Ladies and gentlemen, thank you for standing by, and welcome to the MetLife 2016 Outlook Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results and the businesses 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, and 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. Welcome to MetLife's Year-End Outlook Call. Presentation materials for this discussion are currently available at metlife.com through a link on the investor relations website. To allow you more time to digest these materials, they were filed with the SEC and posted to our website last night just after 4:00 P.M. The Romanette pages starting on page three are required by the SEC and include a cautionary statement on forward-looking and non-GAAP financial information. This governs the forward-looking statements made on today's call. As the statement notes, actual results might differ materially from the projected results we will be discussing today. For a discussion of the factors that could cause actual results to differ, please see the risk factors in our 10-K and 10-Q reports filed with the SEC. Let me remind you that we will be using non-GAAP financial measures on today's call.
Explanations on how we calculate these measures, the reasons we believe they are useful, as well as reconciliations to the most directly comparable GAAP measures, are presented on the Romanette pages immediately after the safe harbor statement. I'm going to start with our agenda on page four. We'll begin the call with opening remarks from Steve Kandarian, MetLife's Chairman, President, and Chief Executive Officer. Following Steve, business outlooks will be provided by Maria Morris for the U.S. business, Chris Townsend for Asia, Oscar Schmidt for Latin America, Michel Khalaf for Europe, Middle East, and Africa, and Frank Cassandra for MetLife Holdings. After the business discussions, John McCallion, MetLife's Chief Financial Officer, will provide a financial update. Among other topics, John will discuss operating earnings sensitivities related to interest rates, variable investment income, corporate and other expenses, and our income tax rate. We will follow with Q&A.
Please remember to limit yourself to one question and one follow-up. Now to Steve.
Good morning, everyone, and thank you for participating in MetLife's Outlook Call. It was only a month ago that we hosted our Investor Day. We spoke about the transformation underway at MetLife and how it will create value for our customers and shareholders. We shared with you the actions we are taking as part of Accelerating Value to boost our capacity to generate sustainable free cash flow. We highlighted the discipline we are using to ensure we allocate the right amount of capital at the right risk-adjusted return with the right payback period. As a management team, we are committed to making the appropriate trade-offs between growth and cash. During periods where good growth opportunities are scarce, cash return will be relatively higher. When we can find good growth opportunities, those with high IRRs, low capital intensity, and strong cash generation, near-term cash return will be relatively lower.
For 2017 and 2018, we expect to generate an average ratio of free cash flow to operating earnings of 65%-75%. Our free cash flow ratio, which can be lumpy, has moved up over time as a direct result of the actions we have taken to reshape our business. As we have said many times, we believe excess capital belongs to our shareholders and should be used to pay common dividends, repurchase shares, or make acquisitions that clear a risk-adjusted hurdle rate. During the fourth quarter of 2016, we have already returned $648 million to shareholders. We paid our quarterly common dividend of $440 million, and through yesterday, we have repurchased $208 million of our common shares in conjunction with a $3 billion authorization we announced in November.
While we believe the economics of our business are best reflected by cash, we calculate our free cash flow yield using operating earnings as a basis. With that in mind, today's call is intended to help you better model our operating earnings over a multi-year period. Consistent with our long-standing commitment to transparency, today's call will include a discussion by business of certain key sensitivities, as well as our near-term outlook for other key drivers of earnings. We view 2017 as a transition year, during which we will focus on executing the separation of Brighthouse Financial and making critical investments to drive efficiency. While this will put downward pressure on earnings next year, we expect earnings to grow for post-separation MetLife in 2018, driven by both business growth and expense discipline. Similar to Investor Day, the call will speak only to post-separation MetLife.
We are not permitted to provide information related to Brighthouse Financial beyond our Form 10 filing with the Securities and Exchange Commission. While we are focusing today on the financial outlook for MetLife, I also want to provide some brief remarks on the policy and regulatory outlook since they are critical to assessing the business prospects of life insurance companies. During our November 3rd quarterly earnings call, I observed that the world had become too dependent on accommodative monetary policy to solve its economic challenges. To spur greater economic activity and job growth, I recommended that policymakers adopt pro-growth tax reform, targeted infrastructure spending increases, and sensible regulatory relief. Five days later, the U.S. election shifted the debate in Washington. The incoming Trump administration has sent positive signals about pro-growth tax reform, increased infrastructure spending, and sensible regulatory relief.
The optimism this has fostered can be seen in a 74 basis points increase in the 10-year Treasury rate since Election Day. The stock prices of the largest life insurance companies have also rallied on the belief that regulation will be better balanced against the goals of spurring growth and providing affordable financial protection to consumers. While it's still early days and more details from Congress and the incoming Trump administration are needed, early indications are encouraging. With that, I will turn the call over to Maria Morris.
Thank you, Steve, and good morning. Today, I will discuss our U.S. businesses, which include Group Benefits, Retirement and Income Solutions, and Property and Casualty. We have leading positions within each of these markets and are targeting growth in the highest value segments. For each business, I will review baseline operating earnings for the last four quarters, key sensitivities, and near-term guidance on certain key items. Let me start with the Group Benefits business on slide eight. There are a few changes to this segment from last year. Group Benefits now includes our individual disability insurance business, while our Group Property and Casualty business is now part of P&C, and our long-term care business is now included in MetLife Holdings. For Group Benefits, baseline operating earnings over the last four quarters were $663 million.
On slide nine, you see the annual operating earnings impact of a one point change in our key underwriting ratios. These sensitivities are close to last year's guidance. Moving to near-term guidance, Group Benefits continues to be an important growth and value creation engine for the U.S. Our leading share in the large employer market will enable continued growth with our existing customers through new product offerings and increased employee elections of voluntary benefits. We also continue to see solid growth in the midsize and small markets. We expect to grow faster than the market at about 3%-5%. We expect our growth in 2017 to be tempered as a result of the loss of a large contract where we held firm on pricing. The expected group life mortality range has not changed. We have adjusted the expected group non-medical health range to reflect the change in business mix.
We have removed long-term care from the segment and added individual disability insurance. As we have shared previously, both of these ranges are annual and subject to some seasonality, typically highest in the first quarter. I will now turn to Retirement and Income Solutions segments on slide 10. It is worth noting that RIS previously included a legacy block of business that is now part of Brighthouse Financial. This block represented approximately $200 million in operating earnings. RIS had baseline operating earnings of $1.1 billion during the past four quarters. Reported notable items included an adjustment for variable investment income below plan and a reserve increase resulting from our annual actuarial assumption review. On slide 11, you see the key sensitivities to the Retirement and Income Solutions segment. Each $1 billion of pension risk transfer sales is expected to generate $6 million-$7 million in annual post-tax operating earnings.
The asset portfolios supporting RIS liabilities are managed as duration matched. Interest rate sensitivity is limited. We estimate a 10 basis point change in LIBOR with other rates unchanged would have a $5 million-$10 million impact on operating earnings. For example, a 10 basis point increase in LIBOR would reduce operating earnings by $5 million-$10 million. In the near term, we continue to see a solid pipeline in the pension risk transfer market. We will be selective in the cases we choose to pursue as we look to balance growth with efficient use of capital. We anticipate general account liabilities to grow up to 2%, driven by modest growth across all product segments in RIS. We do anticipate spread compression to have an impact on operating earnings for the next few years, and we anticipate lower income from variable asset classes.
We expect investment interest spread to be within a range of 115-140 basis points, with 15-30 basis points coming from variable investment income. I will now move on to Property & Casualty on slide 12. This segment combines both the Group and Retail P&C businesses that had previously been reported separately in other segments. Here you see baseline operating earnings of $185 million during the past four quarters. As we have discussed in recent quarters, pressure in our auto line has contributed to a 29% decline from the same period last year. Turning to slide 13 and the key sensitivities, we expect the combined ratio for the aggregated P&C business to be largely the same as prior years. We are also providing the details for auto and homeowners and other.
Looking at near-term guidance, we have been making substantial investments to provide auto and home products through a completely digital experience from quote to claims management. This aligns with our initiative to bring down unit costs. Replatforming our P&C business and expanding our product offerings will fuel growth in 2018 and 2019. The overall expected P&C combined ratio range reflects anticipated improvements in the auto line, driven in by targeted rate increases and other management actions. We expect the impact of these actions will bring the results into the upper end of the range in 2017, with further improvement in 2018. As a reminder, these are annual ranges subject to seasonality. That wraps up the three businesses that form our U.S. segment. I'd like to turn the presentation over to my colleague, Chris Townsend, head of Asia.
Thank you, Maria R. Morris, and good morning, everyone. I'm pleased to report that Asia continues to deliver good performance through quarter three of 2016, guided by a successful enterprise strategy. The overall growth expectations in Asia remain positive due to favorable macroeconomic and demographic shifts, coupled with low insurance penetration. We have a well-positioned franchise across the region, and we're mitigating our risks whilst investing in and deploying the right capabilities to the most attractive customer segments. Let me give you some details on our earnings. Slide 15 shows our reported operating earnings for the past four quarters. As you can see from this slide, after adjusting for the notable items previously disclosed, and one noteworthy item which we consider to be a one-time benefit, baseline earnings are $1.3 billion, which is in line with our guidance of $310 million ±5% per quarter.
Behind these headline numbers are important management actions that are shifting us to growth in cash and value, which I'll talk a bit about in my last slide. Moving to a quick look at the geographical breakdown of our earnings. Slide 16 shows that Japan continues to account for the majority of our estimated earnings in 2016. If we take a step back, you'll remember that we took early action in Japan ahead of the Bank of Japan's negative interest rate policy to optimize our product portfolio, and we're now a leader in foreign currency life, which is a higher value product than yen life, given the current interest rate environment. As a result, you can see in this slide the shift in the currency composition of our earnings reflecting these management actions to deliver more value.
Looking at the rest of Asia, growth continues to outpace that of Japan and remains on track in contribution to around 20% by 2019. This leads me to the sensitivities and our near-term guidance. Slide 17, in terms of key sensitivities, I'd just like to highlight that we'll have little to no sensitivity to FX on our solvency margin ratio, and the sensitivity of our operating earnings to interest rate remains stable, and we'll continue to actively manage our interest rate risk and currency exposure. Moving to guidance, our near-term view remains consistent. Specifically, we expect a few factors to impact 2017. Sales and PFOs will be impacted by a continuing shift to value, particularly in Japan and Korea.
As a result, on a constant currency basis, we expect that growth should be in the low single digits, although we anticipate sales and PFOs in the rest of Asia to be significantly stronger. Earnings growth will be negatively affected by approximately $100 million, which includes the impact of a change in Japan's effective tax rate to 35%. However, we do expect earnings and sales to return to high single digit growth in the outer years on a constant currency basis as a result of strong underlying business growth, supported by a continuing focus on the key differentiators of digital, health, data analytics, and innovation. Finally, in line with the enterprise, growth in dividends is a primary focus, and last year we confirmed that Japan was on track to deliver 50% of the operating earnings in the near term.
We are pleased now to update our guidance with dividends from total Asia expected to exceed 50% of the operating earnings starting in 2017. Dividends are based on local statutory earnings and could obviously be volatile. This is a clear validation of the actions we've been taking to reduce capital strain, to shorten payback periods, and to reduce interest rate sensitivity right across the portfolio. In closing, let me reinforce that we're focused on the right markets, that we're building clear differentiators, and that we have and will continue to make the right investments to deliver shareholder value. With that, I'll hand over to my colleague, Oscar Schmidt.
Thank you, Chris, and good morning, everyone. This morning I will cover baseline earnings for the last four quarters, key sensitivities for LatAm, and near-term guidance on certain key items for Latin America. As we said before, MetLife in Latin America holds a clear leadership position as the largest life insurance in LatAm, measured in written premium. MetLife LatAm has been a very positive growth story with a strong track record of earnings, ROE, and cash flows. On slide 19, we show our trailing four quarters of operating earnings for LatAm. We reported $579 million in the last four quarters, reflecting strong currency growth and improving investment yields over the past 12 months despite weaker currency. We reported $21 million of notable tax adjustments.
In addition, we have some small notable items related to our tax return review reported in the third quarter earnings call and from variable investment income throughout the trading period. All-in-all items of $11 million reflect some additional continuing tax items, which brings you to baseline operating earnings of $569 million. Going into slide 20, I'll cover our key sensitivities and near-term guidance. Sensitivities reflect the impact of a one percentage point change in the Mexican and Chilean pesos and the Provida encaje return. They are similar to last year. However, the sensitivity to the Mexican peso is now lower due to lower baseline earnings from Mexico at current exchange rates. The current macroeconomic environment in LatAm is dampening our near-term revenue and earnings growth expectations by a couple of percentage points.
As a result, we expect high single-digit annual growth in operating PFOs and operating earnings on a constant currency basis. However, short-term investments in business growth will be adversely impacting earnings by two or three percentage points. There have been recent demonstrations in Chile regarding the country's pension system. We're evaluating the potential impact this may have on our business. While it's hard to predict how the situation continues to evolve, at this stage, we believe the impact could be as high as a high percent of LatAm's earnings. Baseline operating earnings at current exchange rates could be approximately 10% lower, primarily due to the Mexican peso deterioration. Finally, we expect to return 80% of operating earnings to the holding company as dividends, continuing our strong track record of cash generation. With that, let me hand over to my colleague, Michel Khalaf.
Thank you, Oscar, and good morning, everyone. It is my pleasure to provide an update on the near-term outlook for EMEA, a region that will remain a growth engine for MetLife. We have deployed a legal entity structure in Europe, which consists of a hub and spoke model with most of our European businesses as branches of our Irish entity, and we hold leading positions in several growth markets in the Middle East. We project meaningful margin expansion from operating leverage and our unit cost improvement program. We also anticipate the continuation of substantial dividends up to the holding companies. The favorable dividend outlook is the result of high marginal returns on capital and the release of excess capital in certain geographies. Turning to slide 22, I will begin with a discussion of earnings. Reported and baseline operating earnings were $255 million for the 12 months ended September 2016.
Baseline operating earnings increased 11% despite strength in the U.S. dollar and were up 22% on a constant currency basis. I am pleased with our performance since last year's outlook call, especially considering political, economic, and regulatory headwinds in the region. On slide 23, you will see some of the key sensitivities for EMEA earnings. Our geographic diversity remains a source of strength. The Middle East and Africa account for approximately 40% of earnings, with the entirety sourced by emerging markets. Europe accounts for approximately 60% of earnings, with growth driven by a combination of emerging markets and niche strategies in developed markets. In certain markets in Europe, we have adjusted our strategy to counteract political, regulatory, and market headwinds with a lot of attention paid to releasing excess capital.
As illustrated by the next sensitivity, the sale of capital-efficient, protection-oriented products will be the primary driver of the EMEA growth story. During the next three years, we anticipate that the combination of employee benefits and accident and health will account for more than 80% of EMEA's total earnings growth. Finally, we quantify our largest currency exposures. EMEA earnings are primarily sensitive to fluctuations in the EUR as well as the GBP, TRY, and PLN. Currency has reduced earnings growth in 2016, and we expect the dollar to continue to strengthen against our basket of currencies. While not one of our largest exposures, the recent meaningful devaluation of the EGP will have a negative impact on earnings growth. Now let me turn to our near-term financial outlook.
Our expectations for sales, PFOs, and earnings are tempered versus last year, primarily due to market uncertainty in the U.K. As you may recall, we talked about an opportunity in the U.K. retirement market on last year's outlook call. However, with Brexit and the associated drop and subsequent volatility in interest rates, the retirement market outlook has become more uncertain. While we are cautious about the sales outlook in the U.K. retirement market, we continue to see good sales growth opportunities for the balance of EMEA. To illustrate, while we anticipate roughly flat sales next year, we project growth of approximately 10%, excluding the U.K. retirement business. Currency is expected to exert pressure on reported top and bottom-line results in 2017, and we quantify the expected impact at the prevailing rates on this slide for both PFOs and operating earnings.
Finally, we forecast that dividends to holding companies will exceed operating earnings during the next three years. The ability to distribute cash in excess of earnings and deliver substantial growth is testament to the strength and value of the EMEA franchise. With that, I would like to turn the call over to my colleague, Frank Cassandra.
Thank you, Michel. Good morning. As you heard at our investor day last month, MetLife Holdings houses our post-separation legacy businesses, including the balance of our U.S. retail business. The primary lines are traditional life insurance, variable and fixed annuities, and long-term care. We are no longer actively marketing new business for these lines. We are focusing on in-force optimization to enhance the value of the segment. This includes maximizing profitability and distributable cash, accelerating the appropriate release of capital and reserves, and reducing risk and volatility. Turning to operating earnings on slide 25. MetLife Holdings reported earnings over the last four quarters were $765 million. These results reflect two notable items. The largest impacts are related to our annual actuarial assumption reviews in the second and third quarters of 2016, as well as the impact of reinsurance recaptures between MetLife and Brighthouse Financial legal entities.
Adjusting for these, baseline operating earnings in the segment were just over $1.1 billion. Slide 26 shows some key sensitivities and near-term guidance. As I stated earlier, the business is primarily traditional life insurance, variable and fixed annuities, and long-term care. Together, these businesses have a total of just over $150 billion in liabilities. Therefore, the segment's results will be sensitive to equity market returns, available market reinvestment yields, and mortality and morbidity-driven underwriting results. With respect to equity returns, the segment's separate account assets total approximately $50 billion and are roughly 60% invested in equities. As a result, for a positive 10% variance in separate account returns, there would be a favorable initial market earnings impact of approximately $15 million after tax, along with an additional favorable impact of about $40 million over the subsequent 10 months. Negative market impacts would have similar but not quite symmetric impacts.
With respect to interest rate sensitivity, ongoing premiums and maturing assets will be invested at prevailing market yields. Each 10-basis-point change in portfolio yield would translate to approximately $45 million of operating earnings annually. With respect to underwriting results, each 1% change in the retail life interest-adjusted benefit ratio represents approximately $24 million of operating earnings. Moving to near-term guidance, we expect operating premiums, fees, and other revenues to decline by approximately 12% in 2017 versus 2016. The natural runoff rate of the block going forward will be about 5% per year. However, the decline in 2017 will be a bit steeper due to the impact of the sale of the former MetLife Premier Client Group and the company's broker-dealer. We anticipate operating premiums, fees, and other revenues will run off at the 5% pace. We expect operating earnings will follow a similar trajectory.
Our interest-adjusted benefit ratio was a bit elevated in the last four quarters, mainly driven by higher claim severity. We anticipate the range to improve to 53%-58% in 2017 based on a more normal severity outlook as well as the business mix between MetLife Holdings and Brighthouse Financial. I will now turn it over to John McCallion, MetLife's Chief Financial Officer, for the financial update.
Thank you, Frank, and good morning, everyone. I will be covering three topics today. First, I will provide an update on our income statement sensitivities associated with low interest rates. You will recall that we provided balance sheet sensitivities at our investor day. Second, I will discuss our outlook for variable investment income in the fourth quarter as well as for post-separation MetLife in 2017. Finally, I will close my remarks by offering some guidance on items that are difficult to forecast from the outside, including corporate and other expenses and our prospective tax rate. As we have done in the past, we are sharing the interest rates assumed in our plan and our stress scenario. They are found on page 28 and will also be published in our 2016 Form 10-K. Specifically, we are offering our assumptions for the two-year and 10-year Treasury as well as for three-month LIBOR.
This disclosure is in response to questions on our earnings sensitivity to the level of rates as well as the slope of the curve. The 10-year Treasury is germane to our longer-tail liabilities, while short-term LIBOR relates more to our securities lending and other capital markets activities. Of note during the year, we shifted our internal planning process to utilize the forward curve. The plan underlying this presentation employs the forward curve as of November 14th. In prior years, we used the consensus curve. Moving to slide 29, I will address some of our key sensitivities. Under our stress scenario, which has three-month LIBOR at 65 basis points and the 10-year Treasury yield at 1.5% through year-end 2019, the negative impact on operating earnings to our plan would be $50 million in 2017, $150 million in 2018, and $140 million in 2019.
On a per-share basis, that is $0.05 in 2017, $0.11 in 2018, and $0.13 in 2019, using our share count at the end of the third quarter. The sensitivities are different from those cited in our 2015 Form 10-K for several reasons: our shift of using the forward curve, the absence of an impact from Brighthouse Financial, and a flatter yield curve. Relative to a year ago, our stress scenario now employs a flatter yield curve that is higher on the short end. This configuration has a negative impact on our derivative portfolio and our securities lending activities, which is partly mitigated by our floating rate portfolio. Overall, we estimate that a 10 basis point increase in three-month LIBOR with no change to long-term rates would reduce annual operating earnings by $10 million in 2017, $15 million in 2018, and $20 million in 2019.
We have started to receive some questions regarding MetLife's operating earnings sensitivities to rising rates. While we view rising interest rates positively, there remains a lag between rates moving up and operating earnings following in kind. For starters, as rates rise, we will immediately forego some derivative income as we are a net payer of short-term LIBOR through our swap book. However, the impact of higher rates on new money will build more slowly as premiums, deposits, and investment proceeds are invested. We estimate that a 50 basis point parallel shift up in the long end of the yield curve and no change in the short end at the beginning of the year would result in an increase of $45 million in our 2017 annual operating earnings, $105 million in 2018, and $150 million in 2019.
As a final point on interest rates, we estimate equivalence between new money rates and our portfolio rate at a 10-year Treasury of roughly 3%. Moving to near-term guidance on certainty items, I will start with variable investment income. For the fourth quarter 2016, we anticipate VII near the $300 million low point on our quarterly range. For 2017, on a post-separation basis, our full year variable investment income range is expected to be $800 million to $1 billion, or $200 million to $250 million per quarter. We have lowered our return expectations for private equity investments to low double digits. Event-driven activity served to boost prepayment income in 2017. We expect prepayment income to moderate in 2017. By year-end 2017, on a post-separation basis, we would expect to hold roughly $800 million of hedge fund investments, which will lessen the future impact of this asset class on VII.
Turning to our outlook for corporate and other, we're forecasting an after-tax operating loss of $450 million to $650 million in 2017. In addition, we will incur roughly $300 million of pre-tax costs associated with our expense initiative. These costs will be reported in corporate and other, and we will break them out on a quarterly basis for 2017 and beyond. As I mentioned at our Investor Day, stranded overhead costs are expected to be $200 million pre-tax in 2017 and will rise to $250 million in 2019 as certain service agreements roll off. Stranded overhead will be reflected in the MetLife Holdings segment. We expect to realize annual expense savings of approximately $400 million pre-tax from our expense initiative, and these will be reported in the segment benefiting from the savings.
Finally, as we mentioned most recently on our third quarter earnings call, our tax rate continues to migrate downward as a greater proportion of our earnings are coming from lower tax jurisdictions. For 2017, we anticipate an effective tax rate of approximately 23%. That completes our prepared remarks. We are now ready to take your questions. Operator?
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 Seth Weiss from Bank of America Merrill Lynch. Please go ahead.
Yeah. Hi. Thank you. Thanks for taking my question. I wanted to ask a couple questions on taxes. First, the 23% effective tax rate, just want to confirm that this is consolidated RemainCo, doesn't represent any potential DRD benefit from Brighthouse?
That is consolidated RemainCo.
Okay, thanks. One thing that at least gives me a little bit of a headache on the tax front is that a lot of the tax true-ups flow through on the corporate line, which make
that a little bit challenging from a modeling perspective. Could you just comment on what the pre-tax implication is on corporate and other that you expect, how we translate that to the $450 million-$650 million after-tax expense guidance?
Yes. Well, Seth, I know taxes are hard to predict as we true up throughout the year. We get our tax returns completed. Sometimes there's positive and negative adjustments to that. It's why corporate and other does have that range. It's kind of a wide range because this will vary throughout the year. The 23 is the total consolidated across the board, as we get certain one-time items come in, those do flow in throughout the year.
Okay, that range that you give is primarily related to uncertainty on tax true-ups and not expenses. Is that right?
Well, there's a variety of things that happens in corporate and other throughout the year. It's why we do it, taxes is an element that does cause volatility.
Okay, thank you.
Your next question comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead.
Thanks. Good morning. I first had a question just on your comments for the Latin American business. If you could just elaborate how the Chilean pension sort of debate is affecting your results. I think you mentioned a 5% impact on LatAm overall, which seems a little high. Secondly, you also mentioned some investments for growth initiatives that are going to affect income in Latin America by 2%-3%. If you could just elaborate a little bit more on those.
Yeah. Hi, Jimmy. Let me comment on the Provida situation first. As you know, we have been protesting Chile recently against the pension system. More recently, those protests approached people to move their retirement savings out of MetLife and another AFP. As a result, we're experiencing negative net transfers, attrition that may continue, we think, into 2017. Also, in addition, the economy in Chile, as you know, has been weaker than expected, particularly in the past year. We're evaluating the appropriate mitigating actions to take in response. However, we think that these developments may have an adverse impact on our Provida operating earnings, and that's the impact we are anticipating, and it's a potential. We're still exploring. Going back into the investments in the region.
In 2017, our growth in solid double digits. If you look into the core growth, it's approximately 9% in 2017 compared to our last year guidance. We think it's more an 8% going forward, like the run rate organic growth, the core compared to the nine in 2016. We're investing in accelerating organic growth, and that's going to take us two or three percentage points. That drives the net number of the core growth to five.
Considering how big Provida is as part of your overall Latin American business, it's implying a fairly large double-digit plus decline in Chilean earnings then, right?
Yeah. Remember, we have two businesses in Chile. Our life insurance company is growing very well, actually high two digits. On the Provida side, we're exploring what's going to happen. We are anticipating potentially the 5%. There is a combination of things that will happen in 2017, probably not recurrent. Other things will probably require attention to the model. It's very early to say anything else about Provida more long term.
Okay.
The number we are anticipating before 2017.
Okay. For Maria on the group insurance business. You mentioned the large lost case. Was it just pricing or something else? Can you also comment on just how the pricing environment overall is, what you've seen as you've gone through renewal season for next year?
Sure. The large case was about a $500 million premium loss. A very modest earnings impact. We stayed firm on pricing. As a matter of fact, we got feedback from the client that we were the highest on the subjective items, but we were not willing to go down in price. In terms of the perspective on sales, we've actually had a good sales season so far in the large market. I'd say the biggest area of aggressive pricing is in the dental space. Much more rational on life and disability.
The large case was dental as well, or was it life or disability?
It was dental.
Okay. Lastly, on the share buybacks. I think Steve mentioned something, but I didn't really get his comments on when you really started to do buybacks and how much you've done thus far. My question, if you could just answer that, as you look at buybacks for next year, how sensitive are you going to be to the price, or is it more that you're going to be doing it at a stable pace throughout the year?
Jimmy, I mentioned that to date we've repurchased $208 million of our shares, the program's really set up for the time we announced it all the way through the end of 2017. As we've said previously, and also during earlier share repurchase programs, we are opportunistic buyers of our stock. The amount of stock we buy is price dependent.
Okay. Thank you.
Your next question comes from the line of Thomas Gallagher from Evercore ISI. Please go ahead.
Good morning. Steve, first a question for you. If I look at trying to back into the ROE of RemainCo for 2017, I'm getting to around 9%. At Investor Day, the ROE guidance, in terms of at least the goal that you guys were shooting for, was implying a little north of 10%, moving to 12% plus as you get the benefit of expense saves. Just looking at the benefit you would get from the expense saves, that adds about a point. Do you really think you can get an extra 200 basis points plus, based on the other levers and drivers? Or do you view that more as aspirational at this point?
Hi, Tom, this is John, I'll talk on that. We had said on our Investor Day that we were targeting about 8% over the 10-year treasury, that's a target, with taking out the one-time costs, that's how we got to that 8% in 2017. I think that we will have some business growth throughout the year, I don't know if you're factoring some of that into your current 9%.
The expense initiative will generate, we've given you the progression out to 2020, we expect solid movement there, although it is slow at first, that is actually, we gave you a minus $100 million impact in 2017, that was compared to a plus $100 million, because we've already done some cost saves in 2016, it's a $200 million swing down, you get a $300 million swing 2018 over 2017. In terms of the progression, it picks up all the way to 2019 and 2020. We also expect good business growth in the outer years, because we do expect that the U.S. dollar will not keep appreciating forever. We will have pressure currently right now, you can see it with the strong U.S. dollar, that will impact our 2017 versus 2016 in many of our currencies.
It's a strength of the U.S. dollar against a basket of almost all the currencies going on, some more than others, and that is pressuring 2017. We do expect that will mitigate or swing back at some point in the future.
Tom, let me just add a few comments in addition to John's. As we look at our business, as we think about our strategy and how to run our company going forward, we think of ways to increase our returns, we look again as against the risk-free rate. If the risk-free rate goes up over time, we anticipate the nominal ROE will go up. We think the more important measure is really the spread above the risk-free rate. The second thing I'd say is we are working very hard, and have been working very hard the last several years, to drive down our cost of equity capital. It's ultimately the differential between our return on equity versus our cost of equity capital. There's a lot of focus on kind of nominal ROE numbers typically.
Just so everyone's clear in terms of how we're running the business, that's how we think about it.
Got you. My follow-up is the $400 million expense save benefit that you expect to get in 2017. Is none of that in Corporate and Other ? Is that spread across the segments? If you could elaborate on which segments are expected to get the biggest benefits there.
Hi, Tom, it's John again. The one-time cost we'll put in corporate and other, the strand is in MetLife Holdings, but the benefits will come through the various projects and programs we have wherever they occur. A lot of it is in technology. That will be spread, of course, across many of the businesses. There was some specific programs. Probably one of the largest areas that you will start to see a benefit in will be in Holdings as we enact some of the cost savings programs. It will be spread across, and we'll try to give you highlights on that each quarter, how it comes through.
Okay, thanks. If I could just sneak one in on Japan. What's happening there from a tax rate standpoint? Tax rates are going up in Japan? I thought they'd come down to 30%, but can you just elaborate on how big of an impact that is having for you? Thanks.
Yeah, we mentioned about the $100 million. Most of it is this change in how MetLife has to record Japan taxes. Tax rates have gone down in Japan, but we have a 35% U.S. corporate tax rate that we are now out of tax loss carry forwards in Japan that have kept it down through this year. Starting next year, we expect to have to start accruing at the full 35% corporate tax rate. Maybe there'll be some positive movements on the U.S. corporate tax rate that would help that someday.
Okay, thanks.
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hey, thanks. Good morning. I guess just first to follow up on that last question, John. I guess you're assuming 100% of Japan earnings are repatriated to the U.S. over time, and that's why you have to pay the U.S. tax rate. Is that correct?
That's correct. GAAP, we have to accrue it at what we expect the long-term rate will be. We won't be paying the cash taxes, the top up, until we bring the dividends back. On a GAAP basis, we have to accrue for the full 35%.
Okay, thanks. Then, in terms of just thinking about the ROE for RemainCo going forward, I guess, if we look at the current allocated equity on a GAAP basis to RemainCo, should we even be making an adjustment to increase that by the size of the pre-separation dividend?
I'm just thinking here for a minute. Yes. You'll have all the separation happen. Brighthouse has taken off. As the dividend comes in, that would increase our equity. Then we're buying back shares as well throughout the year.
Got it. Okay. Just, I guess lastly, on the $400 million of expense saves, I guess I didn't see any real commentary on the business segments about kind of earnings growth above revenue growth, which I would've thought you'd get some kind of expense leverage in some of the businesses. Should we be thinking about in earnings in some of the businesses, like Group Benefits as growing at a rate of, I guess above PFOs? How should we think about that?
Yeah. We've given guidance generally across the board. You can factor in your expense saves spread out through the various businesses, which would be an improvement over that.
Okay. Got it. Thank you.
Your next question comes from the line of John Nadel from Credit Suisse. Please go ahead.
Thank you. Good morning. I wanted to follow up on that last issue. That was sort of my question, too. The outlooks at the segment level, for earnings both in 2017 and then maybe a little bit longer term, is your response to Ryan's question indicative that those outlooks do not embed the benefit from the expense initiative?
Well, they will be in the segments, and when they give the longer-term guidance, they will be in there. I think the question was will earnings grow better than revenues over the time period? Generally, that is the case, but as you move out into future years.
If I look at MetLife Holdings, where I think Frank had mentioned that over the next few years we expect earnings to drop about 5% a year, but 2017 would be a little bit faster than that owing to the sale of the brokered business. If I think about the $200 million of stranded costs that holdings will have in 2017 that it doesn't have in 2016, it seems to me holdings earnings should be dropping by much more than 5% in 2017, maybe 10% or more. Is the reason that it's only a little bit worse than 5% the benefit of expense saves expected to come through? Is that the offset?
Yes, John, we do have expense savings partially offsetting that.
Okay. Then just my follow-up question is just I'm curious how you came up with the 5% sensitivity in LatAm. I know the question was sort of asked earlier, but I'm curious how that 5% sensitivity actually compares to the earnings of the Chilean pension business itself.
Hey, John. Remember we have 2 businesses in Chile, the insurance company and the AFP. This obviously the 5% impact is only in the AFP. As I said before, it implies uncertainty because we are planning how to mitigate increased attrition of customers due to these recent events. Some of it will be just an impact in 2017. It may imply adapting to change the business model. That's as much as we can say now.
How does that 5%, so if that 5% is, I don't know, $25 million-$30 million, how does that compare to Provida's earnings contribution?
Well, Provida.
Is it a cut of 20% of Provida's earnings or 50% of Provida's earnings?
No.
Where is the impact?
No, it's around 15. You need to think Provida like two-thirds of our Chile total operation. Two-thirds Provida, one-third the life insurance company, and you know that in LatAm, 50% is Mexico, 30% Chile, give or round the math.
Okay, that's helpful. Thank you so much.
Thank you.
Your next question comes from the line of Sean Dargan from Wells Fargo. Please go ahead.
Thank you and good morning. Maria, I have a question about the P&C outlook. A lot of auto carriers have run into headwinds recently. I'm just wondering if you can compare and contrast your business to a typical personal lines carrier and what you're seeing versus what they're seeing.
Sure. As we've talked about in the last several quarters, we've started to take rate in our auto line, as you know. Nothing's really changed there in the sense that we said we would take rate through the third quarter of next year, and that's why you're seeing us with the guidance we had in 2017 with improvement in 2018. You're seeing other auto and home carriers take rate as well. We, as you know, also from a reserving perspective, we're very prudent in terms of how we reserve. We're very comfortable with our PYD reserves, as an example. I think the entire industry is really focused on kind of some changes in terms of severity in the auto lines, as an example, kind of higher cost when accidents do occur.
I think that in terms of comparing, contrasting, we feel very good about the pricing actions we've taken, and we continue to have the same guidance we've had in the prior quarters.
Okay, thanks. As a follow-up, Steve acknowledged the run-up in life insurer share prices. I'm wondering if anything has changed about your view of a spin versus an IPO of Brighthouse given recent developments.
Sean, no. As of now, our current intent is to move forward with the 80.1% spin. At a later date, likely do a 19.9% sell the remaining shares.
Thank you.
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Good morning. Thank you. A question on pension risk transfer. I think previously you had guided to every $1 billion of sales being worth about $10 million of earnings, and now it's six to seven. Just curious what's driving the change there?
Sure. This is Maria. If you think about the fact that we've been targeting growth and capital efficiency, we put a lot of focus on what types of customers we want to write and really going after the high-value segments. We're writing with less capital, and actually getting similar returns. Some of the ways we're doing that is looking at focused on shorter duration contracts, retired lives as an example, leveraging separate account structures and really less risky assets. That's the answer.
Got it. Can you comment just generally on the demand and the pipeline that you're seeing, and how will the rise in interest rates, do you think that will cause more activity in the space over the next year?
Yeah, the demand continues to be solid. The pipelines are strong. As you know, in the interest rates is only one reason why a plan sponsor would make the decision to move forward with a transfer of risk. Obviously it will probably have a favorable impact.
Got it. A final question. You mentioned kind of recalibrating sort of your target market. Does that change how you're thinking about sort of the smaller cases versus your appetite for jumbo transactions?
We really look at everything. It has more to do with the risk profile than the size.
Okay. Thank you.
Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning. Thank you for taking my questions. Just a quick follow-up on the PRT transactions. Can you remind us what is the size of PRT transactions that you've done in 2016 to date, and what is your kind of baseline assumption for 2017 business plan?
I'm sorry, Humphrey, you're going to have to repeat your question. It didn't come through clearly.
Sorry. For 2016 year to date, can you remind us your PRT production? Also, what was your business plan for 2017?
For pension risk transfer, we had a plan of around $2 billion, and we're very close to that.
Okay. A question in Asia. Chris talked about right now is around 50% of dividends coming out from Asia and then growing with that over time. How fast and how much that you can grow the dividend capacity from Asia? What will be the ultimate targets?
The comments we've made there were that we would get to over 50% of dividends out of Asia by 2017. This is as a result of a lot of the work we've been doing through the Accelerating Value initiative. It's about reducing strain, it's about reducing interest rate sensitivity, and it's about shortening payback so that the strategy is working in terms of the numbers we're predicting. We're fairly comfortable that it will grow from that 50% we're talking about in 2017.
kind of in longer term, how should we think about the dividend capacity of Asia over time?
Hi, Humphrey. This is John. You have Asia is a tale of two cities, I guess. You have Japan, which has much more conservative accounting, and we are growing in Japan as well in accident and health, so there is some strain. Dividends are less from Japan than other areas. We also have good growth across the rest of Asia that we'll be putting good capital to work there over time. We don't expect to see a material super large increase from that level because we plan to invest a lot of good capital in Asia for growth for the foreseeable future.
I would just say, let me just add a couple of points to John's. We have six countries in Asia now paying dividends, and the rest are all self-funded in terms of their growth. There's no additional capital injections which will be needed to fund that growth.
Okay. Thank you for the color.
All right. Thank you very much. That was our last question. I'm going to turn the call back to Steve Kandarian.
I'd like to thank all of you for joining us today. The path we're taking is not easy, but we believe our transformation will create meaningful shareholder value over time. Best wishes for the holiday season, and we look forward to speaking with you again in the new year.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference.