Ladies and gentlemen, we'd like to thank you for standing by. Welcome to the MetLife first quarter 2014 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference call 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 the Risk Factors section of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise. I would like to turn the call over to Ed Spehar, Head of Investor Relations . Sir, the floor is yours.
Thank you, Steve. Good morning, everyone. Welcome to MetLife's first quarter 2014 earnings call. We will be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliation 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 press release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment income and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Joining me this morning on the call are Steven Kandarian , Chairman, President, and Chief Executive Officer, and John Hele, Chief Financial Officer.
After their prepared remarks, we will take your questions. Also here with us today to participate in the discussions are other members of management, including Bill Wheeler, President of the Americas, Chris Townsend, President of Asia, and Michel Khalaf, President of EMEA, and Steve Goulart, Chief Investment Officer. I'd like to turn the call over to Steve.
Thank you, Ed, and good morning, everyone. We are pleased to report solid first-quarter results with operating earnings of $1.6 billion, which exceeded our plan. Favorable investment margins and well-controlled expenses more than offset fluctuations in underwriting and a $57 million after-tax charge to settle a licensing matter in New York. We anticipate that underwriting margins will improve and consider the New York settlement to be an unusual item. While operating earnings were better than our expectations, results were down 4% from a strong first quarter last year. Operating earnings in the prior year quarter benefited from a weaker dollar and stronger equity market returns. Operating earnings per share were $1.37, a 7% decrease from the prior year period. Performance on a per-share basis was dampened by the conversion of equity units issued in 2010 to fund the acquisition of Alico.
The final $1 billion tranche of equity units will convert in October of this year. Operating return on equity was 11.4% in the quarter. First quarter operating earnings benefited from strong variable investment income driven by returns in private equity. The operating earnings impact from variable investment income was $63 million above the top end of our expected range, or $0.06 per share. Investment margins had been resilient despite a prolonged period of low interest rates. Our margins continue to benefit from effective asset-liability management, good variable investment income, and income from derivatives, many of which were purchased in the mid-2000s to protect earnings in a low interest rate environment. Lower operating expenses had a positive impact on earnings in the quarter, driven by expense control in all three geographic regions, the Americas, Asia, and Europe, Middle East, and Africa.
We feel good that our cost-saving initiatives are translating to improved bottom-line results. Underwriting margins were lower than expected in Retail Life and Group Voluntary and Worksite Benefit, largely because of adverse mortality. We believe underwriting margins will improve for two reasons. First, our analysis suggests that most of the adverse experience in the first quarter was the result of normal volatility. Second, there is seasonality in our business, with underwriting margins typically weakest in the first quarter of the year. Given the underwriting performance this quarter, it is worth reviewing how we think about risk associated with protection-oriented products. Our strategy to shift the sales mix away from market-sensitive products, protection-oriented products should translate to a more balanced risk profile and a reduction in so-called fat tail risk.
For protection products, we think the primary risk factor is earnings volatility, as policyholder claims will sometimes exceed pricing assumptions. We view the balance sheet risk associated with protection products as relatively modest. This is true in group insurance, where we have the ability to reprice the in-force book of business in the near term. Overall, protection-oriented product lines have a favorable risk profile and a relatively low cost of equity capital. Although it may seem counterintuitive, in this case, lower risk does not mean lower returns. For example, group voluntary and worksite benefits remains a high return segment, even with the less favorable underwriting results experienced in recent periods, largely because of relatively low capital requirements. A healthy spread between ROE and the cost of equity capital is particularly important in the current environment, where capital requirements remain uncertain.
Our strategy to shift MetLife's sales mix toward protection-oriented products was clearly evident in our first quarter results. Group voluntary and worksite benefit sales rose 18%, and emerging market sales were up 14%. Variable annuity sales were $1.6 billion in the first quarter, down 54% year-over-year. However, the decline was only 4% sequentially, even though first quarter sales are typically weaker than fourth quarter sales. Since 2012, we have focused on rightsizing our variable annuity business to achieve an appropriate risk profile. Consistent with the December outlook call, we anticipate that variable annuity sales will decline this year. Looking forward, we are now in a position to pursue sales growth with our redesigned mix of products that have a more attractive risk-return profile. We remain committed to the annuity business as we see a substantial retirement savings opportunity in the U.S.
Next, I want to address the legal settlement, the licensing matter in New York, which is related to our global employee benefits business. Let me start by noting that I am limited in what I can say by the terms of the settlement agreement. New York officials investigated whether companies we had acquired through the 2010 Alico transaction were conducting insurance business in the state without a New York license. The companies MetLife acquired run a business that provides insurance to the non-U.S. employees of multinational companies. This insurance is sold through affiliates and partners that are licensed in the countries where the insurance policies are issued. Under the terms of the agreement with the New York Department of Financial Services, we can continue to have meetings and discussions in New York with multinational clients and prospects about the capabilities of MetLife's non-U.S. affiliates and partners.
We are pleased to settle this issue with the Department of Financial Services, particularly because our largest operating subsidiary is a New York-regulated insurer. Finally, I want to close with a discussion of required capital and capital management. MetLife remains under Stage 3 review by the Financial Stability Oversight Council for potential designation as a non-bank systemically important financial institution, or SIFI. We believe the evidence clearly demonstrates that MetLife does not pose a threat to the financial system of the U.S. However, if MetLife is designated a SIFI, we will be subject to enhanced prudential standards by the Federal Reserve. Those standards have not yet been written, there is uncertainty surrounding required capital levels for MetLife. As a result, we have been conservative on capital management. Some shareholders have been frustrated by this cautious approach to returning cash. We share their frustration.
Our philosophy is that excess capital belongs to our shareholders. The challenge is to strike the right balance between adherence to our philosophy and recognition that required capital levels for MetLife remain unknown. We had anticipated that proposed capital rules would have been known by now, but recent comments from the Federal Reserve suggest that it'll be 2015 before we will see draft capital rules for life insurers designated as SIFIs. We will continue to take a conservative approach to capital management until there is clarity on these matters. But we also recognize the need to consider the timing of those rules as our capital base continues to grow. The announcement last week of a 27% increase in MetLife's common stock dividend illustrates the importance that we place on returning cash to shareholders.
In closing, 2014 is off to a good start, and the increase in the common stock dividend illustrates our confidence in the earnings power of the company. By significantly increasing the dividend, we are delivering on our commitment to take steps to enhance long-term shareholder value. With that, I will turn the call over to John Hele to discuss our financial results in detail. John?
Thank you, Steve, and good morning. Today, I'll cover our first quarter results, including a discussion of insurance margins, investment spreads, expenses, and business highlights. I will then conclude with some comments on cash and capital. As Steve noted, operating earnings were $1.6 billion, down 4% year-over-year, and operating earnings per share were $1.37, down 7% year-over-year. This quarter included two notable items. First, pretax variable investment income was $429 million, reflecting strong private equity returns. After taxes and the impact of DAC, variable investment income was $274 million, which is $63 million or $0.06 per share above the top end of our 2014 quarterly guidance range. The second item was the legal settlement with New York, which reduced operating earnings in corporate and other by $57 million after tax, or $0.05 per share.
Turning to our bottom line results, first quarter net income was $1.3 billion, or $1.14 per share. Net income included an investment loss of $343 million after tax from the previously announced sale of the U.K. pension risk transfer business. This was modestly below the $350 million-$390 million after-tax range we had previously disclosed. In addition, net income included net derivative gains of $223 million after tax. The net derivative gains in the quarter were driven primarily by three items that we consider to be either noneconomic or the result of asymmetrical accounting treatment. Number 1, a decline in long-term interest rates, Number 2, changes in foreign currencies, and Number 3, the MetLife Own Credit impact associated with our VA program.
The decline in long-term interest rates in the quarter contributed approximately 70% of the net derivative gains, while foreign currency and MetLife's Own Credit combined for most of the remaining balance. Book value per share, excluding AOCI, was $49.34 at March 31st, up 2% from $48.49 at December 31st. Turning to first quarter margins, underwriting in the U.S. was less favorable than the prior year quarter and our plan. The mortality ratio in group life was 93.6%, unfavorable to the prior year quarter of 91.3% and above our annual target range of 85%-90%. First quarter mortality is usually higher due to seasonality. We experienced an elevated number of large claims in term and Group Variable Universal Life, which we believe was still within the range of normal quarterly fluctuations. Retail Life also had unfavorable mortality quarter due to the three primary factors.
One, two large claims in variable and universal life, two, higher than normal incidents in traditional life, and three, a reinsurance adjustment related to prior periods. On the last point, we had incorrectly recorded policies that were term life conversions as reinsured over several years, and as a result, now had to reimburse reinsurers for claims that occurred between 2006 and 2011. This catch-up adjustment reduced operating earnings by $16 million after tax in the quarter. We are not normalizing for this reinsurance adjustment as we typically do not normalize for mortality-related items. In the quarterly financial supplement, you will note a change in how we are showing mortality experience. We have replaced the historical Retail Life direct mortality ratio with an interest adjusted benefit ratio. The historical ratio reflected direct claims experience as a percentage of expected.
The new ratio measures claims experience, net of reinsurance and changes in future policyholder benefits, net of interest relative to premiums, fees, and other revenues. We believe the new ratio will better demonstrate the relationship of mortality experience to premiums earned and improve your ability to model this business. The interest-adjusted benefit ratio for Retail Life was 56.9% in the first quarter, which is unfavorable to the prior year quarter of 52.1% and our target range of 50%-55%. While we're changing the mortality metric we will discuss with you going forward, there is no change in the expected mortality experience for our Retail Life business. We've also changed the non-medical health benefit ratio in the QFS to an interest-adjusted loss ratio. The primary reason for the change is to provide a better indication of the underlying performance of our run-off Long-term care insurance block of business.
On the old basis, there would've been upward pressure on the benefit ratio as premiums declined and investment income increased. This upward pressure would have nothing to do with the underlying performance of the business. The new ratio adjusts for this by removing the impact of interest on reserves, and therefore provides a clear picture of morbidity margins. The non-medical health interest-adjusted loss ratio was 78.8%, favorable to the prior year quarter of 79.6% and within our target range of 77%-82%. The 77%-82% target range for the interest-adjusted loss ratio is consistent with the old range of 86%-90% on premiums. Dental margins were favorable to prior year and plan due to lower utilization. Disability underwriting results were unfavorable to prior year and plan due to lower net closures of existing claims.
As part of our normal review process, we are pursuing modest price increases in disability. However, it is important to keep in mind that dental is the primary driver of our results in non-medical health. Dental accounts for more than 60% of our non-medical health interest-adjusted loss ratio, while disability only accounts for 20%. Long-term care, which accounts for approximately 10% of the ratio, had favorable underwriting versus prior year quarter and plan, driven by premium rate actions and lower incidence. In our P&C business, the combined ratio, including catastrophes, was 94.3% for retail and 98.2% for group. The combined ratios excluding catastrophes were 89.3% in retail and 94.3% in group. Overall, P&C underwriting results were unfavorable to the prior year quarter and plan, primarily due to non-catastrophe losses as a result of the winter weather.
Moving to first quarter investment margins, the simple average of the four U.S. product spreads in our QFS was 233 basis points, including variable investment income and 192 basis points excluding VII. This result showed only a modest seven basis points decline versus the prior year quarter of 240 basis points, including VII. Excluding VII, there was a 19 basis points decline versus the prior year quarter due to the low interest rate environment. With regard to expenses, the operating expense ratio was 24.1% in the first quarter as compared to 24.0% in the year ago quarter. Adjusting for the New York legal settlement, the normalized operating expense ratio was 23.6%, better than planned in the prior year quarter. Gross expense saves were $200 million in the first quarter, and net saves were $124 million after adjusting for reinvestment of $39 million and one-time costs of $37 million.
We are pleased with our expense performance as we remain on track to deliver gross saves of $770 million-$800 million in 2014 and $1 billion in 2015, and net saves of $600 million in 2015. I will now discuss the business highlights in the quarter. Retail operating earnings were $612 million, down 2% versus the prior year quarter, and up 1% when adjusting for notable items in both periods, including a net positive DAC and reserve adjustment in the prior year quarter, and excess variable investment income in both periods. Life & Other reported operating earnings of $244 million, down 4% year-over-year, and down 5% when adjusting for excess in variable investment income in both quarters. The primary drivers were less favorable underwriting, partially offset by lower expenses. Annuities reported operating earnings of $368 million, down 1% versus the prior year quarter.
Excluding a net positive DAC and reserve adjustment of $29 million in the prior year quarter and excess variable investment income in both periods, operating earnings were up 5%. The drivers included lower DAC amortization and higher fees from separate account growth. Group Voluntary and Worksite Benefits, or GVWB, reported operating earnings of $188 million, down 18% year-over-year due to less favorable underwriting in group life, Disability, and Property and Casualty, partially offset by improved underwriting results in Dental and Long-term care. GVWB sales were up 18% year-over-year, with group sales up in the mid-teens and voluntary and worksite sales up more than 30%. Even though we are modestly increasing Disability pricing over the next year, we believe that first quarter GVWB sales will generate an attractive return on investment.
Corporate benefit funding reported operating earnings of $355 million, up 21% year-over-year, driven by higher variable investment and recurring income, as well as improved underwriting. Latin America reported operating earnings of $183 million, up 28% year-over-year and 43% on a constant currency basis. These results reflected the Provida acquisition, which was in line with expectations, and favorable market and tax impacts, partially offset by less favorable underwriting and higher expenses due to business initiatives, inflation adjustments, and volume-related growth. Premiums, fees, and other revenues were up 9% year-over-year, 22% on a constant currency basis, and 12% excluding Provida on a constant currency basis. The strong growth across the region was primarily due to higher annuity sales in Chile and worksite marketing in Mexico.
Sales were up 19% year-over-year and 15% excluding Provida, driven by growth in the agency sales force, higher annuity sales, direct marketing, and group medical in Chile as well as group medical in Mexico. Turning now to Asia. Operating earnings were $328 million, down 2% year-over-year. On a constant currency basis, operating earnings were up 8%, driven by business growth and lower expenses, partially offset by a return to more normal surrender levels in Japan. While Asia operating earnings were strong this quarter, they did benefit from the timing of certain expenses. Premiums, fees, and other revenues were down 6% year-over-year, but up 6% on a constant currency basis, driven by business growth in Japan, Korea, and Australia. Asia sales were up only 2% year-over-year, dampened by the results in Japan.
Japan sales were flat as a strong rebound in retirement products was offset by a decline in yen life sales due to pricing actions we discussed on our fourth quarter call. As a result, the volume mix is favorable for expected returns. Finally, in EMEA, operating earnings were $88 million, up 1% year-over-year and 2% on a constant currency basis. The prior period benefited by $8 million from unusual items in Greece. Adjusting for these items, operating earnings were up 12% on a constant currency basis, driven by business growth across the region. We would expect lower operating earnings in the remaining quarters of the year. Premiums, fees, and other revenues were up 5% year-over-year on both a reported and constant currency basis, driven by growth in Turkey, Russia, the Gulf, and Poland.
Sales increased 4%, driven by 9% growth in emerging markets led by the Gulf, Turkey, and Poland. I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $4.7 billion at March 31st. As expected, this decline from year-end was primarily due to the $1 billion of senior debt that matured in February. Turning to our capital position, the combined risk-based capital ratio for our principal U.S. insurance companies, excluding Alico, at year-end 2013 was 450%. Also, our Japan solvency ratio was 945% as of December 31st. For our U.S. insurance companies, preliminary first quarter statutory operating earnings were approximately $760 million, down 4% from the prior year quarter, and net income was approximately $666 million, up 18%.
The year-over-year decline in statutory operating earnings was primarily due to higher taxes, while the increase in net income was primarily the result of lower derivative losses. Our total statutory adjusted capital is expected to be approximately $27 billion as of March 31st, up 4% compared to December 31st. In conclusion, MetLife had a solid first quarter with operating earnings better than our plan. Investment margins remain healthy, expenses are well controlled. We continue to focus on generating profitable growth. Although underwriting was weaker than expected in the quarter, we expect results to improve during the balance of the year. With that, I will turn it back to the operator for your questions. We're ready to take questions, operator.
Ladies and gentlemen, we'll now begin the question and answer session of our conference. If you wish to ask a question, please depress the star followed by the one on your touchtone phone. You will hear a tone indicating that you've placed yourself in queue, and all questions will be pulled in the order they are received. You may remove yourself from queue at any time by depressing the pound key on your touchtone phone. If using a speakerphone, please pick up your handset before depressing the keys. Our first question will come from the line of Mr. Thomas Gallagher of Credit Suisse. Please go ahead.
Morning. John, first question for you, just on your follow-up to your comments on the environment for capital rules and how you expect clarity around non-bank SIFI to be pushed out to 2015. There's currently legislation running through both the House and Senate to clarify Collins Amendment. If that legislation passes, will that change your view in terms of having to wait, or will that give you enough confidence that you'd be able to do something less conservative? That's my first question.
Hi, Tom. Yes, there's legislation now proposed both in the House and the Senate. Senator Susan Collins for whom there's an amendment named in Dodd-Frank, which is Section 171 of Dodd-Frank, was interpreted by the Federal Reserve as requiring them to use no less than bank standards for non-bank SIFIs such as insurance companies. There's now a bill that Susan Collins, Sherrod Brown, and Mike Johanns from the Senate have coalesced behind, S.2270. There's an identical bill now in the House, H.R. 4510, again, bipartisan support by Representatives Gary Miller and Carolyn McCarthy. That's all encouraging news, but of course, there needs to be a vehicle by which this would turn into legislation, not just a bill. To date, there has been resistance to any amendments to Dodd-Frank, a bill that's been promulgated now for, it'll be four years this summer.
Our hope is that there'll be some softening of the position of not opening up Dodd-Frank for amendments. It's not unusual for a very complex bill to have technical amendments and for some period of time. Our hope is that Congress can find a way to navigate these issues and get these kinds of technical amendments that are bipartisan, non-controversial through Congress and signed by the President. That's our hope, and we're working hard to try to support those efforts. If such a bill were to pass, that'd be very favorable news, but I don't want to overblow it either. All I would say is to the Fed that you're not constrained, your hands are not tied in terms of posing Basel rules on the insurance industry.
It doesn't say what rules they would apply but presumably they'd be more tailored to the insurance industry, I think that certainly would be a net positive. That'd be positive piece information that we certainly would take into account as we thought about capital management.
If it does pass, positive directionally, maybe not enough for you to change your plan for now. Is that a fair way to characterize it?
I wouldn't phrase it that way. I think that'd be positive news and certainly that we'd take that into account as we thought about capital management, and that could have an impact upon how we would move forward.
Okay, that's helpful. Just one business question from the standpoint of Met and the rest of the life insurance industry now this quarter have had pretty weak mortality results across the board. We've seen more pockets of this over the last few years. Any thoughts overall about whether this is truly just seasonality and randomness of more deaths this quarter, or do you think we're seeing something more structural in terms of seasoning of more aggressive pricing years? Any help or color on that would be appreciated.
Tom, hi, it's Bill Wheeler. We ask ourselves that question when we have a quarter like this. We look at the claims and the data over our overall book. We always go back and look at the last five years or 10 years and say, "Geez, am I missing a trend here? Is there something I should be paranoid about in terms of our underwriting or pricing?" We examine this really carefully, and I think our conclusion after this quarter is there isn't a trend. There isn't something that we need a deeper concern that we need to be worried about. What we saw was some increases in severity, both in the individual life block as well as Group Life, and maybe just a slight increase in frequency in retail life, which probably brought on by the weather. We know that happens, right?
We see quarters occasionally like this where you have a big pop in severity. Of course, this quarter in retail life, which wasn't very good, just remember the third and the fourth quarter last year were extraordinarily low in terms of mortality experience, very good mortality experience. I think we just have to appreciate that this can be a volatile business. As John said in his prepared remarks, it doesn't mean it's not a good business and with great returns on capital, but mortality over the short term can be volatile, and you've just got to take a little longer-term view.
Got it. Bill, no cohort years and anything along those lines as you've analyzed the data to raise alarms?
That's right.
Okay, thanks.
Next question comes from the line of John Nadel of Sterne Agee. Please go ahead.
Good morning, everybody. John, I have a question about the recent CCAR results for the large bank financial institutions. I'm just curious whether you and the board and the rest of management have any real sort of learnings or takeaways from the recent CCAR process, and maybe particularly with a focus on Citigroup's "failure," which appeared to be, at least this is my sense, driven in part by sort of the global nature of their business. I'm just sort of wondering if you're incrementally thinking about implementing any changes or anything incrementally to your enterprise risk management as a result of what you saw.
Well, John, I think you raised a good point, which is we're in uncharted waters here. Dodd-Frank passed in 2010. Implementation really is in the very early stages. Everyone's learning how to work together, both on the regulatory side and, in this case, on the bank side. I think people are going through kind of the learnings of all this. I think as of now, there's not a great deal of transparency in terms of how all these calculations get done on the regulatory side. I think people are trying to figure out how to operate within that environment. It's obviously been difficult in some cases, and we're mindful of that, and we are certainly building out our capabilities in case we are designated a SIFI on a final basis and regulated by the Federal Reserve.
That is something that we have spent a great deal of time discussing internally at the management level with our board, and we certainly are taking steps at MetLife to make sure that we're prepared going forward should we be finally designated as a SIFI.
Okay. That's helpful. Obviously, it was a little surprising, right? My sense is that the management at a couple of these companies, in particular Citigroup, were also maybe taken by surprise in terms of the results. I know you guys had a little experience with that. The next question is more about Asia. I was just hoping we could get a little bit better detail on some of the underlying trends at more of the product level, maybe first sector in Japan versus third sector, what you like and what you saw on the sales side, what you're sort of unhappy with. If you can just give us a sense there, that'd be great.
Sure. It's Chris Townsend here. Look, sales for Asia, as John mentioned, were up 2% year-on-year, and they were down 34% sequentially. If I take that sequential point first of all, we wrote a very significant account in
Australia in the fourth quarter of 2013, plus there were some high sales of two yen-based life products before they were repriced. We repriced both of those products, one in October, one in December, and they're now at or above our return hurdle rate. What you've seen is, following that repricing, a significant reduction in terms of the first sector life sales. Because of some of the packaging element which we've spoken to you before about, there's been a knock-on impact in terms of the third sector as well. The persistency overall is good. Revenues are up, both sequentially and year-on-year. The cancer product is selling very well. We launched a new cancer product last August, and we're just about at 100,000 new customers for that product now. The cancer sales overall are up about 120% year-on-year.
Going forward, what you'll see is that we'll tweak slightly one of the short pay periods of the life product, and also in the second half, we'll launch a range of new A&H products and riders as well. That will lift sales towards the second half of the year. I think the other couple of points to mention here is that we've spoken a number of times about the multi-channel benefits of our business in Japan, and I'd just like to point out that the bank channel sales have returned significantly as we've got greater stability in the yen-dollar, and there's sort of a reduction in the increase of the Nikkei and the TOPIX. We've seen that bank channel come back very strongly and 100% growth year-on-year.
The final point here is collectively, as you think of the repricing there, those actions have turned into very positive margin for us, and we're up about 300 or 400 basis points quarter-on-quarter.
That's really helpful. Chris, maybe just one more quick one. Any expectation, maybe sort of what's your view, reading tea leaves, if you will, of any chance in Japan for the government to make some changes incrementally to co-pays?
Our next question will come from-
I don't have a view on that right now.
Our next question will come from the line of Mr. Erik Bass with Citigroup. Please go ahead.
Tom, hi. Thank you. I guess first, can you provide an update on your thinking about the equity units? I know that you've been clear certainly that you don't want to do a buyback and then have to issue equity if capital requirements change. Is your view on the equity units at all different since you're essentially issuing equity if you don't offset the dilution?
It was our intent when we issued those securities that we'd buy them back in the marketplace. We've mentioned that before. Again, the capital considerations that we're analyzing, because of the uncertainty of the rules, which are not yet in draft form for us to review, has resulted in us to date not buying back those equity units. Certainly philosophically, that is something that we had intended to do when we engaged in the Alico transaction back in 2010 and issued those securities.
Okay. I guess on the group business, can you comment a little bit more on just what's driving the strong sales so far and kind of current activity and pricing trends in the market? I guess, the strong sales, is that coming more from new accounts or an expanded product offering?
Eric, it's Bill. I would say the answer is both. Remember, we've talked a lot about our strategy of growing our group business, going down market and growing in what I would call the middle market. We have a very strong presence in the large company marketplace in the U.S., going down market with what I would say our broad product offering, which means not only our base coverages, but also all our worksite products. We're having a lot of success down there. We've seen increased sales in, I would say, the middle market as well as strong worksite sales. That's consistent with, I think, the strategy that we've laid out here in terms of a shift to more protection products. In terms of just the, I would say, the tone of pricing, the pricing environment is, I would say, relatively good.
The guys who run that business are always sort of flinch when I say that because they always feel there's somebody out there who's being a little aggressive. I would say today, the pricing environment is relatively attractive. For the worksite portion of the business, we think it's quite attractive.
Okay. Thank you for the color.
Our next question will come from the line of Mark Finkelstein of Evercore. Please go ahead.
Good morning. Actually, sort of a follow-up to Erik Bass's question. Steven, your opening remarks, I think you addressed with Tom kind of the evolution of the rules and some of the legislative actions. You also talked about draft rules not coming out till 2015. In your comments, you used the words take into consideration the timing of the rules when you think about capital deployment. The question is, how is the timing influencing or how is your thinking evolving in terms of the timing in terms of those actions?
Hey, Mark. Well, I think you saw it with our dividend announcement. I think that's a fairly aggressive increase in the dividend given that we had a large dividend increase one year earlier. At a $1.40 a share for a dividend for MetLife, that translates to a 2.7% yield and roughly a 25% payout ratio. I think you're seeing we're taking actions now that we think make sense for us to take given the delay in the pronouncement of the draft rules by the Fed. When we first engaged in this analysis and discussion internally two years ago or more, we anticipated that we'd have greater clarity by now about capital rules.
As time goes on and cash accumulates in the company, we're trying to find that right balance between making sure that we have adequate capital in post rules by the Fed on the one hand, if we're finally designated, and on the other hand, making sure we adhere to our philosophy of returning excess capital to our shareholders. The dividend increase, I think is reflective of that consideration of the timing being pushed back and further accumulation of cash. Again, you saw effectively another capital action back last year in the fall. We acquired Provida for $2 billion in cash without issuing any shares in that acquisition. We are trying to, again, strike that right balance.
Certainly, in terms of what we're thinking about in the future, we have to relook at all these things from the perspective of both timing, how much cash we're accumulating, merger and acquisition opportunities for us, acquisition opportunities for us, and where our dividend level is, and so on. Everything is really part of a more complex equation that we consider as we look at capital management.
Okay. That's helpful. Then just two very quick business questions. In Asia, you referenced favorable expenses. How much did that positively influence the Asia earnings? Then in EMEA, you talked about maybe the run rate being lower. How should we think about that as well?
Hi, this is John. It was about $10 million for the Asia earnings on the expenses in the quarter. It was really just mainly due to timing. I'm sorry, but I missed your second part of the question.
Similar comment on EMEA, that the run rate going forward is a little bit lower. Just trying to frame out how we should think about EMEA earnings.
Slightly lower.
Slightly lower. Okay. Thank you.
Our next question will come from the line of Chris Giovanni of Goldman Sachs. Please go ahead.
Thanks so much. John, you made the comment about VA, where you think you now might be in a position to grow with a better risk product. Is this still with the 4% roll-up product, or are you looking to maybe re-risk the product to get back more in line with peers? And then in thinking about the growth here, I think one of the concerns you had with VA was uncertainty over the capital treatment for separate accounts, the way the current bank framework's written. If you're looking to now grow VA again, what's changed, I guess, in terms of your confidence that a bigger VA book won't be an issue in Fed oversight?
Chris, let me take the first part of your question regarding the capital treatment of VAs, and I'll turn it over to Bill for the business discussion about our strategy going forward. Again, the rules are not written, so we don't know exactly how the Fed will treat separate accounts. However, I'd say conversations we've been having with them and others in Washington are encouraging from the following perspective. I think they better understand today than they did a couple of years ago how our business model differs from that of a bank. I think they understand that the non-guarantee portion of VAs, the true separate account component, really is not a risk to MetLife on its balance sheet. Banks don't have this separate account situation on their balance sheets.
There is, even if the Collins Amendment is not modified, I think an opportunity for the Fed to say, "Bank rules just don't apply in this particular instance about separate accounts." It's possible. It's up to them, obviously, not me, but it's possible for them to look at separate accounts and not assess either capital charges or significant capital charges for the non-guarantee portion of that business for us. There's no indication by them one way or the other, but I think I would simply say the conversations I've had indicate more and better understanding on their part about what the risks truly are associated with that part of our balance sheet, which is virtually zero if it's someone else's money that is being accounted for on our balance sheet. With that, I'll turn it over to Bill for the business question.
Chris, with regard to VA pricing and competitiveness, I know you know this, but obviously you've seen a real hardening of that market in terms of product features and investment options. The roll-up rate is an important consideration, but it's really only one on the living benefit rider. There's other things going on. I think the other thing that's happened, of course, is you've seen a lot of sales now, a much broader, diverse group of sales where there is no living benefit rider, where the main motivation is tax efficiency or other things. Our plan going forward is really to pursue all those avenues Not just, we got to have a more aggressive living benefit rider. It's we've got to make sure that we're in all the other kinds of variable annuity products to meet specific customer needs.
When we talk about our strategy, that's a big piece of it. Now, we're always looking at how we can change our living benefit rider. My guess is we'll modify that as well, though there's nothing to talk about at the moment. That kind of gives you a little color of our thinking here.
Okay. Both comments helpful. Just one on ROE. Steve, you made the comment that the group business, despite some of this adverse underwriting, is still generating good returns. I know you don't want to get into kind of segmented allocation of capital, but clearly you are focused on growing certain lines of business. I guess how should we be thinking about the returns on kind of the in-force that you're generating on those kind of core businesses that you guys have? And then what's maybe the drag that you're seeing from those runoff blocks that you've clearly de-emphasized around long-term care and SGUL?
Well, I'll give you a little color on that, Chris. Our protection businesses, we're talking mid to high teens ROEs. They've always been that way, honestly. Even in what I would say a tough underwriting period. Obviously group is really the leader there, and it's quite attractive ROE business. I would say the asset-intensive businesses right now, especially with the longer term liabilities, ergo long-term care, and where there's been really low interest rates, those ROEs are underperforming. That's our challenge going forward, is sort of to work on the risk profile of those particular products, but at the same time grow the higher ROE business. I would say, obviously, another factor is in emerging markets. The ROEs there are attractive as well.
Bill, would those be point drags to ROE or basis point drags to ROE? Just thinking kind of in aggregate.
You're asking order of magnitude of the drags?
Yeah. I guess thinking about long-term care and SGUL, clearly they're underperforming, but is it kind of reducing aggregate ROEs by one point, or are we talking basis points?
Well, the long-term care block in and of itself isn't that big. It's relative to the size of MetLife, so I'm sure that would be basis points, not full points. Yeah, I would say in general, sure, those more asset-intensive long guarantee businesses have the impact on the ROEs.
Thank you.
Our next question will come from the line of Mr. Eric Berg of RBC Capital Markets. Please go ahead.
Thanks very much. Bill, the underwriting in 2013 was in some quarters quite challenging. Now you have a quarter of it, although you have said that it really relates to seasonality and there is no trend here to necessarily tell you that things are okay. You might have a broader problem. My question is, when will you be in a position to sort of sound the all clear sign? If we have another quarter or two more quarters, how many more quarters of normal underwriting results do you need before you can conclude that there is no problem? Thanks. That's my first question.
Yeah, Eric, you broke up a little bit, but I think I got the gist of your question, which is group underwriting experience last year was a little soft. Now we've had a soft quarter in the first quarter of 2014. How long till we feel better about it? If you look back at our history, especially in group life over time, in the first quarter we often run a mortality ratio at 90% plus. That's not that uncommon. This was a little worse than that, obviously. So I kind of view the group life experience as really kind of a seasonal quarter, but a tough seasonal quarter, tougher than normal. In terms of the future, our expectation is that our underwriting, especially in group life, should revert to the mean in the second quarter.
If it doesn't, that'll be another data point which would cause us concern. That's why we kind of view this really as a blip, and there are definitely blips in this experience, not a trend. My expectation is I should see improvement in the second quarter, and if I don't, I should be worried. So that's kind of our feeling.
Very helpful. John, one follow-up question. On a global basis, it feels like the top line at Met, and by the top line I don't mean sales, I mean premium fees and other deposits, is growing at about a 5% pace, excluding the effect of currency. Is that consistent with your expectations, and how do you feel about that level of top-line growth? Are you satisfied with it or should it be better? Do you feel it's appropriate given the markets in which Met is competing, or do you feel it should be better still? Thank you.
Eric, I think it's consistent with where our expectations are. I also would point you to my remarks a little bit earlier, talking about essentially us pivoting from trying to get the risk profile right of the company to now focusing on growth going forward. I think that this is the right time for us to really think about those opportunities throughout MetLife's business platform, meaning through geographies, different products, and so on, and to press on the issue of growth going forward. We've spent the last roughly three years trying to make sure that we had our risk profile in the right place, the products designed in a way that we felt offered good value to our customers on the one hand, but also a fair return to our shareholders on the other hand, and didn't result in significant fat tail risk in the future.
That was step one of the strategy here, step two now that we're pivoting toward is finding ways to further grow the business.
Thank you.
Our next question will come from the line of Mr. Jay Gelb of Barclays. Please go ahead.
Thanks. John, can you give us a bit more insight on the sources of the net cost savings in 2015, the $600 million you broadly outlined?
Sure. These costs are really throughout the entire company. We've been focusing on many different aspects, from taking out, over the past few years, layers of management, particularly in the U.S., as well as the reorganization we've done in retail in the United States and moving people to Charlotte. In the technology side, we've created a new center in Raleigh-Durham. You're starting now to see some of these flowing through. Whereas in 2012 and 2013, we had more restructuring charges that were flowing through, so the net basis was less. You're starting to see these cost saves flow through the entire company, not just in the U.S., but also even in Asia and other areas where we're seeing continued cost discipline. I think this is something that's starting to stick in our company, and you're starting to see the results in our financials.
Is there a certain metric we should focus on in terms of trying to track that level of improvement in 2015 and beyond?
Well, it's the expense ratio. However, you do need to adjust a little bit if we have some material moves in our mix of business. For example, in Latin America, by the acquisition of Provida, that runs at a higher expense ratio. Very profitable business, but a higher expense ratio. Without a mix change, and for the whole company, it takes quite a bit to really shift that. On a quarter-by-quarter basis, you'll see that ratio be a very good measure. I just caution you to adjust your models for when we do major material changes in the mix. Different businesses have slightly different expense ratios.
Okay, separate topic, I guess more for John and Bill on variable annuity sales growth. You mentioned the likelihood that you could start growing VA sales growth again now with the new product in place and the new mix and less reliance on living benefits. Should we think about that as a low, mid-single digit growth opportunity or perhaps something larger?
I think if you think about the overall revenue of the business, yeah, I don't see this being a double-digit grower. Obviously, it somewhat depends on what's going on with the capital markets. Assuming those are benign, I don't expect it to be a double-digit grower.
Is that starting in 2015, Bill?
Well, I think we're a little ahead of ourselves in terms of kind of giving specific forecasts for 2015 yet. I think what we're trying to do is make sure it's clear that we're still committed to the annuity business.
Makes sense. Thank you.
Okay. We're at 9:00. Thank you all for your participation, and have a good day.
Ladies and gentlemen, that does conclude our conference call for the day, which will be available for replay from today at 10:00 A.M. Eastern Time until next week, May 8th at midnight of that day. You may access that conference by dialing 1-800-475-6701 and entering the access code 314838. Once again, the dial-in information is 1-800-475-6701 and the access code is 314838. Once again, that does conclude our conference call for the day. On behalf of today's panel, I'd like to thank you for your participation in today's conference call, and have a wonderful day. You may now disconnect.