Good morning, everybody. I'm Yuran Konar, Deutsche Bank North America life insurance analyst. People always say that life insurance is somewhat opaque. I have to tell you, relative to New York traffic and the public transport system this hour, life insurance has nothing going against it. With us today, I'm very pleased to have Steve Kandarian, MetLife's CEO and Chairman. Met is one of the largest insurers in the world and a truly global company, which I think is very fitting for a global financial services conference. Just a couple of words on the format today. We'll start off with a fireside chat and leave the last few minutes open for the audience. Without further ado, I think we'll dive right into the fireside chat. One area that I think is of great interest these days is the regulatory environment.
You see several issues that are probably front and center for the industry today. Maybe we can start first with the non-bank SIFI designation. Met has challenged the designation in court. The government came back last month reiterating its view that Met is a non-bank SIFI, it specifically noted a few issues were cited. First, $35 billion in outstanding funding agreement-backed notes and commercial paper. Second, $30 billion in securities funding activities. Third, $48 billion in GICs. It also noted liquidity risks should a large number of policyholders simultaneously exercise their right to tap their account values. I'd be interested in hearing your perspective as to why all these above-mentioned exposures do not pose a systemic risk and are not a liquidity risk to MetLife.
Thanks, Yuran. I think you understand that MetLife was designated by the Financial Stability Oversight Council, we were given an opportunity to appeal that decision to the U.S. court system. That's right in the law of Dodd-Frank that was passed in July of 2010. Basically what Dodd-Frank does is say, okay, this body of 10 voting members who are political appointees designate companies for this non-bank SIFI status. We're going to have kind of another arbiter over here on the side, the court system in the United States, to take a look at the decisions if the designated company doesn't agree with the designation, which MetLife does not. We have said a number of times, we are big, we're important.
In the highly unlikely event of a failure of MetLife, it would be a big, messy unwind, that isn't the same thing as saying MetLife is systemic. Systemic under Dodd-Frank says that a material financial distress at MetLife or a failure of MetLife could pose a threat to the financial system of the United States. It's not that shareholders lose money. It's not that bondholders lose money. It's not that even some customers of MetLife might not get $1.00 on the dollar on every single insurance policy. The vast majority would. A small percentage of the biggest policyholders might not get $1.00 on the dollar. None of that qualifies you for being a SIFI. I want to kind of set that up first to make sure that everyone understands what the law really is directed at. It's directed at too big to fail.
Not that big companies couldn't fail in a market-based economy. They do. It's part of our system. It's that that failure of a company doesn't topple over other companies. They aren't so interconnected that the federal government would feel compelled to come forward and engage another bailout the way we saw the bailout occur back in 2008, 2009. We've gone to the courts. We filed our complaint in January of this year in the District Court of Washington, D.C. The government filed their counter-complaint in May, last month. There'll be some pleadings both ways for a period of time over the course of the summer, most likely, and we'll see most likely a hearing before the judge probably in the fall.
We don't know exactly when she'll write her decision, but if we had to guess, it'd be at the earliest late this year, more likely sometime early next year. All that can change, but that's our best guess. The government points out a couple different things. Yuran mentioned them. One was funding agreements and commercial paper, about a $35 billion program. I'll go into the details a little bit, but let me start by saying we had these programs in 2008. They didn't blow up in the crisis. We had a live test here of what we do before, and they were not threatening to our company, much less a systemic issue. The funding agreements and commercial paper that we have, about $35 billion, has about $13 billion of liabilities that could come due to us within 12 months.
We have $18 billion of liquidity, meaning government securities or government-backed securities, that could be sold immediately. We have a $5 billion buffer for a 12-month period of time for this program. Let me also call out the commercial paper part of this program because we combine two things here, the funding agreements, which are $27 billion, and the $8 billion of commercial paper. Sometimes people think, well, commercial paper, you can't roll your commercial paper, and that's going to be a big problem. Except that's not the kind of commercial paper program we're talking about. Our commercial paper does not fund MetLife. We don't use those monies. It's a spread business for third parties. Third parties, mostly money market mutual funds, are looking for short-term investments of high quality with good yield. They come to us. This program really is used for that purpose.
If that program went away, there's no issue of MetLife funding itself. We don't use it for funding our company. We would lose that spread business. We'd lose the profits we make on this $8 billion program, which is a pretty small number. Instead of $5.80 a share, we'd have $5.72 a share. That doesn't make you systemic, much less even have you fail as a company. Sec lending, that's a $30 billion program. We had this program before the crisis as well. It was larger then. It was over $40 billion at the time of the crisis. We unwound it quickly. We took some losses in doing so, but they're, compared to our earnings, relatively small. Today's program is a smaller program. Actually, let me just pause for one second. Everything we're talking about is state regulated. This is not unregulated business.
This is highly regulated today. New York State regulates our securities lending business, our funding agreement business, all these businesses we are talking about. A $30 billion program, 99%, I almost wish I just could tell the guys, make it 100, is government securities we lend out. Virtually all government securities, mostly Treasuries, largely Treasuries. Think about a crisis. The crisis comes, we have lent our securities to the street. They give us cash collateral back. That is how the program works. We reinvest that money in high-quality securities and earn a spread on that. If we had an issue with a problem in the marketplace, and people said, "Give me back my money. I am holding your collateral, a Treasury bond," in a crisis, that Treasury bond actually goes up in value. By the way, we mark-to-market every evening, every day.
We mark-to-market at the end of the day, these securities back and forth, and the collateral back and forth. That program is a very low-risk program the way it is currently run, the way it was running before the crisis. I think the third one that you mentioned, Juran, was the GIC programs that we have, the Guaranteed Investment Contract. It is a $48 billion program. It is used largely in the 401(k) world with a stable value on kinds of investors. The government, I think, actually does not understand the program fully when you read their brief. It is kind of like a run the bank kind of issue is a concern. Typically in a crisis, what happens is people actually put more money into stable value, as we saw back in 2008, 2009.
If there is an issue with MetLife, they said, "Okay, I like stable value, but I do not like MetLife. Let us get my money back." There is a great deal of liquidity in that program as well, and people get back their money in that program on a market value basis. We sell the assets, return whatever the market value of those assets were to them. The loss would be on them, not on MetLife. There is another provision in some of those contracts that enable the stable value investors to say, "Well, I do not want market value. It does not look too good right now. I will take, instead, MetLife paying me back." The way the contract works is we have up to 10 years to pay them back at a relatively low crediting rate.
Again, no sort of fire sale, no run the bank kind of issue in this kind of a program. Of that $48 billion, I think there is just over $1 billion where there actually is more of a put to us, but there is a lot of liquidity in that program. We are more than covered for that $1 billion, and $1 billion would have very little impact upon MetLife, whose balance sheet is closer to $900 billion. The programs they cite, frankly, are all well-regulated today, do not have liquidity issues, do not have issues around quality of assets we are investing in. Overall, we are investing in A-quality assets in these programs. Again, we are lending out our Treasuries. Again, all these programs have been tested through the financial crisis of 2008 and came through fine.
Great. Thank you. Another point around non-bank SIFI has been your capital deployment or the cautious nature of capital deployment.
I think the communication's been quite clear as to why you choose to be cautious at this point. One thing that I'd be curious to hear a little more about is why the preference for dividends over buybacks when I think the dividend yield is about 3% today, stock's trading at about one times book, excluding AOCI. Wouldn't it make more sense to up the buybacks and lower the dividend?
We want to return excess capital to our shareholders. That's the first thing I should always go back to and mention. We don't believe in hoarding capital we don't need. Either it's dividends, or share repurchases, or M&A that is accretive and looks more attractive than a share repurchase. That's our standard. We are doing both right now. We have raised our dividends significantly since the 2007-2008 period in terms of what our dividend was back then. I think it was $0.74 a share. We're now up to $1.50 a share, and we're providing a good yield, which we think is an attractive value proposition for someone investing in our stock at this period of time in history, where there's low interest rates and there's issues around regulation and what will MetLife look like in a few other companies that have been designated as non-bank SIFIs.
When we take all that into context, we're saying we want kind of a floor in here in terms of value of our shares to the market. We think having a strong dividend that we can continue paying and hopefully raise over time, along with our earnings, will help provide that floor. That's part of our thinking. We are doing share repurchases, not as much as we would if we weren't caught up in this Dodd-Frank SIFI issue. We've done $2 billion of share repurchases in the last 18 months, I guess it is, even a little less than 18 months.
We have not ruled out doing further share repurchases, it's still going to be a lot less than we had anticipated doing when we did some strategy work back in 2011, 2012, looking forward to the year 2016, where we thought we'd do $8 billion of repurchases, and to date, we've only done $2 billion.
Okay. Another point in capital deployment is probably around the jumbo pension risk transfer market, where we actually haven't seen MetLife participate in that market the last few years. The company cited, among others, the uncertainty around the capital requirements for such deals. I'd be curious to hear why these deals seem less attractive, and yet you still are quite active in the corporate benefit funding business altogether. There are other products that you do compete for that would also have some uncertainty around capital requirements.
I think maybe modify a little bit what you said. You said we don't participate in that market. We actually did bid on those deals. We weren't the prevailing bidder, but we did bid on those deals. We actually, in some cases, there were maybe five companies roughly bidding, and it came down to two, and we weren't the winning bidder. We evidently were competitive enough to make it to the final two, but we didn't prevail. We're very disciplined on mergers and acquisitions, as I mentioned, making sure that it provides return above share repurchases as one benchmark, for example, to be certain that we're creating value for our shareholders if we expend capital. We look at these large pension transfers in a similar way. They're essentially M&A deals if you get to a big enough number.
You're putting forward capital that's going to be locked up for decades, and that capital could be over $1 billion in some cases. We won, I think we have the leading market share in the small to mid-size pension transfer businesses over the last few years, but we have not prevailed on the larger transactions. Again, we're very disciplined buyers of businesses and buyers of this kind of business. These are very long-tailed liabilities typically. Once the price is set, once the assets come over to us, once we reinvest any of their monies, for a long period of time, you are locked in terms of your spread between what you're earning on the assets and the cost of those liabilities.
If the government were to come in later and say, "We have a new capital regime, and now instead of holding X of capital, you must hold X plus 30%," that margin could go away quickly, and you have no way of resetting the bar on your side. You are locked in now to a much lower return, maybe even a loss, depending how extreme the capital rules that came forward are. Again, we do not know what these capital rules will be. I am becoming more hopeful they are going to be reasonable. Again, once you book those big liabilities, like these big pension closeout deals, there is no going back to the company that you got those liabilities from and say, "Let us go and redo this deal." It is over. You own it. It is on your balance sheet. You are going to live with it for years to come, decades.
Our view is, yes, we will look at those transactions. We want to build in a buffer to account for this regulatory risk that is associated with it.
Maybe one follow-up on that. Do you believe that buffer does exist in the smaller case market then?
I would say two things. One, we did bid on that basis in the smaller case market with a buffer. Two, the amount of our balance sheet we are putting at risk on those deals is far smaller than any one of those large transactions. Again, think about your overall book of liabilities as an insurance company is your portfolio of risk, and how much risk do you want in which buckets. In this case, if you are talking about pension transfers that are on your books for decades where you cannot alter the mix once you have it, our view is to be very cautious. Now, it is different than, say, the group insurance business where it gets repriced every three years, or property and casualty where it gets repriced every year or thereabouts. If you make a mistake in those businesses, you can quickly correct yourself.
You have a bad quarter. You make a mistake in a large number of big pension closeouts, that's going to be a drag on your company for a long, long time.
All right. Moving to another regulatory issue, the Department of Labor proposal for fiduciary standards. Can you discuss the potential impact that you see on MetLife and specifically also touch upon maybe the % of the company's variable annuity book in sales that are in qualified accounts?
Sure. I think a number of you probably have heard the Department of Labor has put a draft rule out for comment. There's a 75-day comment period that we're still in the middle of. We're still reading through this 1,000 page plus regulation. This is a concept that's been around in Washington for a long time. I was in Washington 2001 to 2004, it was being discussed back then. This is not something new. The theory at a very high level is if you are a fiduciary, you're going to sell a financial product to someone in the marketplace. You should give them the best possible advice and the best direction about what product you should own, given your own needs, your own financial needs, and your own financial circumstances.
If that product happens to be not a proprietary product of the company for which you work, you're obligated to inform the person across the table from you of that. I'm simplifying what this regulation's all about, the concept and the theory that we're discussing right now with this regulation. Conceptually, it sounds reasonable. You have a more sophisticated person who does this for a living, talking to someone who may not be a financial expert on the other side of the table, a consumer. Shouldn't you inform that consumer, maybe my product that my company sells isn't the perfect one for you compared to someone else's or not as good, and so on. So far so good. You have to take that to the real world and figure out, well, who will offer what advice to whom if that is the rule?
I'll give you an analogy, simply an analogy. By the way, before I go to the analogy, there's all kinds of disclosures we are required in our industry to give to that person we're talking to, or our agents have to give. How the agent is incented, the commission structure that he or she has, the fact that this is a proprietary product. There may be other products out there they should look at, and so on and so forth. There's a lot of disclosure that's involved in this. It's not as though the consumer doesn't have an opportunity to understand the landscape here. The analogy I'll give you is you walk into the Chevy dealer. You're there talking about yourself, your family. I got three kids, the spouse, we have five of us. I want a third row in the SUV.
I want this, I want that. The Chevy dealer says, "I heard you, but in all honesty, the guys across the street, the Ford dealership, they really have a vehicle that fits you better than mine." Well, there's not going to be a lot of Chevy dealers, or at least guys or women selling Chevys anymore. You're there saying, "My car, there's a Ford dealer across the street. You can go and talk to him or her over there, and you decide which is the better. I think mine's better, but I'm giving you my pitch." We do that every day in America in terms of the marketplace. That's sort of the back and forth of this regulation. This regulation was put out, by the way, in 2010 by the Labor Department, and the way it was written back then got tremendous blowback.
They took it off the table, and they've come back now at the end of the administration to try to get this back out again. We'll see where it goes.
Maybe moving to variable annuities. We've seen some volatility in sales over the last few years. I think they peaked in 2011. Since then, we've seen a decrease of about 75%. Does the company have a target sales number when it thinks about the business? Is there a reasonable run rate that investors should consider for variable annuity sales? Also maybe could you talk about the mix of annuity sales that we should expect going forward?
The variable annuity business was a real growth business, especially pre-crisis, but even post-crisis, it came back pretty strongly. It's an attractive product to many people, as a feature where you can invest in the stock market and the bond market. It has some basic annuity features that give people the right to convert over to a fixed annuity at some point in the future. We grew that business over time, and it got to about $18 billion one year, and the next year it got up to, in 2011, $28 billion. When we did our strategy work in 2011, early 2012, we were looking at the company overall. We said to ourselves, "We really have to make sure we get our risk profile in the right place." It's not that we don't want to sell variable annuities.
We continue selling variable annuities. We think of things in terms of risk budgets. How much do you want to put in this bucket of risk? How much do you want to put in that bucket of risk? They're different risks. In some cases, they're offsetting risks. Life insurance versus annuities, for example, and mortality is offsetting risks. As an insurance company, you have to look at your overall portfolio of liabilities, look at that risk profile, and make sure you get the right mix of risks for your company. We also are mindful, especially then, where our stock price was trading at two-thirds of book value, that one of concerns by investors and analysts was MetLife, as well as other companies, had too much interest rate exposure for products like variable annuities that have withdrawal benefit riders, income benefit riders, living benefit riders.
We took all that into account. The first thing we did was we de-risked the existing income benefit product. We put a risk budget in terms of how much we would sell of that product, which was a lower number than before. We worked toward introducing a new product we thought would be a good value for consumers, well hedgeable by us for interest rate and market risk, meaning currency risks, which in this case doesn't really exist for the U.S. business, and equity risk. We said, "Okay, now we have a risk budget for this product going forward." We're going to grow that business in terms of the top-line sales number. I don't think of it so much in a dollar number budget. I think of it in terms of how much risk it presents when we do our economic capital models.
Because we've de-risked the product and made it more attractive from a hedging perspective, we're now able to sell more of it, in our judgment, and still have the right risk profile overall for the company. I anticipate our numbers going up from the $6-plus billion of VAs we sold in 2014 to a higher number over time. Again, we'll just see how the marketplace plays out in terms of which living benefit riders have picked up, which aren't. We'd love to sell more of the death benefit feature without the living benefits. That would allow us to sell more VAs overall, and there is some movement toward that. About just over 30% that we sell now doesn't have living benefits. The market, I think, around 36%, I think we're 31%.
I'd like to see the part of our VAs that are death benefit oriented, not living benefit oriented, grow even faster. That's our goal.
Do you have any sense where the balance between the two types of guarantees or benefits moves to over time?
It's going to be consumer driven. It'll depend upon how they view these products and when they talk to their financial planners, how much they value the living benefits versus a simple death benefit. We certainly will try to do what we can to move up our numbers over time on the death benefit feature.
Last month, you updated your 2016 ROE target, lowered it to 11%, noting, I think, three headwinds, one being the regulatory uncertainty that's led to fewer buybacks. Second, the interest rate environment, and third, maybe frothy M&A pricing that's kept you from pursuing more M&A. Can you maybe discuss some of the things that have actually exceeded your expectations, that have still allowed you to come in at that 11%?
11, okay. We said back in May 2012, we rolled out our strategy that our goal for 2016 was an ROE of 12%-14%. To give it some context, we also talked about driving up our return on equity, driving down our cost of equity capital by de-risking our company. We've done a lot on both of those measures. We began at about 10% ROE at that point in time, and we were trading at two-thirds of book value back then. Obviously, our market-implied cost of equity capital was very high at that point. Interest rates were low when we rolled out the strategy. They're low now. That part hasn't really changed a whole lot, although people expected rates to drift up from 2012 to now. In the same low-rate environment, our market-implied cost of equity capital has come down.
I think the market is seeing that we're de-risking the company and giving us credit for that. We're trading just above book now versus two-thirds of book back then. The ROE has gone up as well. We've hit 12% in recent quarters. We've mentioned in the last call that for 2016, that 11% was probably more realistic than the 12%-14% range that we had given about four years ago, or at least four years before the 2016 12%-14% target range. If you break out the components of that, about 100 basis points relates to low rates versus the rates we assumed back in 2012, which were largely the forward curve. We're simply looking at where the market said rates were likely to go.
Another 50-75 basis points relates to our decision to buy back less of our stock than we anticipated, less than the $8 billion by 2016 that we had booked into our plan when we rolled it out in 2012. About another 25-50 basis points relates to not doing as much in the M&A arena as we had planned back in 2012. We have done a couple of transactions in that regard. We bought a large pension fund administrator in Chile, a fee-based business, which we like in terms of balancing our risk profile. We don't have a lot of fee exposure, called Provida, which throws off about $200 million roughly of earnings after tax, a $2 billion transaction, attractive multiple, low capital intensity business. We did a $250 million, roughly, transaction in a joint venture in Malaysia with AmBank, where we own 51% of the company.
We've done some other things that are less capital intensive, like planting a flag in Vietnam and having a joint venture of 60/40, our control with a bank there. Still, not up to the level of the M&A activity in dollars and in earnings that we anticipated when we put our strategy together. That's another 25-50 basis points. That's how we got to the 12%-14% range, the midpoint being 13%. You knock off 200 basis points I just went through with you get down to 11% for 2016.
Were there areas that actually exceeded your expectations back in 2012?
We've had some areas where we've done better than we anticipated. For example, given the strong equity markets, our variable annuity business, which is a fee-driven business for the living benefit riders, and it's based upon assets that are in those accounts. As those accounts appreciate with the stock market rise, about 70% plus are in equities. We did get some tailwinds from that.
I've been asking a lot of questions. I want to give the audience an opportunity as well. If you do have questions, please wait for the mic and state your name. All right, I'll ask another one. Maybe it's the last one before our session ends. Bill Wheeler, the head of the Americas division, recently announced that he plans to retire this summer. I think among investors, his name was one that certainly had expectations to possibly succeed you at some point. Is there a succession plan at Met today? What can you divulge about that succession plan now that Bill has decided to move on?
Our board, like most boards in corporate America, are very focused on succession planning. There are ongoing conversations over the last several years about that. You always want to have someone ready to step in to run the company at any point in time for whatever reason. We have a policy of retirement for the CEO and senior executives below the CEO of age 65. I'm 63, so that's roughly two years away. It is a policy. The board could waive that policy. They have not waived the policy, but that should be known in terms of the age policy and what it is. It's not a bylaw or something. It's a policy that's waivable. At the same time, we have a strong group of executives in MetLife who are being developed and are strong executives who potentially could be my successor.
Bill announced that he would retire effective in August of this year. We'll need to fill his position. Right now he runs the Americas, which is the U.S. business plus all of Latin America, including Mexico. That's a big part of our company. One idea is that we may keep it together, we may split in two parts, U.S. versus in Latin America, two different companies, two different businesses. We may bring in talent from the outside as well as further develop talent and move people around internally. All that is to be determined. We're working on that right now. I can simply tell you that it's a major focus of the board, a major focus of mine to make sure that whoever succeeds me is prepared for the job going forward.
Looks like our time is up. Steve, thank you very much. I appreciate it, and thank you all for coming.