All right, I think we're going to get going. Very pleased to have MetLife with us again this year at the conference. Up here with me is John McCallion , CFO, and also want to recognize John Hall and Charlie Douglas from Investor Relations. I'll kick it off with a fairly broad question. With the Brighthouse separation complete, how should we think about the new MetLife going forward?
Well, thanks, Ryan, for inviting us to speak here today, and it's really great to be able to speak about the new MetLife. The Brighthouse transaction did take some time with regulatory approvals and the amount of work involved. We're pleased that's how that's been completed, and we look forward to sharing with investors what the new MetLife is all about. We would say the new MetLife will be less sensitive to market factors than we were previously, and we will have more predictable free cash flow going forward. We think these two elements will make MetLife a stock that can do well in a range of financial environments and economic environments. Maybe a stock for all seasons is our goal to be there. We will be quite international.
We have 40% of our earnings will be coming internationally going forward and very protection-based group business, insurance type businesses will be dominating, especially where we're putting our new capital too over time. We think that steady consistent growth with good cash flow generation, and more predictable cash flow generation, will be a very attractive stock, and that's what we're driving towards is both producing growth with cash and also have more predictability.
Great. One of the key initiatives you have announced is a $800 million net cost save program by 2020. Can you talk more about the initiatives that you're working on to achieve this and also give a little sense of how technology is involved in the program overall?
We said that by 2020 run rate, we would save $800 million net, and that's net of the stranded overhead that we have because of Brighthouse. It's really just over $1 billion of gross savings that we are seeking to take out of the total company. To get that done, we're going to invest about $1 billion between now and the end of 2019. Most of that is in technology, some in severance. It's going to be a major initiative across the board. What are some of the areas that we are looking to invest in? We have recently just, for example, introduced a new front-end sales system in Japan, which has significantly reduced the time for applications to go in, and the applications were very complex, 50 different apps and 50 different rules that the agents had to be trained on.
Now it's on an iPad. It automatically selects the right app you need at the right time. It's also reduced the not in good order. We used to get a lot of applications in that weren't quite filled out right, had to go back again, had to find the customer again, get all the right information. Now it's all edited right through, it's really reduced the not in good order. It's halved the issue time in what we've done, and the cost is, as you can imagine, way cheaper. We also are working on a lot of model offices to regionalize and centralize how we do processing of claims, putting more technology on these, applying robotics to how this works. When you say robotics, people may think you have like a robot sitting there typing away. That's not how it really works.
It's almost like a macro you use in Excel, it's a macro for all the work you can do. If it's something can't quite be automated yet, you can use robotics to do the steps that you used to do yourself, and you can automate that on a regular basis. The third big area is our own area in finance. We're targeted to be much more efficient using much better automation, cloud type systems going forward. Big investment technology, big change in how we work, and that's how we're going to truly drive sustainable cost saves that we expect to go forward. That's a very big focus that we have now across the firm.
Are there certain businesses that you'd expect to realize an outsized portion of these cost saves, or should we expect it to be fairly proportional across the different segments?
Yeah. I get asked that question a lot. It's not that there's one major project that we have that's going to generate in one business unit. It's a lot of technology, and we're leveraging our global technology platforms across the whole company. An example is a commission system. We have created a global module for commissions. We pay commissions everywhere all over the world, and we're standardizing and rolling that across all of our operations across the world. You would expect the cost saves will kind of be in proportion to the size of the business because these savings, although centrally run from our GTO organization, are then allocated to all the businesses that they apply to. We have a lot of savings across the board in the corporate functions, as I mentioned in finance, and that of course is distributed across the whole function.
It's affecting many people across the entire organization.
Got it. Moving to the balance sheet, can you frame Met's holding company cash and excess capital position after you've completed the Brighthouse separation, and also how you're thinking about capital management going forward?
We have a very strong cash position. We announced that on June 30th, we had $4.6 billion of cash at the holding companies, and that we expect to repatriate about $3 billion of that, some of that's overseas. That's both a U.S. holding company and an international holding company. We can repatriate that for not a very large cost. We're going to do that this quarter. That will all be effectively here in the U.S. Hopefully someday with tax reform it'll be much easier, but as of now, we decided to take advantage of this. When you do a large separation, you're allowed to repatriate a portion of the international overseas cash. This $4.6 billion does not include the $1.8 billion that we received from Brighthouse in early August. We'll have our normal generation of cash flow over the year and paying the dividends.
We're in a very strong cash position for this year and as well for going into next year. We've said that for 2017 and 2018, our expectation is to generate between 65%-75% of free cash flow of our GAAP earnings, and that excludes any proceeds from the separation-related activities. We think this is a pretty high free cash flow generation. We have a buyback underway, $3 billion authorized. We announced as of second quarter earnings, we had $2.2 billion bought by then. The remaining $800 million, we expect to complete this year. We also have decided post-spin to keep our dividend at $1.60. That's about $1.7 billion of cash as well. We have a significant cash return to the shareholders this year, slightly over $4.5 billion in 2017. Not only are we generating good cash, but we're providing it back to the shareholder.
When you think about the excess capital position that you have, you have the high dividend. I guess in terms of deploying the rest of the excess capital, how are you thinking about buyback versus M&A opportunities? In terms of M&A, what type of strategic priorities would fit, and what would be the hurdles required to do a transaction?
We've said that we need between $3 billion-$4 billion at the holding companies to act as a liquidity buffer for stress tests across the board and to manage our global operations. Everything above that we do not believe belongs to us. We believe it belongs to the shareholder, and it will either be returned to the shareholder or we will use it for good M&A. When we think about M&A, first of all, it has to fit the strategy. We announced our strategy going forward will be more insurance-based businesses. You won't see us buying long-dated liabilities or complex liabilities. We want to buy businesses that fit the protection world that we're in. We like businesses that fit existing operations we have, so we can get cost synergies from that. We also compare it to buybacks.
When we think about the investment and the IRR that we get from that, we think about that compared to if we sell the business ourselves. We compare it to if we did a buyback or if we buy a company. It's the same logic that we apply across the board. We've been doing this consistently for, well, since I've been CFO and Steve's been CEO. You guys have seen we haven't bought a lot of companies. We've been very disciplined in what we do, and we will continue to definitely be that way.
Got it. On free cash flow, the 65%-75% guidance, is that the type of range that you think is appropriate longer term for the business mix and the growth profile of MetLife, or are there opportunities to further increase it?
The 65%-75% free cash flow, and what we mean by that is dividends up from regulated subsidiaries, less any investments in capital that go down anywhere in the world for growth, less holding company expenses, preferred share cost, anything else. This money is truly available; it's totally free. It can be used for the dividend, for share buybacks, or for acquisitions. We actually publish this in our 10K. You can see it every year. We have all the cash flows that come up and go down, but we say, do we consider this free or not? It would also include any leverage we would add to keep our debt equal at that level.
In terms of the free cash flow and where we are, it's a trade-off between the investment we make in new business in a new year and the generation of that out of the statutory entity. We said, for example, in 2015, we spent approximately $3 billion of capital, $3 billion of shareholder money on new business. At level interest rates in 2015, if you assume rates didn't go up forever, we felt that business, that investment would generate a 12% internal rate of return, unlevered, just cash on cash over time with an eight-year payback. We gave our guidance at 65-75 thinking, knowing roughly how much we can see and the opportunities for organic growth in 2017 and 2018.
If we see better opportunities for organic growth sometime in the future, we may decide to put more there, you'd lower that ratio down a bit. If you see less opportunities, you could make that higher. It's always a trade-off between the opportunities you have for organic growth and returning it back to shareholders.
Got it. I guess shifting to the businesses and growth, what do you think is an appropriate growth expectation for the new MetLife going forward based on your kind of go-forward business mix?
We gave some guidance of the pieces of our business at our investor day across the board. Let me highlight just a couple of the more interesting ones. Both the Group Benefits business, which we said we expect revenues to grow. It's a very big business for us, between 3%-5% in the near term, and we think that's above-market growth. In Mexico, which is growing well in the high single digits, and that's a worksite marketing business. Let me speak a bit about the Group business. MetLife is the market leader in Group. We have over 25% market share in the large case market. We call that 5,000 lives and up, the big, very large employers. We've been at it for decades. I think we actually invented the business back a long time ago. We have a strong position.
We have good unit costs. We're very competitive in that marketplace. We've had a good year this year in that very large market. In fact, our sales are up over 30% year-over-year. We've got some pretty big cases. It's interesting why we've gotten some of those. It's our normal competitive positioning and the services that we offer. We did get a couple of large financial institutions this past year. They came and did extensive due diligence on our technology and our security. You may remember that we've created this technology reinvestment fund, and right now it's running about $250 million a year. We took money out from 2012, but we've reinvested some of that money every year into better technology in a wide range of projects, one of which was to change our data centers.
After we bought Alico, we had data centers all over the world in various shapes and forms. We've amalgamated those into now three major global data centers with fully redundant backup. There's six major ones around the world on the latest servers and also the latest operating systems. Why this is so important from a security point of view is often these viruses attack the systems on if you're running an operating system one version behind. The investment we've made, all modern, all the latest system, creates a much better system. We have a whole tech center in Raleigh-Durham, in Cary, North Carolina, right there. They monitor all of our security around the world.
We're at the standards acceptable to the major financial institutions, and we think that has helped us get with a very large case market some business because we have very sensitive data. We have all the employee data in the Group business, and we think this will continue to pay benefits for us, not only here but around the world as we continue the Group business. In the mid-case market, which we call between 100 to 5,000 lives, the reason we group it that way is these are all sales that generally go through insurance brokers. We are stressing our multi-product opportunity. We are number one or number two in market share by product category across the U.S. We can offer multi-products with good scale and competitive pricing, where many mid-size players only maybe have one lead product.
We're finding this to be an advantage, and sales are up well too in this mid-market. The very small market, called the entrepreneurial market, less than 100 lives, although we have good market share there, we still think that's an area for growth, but it's going to take more technology to really get at that market, and we're investing a lot in that now. That'll be probably out next year when we get there. We are investing in technology in the Group business, and we see a continued opportunity in that space. We also, in Mexico, we're the largest life insurer in Mexico. The major business there is we sell to employees of government organizations, so it could be national organizations or state or city or school teachers for school districts. We have a very successful product there.
We still think we get more growth from that market. We're also taking that product and that chassis and the way it's sold to the private sector to offer this. This is to middle class, lower middle class in Mexico, and it's a very solid market. We're providing services they can't get anywhere else, and we have a good, productive way to do it. We're very excited about these two opportunities.
Great. I guess shifting to P&C, you probably get this question a lot, but can you talk a little bit about how that business fits within Met as a big global life insurer?
One of the great advantages that MetLife really helped to pioneer was to sell more products through the employer base, particularly in the large, this 5,000 lives and up marketplace. We sell, in addition to supplemental disability income or supplemental life, we brought more products in that space. We sell supplemental accident health policies. We sell a legal plan, a prepaid legal plan. We also are the largest seller of auto and homeowners insurance through employers in the U.S. That's really been a great distribution system for us. We have a good brand. People recognize it. We've been growing that business very well. Really, that's why when we categorized all of our businesses at our investor day, we put P&C in the growth category for us because it's leveraging that distribution.
Although we are the largest, we still have low penetration among our existing employees that we cover through the employers that we work through. There's many more opportunities in that, and we are working to digitize the entire system that we sell on P&C through. We have today a fully online binding product for auto, and that's been licensed up in a lot of states. It's on some websites now. We also now have a homeowners policy that's fully digital, being licensed. It's only in a few states, but we're licensing that out. The plan is within a few years, all sales will go through this new channel. Whether you buy through an independent agent from MetLife Auto & Home, or you buy through your employer, you can access it all digitally. You can be on the phone.
You can chat with somebody at a lower cost with better service. It'll be on your phone. I don't fit better with millennials and how they want to deal with this. Again, that's why we have it in that category.
In terms of the combined ratio you've been pushing through rate increases. Do you feel like you're on track to get back to within the target, I think 92%-97% combined ratio guidance?
We've been putting rate increases through over a year ago and continuing to do so in auto. It's been a trend among all auto insurers. We are on track to be within our range excluding some of the cat events going on right now. I'll speak about that in a minute. We're disciplined in our pricing in how we think about it. We don't have to be everywhere. We just want good growth that makes sense. We do middle income America type homes and middle-sized cars. We're not specialty at all any of this.
Going to the cat issue, can you talk about what your reinsurance program is as it relates to thinking about Hurricane Harvey and others?
Hurricane Harvey, to answer your question directly, we keep the first $130 million of losses. We have a good reinsurance tower above the $130 million. For Harvey, we're not going to be anywhere near that. We have less than 1% market share in auto and home in the Texas affected areas. It won't really be that material for us across the board. There will be some. Don't forget, we do residential homes, that flood is not covered by that. In Florida with Hurricane Irma coming, which I'm sure everyone's watching and looking at, we have less than 1% market share in auto in Florida and significantly less than 1% homeowners, sorry, in Florida. Georgia and South Carolina less than 1% too. Our thoughts and prayers are with those suffering from Harvey and those getting ready for Irma.
We hope it all proceeds good for everybody there.
Moving to the Retirement & Income Solutions business. From an earnings standpoint, it's your biggest business in the U.S. at the current time. Just how is that business performing, and how do you think about how much capital you allocate there for new business?
The Retirement & Income Solutions business has two basic components of businesses in it. One is pension risk transfer and structured settlements and sort of income style products that don't have any surrender risk, these sort of matched book, but it is longer duration in nature. Then we have some products, match funding type products that we sell that are shorter duration, quite short duration. Overall this total business has been a very good ROE for the last 10 quarters, about 14%, so it's an efficient use of capital from the mix of those businesses. The match funding business is set by the size of our balance sheet. Our balance sheet is not growing that much, so that business won't have that much growth, but still a very good business and it rolls over every few years.
We like that business, but massive growth you won't see from that. The other business that gets a lot of attention is the pension risk transfer business going on today. I think this year it's looking over $10 billion of flows easily for the market. Now it's a massive market, like $3 trillion they say is the potential. It hasn't been near that area, but I think it depends. There are some motivations coming on now with the new mortality table from the Society of Actuaries. The Pension Benefit Guaranty Corporation has raised their insurance rates. That may be motivating more employers to be looking at this. We like that business. It's a solid business. We set a certain capital budget to that every year.
We've been selling roughly between $1.5 billion-$2 billion a year in that, and we think we're kind of on track for that range for this year as well. We like that business. We take a measured approach, but it's a good solid business and you can match it across the board pretty well. Our spreads this year coming in line with our guidance that we've given.
On the match funding piece, you have some sensitivity to the slope of the yield curve. Does that go away after you can basically solve that when you reprice-
Right
the business after a few years?
Yeah. It'll roll in two, three years and some of that's funded with short-term rates. Short-term rates go up, you get a little squeeze on that, but within two or three years it's all fixed because you just reprice it. It's-
Yeah
it's more a one year issue in like if the short-term rate rises rapidly in a year, you have a little pressure on that, we'll fix it over the time period. This is the type of business that we like that you're either well matched or you can always reprice.
Got it. On MetLife Holdings, in terms of you talked about a mid-single digit runoff annually going forward. Can you talk about if there's any potential reinsurance opportunities that you could do to accelerate that? Or if mid-single digits is really what we should expect.
Our guidance was the revenues will move down about 5% a year. That's a pretty long-term business. About half of the earnings are annuities, 40% is life, and then 10% long-term care, which are all pretty long-term liabilities that are well matched and we can go across the board on. We call it MetLife Holdings, but you have to remember, it's not like a separate legal entity that you can deal with. It is in the Metropolitan Life Insurance Company, the original company dating back to 1868, that has all the business we've written across the board. That's why we have MetLife Holdings because although it was retail business, we could not really easily separate that and move that over to Brighthouse. That's why it's there. It is regulated by New York State.
Any reinsurance transaction you have to balance the cash flow you will get slowly over time versus the cost of reinsurance. Reinsurers take a profit. You've got to balance all that. Any reinsurance transaction requires New York approval and New York State approval, they are stringent on the requirements historically for doing reinsurance transactions. I would say the base case is assume 5% down a year. If we do find something, we will look at it, but our base case is it's going down 5% for the reasons I've mentioned.
Okay. Let's shift to the international businesses. You've made a number of product changes in Japan in recent years. Can you talk about what led to that and where you are in the process?
When we first were looking at our, we call it Accelerating Value efforts, we started actually in Japan in 2015. We looked at how all the capital was being invested and the expected rate of return and the payback period for certain products. It's interesting, a lot of people in the life insurance industry have always priced with a IRR. They talk about an IRR. They often don't talk about the payback period. You can have some products that have a nice, an okay IRR and have a short payback period or have a very long payback period. I mean, very long, like 20 years or longer, depends on the product. When we analyzed Japan, we saw the yen whole life products that were being sold was historically for the sales force in Japan was one of the mainstay products that they had.
That had a very long payback and that was when the JGB was positive. We told that management team, you need to transition and move away from this as your core product for your sales force. They began. We had foreign dollar, US dollar life products available. It wasn't the top product, and over the course of 18 months or so, they've totally converted. Kept sales about flat. Now by this second or third quarter, there are almost no yen whole life sales anymore. It's been totally replaced by US dollar life products, which is not an easy transition for the sales force to understand and sell it for the Japanese consumer to buy it, and they take the currency risk. That was a very big transition, but it's made a dramatic difference in how we allocate capital and getting the payback on it.
We also sell in Japan, in yen, health products, cancer insurance. That's a much shorter payback in terms of, and again, a very good IRR. You don't see it from the outside, but the inside, the capital being allocated and getting a faster payback will really pay dividends going forward. I'd also like to point out that MetLife in Japan, which was the Alico company before, has been a leader in foreign dollar products in Japan and has been selling US dollar and Australian dollar products in the annuity space for 15 years or so. Only half of the earnings in Japan are yen based, and the other portion are US dollar based and Australian dollar based.
Really, although you see Japan in our earnings stream, like looking at about $1 billion a year of earnings, it's only about half of that is actually exposed to the JPY.
I think you talked about introducing some new medical products I think recently.
Yeah.
I guess you feel like when you think about that, some of the actions you've taken, have you kind of maybe hit the bottom kind of in terms of the sales outlook for Japan, and it can improve from here?
Yeah. With the new A&H products that are very consumer directed and segment directed, adding more value for the customers and what they want. We've done a lot of market research with the Japanese consumers on these products. With the transition from the yen whole life to the US dollar whole life, we think we sort of hit the bottom, Japan will be on a more positive track going forward.
In terms of the in-force in Japan, how should we think about the margin pressure you're feeling from low interest rates and how that ties into your overall outlook for Japan going forward?
On our December outlook call, we said there's like two or three million change in earnings for 10 basis points in the JGB rate, which takes a long time. The yen whole life book is a long-dated book. It takes time to flow her over. We've been reducing our exposure to JGBs. We've been doing asset type swap investments or yen-based commercial mortgages which have positive net spreads on it. We think this will be manageable over time, and as we sell good new business, this will also compensate for it.
Moving to Latin America, that business has suffered from currency headwinds in recent years. If we were to strip that out, how is the business performing and what's your outlook going forward?
Well, until now, the LatAm currencies have actually done better this year. But if you go from the last few years to the end of 2016, you saw low single-digit earnings growth in LatAm, but it's actually low double digits when you take account to the currency. The US dollar cannot keep going forever. We've seen it's adjusting a bit now. As long as you have good underlying growth in those businesses, it will come through over time. That's how we view that business. As I talked about Mexico, we're also the largest life insurer in Chile, the largest pension fund provider in Chile. We have very solid positions in some of the largest markets there.
In Chile, you made some fee adjustments at Provida. Do you think those are kind of sufficient at this point, or are there more potential changes coming?
We made some fee adjustments. Provida, which is the largest pension fund provider in Chile, did have higher fees, but also had the most service centers and is a sort of a higher fee, high service type cost. We had always thought we may have to adjust that over time and get a little more efficient and which we've now done. Gone from the base fee on the deposits of 1.54%-1.45%. It's not a massive reduction. That has gotten that business on a better track now. This election year in Chile, the pension system is being discussed a lot between the political parties. That's getting a lot of attention right now. The election will happen this year, and we think things will settle down going into next year.
In the Corporate and Other segment, the losses there have been coming in better than you had kind of expected, it seems. You talked about the low end of the $450 million-$650 million range. Is that mostly being driven just by lower taxes, or are there some other factors we should think about that are driving that?
It's mainly taxes. We're getting some more mix of business, lower rates, and we've had some settlements that have helped in the years. That's why we always give a range in Corporate and Other, because we always have a range across the board in all these elements that can come through.
The actuarial review, you do that in the third quarter. I think last year you lowered your interest rate assumption to 4.25% over 10 years. What are the key considerations that you're thinking about and you evaluate relative to that assumption when you do these reviews?
Well, it's ongoing right now. I can't give any commentary on where we'll end up. We'll announce that when we get there. You have to remember, we're a life insurance company. We have very long-term business. You have to think of businesses in decades, not in this year or last year when you set these long-term actuarial assumptions. If you look over the last, since 2008, yes, we've been low interest rates, but I think the lowest since the history of the U.S. was last year, 1.38% on 10-year Treasury. Generally, the U.S. economy, which is a very vibrant and dynamic economy has had higher rates for all the period of time. We try to set something that's reasonable, that makes sense from where you are right now and thinking about going over a very long period of time.
I think that's fairly appropriate last year, and we'll see where we come out this year. Again, it's a very long-term business in a lot of these cash flows. You've got to take that into account.
Just a question on the asset management business. You've been building that out. You've announced a small acquisition there. I guess how are things progressing in that business, and what's the opportunity from that there?
Since about 2012, we've been growing the asset management business organically using our strengths. We're a very large commercial real estate lender in the U.S. We're a very large commercial equity investor in the U.S. We now have funds that people invest with us along that line. We've been building up our expertise in that. We'll leverage our scale. Logan Partners was a great addition to us. They're a fixed income to institutions. We now get a track record because we don't have a track record as a separate standalone money manager. We've been growing organically. They have one, but that business benefits because of our size. Their cost of operations will be much cheaper.
Yep.
Your licenses for your Bloomberg terminals, all these things, we have a much better scale for that. We think it's a real win-win. We think it's a great team. Again, it fits our strategy of what we're trying to do. Really leveraging our strength, doing things that we know to do well and just continuing down that path.
All right. I think we'll wrap it up there. Thanks a lot for attending. Much appreciated.
Thank you, Ryan. Pleasure to be here.