Ladies and gentlemen, welcome to the MetLife 2017 Outlook conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session, and 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 the Risk Factors section 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. With that, I would like to turn the call over to John Hall, the Head of Investor Relations.
Thank you, operator. Good morning, everyone. Welcome to MetLife's year-end outlook call. Presentation materials for this discussion are currently available at metlife.com on the Investor Relations website. Starting on page three, you will find a cautionary statement on forward-looking and non-GAAP financial information. This statement governs the forward-looking statements made on today's call. Actual results might differ materially from the 10-K and 10-Q reports filed with the SEC. We will be using non-GAAP financial measures on today's call. Explanations on how we calculate these measures, the reasons we believe they are useful, as well as reconciliations to the most directly comparable GAAP measures are presented on the Romanette pages immediately after the safe harbor statement. On this call, we will reference operating earnings. Following, 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.
Following Steve, business outlooks will be provided by Michel Khalaf for the U.S. business, Steve Goulart for Asia, Oscar Schmidt for Latin America, Michel Khalaf for Europe, Middle East, and Africa, and Marty Lippert for MetLife Holdings. After the business discussions, John McCallion, MetLife's Chief Financial Officer, will provide a financial update. We will follow with Q&A. Please limit yourself to one question and one follow-up. Now to Steve.
Good morning, everyone, and thank you for participating on MetLife's outlook call. I will provide a brief introduction and then turn the call over to members of our senior management team to discuss each business segment. So far in 2017, MetLife has generated strong operating earnings, which, along with spread compression, makes for challenging comparisons in 2018. Against that backdrop, today's call is meant to help you develop your operating earnings models. It will include a discussion of our near-term outlook for key drivers, as well as certain other key sensitivities. A year ago, I spoke of the transformation underway at MetLife and how it would create value for our customers and shareholders. Since that time, we have executed on the centerpiece of our transformation, the spin-off of Brighthouse Financial, and we are encouraged by the positive market reaction. MetLife is now well-positioned in less volatile protection and fee-based businesses.
We continue to target an operating return on equity of 800-900 basis points above the risk-free rate, as measured by the 10-year U.S. Treasury. We believe this can rise to 1,000 basis points over time as the impact of business growth compounds and our expense initiative takes hold. Our strong commitment to achieving our expense targets will also aid our ability to generate future free cash flow. We are extending, on average, for 2018 and 2019, our free cash flow target ratio will be within that range. Excess capital belongs to MetLife's owners. We are always looking for opportunities to grow the business profitably, whether organically or inorganically. Organically, we are redirecting capital to higher return in value-creating businesses. With respect to M&A, we will remain selective and opportunistic.
In both cases, if the use of capital does not clear a risk-adjusted hurdle rate, we will return cash to shareholders through common dividends and share repurchases. In 2016, we returned $2.1 billion to our shareholders. For 2017, we completed our $3 billion share repurchase authorization earlier this week, and we are on track to return roughly $4.4 billion, including dividends. In 2018, our baseline capital management plan returns close to $5 billion through dividends, share repurchases, and the anticipated Brighthouse exchange offer. We believe pursuing an exchange offer remains the most efficient and timely approach to divesting our holdings in Brighthouse Financial. An exchange offer allows us to monetize our Brighthouse Financial stake on a tax-advantaged basis. Presentations, I would like to provide some brief remarks on some recent encouraging regulatory developments.
On November 17, the report identified flaws in the designation process and endorsed strong remedies, including the use of an activities-based, industry-wide approach to assessing systemic risk. On November 28th, the U.S. Court of Appeals for the D.C. Circuit granted a motion allowing MetLife and FSOC to file supplemental briefs in the government's appeal of MetLife's lower court victory. MetLife filed its brief on December 12th, 2017, and the government's response is due on January 18th, 2018. Internationally, on November 21st, the Financial Stability Board announced that it would not publish a list of global systemically important insurers for 2017 and express their regulatory future. With that, I will turn the call over to Michel.
Thank you, Steve, and good morning. Today, I will discuss our U.S. businesses, which includes Group Benefits, Retirement and Income Solutions, and Property and Casualty. We have leading positions within each of our target markets and are focused on growing in the highest value segments. For each business, I will review baseline operating earnings for the last four quarters, near-term guidance, and key sensitivities on certain key items. Let me start with the Group Benefits business on slide eight. Group Benefits is having a strong year in 2017. Baseline operating earnings over the strong expense management and loss ratios that are below the midpoint of our ranges for both Group Life and Nonmedical Health. Moving to near-term guidance on slide nine. Group Benefits continues to be an important growth and value creation engine for the U.S. We expect to grow faster than the market at about 3% to 5%.
Operating PFO growth through the third quarter was 4.7%, excluding the loss of one previously discussed large case. This result is at the higher end of our 3% to 5% guidance range. Growth has been driven by strong sales in the jumbo case market, where 2017 activity was higher than usual. Voluntary continues to be an area of focus, and we are making good progress. We are confident that our leading share and strong persistency in the large employer market will enable continued growth with our existing customers through new product offerings and increased employee elections of voluntary benefits. We will continue to shift our mix towards small and mid-size business, where there are higher margins and faster market growth. Earlier this year, we announced a partnership with IBM where we will deliver an end-to-end digital offering for small businesses.
We are already a top 10 player in this market and see significant long-term growth opportunity. We expect this capability to roll out in early 2019. This is a good example of investments in the business that will drive future growth. The expected range for the Group Life mortality ratio has not changed. However, given our 2017 performance, we expect a slightly higher ratio in 2018. We have adjusted the expected range for the Group Nonmedical Health ratio downward 1% to reflect the change in business mix to smaller cases and voluntary products which have lower ratios. As we have shared previously, both of these ranges are annual and subject to some seasonality, typically highest in the first quarter. Finally, you see key sensitivities at the bottom of the slide, which are close to last year's guidance. Next, I will turn to Retirement and Income Solutions on slide 10.
Retirement and Income Solutions, or RIS, is MetLife's retirement business for institutional customers. This business also includes our capital market business. RIS returned baseline operating earnings of $1.1 billion over the last four quarters. This result is in line with our expectations, given the headwinds of a low interest rate environment and the flatter yield curve compared to prior years. Reported notable items included an adjustment for variable investment income above plan. Turning to slide 11, I will cover near-term guidance and key sensitivities. We are having an active sales year in the pension risk transfer or PRT business. MetLife has been in the retirement business for many decades. As practices have evolved, we are improving the process used to locate a subset of group annuitants that can no longer be reached via the information provided for them.
We are making this process more robust to include a wider set of search techniques and better utilize available technology. Taking this action could result in strengthening reserves. John McCallion will provide more detail. We anticipate total RIS liabilities to grow up to 3%, driven by modest growth across all RIS products. Total liabilities include general account and separate account products, as well as synthetic GICs in our stable value business. Stable value, which is an attractive capital-light growth business, is having a strong year. We have leading positions in all product segments, including synthetic GICs, a market we reentered earlier this year. Our guidance range on investment spreads has shifted slightly lower since we do anticipate spread compression to have an impact on operating earnings for the next few years, and we anticipate lower income from variable asset classes.
We expect investment income spread to be within a range of 110 to 135 basis points, with 10 to 25 basis points coming from variable investment income. Although most of the asset portfolios supporting RIS liabilities are managed on a duration matched basis, the capital markets portfolios are more sensitive to the interest rate risk associated with a flatter yield curve. As shown in the key sensitivities, we estimate a 10 basis point change in LIBOR, with other rates unchanged, would have a $5 million-$10 million impact on operating earnings. This is unchanged from last year. I will now move on to Property and Casualty on slide 12. Here, you see baseline operating earnings of $204 million during the past four quarters, up 10% on a 12-month basis. This performance is attributable to actions we have taken to improve auto results.
Turning to slide 13, I will cover near-term guidance. Our P&C business, along with the rest of the industry, faced significant auto pressure in 2016. In order to address this, we took a number of management actions, including increasing rates above the industry average and reducing sales on unprofitable businesses. While we have improved profitability, our actions have put some pressure on the top line. In 2017, we expect PFO growth of 1% versus our prior guidance of 2%-3%. However, Group Benefits, which is our most attractive business, has experienced year-to-date PFO growth of over 3%. We expect 2018 PFO growth to be 1%-2%. We are maintaining our longer-term guidance of 5%-7% PFO growth for 2019 and 2020.
Our significant rate actions are now largely behind us, which will allow us to offer our customers an omni-channel digital experience from quote to claims for auto and homeowners, and would allow greater segmentation than is possible with our legacy platform. These new capabilities will help drive future growth. While we expect the combined ratio for the total P&C business to be largely the same as prior years, our actions in the auto business have led to an improvement in our auto combined ratio of over 4 percentage points year-to-date. As a result, we are now targeting a slightly lower range of 94%-99% for our auto combined ratio. Finally, key sensitivities are unchanged from last year. I would like to turn the call over to my colleague, Steve Goulart.
Thank you, Michel, and good morning, everyone. I'm pleased to report that Asia continues to deliver good performance through the third quarter of this year, with management actions aligned to growing value and cash showing good progress. We continue to see attractive growth opportunities in the region, driven by aging populations, longevity, affluence, and urbanization. We have well-positioned franchises in both mature and emerging markets across the region. We are investing in and growing our competitive advantages in face-to-face distribution, which has top-tier productivity, accident and health and foreign currency products, where we have long history and strong capabilities, and digitalization to make it easier, simpler, and more convenient to do business with us. Let me give you some details on our earnings. Slide 15 shows our reported operating earnings for the past four quarters. After the notable items previously disclosed, baseline earnings are $1.3 billion.
This is in line with our guidance, as the earnings growth was impacted by the change in Japan's effective tax rate to 35%. Excluding the impact of this tax rate change, underlying earnings grew approximately 6%. Moving to our guidance on Slide 16, our near-term view remains consistent. Following strong 2017 sales, we expect sales growth to be in the mid-single digits on a constant currency basis in 2018, moving higher in the outer years. The strong underlying business growth is driven by accident and health and foreign currency products and distribution growth in emerging markets. Emerging markets sales growth remains robust. We continue to expect low double-digit growth in PFOs on a constant currency basis, as our focus on driving value in mature markets has shifted the product mix away from premium-based products to a higher proportion of fee-based products.
Operating earnings will see low single-digit growth in 2018, increasing to high single to low double-digit growth in the outer years. In Japan, the growth in foreign currency products will continue to shift the currency composition of our earnings. We expect our yen earnings to be less than 20% in the outer years. Growth in the rest of Asia remains strong and on track to increase its contribution in accident and health product sales, particularly in emerging markets. Dividends from Asia this year exceeded 60% of operating earnings, ahead of our guidance last year. We expect to sustain this level of dividends, reflecting our progress in enhancing value and cash. Dividends are based on local statutory earnings and could be volatile. On sensitivities, I just want to highlight that there are no significant updates.
We have little to no sensitivity to FX in our solvency margin ratio in Japan. The sensitivity of our operating earnings to interest rates remain stable, and we continue to actively manage our interest rate risk and currency exposure. In closing, let me reinforce that we have a unique Asian business, which is driving increased shareholder value. We are investing in and growing our competitive advantages in face-to-face distribution, which has top-tier productivity, accident and health and foreign currency products, where we have long history and strong capabilities, and digitalization to make it easier, simpler, and more convenient to do business with us. With that, I'll hand over to my colleague, Oscar Schmidt.
Thank you, Steve, and 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, and our strategy is focused on products and distribution that deliver the greatest value for our shareholders and customers. MetLife has a strong presence across our Latin American markets, with a leading position in Mexico and Chile, two countries will represent a significant portion of our business. Overall, we continue to invest in digital innovation and stronger customer value propositions, which will fuel our growth. MetLife LatAm has been a very positive growth story with a strong track record of earnings, ROE, and cash flows. On slide 18, we show our most recent four quarters operating earnings for LatAm.
As you can see, our baseline operating earnings are $568 million after adjusting for previously disclosed notable items. The baseline earnings reflect strong volume growth and better recurring investment margins over the past 12 months. Entering this year, we expect that a challenging environment for our Chile pension business. We are facing attrition at 3% on a constant currency basis from the prior year. Moving to near-term guidance on slide 19, we continue to expect high single-digit growth in PFOs and operating earnings on a constant currency basis, even as we continue to invest in the business. As previously noted, the past year has been tough for our Chile pension business, but we expect this business to return to historical growth rates in the near term.
Finally, we expect to return between 75% and 85% of our operating earnings to the holding companies as dividends, continuing our strong track record of cash generation. Sensitivities reflect the impact of a one percentage point change in the Mexican and Chilean pesos and the AFP Provida S.A. and Caja return. These are similar to last year, with a slight increase in the sensitivity to the Mexican peso and the Chilean peso due to stronger baseline earnings at current exchange rates. In closing, Latin America is an important part of MetLife's success. 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. Earnings have been better than expected in 2017, we continue to have a favorable outlook for the region. I commented last year that EMEA is a growth business for MetLife, that we will see meaningful margin expansion from operating leverage and unit cost improvement. Those comments have been validated as volume growth and efficiency gains have been major contributors to our performance this year. EMEA also remains an important source of cash for the enterprise. We anticipate that dividends will once again exceed operating earnings. Slide 21 shows baseline operating earnings of $298 million, which is an increase of 17% year-over-year. On a constant currency basis, growth was 25% for the trailing four quarters or well above the high single-digit guidance we provided last year.
Let me turn to our near-term financial outlook on slide 22, beginning with sales. You may remember that we were cautious about the sales outlook for the U.K. retirement market on last year's outlook call. After an exhaustive analysis, we decided to exit the U.K. retirement market in July of this year. This was not an easy decision, but one that is consistent with the discipline of requiring every business to clear a risk-adjusted hurdle rate within a reasonable time period. We forecast mid-single-digit sales growth next year as we assume no U.K. retirement sales in 2018. Excluding U.K. retirement from the comparison, we anticipate high single-digit growth next year, with sales growth increasing to low double digits in 2019 and 2020. For PFOs, we forecast a high single-digit growth rate.
With regard to earnings, we see baseline operating earnings growth in the high single digits in 2018, moving to the mid-teens. It is important to note that our 2018 operating earnings plan has been revised upward since last year, so the lower than trend growth rate is the result of outperformance in 2017. The EMEA earnings growth story remains intact, as illustrated by our mid-teens growth expectation beyond 2018. Importantly, so does our favorable cash profile, as we anticipate that dividends will continue to exceed operating earnings through 2020. At the bottom of the slide, we provide some of the key sensitivities for EMEA earnings. Our geographic diversity remains a source of strength. The Middle East and Africa is a good top and bottom-line growth story, as all of its earnings come from emerging markets.
In Europe, earnings are driven by a combination of growth opportunities in emerging markets and niche strategies in developed markets. 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 80% of EMEA's total earnings growth. Earnings are not overly dependent on any single currency. I would now like to turn the call over to my colleague, Marty Lippert.
Thank you, Michel, and good morning. As most of you know, MetLife Holdings houses our post-separation legacy businesses, including the balance of our U.S. retail business. The 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 in dollars. These results reflect the favorable impact of our annual actuarial assumption review and other insurance adjustments. Adjusting for notable items, baseline operating earnings in the segment were $1.1 billion, reflecting good mortality results in 2017, disciplined expense management, and the impact of favorable equity markets. Slide 25 shows our near-term guidance and some key sensitivities. As we stated last year, the natural runoff rate of the business is approximately 5% per year, and we remain comfortable with that guidance.
In 2018, we expect operating premiums, fees, and other revenues to decline approximately 7%, which reflects the impact of final separation-related items recorded in 2017. We expect operating earnings to decline by approximately 10% in 2018. This is a bit higher than the core runoff rate due to the impact of lower equity capital supporting the business. The lower capital reflects the post-separation risk profile of the business and is consistent with the lower capital for the company. After 2018, we expect offers a djusting for notable items was 54.3%, with a target range of 50%-55%. Given the segment's product profile, operating earnings are sensitive to equity market returns, interest rates. MetLife's chief financial officer for the financial update.
Thank you, Marty, good morning, everyone. I will be covering three topics today. First, I will provide an update on our new business-embedded value for 2015 and 2016 to reflect the ongoing progress that we have made through our Accelerating Value initiative. Second, I will discuss our 2018 guidance for items that are challenging to forecast, including variable investment income, corporate and other, expenses associated with our unit cost initiative, and our effective tax rate. Third, I will discuss our key for group annuitants mentioned by Michel. Let's turn to slide 27. This chart shows the new business-embedded value in 2015 and 2016 for the major segments of the new MetLife: the U.S., Asia, Latin America, and EMEA. These numbers were calculated using a mean reversion scenario that starts with the current interest rate curve and moves to 4.25% on the 10-year treasury by 2026.
In both 2015 and 2016, MetLife invested almost $3 billion of capital in these segments to support new business. This capital was deployed at an average unlevered IRR of approximately 13% in 2015 and approximately 14% in 2016. For payback, we expect to receive the full amount of invested capital in eight years for new business in 2015. The value created, which is a net present value of distributable cash flows in excess of the hurdle rate, was approximately $1 billion in both 2015 and 2016. We believe that writing high-quality business year after year will generate higher returns and free cash flow for MetLife over time. Slide 28 takes a deeper look at the new business we wrote in 2016 using a mean reversion scenario. This is the bar Mekko chart , which we presented to you at our 2016 Investor Day for new business in 2015.
As a reminder, the x-axis spread of the IRR above the hurdle rate, which can vary by country and line of business. The colors denote three different spreads that we use to categorize our businesses. Green at more than 4% above the hurdle rate, yellow at 0%-4%, and red below the hurdle rate. As the slide indicates, 91% of the capital we deployed in 2016 was invested at IRR expectations above our hurdle rate. This is represented by the combined green and yellow bars in the chart. The green bars alone represent 61% of the capital, which was deployed at more than a four-point spread above the hurdle rate. We are pleased with the overall results in 2016, the businesses are expected to continue to push for improvement in value. Let's turn to slide 29.
The top section of the slide reflects our near-term guidance on certain key items. I will start with variable investment income. For 2018, our full-year variable investment income range is expected to be $800 million-$1 billion pre-tax, or $200 million-$250 million per quarter, consistent with our 2017 guidance. We expect private equity performance to remain strong in 2018, with returns in the low double digits, while prepayment income to remain moderate. Turning to our outlook for corporate and other, we are forecasting an after-tax operating loss of $450 million-$650 million in 2018. In addition, we will incur roughly $330 million pre-tax of costs associated with our expense initiative in 2018, including approximately $55 million in non-operating earnings. We recognize the critical importance of executing on our unit cost expense initiative.
To help track our progress, beginning in the first quarter of 2018, we will include a total company expense ratio in our quarterly financial supplement. In addition, we will provide the source numbers, premium fees and other revenues and expenses used in the calculation to provide even greater transparency. We expect our effective tax rate in 2018 to be between 23%-25% in 2018. Please note that our 2018 effective tax rate expectation does not factor in the potential impact from tax reform. We are adjusting our outlook for liability management. We had indicated that holding company cash would be impacted by $1 billion-$2 billion. Holding company cash to be between $2 billion-$3 billion over the same period, including the $1 billion maturity in the fourth quarter of 2017.
The increase in liability management will have no impact on our stated plans for share repurchases or the Brighthouse exchange offer. We have decided to change how we disclose notable items beginning in the first quarter of 2018. We are raising our threshold on notable items to $50 million or $0.05 per share from the $20 million or $0.02 per share. In addition, we are going to stop adjusting operating earnings for variable investment income, catastrophe losses, and prior year development each quarter. At the bottom of the slide are our key sensitivities to changes in interest rates. As we've done in the past, we are sharing the interest rates assumed in our plan and our stress scenario. They are found on slide 31 in the appendix. Specifically, we're offering our assumptions for the two-year and the 10-year Treasury, as well as for three-month LIBOR.
The 10-year Treasury is a good proxy for our longer-tail liabilities, while short-term LIBOR relates more to our securities lending and other capital markets activities. The plan underlying this presentation incorporates the forward curve as of September 29th. Before I close, let me comment on our enhanced search and outreach techniques for group annuitants. Taking these actions would result in strengthening reserves, which in the period recorded may be material to our results of operations and is not reflected in the outlook presented today. We don't have an estimate at this point, but we plan to provide further disclosure on our first quarter earnings call and in our 2017 Form 10-K. As Michel mentioned, this involves group annuitants that we've sought to locate over time unsuccessfully. We are developing a process that utilizes enhanced outreach techniques, including greater use of technology.
Based on what we currently know, this involves a small subset of our group annuitant population of approximately 600,000. It represents group annuitants that have moved jobs, relocated, or otherwise could not be located. These tend to be smaller-sized cases with average benefits of less than $150 per month. While this work is underway, we are committed to achieving the targets and capital plans outlined on this call. Based on what we currently know, this will not impact our buyback plans in 2018. With that, we would like to take your questions.
Ladies and gentlemen, at this time, if there are any questions from the phone lines, please press star followed by the one on your touch tone phone. You'll hear a tone indicating you've been placed in queue. Once again, if there are any questions from the phone lines at this time, please press star followed by the one on your touch tone phone. Our first question comes from the line of Ryan Krueger with KBW. Please go ahead.
Hi. Thanks. Good morning. My first question was on the expense saves. You had previously guided to a $300 million year-over-year improvement in the expense saves in 2018 versus 2017. Can you help us think about the geography of where those are coming through the business segments? It wasn't entirely clear to me from your segment outlook where we should see those expense saves come through.
Hi, Ryan. The cost for the expense saves, the investments we have to make are booked in corporate and other. As I mentioned on the third quarter call, we are behind a bit in our investments as planned for 2017, and some of that will get pushed into 2018 just due to the delay in the separation of Brighthouse resources got reallocated. Bottom line, net-net, we had said over a year ago that we expected the net impact of all the savings, plus the strand, plus the investments would be about -$100 million in 2017 and +$200 million in 2018. We now believe that for 2017, it'll be about breakeven impact, and next year will be about a +$100 million as these have shifted. We remain committed, though, to the $800 million savings
By 2020. We will also, as I mentioned, start publishing a ratio in the first quarter, so you'll be able to track our performance. To do the mathematics, a 200 basis points improvement from the ratio from 2015 would be about $800 million. We realize it is complex when you do cost save programs because we are also growing at the same time in various business.
Okay, thanks. On retirement, I know there's a fairly wide range of the spread, but I guess, if I do some of the math, it seems like you may expect retirement earnings to decline maybe as much as in the mid-single-digit percentage range next year. I guess I just wanted to confirm if.
Hi, Ryan. Michel here. As you know, we don't provide guidance. What I'll say here is that we have decreased the RIS spread guidance by five basis points. RIS is a diverse group of businesses. It includes our capital markets business. Rising LIBOR and the flattening of the yield curve puts pressure on spread, mainly in the shorter duration capital markets block. Most of the asset portfolios supporting the RIS liabilities are managed on a duration matched basis. There you'll have some impact from the roll-off being reinvested at lower rates. In addition, in 2017, we had very strong variable investment income, mainly from private equity, and we expect this to moderate in 2018.
I first had a question just on tax reform, given your business mix, it doesn't seem like your tax rate will drop a lot. It should drop a little bit, doesn't seem like it'll drop a lot with tax reform. Not sure if you can quantify the impact on your tax rate if we go to, let's say, a 21% rate, affect your plans for capital deployment if the RBC ratio does in fact go down over the next couple of years.
Hi, Jimmy, it's Steve. From what we are seeing in Washington on tax reform, there should be a positive impact upon our effective tax rate. I don't want to put out a specific number because, as you know, the bill is still being negotiated in the conference committee, and it has yet to be finalized. We do view it as a positive. We also view it as a positive for the overall economy, and that has been our position for quite some time that we support tax reform that is pro-growth, that'll help American workers, both with employment and wages. That certainly is good for our overall economy. It's good for our country. It's also going to be good for MetLife and especially its group insurance business. There's a correlation, fairly close correlation between employment, economic growth, and the group insurance business.
I'll turn it over to John to handle the question related to RBC.
Hi, Jimmy. Based on a 21% tax rate, I think that's the most recent news being discussed and all the other basic components, we would expect our consolidated RBC, combined RBC, to go down by about 65 basis points. The important element is our ratings, and we do not expect our ratings to change even with this change to RBC. We have to work with our rating agencies closely to work through that, and we do not, at this time, believe this would impact our dividend or capital plans.
Okay. If I could ask one more of Steve. Obviously, your results have been pressured by rates, and you changed your ROE guidance or the way you sort of talk about ROE to a spread over a risk-free rate. Given the shift in your business mix post Brighthouse, I think almost 40% of your earnings are from outside of the U.S., and even the U.S. business is not all rate sensitive. Do you expect to go back to talking about ROE in the next few years on an absolute basis as opposed to relative to the risk-free rate?
Jimmy, our cost of capital really is U.S.-based. That's why we use that measure. As you say, 60% majority still is U.S. earnings. I take your point. We have 40% of our company now outside the United States in terms of earnings. We still conceptually want to direct the street to a return above and beyond the risk-free rate. We think that's the right way to look at returns for any company, including ours. At one time people had absolute numbers out there, when the world changes in a 10-year treasury or the rates overseas drop dramatically, oftentimes people didn't change their expectations about ROEs. That, to me, isn't the right way of looking at it. It really should be what kind of return are you getting for taking a certain amount of risk above the risk-free rate?
We do have a question from the line of Suneet Kamath with Citi. Please go ahead.
Thanks. Just wanted to start with the unit costs again. Just based on the slide that you gave at Investor Day, is there any change to the consolidated playout?
Hi, Suneet. It's John. Yes, as I mentioned, some costs are shifted from 2017 to 2018. The benefits are just slightly less in 2018 than we had previously thought. The net impact is about $100 million better in 2017 than what we had shown, and $100 million worse in 2018. We are committed to be on track for the $800 net by 2020.
Okay, got it. When you talk about international dividends to holding companies, can we assume that that eventually comes back to the U.S., or is it going to stay in the international holding company?
Well, to the extent we need capital around the world, we will reinvest it where it makes sense. If the new tax reform does go through, this will be much more neutral from an impact from a tax point of view going forward.
If we think about MetLife Holdings, obviously there's been some discussion in the press about VA blocks potentially being sold. Any thoughts in terms of your willingness to pursue that kind of a strategy?
Suneet, we look at all opportunities for that business, some of those trades were at pretty significant and deep discounts to book value, below even what we are seeing today in terms of the trading values of Brighthouse, which has a significant amount of that kind of business. It just depends upon what's available to us in the marketplace and what's best for our shareholders.
No restrictions in terms of your ability to do that?
Well, Suneet, our remaining variable annuities are MetLife Holdings, which is not a separate legal entity. It's part of MetLife Insurance Company, mixed in with a lot of other business. As opposed to other companies with the recent transaction, which was a sale of actual-
We do have a question from the line of Thomas Gallagher with Evercore ISI. Please go ahead.
Good morning. First question is, just want to get a little more color on, John, what you pointed out on the enhanced outreach for group annuities, what's going on there? I guess why is this happening now? Can you dimension it a bit in terms of the-
Just let me give you a bit more color, and then I'll turn it over to John. We're always trying to provide the best service to our customers. Management tools and processes for pension plans and group annuities have evolved over time, and we've begun developing new enhanced protocols to locate annuitants. We periodically conduct deep dive reviews of our business and our processes. We recently received initial data from a pilot program that we ran, which revealed the need to develop new enhanced protocols to locate annuitants. We'll use these enhanced techniques and make additional efforts to locate any group annuitant who may be entitled to benefits. I'll turn it over to John for more color.
Yeah, Tom. Why now? Well, we're having an outlook call for you, and this work is underway, so we wanted to just really flag this for you. Let me talk a little bit more about it. As I said, from what we currently know, this is currently a small subset of our group annuity, smaller sized cases with average benefits of less than $150 a month. As I said, work is still underway, but currently, the group most impacted is less than 5% of this total of 600,000 annuitants. Further work is underway. We'll give you an update on our fourth quarter earnings call and in our 10-K.
John, just to follow up there, is it likely if you do strengthen reserves there, would it be a 4Q event?
Yeah, we are trying to get estimations so we can give the best estimate we have of the impact of this in the fourth quarter. As I said, work is ongoing. This is a complex situation. It takes time. This has happened over a period of time, and we are trying to find some new techniques to really make sure we can locate these annuitants.
Okay, thanks. Marty, just on MetLife Holdings, you said one of the reasons earnings would be weaker is lower capital backing that business. Does that imply you took more dividends out this year? I guess more broadly for MetLife Holdings, what is the free cash flow or dividendable annual flow we should be thinking about for MetLife Holdings?
Position of the business. With respect to the free cash flow side of the equation, as we look at distributable cash flow going into next year, it's going to be in the 85%-95% range. Although it's a closed block, we expect to run it a bit below 100% as a number of the products, including LTC and the life business with secondary guarantees, will continue to generate statutory strain until we reach the peak reserves for those businesses.
Got it. Thanks. Just finally, long-term care within MetLife Holdings, can you
We're comfortable with where the business is. We're not seeing deterioration in it. We're very comfortable with the reserves and the reserve adequacy that we've got in the business. We test both GAAP and statutory reserves annually and continue to be comfortable with what we're seeing there.
Okay, thanks.
We do have a question from the line.
Is there a sensitivity to kind of a one basis point change in spread that you can provide? Also, how should we think about the 1%-3% growth in liabilities translating to earnings growth?
Well, we have some spread sensitivities, and our 10-K also gives the relative to the plan sensitivities by segment.
Now targeting a high single-digit growth in PFOs and earnings. I don't know if that's just for 2018 or longer-term. I think the last time you gave long-term guidance, you were targeting a low double-digit growth outlook. Wondering if anything has changed there or if the view that you're giving is just more short-term.
Hi, Eric, this is Oscar Schmidt. Yeah, historically, we have been growing low double digits. We are investing in the business for Mexico, we're in marketing business in the government segment, same time in the private sector, creating new agents in Brazil from scratch. As those investments mature, we think we'll go back to low double digits.
Okay. Thank you.
Let me just follow up with Eric again. This is John. The sensitivities for the whole company on page 29, the impact from rates, RIS is a majority of that impact for you, just as an indicator.
Okay. Thank you.
We do have a question from the line of Sean Dargan with Wells Fargo. Please go ahead.
Thank you. Good morning. I have a question about your deferred tax liability. I'm wondering if you have done any analysis, if there is tax reform and the corporate rate goes to 20 or 21%, what would happen to your shareholders equity ex AOCI?
Can you just repeat that? Unfortunately, we had some static when we were talking.
Oh, sorry. I'm asking about the deferred tax liability and the impact to book value, excluding-
To reduce by between $1.5 billion-$2 billion.
Okay. Thanks. I know it's early, have you had any discussions with the rating agencies whether they would give you full credit for that in calculating leverage ratios?
It's still developing. The rating agencies, as are we, are waiting to see the final tax reform when passed, then we will be beginning discussions with them on how they look at things.
Just one final question related to that. If your shareholders' equity
The rating agencies view us because that determines our capital management across the board. We'll have to wait and see how that develops.
Okay. Thank you.
We do have a question from the line of Humphrey Lee with Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my question. Question regarding Asia. I think looking back in your 2017 outlook, you were expecting in 2017 there would be growth. Is that a function of kind of what you're talking about in terms of expanding on your distribution and capability investment? Is that the right way to think about that?
Hi, Humphrey. It's Steve Goulart. When you look at the outer years, we're still expecting the strong growth that we indicated before. When you look at the near term, what actually is happening is just a corporate expense allocation methodology change. When you look at the near term, there is an impact from that. However, if you backed out that change, then we're right in line with what we had forecast last year.
Got it. What type of face-to-face distribution are you looking into?
I think we have a real strength in face-to-face captive agencies in the region, and that's something that we do continue to grow and continue to emphasize on improving the productivity of it.
If I can sneak in one more. A question for John. Looking at your debt-to-capital ratio is kind of 25% right now. You talked about kind of the liability management, increasing that from $1 billion to $2 billion in 2017 and 2018 to $2 billion to $3 billion. I guess, what is driving you to kind of thinking about further deleveraging your balance sheet?
Well, as I mentioned, we think it makes sense given our ratios and where we are to have a little more financial flexibility, to have a little more margin compared to the target ratios that rating agencies are looking for us to be within. We think this is just a good time to execute down that path, and this gives us just more financial flexibility going forward.
Got it. Thank you.
That brings us to the top of the hour. Thank you everyone for participating. We look forward to speaking with you in the new year.
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