Ladies and gentlemen, thank you for standing by and welcome to the MetLife third quarter 2016 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to the trends in the company's operations and financial results and the business and the products of the company and its subsidiaries.
MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission, including in the Risk Factor sections of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise. With that, I would like to turn the call over to John Hall, Head of Investor Relations.
Thank you, Greg. Good morning, everyone, and welcome to MetLife's third quarter 2016 earnings call. I'm John Hall, MetLife's Head of Investor Relations. On this call, we will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the investor relations portion of metlife.com in our earnings release and our quarterly financial supplement. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.
Now, joining me this morning on the call are Steve Kandarian, Chairman, President, and Chief Executive Officer, and John Hele, Chief Financial Officer. Also here with us today to participate in the discussions are other members of senior management. After prepared remarks, we will have a Q&A session. In fairness to all participants, please limit yourself to one question and one follow-up. Finally, given the busy insurance earnings calendar this morning, we will end the call promptly at the top of the hour. With that, I'd like to turn the call over to Steve.
Thank you, John, and good morning, everyone. Last night, we reported third quarter operating earnings per share of $1.28. The quarter was characterized by a rebound in variable investment income and solid expense control. Adjusting for notable items, operating earnings were $1.53 per share, which compares to $1.36 per share on the same basis in the prior year period. Two actions account for most of the notable items, the resegmentation of our business, and our annual actuarial assumption review. First, following resegmentation, the Brighthouse segment will no longer receive an aggregation benefit associated with GAAP reserve testing of its variable and universal life policies. This previously announced charge lowered operating earnings by $254 million. Second, we completed our annual actuarial assumption review in the third quarter. This review covered all of our global businesses with the exception of variable annuities, which we updated last quarter.
The actuarial assumption review lowered operating earnings by $65 million. Compared to a year ago, equity markets, which were up 3.3% in the quarter as measured by the S&P 500, had a favorable impact of $80 million, while most other market factors had little impact. Among other earnings items, underwriting results were weaker in individual and group life, as well as in property and casualty. John Hele will discuss underwriting in greater detail. In addition to generating more of our earnings in lower tax jurisdictions, the settlement of several income tax audits benefited normalized results and reduced our quarterly effective tax rate to 20.6%. Finally, a below the line goodwill write-off served to eliminate Brighthouse's remaining goodwill. Moving to investments. Variable investment income totaled $409 million in the quarter, which is above the high end of our quarterly guidance range of $375 million.
Higher returns associated with private equity and real estate joint ventures contributed to the outperformance. While we continue to face reinvestment rate pressure, recurring investment income benefited in the quarter from higher asset balances. In the quarter, our global new money yield stood at 2.89%. This compares to a roll-off rate of 4.78%. In the second quarter, our new money rate was 3.07%, while the roll-off rate was 4.95%. Declining yields continue to pressure the entire life insurance industry. A prolonged period of artificially low interest rates would be easier to accept if we were achieving the stated goal of boosting economic growth. That is not the case. The U.S. economy continues to muddle along at a less than 2% growth rate, and the global economy at around 3%. In our view, the world has become too dependent on monetary policy to solve its economic challenges.
Fiscal policy must play a larger role in fueling growth, as it has done historically. Pro-growth tax reform and targeted spending increases on infrastructure would accelerate economic expansion. Over the longer term, entitlement reform would reduce the nation's debt burden, and sensible regulatory relief, combined with a more constructive tone in Washington, would boost business confidence and spur greater economic activity and job growth. The alternative of continuing to rely exclusively on unconventional monetary policy will only prolong a massive transfer of wealth from savers to borrowers. Artificially low interest rates punish those on fixed incomes, including the elderly, and make the cost of financial protection more expensive at a time when social safety nets are under increasing pressure.
Turning to regulatory matters, I would like to provide a brief update on the government's appeal of the U.S. District Court decision rescinding MetLife's designation as a systemically important financial institution, or SIFI. On October 24th, oral argument in the case was held before a three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit. MetLife used the opportunity to vigorously defend the district court's carefully reasoned opinion. We continue to believe we have a strong case on the merits and look forward to a final decision from the D.C. Circuit Court in the coming months. The losing party has the option of appealing to the full bench of the D.C. Circuit Court or to the U.S. Supreme Court. Following the close of the quarter, we achieved several important milestones in conjunction with our planned separation of a substantial portion of our U.S. retail business.
Shortly after our September board of directors meeting, we filed a Form 10 for Brighthouse Financial with the Securities and Exchange Commission. At the same time, we filed a companion 8-K providing insight into how we expect the planned separation would affect MetLife. We also filed a resegmented quarterly financial supplement with historical information on the new segments. We are working through the regulatory approval process and do not foresee any issues that cannot be resolved. We believe the separation remains on track for the first half of 2017. Shifting to expenses, I would like to provide an update on our unit cost improvement program. As we explained on the Q2 earnings call, by 2020, the program will achieve pre-tax run rate savings of $800 million, net of stranded overhead associated with the planned separation of Brighthouse Financial.
In order to generate these annual savings, we plan to invest approximately $1 billion from 2016 to 2019, with these one-time investments spread out over the four-year period. The unit cost program reflects one of the ways we are changing how we run our company. We are placing a strict cap on our expenses based on benchmarking against peers. If our peers improve their own expense ratios, our savings targets would need to move higher as well. Before I turn over the call to John to discuss our financial results in greater detail, I'd like to remind you that we are hosting an Investor Day on November 10th. I know you have a lot of questions on capital management and return on equity. We will not be addressing those questions today, but we'll cover capital management and ROE comprehensively at next week's Investor Day.
We'll also highlight MetLife's new brand direction and provide a full overview of our refreshed enterprise strategy. Our accelerating value work has sharpened our focus on cash and capital efficiency, and we look forward to telling you more about our work in these areas. Now to John.
Thank you, Steve. Good morning. Today, I'll cover our third quarter results, including a discussion of our insurance underwriting margins, investment spreads, expenses, and business highlights. I will conclude with some comments on cash and capital. Operating earnings in the third quarter were $1.4 billion, or $1.28 per share. This quarter included four notable items, which were highlighted in our news release and disclosed by business segment in the appendix of our quarterly financial supplement, or QFS. First, the establishment of a Brighthouse Financial segment resulted in the loss of an aggregation benefit associated with the GAAP reserve testing of variable and universal life, or VNUL policies. This decreased operating earnings by $254 million, or $0.23 per share after tax.
Second, results of the actuarial assumption review completed in the third quarter for all products other than U.S. variable annuities resulted in a decrease to net income of $59 million. Along with other insurance adjustments, decreased operating earnings by $65 million, or $0.06 per share after tax. This charge was primarily due to a change in the earned rate assumption for the traditional life closed block in MetLife Holdings, as well as deferred acquisition costs, or DAC, unlockings in EMEA and Asia. These are partially offset by favorable DAC unlockings in Brighthouse and Latin America. For long-term care, the annual loss recognition testing continues to reflect positive margins. Third, variable investment income was above the 216 quarterly plan range by $22 million, or $0.02 per share after tax from the impact of DAC.
Fourth, favorable catastrophe experience and prior year development increased operating earnings by $16 million or $0.01 per share after tax. Adjusting for all notable items in both periods, operating earnings were up 11% year-over-year and 10% on a constant currency basis. On a per share basis, operating earnings were $1.53, up 13% and 12% on a constant currency basis. Turning to our bottom line results. Third quarter net income was $571 million, or $0.51 per share. Net income was $850 million lower than operating earnings, primarily because of derivative net losses of $834 million related to changes in interest rates and equity markets. Additionally, the third quarter of 2016 includes a goodwill impairment of $223 million after tax related to the new Brighthouse Financial segment driven by the separation.
As part of the resegmentation, the goodwill associated with the previous segments were allocated to the new reporting units in the segments, including within Brighthouse, and tested at that level. As a result, we wrote off all of the goodwill allocated to the Brighthouse Life and Run-off units. The difference between net income and operating earnings in the quarter included an unfavorable impact of $360 million after tax related to asymmetrical and non-economic accounting. Book value per share, excluding AOCI as an FCTA, was $53.40 as of September 30th, up 4% year-over-year. Tangible book value per share was $44.40 as of September 30th, up 5% year-over-year. With respect to third quarter underwriting margins, total company earnings were lower by approximately $0.12 per share versus the prior year quarter after adjusting for notable items in both periods.
Underwriting in Brighthouse accounted for approximately $0.07 of the total, primarily due to the quarterly impact of the loss of the aggregation benefit in VNUL and unfavorable mortality. Excluding Brighthouse, underwriting earnings were lower by approximately $0.05 per share year-over-year due to less favorable mortality experience in group benefits and MetLife Holdings, as well as higher group disability claims in Mexico. The group life mortality ratio was 89.3%, unfavorable to the prior year quarter of 86.1% and at the high end of the annual target range of 85%-90%. We experienced higher claim severity versus the prior year quarter, but remain in line with our expectations on a year-to-date basis. The non-medical health interest adjusted loss ratio was 76.9%, favorable to the prior year quarter of 78.5%, and modestly below the annual target range of 77%-82%.
For the year, non-medical health results have been better than our expectations. MetLife Holdings interest-adjusted benefit ratio for life products was 60.4% and 59.9% after adjusting for a notable reserve item as a result of the actuarial assumption review. On a comparable basis, the 59.9% ratio was unfavorable to the prior year quarter of 55.5%, primarily due to higher claims severity. Turning to investment margins, the weighted average of the three product spreads in our QFS was 167 basis points in the quarter, up eight basis points year-over-year. We believe a weighted average is the better measure for U.S. spreads provided now in our QFS, as Retirement and Income Solutions represents approximately 75% of the total asset base.
Pre-tax variable investment income, or VII, was $409 million, up $142 million versus the prior year quarter due to improved hedge fund performance, the sale of a real estate joint venture interest, and stronger prepayments. Product spreads excluding VII were 138 basis points this quarter, up four basis points year-over-year. Higher asset balances and portfolio optimization accounted for most of this increase. Overall, higher investment margins in the quarter accounted for approximately $0.04 of EPS improvement year-over-year. With regard to expenses, the operating expense ratio was 20.1%, favorable to the prior year quarter of 24.2% and 21.4% after adjusting for the interest related component of the non-cash charge in the third quarter of 2015. The lower operating expense ratio in the quarter was primarily due to the sale of MetLife Premier Client Group, lower employee benefits, and other expense efficiencies.
Overall, better expense margins contributed approximately $0.09 of EPS improvement versus the prior year quarter. I will now discuss the business highlights in the quarter based on the new operating segmentation as disclosed in our 8-K filed on October 20th. The U.S. segment is comprised of Group Benefits, Retirement and Income Solutions, and Property and Casualty. The remaining five segments are Asia, Latin America, EMEA, MetLife Holdings, and Brighthouse Financial. Group Benefits reported operating earnings of $186 million, up 5% versus the prior year quarter, and 2% adjusting for notable items in both periods. The primary drivers were non-medical health underwriting and higher investment margins. This was partially offset by a less favorable mortality experience. Group Benefits operating PFOs were $4.1 billion, up 4% year-over-year, driven by growth across all products. Sales were up 31% year-to-date, with strong growth across most products and markets.
Retirement and Income Solutions, or R&IS, reported operating earnings of $308 million, up 15% versus the prior year quarter, and 24% after adjusting for notable items in both periods. The key driver was higher investment margins. R&IS operating PFOs were $1.4 billion, down 13% year-over-year due to lower pension risk transfers, or PRT, versus a strong third quarter of 2015. We continue to see a good pipeline and remain optimistic about future growth opportunities. Excluding PRT, operating PFOs were up 8%. Property and Casualty, or P&C, operating earnings were $58 million, down 13% versus the prior year quarter, and also down 13% after adjusting for notable items in both periods. The primary driver was non-catastrophe homeowners losses, partially offset by an improvement in non-catastrophe auto results.
In auto, we have been taking targeted rate increases over the last 12 months. In the third quarter of 2016, the average premium increase on renewing customers was approximately 6%. These increases, along with other management actions, should increase an improving auto combined ratio in the upcoming quarters, adjusting for seasonality. P&C operating PFOs were $882 million, up 1% year-over-year. P&C sales were down 5% due to pricing actions, as well as a shift toward more profitable business segments and markets. Turning to Asia. Operating earnings were $324 million, down 4% from the prior year quarter, and 5% on a constant currency basis after adjusting for notable items in both periods. The prior year quarter had favorable volume growth and benefited from $21 million of investment income from a loan sale, as well as one-time tax benefits.
In the current quarter, Asia results benefited from strong volume growth and lower expenses. Asia operating PFOs were $2.2 billion, up 4% from the prior year quarter, but down 9% on a constant currency basis due to the impact of the withdrawal in Japan of single-premium Accident & Health yen products in 2015 and the deconsolidation of the company's India operations. Asia sales were down 11% year-over-year on a constant currency basis, reflecting the impact of management actions to improve value in targeted markets. In Japan, sales were down 10% year-over-year. We have seen a successful shift in sales to higher return foreign currency denominated life product, which nearly doubled year-over-year, and away from low return yen life product, which were down 50% year-over-year. Continuing that trend, we expect over 90% of Japan sales in 2017 to come from higher margin foreign denominated and protection products.
Japan third sector sales were down 31% versus the prior year as a result of exiting single premium A&H and the negative impact on package sales from a reduction in yen-denominated whole life product sales. Asia did have strong sales in emerging markets, which were up 24%. Latin America reported operating earnings of $133 million, down 27% from the prior year quarter, but up 12% on a constant currency basis after adjusting for notable items in both periods. The key drivers are market impacts and volume growth. Latin American operating PFOs were $891 million, up 4% and 12% on a constant currency basis, driven by growth across the region. Latin America sales were down 6% year-over-year on a constant currency basis, primarily due to lower group and affinity sales.
EMEA operating earnings were $74 million, up 12% year-over-year and 61% on a constant currency basis after adjusting for notable items in both periods. The key drivers were favorable underwriting, lower expenses, and several non-recurring items, as well as volume growth. EMEA operating PFOs were $621 million, essentially unchanged from the prior year period, but up 3% on a constant currency basis driven by growth in employee benefits and Accident & Health. We continue to see a favorable shift towards higher margin products. Total EMEA sales increased 10% on a constant currency basis. MetLife Holdings, which primarily consists of our legacy retail and long-term care runoff businesses reported operating earnings of $266 million, up 9% versus the prior year quarter, primarily due to higher variable investment income. Adjusting for notable items in both periods, operating earnings were essentially flat as favorable markets and lower expenses were offset by weaker underwriting.
MetLife Holdings operating PFOs were $1.6 billion, down 9% year-over-year, mostly due to the sale of the former MetLife Premier Client Group, which included the company's broker-dealer unit. Brighthouse Financial or BHF operating earnings were $68 million, down 80% versus the prior year quarter. The key driver was the previously discussed $254 million one-time loss related to the resegmentation of MetLife's business to establish a BHF segment, as well as a current quarter impact of $42 million. The ongoing impact to BHF from the loss of the aggregation benefit is expected to be approximately $40 million per quarter after tax, gradually declining over time. Please note that the Brighthouse Financial segment results within MetLife's financial statements do not match Brighthouse Financial, Inc. and related companies' financial statements shown in the Form 10 due to accounting timing differences.
Excluding the one-time loss of $254 million and all other notable items in both periods, operating earnings were down 22% due to unfavorable underwriting and higher taxes. This was partially offset by favorable markets and lower expenses. BHF operating PFOs were $1.3 billion, down 13% year-over-year due to lower fees for annuities as a result of continued negative fund flows, and lower premiums due to a decline in SPI sales. BHF annuity sales were down 34%, and life sales were down 46%, mostly resulting from the suspension of sales through one distributor and lower sales from the former MetLife Premier Client Group. Conversely, BHF continues to see strong growth from Shield Level Selector, which is up 54% year-over-year. In corporate and other, we had an operating gain of $4 million compared to an operating loss of $983 million in the third quarter of 2015.
In 3Q15, corporate and other results included a non-cash charge of $792 million related to the tax treatment of a wholly owned U.K. investment subsidiary of MLIC. In 3Q16, the key driver for the operating gain is a lower effective tax rate, which included a true-up to our projected tax run rate of 22.1% and a benefit related to the settlement of certain income tax audits. Adjusting for these items, the effective tax rate in the quarter was 20.6%. Despite the operating gain in the quarter, we expect corporate and others' full year 2016 operating loss to be within the guidance range of $500 million-$700 million. I will now discuss our cash and capital position. Cash and liquid assets of the holding companies were approximately $5.6 billion at September 30th, which is up from $4.9 billion at June 30th.
This increase reflects subsidiary dividends, proceeds from the sale of the former MetLife Premier Client Group, payment of our quarterly common dividend, and other holding company expenses. Turning to our capital position, we report U.S. RBC ratios annually, so we do not have an update for the third quarter. For Japan, our core solvency margin ratio was 952% as of the second quarter of 2016, which is the latest public data. For our U.S. companies, preliminary year-to-date third quarter statutory operating earnings were approximately $3.4 billion, and net earnings were approximately $2.2 billion. Statutory operating earnings increased by $2.1 billion from the prior year, primarily due to the favorable impact of equity markets on certain variable annuity reserves and the impact of a prior year tax charge. We estimate that our U.S. statutory total adjusted capital was approximately $30 billion as of September 30th, up 3% from December 31st.
In conclusion, MetLife had a solid third quarter. Investment margins driven by an improvement in variable investment income and lower expenses offset underwriting weakness in the quarter. In addition, our cash and capital position remains strong, and we remain confident that the steps we are taking to implement our strategy will drive improvement in free cash flow and create long-term sustainable value for our shareholders. With that, I will turn it back to the operator for your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment please for your first question. Your first question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hey, thanks. Good morning. My first question was on the $1 billion of investments to achieve the cost saves. Should we expect those to, I guess, one, be fairly gradual over the full year period, and then two, will they be reported in the operating earnings like you did with your prior cost save program?
Hi, Ryan Krueger, this is John Hall. We expect those to be spread out over the period of time, a little less in 2016. Then sort of roughly evenly over the time period remaining. We'll give you some more details next week on all this. This will be in operating.
Got it. Okay. Just to clarify, did you say that your expectations for the consolidated tax rate going forward is 22.1%?
I couldn't quite hear. I think you asked if the tax rate for this year would be 22.1%. That's correct.
Is that your expectation going forward as well, though?
Yes.
Okay. All right. Thank you.
Your next question comes from the line of Sean Dargan from Wells Fargo. Please go ahead.
Hi. I have a question about Brighthouse Financial, while it's being reported within MetLife. I'm just wondering if there will be any headwinds from the loss of aggregation benefit in the next couple of quarters that we should expect to see while that's part of MetLife.
Hi, Sean. It's John. As I mentioned in my remarks, I said that we had $42 million this quarter from it, and we expect about $40 million a quarter gradually declining over time. Yes, there will be an impact.
Okay. Yes. All right. I'm sorry about that. Just wondering, did not see any charges in MetLife Holdings from attributable to long-term care. I'm just wondering how the margins are holding up as you review the actuarial assumptions in that product in the quarter.
Right. We just finished our GAAP loss recognition testing for that, and it's still quite sufficient. Our GAAP reserves and our stat reserves are very solid there, too. As you may have seen, we have been putting through price increases and have been getting what we expect. We don't expect to get them in all states at all times, but it has been within our expectations and our plans for the rate actions that we filed.
Thank you.
Your next question comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead.
Hi, good morning. I had a question on just sales in Asia. They were down 11%. Just wondering what your outlook is for the Asian business in terms of sales growth and specifically in Japan given the pullback from the yen whole life market and also the weakness in third sector sales there.
It's Christopher Townsend here. Let me just sort of run through the sales overall in Asia. The sort of high level number was -11% for the quarter. The shortfall there really was all about Japan and Korea. The high point to our emerging markets were up 24%, Asia ex-Japan and Korea was up 10%. For Japan, all the sales shortfall really is around the A&H business, which was down 31%. You should think about that in terms of a third, a third, a third in terms of the shortfall. A third being due to the withdrawal of single premium A&H product. A third in terms of the package yen life sales as we flip the life business effectively from yen whole life to foreign currency, we lose some of those package sales.
A third is also for reduction in terms of the sponsor direct marketing business where the economics weren't appropriate for us. On the life side, whilst you see a number of about -3%, you should note the comments that John made earlier in terms of the really big shift we've made from yen life to foreign currency, which has higher value overall. The other shortfall was Korea. The whole market is down in Korea in terms of the economic situation in that market, and we've pulled back from some of the independent agency business there again because the commissions are too high and the value is too low. That's the sort of the overall story for Asia. I think you'll see that continue for the fourth quarter, although A&H sales in Japan will recover slightly as compared to the prior three quarters.
On the yen whole life, are you completely done making the product changes and pulling the products from all the distribution channels or is that an ongoing process and could result in a further slowdown in the fourth quarter?
Well, you should note that we made significant changes in that portfolio well before the negative interest rate policy came to bear. We were one of the first movers to close down a bunch of that business. The yen whole life sales for us are about 6% of our total sales this quarter. We've made very significant changes. There's a couple more changes we made recently in terms of stopping yen life sales in the bank channel and also stopping sales for the younger cohort. That's really the final changes. There will be a repricing of all of the yen life products in the market next year in April when the standard interest rate changes come in. As John mentioned, we're pretty much out of the yen whole life business in Japan right now.
Okay. If I could ask one more just for John. You mentioned the $153 earnings number ex some of the unusuals you highlighted. Obviously, there's a tax benefit in there. Even if you take out, let's say, $0.10 for taxes, it's still a fairly high number. To what extent do you view maybe a $140-$145-ish number normalized for taxes as indicative of your earnings power going forward, or do you feel that some of the business is over-earned this quarter?
Jimmy, that sounds a bit like an earnings guidance question.
No, not necessarily guidance, I realize quarter results move around. Maybe you could talk about if you feel that maybe P&C margins were unusually strong or some of the businesses that were
VII was at the top end of the range, slightly over the top that we normalized a little bit for. That's probably a little higher than what we would expect. We expect more of the midpoint of the range, I think, on an ongoing basis. We also had some good equity market impacts in the quarter that affected MetLife Holdings as well as BHF. We had some good expenses. We also had some underwriting. The group life was a little higher than we'd seen so far this year. There were some pluses and minuses throughout the quarter. As we said, we thought this was a strong third quarter.
Okay, thank you.
Your next question comes from the line of Thomas Gallagher from Evercore ISI. Please go ahead.
Good morning. First question is on MetLife Holdings. I guess just going back to when you guys announced the sale of the MetLife Premier Client Group, I think the guide was $250 million annual reduction in expenses related to it. If I look at MetLife Holdings, there was a much larger drop than that if I annualize it from an expense standpoint. Just curious if the earnings benefit you're going to get from that is going to be substantially greater than that $250 million or so number that you first gave out. I think you had also said that was going to be split between Brighthouse and Met RemainCo. Is there also going to be or was there a Brighthouse benefit to that?
Hi, this is John. We said the $250 was split approximately between MetLife Holdings and Brighthouse, that would be a full year or so. You have to take a partial year into account. MetLife Holdings has a lot of things in it going on, including some of the costs and strands. I think we'll have to give you more guidance on MetLife Holdings when we get to our outlook call in December and can give you more view on MetLife Holdings.
John, has there been a change in, I guess, the expense benefit that you would expect to get through that transaction, or is there something else going on here that's beyond that?
No, that benefit is exactly coming through as we had thought.
Okay, my follow-up is just on Brighthouse. Steve, I guess the comments you made about $200 million of stranded costs, is that the way we should think about the expense ramp-up? If we take the two businesses, Met RemainCo and Brighthouse, and then think about separation, is a ramp-up of a $200 million figure what we should expect to see from Brighthouse versus pro forma levels that we're seeing right now?
Tom, the number we gave you about stranded costs of $200 million we talked about last time relates to what would be stranded remaining with RemainCo MetLife if it wasn't addressed. We're addressing that in the expense initiative, the unit cost initiative that we discussed. Those numbers move around a little bit, so the 200 may be closer to 250 now as we refine our estimates. The net number has not changed, meaning the higher the strand, the more we'll have to drive the other expense saves. The $800 million net number remains as is.
Is there anything you can say on the ramp in expense levels that you would expect as Brighthouse becomes an independent company?
We'll give you more detail into certainly MetLife going forward at the outlook call in December. As to Brighthouse, these expenses really are at RemainCo MetLife. They're not at Brighthouse. This is the overhead at MetLife that we have to deal with. That's a stranded cost.
Okay, understood. Just curious if you could just address that question. I don't know if you're able to, if you could address the question of expense increases that we can think about as Brighthouse separates from MetLife.
I'm going to give Eric a chance to address what you're talking about.
Yeah, I think you're referring to are costs at Brighthouse going to go up, and you may be referring to there will be some public company costs at Brighthouse that previously would never, of course, exist in Brighthouse as a segment within MetLife. The answer is yes, there are some public company costs that Brighthouse on a standalone basis will incur once it's public.
Okay, thanks.
Your next question comes from the line of Seth Weiss from Bank of America. Please go ahead.
Hi, good morning. If I could just stay on this theme of the corporate expenses. Just to clarify, the stranded overhead that's running through corporate now, is that in the number for the next two, three quarters while Brighthouse still technically remains part of MetLife, or will that only start to exist starting the back half of next year?
That will happen after separation, this is John.
Okay, great. Thanks. In terms of the $800 million of net benefits, can you give us a sense of how that ramps up between now and the 2019 goal?
Hi, this is John. We'll give you some more details on that next week. It's not a hockey stick, so it does spread out over the period of time.
Okay, thanks. If I could just sneak in one numbers question on Brighthouse. I think last quarter you brought the GAAP long-term interest rate assumption down to 425. Can you just comment on what that looks like on a statutory basis?
Well, this is John. In statutory, we do the New York Seven test, which starts at a level rate as of year-end of the prior year. The 10-year Treasury was at 170, if I remember correctly, at year-end. That's all of our reserves are tested in our U.S. statutory needs at that level.
I'm sorry, what's the ramp up as part of that scenario?
For standard reserves and cash flow testing, it's level. There's a shock down that then goes back up again. For the VA CARVM reserves, it matches the long-term assumption, slowly ramps up from the current one point year-end 10-year Treasury at year-end, ramping up slowly to the four and a quarter over 11 years.
Great. Thanks so much.
Your next question comes from the line of John Nadel from Credit Suisse. Please go ahead.
Thank you. Good morning. Thanks for taking the question. I have a question on Brighthouse. You're running there with a 700%+ risk-based capital ratio, and I think versus what we would typically think would be a more normalized 400%, that implies excess capital of about $3 billion, but your Form 10 also talks about a $3 billion differential if you held VA reserves at a CTE 98 versus 95. I guess my question is, Eric, is that a coincidence or should we read into this that management expects to have to run that company supporting the CTE 98 level of reserves on an ongoing basis?
I think the best way to think about it is we'll bifurcate it. The non-VA business, think about a targeted RBC ratio of 400%, and then the VA business, CTE 95 plus the $3 billion, which gets you in the range of CTE 98, 99. The initial starting point, which we have in the F10, says that would be roughly at 700%. I think the best way to think about it is the way I just said, 400% non-VA, and then CTE 95 plus the $3 billion buffer, which will obviously move around over time for the VA business.
Okay, if the overall risk-based capital ratio right now is over 700, that would imply that the non-VA piece is well above 400, I guess.
Hi, this is John. Just let me add in here. The target is 400 for non-VA.
Yeah.
VA will be run not to an RBC target, but a CTE 95 plus a buffer. The initial buffer is $3 billion. As explained in the Form 10, that buffer will vary depending upon market conditions and is used as a buffer for the hedging strategy over time. It will fluctuate up and down depending upon market conditions. It's really quite a different way, I think, from looking at it, and this is quite unique, I think, to what Brighthouse is trying to do. There's a lot of good explanation on this in the Form 10 that I know Eric looks forward to explaining to you over time.
I understand. I've been through it. I guess I'm trying to follow up and understand if the overall RBC ratio for Brighthouse is 700-plus, that would imply, based on the commentary, I believe, that the non-VA is carrying excess capital while the VA piece might not be. Is that reasonable?
I would say that if you're thinking about what gets it to 700, the vast majority of that is the $3 billion buffer.
Yeah.
Okay. The non-VA, 400-plus. What gets the combined ratio now up to the 700 is when you do the calculation and bring in that $3 billion, which of course we're really thinking about on a CTE basis.
Understood
That's what gooses the RBC.
Okay. Understood. Then if I could just switch to Japan. There's some efforts underway there that looks like it might replace the SMR ratio with something closer to a Solvency II type of approach. We've heard from a few companies their views on this change, and I was hoping you could offer some thoughts around this as well, particularly given how significant the Japanese business will be as a percentage of RemainCo post the spin-off.
Hi, this is John. There have been studies underway by the Japanese regulator to think about a more Solvency II type approach. This is under study by them. With negative interest rates, we'll have to see how they think about this. Clearly, Europe is having challenges thinking about using a Solvency II mark-to-market balance sheet when you have negative rates. You do have to scratch your head a little bit on this. I think it'll be a while before Japan gets it really going forward, although we are actively working with the government on that.
Okay. No, a couple of companies have provided estimates even under the approach that's under study. Anything you can provide there?
We're not prepared to discuss it at this time. We think this is still quite a bit in fluctuation, and as I said, thinking about a mark-to-market balance sheet in negative interest rates is really a strange thing to think about.
Okay. Thank you.
Your next question comes from the line of Randy Binner from FBR. Please go ahead.
Hey, great. Thank you. I wanted to ask a question back to MetLife Holdings and kind of specifically, what kind of flow expectations we would have for the runoff areas of that segment if you plan to engage in active programs to accelerate the runoff, or if it's just going to be more status quo. Then the follow-up from that is, what free cash flow conversion expectations might look like from there over time?
Hi, Randy, this is John. That's a great question. We are working hard on that. We have an executive now who's in charge of this whole business, and his mandate is to optimize value for the shareholder from these blocks of business. We've already taken some steps to lower costs. We've outsourced a good portion of the administration of this to CSC. You may have seen that announcement. That will save us money, and we'll be looking at further steps. It is complex, though. These businesses are not simple to deal with. Both, say, the closed block we have, we have agreements with New York on that. We also have long-term care, and this is all in our New York-regulated entity. We would need regulatory approvals on much of what we have to do.
Nevertheless, we will be working on this, and we'll give you more guidance over time as we create plans on this.
Is it reasonable to assume that the free cash flow generation from that piece would be bigger than it was historically and probably a little bit better than the rest of RemainCo overall? Because if you're winding down the required capital there, then that should free up capital.
That's right. There's a lot of interactions going on. Both next week and at our outlook call, we'll give you more detailed guidance on this. There's a lot of factors going on. We don't have the MetLife Premier Client Group sales anymore, the strain from that, which is a help. We also have narrowing spreads on our investment portfolio on these and the closed block going on. It is a slow runoff over time. It's very long-term business, both the life business as well as the long-term care business. It's not a short tail type business. There's a lot of complexity to it. It's why we have a smart person in charge of optimizing this for us but we will give you more guidance as we develop our plans on this.
Okay, great. Thanks a lot.
Your next question comes from the line of Yaron Kinar from Deutsche Bank. Please go ahead.
Good morning, everybody. I have two questions. First, Steve, I think you've taken a very cautious approach regarding the SIFI designation. As you're going through the separation process now, can you maybe talk about how you're looking at SIFI, given the fact that it's still being adjudicated at this point, and maybe government's kind of approach is still not clear, at least to us, insofar as how it would deal with RemainCo or the new structure? Maybe you could give us a little bit of color on how you're thinking about it.
Yaron, as you know, we're before the circuit court when the government appealed the lower court ruling that designated MetLife as a SIFI. We'll have to wait and see what comes out of that court decision, and we think we'll hear that in the coming months here. I think you're really getting to the impact on our thinking around capital management. We certainly are taking that into account, and we'll talk more about capital management next week at our investor day.
Okay. As far as your thinking is concerned, is the regulatory risk profile any different going forward?
The regulatory risk?
Yes.
Once we separate out the U.S. retail business, certainly it is a smaller company. Some of the liabilities in businesses that were pointed to in FSOC's decision to designate us as a SIFI were concentrated in that business. Certainly it is a de-risk business going forward.
Another one probably for you, Steve. I'm hearing some frustration around fiscal and monetary policies, those seem to be real headwinds for top-line growth and spread compression as well. With those in mind, what avenues or what channels do you have for growing earnings? Not so much the cash generation profile, but actual earnings in the company.
Well, after the separation, the company will be less focused on the U.S. in terms of the U.S. portion of the overall business. We're in a number of other markets outside the United States, which are more rapidly growing, that should help our overall growth rate. We also have businesses within the United States that remain at MetLife post-separation that have good growth prospects, including the Group Benefits business. We think that post-separation, we will have a business that has less risk associated with it, has more predictable and higher free cash flow, and greater growth prospects.
Great. Thank you.
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Hi, thank you. First, just to clarify, the $1 billion of investments, is that factored into your free cash flow guidance of 65%-75% for 2017 and 2018?
Yes, it is. This is John.
Okay. Then this may be on the agenda for next week, but given all of the changes, can you provide an update to the guidance you had given previously of a kind of $3 billion GAAP present value charge over time from low interest rates, and how much of that pertains to the business segments that are remaining with Met?
Next week.
Okay. I guess just finally, one question for Japan. You've seen, obviously, a lot of increase in sales in US dollars in the denominated products, both for you and I think the domestic companies are also beginning to offer or emphasize these products more as well. Can you just talk quickly about competition there?
Sure. There's 2 types of current currency products. One is regular premium, one is single premium. We're one of only three carriers at the moment offering regular premium products, which is much harder to manage. There's about seven or eight offering the single premium product, which is easier to facilitate. We think we've got a good competitive position there. We've been offering these products since the late 1990s, and we've got pretty good skills. We feel we're well-placed. But as you see, others will come into this market as the economics around the yen whole life product diminish.
Okay, thank you.
At this time, there are no further questions.
Great. Thank you everyone for joining us today. Have a good day.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference Services.