Good morning, everyone. Thanks for joining us today. We are undergoing one of the most dramatic transformations in MetLife's history. From the separation of Brighthouse Financial, to our focus on cash, to our refreshed brand, we are adapting MetLife to be the kind of company that can thrive in any environment. While we have tremendous respect for the past, we are a company that's firmly focused on the future, as our brand video made clear. I want to thank Esther Lee and her marketing team for the excellent work they have done on MetLife's brand, which I'll have more to say about in a minute. As we begin today, we do so in a changing world marked by macroeconomic volatility, regulatory uncertainty, and rising expectations on the part of customers and shareholders.
This makes it a challenging time to be in the life insurance business, but also an exciting time that calls on us to reinvent how we do business. Over the next two hours, we will share with you our new brand direction, our refreshed strategy, and hopefully a clearer picture of a transformed MetLife. Our brand has been in the news quite a bit lately. As you know, Snoopy has retired from MetLife after 31 years of service. We brought in Snoopy in 1985 to make us more friendly and approachable, and he performed that role remarkably well. New brand directions have always been a part of MetLife's history. As our business evolves, our brand must evolve along with it. We interviewed more than 50,000 customers worldwide to inform our brand refresh.
Our new tagline, Navigating Life Together, reflects the trusted partnership our customers tell us they want from MetLife. Our logo, the partnership M, embodies this commitment. While our new brand direction reflects MetLife's response to changing customer expectations, our transformation is much deeper than that. MetLife has a long track record of executing on bold moves. We pioneered and expanded the group insurance business. We made portfolio decisions to exit the U.S. medical and retail life businesses, and we made a series of acquisitions that transformed MetLife into a truly global company. By continuously adapting to external environments, MetLife has thrived for 148 years. Our 2012 strategy was an extension of this approach.
At that time, we knew we needed to do four things: simply de-risk our company, grow emerging markets, extend the reach of our market-leading Group Benefits business beyond the U.S., and embrace customer centricity in a global brand. We executed on all four of these priorities, but we are not standing still. The world is changing around us, and we face some strong headwinds. Never before in history has a yield on a 10-year treasury been as low as it was post-Brexit at 1.36%. However, we are encouraged that rates have risen since that time. The regulatory environment remains in flux as well. While we have seen heavier regulation at the state, federal, and international levels over the past few years, Tuesday's election in the U.S. may result in a more constructive approach at the federal level. Consumers are not standing still either.
They want more from their financial services providers. Not just better service, but simpler products and an overall experience that matches what they are accustomed to from other industries. The framework for our Accelerating Value strategy initiative is what we call the three Cs. Each element of our refresh strategy had to satisfy the criteria on this slide. Our goal in everything we do is to offer customers truly differentiated value propositions that allow us to establish clear competitive advantages and ultimately drive higher levels of free cash flow. While Accelerating Value is a multi-year journey, we have already made important value-creating decisions based on AV principles. We have improved the risk-return profile of what we now call our Retirement and Income Solutions business. We have essentially stopped selling JPY whole life insurance in Japan. We are extending our accident health presence from the public to the private sector in Mexico.
We are optimizing our investment portfolio asset mix. In our most important AV decision to date, we have decided to pursue the separation of a substantial portion of our U.S. retail business. Our Accelerating Value work now covers 98% of MetLife's allocated capital for new business, ensuring a consistent capital allocation approach across the enterprise. This brings us to MetLife's refreshed enterprise strategy. While we are depicting the strategy with the same cornerstone approach you saw in 2012, the level of transformation reflected on this slide is even more dramatic. One MetLife remains at the center of everything we do, collaborating, sharing best practices, and putting the enterprise first. Digital and simplified are the key enablers of the strategic cornerstones. The life insurance industry needs to become a lot more digital. That means digitally enabled distribution, better digitized back offices, and enhanced data analytics.
MetLife has been making significant investments in technology for years. We must take the next step and become a truly digital company to drive the efficiencies and innovation we need to achieve competitive advantage. I probably do not need to convince anyone in this room about the need for simplification. We are in a highly complex industry, and this complexity comes with risks and costs to customers and shareholders. Simpler products and simpler customer interactions will benefit everyone. Now for the cornerstones. I will start with the upper left, optimize value and risk. Capital is precious. We know that. With respect to the new business we write, we have a strict new capital budgeting process in place that prioritizes businesses with high internal rates of return, lower capital intensity, and maximum cash generation. At the same time, we are going to aggressively manage our in-force block of business to improve profitability.
Our focus on capital efficiency extends across our entire business, from the customer segments we pursue, to the products we design, to the distribution channels we use. Historically, the insurance industry had a sales-driven culture. At MetLife, we will not pursue growth for growth's sake. We are only going to allocate capital to growth that creates value for our customers and shareholders alike. The lower left, drive operational excellence, is about becoming a high-performance operating company with a competitive cost structure. Post-Alico, our focus was on integration. Now our focus is on truly leveraging our scale through greater use of shared services, outsourcing, and partnerships. Operationally, the hallmarks of our culture will be management rigor, data-driven decision making, and continuous improvement. We will have to move away from the manual processes in underwriting and claims to be more automated in digitized processes. The bottom right cornerstone is strengthen distribution advantage.
This means transforming our distribution channels to drive efficiency and productivity through digital enablement and improved customer persistency. Here's an example of a project that showcases both operational excellence and strengthen distribution advantage.
A few years ago, MetLife Japan needed a complete redesign of the front office sales process that supported tens of thousands of agents. The technology was outdated. Software had to be installed via CD-ROMs on laptops. The majority of the process was paper-based. Agents were provided hundreds of pages of training material to learn the rules for selling those products. Those rules existed in millions of lines of code that was expensive and difficult to maintain. Simply moving from a paper process to electronic form was not the answer. This challenge required an innovative solution that focused on the customer and a cultural change where the business and the technology shared executive sponsorship for the outcome of the project. It is my honor to introduce our MetLife sales platform. In Japan, it's called e-Mirai, which means good future.
The MetLife sales platform enables product configuration, an industry software concept that eliminates the need for complex coding. Product configuration is typically found in simpler insurance products, but we were able to apply it to the more complex products in Japan's highly regulated environment. As a result, product configuration is differentiating us by allowing us to get products to market faster without complex and expensive coding. In addition, the reduced error rates and digital payments have greatly reduced turnaround time from days to, in some cases, minutes. Combining this concept with a rich experience allows the agents to focus on the customer instead of the sales process.
With rollout progressing in Japan, we are now expanding in Korea, Australia, and Mexico. Enabling digital distribution for agents to sell our products is core to MetLife's digital strategy and key to our success.
The final cornerstone is deliver the right solutions for the right customers. In an industry where the goal is often to sell any product to any customer, we will take a more targeted approach. We are engaged in data-driven customer segmentation work to identify the right customers, and we're committed to creating truly differentiated customer value propositions. I'm going to return for a moment to the first cornerstone, optimize value and risk, because of its importance to investors. Using our Accelerating Value framework, we've examined most of our major businesses from a portfolio standpoint, looking at each business's financial performance, risk profile, strategic position, and materiality. For financial performance, we assess the contribution of each business according to several key financial metrics, including value of new business, free cash flow, operating earnings, internal rate of return, and payback period. John Hele will speak to these metrics in greater detail.
Risk profile measures the potential impact of relevant risks such as market, currency, political, and regulatory. Strategic position captures the attractiveness of each market and MetLife's competitive position in that market. Materiality measures the relative importance of the business as a driver of operating earnings now or in the future. Our work revealed five key clusters: growth engine, balanced cash and growth, scale, longer-term play, and optimize. Every business is viewed along this spectrum, and each of these clusters has an important role in our portfolio of businesses. Some businesses will be focused on growth in new business, others on maximizing cash from their in-force book, while still others may be focused on both. I would like to elaborate on how we have assigned our businesses to the various clusters. Please keep in mind, this is not a static process.
Although we would not expect significant changes from year to year, each business will be reassessed during our annual planning process. Based on our Accelerating Value work, the businesses displayed on this slide are considered growth engines due to a combination of positive market and financial characteristics, including strong growth and strong returns. You can see these businesses on the right. I'd like to show you two short videos that provide a window into two of our growth businesses, Mexico and Group Benefits.
We acquired this company in 2002 at a price of $929 million, and the investment was paid off in the first five years with the earnings flow of the company. Additionally, at the moment of the acquisition, we had presence only in the government market. Our market share was 12.2%, and now our market share is over 15%. Regarding our product value proposition named Met99, it's a universal life platform that provides access to 20 different riders. Our customers enhance their policy with different protection plans, additional benefits, and characteristics such as savings, critical illness, and personal accidents coverage, all in one product. The product itself is a competitive advantage. Our admin system can manage all the riders under one umbrella policy, and none of our competitors have developed the same technology yet. It means we sell one policy that adapts to each unique customer need.
The key element of this business is our premium collection model that is through payroll deduction. All payments are deducted through a single slot managed by the government entity in order to collect the premium and transfer it to MetLife. Besides payroll deduction, we have also worked in developing the banking collection as a proper alternative to open new business in markets without the payroll deduction mechanism. When it comes to our distribution channel, we have 22 promotorias, 223 regional branches, and over 3,000 agents. Promotorias are independent companies equivalent to general agents with commercial intermediation and exclusivity contract with MetLife. They have more than 35 years of experience, and they have two main activities: attract and grow sales force through recruitment, selection, hiring, and training. They execute operational work such as data entry or policy issues that let us make a huge part of our costs variable.
They are remunerated through a variable commission based on sales and persistence. Our nationwide presence is another competitive advantage because we have offices in 140 cities where our customers can interact with MetLife. About our market presence, we have a very high penetration. We have achieved a penetration of 60% of the entities that manage payroll deduction schemes, but we still have a huge opportunity of over 2 million prospects in government segment. Also a huge opportunity that we are work in progress building to expand this business model towards privates.
MetLife has been a market leader in the U.S. Group Benefits space for many years. The combination of a strong competitive standing, capital-efficient products, and significant growth opportunities positions us as a growth engine for the company. Over the past decade, our industry has seen a shift toward voluntary products that provide good value to employers and employees while maintaining a favorable risk and cash profile. Our ability to package core and voluntary products has allowed us to design offerings that we believe create sustainable competitive advantage by meeting a wide range of customer needs. In our large market business, we will continue to win by providing a superior service experience that drives persistency and by growing with our existing customers. Today, we do business with 92 of the Fortune 100 and over two-thirds of the Fortune 500.
We expect that the majority of our future growth will come from increasing sales of voluntary products and driving up employee participation levels. In our middle market business, we are already a leading carrier. Our strategy is to work closely with intermediaries and employers that align to our value proposition. We believe we can drive growth through more packaged offerings, strong enrollment, and communication approaches, and a frictionless customer experience. We continue to invest in each of these areas. In our small business market, we have increased focus and believe we will grow faster than the market. We are building a new digital buying and service experience for our brokers, employers, and their employees. This capability will allow us to bring our full product suite to small businesses with a simple, low-cost operating model.
Profitable growth, clear competitive advantage, strong cash generation. These are the hallmarks of our strategy for the Group Benefits business at MetLife.
Our balanced cash and growth businesses enjoy some growth but carry some challenges, too. Most of these businesses have important market positions with good cash flow, but more limited near-term growth potential. The goal of these businesses is to grow profitably where they can, but also to generate free cash flow that can provide dividends to MetLife Inc. I should emphasize that even in those areas of the business where we are planning to grow, we recognize that not all growth is created equal. In our industry, it is easy to see examples of bad growth that have attractive GAAP ROEs at time of sale, but later prove to be value destroying. At MetLife, we are focused on good growth characterized by the factors I highlighted earlier: high IRRs, low capital intensity, and maximum cash generation.
If such opportunities are not available, we are happy to reinvest less in the business and distribute more to our shareholders. Scale businesses have a foothold in attractive markets and the capacity to grow over time. These may be big markets where we have a small position or smaller markets where we have a strong competitive position. Our longer-term play businesses have a slower path to growth and more uncertainty, but could potentially become important over time. These can be thought of as educated bets on the future. Finally, our optimized businesses are those that are more structurally challenged. Some are in runoff and are captured in our new MetLife Holdings segment. John Hele will discuss our thoughts on how to coax more value for our in-force books of business over time.
Other businesses in this category may face regulatory challenges or may no longer fit with the overall strategy. Before I move on, I would like to take a moment to address the role of compensation. We know it is important to reflect our strategic objectives in our compensation structure. We have continued to sharpen our focus on bringing critical metrics into how people are paid, including free cash flow. While it will take time to do so comprehensively, most of our executive group members, including John and me, have free cash flow and other Accelerating Value metrics established as individual objectives that can materially influence compensation. If we successfully execute on this strategy, what will MetLife look like? Our most significant AV initiative to date is the decision to separate a substantial portion of our U.S. retail business.
Examining the post-separation MetLife provides a good picture of the direction we want our refreshed strategy to take us. As we have said many times, we are running our company more and more based on generating free cash flow. We expect that MetLife, post-separation, will have a stronger ratio of free cash flow to operating earnings. In conjunction with filing Brighthouse's Form 10 with the Securities and Exchange Commission, we also filed an 8-K. We said we expect MetLife to generate an average free cash flow ratio of 65%-75% over the course of 2017 and 2018. The prior range for our pre-separation MetLife had been 55%-65%. MetLife will also be significantly less sensitive to interest rates. Our best estimate is that our interest rate sensitivity will be cut by two-thirds post-separation. Notably, the separation will also make MetLife a more globally diversified company.
Just after our demutualization in 2000, MetLife was predominantly a U.S. company. Over time, as a result of acquisitions, organic growth, and portfolio decisions, our non-U.S. operating earnings have grown steadily. Post-separation, we expect MetLife will generate over 40% of its operating earnings from outside the U.S. On the current trajectory, that percent should continue to grow over time. Let me move on to a topic I have not been able to address this year as fully as I would have liked, capital management. As you know, earlier this morning, we announced that our board of directors authorized a $3 billion share repurchase program. As I mentioned on both our second quarter and third quarter earnings calls, once we had defined a capitalization and execution plan for the separation, we would address the deployment of excess capital.
It is our intention to initiate this program as soon as we are free of any legal restrictions to trade in our own securities, subject to appropriate market conditions. In addition, our board of directors declared a fourth quarter common stock dividend of $0.40 a share. As you all know, common dividends are a board decision. However, my recommendation to the board has been that immediately post-separation, we maintain MetLife's annual dividend at a $1.60 per share, assuming no deterioration in macroeconomic conditions or the regulatory environment. Our views on capital management have remained consistent. We believe that any excess capital above and beyond what is required to fund organic growth belongs to our shareholders. As such, it should be used for share repurchases, common dividends, or strategic acquisitions that clear a risk-adjusted hurdle rate.
The same Accelerating Value discipline we use to manage our portfolio is applied with equal rigor to the M&A process. Industry-wide, the volume of financial services deals is up, and we remain active in evaluating transactions. In the past 12 months, we have looked at more than 60 deals ranging across life insurance and asset management, both in the U.S. and around the world. Let me now turn to a quick update on the timeline for our planned retail separation. Our Form 10, which describes a pro rata spin of 80.1% of Brighthouse shares to MetLife shareholders, was filed on October 5th. We are working through aspects of the regulatory approval process and do not foresee any issues that cannot be resolved. All the rating agencies have completed their work and issued claims-paying ratings for Brighthouse's anticipated insurance companies.
The first step in the separation transaction is expected to take place in the first half of 2017, which we believe remains on track. Before I turn over the podium to John, I would like to provide a regulatory update. As you know, oral argument in the U.S. Court of Appeals for the District of Columbia Circuit took place on October 24th, and a decision is anticipated in the coming months. Given our caution regarding capital standards for non-bank SIFIs, it is valid to ask whether our capital management plans would change if we were redesignated. I want to be clear: they will not. When we put together our capital plan, we considered the full range of potential regulatory outcomes and believe we are adequately capitalized for any of them. With that, I'll turn over the podium to MetLife's Executive Vice President and Chief Financial Officer, John Hele.
Just wait a second here. There we go. Thanks. Thank you, Steve, and I would like to add my thanks to everyone for being with us here today. I look forward to sharing how MetLife is navigating the course to value creation for our customers and shareholders. I am going to start by talking about our capital philosophy. None of our businesses is automatically entitled to capital. They are all in competition for this scarce resource based on which will create the most value. We do not leave cash and capital scattered around the world sitting idly in statutory entities. It does not belong to the business that generated it. It belongs to the house. This includes earnings on capital, as well as capital freed up over time as the book of business matures.
Each business must request capital for new business as part of the budgeting process, and each is responsible for generating value on that capital. If capital is not supporting valuable growth, our aim is to move it to our holding companies as quickly as practical. Once there, our cash and capital will be deployed along the lines articulated earlier by Steve: dividends, buybacks, and acquisitions. Beyond this, the collection of cash and capital at the holding companies aids in our capital budgeting process, how we allocate capital to our business units, and how we execute that process each year. At MetLife, free cash flow has four primary components. The first and most important source is dividends paid by our subsidiaries. We have two major holding companies, one in the U.S. and one internationally.
We have primary dividend-paying operating subsidiaries in the U.S., the largest being Metropolitan Life Insurance Company, or MLIC, domiciled in New York State. That remains the case post-separation. Statutory dividends are subject to regulatory rules and other solvency requirements. Recent changes in New York now permit MLIC to dividend annually under one of two alternatives, the greater of 10% of surplus or prior year statutory net income, subject to certain conditions and adjustments. Before last year, New York was a lesser-than state only. Outside the U.S., we have large dividend-paying operating subsidiaries in Japan, Mexico, Chile, and across EMEA. Free cash flow includes capital contributions to subsidiaries required to fund organic growth. In addition, holding company expenses, primarily interest expense and other administrative expenses, are included in free cash flow. As a final component, we consider leverage, something we manage very carefully.
We target a AA financial strength rating from MetLife, which was recently affirmed by the major rating agencies following the filing of the Brighthouse Financial Form 10. As our company grows, our debt capacity also increases. We view incremental debt less than or equal to rating agency targets as part of free cash flow. Mind you, leverage cuts both ways. As we manage through the separation, we'll be modestly decreasing our debt outstanding to reflect a smaller equity and earnings footprint post-separation, which serves as a use of free cash flow. This planned reduction in leverage is not included in the definition of free cash flow, so it is not in the 65%-75% guidance provided. Rather, it is a use of free cash flow, similar to using free cash flow, say, for an acquisition.
The sum total of these four components provides us with the cash needed to pay common dividends, repurchase shares, or finance growth, including risk-adjusted hurdle rate clearing acquisitions. You will be able to see these components again in our 2016 10-K. Our Accelerating Value initiatives are oriented towards seeing that the business we write delivers an appropriate internal rate of return on the right amount of invested capital with a reasonable payback period, i.e., more cash sooner. The same view is also applied to our in-force books of business. IRR is not a new concept. It is an essential tool in quantifying capital deployment opportunities. When we measure IRR, we use after-tax statutory distributable cash flows, which are comprised of statutory profits and the increase or decrease in required capital.
We do not use leverage or GAAP metrics, so we can compare the net distributable cash to shareholders from all of our businesses. However, we do not think it is appropriate to use IRR in isolation because it fails to recognize two critical elements of capital deployment: how much capital can be committed, and when can we get that capital back. Looking only through the IRR lens may lead to the wrong course. Let's look at how the value graph works, often called a MECL chart. The x-axis Whoops, sorry. Got to watch my arms here. The x-axis shows how much capital is deployed in an opportunity, such as a new product, distribution channel, or customer segment. The y-axis shows the spread of the IRR above an appropriate hurdle rate for that business.
The hurdle rate is generally the same for each country and depends upon the risk-free rate and the country risk. The hurdle rates are also based on an assumed blend of funding by equity and after-tax debt to estimate a cost of capital used by businesses. The first opportunity, A, shown in blue here, has an IRR over the hurdle rate of 600 basis points. It uses $100 million of capital. Value created is the area of the blue box, which is $17 million. The break-even or payback period on the $100 million of capital is four years. The next opportunity, in orange, uses $400 million of capital with an IRR of 200 basis points over the hurdle rate. The value created of this opportunity is $41 million, but has a longer payback period of seven years.
Opportunity green has an IRR of 100 basis points over the hurdle rate with $500 million in capital, $42 million in value, and a payback period of 12 years. These examples are similar to many life insurance products sold by the life insurance industry today throughout the world. Of course, we would want as much of the blue opportunity as possible, but often the market for this is limited. The orange opportunity is good with a lot of value at a reasonable payback. The green opportunity has value, but with a small margin of error above the hurdle rate and a very long payback period. This is an opportunity we do not expect to pursue. This MECL chart is how we evaluate all products, distribution channels, and customer segments under our Accelerating Value initiative.
It seems straightforward, it takes discipline to properly, consistently, and regularly calculate the IRR on the capital invested for distributable cash flows around the world. Beyond IRR and capital budgeting, we spend a lot of time considering payback periods, namely, when can we get our cash back? Life insurance is an assumption-driven business with liabilities that can stretch far into the future. Traditional life insurance has always had a long payback period. It takes a while to earn back those heavy upfront commissions and underwriting costs. In the present low interest rate environment, payback periods are only getting pushed out as new money rates drop. This is especially true for younger ages where mortality margins are quite thin. We see this in markets around the world, particularly Japan.
Here on the left is a product that has a 12% IRR with a large amount of capital invested and a seven-year payback period. On the right is a product that has the same IRR, the same amount of capital invested, and a payback period of 15 years. We are rejecting new products that have acceptable IRRs, but very long payback periods. I tell folks who submit new products to consider the following simple rule. I need to see the payback during my working career so I can have a positive return in retirement. Not all payback periods are created equal either. A simple five-year payback can be achieved through five years of approximately equal cash returns, or four years of little cash return and 90% in the final year. Both are five-year paybacks. Our preference is for the left, more cash sooner.
Spending time talking about where cash come from, I would now like to discuss how we generate value at the business level. This chart shows the new business embedded value view of the major businesses of the segments of MetLife post-separation. The U.S., Asia, Latin America, and EMEA. In 2015, MetLife invested almost $3 billion of capital in these segments to support new business. This capital was deployed at an average unlevered IRR of 12%. For payback, we expect to receive the full amount of invested capital in eight years. The value created, which is the net present value of distributable cash flows in excess of the hurdle rate, was $650 million. These numbers are calculated using a level interest rate scenario as of year-end 2015.
Please note that we also look at our business using a mean reversion scenario that starts with the forward curve and moves to 4.25% on the 10-year treasury over 11 years. The embedded value of the business written in 2015 would be even higher at $1 billion. Let's take a deeper look at the new business we wrote last year using a level interest rate scenario. This is the bar MECL chart now put into actual practice. The X-axis denotes the capital invested by the business and represents the amount shown on the prior slide, or $3 billion. The Y-axis shows the spread of the IRR over the hurdle rate, which can vary by country. The colors denote three different spreads that we use to categorize our businesses. Green at more than 4% above the hurdle rate, yellow at 0% to 4%, and red below the hurdle rate.
The best result is a really tall, really fat green bar. All companies have a spread of business' returns in their portfolio. The key is to manage the mix. I have a few observations. First, as the slide indicates, roughly 60% of the capital we deployed in 2015 was invested at IRR expectations more than 400 basis points above our hurdle rate. Second, of the businesses in red that had IRRs below our hurdle rate in 2015, many started the year yellow or green but fell victim to falling rates and moved into red by year-end. All of them have taken actions to increase their respective IRRs, and we expect them to show improved 2016 results. Again, this chart is using a level interest rate scenario. Under a mean reversion scenario, many of the red blocks are no longer red.
Let's look in detail at one that I'm sure you have noticed. That large red thin bar on the right with a -1% return on approximately $700 million of capital. Sometimes looking only at the consolidated view of the value of new business can mask the underlying performance. Every business has its own MECL chart, and in the one we are breaking out, you can see that a single product line was dominating the consolidated value of new business picture. Of the $700 million of capital deployed, $500 million added value, but $100 million really destroyed value. This business took action last year to fix the value-destroying portion by changing pricing, exiting certain market segments, and making other adjustments. For 2016, we expect the red portion to dramatically shrink and the green portion to grow. A final point, this is not a static analysis.
All businesses are expected to push for improvement irrespective of where they are on this green, yellow, and red continuum. All businesses do this MECL chart not just for products, but for distribution channels and customer segments as well. One of the characteristics of MetLife's post-separation business mix is less capital intensity. Perhaps better put, we expect more of our earnings to be derived from higher return businesses. For each business segment, this slide shows the 2015 full year operating ROE and the 2016 year-to-date annualized operating ROE. Both ROEs are adjusted for notable items in each period as reported in our QFS. The U.S., Asia, and Latin America segments all have solid ROEs. EMEA's return on equity is lower, mainly due to goodwill allocations from the purchase of Alico, but its tangible ROE was 13% in 2015.
MetLife Holdings is the one segment with a lower ROE and that uses a lot of capital. I will discuss shortly how we plan to optimize MetLife Holdings or MLH. We also show you the capital allocated to corporate and other so you can see the total for post-separation MetLife. MetLife Holdings houses our post-separation legacy businesses, including the balance of our U.S. retail business with the primary lines being variable annuities, universal life, and long-term care. We are no longer actively marketing new business for these lines. While MetLife Holdings will run off over time, it is at the moment a big segment with more than $100 billion of general account reserves, $11.4 billion of allocated equity, and more than $1 billion of operating earnings. Stranded overhead will also be located here post-separation.
Although there are no new sales, and therefore no capital strain associated with new business, the MLH segment has very long-term cash flows and is pressured in the next few years by the closed block from demutualization. However, this impact has already been factored into our overall 65%-75% free cash flow target. Recognizing the segment's importance, we've assigned P&L responsibility to a single MetLife executive. We are now working hard on the in-force optimization as a strategy to enhance the value of MetLife Holdings. Our first responsibility is to honor our commitments to our policyholders. Within that framework, the primary objectives of optimization are to maximize profitability and distributable cash, accelerate the appropriate release of capital and reserves, and reduce risk and volatility. Clear P&L responsibility will establish accountability and direct resources to the best value enhancement opportunity.
Let me spend some time talking about our options for creating value within MetLife Holdings segment. The four boxes on this slide represent different levers of value creation: contractual, operational, financial, and behavioral. Since the levers reach across business areas, we have set up a small cross-functional team within MetLife Holdings to generate and execute on opportunities. As we consider options, we weigh each idea against its perceived degree of difficulty, legal or regulatory constraints, and potential financial impact. As Steven referenced in his presentation, we've embarked on a multi-year expense program that will reduce our total costs on a pre-tax run rate basis by $800 million, net of stranded overhead. This number applies only to post-separation MetLife and represents 11% of our ongoing fixed expense base.
When we announced this program in August, we targeted gross savings of $1 billion to offset an expected $200 million of stranded overhead due to separation. On our last call, Steven clarified our goal is to deliver $800 million net savings, even if the stranded overhead is higher than in, than the initial $200 million. Currently, we estimate the stranded overhead will reach $250 million by 2019, so the gross target has been adjusted to $1.05 billion. This is an ambitious but necessary program in light of the macroeconomic environment we face. This slide offers more insight into how we expect the savings to emerge year by year, as well as the cost associated with achieving the savings.
We will invest $1 billion over four years to deliver $800 million in net savings every year going forward. Net of costs and stranded overhead, we expect a $100 million loss in 2017, followed by net savings of $200 million in 2018, $400 million in 2019, and $800 million by 2020. We are benchmarking our unit costs against best-in-class financial services companies. As Steve mentioned on last week's call, if our peers improve their expense ratios, our savings targets would need to move higher as well. I would like to offer some considerations as you think about our return on equity over the next several years. We haven't spoken much about investments today. However, the low interest rate environment is pushing down the yield on our portfolio.
As long as rates remain as low as they are, we will face pressure on our return on equity. New money rates in the most recent quarter were less than 3%. The yield curve had flattened. The derivatives we purchased in the past continue to offset some of the impact of low rates, but not all. Even though yesterday we have seen an increase in rates, the new money investment rate is still below the portfolio rate, and therefore will have an impact in 2017. After the separation of Brighthouse Financial, we expect variable investment income to drop by 25%. Lower assumed private equity returns and a smaller allocation to hedge funds will also impact VII. As a result, we expect future returns to be more in the range of the 2016 performance. We also referenced having $250 million of stranded overhead. We are committed to eliminating it.
However, it will take time, and until these stranded costs are gone, they will have an impact on our return on equity. Still, it will take time for MetLife to fully benefit from the compounding effect of a sustained program of share repurchases. I would like to expand our discussion of return on equity to how we think about ROE over time. Economically, we believe the right way to look at ROE is as a spread over the risk-free rate. If an insurance company's cost of equity capital is 12% when Treasuries offer 4%, then its cost of equity should fall to 10% when Treasuries offer 2%, all else being equal. This same 800 basis points equity risk premium is available in both cases.
Since the financial crisis, the spread of MetLife's ROE over the risk-free rate has averaged more than 8%. In the absence of the Accelerating Value actions we are proactively taking, sustained low interest rates and tepid GDP growth would test our ability to maintain an ROE spread above historical levels. However, we believe our refreshed strategy will not only improve our return on equity, but will also reduce our cost of equity. By significantly reducing the riskiness of the business, our strategy should lower our beta. As a result, we are targeting an ROE spread over the risk-free rate of approximately 8%, increasing to 9%-10% as our unit cost improvement program phases in. Keep in mind, this spread will not always respond instantaneously to changes in the underlying Treasury rate, but will adjust over time.
We believe this target will fairly compensate shareholders given the numerous actions we are taking to improve our risk profile. This slide is an update on the potential balance sheet charges if the 10-year Treasury yield stays at 1.5%. We gave an estimate of potential statutory and GAAP charges on our December 2015 outlook call at a level interest rate of 2% for all of MetLife, including what is now Brighthouse Financial. Those impacts were a net present value of less than $3 billion on a U.S. GAAP basis and less than $1 billion on a statutory basis. On this slide, we are showing the expected balance sheet impact on MetLife post-separation if the 10-year Treasury stays at 1.5%. For GAAP, we estimate the present value of potential charges at less than $1 billion after tax.
Most of the GAAP impact will be negative unlocking of deferred acquisition costs. There would be some effect from loss recognition for certain product lines. For statutory purposes, we estimate an impact on statutory capital of less than $0.2 billion. When measured against our operating and statutory earnings power, we think the impact of low rates on our balance sheet is manageable. As mentioned earlier, we are limited in what we can say on Brighthouse Financial beyond the information included in the Form 10. We are not able to offer any forward-looking information, nor are we able to offer opinions on the information included in the Form 10, just the facts. First, the transaction the Form 10 describes is a pro rata distribution of at least 80.1% of the shares of Brighthouse Financial's common stock to MetLife's shareholders, subject to conditions and regulatory approvals.
As stated in the Form 10, we think the separation will facilitate investors' ability to independently value Brighthouse Financial and enable Brighthouse Financial to take advantage of a retail dedicated business model. We spent a lot of time putting together the Form 10 with transparency in mind. This brings me to the cash flow and liquidity disclosures we offered in the 8-K we filed on October 5th to complement the Brighthouse Form 10 filing. Based on market conditions on June 30th, we expect to receive dividends paid to us from Brighthouse Financial and a MetLife-affiliated reinsurance subsidiary in an amount between $3.3 billion and $3.8 billion, subject to contingencies, investor interest, rating actions, and the macroeconomic environment, among others. Over the course of 2017 and 2018, we expect to pay down $1 billion-$2 billion of debt, again, subject to the contingencies we just listed.
This will likely be accomplished via debt maturities in those years. Steve previously mentioned our updated free cash flow ratio outlook of 65%-75% on average for 2017 and 2018. I want to point out that we are deliberately using the word average. Given the potential lumpiness of operating subsidiary dividends, we think it is prudent to frame free cash flow ratio over a multi-year period. Prior to the 8-K, we had not disclosed the size of the liquidity buffer we maintain. Going forward, we intend to carry a liquidity buffer of $3 billion-$4 billion at the holding companies. Roughly speaking, the range corresponds to two times fixed charges, which we believe is an appropriate liquidity buffer given the size and scope of our balance sheet and risks. Thank you so much for your attention.
The program now calls for a 10-minute break, after which we will take your questions.
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Ladies and gentlemen, please take your seats. Our meeting is about to resume. Ladies and gentlemen, please take your seats. Please make sure your personal electronic devices are turned off. Our meeting is about to resume.
Too excited there. I'm not going to lie, honestly.
All right. Thanks for joining us again. I'm going to kick off the Q&A session. A show of hands. Let's start with, we have the mics moving back and forth? Okay. When you're called on, if you could just say your name and state your firm, that would be outstanding. I'm going to go with Jimmy up here in the fifth row back.
Hi, Jimmy Bhullar, J.P. Morgan. I had a two-part question, but it's on the same topic. On share buybacks, if you can comment on the expected timing of the resumption of buybacks and give us some idea on the pace of the program that you announced, and how long would you take to do it. Related to that, Steve mentioned in his comments on having enough confidence in going through with the buyback plan, regardless of the SIFI outcome. What really gives you that confidence, and what have you learned through the process that allows you to make that statement?
In terms of timing, once we have clearance in terms of the period where we can't buy our own stock, we will begin a program. We'll be an opportunistic buyer, as we have always been in share repurchase programs. The $3 billion we think of as a program through the end of 2017. I can't be more specific because I don't know what the price of the stock will be at any point in time, but we'll be more aggressive when the stock's lower and less aggressive when the stock's higher.
As to why we feel confident about the ability to engage in this $3 billion buyback program, regardless of outcome of SIFI, is because we've done a lot of analysis around our free cash flow and our excess capital, and we've made some assumptions about what will occur on a regulatory basis, regardless of the outcome of the court case. All those factors combined make us confident of the program we've outlined.
Just to clarify the clearance, you mean once you're through the separation process? Is that the clearance you're referring to?
No, before that.
Okay. Thanks.
Quiet period.
Thank you.
Let's go to Tom on the right-hand side of the room.
Tom Gallagher, Evercore ISI. Couple of questions on cash flow. John, what % of the MetLife Holdings capital is expected to be released? Like, when you define your 65% to 75% free cash flow as a % of GAAP earnings, is some % of that assuming the MetLife Holdings capital is getting slowly freed up over time? Can you give us a rough sense of what that is?
Sure. Let me clarify a bit on MetLife Holdings, just to help all of you. If you think of MetLife Holdings, it's a very long-term business. It's got long-term care, universal life, and variable annuities. Its cash flows are very long-term, as I mentioned. In the next few years, it will be pressured a bit from our closed block, which is our pre-demutualized life insurance blocks, and we have to get back on a glide path with dividends. There'll be a weaker than normal cash flow generation for the next few years from that block of business. Also, if you want to think of that block, if you took the PFOs for that block for this year, sort of pro forma, you would need to reduce it by about $500 million as a starting point because of the sale of the broker-dealer.
It was half a year in the first six months of the year. We will be executing an SBDA recapture to Brighthouse that will also lower the PFOs. To get down to a starting point. It'll go off roughly at about 5% a year. That's a very slow runoff. As we mentioned, we're going to be looking at various ways to optimize that in the future, but that's not in those numbers that we quoted. Even though this MetLife Holdings will have slightly lower free cash flow than you might have normally thought because of this closed block, our $65-$75 in total reflects those current free cash flows. To the extent that we get more from optimization from the projects, that will only serve to increase the free cash flow.
My follow-up is, you talked about leverage and how it's going to be a use of capital as you're de-levering for the next few years. When we get to that point a couple of years out, you think from that point forward, I presume you'd be able to start increasing leverage again, which would be additive to free cash flow. At least the way I've thought about it, that could add another 10% or 15% to the ratio if you lever it up to 25% debt to cap, considering some level of book value growth. Does that sound directionally correct?
Right.
Can you comment on that?
There's a couple of things going on. When we separate and spin off, we need to bring down our leverage to get to our ratios we need to be with the rating agencies. They don't make you do it immediately. We talk to them, we have a plan, but between $1 billion and $2 billion, we need to let likely mature, which because we have about $1 billion a year maturing in 2017 and 2018. Those are probably just likely mature, and we'll be back then in line to where we want to be for our target for our rating. After that point, as our book value grows to keep the same percentage of leverage, that piece would be free cash flow. The compensating piece for that is share buybacks, because share buybacks keeps your book value down.
You just have to factor both those into models to think through how much is generated. Every year, obviously, we will keep the correct targeted debt to equity ratio that the rating agencies like as book value grows, then that piece is free cash flow. You'll see it in our historical 10-K where we show you the free cash flow. We'll publish that for you every 10-K, say, "Here's free cash flow, here's what we consider free or not." You can really follow it piece by piece, and it'll be there, so it'll be very transparent for you.
Ryan, keep your hand up there, please. Pass it down.
Thanks. Ryan Krueger, KBW. First on the ROE target, the 9%-10% above risk-free rates. Should we think about that as kind of a 2020 type of target once the cost saves are fully phased in?
It's more towards that versus further versus sooner. It takes time to flow this through the whole system. As you see the cost saves added with the strand, there's like a double investment that you have to make, which will affect, you saw 2017 was a $100 million loss from the program to our earnings power from that. That's on a pre-tax basis.
Okay. Then on interest rates, I think, Steve, I think you said two-thirds less interest rate sensitive, which I believe referred more to the balance sheet sensitivity. Can you comment on your view of how much less interest rate sensitive the earnings profile is of RemainCo?
Well, we'll give you some updates on that on our December call. It is far less. It is less sensitive, we still have that MetLife Holdings block, which has $11.4 billion of capital and all those assets, and that still has universal life and variable annuities, and long-term care, which is interest rate sensitive. It's kind of a balance going on between that.
Thank you.
We'll move over to the side here. Seth, keep your hand in the air.
Hi. Thank you. Seth Weiss, Bank of America, Merrill Lynch. Steve, you commented on your intention to keep the dividend flat at $1.60 post-separation. Just by my rough math, that raises the dividend payout ratio by call it 10 percentage points or so, just having a lower earnings base. Is the intention to keep that level of dividend payout stable going forward or to grow into a more normalized dividend payout ratio that's more commensurate with what you're doing now?
Seth, when we look at uses of capital, we look at opportunistically buying back shares, offering a good dividend that we want to grow with our business over time, acquisition opportunities. I'd say directionally, the $1.60 will probably grow a little more slowly than our earnings growth in the near term to do a little bit of catch up in terms of that ratio. At some point, I think we'll have caught up and then it'll go back to a more normal growth pattern. Our view was that our shareholders are looking to us to make sure that we approach capital appropriately. With the separation of Brighthouse, we're not anticipating that entity having a dividend coming out of the block other than maybe a nominal one.
We wanted to keep the combined dividend at the current levels. That was the reason for the $1.60 going forward for RemainCo MetLife.
The third row. Andy, over here. Just Andy.
Can you wait for the mic for me?
Just wait for the mic, please.
Hi, Andrew Vindigni, General American. RemainCo, from an assets to equity standpoint, excluding separate account assets, where would that roughly be, say, next year? In terms of new money business, what's the incremental new money business asset equity ratio? What would that be, or where do you expect it to be based on all the businesses that you were estimating before?
It's-
Roughly speaking.
Roughly it's 8% or 9%. It's not that much different from today, but very different types of businesses are changing. The international has higher, but we also have some very capital efficient businesses that we write. The Met99 is very capital efficient, very fast payback periods. The risk profile, I think, is what is the most dramatic difference between today and then tomorrow. Less so the raw equity ratio, but the risk in really part of that ratio.
I assume your ROE calculations in that table you showed had no capital buffer included or excluded from it, or how does any capital buffer play into those numbers?
That would've been in corporate.
Over here, Erik, please. Keep your hand in the air. Thank you.
Thanks. Erik Bass from Autonomous. Just a question. Can you walk through the cash flow repatriation mechanisms you have from your international operations, and how much of that cash gets to your U.S. holding company annually?
Today, we have an international holding company. I think we publish in our 10K what's in the U.S. and what's international. At year-end 2015, it wasn't that much internationally, it was about $1 billion. The repatriation, it's sitting there. Most of our international operations, except for Japan, are within this holding company structure, so we can reinvest money up and down without bringing it back to the U.S. We'll have to wait and see what happens with the tax reform on how we do this. It hasn't been a big issue for us yet, but as our international operations grow, and our international operations, even though they're growing well, do also pay cash. It would be a building force for us over time. We are very positively looking forward to a tax reform that could help with this.
Got it. Am I correct, though, that you would need cash to get to the U.S. holding company to ultimately be available to shareholders?
Correct.
Over here. Sean.
Thank you. Sean Dargan of Wells Fargo. Your capital deployment plans will not change if you're redesignated as SIFI. Is it fair to assume that embedded in the $3 billion-$4 billion liquidity buffer, that there's some sort of SIFI buffer, and if you are permanently not a SIFI, that there's more cash to be freed up to deploy?
Well, how we thought about it is, I think at last quarter, we're like $5.6 billion of cash to holding companies, well above the $3 billion-$4 billion. That's why we're confident that with earnings and the cash flow generation out to the end of 2017, that the $3 billion share buybacks can be done even if SIFI. We've got enough buffer there. The other factor is, if we were to be redesignated, there's still no capital rules. There's nothing published. It's going to take quite a while. You've got to go through CCAR. Our basic working assumption was you wouldn't have anything freed up until the end of 2017, which of the program would be done by then. It's all those factors together that give us the confidence that we think we've got enough.
Thank you.
Next one. Humphrey, keep your hand up. Thank you.
Humphrey Lee from Dowling & Partners. Steve, you mentioned that you look at kind of over 60 different transactions over the past 12 months, now with today's announcement related to buyback authorization, how should we think about your appetite in terms of acquisitions in the coming kind of 12 to 24 months?
Well, we are always looking at things that may fit our strategy and will be accretive over time for our shareholders. We'll view an acquisition the same way we're viewing capital allocation for our existing businesses. If we find something that we think is a good fit and the price is a price we think makes sense, we will either use internal capital or, in the case of a larger acquisition, we will go to the marketplace like we have in the past with other acquisitions to raise capital.
Just to follow up, do you have any kind of specific sweet spots in terms of the size of a transaction that you would prefer?
I'd say no. I don't anticipate doing a large transaction. When I say large, on the level of a Travelers or a Alico. In the near term, that's not something that I anticipate. If something got served up on a platter to us that was hard to walk away from, we'd consider it, but I think it's more smaller to midsize transactions are more likely.
Thank you.
Randy, keep your hand up, please. Thank you.
Thanks. Randy Binner, FBR. This question, I think, is for John, and it has to do with MetLife Holdings optimization. There's $11 billion of GAAP equity, I think, allocated there. The first part of the question is, in this base case of planning out to 2012 that you went through, do you assume that that $11 billion goes down? If so, roughly by how much?
We assume that the block, the PFOs and the capital will be freed up as the block wears off. It goes down about 5% a year.
That's normal runoff.
Correct.
You outline behavioral and contractual optimization levers. Would that be trying to incent holders to get out faster? Is that something that you want to pursue there?
Well, we said we're studying all these aspects of it, and to the extent that something makes good sense, good for the customer, as well as good for the shareholder, we will consider putting programs like that into place, which would be benefit the runoff faster. It has to be appropriate and good for all involved.
Just going back to Thomas Gallagher's question, this is the last one. That 5% reduction in GAAP equity, is that part of the plan free cash flows that go back up?
Yes. Yeah.
And-
Our $65-$75 takes into account this normal runoff that we have, but not additional actions that we could be able to do.
With the three-year drag you talked about with the closed block dividends being lower, you said you took the PFOs down $500 million and start from there after the recapture and the BD sale?
Yes.
Do you still go up from there with the three-year kind of dividend drag or is that more-?
No, that's included.
More back. Okay.
Yeah, that's all included.
Thank you.
Scott, on the right-hand side.
Hi. Thanks. Scott Frost from State Street. You talked about your double A OpCo targeted rating. Could you remind us why that target's there and specifically speak to any operational benefits that you may have that result from that rating?
Well, I'll start. There's art and science involved. We think that on the one end of the spectrum, a triple A rating doesn't get you much in terms of ability to sell product or do business in general versus a double A. In a single A, we think in some areas could be detrimental to us, including some of the larger corporate related transactions like pension risk transfers and some of our capital markets businesses. We think double A is kind of the sweet spot for us.
Just to touch on pension risk transfer, could you give us an idea of what would happen if your rating were lowered? What would we see in terms of potential migration, or would it affect new sales only, or how would that work under that scenario?
Well, I'd say the potential new sales could be impacted in some of those transactions. If you had a split rating, maybe you still were able to do some of those same transactions. If you had both the key rating agencies drop you down to single A, it could be problematic in terms of some of those businesses.
Just to be specific, that would affect new sales mainly not existing business you wouldn't expect to see migrate.
Correct.
Okay. Thank you.
Larry, in the back there. If you can just keep your hand up there, Larry, please. Thank you.
Larry Greenberg from Janney. Wondering if you could give us a little bit more color on your Property & Casualty business. You've got it grouped in the growth bucket. I think if you looked at pure auto personal lines companies, they would really point to some strong competitive advantage from a distribution standpoint if they considered themselves a growth company.
We put it in that bucket because of the strength we have at the work site and our ability to sell in that marketplace. We see some good growth prospects. We've been growing faster in that segment than others have, and we have a very strong position there.
Would you look for geographic expansion from where you're located now?
You mean beyond the U.S., or you mean within the U.S.?
Within the U.S.
Maria?
Hi, this is Maria Morris. With regard to Property & Casualty, we really have a data-driven approach. As you may know, we've been concentrated more in the Northeast. Most of our group customers are all over the U.S., and we're very opportunistic with regard to where geographically we want to do business. The reason it works for us is that with our clients, we have a choice model with many of them, where we will be competitive in many places, and where we're not, we can offer competitors.
Over on the left here.
Thanks. It's John Heagerty from Atlantic Equities. Just on the free cash flow. Is there anything temporarily boosting or depressing the free cash flow ratio over the next couple of years? Then further out, I know it's a long way away, but beyond 2018, would you imagine it staying in that sort of same ratio level, all things being equal?
Free cash flow varies due to statutory earnings is a key driver of the biggest piece of it, and that can vary by economic conditions. We have to do loss recognition testing at the end of every year. Depending on where interest rates are and the economy, that can have a year-on-year impact on your statutory earnings. Regulators can introduce new things sometimes year by year that can affect you in those periods of time. That's why we quote it on average. We give you a couple of years out. You tell me what interest rates are going to be in 2019 and 2020, and we can probably give you a better outlook for these things. We do believe that MetLife, the RemainCo, let's call it, is a solidly generating cash company.
It will also depend on our opportunities for growth around the world, because there's a trade-off between free cash flow and investing in your organic growth business. The best performing companies have really this trade-off. You can grow and invest the business, or you can pay it back to the shareholders. If we have good value-adding business in our IRR that looks good, and we got a big, fat, tall green bar to invest in, we think that's the best thing for shareholders. It'll be a balance between the opportunities we have organically as well as getting the free cash flow generation.
Thanks.
Yaron?
Thank you. Yaron Kinar with Deutsche Bank. Would you actively pursue transactions or reinsurance deals to maybe shrink the profile of MetLife Holdings and thereby further improve the free cash flow or ROE story?
We would look at it on the IRR to shareholders, because there's always a cost in reinsurance. You get cash, but the reinsurer usually makes some money, so you have to do a calculation that way. We look at it the same way, what's the IRR trade-off? First and foremost is to protect the policyholders. That is our job. We have to ensure that happens, and it has to be, we believe, beneficial for the policyholder as well as for us. We will look at all aspects of it. Most of this business is regulated in N.Y. That makes reinsurance. They do review the transactions very carefully, it's not always as easy as, say, compared to some other states, but it is something that we would definitely look at.
The second question would be, getting to the 9%-10% above risk-free ROE, it seems like just by doing the buybacks and the expense saves, you're roughly there already. Wouldn't there be additional drivers as kind of the next three years go through or go by to see further ROE improvement, whether through changing business mix or some of the other initiatives you highlighted today?
Well, if we did major transactions affecting MetLife Holdings, you saw the amount of capital there. That could change your ROE profile faster, we haven't factored that into that guidance that we've given you. You still have that big chunk earning and shrinking and going down year by year that affects the overall ROE.
Up front here, Todd, please.
Yeah, how you doing? Steve Roukis from Matrix Asset. I just want to ask you guys on digital sales, where are you thinking the next five years digital sales can be as a % of your sales? Because you showed the slide that when you make a sale, it's very capital intensive, commission intensive up front. What parts of the business and how much of the business do you think can be a point-and-click Amazon type like business?
We're doing a lot of work around that right now. I'm not sure that we've really seen demonstrated any place in our industry other than maybe in some of the auto policy areas where people are getting more online to buy insurance. We certainly are looking closely at ways to make that possible and try to do some pilots over time to see what kind of uptake there is by customers. There'll be some products that are simple enough that will work. Obviously, a term policy would be a much more likely candidate for that than a very complicated investment-related life insurance policy. We are working hard and finding ways, first of all, to put the technology in place to enable those kinds of sales, and also looking at pilots and tests to see what kind of uptake there are with customers.
Let me clarify a little bit because we put digital at the heart of the strategy. By that we mean digital in everything we do, whether you're an agent, a customer, how you deal with us, the new computer system we put into Japan that'll be rolling around the world helps the agents become much more productive. I don't know if any of you ever bought life insurance, even recently, it's still a very rules-based, form-based system for larger sales. This is digitizing with the agents, with the customers, how they deal, whether it be direct through the internet buying or with an agent helping you on the phone or in person. We plan to digitize all touch points.
Just to follow up, I guess someone going online and buying it themselves, what % do you think of your sales could be like that currently and in the next three years?
I don't see a large percentage of our sales being bought that way in the near term. I think over time, people will start buying simpler products that way, and that we want to be ready for that, and not only be ready for it, but be out front in terms of how we market to them. We need to build that infrastructure first to make sure the process is a streamlined one and a secure one.
All right, Tom.
Thanks. Tom Gallagher, Evercore ISI.
A question on disclosure. I heard what you said about GAAP ROE. You don't view as particularly the most useful measure of your returns. It's more IRR or value-added. Would it make sense then to start giving out those measures on a business-by-business standpoint so we can see what you're seeing? Because you showed broad directionally what you like, but you didn't really give any precision on the IRRs for each line of business or the value add for each line of business. Is that something that you're contemplating?
Well, we are using this extensively as a great management tool internally. To get it to the level of publishing and auditing all that is a whole other level of work. We may consider that over time, but the primary purpose of this is so we know how the capital is being well deployed. We use it as part of our planning process, our budgeting process. We believe that will generate better free cash flow over time as well as growth. We might consider that. It depends on the demand from the analysts and what you need, and if you find that truly useful. It is a great deal of work to get it, and you got to publish it regularly. European companies do this, but I've heard mixed views on how useful it is published all the time.
We're open to listen to what might make sense.
You have one vote for yes.
Okay.
Randy?
John, you mentioned that despite the recent move up in the 10-year Treasury yield, that you're still investing below the prevailing portfolio rate. It'd be interesting if you could size that as of today and yesterday and if there's any view on the investment side, if this move up in yield from how you look at the market is more driven by inflation expectations or possibly a little bit of an underbid Treasury auction. The net question is, are you really putting money to work as high as we think you are given where the 10-years moved in the last couple of days?
Hi, Steven Goulart, Chief Investment Officer. We certainly like the rate movements we've seen in the last few days. The question is, will it be sustainable? 10-year yield interest rates in general have been slowly moving upward. You are aware of how we use the forward curve now in projecting 10-year and its impact on earnings. Certainly, as rates move on a daily basis, we're putting money to work every day based on what the yields in the market are, that's positive to us. You raised why is it happening. I think that's one of the questions that we are watching very carefully as well and trying to understand. I think the general view right now is there's a little bit of a mix. Certainly, the election outcome was probably the least expected outcome, that creates uncertainty in the market.
That uncertainty reflects its way through prices and values in the market. There's also a view now in trying to focus on what are the policies of President Trump going to be and how is that going to impact the market. Certainly, we know there are things like a desire for more infrastructure spending, perhaps increasing debt levels, perhaps even generating growth. All of those factors could potentially be contributing to higher yields. I think right now it's a combination of some technical, you mentioned the auction, which there's been heavy supply in auctions in the last few days. Also the market's trying to figure out in this period of uncertainty where are policies going and what are the impacts on markets going to be. Again, it's all favorable to us.
We really do want to see markets rates move upward on a gradual path, on a manageable path. As far as you started the question with just the negative yield or what I call the sort of roll-off reinvest dilemma. I think we said in the earnings call earlier that for this quarter we were still looking at about 150 to 200 basis points difference between the roll-off yield and where we're reinvesting, that tends to be the case. It was a little bit higher this quarter for just some kind of abnormalities in what the actual roll-off was. We've been saying pretty consistently it's still 100 to 200 basis points. Again, you can just watch that as Treasury rates do move, it'll impact directly that gap.
Thanks.
Jay, up here on the left in the middle. You want to just keep your hand up in the air so Alicia can see you.
Thank you. Jay Gelb from Barclays. With regard to the distributable capital post the Brighthouse separation, this currently doesn't take into account the potential sale of the remaining 20% of Brighthouse once the spin-off is completed. Is that correct?
That is correct.
Would a reasonable range of additional distributable capital over and above what you've already talked about based on selling down that remaining 20% in the $2.5 billion-$3 billion range be reasonable as a starting point for analysis?
That's too high.
I don't think we can comment on.
We can't comment on.
potential value of what that statement is saying.
A value of Brighthouse. Let me clarify. All of our 65-75 does not include any of the Brighthouse movement of capital here or there. It's the underlying growth of business as usual.
Thank you. In the back on the left there. Thank you.
Thank you. Raquel McLean from Cohen & Steers. With regard to the $1 billion-$2 billion debt paydown, I thought the 8-K mentioned doing that via liability management, today you talked about maturing debt. Can you just clarify how you expect to accomplish the debt paydown?
We would call letting debt mature liability management.
Got it.
Clarification.
Thank you. Ryan?
Ryan Krueger, KBW. You've given us the free cash flow for the next couple years, you haven't talked about a kind of level of RBC expectation within the U.S. subs on a go-forward basis. I think you used to talk about 400%, and given that you won't have as much variable annuities or other interest rate sensitive products, is there also some level of embedded excess capital within the U.S. businesses that could be worked down longer term?
Our target is still 400% on an NAIC basis. N.Y. has some additional charges, there's a difference in what MLIC might publish, but our target is 400% on an NAIC basis. This will be factored in over time. We have this now at least with N.Y., with the greater of rule. Before, we were quite limited in the dividends that can naturally come out from N.Y. We'd have to go for an extraordinary dividend applied in N.Y. On December 31st last year, the law got changed. It's a greater of now, like many other states. It's a greater of 10% of your surplus or your last year's statutory operating earnings. Those operating earnings do change by interest rates going up and down because your derivatives are marked within those statutory earnings.
That's why your cash flow in a year can vary a bit as interest rates go up and down. Over time, this will flow out and we will target over time to be at 400% there.
When you thought about the 65%-75% free cash flow guidance for the next two years, was that mostly based on incremental statutory capital generation, or did it contemplate any actual work down of excess RBC?
I think it's a combination. We're taking the dividends out that we can take out. We're not assuming any extraordinary dividends.
Thanks.
Ryan, could you hand the mic to Donna, please?
Nigel Dally from Morgan Stanley. I had a question about your $800 million net savings target. You labeled it unit cost improvement. You also described it as ambitious. I was hoping to better understand exactly what you're doing to get that $800 million, maybe different buckets of targeted sources of savings, if that's the right way to think about it, but just wanted to understand how you're going to achieve that.
It's through a variety of programs. We have many mapped out and underway. A lot of it is an investment in technology to get better data that we can save a lot of money on how we process and do things. There's a series of programs that we have underway and how and where we do work, much more in shared services around the world. It's really streamlining and moving further on the core strategies laid out in 2012, but really leveraging the power of One MetLife much more, mainly through applications of technology.
Is there any thought to, over time, tackling some of the incredibly high cost debt on your balance sheet?
Well, it's high cost debt and it's high cost to replace, so it's unfortunate, but that's what we have.
All right. Thank you.
All right. I think that takes care of the Q&A. Steve?
I want to thank all of you for being here today, and I hope we've been able to answer your questions in this Q&A session. I would like to leave you with three key takeaways. The first is that we're committed to taking bold actions to better serve our customers and our shareholders. It is not easy to take MetLife through the kind of transformation we're undergoing, but it's necessary. The world is changing, and we must change along with it. The second is that we have the right strategy for the world that we're living in right now. We are directing capital to businesses with less interest rate sensitivity, higher free cash flow characteristics, and shorter payback periods. Third, now that the separation plan for Brighthouse Financial has been filed, we're very pleased to be able to resume capital management. Our investors have been patient. Thank you.
The $3 billion buyback authorization we announced this morning will begin to reward them for their confidence in MetLife. Again, thank you very much, and we look forward to speaking with you again on December 16th on our outlook call. Thank you.