Steve Kandarian, Chairman, President, and CEO of MetLife. Prior to his role as CEO, Steve served as the Chief Investment Officer, and this background is evident in his approach to managing the company with a keen focus on not only return but also risk. We appreciate Steve joining us today. It's a busy day for MetLife. They reported earnings last night and hosted their call early this morning. Just a reminder of the format of how this is going to work. Steve's going to present a few slides, join me up on stage for a Q&A, and then we'll open it up for questions from the audience. With that, I'll turn it over to Steve.
Thanks very much. Obviously, this is the hearty segment of the investment community that made it out here today. Thank you for coming. Here is our cautionary statement. Basically, the bottom line is that we have forward-looking statements we'll be talking about today, and some of those may prove to be wrong, and the actual results may vary from these forward-looking statements. As was just mentioned, we put out our earnings last night, four o'clock, after the market closed, and we had our earnings call this morning. You can see the results here on the slide. It was a strong year for us. Operating earnings were up 11%. Our operating earnings per share up 7%. The differential there is we had some converts kicking over from the Alico transaction that did dilute our share base a little bit.
I'll talk a little more about that later in terms of regulatory environment, why we didn't do any buybacks. Those earnings were driven by a number of factors. Strong equity markets certainly helped us. Investment spreads were strong. In particular, variable investment income was very good for us. Even recurring investments performance was very good. We had taken a number of steps during the course of the year on the investment side that helped bolster our returns there. There were some negatives. Underwriting was weak in certain areas, both in retail and group. Life side in particular. We had a legal charge related to an asbestos litigation claims that we have had for a number of years at MetLife. There were some FX moves that hurt the earnings as well.
Net, it was a positive outcome between all those factors I just mentioned, and we ended up with, as I mentioned, a very strong year, up 11% on top of the year before, which was up 22%. Good performance the last several years for MetLife post-crisis. Operating expenses, the one in red on the page there, was a little higher than last year, a little higher than planned. We are going through some transformation of the company that's adding to some expenses in the near term. There are other things that went in there as well.
If you factor those things out, such as the asbestos reserve that we put on the books this past quarter, and a few other items like that and kind of normalize, we're back to the 2012 number of 23.8% and actually a little bit below where our plan was for expenses for the year. We feel good in terms of expenses being under control. In book value per share, up a little bit there, net of $48.49 after AOCI. Maybe the most important number on the slide there is the return on equity number. We've hit the bottom end of our range that we gave when we talked about our strategy a couple of years ago. We wanted to reach the 12%-14% ROE range for the company. We said if we couldn't do share buybacks, that would be adjusted down by 100 basis points.
There would be no share buybacks. 12-14 would be 11-13, and we've hit the low end of the range even without being able to do buybacks in 2013, driven both by strong earnings as well as factors related to book value, which results in our numbers not being as high as we anticipated. That included some goodwill write-offs last year and an adjustment that we made on the actuarial side last year as well. All factored in, a good year at the 12% number in 2013 before plan. These are our ROE numbers going back to pre-crisis 2007. You can see that we had a very good year in 2007. That's a high-water mark. If we went back further than that chart, you wouldn't see any higher number than the 14.2.
We actually built up to that over a number of years post going public in the year 2000. The crisis comes. Like everyone else, we saw those numbers go down dramatically. We have inched our way back up. We're up now to 12% ROE, a steady improvement since the crisis. I think what's equally important isn't just the returns, but it's our risk profile. We've worked hard on both sides of that equation, the return as well as the risk side of the equation. We have a couple of measures here to talk about risk and return. Equity divided by total assets, proxy for our leverage, our risk. Here you can see that we are less leveraged than we were even pre-crisis. In the second chart, the yellow bars talk about the return side of the equation.
Here we have operating return on total assets, which are almost back up to the pre-crisis numbers. We've worked both sides of the equation very hard, and we're making good progress along both lines. I think the quality of the ROE today is as high as it's been for quite some time. We have a cautious stance on leverage. People have asked that question a lot, and obviously the regulatory environment for us is uncertain. We're in phase 3 of 3 phases with the Financial Stability Oversight Council, FSOC, that's reviewing us to determine whether we're going to be deemed a non-bank systemically important financial institution. The betting is, given that AIG and Pru have been already designated, that MetLife will be designated. That certainly is the betting.
We disagree with that analysis in terms of whether MetLife is a systemic institution, but we certainly have to take into account the possibility of us being designated a non-bank SIFI. The question becomes, what will the rules be after you're designated, if that's the case, and if any appeals are not successful in terms of designation. That is a no. As of now, the Fed has not put out rules. In fact, the most recent pronouncements suggest that rules might not come out until early part of 2015. That's a long way off, and my hope is we'll see something before that to give us some clarity.
Statements by the Fed have been around issues such as, well, we'd like to be flexible in terms of making the rules appropriate for insurance as opposed to a banking-centric approach, but we feel constrained by the so-called Collins Amendment, Section 171 of Dodd-Frank, and how much flexibility we have, we're still investigating. That's kind of the state of play in terms of where the Fed is on the rules. Overall, better macro environment. We've shifted our focus to the income statement. We're thinking now about growth. We'll talk about that in a few minutes. Here you can see in this slide, mid-single digits for the Americas, that's US and Latin America. High single to low double digits for Asia, and low teens for Europe, Middle East, and Africa, where we have some real growth markets there in Central and Eastern Europe and the Middle East.
The quality of that growth, we think, is very good because we're shifting away from more market-sensitive products to more protection-oriented products. Doesn't mean we're abandoning the market-sensitive sector within the insurance industry. It just means we're trying to get that balance a little better than we think perhaps we had it pre-crisis. Certainly, I want to leave with you that management is very focused on free cash flow. It's something we talk about a lot. It's something that we're embedding into our strategy in terms of where we're growing the business, where we're not growing as fast, where we're growing faster, what markets we want to be in, what markets we want to de-emphasize, and so on. We look at it with a lens of free cash flow and eventually capital management when the environment becomes clear for us.
With that, I think I'll take my seat and see if there's something I can do, some questions.
Great, thanks for those remarks, Steve. You mentioned it up front in terms of trying to improve the risk profile. I believe MetLife is actually the only company to explicitly talk about the spread between the market-implied cost of capital and the ROE.
You're undergoing a shift in sales, and it's a subtle shift in terms of the in-force business, but maybe you could give us an update on the progress of that initiative.
Sure. When we took a look at our strategy post-crisis, we looked at a couple different levers. We saw that our cost of equity capital had spiked, as did the industry overall. That was, I think, a reflection of concern around tail risk associated with market-sensitive products. The industry and we have been trading at a beta of a little bit over one historically, but pretty close to one. Things have spiked well above two certainly at points post-crisis. That really focused our mind on not just our returns, but our risk profile. Now, we thought the market perhaps overreacted in terms of their assessment of the tail risk of our products given our hedges and given how we designed those products, and the in-the-moneyness of things like variable annuities, which we thought was much lower than the marketplace was assuming.
Having said that, we recognize that, A, there are substantive risks, and B, even the perception of risk is important in the marketplace. We have redesigned existing products. We've gotten out of certain lines of business, excuse me, I'm getting a little cold. We're focusing on growing lines of business where our risk profile, we think, is more attractive longer term. Some examples. We no longer sell new long-term care policies, and long-term care is a very market-sensitive product. It was designed throughout the industry in a way that put the risk of interest rates on the company, not on the individual who's buying the product. In the declining interest rate environment, that became very difficult, even with hedges. We've de-emphasized that. ULSG, universal life with secondary guarantees, we stopped selling that product in mid-2013.
Variable annuities, we still sell, but we sell less of, and we're also selling a de-risked product. For example, the roll-up rate today is 4% on that product. It used to be as high as 6%. In addition, we have a Shield Level Selector product that we bought in the marketplace, which is still early days, that in some ways is very much a natural hedge to the existing book of VA products we sold historically. We're taking a number of steps to get that risk profile in a better place. Just our acquisition of Alico helped along those lines as well.
A lot of our emerging market exposure and the products we sell there, other products we sell in Latin America, Middle East, Central Eastern Europe, are more protection-oriented products and a good complement to the market-sensitive products that have been emphasized in the U.S. marketplace historically.
You mentioned upfront the spike in beta is obviously a market outcome, it's not anything that you can manage the business quarterly to or even annually to. When you think about success of this program in terms of de-emphasizing market-oriented products, how do you internally measure success in the shift?
There's different ways to measure it. One is just substantively, what does our product mix look like on our balance sheet today versus before? Certainly moving in the right direction. As all of you know who cover the industry, we sell products that stay on our balance sheet for oftentimes a long time, depending on the product. It's not the same as some industries like manufacturing, we can do a complete shift over to something brand new, your profile looks dramatically different very quickly. We are moving along that spectrum, I think, in the right way to get the right risk-return profile. I think the other way to look at it is how are we trading in the marketplace? A number of different measures. One would be price to book. We sold off to a point of about 60% of book at one point.
We're now back a little bit over book value. That certainly, I think, indicates that the marketplace is looking at the quality of our earnings differently than it did a couple of years ago before we instituted this major transformation for the company.
One growth area where you get access to the protection-oriented type businesses international. In 2012, you set out a goal of 20% of earnings mix coming from international emerging markets, specifically. I believe in 2012, you were on 14%. The Chile acquisition got you about halfway there to 17% with Provida. In terms of closing the rest of that gap and recognizing this is a longer-term goal, what's the growth strategy? Is it organic M&A or through increased distribution partnerships?
We laid out a couple of years ago that we wanted 20% of our earnings to be from the emerging markets. We're at 14%. Provida, which is the pension administrator we bought in Chile last year, closed October 1st of 2013 for $2 billion. We used cash off our balance sheet to make that acquisition. That company will throw off roughly $200 million of earnings. Our numbers to get to the 20% ratio that we're seeking requires about that much more of additional emerging markets earnings. I'd say two things. One is we don't rule out further acquisitions. They may or may not be as large as Provida, but they certainly could be meaningful acquisitions for us going forward. We've made some forays into certain markets in the emerging market sector. These are early days.
I'm not suggesting they'll have a big impact upon that number pre 2016, they certainly have more impact longer term. We've entered a joint venture in Vietnam, a country that's under a million people. Obviously, an emerging market behind China, probably by at least a decade. We think a market that's going to be meaningful to us down the road. We have a representative office opened up in Myanmar, the former Burma. We just announced a joint venture with a large bank in Malaysia, which is a good market in our judgment for growth. We're looking at other markets in Asia as well to make inroads in.
Between those kinds of efforts, potential acquisitions that could still come up between now and 2016, and organic growth for places like the Middle East, places like Central Eastern Europe and Latin America, we think we'll get to our 20% number.
To start the year, there's been at least market turmoil, market volatility in some of those geographies that you just mentioned.
Right.
Does this at all impact your operating strategy?
All of our businesses have some form of risk. In the United States, you wouldn't think so much about political risk as you do in emerging markets, but you have other kinds of risks. We have regulatory risk. We have market risk in certain products that are popular in developed nations like the U.S. I think our approach is more of a portfolio approach of saying, what's the right balance across our entire company? Having, let's say, eventually 20% of our earnings come from emerging markets where there is obviously more political risk than you see in developed markets, we don't think is imprudent. We think it's actually a good diversifier. There's currency risk, certainly, when you do that, but we are across a number of currencies. The Euro has strengthened a little bit. We have exposure to the Euro through our EMEA operations.
We have other currencies that weakened, like in Turkey because of the recent political turmoil there. Things tend to balance out over time. We feel good about the fact that there's an emerging middle class in these emerging markets, and it's growing rapidly in terms of people becoming part of the middle class, and that the penetration rates for insurance in those markets are extremely low, certainly compared to the developed markets. Growth in the life insurance sector globally is not going to be very rapid in places like the U.S. and Japan. It'll be far more rapid in places like the Middle East, Southeast Asia, Latin America, Central and Eastern Europe, where we do have a strong footprint and a growing footprint. We think that's about the right balance.
We certainly understand the risks associated with exposure to those emerging markets politically and from a currency perspective. We think overall that the risks we're taking do make sense, especially given that in many of those markets, we have a very attractive risk-return profile on the products we sell. They tend to be more traditional insurance products, protection products, relatively low capital intensity products. There are a number of things that I think cut in favor of having a meaningful presence in those markets, in addition to, of course, staying in our historic markets of the U.S. and in Mexico. We've been in for a long time in some other markets that have been big contributors to us.
Finally, maybe before moving on to some of the domestic businesses, what is the return profile of new business that you're planning on in the emerging markets? Perhaps what countries represent the biggest opportunities?
I'd say emerging markets overall, they all vary, but are protection-oriented markets largely. They're low capital intensity markets. Once you hit scale in these markets, they can be very profitable. The key is getting up to scale, and you have to make some investments to get to that point in time where you really hit the scale. Through the acquisition of Alico, we have a presence, for example, in Russia. Russia is still a nascent market for life insurance. Its per capita income would suggest there be a lot more life insurance sold in Russia, but for historical reasons, cultural reasons, has not been a big market. We had to hit a certain point of scale in Russia before it really became more profitable.
Right now it is a profitable market, a growing market, to be an example of an Eastern European market and to be part of our emerging market strategy that we think is going to benefit us longer term.
Moving to some of the domestic businesses, one of the growth opportunities that you highlighted at your recent outlook call was pension closeout market. You commented about it this morning on the earnings call that it's a strong flow in terms of new business. Maybe the jumbo market, there's nothing specific in the pipeline. Perhaps you could talk about the competitive environment in pension closeout and what you're seeing in terms of long-term demand.
Pension closeouts have been, to varying degrees, a meaningful part of the life insurance industry over decades. Big push in the 1980s when lots of big companies decided to offload their pension plans to insurance companies. Things went kind of more dormant, more silent for a number of years after that. With very strong stock market returns, there's a different view by corporate treasurers and others about closing out their pensions. More recently, we've seen increased activity, increased interest in offloading their pensions to the insurance industry, focusing more on 401(k)s, less on traditional defined benefit plans. There are mitigating factors that kind of cut both ways in terms of whether it's desirable for a company to offload their pension or not. It obviously revolves around whether or not the pension plan is well-funded.
If the stock market's doing well, traditionally the pension plans are well-funded, all else being equal. The flip side is low interest rates results in calculations around the liability side, which will increase the size of those liabilities. A perfect world for them would be higher interest rates than we have now, continued strong stock market returns, highly funded plans, offload to an insurance company, and kind of get out of the defined benefit business. That, I think is a perfect scenario for corporate treasurers and others in this area. We have part of that so far. We have the stock market being strong, but the interest rate part obviously is still a buffer. The jumbo market right now, there's nothing that we see for 2014. Things can change. There were a couple of big deals done a couple of years ago with GM and Verizon.
It wasn't all of GM, some people think maybe that will evolve over time when more of this will come out in the marketplace. The predictions as of now is nothing jumbo probably in 2014, but a pickup from 2013 in terms of more steady flow of mid-size, even smaller size pension closeouts. If you're talking about jumbo deals, let's call them $2 billion-$3 billion and up, it's been primarily MetLife and Prudential that have been aggressive in this sector. It doesn't mean others couldn't enter it, but that's pretty much the landscape. The smaller deals have other participants that will get involved given that the capital requirements are less for a smaller deal than a larger deal.
I think if you look at the really large transactions, the jumbo transactions in the high end of the jumbo range, you almost have to look at them as an acquisition. There's a lot of capital that's involved. You got to compare it against a lot of other uses of capital, but it is a sector that MetLife has been a major player in historically. We're the largest, again, last year in 2013 in terms of pension closeout business. We did not do the GM and Verizon deals. We view ourself as very disciplined players in the space, and we look at what kinds of returns that these large deals would provide to us and our shareholders. If they clear a threshold, we're going to be interested. If they don't clear that threshold, it's like an M&A deal.
We'll say, "Let someone else pay more for that property than us." We just don't think we can get the return that we feel we need given the risk profile of the liability and given the kinds of returns that we want to give our shareholders.
Maybe moving on to group and voluntary, this is an attractive, again, risk profile type business. There's a little bit of a shift in the way benefits are being provided to employees, a shift from sort of employer paid to employee by some extent. When thinking about the voluntary products that MetLife offers, is there any impact on demand from the trickle-down of this shift?
We think we'll benefit as there ends up being a bigger worksite voluntary benefit business. Certainly MetLife historically and today is the largest player in the group insurance business, and by a fair margin. We have very good and strong relationships that go back decades with the largest corporations in America, and we are also focused on the middle market as well going forward. There is a big push on our side to increase our sales in the voluntary space at the worksite. We are seeing traction, and we think that that sector will increase in terms of sales over time. It's attractive to us in many ways. First, it's something we've done very well for many years. We have expertise in that area.
Second, we think there's a need in the marketplace for people who are not getting as many benefits directly from their employer as they once had, and now they have to provide other ways to protect themselves going forward. We think also that if the healthcare area improves in terms of cost, that the goal certainly of the Affordable Care Act, there will be some more dollars left over for people and for companies to spend on their employees in the group side. Both voluntary and direct group business, we think, could benefit if things do well around healthcare in terms of getting our costs under control. We've seen some recent evidence that that number is coming down a little bit in terms of percentage of GDP.
Early days, that trend continuing, we think, would be a benefit to us.
There are a couple more topics that hopefully we could touch on in the remaining time. One would be free cash flow, and this is something that you give updates to us, and I believe 2013 was precisely 36% free cash flow, which I think was the number given on the call today. The goal is to get that closer to 50% in the next couple of years. Maybe you could just help us think about what were the pressures over the last year that kept that a little bit lower than goal. As we move out beyond 2015 and 2016, as this shift to less capital-intensive products occurs that you outlined, is there any reason we can't get higher than a 50% free cash flow number?
We are making progress. The number is going up. It is a major focus of myself and my executive team that run the company. It's something that we didn't really talk a lot about historically. Now we are talking a lot about it. We're measuring it. We're doing a lot of analysis internally in terms of looking at products in sectors, in countries, in geographies, in terms of what parts of our business really provide more higher percentage of free cash flow and which ones are absorbing a lot of our cash. Again, I don't want to say we won't go into businesses or stay in businesses that don't throw off 50% or more free cash flow.
We want the overall mix of our business to enable us to get a higher number for free cash flow as a ratio of total cash so that we can do more around the capital management side, both in terms of dividends and ultimately, at some point in time, share buybacks. We know what drives shareholder value. We know how important this number is. It's a major focus of ours. Again, all of you know that it's a big book that we have at MetLife or any big insurance company. It takes time to move that book in terms of its profile, in terms of things like free cash flow and so on.
It can't happen overnight. It's a major focus. We're driving it as hard as we can drive it, retaining the existing business we have that we want to retain and growing the businesses we want to grow in. Major focus. Whether we can get past 50%, I don't want, at this point in time, to make predictions. I want to kind of hit that number by 2016. As we get closer to 2016, we'll have more visibility in the out years. I think we'll have more to say about it at that point in time.
The final two topics have been focused on the last couple of years. First is interest rates. We've had about a 1% improvement in interest rates, 1% increase in interest rates over the last year or so. Rates are still historically low. When does this move from being a headwind into a tailwind? When does that switch get flipped?
It's clearly a headwind for us, has been for several years now, certainly since 2009. We've seen a slight improvement from bottoming out around 1.5% for the 10-year. We're now at 2.6%, 2.7%. We got as high as 3%, but it fell back. Not where we'd like to see interest rates, clearly. We're hoping for the economy to pick up, so rates will pick up. The Fed's actions in terms of tapering, we think over time, will help here from our perspective. I'll say a couple things. First, you haven't seen our earnings dramatically hurt by the low-rate environment. That's because we put hedges in place dating back to the pre-crisis years to protect against a tail scenario which we didn't think would happen, frankly, but it did happen in terms of very low interest rates for a number of years.
That's one thing I just want to emphasize. The second is where is that break point? I'd say it's somewhere around 3.5% for the 10-year Treasury. It depends on a lot of factors, including spreads on top of that. Roughly 3.5% is our view of when the headwind turns into a tailwind for us. We're obviously not at that point yet, but it's been a long time since we've seen a 3.5% 10-year Treasury. For most of our careers, we've seen Treasuries well above 3.5%. We're hopeful if we can get some momentum in the economy, if the macro environment improves, that we can get back to more normal kinds of levels of interest rates. We've built things, if you will, based upon this low-rate environment, and we can certainly continue to do well for a number of years in a low-rate environment.
We have about two minutes left. I'd like to just close on the regulatory environment, and you've been pretty clear in terms of your capital strategy in the face of uncertainty. I'm interested in the operating strategy. You mentioned earlier that we may not have rules till 2015, and that's 12 months of operations where it's difficult to price products without knowing where underlying capital requirements are. How do you go about the normal operations without having certainty, or with having such great uncertainty on where capital regulation ultimately falls out?
We certainly don't know the specific rules that will be promulgated by the Fed if we're designated a non-bank SIFI. We certainly also have some indication in terms of regulators' in general view around capital-intensive products and capital charges. Even before, or even excluding Dodd-Frank related issues, our strategy that we put together back in 2009, really right post-crisis, and then refreshed in 2011, shared in 2012 with many of you, talked about a meaningful shift in our product mix and our risk profile in trying to de-emphasize our capital-intensive products and emphasize low capital intensity products. We talked about things like Provida, which is the fee business that isn't even dependent upon the assets under management, but the flows into those funds in Chile.
We certainly have built the company going forward from the crisis to assume that the capital-intensive products, we're going to get higher charges assessed to them. Exactly how high, we don't know, but we know directionally that's likely to be the case. We can't be precise right now, makes it a little difficult. Directionally, we've already taken these steps pre being designated if we are going to be designated a non-bank SIFI.
That's helpful color. I see the clock counting up, which means that we're out of time. Thank you all, thank you, Steve, for your time on what is a very busy day for you.
Okay. Thanks, Seth.