Ladies and gentlemen, thank you for standing by. Welcome to the MetLife First 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 the trends in the company's operations and financial results in 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 statement 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 Factor 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, and good morning, everyone. Welcome to MetLife's First 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 on 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 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. 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 participants, 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 first quarter operating earnings per share of $1.41, up from $1.20 per share a year ago. Overall, it was a strong quarter across most business segments, with favorable results from variable investment income, expense management, and underwriting. Equity markets, which rose by 5.5% in the quarter as measured by the S&P 500, created a tailwind for earnings, while low interest rates and a strong U.S. dollar remain as headwinds. Adjusting for notable items, operating earnings were $1.46 per share, which compares to $1.31 per share on the same basis in the prior year period. Net notable items of $0.05 per share in the quarter included higher catastrophe losses, expenses to support our unit cost initiative, a legal settlement, and a Penn Treaty guarantee fund assessment. These were offset in part by a retail life insurance reserve release.
As noted in my annual letter to shareholders, MetLife has a leading position in Group Benefits, with a market share of 25% among large employers. We are also experiencing strong growth in the mid-market and have over 40,000 small employer relationships. While we pioneered this business a century ago, we consider Group Benefits an avenue for future growth and highlighted the segment as one of our growth engines at our November investor day. During the quarter, sales of Group Benefits were up by 29%, with strength across all market segments and product lines. Our national account sales were particularly strong, especially among clients with more than 25,000 employees. We continue to invest in this business to create differentiated customer experiences, supported by strong enabling technology and leading data protection capabilities.
Over the years, our group customers have put their confidence in us because of our financial strength and strong service capabilities. Today, they're also trusting us to protect client privacy in an uncertain world. The macroeconomic environment in the last eight years has affected our business units in different ways. Our group business, for example, is correlated to the health of the U.S. employment market. We have been able to grow premiums and fees in the group business at a compound annual rate to 4.5% over the past five years, despite modest U.S. labor force and wage growth among large employers. All else being equal, a stronger U.S. job market would drive faster growth in our Group Benefits business. I have also made note of our shift away from capital-intensive yen whole life insurance in Japan.
This decision was driven by our requirement for appropriate internal rates of return and payback periods for the products we sell. The shift in our product mix resulted in lower Japanese sales for most of 2016, but we have started to turn the corner. In the first quarter of 2017, Japan sales grew by 8% with strength in foreign currency denominated whole life, as well as accident health products. Although it is too early to declare a trend from a single quarter, we are pleased with the overall direction of our sales transition in Japan. MetLife's net derivative losses in the quarter totaled $602 million. With interest rates ending the first quarter roughly where they started, much of the derivative loss was driven by strength in the U.S. equity markets and costs associated with executing the separation of Brighthouse Financial.
As part of our supplemental disclosure, we have again included an exhibit that details the fair value movements of our derivative portfolio. As promised at meetings with investors throughout the first quarter, we are providing on this call an update on our RemainCo MetLife hedging strategy. We have refreshed our hedging strategy to protect free cash flow from both falling and rising interest rates. This was accomplished through a process that sought to optimize free cash flow while balancing several key statutory, economic and GAAP metrics. While the restructuring of RemainCo hedge program is largely complete, the program is dynamic. We will actively monitor and rebalance when market conditions warrant. John Hill will offer more detail on this topic. Moving to investments. Variable investment income totaled $343 million in the quarter.
Of this amount, $272 million is attributable to RemainCo MetLife, which is above the high end of the quarterly guidance range of $250 million provided on our outlook call in December. Private equity investments were the largest contributor to the outperformance. In addition, hedge fund returns improved significantly from a year ago. In the quarter, our global new money yield stood at 3.34%. This compares to an average roll-off rate of 4.45% over the past four quarters. In the fourth quarter, our new money rate was 3.15%. Low yields continue to pressure the life insurance industry. I would now like to provide an update on our plan to separate a substantial portion of our U.S. retail business. Many of you have asked whether the separation of Brighthouse Financial will still occur in the first half of 2017.
Given the complexity of the transaction, we do not believe we will have the necessary approvals to complete the separation in that time frame. The MetLife and Brighthouse Financial teams continue to work diligently with our regulators on all aspects of the disaffiliation. While we do not have an exact estimate of when that work will be complete, we are hopeful it'll be in the coming months. Operationally, the separation is proceeding on schedule, and we have reached several important milestones. In January, Brighthouse Financial began to operate as an independent entity under MetLife. In March, most significantly, Brighthouse Financial began doing business under its own name. In April, Brighthouse Financial launched its first broadcast advertising campaign called Predictability. You may have seen some of the ads during March Madness, The Masters, or on Squawk Box.
Most recently, we finalized the form of financing for Brighthouse Captive to hold ULSG liabilities. This captive will aid Brighthouse's capital efficiency and reduce statutory capital volatility. Looking ahead, the next regulatory milestone would be the declaration of a hearing date by the Delaware Department of Insurance. We remain confident that the separation will position both companies for success in their respective marketplaces. For MetLife, the separation remains the cornerstone of our transformation to a company with lower market sensitivity and a higher and more sustainable free cash flow ratio. Turning to regulatory matters, I would like to provide a brief update on the government's appeal of the court ruling that rescinded our status as a systemically important financial institution or SIFI.
On April 21st, the Trump administration issued a memorandum directing the Secretary of the Treasury to report within 180 days on the SIFI designation process used by the Financial Stability Oversight Council, or FSOC. On April 24th, MetLife filed a motion in the U.S. Court of Appeals for the District of Columbia Circuit, asking the court to hold appeal in abeyance until that report is complete. As we said in our filing, we believe an abeyance will enable the new administration 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 the appeal. The timing for a ruling on our motion is at the discretion of the Court of Appeals. Before I close, I want to update you on our share repurchase program. During the first quarter, we repurchased $858 million of our common shares.
To date, we have bought back approximately $1.5 billion of our common shares, or roughly half of our $3 billion authorization that we announced in November 2016. We are on track to fully execute this authorization by year-end 2017. With that, I will turn the call over to John to discuss our Q1 financial results in greater detail.
Thank you, Steve, and good morning. Today, I'll cover our first quarter results, including a discussion of our insurance underwriting margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash and capital. In addition to our earnings release and quarterly financial supplement, last evening, we released disclosure labeled 1Q17 supplemental slides that addresses the net derivative loss in the quarter. I will speak to these slides later in my presentation. We will continue to release additional supplemental slides when we have complex elements in a quarter. Operating earnings in the first quarter were $1.5 billion, or $1.41 per share. This quarter included five notable items totaling the negative $61 million that we highlighted in our news release and quarterly financial supplement.
First, unfavorable catastrophe experience, net of prior year development in property and casualty decreased operating earnings by $45 million or $0.04 per share after tax. Second, corporate and other was negatively impacted by a guarantee fund assessment for Penn Treaty insolvency and an increase in litigation reserves, which decreased operating earnings by $44 million or $0.04 per share after tax. Third, expenses related to our unit cost initiative, also in corporate and other, decreased operating earnings by $21 million or $0.02 per share after tax. Fourth, reserve adjustments, primarily resulting from modeling improvements of individual life products, increased operating earnings in MetLife Holdings by $34 million or $0.03 per share after tax. In addition, activity related to separation resulted in an increase to operating earnings of $42 million in MetLife Holdings and an offsetting $42 million decrease to operating earnings in Brighthouse Financial.
Finally, variable investment income was above the company's 2017 quarterly business plan range, excluding Brighthouse Financial, increasing operating earnings by $15 million or $0.01 per share after tax, and the impact of deferred acquisition costs or DAC. Adjusted for all notable items in both periods, operating earnings were up 11% year-over-year and 12% on a constant currency basis. On a per share basis, operating earnings adjusted for all notable items were $1.46, up 11% year-over-year and 12% on a constant currency basis. Turning to our bottom line results. We had first quarter net income of $820 million or $0.75 per share. Net income was $726 million lower than operating earnings, primarily because of net derivative losses of $602 million after tax. For more details about the difference between net income and operating earnings, please reference page three in our supplemental slide disclosure this quarter.
Page four in the supplemental slides shows the attribution of the after-tax derivative loss. As Steve noted, the derivative loss is driven by strength in the U.S. equity market and the repositioning of our hedging strategies. For the total company, the $602 million GAAP derivative net loss included, number one, $402 million or two-thirds of the total for asymmetrical and noneconomic accounting, which included costs to reposition the RemainCo hedges to protect from changes in interest rates on a statutory basis. Number two, $139 million of VA hedge ineffectiveness, primarily in Brighthouse Financial, including the impact of the transition to their new hedging strategy with, number three, the balance of $61 million, largely driven by other risks in VA-embedded derivatives.
The asymmetrical and noneconomic accounting is a recurring feature under U.S. GAAP, as the derivative assets are marked to market, but a significant portion of MetLife's VA and life liabilities are not. As Steve mentioned, we have made significant progress at RemainCo with protecting our statutory capital and thus free cash flow from future changes in interest rates. We have obtained further hedge accounting treatment on a statutory basis and restructured the hedges such that our free cash flow percentage is expected to stay within a 65%-75% band on average over two years with a range of the 10-year treasury rate from 1.5%-4%. As stated in the recently filed Form 10 amendment, Brighthouse Financial has made significant progress in repositioning to its new strategy. This strategy targets hedging to the statutory measurement of CTE 95, while also holding a targeted buffer of $2 billion-$3 billion.
The new hedges protect on the downside using a portion of the buffer but offer upside potential to Brighthouse Financial. Brighthouse Financial believes this new strategy will reduce hedging costs over time and improve statutory results. Brighthouse Financial and MetLife share a common philosophy of preserving free cash flow to the hedging strategies and protecting statutory capital. The circumstances of the companies are a bit different. Brighthouse Financial is hedging to CTE 95. Brighthouse Financial has a greater concentration of variable annuity business than RemainCo, and this capital measure better reflects Brighthouse Financial's business. Since Brighthouse Financial maintains a large capital buffer, it can retain some risk, like a deductible, reducing hedge costs. In contrast, RemainCo has a more diverse business with a lower concentration in variable annuities and no longer writes new variable annuity business in the U.S.
Book value per share, excluding AOCI other than FCTA, was $50.52 as of March 31st, down 5% year-over-year, primarily due to the impact of derivative losses as well as the actual assumption review in the second quarter of 2016. Tangible book value per share was $41.64 as of March 31st, down 6% year-over-year. With respect to first quarter underwriting margins, total company earnings were lower by approximately $0.13 per share versus the prior year quarter after adjusting for notable items in both periods. Underwriting in Brighthouse Financial accounted for approximately $0.10 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 lower by approximately $0.03 per share year-over-year.
This is primarily due to higher claim volumes in Mexico and the impact of a DAC assumption change in the company's Chile pension business, as well as a one-time reserve adjustment in Japan. In the U.S., underwriting results were essentially in line with the prior year quarter. The group life mortality ratio was 86.9%, unfavorable to the prior year quarter of 85.7%, but below the midpoint of the annual target range of 85%-90%. This is the second lowest first quarter mortality ratio for group life in 13 years. Only the first quarter of 2016 was lower. MetLife Holdings interest-adjusted benefit ratio for life products was 48.6% and 53.8% after adjusting for notable items discussed earlier. This result was favorable to the prior year quarter of 56.6% and with the low end of the targeted range of 53%-58%.
Finally, the group non-medical health interest-adjusted benefit ratio was 79.9%, favorable to the prior year quarter of 81.2% and within the 2017 annual target range of 76%-81%. Favorable underwriting results were primarily due to renewal actions in dental and lower new claim severity in disability. Turning to investment margins. The weighted average of the three product spreads presented in our QFS was 165 basis points in the quarter, up 25 basis points year-over-year. Pre-tax variable investment income, or VII, was $343 million, up $178 million versus the prior quarter, driven by stronger private equity and hedge fund performance. Product spreads excluding VII were 129 basis points this quarter, down 2% year-over-year. Lower core yields accounted for most of this decline. Overall, higher investment margins in the quarter accounted for approximately $0.01 of EPS improvement year-over-year.
In regards to expenses, the operating expense ratio was 22.5% and 21.6% after adjusting for the notable items this quarter related to Penn Treaty litigation reserves and the company's unit cost initiative. The ratio was favorable to the prior year quarter of 23.8%, primarily due to the sale of MetLife Premier Client Group and expense efficiencies. Overall, better expense margins contributed approximately $0.08 of EPS improvement versus the prior year quarter. I will now discuss the business highlights in the quarter. Group Benefits reported operating earnings of $194 million, up 37% and 34% adjusting for notable items in both quarters. The primary drivers were favorable expense margins and strong non-medical health underwriting results. Group Benefits operating PFOs were $4.3 billion, up 5% year-over-year, driven by growth across all markets.
This is at the high end of our guidance of 3%-5%, which excluded the loss of one large dental contract, which will occur in the second quarter. Group Benefits sales were up 29% with growth across all markets. We saw 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 $280 million, up 16%, but down 1% after adjusting for notable items in both quarters due to less favorable underwriting. RIS operating PFOs were $479 million, essentially unchanged year- over- year. While 1Q tends to be the seasonally weakest for PRT transactions, we continue to see a good PRT pipeline, and we 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 and Casualty, or P&C, operating earnings were at $29 million, up 32%, but down 3% after adjusting for notable items in both quarters. Elevated Catastrophe losses net of prior year development reduced operating earnings by $45 million in both quarters. Nearly half of these cats were due to hailstorm activity in northern Texas. We have taken steps to address this, and as a result of our homeowner policy count in this area has declined 18% year- over- year. We expect that pace of decline will accelerate through additional rate increases and management actions. Our P&C combined ratio, excluding CATs and prior year development, was 89.8%, modestly better than the prior year quarter of 90.0%.
We continue to see improvement in our non-CAT auto results, which posted a combined ratio excluding CATs and prior year development of 97.2%, well below the 100.7% in the prior year quarter. Lower auto claim frequency was partially offset by higher severity as repair costs continue to increase on technology-laden vehicles. We've been taking targeted rate increases in auto over the last 12 months of 7%-8% and expect to take similar rate actions in the immediate future. P&C operating PFOs were $875 million, down 1% year -over- year. Overall, P&C sales are down 5% due to price increases and management actions to drive value. Turning to Asia. Operating earnings were $295 million, down 3% from the prior year quarter and 4% on a constant currency basis after adjusting for notable items in both quarters.
Volume growth and lower expenses were offset by higher reserves and taxes due to the change in the Japan effective tax rate. Asia operating PFOs were $2.1 billion, up 3% and up 1% on a constant currency basis. PFOs, including the joint ventures at ownership, was up 3% on a constant currency basis. Asia sales were up 35% on a constant currency basis. In Japan, sales were up 8%, driven by foreign currency life and accident health growth. Other Asia sales were up 89%, representing good growth in all markets, driven particularly by China, with the growth of our protection business through our professional agency channel, as well as a large group case in Australia. Latin America reported operating earnings of $143 million, down 5% and down 8% on a constant currency basis after adjusting for notable items in both quarters.
The key drivers were less favorable underwriting due to higher claims in Mexico and the impact of an assumption change in the company's Chile pension business. Favorable market impacts due to better yields in Mexico and in CAHE, as well as volume growth, were partial offsets. Latin America operating PFOs were $916 million, up 5% and 6% on a constant currency basis. Total sales for the region were up 3% on a constant currency basis, driven by strong employee benefit sales, partially offset by lower pension sales in Mexico. EMEA operating earnings were $75 million, up 19% and 34% on a constant currency basis. The key drivers were favorable expense margins and volume growth. While unit cost improvement is ahead of plan, a meaningful portion of the year-over-year decline in expenses is related to timing and favorable items that are not expected to repeat in subsequent quarters.
EMEA operating PFOs were $614 million, essentially unchanged from the prior year period, but up 5% on a constant currency basis, driven by growth in Turkey as well as employee benefits in the U.K. and Egypt. Total EMEA sales increased 4% on a constant currency basis. We continue to see a favorable shift toward higher margin products in the region. MetLife Holdings, which primarily consists of our legacy retail and long-term care runoff businesses, reported operating earnings of $385 million, up 44% and up 12% adjusting for notable items in both periods. The key drivers were improved underwriting and market results. MetLife Holdings operating PFOs were $1.5 billion, down 8% mostly due to the sale of MetLife Premier Client Group, which included the company's affiliated broker-dealer unit. As previously guided, we expect operating PFOs to decline by approximately 12% in 2017 versus 2016.
Corporate and other had an operating loss of $99 million compared to an operating loss of $190 million in the first quarter of 2016. Adjusting for notable items in the current period, the operating loss was $30 million. This unusually low quarterly loss for corporate and other is primarily due to the incremental tax benefit of $151 million reflected in the earnings by source table at the bottom of page 28 in the QFS. The incremental tax benefit is required by GAAP accounting rules to adjust the company's overall consolidated quarterly tax rate to equal the company's annual projected effective tax rate. As a result, it enables the consolidated tax rate to be consistent period over period, yet causes corporate and other to fluctuate on a quarterly basis.
As for the company's effective tax rate, we expect it to be between 21%-22% for 2017, down from 23% as previously guided. The primary reason is the benefit of non-U.S. operation at rates lower than the U.S. tax rate of 35%. Brighthouse Financial operating earnings were $244 million, down 25% and 17% after adjusting for notable items in both quarters. The key drivers of the earnings decline primarily related to the previously mentioned unfavorable underwriting, including $39 million from the loss of the aggregation benefit and $10 million from the previously discussed 2Q16 modeling changes. 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.
Brighthouse Financial PFOs were $1.1 billion, compared to $1.3 billion in the first quarter of 2016. Overall, annuity sales were down 35%, and life sales were down 54%, mostly resulting from the suspension of sales through one distributor and lower sales to the MetLife Premier Client Group. Sales of the company's index-linked annuity product, Shield Level Selector, remained strong in the first quarter 2017 at $455 million, up 25% year-over-year. I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $3.8 billion at March 31st, which is down from $5.8 billion at December 31st. This decrease reflects the net effects of share repurchases, payment of our quarterly common dividend, and other holding company expenses.
Please note that first quarter cash at the holding companies include minimal dividends from our operating subsidiaries, and we expect operating subsidiary dividends to increase in the second quarter. Consistent with our prior guidance, we expect MetLife to receive between $3.3 billion-$3.8 billion in dividends from Brighthouse Financial prior to separation, subject to regulatory approvals. Next, I would like to provide you with an update on our capital position. Our combined risk-based capital ratio for our principal U.S. insurance companies, excluding Alico, was 465% on an NAIC basis at year-end 2016. For our U.S. companies, preliminary first quarter statutory results were operating earnings of approximately $870 million and a net loss of $107 million. Statutory operating earnings were up 18% from the prior year quarter, primarily due to favorable underwriting and lower operating expenses. The net loss was primarily the result of losses on derivatives.
We estimate that our total U.S. statutory adjusted capital was approximately $24.1 billion as of March 31st, down 2% from $24.6 billion at December 31st. The decrease in statutory capital was driven by Brighthouse Financial, with total adjusted capital, or TAC, reduced by $1.2 billion. This drop was a function of certain restructuring transactions of the separation, which caused VA reserves to be less responsive to equity markets in the quarter. Several restructuring and capitalization actions are expected to occur prior to the separation, which positively impact TAC. Many of these have been completed in the month of April. As a result, Brighthouse Financial combined TAC has increased by approximately $1.5 billion since quarter end.
On a pro forma basis as of March 31st, 2017, after giving effect to all restructuring and separation-related transactions, including those in April, we continue to estimate a buffer of approximately $2.1 billion above CTE 95. This will result in a combined pro forma RBC ratio for Brighthouse Financial of approximately 650% as of March 31st, 2017. Further details will be included in the next amendment to the Form 10, which we expect to file in May. For Japan, our solvency margin ratio was 909% as of December 31st, which is the latest public data. Overall, MetLife had a strong first quarter in 2017, highlighted by favorable impacts from equity markets, lower expenses, and solid underwriting in the U.S. Top line growth was particularly strong, with sales up 15% year-over-year for MetLife as a whole and 21% for MetLife on a post-separation basis.
GAAP net income was negatively impacted by net derivative losses, two-thirds of which were asymmetrical and noneconomic. 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 improvement in 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 Thomas Gallagher from Evercore. Please go ahead.
Good morning. Steve, just a question on the separation. You mentioned the complexity that may delay the timing. Just a question on that. Do you still feel confident in the structure of the transaction in terms of the dividends, the capital for each business, or do you see the delay being more administrative complexity?
Hi, Tom. Nothing changes in terms of our expectations other than the timing, the timing is, I used the word months, I didn't use the word quarters. It is a complex transaction. We are working closely with our regulator. There's a lot of information to impart. We are working very diligently in providing the information as fast as humanly possible, but it is a large volume of information and analysis that is going on. That's what's resulted in the expected delay from what our initial thought was, which was made many months ago, many quarters ago, in terms of expectation around timing. Once you get into these transactions and you see the complexity associated with them, you see what occurs in terms of amount of work that has to get done to make sure that everything is detailed appropriately and analyzed appropriately.
Okay. Thanks. That's helpful. Just a question on expenses to make sure I have my head wrapped around these. John, if I'm understanding the flow of the strategic expenses for RemainCo, that would imply you still have another $260 million-$270 million left for the balance of the year that would come through operating and corporate. That was my first question on expenses. Also on Brighthouse, I just want to get a sense for how much of the kind of annualized $200 million increase in expenses this year is embedded in the 1Q result.
The answer to your first question is yes. That's what you would expect for the year. Could you say the second question again? I didn't quite get that.
Yeah. In the Form 10, it indicates Brighthouse expenses are expected to go up $200 million in 2017 versus 2016 levels. I just want to understand how much of that planned increase is embedded in the 1Q number. Is any of that or is it a small amount? Just some indication of how much is in the 1Q number.
Probably about $30 million of that is in Q1.
$30 million on an annualized basis?
No, $30 million in the quarter. It's 200-
In the quarter building to like $50 million quarterly run rate.
Yeah.
Okay. A little more than half. Thank you.
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hi. Thanks. Good morning. My first question was in regards to the changes you made to the derivatives program. Should we expect any impact to your ongoing benefits from some of the low interest rate hedges that would have been coming through operating earnings?
There's not a material change to the benefit that we get from those hedges. Of course, rates are higher now, so we get less benefit, but those are still essentially there.
Okay. No material change other than just interest rates moving. Just secondly, coming to the year you had guided to $450 million-$650 million of corporate losses excluding the expense initiative costs. Does that outlook change now that you've lowered your consolidated tax rate outlook?
We expect still to be within that range. We do expect the lower tax rate for the year now.
Okay. All right. Thank you.
Your next question comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead.
Hi, good morning. First just had a question on the derivatives losses. Obviously, the derivatives loss declined significantly from 4Q but was still relatively large. I was a little surprised with the loss in interest rates in that rates were generally flat or lower depending on which part of the curve you look at. Just wondering what caused that. Was that related to sales of some of the hedge positions or something else? How the GAAP loss on the hedging program affected yours or whether it had any effect on stat capital.
There's a few things going on, Jimmy. First is, although the 10-year Treasury dropped a little or almost flat quarter-over-quarter, swap rates are up a little bit. Some noise from that. That's asymmetrical and noneconomic, but you get the GAAP noise from that. You also had some strong equity markets in the quarter, and you get some GAAP noise from that as well. We also, as we pointed out, had some hedge ineffectiveness in the quarter, and that impacted the total GAAP net income.
Just in terms of the changes you implemented, I'm assuming you changed from swaps to swaptions as you had discussed before, but is that correct? If you can discuss some of the other changes that you've made and whether you've changed the size of the hedge program, whether it made it bigger or smaller.
We actually did a variety of things. We were able to get some more statutory hedge accounting for some types of derivatives by changing their technique and structure. We did move a few different instruments like that. We have accomplished our primary goal of making stat capital for RemainCo less sensitive to changes in interest rates. As you can see from the numbers and the breakouts, RemainCo has less sensitivity across the board. In terms of equities, it is relatively insensitive. There's always movements. Every time you look at these results every quarter, there's a lot going on in a quarter when you have derivatives as well as variable annuities. There's the time decay of the derivatives. There's the aging of the portfolio, your basis risk, or otherwise known as VA hedge ineffectiveness. All these get grouped together.
There are sensitivities going up and down. We minimize that, but there will always be some movement here due to all of these factors.
Lastly, just you mentioned the strong sales in Japan, I think up 8%. To what extent do you view this as sort of a turn in your sales since the results have been pretty weak the last few quarters versus maybe some front selling related to the discount rate changes that are going into effect in the second quarter?
Let me take that. Christopher Townsend here. Japan sales were up 8% year-on-year, this is driven primarily by foreign currency life sale growth that were up 51%. As you know, we made that shift from yen life to foreign currency life at the end of 2015, beginning of 2016. We also had very strong growth in the A&H sector, which was up 6%. The foreign currency business now makes up about 70% of our total life sales, and we think that's fairly consistent as a mix going forward. As a number of our competitors have pulled yen life products and changed pricing following that reserve discount rate change, we're seeing customers and agents being pushed much towards the foreign currency life products, and we're very well positioned to provide those given the breadth of distribution we've got.
We see that as a fairly consistent theme. We probably did benefit from a ramp-up in the A&H sales pre-repricing of some particular products where we've repriced in April. As you know, following that reserve discount rate and the sort of financial year-end, you'll expect sales in the third sector to fall off in the second quarter. Overall, we're very comfortable in terms of Japan sales. It's too early to sort of lift our guidance for third sector at the moment.
Thank you.
Your next question comes from the line of Erik Bass from Autonomous. Please go ahead.
Hi. Thank you. In Group Benefits, can you just talk about the competitive environment and where you're seeing the best opportunities? Given relatively strong industry results in recent quarters, have you seen any uptick in price competition?
Hi, this is Maria Morris. First of all, I just want to say we were very pleased with our group sales results in 2017. It's a competitive market, as you know, it's always competitive. Having said that, I'd say that life and disability has been rational. We've seen a little bit more of an intense competition in dental, especially down market. Overall, we feel very comfortable with the market that we are in. You probably saw that we had strong growth and strong persistency. We've been able to get our renewal actions, overall, it's been a rational market.
Got it. Then one thing to clarify, just on the pace of buybacks, should we expect it to slow at all until you receive the dividend payment from Brighthouse? I'm assuming that $3.3 billion-$3.8 billion is contingent on the transaction being approved. I guess also, are there any restrictions to your being in the market around the time of the transaction?
No, we don't anticipate any change in the program that we put in place. Between our existing cash reserves and earnings, we believe we're on track for the program being completed by 2017.
Got it. Okay. Thank you.
Your next question comes from the line of Sean Dargan from Wells Fargo. Please go ahead.
Thank you. Just to follow up on Erik's question around the share repurchase, as I understand it, there was kind of a bright line test that RBC couldn't fall below 400%, and it sounds like whatever happened with hedge losses in the first quarter didn't bring you close to that. Is that 400% applied to the statutory entities related to RemainCo or all of the current MetLife?
Well, RBC is only measured once a year. We work off of long-term projections. We always knew that there's a lot of pluses and minuses as you do this restructuring, unwinding reinsurance transactions, you see the pieces moving back and forth. The Brighthouse 10 of RBC, we haven't done the debt infusion yet from that. There's a lot of moving pieces here, and you have to take that into account. We're strongly capitalized across the board for all of our businesses.
Okay. Great. Thanks. Just on MetLife Holdings, the results were stronger on a normalized basis than I would've thought. Broadly speaking, should we think that in quarters in which you see favorable equity market performance, that MetLife Holdings will not run off as quickly as you've guided to?
Well, there is a block of VAs in MetLife Holdings. Favorable equity markets, you get better fees on an ongoing basis, and that will continue to be one of the factors.
Okay. Thank you.
Your next question comes from the line of John Nadel from Credit Suisse. Please go ahead.
Thank you. Good morning. A question about the group insurance business. Steve, it's been a long time since I can remember you sort of starting off the conference call talking about or highlighting that business. Given your size and scale there, particularly at the large case market, is there anything beyond further economies of scale that you think you could gain from a large acquisition within that business line? Relatedly, why do you think you're seeing more success, particularly in the jumbo case market? Has competition declined there, or have you just gotten a bit more aggressive?
John, as to the first part of your question, we always look at any opportunities out there in the marketplace. The group business is one in which we have a very favorable view going forward. It's been a strong part of our company for many decades. If there's opportunities in the marketplace to make an accretive acquisition, we certainly are going to be quite interested in looking at that. Maria, do you want to hit the second part of the question?
Sure. In terms of where we've been investing in group insurance, I think we're seeing the benefits of our investment in our growth. As an example, we've been investing in our voluntary benefit platform. We're seeing large groups as well as medium-sized groups really gravitate toward carriers, both for their core benefit programs and to offer voluntary benefits to their employees toward a carrier like MetLife, where we're in a position to do that. We've talked historically about benefiting, as an example, from the exchanges where we're, in some cases, the only non-medical carrier on the health exchanges. I'd say going forward, the other place we really put investments is in our ability to ensure that employee records are secure. A lot of work in our security platforms.
That's been very helpful up market as we've looked to bring on new group life and disability business as well.
Maria, is it fair to say that when you talk about really strong growth in sales at the jumbo case market, that a good chunk of that is actually voluntary, not employer paid?
It's actually both. I would say that we've had a very strong sales quarter up and down the market. Double-digit growth in the jumbo market. We've had high single-digit growth in the regional market. As you know, small market is actually not seasonally first quarter focused, but even there we've had strong growth. We've had growth in both our core business and our voluntary business. Our voluntary business is up double digits from a sales perspective. Overall, a very strong sales quarter for group.
Thank you. A question for John on the change in the hedging strategy implemented at both Brighthouse and RemainCo. Can you give us some sense as to the duration of the program that you've put in place now, and how often some of these hedges need to roll? I'm just trying to understand how the new instruments compare with some of the older hedges, I'm not sure if you even still have them, that had extended into the 2020s.
On RemainCo, the duration is about the same, and it's basically some longer-term hedges mainly in that. Brighthouse is like a one to three-year type restructuring of hedges that they're doing. They've made significant progress to get their hedging done now. If you think about future sensitivities, we point out, look at the Form 10 that was recently published. The sensitivity to VA as well as ULSG in there, and you can see both on a stat and a GAAP basis, what the expected sensitivity should be going forward.
No, I understand that that disclosure is there. I was just trying to understand duration, and maybe the risk of having to roll.
For Brighthouse, it's about one to three years.
Thank you.
Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.
Thanks. Just wanted to start with the stat capital. I guess it was down about $1 billion from year-end, despite not taking any dividends out. John, can you just walk through the mechanics in terms of why the capital was down?
It was only down $500 million from $24.6 billion to $24.1 billion. As I said, most of that is Brighthouse Financial. They had some of the restructuring cause less sensitivity to the reserves. The total CTE 95, which is what they're really hedging to in their strategy, is still at the buffer when we take into account all the transactions that will happen, so on a pro forma basis. As of March 31st, you're seeing partway through the restructuring and all the steps that have to happen. You're seeing this as sort of the low point, and as I said in my script, it's up significantly from March 31st, and there'll be a whole series of further transactions that have to happen to get there.
We gave you sort of the pro forma view of it, and they expect to be like a 650 RBC pro forma for all that as if all that had happened as of March 31.
Okay. Just another question on the updated Form 10. Two of the changes were that the debt to capital at Brighthouse is now going to be 25%, the CTE95 buffer has gone from, I guess, around $2 billion-$3 billion. Can you just discuss what drove those two changes?
The first Form 10, all the calculations, the values, as well as all the core assumptions and projections were all done as of June 30th last year. The updated Form 10 is as of December 31st. Things change a lot between June 30th and December 31st. There's a series of changes, and I think Brighthouse will be a dynamic company in how they manage their business. That's the reason for that. Still strongly capitalized and will provide good value over time to shareholders.
Okay, just one last clarification question, if I could, on the 9% ROE target for Brighthouse. Is that the guidance for sort of out of the gate, or is that more of a longer-term expectation?
I think what happens with Brighthouse is for the next little while, it is about that type of range because of just how kind of GAAP works. Their key focus is to build up over time to reduce the hedging cost to start getting cash out of the company. That's the key focus is to run it mainly on a statutory basis.
Okay, thanks.
Your final question today comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning, and thank you for taking my question. Just to follow up on John Nadel's question regarding kind of your appetite for group market acquisition. Given your capital position, what size of a transaction would you be more comfortable in doing it without kind of seeking external capital?
Hi, Humphrey. Well, first of all, we certainly will have some capital and reserve for acquisitions.
Please remember that we do acquisitions that are of larger size, like the Travelers deal back in 2005, the Alico deal in 2010. We would access the capital markets for any funds necessary above and beyond what we hold at the holding company. It's just important to reiterate our philosophy on acquisitions. They have to make sense strategically in terms of what we are planning for the company going forward in direction and businesses we want to be in. Second of all, they have to be accretive for our shareholders and create shareholder value. They have to earn more than their cost of capital. At any point in time when there's an acquisition opportunity, we look at the capital markets, what it would cost us to raise capital, and what kinds of returns we'd expect from an acquisition, including synergies.
We make a determination in terms of what we're willing to pay for that business.
Got it. Then just a housekeeping question. Do you have any updates regarding the dividend stopper in some of your debt clause right now?
Well, we do not believe that this will be a factor going forward. We have steps that we can take if we need to adjust for this. That's something that we've been planning for if we need to execute it.
Got it. Thank you.
At this time, there are no further questions. I'll now turn the call back over to Mr. Hall.
Thank you, everybody, and we'll talk to you throughout the quarter. Goodbye.
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