Hi, welcome to the MetLife second quarter 2017 earnings release conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results and the business and the products of the company and its subsidiaries.
MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission, including in 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, Head of Investor Relations.
Thank you, Greg. Good morning, everyone, and welcome to MetLife's second quarter 2017 earnings call. On this call, we will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the investor relations portion of metlife.com in our earnings release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Now, joining me this morning on the call are Steve Kandarian, Chairman, President, and Chief Executive Officer, and John Hele, Chief Financial Officer.
Also here with us today to participate in the discussions are other members of senior management. After prepared remarks, we will have a Q&A session. In fairness to all, please limit yourself to one question and one follow-up. With that, I'd like to turn the call over to Steve.
Thank you, John, and good morning, everyone. Last night, we reported second quarter operating earnings per share of $1.30, up from $0.83 per share a year ago. Overall, it was a good quarter across most business segments, aided by favorable expense management and underwriting. Equity markets, which rose 2.6% in the quarter as measured by the S&P 500, provided a modest boost to earnings, while low interest rates remain a headwind. Operating return on equity in the quarter was 10.3%. Adjusting for notable items, operating earnings were $1.34 per share, which compares to $1.27 per share on the same basis in the prior year period.
Net notable items of $0.04 per share in the quarter included costs incurred to consolidate our New York offices at 200 Park Avenue, investments to achieve our target of $800 million in after-tax run rate savings by 2020, and branding efforts to support the launch of Brighthouse Financial as a standalone company. These costs were offset in part by a favorable settlement of a tax audit and a reinsurance reserve release. Net income for the quarter was $838 million, substantially higher than a year ago. Current period net income was negatively affected by net derivative losses and costs associated with the Brighthouse separation. Before I provide key business highlights for the quarter, I would like to provide an update on the Brighthouse Financial separation, which is almost complete.
All necessary approvals have been secured, and Brighthouse Financial shares have been trading on a when-issued basis for the past three weeks. Last night, MetLife filed an 8-K disclosing that Brighthouse Financial would need to increase its reserves by approximately $400 million due to refinements in legacy actuarial models. As a result, the size of the dividend MetLife expects to receive from Brighthouse Financial will be reduced from $3.4 billion to $3 billion. John Hele will discuss this matter in greater detail. On Monday, both Brighthouse and MetLife are expected to trade for the first time on a post-separation basis on their respective exchanges, Nasdaq and the New York Stock Exchange. We believe the separation marks an inflection point for MetLife.
Over the past few years, we've overhauled our product offerings to ensure that the business be right, has better internal rates of return, less capital intensity, and stronger free cash flow. MetLife is positioned to grow profitably in the protection and fee-based businesses that form the core of the new MetLife. To be clear, we will remain vigilant in fixing or exiting businesses that do not create value. For example, shortly after the end of the second quarter, we made the hard decision to close our U.K. wealth management business, which could not clear its hurdle rate in the prolonged low-rate environment.
Nevertheless, we are confident that the heavy lifting has been done to transform MetLife into a company with less volatility and more free cash flow, which should lead to a lower cost of equity capital, and ultimately, a higher valuation. Turning to highlights across the business segments. The U.S. business segment saw another strong quarter of earnings and sales from Group Benefits. At separation, Group Benefits will be the largest of our growth engines in the U.S. segment. The business we write continues to have attractive risk and return characteristics. Retirement and Income Solutions delivered strong growth in the quarter while maintaining pricing discipline. In our Property & Casualty business, stronger auto results reflected recent pricing and underwriting improvements, while weather, both cat and non-cat, had an adverse impact on home operating earnings.
For international businesses, operating earnings for both Asia and Latin America benefited from volume growth and higher investment margins, while operating earnings for EMEA were aided by expense control and favorable underwriting. Finally, MetLife Holdings benefited from favorable life insurance underwriting results. Moving to investments. Pre-tax variable investment income totaled $279 million in the quarter. Of this amount, $222 million is attributable to the new MetLife, which falls within our quarterly guidance range of $200 million-$250 million provided on our outlook call in December. Private equity investments were the largest contributor to the performance. In the quarter, our global new money yield stood at 3.32%, compared to an average roll-off rate of 4.23%. Over the past four quarters, our new money rate has averaged 3.18%.
Although interest rates are higher than they were a year ago, we have not experienced the rise in rates that many predicted after the U.S. presidential election. While I still believe that monetary policy is keeping rates artificially low, I also believe that elected officials need to do more on the fiscal policy front, especially through tax reform, to spur faster economic growth. In a positive regulatory development, yesterday the U.S. Court of Appeals for the D.C. Circuit Court approved MetLife's motion to hold in abeyance the government's appeal of our SIFI victory. The court directed the parties to file motions by November 17th, 2017, or within 30 days of the U.S. Treasury Secretary's report on the Financial Stability Oversight Council's SIFI designation process, whichever occurs first.
This decision provides the administration time to determine whether any of FSOC's positions in this case should be reconsidered, and whether it is appropriate for the government to continue pressing this appeal. Consistent with our goal of growing profitably in the right areas, on July 7th, we announced that MetLife had reached a definitive agreement to acquire Logan Circle Partners, a fixed income asset manager with more than $33 billion of assets under management. Logan Circle will be integrated with MetLife Investment Management and strengthen our ability to provide investment management services to existing and new institutional clients. MetLife is already one of the largest life insurance investors in the world. Logan Circle's strong track record in public fixed income will accelerate our effort to grow our third-party asset management business.
In addition to the approximately $80 billion we will manage for Brighthouse Financial, MetLife Investment Management will have more than $60 billion of additional third-party assets under management after the transaction closes. While the acquisition of Logan Circle was consistent with our strategy of growing businesses with less capital intensity and strong free cash flow, it needed to meet our financial targets as well. When we analyzed projected growth, expense synergies, and tax benefits, the transaction delivered an internal rate of return above our cost of capital, an attractive cash payback period, and compared favorably to repurchasing our common shares. MetLife Investment Management was another business we identified as a growth engine at our most recent Investor Day, and we will continue to grow the business organically while keeping an eye out for attractive acquisitions.
Before I close, I want to update you on our $3 billion share repurchase program, which is the largest in MetLife's history. Since we announced the program, we have bought back approximately $2.2 billion of our common shares and remain on track to fully execute the authorization by year-end. The reserve strengthening at Brighthouse Financial does not affect our current capital return plans. During the second quarter, we repurchased $952 million of our common shares. Combined with our common dividend, we returned roughly $1.4 billion of capital to shareholders, which is close to 100% of the second quarter operating earnings. In closing, we believe our transformation work, combined with our capital return program, will create significant value for shareholders. With that, I will turn the call over to John to discuss our Q2 financial results in greater detail.
Thank you, Steve. Good morning. Today, I'll cover our second quarter results, including a discussion of our insurance underwriting margins, investment spreads, expenses, and business highlights. I will conclude with some comments on potential impacts on separation, as well as cash and capital. In addition to our earnings release and quarterly financial supplement, last night, we released disclosure labeled 2Q17 Supplemental Slides that provide a walk from net income to operating earnings for the quarter. I will speak to these slides later in my presentation. We will continue to release supplemental slides when we have complex elements in a quarter. Operating earnings in the second quarter were $1.4 billion, or $1.30 per share. This quarter included four notable items totaling a negative $41 million that we highlighted in our news release and quarterly financial supplement.
Adjusted for all notable items in both periods, operating earnings were up 3% year-over-year. On a per share basis, operating earnings adjusted for all notable items were $1.34, up 6% year-over-year. Turning to our bottom line results, we had second quarter net income of $838 million, or $0.77 per share. Net income was $569 million lower than operating earnings, primarily because of net derivative losses of $284 million after tax and costs related to the Brighthouse Financial separation of $216 million after tax. For more details about the difference between net income and operating earnings, please refer to page three in our supplemental slide disclosure this quarter. Page four in the supplemental slides shows the attribution of the after-tax net derivative loss. I would highlight three main drivers.
Number one, foreign currency derivative loss of $188 million after tax, primarily due to the weakening of the U.S. dollar against several currencies, including the euro, the British pound, and the Canadian dollar. MetLife invests in non-U.S. bonds for our U.S. portfolios to provide enhanced risk diversification and incremental yield. These bonds are swapped back to the U.S. dollar, so they economically match the U.S. dollar liabilities they support. Since certain of these hedges do not qualify for hedge accounting, asymmetrical accounting treatment between the bonds and the related currency swaps drives volatility in our GAAP net income. Importantly, this FX volatility in GAAP does not exist in statutory accounting. Number two, the VA hedge program accounted for an after-tax loss of $340 million, mainly in Brighthouse Financial, including $116 million related to asymmetrical and non-economic factors.
Losses related to other risks were driven by the non-market drops in account value, primarily the deduction of fees. These losses were offset by number three, interest rate net derivative gains of $295 million after tax due to the decline in long-term rates in the quarter. Overall, $114 million of the $284 million net derivative loss was due to asymmetrical and non-economic accounting. Under U.S. GAAP, this continues to be a significant component of our derivative gains and losses each quarter as the derivatives are mark-to-market, but a significant portion of MetLife's VA and life liabilities are not. You can find the total impact of $203 million of adjustments for asymmetrical and non-economic accounting on our net income in the second page of tables attached to the press release.
Book value per share, excluding AOCI other than FCTA, was $51.03 as of June 30th, up 1% versus the sequential quarter as of March 31st. With respect to second quarter underwriting margins, total company earnings were lower by approximately $0.02 per share versus the prior year quarter after adjusting for notable items in both periods. Underwriting in Brighthouse Financial accounted for approximately $0.05 of the total decrease. This was primarily due to the previously disclosed impact from the loss of the aggregation benefit in variable and universal life and the second quarter 2016 modeling changes. Excluding Brighthouse Financial, underwriting earnings were higher by approximately $0.03 per share year-over-year. This was due to favorable underwriting in the U.S., primarily in Group non-medical health and retail life within MetLife Holdings.
The Group non-medical health interest adjusted benefit ratio was 76.9%, favorable to the prior year quarter of 78.9% and within the 2017 annual target of 76%-81%. Favorable underwriting results were primarily driven by dental. MetLife Holdings interest adjusted benefit ratio for life products was 51.1%, driven by favorable mortality. This result was favorable to the prior year quarter of 59.4% after adjusting for notable items and below the targeted range of 53%-58%. Turning to investment margins. The weighted average of the three product spreads presented in our QFS was 150 basis points in the quarter, down 20 basis points year-over-year. Pre-tax variable investment income, or VII, was $279 million versus $285 million in the prior year quarter, as lower prepayments were offset by stronger private equity performance. Product spreads, excluding VII, were 120 basis points this quarter, down 18 basis points year-over-year.
Lower core yields accounted for most of this decline. Overall, low investment margins in the quarter accounted for approximately $0.09 of EPS underperformance year-over-year. The operating expense ratio in the current quarter was 22.0% and 21.1% adjusting for all notable items, benefiting from higher pension risk transfer sales and the sale of the MetLife Premier Client Group to MassMutual in the prior year. Operating expense margins, adjusting for all notable items, were less favorable to the prior year quarter by $0.02 per share. Costs associated with the build of Brighthouse Financial as a standalone company, higher variable expenses, and a prior year adjustment, which reduced employee benefits, were partially offset by lower operating expenses due to the sale of MetLife Premier Client Group. In regards to our unit cost initiative or UCI, our first half expense savings are generally in line with expectations.
Consistent with prior guidance as provided at our 2016 Investor Day, we believe full year 2017 UCI expense savings will be masked by the impacts of our one-time investments in stranded overhead, with the net unfavorable impact to operating expenses of approximately $100 million. I will now discuss the business highlights in the quarter. Group Benefits reported operating earnings of $203 million, up 10% and 9% adjusting for notable items in the prior year quarter. The primary drivers are strong non-medical health underwriting and volume growth. Group Benefits operating PFOs were $4.2 billion, up 3% year-over-year, driven by growth across all markets. PFO growth was negatively impacted by the loss of a large dental contract in this quarter. Excluding this impact, PFO growth was 5% and at the high end of our guidance of 3%-5%.
Group Benefits sales were up 30% year-to-date with growth across all products. We continue to see particular strength in the jumbo case market due to more quote activity and higher closing ratios, while persistency continued to be favorable. Retirement and Income Solutions, or RIS, reported operating earnings of $268 million, up 3% due to reserve adjustment in the prior year quarter. Excluding all notable items, operating earnings were down 5% due to lower investment margins driven by continued spread compression. RIS operating PFOs were $1.2 billion, driven by two large pension risk transfer sales. Excluding PRT, PFOs were down 1% year-over-year. We continue to see a good PRT pipeline and expect 2017 to be an active year for transactions of all sizes. Our approach will continue to balance growth with an efficient use of capital.
Property & Casualty, or P&C, operating earnings were $28 million, up $30 million compared to the second quarter of 2016, and up $15 million after adjusting for notable items in the prior year quarter. This result was due to improved auto underwriting, partially offset by non-catastrophe weather losses in homeowners. Our P&C combined ratio, excluding CATs and prior year development, was 88.2%, better than the prior year quarter of 90.8%. We continue to see improvement in our underwriting auto results, which posted a combined ratio excluding CATs and prior year development of 94.2%, well below the 101.0% in the prior year quarter. Auto results have benefited from targeted rate increases over the last 12 months of 7%-8%, and we expect to take similar rate actions in the immediate future. P&C operating PFOs were $887 million, up 1% year-over-year, primarily the result of the auto rate increases.
Overall, P&C sales were also up 1%, reflective of price increases and management actions to drive value. Turning to Asia. Operating earnings were $310 million, up 20% year-over-year, but down 4% on a constant currency basis after adjusting for notable items in both quarters. Volume growth was offset by higher expenses and less favorable underwriting. Asia operating PFOs were $2.0 billion, down 1%, but up 1% on a constant currency basis. Asia sales were down 4% on a constant currency basis, reflecting management's actions to improve value in targeted markets. In Japan, sales were down 5% as the shift to foreign currency whole life continued. FX life sales were up 43%, while JPY life sales were down 66%. FX life sales accounted for 85% of total life sales in Japan this quarter.
A&H sales in Japan were down 9% in advance of the introduction of our refreshed medical products, Flexi S and Flexi Gold S, which were launched in July, which we expect will have improved sales in the second half of the year. Emerging market sales in Asia were up 21%, driven by continued growth in China following the successful launch of a whole new life critical illness product called Safeguarding Your Health, which is the first in the market to offer a full end-to-end health solution. Latin America reported operating earnings of $154 million, up 12% and 14% on a constant currency basis. The key drivers are volume growth, lower taxes, and higher investment margins.
We expect lower operating earnings in the second half of the year as the full impact of the Provida fee reduction implemented in June takes hold and the favorable market performance in the first half returns to normal. Latin America operating PFOs were $928 million, up 2% on both the reported and constant currency basis. This growth reflects the non-renewal of a low-margin large group contract in the second quarter of 2017. Excluding this non-renewal, PFOs were up 8%, driven by strong growth in Mexico. Total sales for the region were down 28% on a constant currency basis due to large employee benefits sale in Mexico in the prior year quarter. Excluding this employee benefits sale, sales were up 3%. EMEA operating earnings was $72 million, up 13% and 24% on a constant currency basis. The key drivers were favorable expense margins and underwriting.
EMEA operating PFOs was $625 million, down 1%, but up 3% on a constant currency basis driven by growth in Turkey and employee benefits in the U.K. Total EMEA sales decreased 5% on a constant currency basis, mainly due to competitive pressures in the Gulf as well as the recently exited wealth management business in the U.K. As a reminder, we had guided to flat EMEA sales in 2017, mainly due to uncertainty in the U.K. following Brexit. Those challenges, mainly related to low interest rates, have proven to be severe. While the Gulf has been a challenge, we continue to see strong growth in other parts of the Middle East, particularly Turkey and Egypt, and also in A&H business across the region, which now represents nearly a quarter of overall EMEA sales.
MetLife Holdings reported operating earnings of $235 million compared to a $33 million operating loss in the second quarter of 2016. The second quarter 2016 operating loss was due to a $304 million negative impact, primarily from the separation-related items and other insurance adjustments. Operating earnings in the second quarter of 2017 include a $40 million negative impact from separation related activities that was offset in Brighthouse Financial. Excluding notable items in both periods, operating earnings were up 1%, driven by favorable equity market impact and underwriting, mostly offset by lower investment margins. MetLife Holdings operating PFOs were $1.4 billion, down 17%, mostly due to the sale of MetLife Premier Client Group, which included the company's affiliate broker-dealer unit. As previously guided, we expect operating PFOs to decline by approximately 12% in 2017 versus 2016.
Corporate and other reported an operating loss of $146 million compared to an operating loss of $243 million in the second quarter of 2016. Adjusting for notable items in both periods, the operating loss was $115 million compared to a loss of $244 million in the prior year quarter, driven by a lower effective tax rate and favorable investment margins. As for the company's effective tax rate, it was 20.6% and 21.7% after adjusting for a favorable tax audit in the quarter. We still expect the company's 2017 effective tax rate to be between 21% and 22%, as previously guided. The primary reason for the company's low tax rate has been due to the tax preference items in the U.S. and foreign operations taxed at lower rates than the U.S. tax rate of 35%.
Brighthouse Financial operating earnings were $283 million, down 5% or 31% after adjusting for notable items in both quarters. The decline in earnings when adjusted for notable items was primarily driven by lower net investment income from reduced interest rate swap and securities lending books, lower universal life with secondary guarantees earnings after the model changes in the second quarter of 2016, and higher expenses. The higher expense activity is related to the build-out of Brighthouse as a standalone business. As a standalone company, Brighthouse Financial expects corporate expenses to be $175 million to $225 million higher in the initial year post-separation as compared to the 2016 levels, as well as incremental interest expense from debt service. Overall annuity sales were down 8% and life sales were down 64%, mostly resulting from the sale of the MetLife Premier Client Group in July of 2016.
Sales of the company's index-linked annuity product, Shield Level Selector, remain strong. In the second quarter of 2017, sales were $570 million, up 28% year-over-year and over $1 billion for the first half of 2017. As a reminder, Brighthouse Financial segment results within MetLife's financial statements do not match the financial statements of Brighthouse Financial Inc and related companies shown in the most recent Brighthouse Financial Form 10 due to accounting timing differences. Next, I would like to comment on some of the expected third quarter financial impacts as a result of the Brighthouse Financial separation. The separation will result in Brighthouse's historical results being reported as discontinued operations. Upon separation, the remaining ownership interest in Brighthouse Financial will be accounted for under the equity method, with changes in the fair value reported in net investment gains and losses.
To give you an indication, if Brighthouse Financial closes at $70 per share at the end of the third quarter, we would anticipate realized losses of approximately $120 million post-tax. In addition, there are $800 million of losses post-tax related to intercompany transactions and tax-related items. Additionally, we anticipate an operating tax charge of approximately $200 million related to the repatriation of cash as a result of the separation, partially offset by a tax benefit associated with dividends from our foreign operations. I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $4.6 billion at June 30th, which is up from $3.8 billion at March 31st. This increase reflects $650 million of net proceeds from the spin, as well as subsidiary dividends, share repurchases, payment of our quarterly common dividend, and other holding company expenses.
As announced in the MetLife and Brighthouse Financial Form 8-K filed last night, MetLife will receive a cash remittance of approximately $1.8 billion from Brighthouse Financial prior to the completion of the spin-off. This brings MetLife's total net cash remittance to $3.0 billion. Of the remaining $1.2 billion, $295 million was received in the fourth quarter 2016, $640 million received this quarter, and the remaining relates to proceeds received from the unwinding of certain reinsurance transactions, which will be recognized at the holding company in 2018. This is lower than our initially planned range of $3.3 billion-$3.8 billion to adjust for Brighthouse Financial's planned reserve increases for refinements in legacy actuary models. These refinements bring to a close an extensive internal and external review. Next, I would like to provide you with an update on our capital position. For our U.S.
companies, including Brighthouse, preliminary year-to-date second quarter statutory operating earnings is approximately $1.8 billion, up 67%, and preliminary net income is $538 million, up 6%. MetLife's U.S. companies, excluding Brighthouse, preliminary statutory operating earnings were $1.9 billion, up 67%, and preliminary net income was $1.4 billion, up 83%. Both are higher, primarily due to favorable underwriting and lower expenses, partially offset by lower net investment income. We estimate that our total U.S. statutory adjusted capital was approximately $26 billion as of June 30th, up 6%. MetLife's preliminary statutory adjusted capital was $20 billion, up 3% from December 31st, 2016, primarily due to higher net income, partially offset by a dividend paid to the holding company. Brighthouse Financial expects combined statutory total adjusted capital to be approximately $6.4 billion as of June 30th, an increase of $2.2 billion from March 31st.
This increase was driven primarily by spin-off related transaction at the life holding companies, including a $600 million capital contribution to Brighthouse Life Insurance Company on June 30th from the proceeds of the Brighthouse bond offering. Brighthouse Financial estimates that at June 30th, fair value of the assets above CTE95 would be approximately $2.3 billion pro forma for the separation. For MetLife Japan, the solvency margin ratio was 957% as of March 31st, which is the latest public data. Overall, MetLife had a strong second quarter in 2017, highlighted by favorable impacts from equity markets and solid underwriting in the U.S., as well as a continued focus on expense management. In addition, our cash and capital position remains strong, and we remain confident that the actions we are taking to implement our strategy will drive free cash flow and create long-term sustainable value to our shareholders.
With that, I will turn it back to the operator for your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one 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 pound 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 star one at this time. One moment, please, for your first question. Your first question comes from the line of Sean Dargan from Wells Fargo. Please go ahead.
Hi. Yes, thank you. Good morning. I have a question about the corporate segment. Results have been more favorable than I think were in most models in the first and second quarters. How should we think about the timing of the expense initiatives? Just wondering if you can give any guidance for how corporate is going to play out the rest of the year.
Hi, this is John. Corporate does have volatility in tax from quarter to quarter. We sometimes get one-time tax settlements that would be reflected in there. That's why it's a bit lower this quarter, as well as timing. As I said in my comments, you should use a tax rate for the full year of between 21%-22%, and I think that'll get your model on track.
Okay, thanks. Then a question about the competitive environment in Group Benefits. We've seen at least four or five carriers all have very favorable risk results. Is this as good as it's going to get? Is this the point where competitive pressures lead to some carriers start cutting pricing?
Yeah. Hi, Sean. This is Michel. We're seeing the environment is competitive in life and disability. It's aggressive on the dental front. We remain disciplined in terms of our approach, and as you can see from our sales in the first half of the year, we have good growth across all segments.
All right. Thank you.
Your next question comes from the line of Thomas Gallagher from Evercore ISI. Please go ahead.
Good morning. John, the final adjustments that you highlight that are coming for the Brighthouse spin, can you just go through those again? Will all those hit GAAP net income? Will any of them be OCI adjustments instead? How many of those will actually have an impact on capital at RemainCo, or will they largely be non-cash?
These generally all flow through net income. Most adjustments I've spoken about are non-cash items.
Got you. Can you total those up again? I had trouble keeping track of those.
Hold on. Yes. Let me just flip to my page. Hold on one. As we announced in the 8-K, we took $1.8 billion, which will come in today in cash from Brighthouse to MetLife holding companies. This brings the total to $3 billion, $3.0. Of the remaining $1.2, $295 we got in the fourth quarter of 2016.
Oh, no, I'm sorry. John, sorry to interrupt you. I meant the charges that are coming in 3Q, not the cash payments.
The first charge will be in the third quarter, will be reflecting the mark to market on our remaining shareholding in Brighthouse Financial.
Right.
To give you a reference point of that'll get marked at the end of the quarter. It'll flow through net income. If Brighthouse closed at $70 a share, that'd be $120 million post-tax. A delta $5 difference in that number would be about a $75 million delta.
Okay.
There'll be another $800 million of losses post-tax. These are intercompany transactions and tax-related items. Most of those would be a non-current cash impact. Some are accounting adjustments, and the tax charges were not in a current tax paying position, so they would not be for the foreseeable future, for at least the next five years, impacting our cash position. I also mentioned that we anticipate an operating tax charge of approximately $200 million related to the repatriation of cash as a result of separation, partially offset by tax benefit associated with dividends from our foreign operations. As part of the separation, we anticipate to bring back approximately $3 billion of foreign cash. That generates a tax charge, but we'll get $3 billion back cash back from the foreign holding companies to the U.S., and we can do that in this quarter related to the separation.
We are still evaluating and considering this point, but we wanted to give you a heads up on that. This will not change our APB 23 election going forward.
Got you. Thank you for that. Steve, just for a point of clarification, did you start out by saying you're targeting $800 million of after-tax expense saves by 2020? I thought previously you had said pre-tax.
Pre-tax.
Sorry, I thought you said after-tax in your prepared remarks. It's still pre-tax.
It is.
Okay, thank you.
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Hi, thank you. I was just hoping you could provide a little bit more detail on what's driving the need for the increased statutory reserves at Brighthouse, which block of business it relates to, and why it's coming up now.
Erik, hi. It's John. Absolutely. First of all, this reserve charge that's mentioned in the Brighthouse 8-K is only statutory. There's no impact on GAAP on this, there's no impact to the rest of MetLife in all this. It's only a Brighthouse view. As you have seen by reading through the Form 10, there's been very extensive modeling on the variable annuity business. This reserve increase does reflect it is in the variable annuity business. We have had underway, in addition to all this modeling, a very extensive internal and external model review going on. This is the end result to close out the final items of that. We expect this reserve adjustment for the refinements will be a prior period adjustment and will be part of the second quarter statutory filing.
Got it. I would assume that this changes some of the sensitivities and other tables that are outlined in the Form 10. Do you have a plan, or does Brighthouse have a plan to update those?
No, this will not. Brighthouse will be in the exact same position because the smaller dividend coming up to us offsets that whole need. Their current Form 10 is fully effective and all the numbers are fully applicable. I want to reiterate that going forward, this dividend up from Brighthouse, none of this is in our free cash flow guidance that we've given at between 65%-75% between 2017 and 2018. This is all in addition to that cash flow that we have, and we expect to still be in a very strong cash position. The fact that this is lower than what we had anticipated when we first started this project over a year ago, it doesn't affect our current share buyback plans at all.
Got it. Maybe last question, just sort of related to that, you mentioned bringing back the additional cash as well from the foreign subsidiaries. I guess, how do you think of kind of total excess capital resources at the holding company and weigh sort of uses between, obviously, you've committed to maintaining the dividend and some de-levering, but thinking about buybacks versus M&A or other uses with that excess capital?
Well, our guidance for MetLife RemainCo is between $3 billion-$4 billion we want to run with at cash in the holding companies. We are in a very strong cash position post all of these elements and continue to expect to pay a very strong dividend going forward. As Steve has always said, we believe any excess over our target that we need belongs to the shareholders or will be used for valuable, accretive, and good acquisitions.
Okay. Thank you.
Your next question comes from the line of John Nadel from Credit Suisse. Please go ahead.
Good morning. I have a couple of questions. I have, I guess, a bit of a theoretical question for you, Steve or John. As part of the separation of Brighthouse, why not take them all the way to the $3 billion cushion above the CTE 95 level, let them return less capital to you guys, and see that stock come out of the box with a capital management story that I assume would greatly positively affect the valuation relative to where it stands right now?
John, we work closely with our bankers in terms of trying to find the sweet spot in terms of how much capital would be in Brighthouse post-separation. Some of the factors included making sure that there was adequate capital for Brighthouse to operate over the long run. Just the same as MetLife, not excess capital that's not needed to run the business appropriately, given the hedging strategy going forward, given the business model that they have put together with respect to new business being written, and so on. There was a lot of discussion, a lot of analysis around where that right number would fall out, and that's what we came up with.
Okay. John, I guess a question, inclusive of a few of these charges related to the separation that we'll see in the third quarter. For RemainCo, can you give us a sense for making all of these adjustments, what is your estimate of what the book value per share ex AOCI and ex FCTAs will be? I'm coming up with something around $40-$42 a share. Is that reasonable?
We'll have more details releasing that next week once the distribution is finalized and the pieces exactly are figured out. We'll have some better information early next week coming out to you on that, John.
Okay. I've got one more if I could sneak it in. Just the $0.09 that you mentioned of year-over-year pressure from lower core investment spreads. How much of that was RemainCo versus Brighthouse, and how should we think about that sensitivity for RemainCo after the separation?
It's actually in both. I don't have the exact split at my fingertips here, but I'd assume it's pretty proportional. All of our portfolios are seeing some spread compression year after year as the portfolio runs off. I think it's about half. Yeah. It's about half and half between Brighthouse and RemainCo in terms of the split. Going forward, if rates don't come up more, we will continue to see some pressure here. It's why we're taking costs out of the company so that we can react to it and manage the company well going forward.
Okay. All else equal, we can think about $0.04, maybe $0.05 a share on a year-over-year basis, assuming rates don't move.
Yes.
Thank you.
Your next question comes from the line of Seth Weiss from Bank of America. Please go ahead.
Yeah. Hi, thank you. I just want to follow up on corporate and maybe just ask the question explicitly as it relates to guidance. Should we still assume that that $450 million to $650 million loss in corporate, excluding the expense initiatives, is a good guidance number for the full year? Then relatedly, should we assume that $300 million of expense initiatives is also a good run rate for the full year as you guided to in your outlook call?
The range of $450 to $650 was excluding the expense initiatives, Seth. Right now we'd be toward the lower end of that range. Yes, we're still within our UCI guidance generally.
Okay. On Brighthouse, could you give any detail on how much the higher expense build was in the quarter there?
Seth, let me just check on that and I can get back to you in a second.
Okay, great. Thanks a lot.
Your next question comes from the line of Randy Binner from FBR. Please go ahead.
Hey, good morning. Couple quick follow-ups. First, just a John Nadel question. What exactly would be the timing and format of the restated numbers post-spin?
Let me answer the question that Seth had. It was a $15 million pre-tax was the higher cost in the quarter from BHF. We will have more guidance for you early next week. Once the spin is complete, we will have more information coming out for you on that.
Okay. I guess just jumping to pension closeouts, this is a little bit longer-term question, but the activity there is good in the second quarter. Does your attitude or positioning, either strategically or from a financial perspective, change now that Brighthouse is going to be spun out? Does that give you more risk tolerance to do more in the pension closeout area?
Hi. As we've mentioned, when we talk about pension closeouts, we think this is a good growing business, but we actually have an annual capital budget we think on how to allocate to that business. The spinoff of Brighthouse doesn't really affect how we think about that. We like the business, but we only put a certain % of our capital to that each and every year.
Is that something that would be subject to review, or is that kind of the final capital budget there?
I think it's pretty much where we are in it. Of course, we look at it every year, and we think about the opportunities and the margins available in that business versus other margins and other activities. We think we have a good balance today in how we do that business.
Okay. Thank you.
Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my questions. On the third-party asset management side, you mentioned you want to grow it organically and maybe through M&A. Is there any area of either from a product perspective or geographic perspective that you are interested in taking a stab at potential M&A?
Hi, Humphrey. It's Steven Goulart. I think as we've defined the strategy that we're pursuing in third-party asset management, it's pretty clear we're drawing on our core capabilities and strengths, and that really means emphasizing institutional fixed income and real estate asset classes. That's what we've been doing so far. We've grown the business very well on an organic basis, and we've been looking opportunistically on ways to grow it through acquisitions, and that's of course how we resulted in the acquisition of Logan Circle Partners. Again, it really is focused on fixed income assets for institutional clients and real estate. We think that's where our core strengths are for now.
Given you're managing a sizable general account for yourself to begin with, so looking at potential acquisitions, would you be thinking more of a bolt-on type because you don't necessarily need the scale, or do you by any chance have a strong appetite?
As we've looked at acquisitions, there really are three criteria that we look at. One is it has to meet our financial criteria, and Steve talked about that, too. We're very disciplined financially. Anything we look at has to make sense from that perspective. Second, it goes to the strategy. I've outlined the strategy. It really is in institutional fixed income and real estate. When we're looking at those, they tend to be things that go along well with what we're already doing because we do want to try and achieve synergies on the revenue side. There are usually going to be some expense synergies, but we want to be able to grow the business synergistically as well. Third is it has to fit culturally, too. We want to integrate this business.
We don't believe that it should be run separately or businesses should be left outside of what we're trying to do in MetLife Investment Management. As long as it meets those criteria, which I think are hard bars, that's what we're looking for.
Okay. Thank you.
Your final question today comes from the line of Suneet Kamath from Citi. Please go ahead.
Thanks. Just on the Brighthouse mark that you talked about for the third quarter, is that going to be a quarterly event as long as you own these shares?
Yes. It'll be mark-to-market through net income each and every quarter as long as we own the shares. As Steve has said, we've not planned to be long-term holders of these shares.
Sure. Then that $3 billion of cash that's coming back to the U.S. that you talked about earlier, was that contemplated in your free cash flow guidance for 2017, or is that incremental?
It is already free cash flow. It's cash at the holding companies.
Okay.
We have a U.S. holding company and a foreign holding company. Due to the separation, we anticipate and we believe that this part could be brought back to the U.S.
Just relatedly, why would the separation of the U.S. business impact some cash that's sitting outside the U.S.?
It's total capital across the board, and the tax code does allow for such a repatriation with significant separation activities.
Just to be clear, was that number in your holding company cash, since the holding company cash I think includes U.S. holdco and international holdco?
Yes.
It was already in there.
That is correct.
Okay, got it. Thanks.
I'd now like to turn the call back to John Hall for closing comments.
Great. Thanks everyone for joining us, and we'll speak again next quarter. Thank you.
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