annual appreciation for the S&P 500, with the index ending 2019 at 2765. Turning to slide nine. The top section of the slide reflects our near-term guidance on certain key items. For Corporate & Other, we are forecasting an after-tax adjusted loss of $550 million-$750 million in 2019. An additional $300 million of after-tax costs associated with our Expense Initiative will also run through Corporate & Other. Keep in mind, 2019 will be the last year that we will have these one-time costs.
We understand the critical importance of our Unit Cost Initiative, and we expect to meet our commitment to improve our net margin by $800 million by 2020. This will have the effect of lowering our direct expense ratio by approximately 200 basis points. We expect our effective tax rate in 2019 to be between 18% and 20%. This is consistent with our prior guidance. At the bottom of the slide are key sensitivities to changes in interest rates relative to our base case, which incorporates the forward curve as of September 30th. These interest rates can be found on slide 34 in the appendix. Let's turn to slide 10. This chart shows the new business value metrics in 2015 to 2017 for the major segments of MetLife.
In 2017, MetLife invested about $3.1 billion of capital to support new business, of which 98% was deployed at IRRs above our hurdle rate. This can be seen on slide 35 in the appendix. This capital was deployed at an average unlevered IRR of approximately 14%, and we expect to receive the full amount of invested capital in seven years. The value created, which is the net present value of distributable cash flows in excess of the hurdle rate, was approximately $1.3 billion in 2017. We expect the value added to be even higher in 2018, benefiting from volume growth, expense efficiency, and the impact of U.S. tax reform. With that, I will turn the call over to Michel.
Thank you, John. Good morning. Today, I will discuss our U.S. businesses, Group Benefits, Retirement and Income Solutions, and Property and Casualty, where we have leading positions and a focus on growing in high-value businesses. Let me start with the Group Benefits business on slide 12. Group Benefits is having a very strong year in 2018. Baseline adjusted earnings over the past four quarters were $1.1 billion, benefiting from strong growth across our business segments, favorable underwriting results, particularly in non-medical health, and solid expense management. In the large case market, we are pursuing a strategy to grow customer relationships by adding new lines of coverage and to increase enrollment through employee education. In the middle market, we are focused on distributors that see the value embedded in our broad product set and our ability to package products through simplified processes. This is enabling above-market growth and strong margins.
In the small or under 100 market, we are achieving strong growth through aggregated points of distribution. We are also investing in a unique quote-to-claim digital operating model in partnership with IBM, which will roll out in 2019. We expect these market-based strategies to continue to deliver. This is especially true for voluntary benefits. We have grown voluntary adjusted PFO double digits this year, and we expect this to continue in the near term. While growth is important, we are careful and measured in our approach to pricing and strong operational fundamentals. Moving to near-term guidance on Slide 13, Group Benefits has been a beneficiary of a strong economy, driving unemployment down and wages up. To reflect this economic outlook, we are boosting our adjusted PFO guidance to 4%-6%. We expect adjusted earnings to grow in the mid-single digits over the plan period.
Turning to bottom-line drivers, the expected range for the Group Life mortality ratio has not changed. While some of the strong 2018 underwriting experience may not reoccur, we have still adjusted the expected range for the Group non-medical health ratio downward 3% to reflect positive economic trends and the shift in business mix to more small cases and voluntary products. Both of these ranges are annual and subject to some seasonality, typically highest in the first quarter. You see key sensitivities at the bottom of the slide, which have been updated based on the increase in our business. I will turn to Retirement and Income Solutions on Slide 14. Retirement and Income Solutions, or RIS, is MetLife's retirement business for institutional customers. This business also includes our capital markets business.
Over the last four quarters, RIS baseline adjusted earnings were $1.3 billion, driven by favorable volume growth, expense margins, and underwriting, partially offset by market factors. Turning to Slide 15, I will cover near-term guidance and key sensitivities. We are having a record sales year in the pension risk transfer or PRT business. In the second quarter, MetLife announced a $6 billion PRT deal, which was the third-largest U.S. pension transaction in history and further cements our reputation and leadership in the PRT market. We see a robust PRT pipeline and attractive market opportunity for buyouts. We have increased growth guidance for RIS liabilities to 2%-4% annually, driven by positive net flows from PRT, stable value, and structured settlement annuities. For our stable value business, liability exposures include general account, separate account, and synthetic GIC liabilities. Growth in this business has been driven largely by synthetic GICs.
Disclosure on synthetic liabilities is presented in the derivative notes of our SEC filings. With regards to spreads, our guidance range has shifted lower based on forward rates, which suggest that short rates increase faster than long rates. We expect investment spread to be within a range of 100-125 basis points, with variable investment income contributing 15-20 basis points. Coming off a strong 2018, we anticipate a mid-single-digit percentage reduction in adjusted earnings from the spread compression. If the recent slope of the yield curve were to remain unchanged, 2019 spreads would increase 2-4 basis points through ALM actions, particularly in our capital markets business, with further improvement in later years. As you can see from our key sensitivities, $1 billion of PRT business is expected to generate about $7 million-$8 million of adjusted earnings annually.
Finally, we estimate, all else equal, a 10-basis-point increase in LIBOR relative to our expectations would have a favorable $5 million impact on adjusted earnings, while a 10-basis-point reduction in LIBOR would reduce adjusted earnings by $2 million. I will now move on to Property and Casualty on Slide 16. P&C has delivered strong results over the last 12 months, with baseline-adjusted earnings of $355 million, benefiting from significant improvement in both our auto and homeowners businesses. In auto, we benefited from targeted rate increases and underwriting actions to reduce loss trends. For homeowners, favorable underwriting was driven by fewer catastrophe losses and underwriting actions to mitigate our catastrophe exposure. Overall, the total combined ratio has been at the low end of our guidance range, with $24 million in favorable prior year development and catastrophes, primarily in auto, not expected to repeat.
Turning to Slide 17, I will cover near-term guidance. We expect 2019 adjusted PFO growth to be approximately 2%-4%. As seen elsewhere in the industry, the better returns following tax reform are limiting rate increases and lowering our top-line growth in the short term. Our adjusted PFO guidance for 2020 and 2021 is 5%-7% growth. Most of that will come in our Group and Digital businesses. We expect our agency business to begin growing in the mid-single digits after shrinking for several years due to underwriting actions to improve margins. Our overall combined ratio was 93.2% over the last 12 months, which is at the low end of the 92%-97% range recommended last year.
This was driven by our auto combined ratio, which was 94.5% over the last 12 months, at the low end of the range and one of the more favorable results in the industry. We are revising our auto combined ratio range down 100 basis points to 93%-98%, and we expect to be close to the midpoint of this range. For homeowners, our combined ratio was 91% over the last 12 months. We have made progress in de-risking our homeowner book of business to be less sensitive to tornado, wind, and hail risk, and this has had a favorable impact on our results. We have kept our homeowners' range at 88%-93%. Finally, key sensitivities have changed since last year, mainly due to the impact of tax reform. With that, I would like to turn the call over to my colleague, Kishore Ponnavolu.
Thank you. Good morning, everyone. Asia has delivered good performance through the third quarter, benefiting from management actions aligned to grow value, earnings, and free cash flow. We continue to see attractive growth opportunities in the region driven by demographic changes, a growing middle class, an aging population, and increasing affluence. We have well-positioned franchises in both mature and emerging markets to capitalize on the opportunity in Asia. First, let's talk about our adjusted earnings. Slide 19 shows our reported adjusted earnings for the past four quarters. After adjusting for the notable items previously disclosed and the applied impact of tax reform in fourth quarter 2017, baseline adjusted earnings was $1.4 billion, reflecting strong volume growth and the favorable impact of U.S. tax reform. Moving to our guidance on slide 20, our near-term view remains consistent. Let's start with sales.
Year-to-date sales grew 13%, driven by foreign currency and A&H products in Japan and distribution growth in emerging markets. Following anticipated strong 2018 sales, we expect sales growth to be in the mid-single digits on a constant currency basis in 2019, moving higher in 2020 and 2021. We also expect double-digit sales growth in emerging markets in the near term. Moving to revenue, PFO growth on a constant currency basis will be impacted by mix shift in 2019, but will revert to mid-single digit growth in 2020 and 2021. PFO growth is muted for foreign currency products sold in Japan and Korea that are classified as FAS 97 products under U.S. GAAP. The premiums are treated as deposits with limited impact on adjusted PFOs. Assets under management is an alternative metric to measure growth, which we expect to grow at high single digits.
Adjusted earnings are expected to grow high single digits in the near term on a constant currency basis. In Japan, the growth in foreign currency products will continue to shift the currency mix of our earnings. We expect our yen earnings to be less than 20% in the outer years as foreign currency business grows. Dividends from Asia this year will be in line with our guidance last year, 55%-65% of adjusted earnings. Adjusted earnings have benefited as a result of U.S. tax reform. However, these changes have no impact on dividends, which are driven by statutory earnings. As a result, we expect to sustain dividend levels of 50%-60% of adjusted earnings. On sensitivities, there are no significant updates to highlight.
The sensitivity of our adjusted earnings to interest rate remains stable or lower. We continue to actively manage our interest rate risk and currency exposure. We have little to no sensitivity to effects in our solvency margin ratio in Japan. In closing, let me emphasize that we have a well-positioned Asia business, which is driving increased shareholder value. Through key investments, we're expanding our competitive advantages that include face-to-face distribution, product development, and digitization to better serve our customers. With that, I'll hand over the call to my colleague, Oscar Schmidt.
Thank you, Kishore. Good morning, everyone. MetLife holds a clear leadership position in Latin America as the largest life insurer measured by written premium. Our business mix is well diversified throughout the region. Our strategy is centered on products and distribution that deliver the greatest value for our shareholders and customers. We remain focused on improving the quality of sales and increasing persistency to drive top-line growth. MetLife has a leading position in Mexico and Chile, two countries which represent a significant portion of our business. Overall, we continue to invest in digital innovation and customer value propositions, which will fuel our growth. MetLife Latin has been a very positive growth story with a strong track record of adjusted earnings, adjusted ROE, and free cash flows. On slide 22, we show our most recent four quarters of adjusted earnings for Latin America.
As you can see, our baseline adjusted earnings are $542 million after previously disclosed notable items, as well as the applied impact of U.S. tax reform in the fourth quarter of 2017. The baseline adjusted earnings reflect strong volume growth and better underwriting results over the past 12 months, offset by an impact from U.S. tax as well as some other non-recurring items. Moving to near-term guidance on slide 23, we expect high single-digit to low double-digit growth in adjusted earnings on a constant currency basis, even as we continue to invest in the business. We expect adjusted PFO growth on a constant currency basis to be in the high single-digits in 2020-2021, but expect 2019 to be in the mid-single-digits due to the cancellation of some large government contracts in Mexico. This is due to President Obrador's proposed reductions in certain benefits for government employees.
The federal government contracts account for about 4% of LATAM's adjusted earnings. In Chile, President Sebastián Piñera introduced his proposed pension reform in October. MetLife supports proposals that increase the level of pensions in Chile. We have been actively engaged in consultations. Finally, we continue our strong track record of cash generation. We anticipate that dividends will exceed adjusted earnings in 2019. We expect to return between 80% and 90% of adjusted earnings to the holding companies as dividends in 2020 and 2021. Sensitivities reflect the impact of a one percentage point change in the Mexican and Chilean pesos and the Provida encaje return. These are similar to last year, with a slight increase in the sensitivity to the Provida encaje return due to growth in the asset base. In closing, Latin America is an integral part of MetLife.
The region has good growth prospects, MetLife's scale and experience in key markets in the region will allow us to continue to capitalize on opportunities that drive value. With that, let me hand the call over to my colleague, Michel Khalaf.
Thank you, Oscar. I will provide an update on the near-term outlook for EMEA. Baseline adjusted earnings have exceeded expectations in 2018, driven by expense savings. We have a favorable outlook for the region, but see challenges in the near term, largely related to market factors. We will deliver more efficiency gains to help offset top-line pressure while continuing to invest in the business to enable long-term growth. EMEA remains an important source of cash for the enterprise, we anticipate that dividends will once again exceed adjusted earnings. Slide 25 shows baseline adjusted earnings of $317 million, which was better than expected. The outperformance was driven by expense margins, as we delivered on better-than-planned unit cost improvement. Let me turn to our near-term financial outlook on slide 26, beginning with sales.
We forecast low double-digit sales growth next year, which is a function of the economic slowdown in Turkey and the impact of new data privacy regulation in Europe. In 2020 and 2021, we anticipate high single-digit growth as Turkey recovers and Europe returns to a more normal growth rate. For adjusted PFO, we see mid-single-digit growth on a constant currency basis during the next few years. Turning to earnings, we expect full-year 2019 adjusted earnings will be relatively flat, with baseline-adjusted earnings on a constant currency basis. Turkey is the primary driver of our cautious adjusted earnings outlook for next year. Our business in Turkey has delivered approximately 40% annual adjusted earnings growth during the past five years, we anticipate it will continue to be a growth driver over the long term. In the near term, we face challenges due to the Turkish economy.
A significant portion of our business in Turkey is linked to consumer lending, we have seen a decline in new consumer loan activity in recent months. We see an improving growth trend in 2020 and 2021, as we expect adjusted earnings growth will be in the low double digits on a constant currency basis, we continue to generate strong free cash flow as we anticipate that dividends to holding companies will exceed adjusted earnings through 2021. At the bottom of the slide, we provide some key sensitivities for EMEA earnings. Our geographic diversity remains a source of strength, the sale of capital-efficient, protection-oriented products will be the primary driver of growth for EMEA. During the next three years, we anticipate that employee benefits and accident and health will account for almost all of the increase in EMEA's adjusted earnings.
I would now like to turn the call over to my colleague, Marty Lippert.
Thank you, Michel, and good morning. As you all know, MetLife Holdings is comprised of the post-separation legacy businesses, including the remaining in-force of our U.S. retail business. The primary product lines are traditional life insurance, variable and fixed annuities, and long-term care. We are no longer actively marketing new business for these lines. We continue to focus on in-force optimization to enhance the value of the segment. This includes maximizing profitability and distributable cash, accelerating the appropriate release of capital and reserves, and reducing risk and volatility. Slide 28 shows our near-term guidance and some key sensitivities. As I stated last year, the natural runoff rate of the business is approximately 5% per year, and we remain comfortable with that guidance for our adjusted premiums, fees, and other revenues. We expect adjusted earnings to be in the range of $1 billion to $1.2 billion in 2019.
The decline in 2019 is higher than the natural runoff rate, largely due to $65 million of favorable items in 2018, which are not expected to repeat. After 2019, we expect adjusted earnings to follow the natural runoff rate of 5%. Our interest-adjusted benefit ratio for life insurance for the last four quarters, adjusting for notable items, was 51.9%, well within the target range of 50%-55%. We expect the ratio to fall within a similar range in 2019. Finally, given the segment's product profile, adjusted earnings are sensitive to equity market returns, interest rates, and mortality experience. The sensitivities shown here are consistent with our previous guidance. I'll now turn it over to Steve Goulart, MetLife's Chief Investment Officer, for the investments update.
Thank you, Marty, and good morning, everyone. I'm going to provide a brief update on investments outlook today. Let's begin with variable investment income on slide 30. For 2019, our full year variable investment income range is expected to be $800 million to $1 billion pre-tax, or $200 million to $250 million per quarter, consistent with our 2018 guidance. We expect private equity performance to remain strong in 2019, with returns in the low double digits and prepayment income to be relatively consistent with 2018 levels. Let's turn to slide 31. MetLife's general account portfolio totaled $419 billion at September 30th, 2018. Our portfolio is highly diversified, which positions us well for any economic environment. Despite trade frictions and recent market volatility, the U.S. economic and credit cycles are likely to extend throughout 2019, as we see both consumption and investment benefiting from tax reform.
Defaults are projected to remain low next year, reflecting continued solid fundamentals. We are concerned about certain areas of the credit market, in particular syndicated bank loans and growth in BBB-rated corporate securities. In the bank loan market specifically, loans have been issued with aggressive structures such as fewer covenants or loan-only structures. BBB-rated debt has grown by $1.4 trillion since year-end 2009, driven primarily by corporate M&A and shareholder-friendly actions. Significantly higher leverage exists in the lower tier of the BBB market. While we believe the risk of a U.S. recession in the next 12 months is low, we have reduced our holdings in certain credit sectors and in names that we believe carry a heightened risk in a downturn. We continue to favor private placement credit, given our ability to structure deals, negotiate financial covenants, and receive incremental premium.
Beyond credit, we remain constructive on other privately originated assets, such as commercial mortgages, residential whole loans, and agricultural mortgages. MetLife's investment portfolio has a strong track record of performance. As you see on slide 32, for the time period January 2008 through September 2018, MetLife's cumulative after-tax impairments equate to approximately 1% of average total general account assets, which is roughly half the rate experienced by our life insurance industry peer group. The years 2008 and 2009 account for about half of MetLife's impairments. We believe our strong performance reflects our culture of strong underwriting, deep fundamental analysis, and strong risk management, which will continue to allow us to meet the commitments we've made to our customers in all economic scenarios. With that, we would like to take your questions.
Ladies and gentlemen, if you'd like to ask a question, please press * then 1 on your touch-tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the # key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press *1 at this time. One moment, please, for your first question. Your first question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hi. Thanks. Good morning. On the expense initiative costs and corporate losses, is it reasonable to expect corporate and other losses to improve by about $300 million in 2020 versus 2019? Are there any other offsets we should be thinking about?
Ryan, it's John. Yes, you got it. The expenses should improve by $300 million between 2019 and 2020.
Okay, thanks. Then, I guess for Steven Goulart, on VII, can you give us any sense of how sensitive you'd expect it to be to equity markets and how much of an impact that might have in terms of the recent weakness?
Hi, Ryan. It's Steve. I guess I'd start by saying we call it variable investment income because it is variable. When we look at correlations, obviously the equity market performance is sort of directional guidance for what happens in our private equity portfolios, subject to the one quarter lag, which you're well aware of. That said, as we created the plan for 2019, we look at several things for it. First is we do a very thorough bottoms-up analysis of our actual portfolio, looking through investment by investment, fund by fund, to come up with what we think is a reasonable expectation for that portfolio. We look at what's happening in the overall industry on sort of a sector-by-sector basis and come up with our return expectations that way.
Essentially, as I mentioned, we're in sort of low double digits, but basically our expectation for next year is that the returns on the private equity portfolio are probably going to be about 200 basis points lower than what we expect to see this year. That actually sort of follows in trend with what happened the year before also when our returns were down about 200 basis points. That's really about all I would say on sensitivity. We do expect the returns to continue to come down. It's offset by a modest increase in balances. We look at our overall alternatives portfolio, it's still basically in line with the percentage of total invested assets. Again, a lot of the VII return will be predicated on what happens in the PE portfolio.
The second biggest component, and by the way, PE is about 75% of the total. The second biggest component, of course, are prepayments, and those are, as you know, very hard to predict also. Our plan is essentially sort of flat to what our plan was for 2018 as well.
Okay, great. Thanks a lot.
Your next question comes from the line of Thomas Gallagher from Evercore. Please go ahead.
Good morning. Hey, John, just to come back to Ryan's question on corporate, and I guess it's related, but maybe a little bit different. The TSA fees from Brighthouse, as you think about those toward the end of 2019, is that going to offset some of the $200 million of restructuring expenses going away? How do we think about netting those two items?
Hey, Tom, it's John. I would think of it as in our outlook, we have assumed runoff of TSAs over time. As those TSAs run off, we would have a commensurate reduction in the expenses as a result of that. I wouldn't consider it an offset to the $300 million benefit you'd see from 2019 to 2020.
Got you. The $120 million, I believe it is, of management fees you're also getting from Brighthouse Financial for investment management. I believe that comes up for renewal in February. Anything you can mention as to what you would expect there as to those fees, and whether or not you expect to retain either most or some of the assets?
Hi, Tom, it's Steven Goulart. You have the numbers right. We have been the exclusive investment manager for Brighthouse Financial since January of 2017. Currently, those assets stood at about $79 billion. We are in discussions with Brighthouse Financial given the termination of the exclusivity in February. There's really not much more we can say at this point. We do expect to retain some of those assets, but until there's something formal to say, there's nothing more we can say.
Okay, thanks.
Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Hi. Good morning. My first question on your group benefits business, which has been pretty strong this year, just driven off of the strong economy, and we've seen that really throughout the industry. Could you just talk about, I know you guys said in your prepared remarks you don't imagine that we're going to get into a recession next year. If we do get into a recession, can you comment on the impact that could have on your underwriting results for your business? If a recession would come late next year, would that be something that we think about a lag where it wouldn't really start to impact your group business until 2020?
Hi, Elyse, it's Michel. I would sort of agree with that in terms of, one, the potential impact we would start to feel that. As we signaled the favorable economic conditions, low unemployment helps in terms of what we're seeing on the disability claims incidence front. In particular, you've seen that we've lowered our range there for non-medical health. There are other factors that are contributing to this improvement as well that I would point to. That's primarily our strategy to grow in the small market where we see lower benefit ratios as well as in voluntary products. Those are two factors that we believe are sustainable even if the economic conditions were to worsen.
Okay, thank you. My second question on your property casualty business. In your prepared remarks, you mentioned looking for stronger growth in PFO in 2020 and 2021, which seems to be more policy count driven. If you could just comment on what's driving that. In terms of the rating environment, you alluded to the fact that we're seeing less rate throughout the sector right now. I'm assuming your assumptions going out the next few years is kind of just taking price about in line with trend. Can you just talk to that as well? Thank you.
Yeah, sure. I think we're positive about the medium-term outlook, especially 2020 and 2021. We're deploying a new quote-to-claim digital capability in our P&C business. This capability will help us bring a new product, better segmentation, better pricing to market. We believe that that's going to help us drive growth. We continue also to see good growth opportunities in our group business, which is roughly 50% of our P&C volumes. That's another factor there. In terms of rate action, I would say that our rate action going forward should be more in line with industry, and I'd say that's true for both auto and homeowners.
Okay, thank you very much.
Your next question comes from the line of Jimmy Bhullar from JP Morgan. Please go ahead.
Hi, good morning. I had a couple of questions. First, can you talk about how much your cash flow targets of 65%-75% are benefiting from not having to pay U.S. taxes? How long do you think that benefit will sustain?
Hey, Jimmy, it's John. I'd say to start with, actually, U.S. tax reform was a negative to the ratio. If you remember, it was a little bit of a headwind because of timing of cash flows and the fact that our U.S. GAAP results improved, that ratio actually had a headwind. We do have certain tax attributes. We do pay taxes, we leverage some of those attributes to lower the outlay, at least temporarily. I would say that's for another four to five years.
Okay. What's the benefit? Is that a five- to 10-point benefit, or is it a larger benefit than that in the ratio or on taxes overall?
It varies. It's hard to say by year. I think I'd probably just say it's relatively low today. We still pay. As I said, we have quite a bit of attributes today.
Okay. Any thoughts or comments on just the potential for reinsurance or sale of blocks that are sitting within the MetLife Holdings, I think? Is it something that you're looking into, or do you think it's uneconomic, just given that a lot of the business sort of resides in New York, where it would be hard for counterparties?
Hi, Jimmy, it's Steve. We look at it. We continue to look at it. As of now, we've not found structures that we think make sense for our shareholders in terms of what the economics result in. We continue to consider ways to bring forward some of those cash flows.
Okay. Lastly, do you have any insight into the potential impact of just changes in accounting for long-duration contracts?
We're going through that now. We're just starting the review phase, we have no insights at this time.
Okay. All right. Thank you.
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Hi. Thank you. Your overall sensitivity to LIBOR had declined pretty significantly year-over-year, and RIS now looks like it benefits from higher LIBOR. Can you just talk about the actions you've taken to drive this?
Hey, Erik, it's John. Yeah, it certainly has changed. Let me try to walk you through this, there's probably a few answers to that question that I think will help pull it all together. Last year, just as a reminder, when we gave this sensitivity, LIBOR was probably 100 basis points plus lower. As you said, we showed a sensitivity that was the opposite, right? That was a function of the fact that we had caps that were out of the money at the time based on those rates and the projected LIBOR based on the forward curve at that time. Now you have LIBOR at, I think the last I checked was 278 today, three-month LIBOR. The forward curve projecting LIBOR to rise further. These caps we have are in the money.
Those caps, coupled with floating rate assets, more than offset the negative impact of funding costs using LIBOR. It has shifted. This is the new sensitivity now at these levels. I would consider this sensitivity to hold plus or minus 50 basis points around the forward curve. That's maybe one around the sensitivity. Having said that, we still have, as you saw in the slides, we have spread compression RIS, this is primarily due to certain liabilities in our capital markets business that will need to be refinanced next year. These are often issued at the short-term and medium-term parts of the curve. This is really the main driver of that contraction in spreads year-over-year. Maybe just to give you another data point for that was based on the forward curve.
If you took, say, the curve as of November 30th, and you assume that curve stayed that way throughout 2019, spreads would be better by 2 to 4 basis points. Okay. The last piece of that question I would kind of tie together is if you go back to page nine in the slides we gave, and you look at the firm overall, you'll notice that it's really benign, the impact of LIBOR one way or the other, and it's because while RIS has positive, if LIBOR rises, there's positive income coming from the caps. If they go down, there's a negative impact. For all the other businesses, it's basically exactly the opposite or close to the opposite. We're effectively neutralized when you just look at the sensitivity of LIBOR right now at these levels.
Got it. Thank you. That's helpful. For Steven Goulart, one thing, your investment portfolio leverage screens as relatively higher versus peers. Are there any offsets or adjustments you think we should consider when looking at this ratio?
Well, I think when we look at our portfolio, we're looking at a number of things. We're always optimizing, though, for the amount of capital that we need to support our investment portfolio with the returns that we're getting from that overall portfolio. That in itself really will account for a lot of the leverage factors. When you think about our portfolio overall, obviously we have a fairly large investment in low-risk assets, governments, treasuries, agencies, and the like. Of course, the bulk of the portfolio is in highly rated corporate credit securities. There's a small amount in expected high return equity and below investment-grade assets.
When you think about it on that basis, account for the fact that there's a significant amount of the portfolio in what we'd consider low or virtually no credit risk aspects, we're very comfortable with the overall leverage in the portfolio.
Erik, this is John. I would just add, if you take all those adjustments, you could maybe to frame it a little bit is our asset leverage would be cut in half if you were to adjust for all those things, coupled with maybe some participating liabilities as well.
Got it. Appreciate it. Just real quick, John, what are you assuming in your free cash flow target for credit impairments?
We've assumed what the run rate has been really for the last year or so. There's no material change. Maybe it's up a bit. We're still assuming relatively low impairments in the outlook, but maybe a little higher than last year.
Got it. Thank you.
Your next question comes from the line of John Nadel from UBS. Please go ahead.
Hi. Good morning, everybody. In the international businesses, your growth targets are based on constant currency. If I recall though, you had some hedges in place for a couple of your foreign operations, maybe more specifically including Japan and Korea. I was just hoping you could tell us at what level you're currently translating your larger foreign operations and if there's any change in those hedge levels as we head into 2019.
Morning, John. It's John.
Hi, John.
Couple things. Just as for everyone, a reminder, and I said this in my opening remarks, and as you correctly point out, the guidance that the teams provided in the businesses were on a constant currency basis. As we note, and certainly if you look at the forward curve, and it certainly has been volatile over the last several weeks, we used November 30th forward curve. That would show a headwind of about 10%, both in EMEA and in LATAM. Those headwinds need to be considered on top of the, call it the constant currency growth rates that were provided by the businesses. In terms of hedging, the one place where we hedge earnings right now is in Japan. We still do that.
As Kishore said, we're close to 30%, trending down to 20% of overall Asia earnings in yen. We've hedged 2019 at 109 of a strike.
Two quick follow-ups there, John. The EMEA and LATAM earnings growth outlook for 2019 is before accounting for the headwind of FX. I just want to make sure I got that right. Secondly, how does that 109 in 2019 for the yen-related earnings compare to 2018?
The answer to your first question is yes. Yes, exactly right. Those growth rates provided were on a constant currency basis, as a result, you need to take into account the forward curve or whatever assumption you're making around FX to project those earnings. In terms of the impact, was the second question around the impact of those hedges?
No, the second question was just, you're translating yen at 109 in 2019. What's that number? What's that translation in 2018?
Yeah. I'd say it this way. It's benefiting us next year by $10 million-$15 million.
Got it. Okay. That's helpful. Just a quick one for Steven Goulart. Clearly, your overall outlook is assuming a reasonable economy, credit conditions remain pretty benign. That seems pretty different from what the overall market is reflecting, whether I look at life insurance stock valuations or otherwise. What, if any, changes are you making in the portfolio, whether domestically or internationally, to get a bit more defensive in light of what the market views as a higher risk than maybe what you guys see built into your outlook?
Hey, John, it's Steve. First of all, I guess I might differ a little bit with your description of our posture here. When I look at our macroeconomic outlook, we do still see a fairly strong economy. It's hard to find real negative things that are happening when you look at various indicators. However, the markets are saying something different, and I think if you go back even and listen to our last couple of earnings calls, you may remember I've sounded some, I wouldn't call them warnings perhaps, but we have noted that we have concerns about different areas of the credit markets.
Yeah.
We continue to have those views. In fact we implement those views too when we have them. Starting in the third quarter, we actually did begin a fairly large repositioning transaction within the overall portfolio where we've taken down names and sectors that we are concerned about, particularly if there is a downturn coming. We've talked a lot about market structure and liquidity and how different it is this time, and that's one of the things you have to factor into any of these sorts of moves. We have been taking steps to prepare for a potential downturn. We're comfortable with the steps we've taken so far, and we continue to look, and could likely do further based on our outlook.
Okay. It sounds, Steve, like most of that repositioning that you started maybe a couple of months ago is more about corporate credits. I'm wondering, anything you'd highlight on structured credit?
Yeah, most of it has been in corporate, as you point out. There are some things we've looked at in the structured finance space. I will say, though, we generally feel very good about our structured finance portfolio. I know people have talked about the CLO market and how that has continued to grow. We're very comfortable with our CLO exposure. It's a $7 billion portfolio, and 90% of it is AA or AAA and higher. We undertake an extensive due diligence program of CLO managers before we invest in any CLO. We're pretty comfortable with that, just given the structured nature of it. Recall also, they came through the financial crisis in pretty good shape, too. I think that's one area that a lot of people have looked at.
We're pretty comfortable with our portfolio, again, we'll keep reviewing it and keep reviewing what's happening in the markets and the underlying economy.
Thanks very much for the answers.
Your final question today comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.
Hey. Just to follow up on that with Steven Goulart. Steve, you mentioned earlier that you are decreasing the holdings in certain sectors. Could you clarify that? And also, maybe what % of your BBB portfolio is BBB-?
Hey, Andrew. We're going to dig out the number on the BBB-. Just going back to your first question, though, I wouldn't get into specific names right now, but what I'd say is reiterating some of what I said, which is we look at where we are. If the economy were to head into a downturn, what sectors are likely to be most impacted? You can think about things like consumer cyclicals. Another area I'd point out that we've looked very hard at and taken actions for is in the M&A-related field. I think we've commented before that if you look at the BBB space, there are a lot of names in there with companies that have leverage ratios that are a lot higher than the rating agencies used to feel comfortable with. We've taken a look at a lot of names in that space as well.
We'll keep looking. I think we're pretty comfortable where we are right now. Within the BBB space, about a quarter of our total exposure is in BBB-.
Quarter. Got it. Then just lastly for John McCallion. With regard to the $800 million of expense saves through 2020, I think you're halfway there already. Could you talk about the timing of the next $400 million and the geography of those expenses savings?
Yeah. For the remainder of our time here to reach our target 2019 and 2020, I would say it's about half and half, give or take. In terms of geography, it'll come through that direct expense ratio. I don't know.
No. I mean, any particular segment? Should we see it mostly in Corporate?
No, it'll be sprinkled throughout. It's kind of everywhere. Corporate is a component. You also have Holdings, which is obviously an area that Marty's working quite a bit on, as you said in his opening remarks, on optimizing the expense structure as that business runs off. There's a few different places, but Holdings actually would be one probably a little heavier weighting.
Got it. Thanks a lot.
Great. Thank you everyone for joining us. We appreciate your attention. We look forward to speaking with you in the new year.
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