Good morning, everyone. Welcome to our 2013 Investor Day. For those joining by webcast, presentation materials are currently available at metlife.com through a link on the investor relations page. This is our cautionary statement. I'm not going to read the whole thing. Forward-looking statements, non-GAAP financial information will be discussed. These items will be discussed in further detail in the appendix slides. The safe harbor statement contained in the appendix covers the forward-looking statements made here today. Forward-looking statements include our projections for 2013 and any other statements providing information about future periods. As the statement notes, actual results might differ materially from the projected results we will be discussing today. For a discussion of the factors that could cause actual results to differ, please see the risk factors in our 10-K, 10-Q, or other reports filed with the SEC.
Let me remind you that we will be using non-GAAP financial measures on today's call. The explanatory note on non-GAAP financial information contained in the appendix includes information on how we calculate these measures and the reasons we believe these are useful. Reconciliations to the most directly comparable GAAP measures are also included in the appendix. It sure feels like I did read the whole slide. What I'd like to do now is just provide a brief overview of what you should expect today. We'll jump right in as we have a lot of material to cover. There will be very brief intros for all the speakers, as there are bios included in the back of the presentation book at your desk, at your table. First, we're going to start with some comments from our Chairman, President, and Chief Executive Officer, Steve Kandarian.
We will then move into a discussion on annuities, kicked off by a presentation from our CFO, John Hele. After the annuity section, we will have a Q&A session. That will be followed by a short break. When we return, we're going to turn our focus to earnings and free cash flow. After that section, we will have a final Q&A where all the presenters will come on stage. We should wrap up around lunchtime. Now, as you probably have noticed from the booklet, we have a lot of new material we're covering today. A lot of it is highly technical in nature. We expect that we're going to have a lot of questions. With this in mind, I am going to strictly enforce the one question and one follow-up rule. To be clear, that rule is not three housekeeping items, one question, and a two-part follow-up.
That's not the definition. I'm going to be the bad guy in some cases. It's necessary. We have a lot of people here. We want to make sure everyone has a chance to get their question asked and hopefully answered. With that, I would like to turn it over to Steve Kandarian.
I think that was the biggest applause I've heard from one of our IR guys. I can't imagine why that was, but all right. On a more somber note, want to extend my sympathies for those who suffered greatly last night in Oklahoma City, and our thoughts go out to all those families that were so terribly impacted by that terrible tornado. Let me turn to our presentation. Ed kind of set it up for us in terms of who'll be speaking. For those of you who have been coming to our Investor Day over the years, I think you'll notice that we really have kind of narrowed the topics for today's discussion. It really came from, in a sense, all of you as to the kinds of questions you've been asking us over the recent months and quarters.
Typically, we go through discussion about our different lines of business. Oftentimes, there's something on investments. Today, we really are narrowing in and really focusing very heavily upon a couple key aspects of the company. One is variable annuities. The other is the free cash flow power of our operating earnings in our company overall. That really is in response to the kinds of things that all of you in this room have been asking us to focus on and asking us to address. Okay. Some key messages for today. Variable annuities, as I mentioned, will be a major focus. I think the takeaway you'll have at the end of the day is that, yes, there are risks there. There's no question, but they are manageable risks. We are managing them. We're taking proactive steps. We'll talk more about that in a little bit.
There's actually upside to that business. In a more normal interest rate environment, with equities continuing to perform well over time, that business has significant upside. Lisa, later on, will talk about some of the numbers around the analysis we've done on that business. Also, we want to emphasize the attractive mix of our businesses. We're well-diversified in terms of geography. We're well-diversified in terms of product offerings and the kinds of risks we have in the company. There are certain risks we think we probably have too much of. We're going to try to de-emphasize that over time. Other risks we can take more of. We're going to try to get that balance right going forward. We'll talk more about that.
As to free cash flow, 35%-45% of our operating earnings resulting in free cash flow for the years 2014 through 2016 are projections. A real focus by the company on driving that number as high as possible. Obviously, we have a large portfolio that already is on our books. It takes time to move a big ship like MetLife with products that stay on our books for many years. We're really focused on making sure that number gets as high as we possibly can make it over time. I think most of you have seen this slide before, but I think it's worth reviewing. These are kind of cornerstones of our strategy, four key aspects to our strategy.
Let me just say that the driver behind this, the kind of why do we have this strategy, the key driver is to increase, over time, our return on equity and lower, over time, our cost of equity capital. That's central to all aspects of our strategy that I'm showing you here on this slide. Refocusing the U.S. business, that is really talking about getting the variable annuity and other interest and market sensitive products right-sized and having the products designed in a way going forward that has appropriate risk for the company. Emphasizing protection products and trying to increase that portion of our revenues coming from protection products. Getting our expenses in control, becoming more efficient in that business, Eric Steigerwalt will be talking more about that in a little bit.
If you look at the next part of the slide on the right-hand side there, building the global employee benefits business. It's really about leveraging our footprint post-Alico, being in over 45 countries around the world, also leveraging our capabilities. Most of you know how strong MetLife is domestically here in the U.S. in the employee benefit business, taking that expertise, those capabilities, in essence, exporting that across our global span of operations we think is a great strategy for us. It's a lot of open space right now in the marketplace. No one really has done it well. We're working hard to do it the right way, we're making good progress to date. Those kinds of businesses associated with the global employee benefits business also have good ROEs and relatively are light in terms of cost of equity capital.
The risk profile is quite attractive in that business. The bottom left, growing the emerging markets. Obviously, we're quite large in two mature markets, the United States and Japan, but we do have exposure to a lot of very attractive emerging markets. I think you've seen more recently the kinds of performance we've had in those markets in the last earnings call. Our goal is to increase that over time. Right now, it's about 14% of our earnings come from these emerging markets. Our goal is to get over 20% by 2016 within the strategy timeframe that we've laid out. With the Provida acquisition that we announced, the Chilean-based pension business, which is really a fee business, that number will go up to about 17%. We're making good progress along the lines of getting that number to over 20% of our earnings by 2016.
Bottom right-hand box, drive toward customer centricity and global brand. I mean, just think about our business. It's so easy for people to kind of knock off an innovative product. What can be your competitive advantages? These are two areas where you truly can have a competitive advantage if you do it right. Our brand, certainly in the United States, provides that competitive advantage. Less so outside the United States, where we're less well-known, although we're gaining traction in places like Mexico, where we're the number one life insurer. Gaining traction in places like Chile and Korea, where we've been there for quite some time. We have to do more in other markets that we picked up now through Alico. Customer centricity, I think historically our industry, and MetLife included, has not done as good a job as we should have in this regard.
We have very complicated products, and oftentimes for a good reason, but I think we've sometimes made the experience more complicated, more difficult than it needs to be for our customers. We're working very hard throughout the company to really drive customer centricity through everything we do and really putting the customer at the center of all of our planning, all of our analysis, designing products, designing forms, how we set up our websites, how we service our customers, our sales rep centers, the technology spend that we're engaging in really is focusing on becoming really proficient in the area of customer centricity. This slide's not necessarily a happy slide, but this is the reality we had. During the first part of the decade after going public, our cost of equity capital was less than our returns on equity, which obviously is what you want.
At that point in time, we were trading at a reasonable multiple of earnings. We were trading at a premium to book value. The financial crisis comes along, lots of uncertainty, and we see not only earnings drop, return on equity, but also our cost of equity capital go up dramatically during the crisis, driven by the uncertainty at that point in time. Things bounce back in the year 2010 when rates go back up. The 10-year treasury at the end of 2010 was 3.3%. Some of the pressure came off in terms of concerns about low rates on the insurance business model. Over time, those 10-year treasury rates started coming down again, and by the end of 2012, the 10-year treasury is back around 1.8%. During that period of time, 2010 through 2012, our return on equity capital was actually going up.
A little bit over 10% in 2010 to a little bit over 11% in 2012. That's the good news. The bad news was our beta in that equation for cost of equity capital was going up as interest rates started to sink again. There's things that we can control at MetLife and there's things we can't control, but we certainly can react to the environment. We don't have any control over rates. One big factor in terms of how this slide looks. We can influence, we don't control the regulatory environment, which is a factor for us in terms of whether we're named a non-bank SIFI or not, and whether or not the Fed has rules that are appropriate for the insurance industry or not. We can influence, but we can't control that.
Things we can control include how we run our own business, the variable annuity business, how we manage that, and again, that's why we're going to spend so much time today talking about that component of our business. Again, we're working on both trying to drive up the return on equity for MetLife and drive down the cost of equity capital, some of which we can control, some of which we cannot control. Okay, VAs. The biggest lever that we can really control in driving down that cost of equity capital. I think most everyone in this room knows that we sold $28 billion of VAs a couple years ago. That dropped last year to just under $18 billion in the U.S., and the year 2013 number for the U.S. VA business is $10 billion-$11 billion.
We're confident we'll come in within that range for the year. In addition to the volume of sales for VAs, we're also, and have also redesigned the product. We've de-risked the product, and we're taking a number of steps to further de-risk this business, including how we're going to organize the business, and including some products that we're introducing that will be natural hedges to this product. Eric will come out later and talk about the MetLife Shield Level Selector product that we're introducing. Just to give you a high level view of it, when you think about two big parts of our business, we have life insurance, and we have annuities in general. There is a natural balance between those two products for us.
If people live longer than we anticipated in our models, the life insurance business actually does better since you don't pay out as soon. You keep the money longer and get returns on it. At the same time, the annuity business gets hurt if your assumptions didn't reflect the actual mortality of people in the future because you're paying out annuities for a longer period of time than you anticipated. The two have a natural hedge. One of the things we've spent a lot of time at MetLife looking to do here on the VA business was to find some natural hedges for that business, and again, Eric will talk about that in a little bit, in addition to the other kinds of ways we manage that business, including using derivatives to hedge risks and the way we organize the business overall.
In terms of our structure, we've made a proactive decision to manage the VA risk and provide more transparency both to investors and to regulators. We're merging our offshore reinsurance subsidiary into a more highly capitalized U.S.-based and U.S.-regulated entity. I should note at this point in time, the New York Department of Financial Services industry inquiry regarding captives was an important factor in our taking a closer look at our offshore reinsurance subsidiary. We have looked at this very carefully. We've decided, given the size of our book, given a number of regulatory factors, including how Dodd-Frank works around collateral for derivatives.
The structure we had in place really since 2001, which made a lot of sense in that environment, probably makes less sense today, and therefore, we're going to take steps to bring these businesses back onshore into a more highly capitalized U.S.-based and U.S.-regulated entity. John Hele will talk more about that in a little bit. Okay, we're clearly committed to value creation for shareholders and more transparency to all of you, shareholders and analysts and others. We're shifting our business mix, as I mentioned. First quarter sales, just to give an example of this, up 20% in Latin America, up 40% in the emerging markets in our EMEA region, driven by very strong sales in places like Turkey, Russia, the Middle East, the UAE in particular. In Latin America, we've had very strong business there for a number of years.
It continues to grow very well for us. Those businesses are important to us because not only is kind of a diversifying effect overall for our company, but they are lower risk kinds of products versus the U.S. marketplace, which is a more developed marketplace, obviously, in insurance. It has more complicated and riskier products in terms of risk associated with interest rate and equity markets. That business mix shift, we think, will serve us well in the years to come. 60% of our earnings come from products that are largely protection oriented versus market sensitive kinds of products. Cash flow for 2013 is expected to be 27% free cash flow. That number we anticipate being in the 35%-45% range for free cash flow. For operating earnings in the years 2014 through 2016.
2013 has some demands on the holding company cash, we think in 2014 through 2016, you'll see the number in the 35%-45% range. Again, our goal to drive that number higher over time as we get our business mix in a different direction. Creating shareholder value. The current business is performing well despite the external challenges. First quarter earnings, as you know, $1.48 per share, well above the first call number of $1.30. Again, the kind of earnings we had were great earnings with growth in the emerging markets, very strong performance in the U.S., especially around things like expense saves. Our focus on areas of growth should contribute to higher ROE back to that whole dynamic that we talk about MetLife on a constant basis. How do we drive up our return on equity?
How do we drive down the cost of equity capital? In other words, reduce the risk associated with our overall profile. Generating cash for you, our shareholders, is central to what we're working on here at the company. You saw our action once we were no longer a bank holding company regulated by the Federal Reserve, where we raised our dividend from $0.74 a share to $1.10 per share, putting us more in line with our peers in terms of payout ratios. While our numbers for 2013 do not indicate any share buybacks, we're really waiting for some things to settle down and more clarity around the regulatory environment. Our goal over time is to do share buybacks. Our goal over time is to increase our dividend, and that is a real focus of ours at MetLife.
I'll be back up here later on at the end of the program, at this point, I'm going to turn the program over to our CFO, John Hele.
Good morning.
Good morning.
It's great to be here as CFO of MetLife at my first Investor Day. It's interesting, since I became CFO in September of last year, we've had a lot of meetings with investors and analysts. There have always been three important topics brought up at every meeting. The first is about questions about variable annuities. The second is about what happens in low interest rates, what if rates stay level forever? Third is cash. What about cash generation? These three topics have really dominated most of our meetings. The only difference has been the order in which you've brought them up. Sometimes it was low interest rates first and then variable annuities. These have been three very big, important topics, and as Steve said, we're going to spend some time on this today.
A lot of this is pretty technical, as Ed said, we're happy to answer your questions on all this. I'd like to start, though, and say that we have no change to our earnings guidance that we gave you at our last call, and that we expect to be toward the top end of the range we gave you for 2013. We do, though, however, have an update to the cash guidance for the year, and Marlene, our treasurer, will give you more details on that when she gets up here. We have some key messages today on variable annuities, and Lisa and Eric will be talking about this in addition to myself. The first is that managing this risk remains a top priority for MetLife.
The variable annuity risk is a relatively larger risk at MetLife, and we are actively managing that both through risk management programs, but also in resizing that risk to our total balance sheet. We also want to make our variable annuity risk more transparent to you, the investor, and the steps we are taking announced today will accomplish that. However, we also want to demonstrate to you that the variable annuity book does have value, and actually has much more value with slight improvements in the markets, and that the risk is manageable in the downside scenarios. Most importantly, MetLife as a firm remains committed to annuities. This is a product that meets a very important consumer need.
It is increasing in importance in terms of total retirement, both on our government's ability to fund supplemental retirement, as well as the demographic trends occurring, not only in the U.S., but throughout the developed world. This is a key competency that we possess as a firm, and we plan to continue working in annuities throughout the world. We are going to explain this morning these actions to address the variable annuity risk. We have redesigned the product portfolio to further improve the risk-adjusted return profile. One of the most important elements was introducing managed volatility funds in 2011, and as those have grown, they have improved the risk profile. We have continued to manage down this reduction of variable annuity sales volume. And last, we are also announcing this morning the merging of our offshore captive reinsurer into U.S.-regulated entities, and I will explain these three points in the coming slides.
MetLife has embarked upon now multiple generations of variable annuity product de-risking. This has been a combination of price increases as well as benefit reductions in recent years. The most recent one, GMIB Max 5- Change the guaranteed minimum income benefit, which is our largest selling rider benefit, where the roll-up rate was reduced from 5% to 4%, and the withdrawal rate was lowered from 5% to 4%. So the way I remember this, the GMIB Max 5 has a 4% guarantee, the GMIB Max 4 has a 5% guarantee. But these are important changes that we have instituted and do dramatically impact the overall risk profile to our firm. In 2011, with the record sales of $28 billion, that has been reduced in 2012 to $17 billion. Our outlook for this year is $10 billion to $11 billion. The first quarter of 2013 was slightly above.
If you annualize the first quarter times four, you came above 10 to 11. Our new product, the GMIB Max 5, was introduced in February of 2013, so it takes some time for this to phase in. And our sales team is quite confident that they are going to be within this range for variable annuity sales for the year. We think this is a good balance of sales and risk profile for our firm at this level. A very important announcement we are talking about this morning is the merging of our subsidiaries and the onshoring of our VA risk. MetLife has written variable annuities from several, actually many, U.S. statutory companies, some N.Y.-based licensed and some non-N.Y.-based. Today, we will be taking three major companies and announcing we are going to be merging these to create a larger U.S.-based statutory entity.
That includes MetLife Insurance Company of Connecticut, MetLife Investors USA, which is a Delaware company, and MetLife USA has been the primary writer of VA risk in the past few years. We also will be including MetLife Investors Insurance Company of Missouri, which also has some VA risk as well as some other business. These three entities will be put together into one larger U.S. statutory entity. We will then be merging into that Exeter Reassurance Company, which is a variable annuity reinsurer, and that business will be merged within this one larger, now consolidated U.S. statutory company. The New York-based business that is currently in Exeter, because we reinsure variable annuities written in New York licensed entities to Exeter, that will be reinsured out to MetLife Insurance Company, which is a New York-based company. This is a very complex and long process.
Work is still underway, but it has progressed enough to announce our plans today, and our initial meetings with our regulators have gone very well. This will take some time. We expect most of this to occur in 2014, actually toward the end of 2014. But by the end of 2014, there will be a much larger non-New York, U.S. statutory company that will have a variety of business in it, as well as the VA risk. The benefits from bringing all this together are several. You may recall we spoke about and had reserved some cash for Dodd-Frank derivative collateral requirements. Because the VA risk was concentrated in a reinsurance company that mainly had only derivatives as its assets to manage that risk, it does not have a lot of other assets there to post as collateral for derivatives.
There are new margins coming into place, new requirements for initial margins for derivatives starting in June of this year that will be phased in over the coming years. There have been two sets of rules that have been discussed. The United States was discussing having a set of rules that would have been effective in June of this year. The international bodies had a different suggestion, where it would be phased in over a longer period of time. It looks like now that international rules will be the binding rules for us, and these initial margin requirements for derivatives will be phased in over time. All derivatives as of June of this year are grandfathered, so you only need to post the initial margin as you have to buy new derivatives. And we have long-tail derivatives, so it will affect us over many years.
But nevertheless, this will require collateral to be posted for initial margins. Therefore, by bringing these derivatives into a large statutory capitalized insurance company in the United States with a lot of assets, the collateral is not really an issue. If we had left it in the offshore reinsurance company, we would have to find cash from the holding company to match that initial margin. We also proactively are addressing the recent regulatory interest of captive reinsurers. And importantly, this will make it quite transparent to you, the investor. The bulk of the VA business is moving into the U.S. regulated sub from the offshore captive. It will be in our Blue Book at the end of 2014. You will see how the liabilities are calculated. You will also see all the derivatives we hold against that risk.
The pro forma combined risk-based capital ratio of MetLife for all of our U.S. statutory entities, after all these mergers are completed, pro forma based on 2012 under current market conditions, we expect will be above 400%. As of year-end 2012, that combined risk-based capital number was 466, and we believe bringing all these businesses together will still be above 400. In summary, we've had a very active de-risking of variable annuity products in recent years. We've had an ongoing process to ensure this business is right-sized to the risk profile of MetLife, and that this restructuring will improve the transparency and risk profile for MetLife. With that introduction on variable annuities, I'd like to introduce Lisa Kuklinski, the Chief Actuary of the Americas, and really one of the experts in variable annuities, who will take you through variable annuities in some more detail. Lisa?
Thank you, John. Good morning, everybody.
Morning.
Morning. Today, we're going to do a deep dive on our variable annuity block. As Steve and John indicated, as we've known over the years, you've had a lot of questions on our VA block and wanted more information. We've heard you, so today we're going to share some new cuts of our data, some new metrics, and a lot of sensitivities. Here's the agenda for my segment. First, we're going to start off by talking about the profile of our domestic block to be able to level set. Next, we'll talk about the net amount at risk and what it means, in particular for our guaranteed minimum income benefit, or GMIB, since that product does have some nuances. Next, we'll talk about cash flow projections, pure cash flow under some different scenarios. Then we'll present our market consistent valuation.
Lastly, we'll wrap up by talking about policy holder assumptions and the experience that we've had to date. What we'll demonstrate is that the risks are manageable and that we're well-situated for the future. I'm going to start off with an overview of our domestic death benefits. As you see at the end of Q1, we had just under $170 billion of annuity account value in force. Taking a historical view on this chart, MetLife has been in the variable annuity business since 1960. We sold some of the first policies in the industry. In the beginning, the only type of guarantee available was a relatively modest incidental death benefit, return of premium, to protect against the risk of dying when the market's down.
The five to seven-year step-up, where you look at the account value on each fifth or seventh anniversary and lock in that high water mark, also became standard. It coincided with the typical surrender charge on these benefits. Although the market has evolved over time to have richer benefits, we still see roughly half of new clients selecting these basic death benefits. You can see this preponderance in the chart between return of premium, five to seven-year step-up, and the small piece with no guarantee at all. These basic death benefits are 60% of our in-force block. Moving around the pie, we have the annual step-up at 18% of our business. Two things on this block. First, our annual step-ups only run through age 80, so that limits the risk at older ages. Secondly, we've never offered step-ups more frequent than annual.
Lastly, we have 22% combined in the compound and enhanced variations. That's the maximum of a roll-up, ranging from 4%-6%, and an annual step-up. I'll comment more on these later. These do have some key risk offsets. We do believe that death benefits are a modest risk. This next chart shows our claims since 2007, net of reinsurance. As you can see, it is heavily driven by the market. 2009 was our highest year, with death claims topping out at $152 million pre-tax. That translates into about $0.12 per share. It's modest in terms of amount. Also, death benefits have less policyholder optionality because nobody generally chooses to die when the market's down. We'll be focusing on living benefits for most of this presentation. Moving on to living benefits, MetLife didn't offer any living benefits until 2001.
That's when we developed our Guaranteed Minimum Income Benefit, which provides a minimum level of lifetime income upon annuitization, and that's been our main focus ever since. However, we have evolved this product over time. Our legacy block, GMIB I, II, and Plus, the gray slice, is 39% of our book. In 2011, we launched the GMIB Max contract with our Protected Growth Strategies, or managed volatility funds. These funds were designed to manage equity market volatility and to hedge interest rate risk while providing the client with more stable account values over time. Max is already 16% of our in-force. Moving through the chart, we have offered withdrawal benefits over time, both return of premium and lifetime, and that's 15% of our block. Lastly, we get to the blue slice.
That's the part with no living benefits at 30%, which is a pretty big share for a company of our size. That slice comes from both the old and new business. About one-third of that, or 11% of our block, is our pre-2001 business, which predates the launch of living benefits, and that old business is pretty persistent. We also see a significant number of new clients not electing living benefits. In 2012, we had $2.3 billion in VA sales with no living benefit at all, and that's coming from clients that just want good old-fashioned tax deferral, and also from our participation in the 403 and other qualified plan market where living benefits are not a big piece of the story. You might wonder about the interaction of these death benefits and living benefits, here we have our Venn diagram.
On one hand, on the gray circle, we have our living benefits at about $118 billion. On the other side, we have that 22% that I mentioned, the $37 billion in enhanced death benefits. These contracts with the enhanced death benefit have both a roll-up and a step-up and perform in a manner similar to, or in some cases, the same as the GMIB benefit base. It's been very much a companion product over time. You could see that in the interaction, in the intersection of the two circles. Most, $31 billion, has a living benefit too. These contracts with both benefits have a natural hedge built in. First, we've got the mortality and the longevity offset, similar to what Steve described, but that's within the single contract. Next, we have an offset on the policyholder behavior risk because clients can either die or annuitize.
We'll only pay on one benefit stream. Lastly, we price these two benefits independently, so we're not looking at the interaction of the two. In fact, this overlap is by design. Today, you can't buy an enhanced death benefit from MetLife without purchasing a GMIB. We do like that offset. Before we start talking about net amount at risk and some of the other metrics, I'd like to refresh everyone's memory on the GMIB and how it works. This is something that Bill Wheeler and others have spoken about on past investor days. At its core, GMIB is aimed towards guaranteeing a minimum level of income. Whether the roll-up rate is 4%, 5%, or 6% does get a lot of attention, but it's not the whole story. We're not making 4%, 5%, or 6% guarantees on the funds.
You really have to look at the payout rates to appreciate the whole benefit. Let's say in this chart, the client has a benefit base of $100, and he arrived there through the roll-up rates. This $100 is not available as a lump sum. It's a notional amount that the client can only use to purchase a lifetime income annuity using the guaranteed basis that's published in the rider. Let's say this client is age 75, and let's assume that he has a Max 1. That's the version that we launched in 2011 and sold a significant volume of. We disclose the payout basis in the contract. The payout rates are based on a 1% interest rate and conservative mortality. We use a 10-year age setback, which means that we make the client 10 years younger.
More longevity reduces the income, and a 65-year-old would get less than the 75-year-old. All of this translates into a guaranteed payout of 5.3% of the benefit base paid out over the client's lifetime with a five-year certain period. Let's scale this up and say that the client had $100,000 benefit base. It means that the GMIB is guaranteeing him at age 75, $5,300 a year for life. The real question is, how much is this income of $5,300 a year for life worth? What would be the price tag? We ran our SPIA quotes, our Single Premium Immediate Annuity quote system as of 3/31, and that price tag would have been $60,000. A $60,000 premium would buy a 75-year-old a lifetime income of $5,300 a year for life. That's the same basis that we would provide any client coming to MetLife.
It's our street rate, so to speak. If you had this contract and had a $100,000 benefit base on one hand and a $60,000 account value on the other, the GMIB guarantee would not be in the money. You would, in fact, be indifferent between exercising your GMIB with the $100,000 benefit base or taking your $60,000, withdrawing it, and purchasing a single premium immediate annuity at our current street rates. This present value of the $60,000 will vary from time to time based on current income annuity rates. Let me remind you that this is for GMIB Max versions 1 through 3. We've actually got $28 billion on this payout basis, and you can see that in our 10-Q. With our current contract version 5, this ratio would be even lower. In summary, the payout ratio provides a significant offset even in this low rate environment.
In addition to this age setback, I'd like to comment on some other risk mitigants that we have. We've always said that the first prong of risk management is product design. First, asset allocation requirements. Our clients do not have free rein to select the riskiest funds. We implemented asset allocation requirements a long time ago in 2005, and at this point, 78% of our living benefit block does have an asset allocation requirement, either to be in a particular set of funds or to manage a certain equity bond mix. We launched GMIB Max in 2011, like I said, with the managed volatility funds. The only way that you could purchase a GMIB from us today is with investing in the managed vol funds. At this point, we have eight different funds, so we're not too concentrated in any one particular fund.
These funds have performed well and provide a good customer value proposition. While it's required on our new block, we've also made these funds available on our old block, and we've seen about $1.6 billion in voluntary inflows, which is good for the client and good for the risk of our old block. Next, the 10-year waiting period on the GMIB. We've always had a 10-year waiting period before the client could annuitize. This is a good risk offset because it means that we're collecting fees for 10 years before we pay a claim. If the client elects a step up, that 10-year period resets. After the waiting period is over, the client has an opportunity to exercise the rider on their anniversary. If they decide not to do it, they have another opportunity on their next anniversary and their next after that.
That opportunity ends at the rider termination date. Our GMIB riders terminate at age 85 on the legacy business and age 90 today. That means that our coverage period is limited. If the rider is not exercised by that date, the rider expires without value and we're off the risk. Next, as we've mentioned in the past, we've been hedging since 2004, and our hedge program has performed well through up and down markets, and it's been complemented with external reinsurance. With these risk offsets in mind, let's talk about our net amount at risk. First, let's define exactly what we mean. Net amount at risk, or I'll be calling it NAR, is a point in time measure showing our total exposure if all claims come due at once. On the death benefit, that means that all of our clients die at a particular point, say 3/31/2013.
We're comparing the death benefit that we would pay versus the account value. When we talk about the net amount at risk, we're not deducting the value of hedges or any reserves that we're holding. Next, on the Guaranteed Minimum Income Benefit or GMIB, that's the claim that we would pay if all were to exercise the benefit. It's a little more complicated because we're talking about a lifetime income stream instead of a lump sum. What we're doing is converting the benefit base using the payout ratio, similar to what we described a couple of slides ago. Note that not all can exercise because not all of our clients are through their 10-year wait. We assume everyone does for purposes of calculating the NAR. Let's just look at some quick examples before we move on. On the death benefit, it's very straightforward.
If a client has a $100 death benefit and a $50 account value, the net amount at risk would be the difference, $50. On the income benefit, revisiting our diagram from a couple of slides ago, the $100 benefit base would be worth $60 on 3/31. Comparing that to a $50 account value, the net amount at risk would be $10. You can definitely have situations where the benefit base is greater than the account value, but when you deflate that nominal base by the present value of income, the NAR may actually be zero. One other thing, the income street rates that we use to calculate the NAR are fully loaded for profit, and our Single Premium Immediate Annuities are priced to get an ROI in the low teens. We're setting up the claims using these fully loaded amounts.
However, the income annuity segment would be showing future profits on these annuitized GMIBs, and those profits are not included here. The next few slides focus on the net amount at risk for the GMIB, since that is about 80% of our living benefit block. What we're doing here is showing the net amount at risk by issue year to understand the dynamics. The big drivers are, number 1, the volume that we sell, the performance of the funds relative to the guarantee, and the interest rates. The dark blue bars show the current value. Our net amount at risk on GMIB as of 3/31 was $2.5 billion. You can see how it spreads out by issue year. The early years, going back to 2000 to 2001, 2005, show small amounts.
Even though we had very mediocre market performance over that time period, the S&P has averaged about 2% from 2001 to 2012. We were not selling significant volumes at that time. You see we hit peak NAR for the 2007 cohort. That's where we had ramped up to significant volumes, and the market was at a local high. Then you'll notice that those blue bars virtually disappear post-2008. Even though we were selling larger volumes, two things. First, the funds have performed well over that time period, and number 2, we greatly scaled back our guarantees post-crisis. On the slide, we're showing some sensitivities to increases in account value. If we were to get a 5% immediate increase in account value, that's shown by the medium blue bars, the net amount at risk would go to $1.7 billion.
With a 10% increase in account value, the net amount at risk would go down to $1.2. We all know that NAR is very sensitive to market returns, and this next slide shows how sensitive the net amount at risk is to interest rates, especially now that interest rates are low. It's having an impact on the net amount at risk. When you think back to 2001, interest rates have come down about 400 basis points since then. As I said, to calculate the net amount at risk, we look at the SPIA rates on each policy, and that goes into the net amount at risk.
We ran our SPIA pricing formulas assuming that the 10-year rate was 100 basis points higher, and this is shown by the medium blue. It brings the net amount at risk down to $1.0 billion. The takeaway of this slide is that interest rates are extremely impactful. You can see that 100 basis points has about as much of an impact as a 10% increase in account value. If rates were to go up to 4.5%, which we think is a reasonable long-term rate for the 10-year, the net amount at risk would actually shrink down to $0.4 billion. This next table shows the interaction. We've got our starting point of $2.5 billion in the gray bar. Looking at the bottom row of this chart, if the account value were to go up 10%, we saw that $1.2 a couple slides ago.
Combined with 100 basis point increase in rates, it would go down to $0.5, combined with rates at 2.5%, it would go down to $0.2. On the other side of the coin, looking at the first row of the chart, if we had a minus 10% change in separate accounts, the net amount at risk today with no change in rates would go up to 4.6%. Combined with 100 basis point pop-up, it would bring the NAR down to $2.2, which is lower than our starting point, and this shows how interest can offset the market. At a 250 basis point increase, it would go down to $1.0. That's the net amount at risk, and it's one way to measure your exposure and get your arms around the risk, but it's a snapshot at a point in time.
Over the next couple of slides, we're going to be showing some cash flow scenario analysis. We're translating this net amount at risk into claims as we expect them to emerge over time. There's a lot of discussion about GAAP versus stat, and while both are vital and we manage to both, we wanted to focus on the cash flows here because that's kind of an absolute. In the slides that follow, we're projecting out all contracts with living benefits. We're looking at the base product fees and expenses, and the expenses that were included are maintenance expenses and trail commissions. This is on the 70% with living benefits. We're not including the other 30 because we wanted to show the living benefit block is self-contained.
We're looking at all rider fees and all claims on the income benefit, now we're including the withdrawal benefit and even our small piece of accumulation benefits. We're settling IB claims using our current income annuity payout rates, which like we said, are loaded for profit, those profits are not included here. We're not showing the impact of hedges or reinsurance unless otherwise noted, we wanted to focus on the absolute contract cash flows. We're going to be showing some present values, those present values are discounted at 4% because that's indicative of typical long-term spread assets that we can invest in today. We're going to be showing a number of scenarios. As you know, we price these benefits and we do our analysis using stochastic analysis, so using over 1,000 scenarios.
Ed Spehar wanted me to present all 1,000 scenarios, in the interest of time, we got it down to a crucial six. To keep things simple, we're playing with a couple of inputs. On the S&P and the stock indices, we're toggling between a 5% return, which is, as you know, what we use for planning and projections, a 0% flat return, then a -30% shock. All of that is before any fees. Then on interest rates, we're varying between flat rates and interest rates go into that long-term rate of 4.5%. Everything that I'll be showing is pre-tax. We've ordered the six scenarios from best to worst, the first one is the best one, that's the baseline where we have 5% S&P growth and the 4.5% 10-year swap.
This immediate increase in rates causes a capital market loss on the bond funds, then we have higher income over time. The yellow line on this chart shows the cash flows associated with claims, what you're seeing on the chart is not discounted. That's the full amount in each year. As you see, claims are low for the next several years, then we get an increase as clients start to emerge from that 10-year waiting period on the GMIB. The blue line shows all fees on contracts with riders less expenses. Since we're looking at existing contracts only and not modeling new sales, you see the amounts decline over time as we have lapses and mortality and annuitizations. On the right, we're showing our present values. As you see in this scenario, base fees are 11.4%. Again, that's on the 70% with living benefits.
You can get a sense of the fees on the non-living benefit portion by simply grossing up, these two kinds of contracts have the same basic fee structure. We have rider fees of $8.4 billion, our total base fees and rider fees add up to about $20 billion. Minus claims of $5 billion, we have a margin. We have positive margin of $15 billion. In the baseline, we're showing a significant margin. Let's see what happens when we have flat rates forever. The fees are slightly higher on the base contract from the bond funds. We're not having any upfront loss. Claims are $3.5 billion higher, that's from the lower SPIA rates affecting the GMIB claims.
The total present value of cash flows is still positive at $12.5. The takeaway here is that even if rates stay flat, we do have margin. Next worst is the 30% drop, followed by a 5% recovery in the S&P and a 4.5% swap rate. With this downturn, we lose about $3.5 billion in base fees. However, you'll notice on the next line that rider fees don't change much. They're going from $8.6 to $8.0. Not a big drop with this kind of shock, and that is by design. We've always priced and sold our guaranteed living benefits with the fees on the benefit base, and that gives us a lot more stability when we need the fees the most, and that's another risk mitigant that we have. Claims are slightly higher and total cash flows are still positive at $6.9.
Next in order is the same as the prior in terms of stock returns, again, but with a 30% drop followed by a 5% recovery and the flat rates. We've got the stress here and then the base case for the market and rates staying flat. Claims increase about $5 billion, and again, that's from lower SPIA rates. The total present value of cash flows are still positive at $2.2 billion. The next slide shows everything staying flat forever, flat equity markets and flat interest rates. This is a pretty dismal scenario because we're looking at over 50 years, and we have significant cash flows for about 25 of those. We're seeing slightly more claims costs and total cash flows are just breaking even at $1.6 billion. The last scenario that we'll show is a 30% immediate drop and then markets and interest rates staying flat in perpetuity.
Base fees go down. Rider fees, as we said, don't change too much. Claims increase to $21 billion, and total cash flows are now negative at $6.4 billion negative. Let's revisit the items that are not included here. First, we've got the rest of the block, the block without living benefits. The fees would've been shocked by the 30% downturn, but would still be a positive. We've got our reserves, and I wouldn't want to overlook the hedges that we have here. Our existing hedges, plus the increase in value that they would have with a 30% shock, would be worth $4.2 billion on our current holdings. In summary, that's a pretty significant offset. In summary, we showed six scenarios, and we had positive margin in five out of the six. The sixth one, which is pretty extreme, had significant offsets.
Next, we're going to move on to market-consistent value, and that's something that we're sharing for the first time. What we do is we take all product cash flows, and we mark them to market as though they were derivatives. We model all of the cash flows over 1,000 scenarios, and then we take the average of the discounted cash flows over those 1,000 scenarios to calculate the market value of the guarantees. In this kind of market valuation, those 1,000 scenarios have certain properties. These are not your typical real-world scenarios where the market earns, on average, the long-term stock rate of maybe 8% a year and interest rates revert to some normal level. These scenarios are different. They assume that all funds, the S&P as well as any bond funds, earn the risk-free rate on average over the scenarios.
That's 2% at the ten-year level, and that's before any product and rider fees. When you take out rider fees, on average, the account values are decreasing in the market consistent valuation. Again, that's the average. Half of the scenarios are better and half of them are going to be worse. That's where the next input, volatility, comes into play. Volatility determines how bad the bad scenarios go and how high the good scenarios go. The higher the volatility, the more bad scenarios and the more claims we'll generate, and the higher your market consistent liability will be. The volatility that we use, like the stock performance, is not the volatility that you would observe from looking at S&P price returns over time. That would be about 16.5% going back to the Great Depression. Instead, we look at the implied volatility from equity options.
We look at the entire term structure of volatility going out even beyond ten years. This market is not very liquid, so supply and demand really come into play. The ten-year implied vol as of 331 was 25%, which is a lot higher than the 6.5 observed vol that I referenced, driving a more conservative valuation. Lastly, interest rates are modeled stochastically. There's no corporate spread implied and no reversion to a long-term mean. Normally, of course, we'd invest in spread assets, which would increase our earned rates and also the payout rates and decrease the cost of any claims. Safe to say, this is a pretty conservative valuation. For discounting, we're using an average of the risk-free rate and the Industrial A and BBB curves to discount back all cash flows. It's slightly higher than the ten-year swap at 2.6%, so a 60 basis point spread.
The reason that we're using a spread is because we're providing lifetime guarantees, which cannot be fully replicated using tradable derivatives. Again, these numbers are pre-tax. This chart shows our market consistent valuation by the different kinds of inputs that we have, and we've got our starting point, the MCV as of 331 on the left. On the first row, we have our base product fees less expenses. That's got a present value of $13 billion market consistent. The next row shows living benefit riders, and we're looking at the living benefit fees versus the living benefit claims. That value is negative right now under the market consistent lens, coming in at negative $11 billion. You might ask, looking back at some of the earlier slides, why is the rider value worse than net amount at risk?
The reason is because I explained in the scenarios, we're assuming that the benefits are getting more and more in the money each year with the market growing on average at 2% before fees. This is much worse than an immediate exercise. The gap is growing larger. However, we do have an offset of about $2 billion from the hedges and reinsurance. This value is down in 331 because of the positive markets. In summary, the total block of business has a positive value of $4.3 billion. Our total VA block has a positive intrinsic value even under this conservative valuation. The next column shows the impact of a 20% change in the market, and that would improve the valuation further. You see the VA product fees go to nearly $15 billion.
The living benefit riders, the liability decreases, and a lot of that is offset by the hedges, which is how we design the hedge program to work. That brings the net value to $6.6 billion. The next two columns are really key. They show how sensitive living benefits are to interest rates in this kind of valuation, because remember, we're assuming that all funds are growing at the risk-free rate. That doesn't affect the base fees too much, because you're growing them at the risk-free rate, and then you're discounting back at a rate that's similar to risk-free. You can see the VA product fees don't move much. They go to $12.8 billion. However, the living benefit riders, the valuation improves by nearly $7 billion. You've got some offset from hedges and reinsurance. The net value goes to $9.6 billion.
Annuitization, where it's a little too early to take action as experience emerges, but we have some positive experience, which I'm going to show. Then dollar-for-dollar withdrawals, which gets a lot of attention, and we're going to show an extreme stress on that assumption. We've got one slide on each of these. First, we changed our lapse assumption in the fourth quarter. This graph shows a typical product in the year following the expiration of surrender charges. That's when you typically see a spike and lapses are at their highest. It's a sample product. We have different lapse functions for each product version and compensation option. First of all, we always priced going back to 2001 using dynamic lapse, and we assumed that lapse would decrease the more the riders were in the money.
The fourth column shows a further increase in rates to 4.5%, which is the long-term base we've been talking about. We see the VA product fees remain about the same, slight degradation, but we see the living benefit rider value swing another $7 billion, and it goes from a liability into an asset. The market consistent value for this entire block gets to the $15 billion level. The point of this slide is to, number one, present our market consistent valuation, give you the baseline, and then to show how sensitive it is to interest rates in this kind of framework. All of these projections, of course, are only as good as the assumptions that go into them. The key policyholder behavior assumptions are lapse, where we took action in the fourth quarter.
We had a maximum and a minimum, and we were on target with that maximum. We assumed that lapse could be as high as 30% right after surrender charges go away, and we assumed that it might get as low as 3%, which was unheard of at the time for riders that were deep in the money. We assumed that the grading down would be pretty gentle as the rider became more and more in the money. That function served us well pre-crisis. However, post-crisis, we had a sea change in behavior, and we saw policyholders become a lot more sensitive. As you could see in our current curve, which is what we switched to in the fourth quarter, lapse dropped like a stone even before the rider gets in the money, as it's approaching in-the-moneyness.
This is very good for the base contract because it means that we're collecting more fees over time, but it is a negative for the living benefit if they are in the money, because we'd be paying more claims. The one thing that I want to emphasize here is that when we made this change in the fourth quarter, we fully reflected post-crisis experience. We did not assume any reversion to long-term or pre-crisis levels. Next, annuitization. Annuitization on the GMIB was another area where we did not have experience, but we wanted to be conservative because we knew that it had a great impact on the GMIB pricing. We also knew, given our history, that clients were historically reluctant to annuitize. People just don't like to lose control of their assets.
However, we assumed that the maximum level for in-the-moneyness might be as high as 25%, and that was per year. Given a couple of consecutive years of in-the-moneyness, you could easily get near 100% annuitization. We had a dynamic function, and we assumed that they would only annuitize if they are in the money. At this point, we've got 780,000 contracts with GMIBs. As we said, contracts can only exercise their GMIB after ten years, and there's a 30-day window period to do so. At the end of the first quarter of 2013, we've had almost 18,000 contracts which got through their waiting period and also had GMIB riders that were in the money, where they could get more from their guarantee than they would from a normal annuitization. Some of these, about 3,000, were pretty deep in the money, over 30%.
I guess you could say the good thing about this lost decade of stock performance is that it gave us a lot of exposure points to calibrate our assumption with. Based on our original assumption, we would have expected about 2,700 policies to annuitize. That's shown by the gray bars, and that would have been 14% of the in-the-money contracts. In reality, looking back to when the first contracts that were sold in 2001 had their first chance to annuitize in the second quarter of 2011, we've only had 93 GMIB annuitizations. That's in total. It's only 0.2% of the in-the-money contracts. Our peak was in the second quarter of 2012 when we had a 1.2% annuitization rate. One thing I want to emphasize here is that we're not expecting the clients to tell us when it's their time to annuitize.
We don't expect them to have been tracking when they bought the contract and when their 30-day window period is. We're being proactive and customer centric and sending notifications to the clients and to their reps too, explaining what they bought and inviting them to come in and get quotes on this option. I want to emphasize that we ran the cash flow projections and the MCV using the original pricing assumptions. On annuitization and using the fourth quarter lapse assumptions, we've not reflected the new experience, but this new annuitization experience would reduce the claim cost. Nor have we changed the assumption in our GAAP and stat accounting. We're waiting to get sufficient, credible experience before we change the annuitization assumption, but we do believe that there is upside here.
The last assumption that I'll talk about is the dollar-for-dollar feature, which has attracted a lot of attention over the years. What it is is the ability to take withdrawals from the GMIB and to reduce the benefit base in a predictable way by the dollar amount of the withdrawal. These dollar-for-dollar withdrawals are limited to a corridor, 4%-6%, and generally the same as the rollup rate. There's a few exceptions to that. Combined with the rollup rate, it allows the clients to maintain a flat benefit base over time. One thing I'll say is that it does cost more to hedge the liability if the client is taking dollar-for-dollar withdrawals, but that is less the case on our new business. Again, that's something that we priced for, and the chart here shows the utilization rate over the years in the blue bars.
As you see, it is increasing. It went from about 13% in 2007 to about 19% today. We've studied what the different drivers are. The driver is not market performance. The big driver here is age and tax markets. You see that with the yellow bar. We're showing the percentage of our book that's in the IRA tax market where the client is over age 70. As you see, they're moving pretty much in tandem, and the reason for that is because when you're in the IRA tax market, of course, the IRS requires you to start taking minimum withdrawals to maintain that tax status. That's what we're finding is that clients start dollar for dollar, for the most part, when they reach this triggering event. Now, in order to get a sizing on the total risk, we ran a very extreme stress test.
We wanted to show what would happen if the 19% that we're seeing today went to 100% overnight, that all the clients that were not taking dollar for dollar right now notified us and were asked to put on our dollar-for-dollar withdrawal program. We measured the impact on our market consistent valuation, and that increase was $2 billion, which $2 billion is obviously nothing to sneeze at, but compared to the size of the market sensitivities, that kind of gives you a perspective on the size. To sum it up, in conclusion, we showed how the profile of our book mitigates risk, and that's thanks to the product design, the hedging, and the reinsurance that we've placed over the years. Second, our experience is on target. Lapse rates are fully reflecting the new normal, and the annuitization that we have baked in appears to be conservative.
Finally, we showed a lot of analysis and some new metrics. We believe that the downside is manageable and that we have significant upside. With that, I'll turn it over to Eric Steigerwalt to talk about our new business.
Good morning, everyone. Lisa actually priced a lot of that stuff a long time ago, and now she's up here talking about how it worked out, and I think a pretty fantastic presentation. You know why we gave it. I hope it was helpful. I actually would like to acknowledge one other person in here, Liz Forget. You stand up one quick second, Liz. Liz runs the annuity business, and just think about what it'd be like if you had her job. If you see her, maybe you put your arm around her for a second and say it'll be okay, et cetera. I'm going to walk you through some more on variable annuities and our new product, but I'm also going to give you a little sense of what's going on in the retail business. You heard Steve Kandarian talk about refocusing the U.S. business.
This is the biggest business within Bill Wheeler's empire, and I'm just going to give you a little sense of where we are right now. We essentially have a brand new leadership team with respect to the U.S. business, and they're doing a great job. We are focused on everything that you heard Steve Kandarian lay out, and I think you'll get a little sense of that during my presentation as well. Advisor count is down. When I started this job back in February of last year, we had roughly 7,500 advisors. That number's a little over 5,000 today, and I think we're just about hitting our bottom. We'll probably start growing from there. Our productivity is way up and we're saving a lot of money.
We're not financing advisors who frankly were never going to make it in this business, and we're putting all of our resources into people who have demonstrated that they can do a great job for their clients and a great job for the company, as a matter of fact. I just got back from all of our conference season. We have various tiers of conferences for all the agency force. Somebody like me can stand up here and say, "Morale is great, and I just want you to know that." Let me give you a quick example of what somebody said to me, one of the advisors. They said, "You know, a year ago, when you gave your speech here, we were not feeling good. We were nervous. We didn't know where things were going to head." Most human beings don't like change.
Maybe advisors are at the top of that list. Following this conference, we feel great. We understand the direction. We can see a lot of new life products and the brand new Shield Level Selector that I'll talk about in a second coming out. We understand why you would enforce minimum production requirements. Here I am at conference. I worked very hard to get here. I want to know that everybody else is working hard as well. It feels pretty good to see that change in sort of the morale of the field force for MetLife over the last, let's call it 15 months. Restructure our agency footprint. About, let's call it 15 months ago, we had roughly 85 agencies. Today, we have right around 60. That'll finally stabilize in the 55 to 60 area.
Obviously, more scale, exactly what we've been talking about for the last year here, as we've talked about the strategy for MetLife. We've renegotiated a number of third-party distribution agreements. Look, we want our third-party distributors to make money. We also want to make money as well. The key word here, I think, is balance. I've been very pleased with respect to how they're responding to our needs. We've gone through distribution agreement by distribution agreement, talking through what we need, understanding what they were trying to get with an agreement, maybe that was negotiated five, six, seven years ago, and coming to, I think, a balanced agreement as we go forward. We've rationalized our wholesaling structure. Obviously, we're selling a little less than we were.
We've got, I think, the best wholesaling force in the industry, and we're going to get a sense of their capabilities as we see our new SLS product roll out over the coming, let's call it four to six months. We've repriced our variable annuity products. We've lowered the benefits in there. We're on our 5th generation of the GMIB Max. Remember John's little key, right? GMIB Max 5 has the 4% rollup. GMIB Max 4 has the 5% rollup. The current product has the 4% rollup and the 4% dollar-for-dollar feature. Finally, on April 29th, we have exited the lifetime secondary guarantee market for universal life. We felt that was the right thing to do from the company perspective. We're placing our bets going forward on many products, but whole life is one of them. We have officially exited that business.
Scale and Simplicity Initiative that you've heard over the last X amount of months. I'm sure Ed's taking you through some of the details. This is the retail piece here. We are on track to achieve over our $150 million net pre-tax expense savings target by the end of 2014. All the initiatives are on track. I feel very comfortable there. In addition to that, we're going to relocate the headquarters of the U.S. Retail Division to Charlotte, North Carolina. I move in five weeks down to Charlotte. My entire management team is coming with me. We've been very pleased with the response that we've gotten across the group of people that we want to have come down to Charlotte.
We'll have roughly 500 positions in Charlotte by the end of this year, in excess of 800 more by the end of 2014 into that first half of 2015. It significantly reduces our geographic footprint. I have here existing sites down by 10. Many of you who followed the company for a long time know the U.S. retail business was built up over many, many acquisitions. We didn't consolidate. This is a perfect chance to do that. Even though I'm not going to talk very much about it, frankly, I'm not going to talk about it at all today, our auto and home business. I have a model in my head with respect to where we're going, and it's to replicate what we have in Warwick, Rhode Island with our auto and home business.
The cultural synergies that you get out of having a management team and all the partners in one area are significant, for those of you who've ever done any research on this. In addition, of course, we're going to save a lot of money through this move. I think this is a terrific opportunity to further align the management of the U.S. Retail Division. Shifting away from capital intensive products. Part of our strategy here for the last 15 months, you can see in 2012 versus 2011, variable annuities down 38% on variable annuity sales. For 2013, we expect to be down roughly another 40% from 2012. In the first quarter, we were down about 30%. Little fire sale in there with respect to changing over to GMIB Max 5. We're on target to hit that number. With respect to ULSG, down 25%, 2011 to 2012.
Down another 35% for 2013, that's kind of baked in since we are out of that business here. Let me give you a sense on where we are with respect to the risk profile of new sales for our life insurance business. This stacked bar here shows 2012 there at $436. We expect to be down roughly 10%, 2013 versus 2012. Remember, underneath all this, you have some third party distribution which we are no longer doing business with, and you have 7,500 advisors going down to the 5,000-ish number here, okay? Despite the fact that you see the big degradation in Universal Life with Secondary Guarantees, you can see whole life is flat despite those facts that I just laid out. One important thing I'd like to say here, everything I've talked about up to this point in the presentation has all been deliberate.
All of it. Less advisors, less hiring of new advisors. We'll probably only hire maybe 500 inexperienced advisors this year and maybe 200 experienced advisors. That number was 2,200 only two years ago, okay? All the actions that we're taking here and the results that I'm showing on these slides were all deliberate. I expect in 2014, you're going to see our agency productivity way up, and we'll probably see higher levels of whole life sales at the very least. Moving on to retail annuities. Three keys here, reducing risk, obviously lowering sales of what we'll call traditional variable annuities with lifetime living benefits. By the way, for all the businesses on the books, the old GMIB contracts, we've made the managed volatility funds available to all those in-force contracts.
We're not marketing them in any way, over the last X amount of months, we already have $1.6 billion moving into those funds. Clients want to put their money in here, okay? Obviously, the fund performance has to be good, and it is quite good. People are concerned about their account values, and they feel very comfortable with these funds. So far, as I said, $1.6 billion has moved in there. Diversifying risk by shifting our annuity product mix. We're going to talk about that a little more in a second here. That's going to be ongoing for the next number of years. Finally, offsetting risk.
One of the keys with respect to the design of the new product, which is an SPDA that I'm going to talk about in a second, was that it not only covered our return requirements and risk requirements, but could we design something that would be an offset to our lifetime living benefit? In fact, we've been able to do that, and I'm going to take you through that. First, I'll talk about GMIB Max 5, the current product, for just a second. Improvement in ROIs, lower hedge costs, lower capital required, and likely lower utilization of dollar-for-dollar. We priced in higher dollar-for-dollar utilization for the entire MAX series. In fact, at this point, we're down to 4% dollar-for-dollar, and we expect utilization to be lower. Here's the new product, MetLife Shield Level Selector. We don't let Lisa name products anymore.
We might have to sell NAR. New Single Premium Deferred Annuity allows clients to protect retirement assets, obviously, participate in growth opportunities while protecting on the downside, and personalize their strategy. You can take $100,000 and pick a number of different tenors and downside protection options. I'm just going to show one for a second here, but I'm also going to give you a couple of slides that are going to show you how this product, sales of this product, are a direct delta offset to the MAX product. Let's get into it here. This shows you an example of a single purchase here. Someone has picked a 10% market protection level on a large cap equity index fund with a 6% cap rate, okay? Which obviously is the driver for us to be able to protect on the downside.
You can see on the left side there, the maximum growth opportunity here is that 6%, that dotted line that goes across. You can see the index is performed, in this case, let's call this a one year. We have a number of different tenors, but this is one year. In that year, this particular index performed +4%, and you can say as a result, the client's account is credited with 4%. In scenario B, the index is up 12% for that year, but the client gets the MGO of 6%. You can imagine the flip side of this in a down market scenario. Again, 10% protection now, and you can see that on the bottom dotted line with the level of protection dotted line running across. Now we have the index performing at -8 for the year.
The client has no decrease in their account value because they have that 10% corridor of protection. Scenario B, the index is down 15%. MetLife will absorb that first 10%, and the client is credited with -5 instead of the -15 that the index did. Very importantly, this is basically a direct offset, delta offset, the delta risk that we put on the books that we have to hedge from the GMIB Max product. In fact, it's a slight vega offset too when we have residual vega hedging that we've got to rebalance. These slides are iteration 62 on attempting to give you a feel for this. These particular two slides that I'm going to show are from the policyholder point of view. Just reverse that and think about MetLife's liabilities, okay? You see on the bottom change in the equity level.
I'm valuing the policyholder put here, essentially. When you buy a GMIB Max contract, you essentially have on that living benefit rider, you're long a put. What happens? We value it at inception when you buy it, what is the value of that put, and then we run it through the 1,000 stochastic scenarios and see what happens as the market goes up and down. As the market moves up to the right, you can see that the present value of the policyholder option is less. As the market moves to the left there, down, you can see that the PV of the option to the policyholder is higher, okay? Bless you. Let's look at SLS here. Obviously, the line is sloping in the other direction. Present value of the option to the policyholder as the market goes up, you can see that option is worth more.
As the market goes down, it's actually worth less. It actually, if you keep going there, it will become negative because you're essentially selling a put as the policyholder here. Once MetLife has covered their piece of the protection, it can continue to go down. Can we just back up one second on the slide? Okay. Sloping this way. Sloping this way. The slopes are different because in Shield, it's 100% equity allocation, if you will. In Max, given the volatility funds, let's call it 60 or 65 in equity. The slope is different, but obviously, they're an offset. This has only been introduced in early May. We've sold some. We only have anecdotal information here from the wholesalers and from the agency force. We think we could sell-- Our aspiration is to sell $500 million of this year.
We have no idea. There is a product kind of like it from another company. I think we're a couple of generations ahead here. We have reason to believe that we could sell more than that. Obviously, we are encouraged if we can do that. This not only covers client needs and so far back from the wholesalers, both in third-party distribution and with respect to the agency force, we are getting great feedback. Obviously, it's a great hedge for us versus the GMIB Max contract. Two last slides. As we move from left to right here, I'm showing the incidence of profitability. I've shown this slide before. This now shows GMIB Max 4 moving to GMIB Max 5, and then to the new Shield Level Selector product.
You can see the 4s in the mid-teens on a gross ROI, the incidence of profitability there, you can see in the rest of the stacked bars. As you move to GMIB Max 5, the gross ROI is rising, the incidence of poor profitability is decreasing. As we move over to Shield Level Selector all the way on the right, the incidence of profitability is getting even better, and the return is even better than the Max 5 product. This gives you a sense of product development. We've got much more on the drawing board and stay tuned over the next year to see what else we're going to come out with. Here are the key takeaways. Significant strides to manage our new business risk profile and restructure distribution from 2012 into 2013.
We will manage to the 10-11 of U.S. variable annuity sales and launch the Shield Level Selector, and it would be wonderful if we could do $500 million+ there. We have exited guaranteed UL, and we're launching new whole life product portfolio as we speak. We have aligned distribution, both affiliated and third party, and I think through the new management team, from my point of view, I've been at Met for 15 years and in my various jobs watching the retail division, I think it's very safe to say the management team of this business has never been more aligned. Finally, our product development and everything that we're working on is focused on delivering profitable risk-informed results while leveraging the foundation that we've taken you through ever since we've gone public.
With that, I think, Ed, you coming up, and John's going to join me, and Lisa's going to join me for Q&A. Thanks. Welcome to the dating game, John. That's right. Here we go. When shall we be chosen? How stable are these?
Okay. If you could please wait for the mics, before you ask your question and announce your name and firm, if you would. Again, one question, one follow-up.
I can't see anybody.
John?
Thanks, Ed. John Nadel from Sterne Agee. I guess my first question is this. Nowhere in here, and I don't think we've really discussed it in the past, but can you give us a sense for how much GAAP equity and how much statutory capital supports the variable annuity business today?
We haven't disclosed that by segment. It's complex because of everything's split off. The variable annuity risk is in this reinsurance sub, and we have the statutory entities. By the end of 2014, we'll be able to give you that statutory capital much better. We all calculate it under the same basis.
To use my follow-up. On slide, I guess it was in John's presentation, I'm having a hard time seeing the numbers, but it was the merging the subsidiary slide. You indicated that risk-based capital for, I believe it's these entities or was it the full U.S. combined? I just want to clarify that, but the risk-based capital would still be above 400. I guess my question is, above 400, but how would that compare? Is it going to be lower, equal to, or higher than keeping everything else consistent, your 2012 year-end risk-based capital?
What we disclose as combined RBC, which is our major U.S. writing entities, would include the companies we listed on that slide, as well as MetLife Insurance Company, which is New York-based, and a few other smaller ones. We said it was at year-end 2012 was 466% RBC on a combined basis. After we merge those three entities, which doesn't change it but bring Exeter in, we expect it'll be still above 400% RBC, that combined number of all the entities.
I guess my question is just order of magnitude above 400, are we losing something in this translation? I guess is really the question. In bringing Exeter, I assume you're going to lose some of the offshore benefits. Risk-based capital would be lower, still above 400. Is that fair?
It's lower than 466-
Got it.
-but above 400.
Thank you.
It is requiring additional capital to bring that back onshore.
Thank you.
You want to pass it to Mark?
Mark Finkelstein of Evercore. I guess just to follow up on John Nadel's question. How should we really think about that? You're bringing onshore kind of what's in an offshore vehicle. Should we think about how you view the overall capital of the company differently? Would it affect 2014 dividend capacity out of the statutory entity? Obviously, the RBC goes down, but theoretically, the risk doesn't change. I guess I'm trying to understand what it means.
By bringing it all together by the end of 2014, it doesn't change our overall risk profile or how we view our overall risks and how we measure things. There will be these statutory calculations that we have to do, and the statutory capital will be more than what we have today in these statutory entities, but we've had the risk over in Exeter already. It's just going to be a lower number than 466 above 400, and you'll be able to see it on an ongoing basis and see all the derivatives that we have against that.
I guess the question, if you have a certain dividend potential that you're assuming, should we think that that cash going to the holding company is different because of what you're doing in 2014? Should we just think about it as, yeah, structurally, the RBC goes down, but that's looked through by the rating agencies, that's looked through by everybody else, and it really doesn't affect either the cash generation or our overall view of capital.
Yeah. We will have the statutory, these CARVM calculations on an ongoing basis within the statutory entities. As long as we don't do $20 billion of sales in a year and do huge amounts of sales, it'll be fairly predictable, and we'll be able to manage through that. It shouldn't have a material impact on cash flow.
Okay. I'll follow Ed's rule.
Yeah.
Okay.
We'll go to Charlie.
I'd just like to add, it is very complex to do these runs. The statutory reserves are extremely complex to run. They take a long time. We've been doing a lot of work on this. It's hard to give simple answers, quick answers for you on that because it is complex. That's the downside of bringing it on shore, is we're going to be using a lot more computing work by the actuaries.
Okay. It's Eric in the back.
Thanks, Ed. Eric Berg from RBC Capital Markets. My question is for Lisa. Lisa, since you said that by your own acknowledgment, most consumers don't like to annuitize, and you knew that ahead of time, why were your expectations as high as they were relative to what has actually happened? I mean, after all, you knew this as common sense. Relatedly, this is my related question, since we've now had eight quarters in which the actual numbers have come in so far below your expectations, can we infer that the reserves are too high and that therefore your book value may be slightly understated, I guess?
Okay, Eric. Looking at your first question, why did we assume that annuitization would grow so high? While we knew that people were reluctant to annuitize, that was looking at annuitizing their current value and not getting a bonus or a safety net, if you will, upon annuitization. What we wanted to provide for was that the potential that when there was a significant increase in your income because of this guarantee coming into play, we wanted to make sure that our riders were priced correctly in that way. Like I said, there wasn't a lot of experience to draw on. If you think back, going back in the annuity market over time, there were these things called two-tier annuities, and we did have some limited experience on that, and we saw two-tier utilization. That's where you have two different account balances.
One is higher if you annuitize. We did see annuitization under the two-tier going higher. That was kind of laying the groundwork for the pricing and making sure that it was sufficient because you just don't know, and you want to make sure that you price the guarantees correctly so that you're able to hedge them and that you're there for their clients when it's time to collect on the guarantees.
Right.
As for the second part, why haven't we shown it to date? As I mentioned, only 3% of our contracts have been out of the waiting period and with the chance to annuitize. The numbers are high, but the percentage of the block is low. What we want to see is the behavior across all the different ages where they're able to. I mentioned that the GMIB terminates on a particular date. That's age 85 for the business that is getting into their window period now. We want to see how the behavior works out through that whole curve. If there is more annuitization at that last opportunity, we need to understand that. Certainly, that if we do reflect this lower annuitization or even start to move closer to what we're utilizing, the reserves would be lower on this.
Thank you.
You want to stay in the back, Eric? Do you want a question to Chris?
Thanks. Chris Giovanni, Goldman Sachs. The cash flow and the MCV sensitivities, I guess very helpful. How do you think about the potential, I guess, cash calls under the, call it, the flat market, no change in interest rates from a statutory basis, and then also the potential implications on the GAAP balance sheet under that scenario?
What we wanted to focus on was the absolute cash flows and not to get into statutory, whether it's onshore or offshore, which clearly makes a difference. Under GAAP, you get into how much of the FAS 133 reserve versus the SOP. Those are all things that we model over time. We want to understand the sensitivities, but it becomes a lot more complicated. In GAAP, you'd be looking at, do we change our long-term separate account growth rate, and what does that do? While there are things that we look at internally, we wanted to focus on the cash flow for this.
Yeah, it makes it much more complex because you can run these scenarios, but there's a big timing difference how you set your assumptions. It's different from stat to GAAP, and the modeling, as I said, in stat, is extensive to do these scenarios. If the cash is there, ultimately the earnings will definitely come through. If you have the value, you have the value. Accounting can change the timing, but you've got to have the cash.
In general, we're going to help you in the second half of the day on the flat interest rates and the impact on stat and GAAP balance sheets.
Okay. Then just to follow up, the 466 RBC to something north of 400. Is your definition of excess capital changing at all, or is the dollar amount changing, or is it purely just geography?
We disclose cash at the holding company. Of course, the statutory entities are limited by the dividends that can be paid from those statutory entities, and we have some slides later on on our statutory earnings that drives this whole cash generation from the statutory entities. However, we have not given definitions of excess capital to you in recent quarters because we're really waiting to see what our regulatory framework will be long term. We've held back from that. When we understand the regulatory framework, which will be driven by, number one, if we're deemed a non-bank SIFI, and if we are, what the rules of the road will be then. I think we can give you better guidance on excess capital.
Until then, we're going to wait and see what the regulatory framework would be.
Thank you.
Let's take one more just from Suneet in that row there, and then we'll move to the other side.
Thanks, Ed. Suneet Kamath from UBS. Just following on the capital, I guess, John, I think it was in December of last year, the guidance was to get to the 12%-14% ROE by 2016. You talked about $5 billion of net buyback, so x the mandatory converts. With this 35%-45% payout ratio that you're talking about, or free cash flow generation, excuse me, ratio that you're talking about, and if we assume that you just increased your common dividend sort of at a decent rate, is that $5 billion of share buyback still on the table?
Well, it depends. Buybacks depend on quite a lot of different factors. We've given quite a range of the 35%-45% because there are various expenses that happen throughout the years. We've given you that scenario. The cash flows, you can do the calculations, would allow that to happen. You need, though, to understand what the capital regime will be. Again, we really don't want to give any future guidance on share buybacks until we understand the regulatory regime. Although, as Steve mentioned, good capital management is a core part and it's very important to us as a management team. We are still taking key actions. We've decided to buy Provida this year, which is a great business, and that's $2 billion of cash. We've raised the dividend, and we're taking appropriate actions where we can.
Maybe I would ask if we could try to keep the questions focused on the VA business for this session. The last Q&A, we can cover anything you want.
Can I get just a follow-up?
Sure.
Just on the VAs, I guess, just to follow on Chris's question. In some of those scenarios, the claims payments were quite a bit higher than the fees. I get that you're doing a present value of a long period of time, but are there scenarios where you're going to be taking big losses in any particular year because those claims are so much higher than the fees that you're taking in?
Well, that's where you get into the question of the reserves that you're holding over time and how the hedge assets appreciate in those scenarios. What we wanted to show was the claims, and you are seeing some of the incidents there. If you did start to go down a path where you had a -30% shock to the stock market, then you would start to accumulate a reserve, and that would help.
Right. We have derivatives, we have reinsurance. We also have the other base fees from the contracts not showing with the living benefits in all those runs. There are a lot of offsets that you would factor into your net present value calculations for your GAAP and statutory statements.
Okay, we'll go to Jay.
Thanks. Jay Gould from Barclays. For Lisa, on page 22, where you talk about the market consistent value, the net value there of $4.3 billion currently, I'm just trying to better understand, what is that? What does that mean?
That is basically using the methodology that we describe, projecting out all of the cash flows on the block that has living benefits and looking at what it's all benefits combined, actually, and looking at it in a risk-neutral framework, basically marking it to market, looking at the fees, looking at the riders, and then the hedges that we hold.
That's the value of the block.
Right. It's like marking it all to market.
Okay. Then
Well, but there's that. I mean, that's the value under this framework and this calculation. We believe it has a premium to that value because we assume the stock market, we hope the stock market for the next 50 years will go up by more than 2% a year. To the extent it does, we'll get more fees from that net present value. It's a risk-neutral valuation consistent with the capital markets, and it's a good test when you price these options. If you price them that way, you can buy hedges and your derivatives against that. It's an easy way to sort of value those options. We plan to make much more money from that business than that base value.
Okay. Maybe going forward, we could get your assumptions on that as well. Then for Eric, if I look at slide 11 and 12 of your presentation, looking at the present value of the GMIB Max 5 versus the Shield, why would a client buy the Shield?
Look, the Shield is more of an accumulation product, right? The benefit attached to the base rider for GMIB Max is for guaranteed minimum income, okay? From what I've heard from the wholesalers over the last three weeks, it's a gap filler.
It's for someone who's looking for mostly accumulation. It's for someone who wants to protect the downside, given what they've seen happen to whatever, their brokerage account, et cetera. It's not necessarily a completely different buyer, but probably the audience at the beginning is different than the audience that would naturally buy a GMIB Max. Far, both in the wirehouses, the regional firms, and in our agency force, people have pretty quickly come up with clients that they believe that that product or some iteration of that Shield product, remember, because it has different tenors, different levels of market protection, would be perfect for their clients.
A younger client than your traditional living benefit?
Probably, but not necessarily.
We're going to go to Ryan back there.
Thanks. Ryan Krueger with Daleen. As a follow-up on the MCV calculation, I think it would be helpful since that doesn't include your current reserves, and I know you don't want to talk about the capital backing the VA business right now, but could you help us understand how much statutory reserves you have currently for the variable annuity business?
MCV really is just a cash flow analysis, and like we said, it doesn't include reserves. It's marking everything to market in a particular methodology as though they were derivatives, which is just one lens to look at the business, and it doesn't include statutory. It's a separate view, just like GAAP is a view, STAT is a view, MCV is another view.
I guess my question is there anything you can help us with to understand how much statutory reserves you have right now for VA?
Well, most of the risk is reinsured. The vast majority of it is reinsured to Exeter, so we're not holding statutory reserves. We're holding reserves in Exeter, which is based on a U.S. GAAP basis, and we haven't disclosed those numbers.
Okay. Understood. Separately, also on the MCV, does that include the value that you would get from the 30% of account value that doesn't have living benefits?
The MCV is on the entire block-
Okay
with living and without.
Okay. Thank you.
The cash flow analysis, we're just limited to living benefits like a self-contained block.
You want to give it to Steven back here?
Thank you. It's Steven Schwartz, Raymond James. If we can go to slide seven, Lisa. This is the slide where you're looking at GMIB Max One, age 75. You're comparing the 100 benefit base to the PV income guarantee of 60. Just to make sure clear, you said you were indifferent between what and what if your AV is 60?
If your account value is 60 and you're comparing to a benefit base of $100, at that point in time, on three thirty-one, given our current Single Premium Immediate Annuity rates, you're indifferent between taking your GMIB with the $100 and applying that to the guaranteed basis, the guaranteed payoff basis in the contract-
which is an income of 5.3% of the benefit base.
Right.
Right. $100,000 turns into $5,300-
Right
a year for life, versus taking your account value of 60, withdrawing it, and just purchasing a SPIA at street rates. That would also get you an income of $5,300 a year for life.
Okay. the understanding that your MCV, as you calculate it, goes down by $2 billion, which isn't the end of the world, right?
No.
If I'm looking at this, I got 5,300, I've got $60,000 in account value. I'm getting $5,300 a year. That's 8.8%. I'm more likely this is what it's going to look like for your 2007 GMIB, whatever number that was, where I'd have a benefit base that much bigger. All right? Maybe I get 7%. I could be looking at a return on my current account value of 8.8%, given your example here, to north of 11%. Why don't I want to do that?
Why wouldn't you want to take dollar-for-dollar withdrawal?
Yeah. Why don't I want to take dollar-for-dollar here and get that money out? That's a heck of a return off of what I've got in my account value.
That may be an option, but the question is, first of all, you could start taking dollar-for-dollar withdrawals, but then at that point, you're going to come up on your rider termination date. In this example, the 75-year-old would have until age 85 to decide if they want to exercise that benefit. At that point, if they don't, the ability to take dollar-for-dollar withdrawals would end.
I understand.
It does make sense. It may make sense to wait and to reexamine at that point and wait for the next anniversary, and that's why we do want to see the experience emerge over the full range of ages before we make any changes to the annuitization assumption.
I'm sorry, I don't understand. Why do I want to wait a year? Why don't I just want to take the $8,800 now?
You might want to, or it would be the dollar-for-dollar corridor on your $100 benefit base. If you've got the Max, depending on which version you have, that withdrawal rate could be anywhere from 4% to 6%, and that is another alternative that's at the client's option.
Clients just don't do that.
Some do. We find the big driver is really when do you need to start taking withdrawals, and that's a mandated legislative birthday.
I think you're reducing your account value as well. I mean, you're giving up potential upside from the market.
It would reduce your account value. You would come up again to the rider termination date. You'd have to make a decision at that point.
Want to go over to this side, Ian?
Thanks. My first question is a follow-up to Suneet. If I look at the PVA cash flow as the base case with flat rates of $12.5 billion, and the cases that are worse than that are down about anywhere from $5 billion-$10 billion worse. Right? I think what we're trying to get at, and if you can't answer this today, maybe we can answer it down the road, but just is that $5 billion or $10 billion mostly covered by hedges, reserves, et cetera, or is there the risk of a capital raise in that situation, or capital contributions down to the subs, we have less free cash flow available for buybacks and dividends, et cetera? I think if there's a way to help us understand that that's off the table, that would bring a lot of confidence.
Right. I think the best scenario that shows that is the final one, where we show the 30% decline in markets, and then we're showing how the hedges do help with that.
Right. I guess the question is, though, if the $12.5 billion in the scenario that's closest to today's, if that's what you're holding capital to today, and that last scenario is $10 billion worse, then maybe you need $10 billion of capital. Right? Is there a hole, or the current reserves imply something closer to those worst cases and the $12.5 billion is actually cushion. Right? That's, I think, what we're still unclear of.
Well, it's just looking at a pure cash flow as opposed to capital. When we see the cash flows breaking even, that's a good sign that we would be able to self-fund the liabilities within that block.
Then if I could just ask quickly on the lapse change. I think the charge in Q4, if I recall, is $300 something million, that was a pretty big move. Is it fair to say that any further move that might be necessary from this kind of 5% type lapse function for in the money would be pretty de minimis, going from single digit to a lower single digit?
Well, getting back to the fourth quarter change, we had a positive to operating earnings.
Right.
You saw most of it take place in the fourth quarter. Then there was that catch-up piece in the first quarter that we talked about. There was a positive $100 to operating earnings. Then the minus $300 that you're referencing was on the non-operating earnings.
Right.
The total impact was -$200.
Okay.
Yes, we do believe that we've gone all the way with that lapse assumption.
Great. Thank you.
We're going to stay on this side, Jorge and Joanne.
Joanne Smith, Scotia Capital. I was just wondering if you have discussed these changes in the structure with the rating agencies and what their views on this are.
Yes, we've had meetings with the rating agencies, there's no real change to our overall risk profile. We're moving risk from one place to another. The only question they have is this is a very large project, bringing together three statutory entities, contacting policyholders, and merging Exeter in. They did raise the execution point that they do raise when you do major mergers like this. We have a good plan in place. We have a steering committee. We're approaching this in a very experienced way, and we have a good team from Alico that's freed up now to help us on the Alico integration to work on this for us.
Just as a follow-up, just thinking about bringing Exeter on, that would impose some more volatility on the statutory earnings, I would think. Therefore, I would think that the rating agencies would look at this as a little more volatile business and potentially ratings at risk.
We're looking at optimizing our hedging strategy to reflect the statutory volatility as well under VA CARVM, that's work underway. We've communicated that with the rating agencies as well, that'll be future work that we'll be communicating with them. Joanne, you want to pass it to Sean?
Sean Dargan from Macquarie. Lisa, when we look at the NAR bar graph, it looks like the 2007 issue years is the most troublesome. Has there been any thought to mitigate risk by basically paying policyholders to lapse or taking a strategy that I think some of your competitors have looked at?
I'd like to let Eric answer that question.
Okay. We are in this business, right? You've seen both on the life side and on the annuity side, but particularly your question on the annuity side, some companies offering these buyout programs or whatever you want to call them. As you can imagine from everything that you've heard here today, we are researching everything, okay? Given what you've heard John talk about and what Lisa talked about, we don't need to buy back what we've put on the books. We think that we've got a pretty good risk profile here, and as a result, if we can find a couple of places where it would be appropriate for the client and helpful to Met, we could do something like that. Right now, we have not announced anything. We don't intend to announce anything tomorrow. We're thinking about every possibility.
As you heard Steve say, we're still in this business. We're committed to this business. We're committed to running it properly. We believe we've demonstrated today that we have in the past, and we intend to going forward. We'll see if we can come up with a solution that would be both beneficial to the client and to the company.
Thanks.
In the back.
Jeff Schuman from KBW. Actually, just kind of following up on the last question, maybe thinking more broadly, any level of interest in exploring third-party transactions, either to kind of change the size or nature of the variable annuity risk, or to possibly offload fixed annuity risk or risk in other areas that are sort of capital intensive, lower ROE businesses?
Well, the question is regarding variable annuity risk, and to our knowledge, there's only one major player who has a balance sheet large enough to offer variable annuity reinsurance. It's very pricey. Warren and Ajit do very high returns on their side, so it really doesn't make economical sense from what we've seen. That's why we've decided to bring this together and manage it ourselves. We think we'll get a better return. You can see, we are in a low interest rate environment. You can see the huge cash flow economic upside by interest rates moving up a bit over time. We'd rather retain that risk for us rather than doing a transaction now and giving it to somebody else.
The second part of that was on fixed annuities. Just once again, you have this overarching idea of kind of moving capital from certain types of businesses to certain other types of businesses. Any interest in sort of accelerating that by maybe moving some fixed annuities or other blocks off of your balance sheet?
Well, our fixed annuities are well-matched. We have good returns on those today in a relative sense. Taking blocks of those doesn't make a lot of sense to us. We have good margins. It's contributing to our business. Met's been very selective. We're not selling many fixed annuities now. With lower interest rates, we can't get the margins. When we can get the margins, we want to be back in that business. It's a very needed product. When it makes sense and we can get the right returns, we will sell those products.
We've felt that way over years on the fixed annuity business. I mean, Jeff, you've been following us for a long time. We've been in and out, depending on where we think we can get returns. We'll just continue to do that.
Okay. Thanks.
Can you give it to David?
Yeah. Thanks. Just a quick question. Utilization from your charts has been lower than you anticipated. Could you just help quantify for us the potential benefit if you trued up your utilization assumptions? Because we had a sense on the negative impact of truing up lapse. What would the benefit of truing up utilization be? If you could just help size that.
I think it would be premature at this point to give an estimate of what that would do to our liabilities. No doubt it would be a positive, we'd have to look at how we actually recalibrated that assumption. At this point, I wouldn't want to give an estimate.
Okay. I'm going to pass it to Randy here. Oh, Jorge, over here. Sorry.
Thank you. Randy Binner from FBR Capital Markets. Just a couple on the cash flows, which are much appreciated. I guess first in the base case with flat interest rates on slide 16, then the one before that, the kind of the happy scenario of kind of up markets and better yield. Can you size for us what the hedge impact would be over the totality? This is kind of following up on Ian's question, we didn't get the kind of that there would be hedge bad guys in both of those situations, I think.
They would be. They'd be relatively small on an ongoing basis with those because the markets are not appreciating. They're just moving either 5% a year. It's not going to be a major bad guy. It's similar to what you'd see in a typical quarter.
Okay. Something in like the low single-digit billions for each of those.
To project it out over all these years, I'd have to think about that some more, it would be small. No doubt it would make the good scenario slightly worse. That might be reasonable.
Okay. Again, to kind of amplify what he was asking, if there's hiccups along the way in that 50-year look, then the reserves and the hedges would be meant to kick in to kind of not create significant RBC shortfalls. I mean, that's the key message.
Exactly.
What do you do with the rider fees in this assumption? Do you treat them as float? Do you invest them, or do you just kind of take them as cash going through the analysis? How do you model all these fees coming in over the years?
In the cash flow analysis, we projected what the fees would be, and we simply took a present value.
Okay.
In reality, we use them to purchase hedges.
Build the reserves.
To cover reserves.
You're not projecting any kind of positive yield you'd get on kind of holding those fees.
No, we're not accumulating them. We're just projecting out the incidents year by year and then taking the present value of those.
All right. Thanks.
Maybe one last question. You want to pass it back to Eric?
Hi, Erik Bass with Citigroup. Just a question, kind of following up on your comment that you're in the variable annuity business. How do you think about sizing that business over time, either as sort of as it is a % of EPS, a % of capital? Sort of related to that, given kind of the return profile of the new sales that you're talking about, do you think you're at a point where now kind of $10 billion-$11 billion is a comfortable run rate going forward?
Yeah. There are many dimensions in thinking about risk, just raw risk, earnings, GAAP, STAT. There's not a perfect exact number. I do know, and I think we all agree, $28 billion in a year was too high. We spent a lot of time in thinking about the plan for this year with Bill and Eric and Lisa and our actuaries and our risk people, we came up with this $10-$11 with this new type of product in terms of the risk profile. For now, we think that that's a good balance in what we have. Obviously, the more Shield we could sell, the more that would naturally balance it. You could think about the range that you're doing.
I think in setting this up, this is a real credit to this management team was one of the key reasons I was happy I joined was, we're talking about setting a sales limit of a product, which hasn't been seen much in the life insurance industry, sort of really thinking about risk. That's a really great part of being part of MetLife.
Just to follow up on that, how did you arrive at that $10 billion-$11 billion target? Can you kind of go through the process that you went through?
We went through the capital we expected that would consume in a year for that new product and that risk profile, the volatility through various sensitivities of that, and looked at our capital forecast in cash and the derivatives we need to go against that and triangulated down to get to about this range.
We did it pre-SLS.
It was pre the new product.
Yeah.
Right. Basically, we're not looking for the annuity business to become a larger portion of MetLife's total risk. That's another lens that we look at it through.
Okay. We'd like to take a short 10-minute break. If you could all come back, and we'll get into the second half of the presentation. Thank you.
That's right. Hit the road, Jack. Hit the road, Jack. What you say? Hit the road, Jack. Hit the road, Jack. Hit the road, Jack. Hit the road, Jack. What you say? Hit the road, Jack. Hit the road, Jack. That's right. That's right.
Ladies and gentlemen, please take your seats. Please make sure your personal electronic devices are turned off. Our meeting is about to resume.
If we could all return to our seats, we'd like to get started, please. We're going to head into the second half of the Investor Day, where we're going to focus on earnings and free cash flow. I'm going to invite John Hele back up on stage to kick off this segment of the day. John?
I like the music. We have the next section to start. I just wanted to follow up on one question Ed suggested, being the good analyst that he is. That we said in total, by merging these companies together and bringing Exeter on shore, there's no real change in our economic risk. We do have some benefits to it, due to having collateral that would be required to be posted today with this separate reinsurance company. By having it within the statutory entities, we have the assets there that we'll be able to post collateral very easily with, and no potential requirement of holding company cash. That's a real true cash flow economic benefit if you want to think of it that way. There's another key point in bringing these all together.
We have the base fees in the calculations now because the rider fees and the base fees are all together in one statutory company. This is quite a help when you calculate the statutory reserve. There's a statutory calculation benefit as well. Those are two very important points that I just wanted to clarify. Our next section that Marlene and I will be covering will be on our earnings and our free cash flow. We're first going to show you some slides that break down our products into protection margins versus investment margins. Our products that have substantial protection margins are very key contributors to MetLife's profitability. Importantly, our growth businesses generate profits that are driven by lower capital-intensive products, so it's very favorable mix occurring over time.
We have some slides of statutory GAAP results. We're showing for those statutory entities what the GAAP earnings were for those statutory entities, so you can compare the statutory to GAAP results. We believe this validates our operating earnings quality. Why is this important? Well, statutory earnings, both in the U.S. and worldwide, are more conservative. These ultimately determine the cash to the holding company. Of course, we have a lot of interest in cash. The trend of the statutory earnings is a key predictor of future cash flow. Lastly, Marlene will give you some information and some views that show that the ratio of free cash flow to our operating earnings is expected to improve to 35%-45% over the 2014-2016 period. Let's look at our operating earnings by reporting segment.
This breaks down in the gray slides, businesses, operating businesses that we report on, where the margins from investment margins are the majority of these earnings, and protection is less. That's retail annuities and corporate benefit funding. The other blue slices are where the protection is the majority. The investments can be a major component or a large minority component of these normalized operating earnings. Protection is the core margin. We would also include fees in this regard with protection, really non-investment margin. We've broken out for this P&C as a separate segment. There's P&C is the group and individual together, just broken out, it's not our true reporting segments in the QFS. There are many footnotes at the bottom that show how it's all normalized that you may need some good glasses for.
We've tried to normalize the overall operating earnings for you. If you add all this up, we currently have lower risk businesses are 62% of our 2012 operating earnings. We include in this both property and casualty and the group business. These do have quite significant investment components to the earnings of this business, but they differ from the other gray businesses because the P&C and the group business can be repriced every year. It comes up for renewal, it's repriced. It has a different risk profile from an investment perspective than the retail annuity and the corporate benefit funding business.
As we implement our strategy over time and sell more protection business, also the emerging markets where you can see Asia and EMEA and Latin America, where these businesses continue to grow, we execute our strategy, this percentage will increase over time, which is really the core to our strategy. We're starting from a pretty good place here already with more than 60% of our earnings in these lower risk products. Let's turn to this stat to GAAP comparison. We'll go through each of our major areas, first here in the U.S. This is new information for you. Remember, as I said earlier, stat drives cash, it's a very important metric. However, there is a difference in accounting basis between stat and GAAP.
For the statutory operating earnings for the U.S. major combined subsidiaries, we've adjusted to remove dividends from affiliated entities to avoid any double counting. We've included some other smaller businesses, Safeguard, Del Am. This excludes ALICO because that's a really foreign business. You can see it does vary year by year. We've added up all these ratios together in over a five-year period. The ratio is 83%. Let me highlight a few key areas. The 2008 ratio is quite negative. It's no statutory earnings, yet you have GAAP. This reflects the very conservative nature of the U.S. statutory business. The statutory loss was due to CARVM and Reg 128 reserve testing in the crisis. This came back in 2009 where a great deal of this came back from Reg 128 and CARVM as the markets improved.
In 2011, the ratio is 68%. This reflects stat increase from VA CARVM. The 2011 business, that record $28 billion of sales, was not reinsured to Exeter. It was reinsured to MetLife Insurance Company of Connecticut. You can see the statutory strain that happened from that. That's one of the factors when we think about even going forward, how much sales do we want to do in a year? We will take that into account. I think you can see that averaging out this over time, this is a very solid ratio when you look at our overall GAAP earnings to the statutory on a U.S. basis. Turning to Latin America, we've highlighted for you here Mexico and Chile, which are our two largest reporting units and really dominate the earnings throughout Latin America. Of course, Mexico and Chile have different statutory earning basis.
It's different from the U.S. It's also conservative. It is slightly different. You can see the total is 81% year by year, so it's very close to the United States. Mexico's 86%, Chile's 56%. In 2010, the ratio. Sorry, in 2012, the ratio is 63%. Mexico had a stat FX charge of $60 million in their U.S. dollar portfolio, the Mexican peso strengthened versus the U.S. dollar. That caused a charge in that year. That explains some of that difference. It'll never be perfect year by year. There's always going to be differences in timing between statutory and GAAP. You can see over a period of time, it's still a very high ratio. Turning to Asia.
The Asia statutory, both in Japan and Korea, which are the two major entities we're highlighting here, are more conservative than the U.S. and even Latin America accounting. The FSA-based Japan is quite conservative, as is Korea. We've only shown you two years because that's post the Alico transaction. The cumulative ratio is 49%. In Japan, in 2011, we did have integration costs and also factored a bit into 2012. That explains some of the difference. We did give you some highlights at our investor day that for Japan, a good range is probably 40%-50%, reflecting the volume of sales we have and the conservative statutory nature of the Japanese statutory accounting. Different in the three areas and different accounting. I think this can show just how strong the statutory is compared to GAAP, and that will ultimately drive our cash.
In summary, more than 60% of our operating products come from products with a lower risk profile. The execution of our strategy, particularly with emerging markets and less capital-intensive businesses, will increase that proportion over time. Again, we include businesses that are mainly fee-based here, such as the Provida acquisition we expect to close later on this year. That's a fee-based business, not an investment margin business. Lastly, our statutory GAAP results indicate high-quality operating earnings, which is key to generating cash over time. In speaking of cash, I'd like to introduce our treasurer, Marlene, who will give you some more views on our cash.
Okay. Thank you, John, good morning, everyone.
Good morning.
Today, I'm here to talk about one of my favorite subjects, that's cash. I think you probably like it as well. I'm going to provide some updated information about our projected cash position in 2013, I'll also talk about free cash flow. Okay. I'm going to start here, which is a slide you should be familiar with. It's the holding company's cash roll forward that we showed you last December. Just to take a second to refresh on how this works, we started with our year-end 2012 cash estimate. We added to that expected dividends from subsidiaries, as well as the expected inflow from our common equity unit remarketing, subtracted from that expected expenses and other net flows, as well as debt maturities and the payment of our common dividend. Remember, at the time, that was $0.74 a share.
The net of that, we estimated that we would end cash in 2013 in a range of $4.8 billion-$5.8 billion, that is before any incremental capital actions. Let me just give you an update on where we are now. Okay. Previous slide, I showed you $4.8 billion-$5.8 billion. Since then, we've announced, as you know, two significant capital actions. One was the $2 billion acquisition of Provida, the other was the recent 49% increase in our common dividend. That in 2013 is worth another $300 million of spend. Had we known about that $2.3 billion when we put our forecast together at end of last year, we would have showed you a range of $2.5 billion-$3.5 billion.
As you can see in the last bar, we expect that our cash will come in higher than that and are adjusting our forecast to $3.9 billion-$4.9 billion. The difference, the $1.4 billion, is due to a couple things. First of all, higher dividends from subsidiaries. We're anticipating an additional $750 million of higher dividends, and this is primarily driven by $550 million of release of capital from MetLife Bank as we are unwinding that legal entity. As a matter of fact, just last week, the holding company received a payment of $550 million from the bank. The remaining $200 million is the sum of smaller dividends, various other dividends from across the company. The total of that $550 and $200 is the $750 of higher dividends.
The rest of that difference is we expect expenses and other net flows to be about $600 million lower than originally anticipated, and about half of that is due to a lower placeholder for the Dodd-Frank collateral. As John noted, that's primarily due to an expected longer phase-in period than we originally anticipated. I should just make one note, that the $600 million, we've adjusted that for the $300 million expense carryover. If you recall, we had some expenses at the end of 2012 that slid into 2013, which was supported by a higher starting cash balance. Let me move on from our cash position to talk a little bit about free cash flow. I'll start with the definition, and on the next couple of slides, I'll provide some numbers.
These three boxes give a good overview of how we think about and define free cash flow. The first most important contributor, of course, is going to be dividends from our subsidiaries, and that provides cash to our holding companies, subject, of course, to regulatory rules and target solvency ratios. The middle box is expenses and other net flows of the holding companies, and this is primarily interest expense. There are some administrative expenses in here, but it also includes other net flows like capital contributions. Think of this as sort of everything that is not a dividend or a capital action falls into this box. I'll just note that we sometimes refer to this as expenses, and that's really shorthand for expenses and other net flows of the holding companies, which tends to be a mouthful. The last box is leverage.
Just a couple things to note here. First is we manage our leverage very carefully, and we target a double A financial strength rating. As our company grows and our capital base grows, so does our debt capacity, and that can contribute to free cash flow. These are the key components of free cash flow generation. It adds to our cash position to support our common dividend as well as other potential uses like stock buybacks, debt reduction, and M&A. Just a little more detail. Now here are the components, and a bit of history. The gray bars are the subsidiary dividends. The blue bars are expenses and other net flows. The difference of those two bars is free cash flow. The yellow line is leverage, and I'll get to that in a second.
If you take a quick look at 2011, that was a very strong year for free cash flow, and that was, remember, we had some catch-up dividends, and we also had lower than normal expenses and flows that year. In 2012, dividends were elevated. As you recall, we received $1.6 billion from our Japan subsidiary, and those high dividends were offset by higher expenses and other flows, primarily due to the capital that we provided to our reinsurance subs, and we've talked about that previously. 2013 is our current projection. Dividends are in more of a normal range. One way to think about 2013 is that that return of capital that we're getting from the bank somewhat offsets the fact that we're not getting a dividend this year from Japan. Expenses are still a bit elevated.
Some of this is the timing difference we talked about earlier that slips from 2012 into 2013, and there is some residual support in these numbers for our reinsurance subs. The net of these two bars in 2013 is free cash flow of $1.6 billion, and that is a point estimate within a range. I'll just note on leverage is leverage has declined over the period as we repaid maturing debt both in 2011 and 2012. As you know, we've already refinanced our 2013 maturities. Okay. This is free cash flow now in percentage terms, so shown as a percentage of operating earnings. 2012, 26%. We just talked about some of the reasons, primarily higher than normal expenses. 2013, 27%, approximately. That's a midpoint of a range.
This includes the release of capital from the bank, does not have a dividend from Japan, and expenses are still a bit higher than we'd expect on a normalized basis. Just on Japan for one moment, remember when we converted Japan from a branch to a sub, earnings were reset to zero. While there's no dividend in 2013, dividends will grow to a more normalized basis over the next few years. Looking forward, expect to be in a range of 35%-45% free cash flow as a percentage of operating earnings and working to increase it over time. Just to wrap things up, again, expect to end the year with cash higher than we originally expected in a range of $3.9 billion-$4.9 billion. We will generate $1.6 billion of free cash flow this year.
We expect our free cash flow range to be 35%-45% of operating through 2016. As you've already heard from us today, cash generation is a very high priority. Thank you very much, and I will turn it back over to John.
I'm going to move into the final section, understanding net income and book value, which could be a very long session if we went through it in all the detail. We'll try to give you a short summary. We're going to share with you some numbers and come up with a concept of adjusted net income, where we try to remove the non-economic and asymmetrical accounting out of net income. When you even do that, it's still substantially below the operating earnings, but we'll show you some of the core components from this period of 2008 to 2012 that we would submit are not typical.
The interesting thing is that this adjusted book value, which uses adjusted net income, shows faster growth and much less volatility, such as much more even growth throughout the period. Finally, we'll share with you a key question I've had since I joined, is what happens if we eliminate the reversion to the mean assumptions for interest rates when we do our reserves and calculations. We would submit that this is a very manageable impact on book value. Let's first walk through. If you take our operating earnings in total from 2008 to 2012, the operating earnings are about $18.5 billion. The net income was $10.4 billion through that same period. I have to point out that the net income was quite volatile in this period. The low was -$2.5 billion to a high of +$6.2 billion. Quite a swing from year to year.
We've deducted from net income what we are labeling non-economic or asymmetrical accounting. This includes the non-performance risk on our embedded derivatives. These are the liabilities for our FAS 157 and FAS 133 reserves. We also include in this derivative gains on non-VA hedges or derivative losses. These are principally interest rate driven, they are gains. We exclude inflation adjustments where the asset adjustment is in AOCI, but the liability is in earnings. We have these products in Chile and Mexico. As well as we exclude pass-through adjustments for experience rated and par contracts. If you total all this up over the whole period, and there are pluses and minus in all this, it was about $1.1 billion.
The adjusted net income is $9.2 billion, which is still quite a difference from the operating earnings of $18.4 billion to $9.2 billion gets you to this $9.2 billion, which is the difference. There are five key items that are noteworthy, that look at this difference and explains about 75% of this difference. The first is net investment losses of $4.1 billion. These primarily occurred in 2008 and 2009. MetLife, like other financial institutions, did take write-downs. Financials were $1.4 billion of that. Corporate credits were about $800 million. There were a series of other single names, no more than $300 million. Remember some Lehman bonds, Greek bonds. These are the credit losses through that time period. Now, we're not saying that credit losses would be zero. In fact, we plan for approximately $400 million after tax a year of credit losses when we think about this.
This level is twice that level from this time period. We did come through like a one in 60, one in 80 year credit crisis. That was the 2008, 2009, 2010 period. We also wrote down the goodwill, $1.6 billion that was in the retail annuities, which has no goodwill left in it now. We did some assumption changes in the fourth quarter, which Lisa spoke about, the major part of that. We think that's put our reserves on a much better footing. We had some divested businesses. I skipped integration costs. Of course, there was Alico. Of the $607, about $500 million of that was from Alico, which was clearly a very large acquisition for MetLife. There were some smaller acquisitions which we would view as more normal as integration costs. The divested businesses include the bank and the Caribbean business.
If you add those up, you explain a big piece of this. There's always going to be a difference between our net income and our operating income because it's due to the volatility of the business. We think this explains quite a big piece of it. If you take that same adjusted net income and apply it to the book value, you can see a slight change from year to year compared to our reported book value excluding AOCI. It ends up in the same place on the far right in 2012. The two colors are about the same. You can see the adjusted is a much smoother progression year on year. There's a better growth pattern from the adjusted book value.
If you flip ahead and think about it, the average growth of the adjusted book value, where the actual was 2.25% in the blue on the left, the adjusted is 4.3%. The standard deviation, importantly, the actual 7.75%, and the adjusted is just over 2%. You can see we are growing book value if you can remove some of this non-economic and asymmetrical accounting noise that we get. Lastly, a key question that we get is, what happens if interest rates remain low indefinitely? It is quite a complex analysis to go through and do. We've reviewed our statutory reserves cash flow testing. We've looked at our GAAP reserves loss recognition testing. We've looked at our deferred acquisition costs and other intangibles unlocking, as well as goodwill impairment testing. The last three, of course, all affect our U.S. GAAP results. We did this globally.
What we did was we held the U.S. Treasury rate constant from September 30th. It was at 1.7%, 1.65% then. We're only a little higher today. We removed all mean reversion worldwide, but that's mainly in Korea and the U.S. Japan is flat already in our core assumptions. The separate account returns, when you factor all this in on interest rates, we told you that at year-end, we reduced the separate account total fund performance to 7.25%. This would be now a return of about 6%. The general account returns, which range today in our mean reversion assumptions 5.25%-6%, would reduce to 3.5%-4%. This does vary by product line and by product because that depends on the duration of the business. The life business is longer than the annuity business.
This 3.5%-4% is consistent to the returns we got on new investments in 2012. This is truly taking in the current interest rates of 2012 and just projecting it forward. What was the impact? On statutory capital, our Reg 126 testing would require no major immediate strengthening. We have been strengthening statutory reserves for several years, putting about $300 million a year in our statutory company's pre-tax toward these reserves. We would plan to continue on doing that in an ongoing basis. In all of our projections, we assume this is being done anyway going forward through our projections. Turning to GAAP, we would not expect any loss recognition. You have to test your GAAP reserves for losses. It's separate from DAC. We would not expect a one-time GAAP loss recognition.
In U.S. GAAP, if you are insufficient in your reserves, you have to come with a plan to strengthen it over time, and you can plan to do that. We would need to strengthen in a couple of areas, about $400 million net present value pre-tax in the U.S. and $350 million net present value in Korea. You would do this over a period of time. It's a bit more front-end loaded. Still, it's roughly you take that number, divide by 10 and put a little more front-end, and that's the impact that we would have pre-tax for our company. For DAC, related items in goodwill, as we think of this over three to five years, we would anticipate DAC unlockings of approximately $2.5 billion net present value pre-tax in the U.S. variable annuity business and $350 million pre-tax in the U.S. life business.
Why do we say over three to five years? It's because we would not wake up tomorrow and say we're going to go flat interest rates forever in the United States. We still have quantitative easing. Our Federal government's very actively buying bonds and doing interest rates. If you think about this in a practical way, you would wait till that stopped and wait some more time to see what happens to interest rates. If they don't go up after that, then you may be towards a new normal and you would ratchet down your assumption. You'd wait another year. You'd see what happens. You'd ratchet down again. You wouldn't go immediately all that way. That's why we say, in a practical way, over three to five years we would be doing this change.
In addition, we would not have from our goodwill impairment testing through all of our goodwill worldwide, we would have no goodwill further charges because there's a lot of protection margin in all of our business. In particular, our largest block of goodwill is the Alico acquisition for Asia, and that has substantial protection margins, as we showed from our earlier slides. We have no goodwill left in our retail annuity business. If you add all this up, tax effect divided over a period of time, we're speaking $0.35-$0.40 a share over the next five years and less than $0.05 a share for year six to 10. We would submit that's a very manageable risk for the earnings power and the current capital position of MetLife.
In summary, we've shown you about 75% of the difference between net income and operating earnings are explained by items that we would say are not generally typical in the last five-year period. The adjusted book value when you take out some of the asymmetrical and noneconomic factors does show faster growth and less volatility. Eliminating the reversion to the mean accounting for interest rates, we believe has a manageable impact on our overall book value. I think with that, we're going to take questions now.
Oh, it's in the end.
Yours right here?
Yeah.
Yeah.
Okay, we'll follow the same format as the first Q&A session. We'll start off with Nigel.
Thanks. Nigel Dally at Morgan Stanley. I guess back at the end of 2011, you also provided some sensitivities as to what low interest rates would mean for DAC. It seems like the DAC impact is substantially larger with today's presentation than it was with the slide back then. Just hoping you can run through the reasons why.
What was the 2011 sensitivities? I think it was spread out over time and didn't reflect going all the way immediately to that number.
Yeah, I don't think it ever had reversion of the mean eliminated in the presentation in the fall of 2011.
Okay. That makes sense.
2011 interest rates were higher, too.
Let's go to the back to who we haven't had yet. James, I think you had your hand up. No? Jimmy.
On slide eight, the $3 million of modest annual strengthening on stat reserve, should we think of that as a reduction to your free cash flow guidance of 35%-40%?
No, that's been included already. We've factored that in.
That's.
Implicit.
Okay. Then just for Steve's picture, assuming, obviously, you can't comment on capital deployment until you have clarity. Assuming we're in this type of a capital regime longer term, and SIFI doesn't materially impact how you manage capital or what the thresholds are, what would you assume, or how would you use your free cash flow? Over time, Met has been acquisitive. You've done acquisitions from time to time. Maybe some of them were to fill certain holes in your business. How would you assume you'd use your free cash flow over the next 5-10 years?
Jimmy, I don't have a specific breakout today. The dividend is something we're really focused on improving over time, dependent upon our earnings and the regulatory regime. Buybacks are something that we want to do going forward, and acquisitions that fit into our strategy, especially in emerging markets, especially in regions like Asia and Latin America, and parts of the EMEA region as well, all come into play. As we've said, it's just too early for us right now to make determinations about the buybacks, given the regulatory uncertainty. Rather than me saying, "Well, here's the philosophy we're going to utilize going forward," I'd rather see how those capital rules come out. Also want to see what opportunities there are on the acquisition front. We'll look at both.
As I've said many times in the past, when we look at an acquisition, we look at it compared to a share buyback. Even if we're constrained from doing share buybacks, we still use that as a key measure when we price transactions in the M&A market.
Maybe just one follow-up on the regulatory environment. I'm assuming that the key fear is that you're subjected to a bank-type standard where because if you apply Basel III to MetLife, the result would be a capital shortfall. Have you made any progress with the regulators in Washington convincing them of not to do that?
Our biggest concern obviously is if the Fed applies bank rules, Basel III-like rules, to the insurance industry model, which is a very different model, very different liquidity kinds of issues, we think not appropriate to even the investment side of our portfolio, meaning lack of risk-based rules and assets. That's our biggest concern. We've had a number of conversations with people at the Fed, elsewhere in Washington. I think we're being heard. I think it's a good dialogue. It's a good discussion back and forth. They're noting the information we're providing to them. We've asked that they consider doing a quantitative impact study before they finalize any rules. They've taken note of that request. We're hopeful they'll do something along those lines, as of now, we don't know for certain.
Okay. Seth in the back.
Hi. Thanks a lot. Seth Weiss, Bank of America Merrill Lynch. You talked about the 60/40 split of protection-oriented products versus capital market-oriented products. You've previously spoken about the desirability of that type of business. You could talk about the long-term target of where you see that business mix shift and the best way to get there, if that's through organic or opportunities you see in M&A.
It's both. Praveen would go along the lines of our protection like our fee business, not so interest rate sensitive. We're looking for ways, both organically and by acquisition, to get that balance in the right place. Having said that, we are still opportunistic. There's still parts of the business that are interest rate or equity sensitive, market sensitive products or acquisitions that we're going to look at. We're going to look at those kinds of opportunities with a very high bar as to return requirements and fully allocating economic capital, given these low rate scenarios that we've gone through. I don't rule out doing more in the 40% bucket, but it's going to have a very high bar to clear for us to pursue things in that area aggressively.
Okay. Who hasn't asked a question? Is anybody out there? We'll come back. Yes, Yaron.
Thank you. Yaron Kinar from Deutsche Bank. As you shift businesses and maybe focus more on emerging markets, what does the stat to GAAP ratio look like in those markets?
It varies a lot by the statutory accounting, you can't give a basic rule of thumb. Generally, Korea and Japan probably have the most conservative statutory accounting. Emerging markets are generally not as onerous, sort of as a general rule of thumb. It's probably like the U.S. or perhaps better.
Come back to Mark.
I just want to go back, I mean, a 35%-45% free cash to operating earnings ratio by 2016, obviously, you're pivoting to lower capital intensity businesses. You've made the Provida acquisition, which is a fee-based business. I get that there's an interest rate hit, call it 5% to that ratio. What is it? Why is it that the top end in 2016, after a lot of things have happened, is 45% and not somewhat higher? What is it in the businesses that's really causing that strain when you look out to 2016?
Well, remember, we're changing the mix of our business. Cash is driven by statutory earnings.
Right.
That's conservative. We have the U.S., we have Japan. Those are big contributors. We have the emerging markets. It's new, but it's still moving slowly. If you change your mix of the business, our sales, what we do this year, it'll start to come in the next year, Your statutory dividends are based on your prior year earnings. From actions we take today, it's the third year by you'll start to see it, It moves slowly. Statutory earnings, because of the conservative nature, is more conservative on the front end, and it releases profits slowly over time. It's a real shift in the mix of business, but it takes time to flow through. That's why Marlene said it'll be improving going beyond 2016. It does take time with these statutory earnings.
I guess I get that, the stat to GAAP outside of Asia is a lot higher, number one. Maybe the right question is, what should the right ratio be when this mix shift is totally done, we've flowed through all these transitional periods? What is the structural free cash to operating earnings of this business when your strategic initiatives are completed?
Well, we've said the 50%'s our goal to get to over time as we shift this business.
Okay. Thanks.
Go to John.
Thanks. John Nadel from Sterne Agee. I guess I had a question about Alico. I know it hasn't really been the focal point today, but as we think about Alico, the results of Alico have really disappeared into segment disclosures. Looking back on it with a couple of years of hindsight at this point, recognizing capital's come out of Japan, some other things have occurred, can you give us some sense as you evaluate with a couple of years now gone by, how that deal has performed relative to your expectations, how it's performed on a return on investment basis?
We did a review of the transaction with our board recently, we looked at the original projections we gave the board before we made the deal. It performed within the range we provided before we did the transaction. Pretty much on course. It's going to get more and more difficult, John, of course, over time.
Yeah
track that acquisition because it is now integrated into overall MetLife. There are some markets where we operated prior to the acquisition, we're not going to be running the numbers the same way going forward, where everything's going to be combined.
Okay, that's helpful. Then a separate question on just interest rate hedging. Obviously, going back to the mid-2000s, Met management did a excellent job of sort of protecting the company, recognizing important risk, protecting the company against that risk. I wonder, as we've now fast-forwarded to 2013 and perhaps the risk is greater that rates rise from here and perhaps quickly, as opposed to rates remaining extremely low as you've sort of gone through. I just wonder whether you're taking any actions that could be discussed today to give us some sense for how you're protecting against that scenario.
It's something we discuss monthly, weekly with our investment team. We have sold some of those derivatives or locked in some of that gain. We won't participate on that piece if it goes lower, but we have locked in the gain so we don't lose on the upside if rates come back up again. We're looking at other various techniques by which we could protect on a sharp spike. It's really where it depends on us economically that really is important. Generally, rising rates over time are good for us.
Sure.
It is a key challenge. However, for the next period of time, it looks like from all the forecasts that we're going to be in low interest rates for a while longer here.
Thank you.
We go in the back. Alan.
If the SIFI rules become too difficult to manage, how difficult would it be for MetLife to separate the company into a U.S. company and an international company? Is that a two-year process, 10-year process, impossible? Can you comment on that?
Well, let me just answer that in the following way. The regulatory rules, we hope and believe will come out in some reasonable way. We have lots of conversations going on with regulators in Washington. As I mentioned, we've asked them to do a quantitative impact study before finalizing any rules. There is some indication that at least it's being considered seriously. If the rules don't come out the way we think they will in terms of being reasonable, all options have to be put on the table. If we cannot be competitive because of capital rules that disadvantage a couple of large insurers compared to the rest of the industry, which is still a very fragmented industry in many ways, we'll have to take actions to address that. I think that
That should be part of the calculus that people think about in Washington when they consider these kinds of policy decisions. I think that it will be considered.
In the back, Jeff?
Jeff Schuman, KBW. I have a very basic score keeping question, I guess. A year ago, when you talked about the 2016 IR week goal, you talked about an assumption of $5 billion of net share repurchase or capital management. You still talk about the $5 billion, but we have had $2 billion deployed towards Provida. Does that somehow not fulfill 40% of that assumption or not?
Well, we're also getting earnings from Provida that factor in to that overall calculus.
Is that $2 billion of capital deployment that helps towards that goal? Or does it not help in the way that share repurchase would've? Because I'm wondering, because it could impact how we think about acquisitions going forward as well.
Our projections had some acquisitions built into them through 2016. It wasn't a very large number. I think some of those dollars that are going to Provida have to be looked upon as in lieu of share buybacks, and that's how we looked at the transaction. We actually analyzed it. Again, going back to the comments I made earlier about M&A transactions being weighed against even a theoretical share buyback if we, at one point in time, couldn't do share buybacks.
The bottom line is there's different ways to skin the cat. If you have some frustration with share repurchase, to the extent you can do acquisitions, you can
You can
part way there.
Yes, you can. I think at the point in time when we were under Fed supervision, they viewed it differently. A share buyback was simply cash off the balance sheet back to the shareholders, no longer supporting the company in terms of a downside scenario where a reasonable acquisition was it generating earnings going forward and had assets as well to support the company in downside scenarios. There was a distinction, I think, on the part of policymakers in Washington between those two different avenues of utilizing capital, one being viewed as being riskier in their mind than the other. There is an ability for us to do acquisitions, but I want to state clearly that we're not going to drop our standards around valuing transactions just because of concerns around returning monies to shareholders through buybacks in this environment.
Thanks.
Here in the end.
Could you give us an idea of under, let's say, a worst case scenario where they hold you to Basel III standards, what MetLife looks like pro forma? From my looking at the numbers, it probably would eliminate a lot of the excess capital that I think you have, but I think even under Basel III, it seems like you wouldn't be in such terrible shape.
I missed the first part. Could you repeat that?
In other words, your concern is that you're held to a Basel III bank-like capital standard. My question is, if you could frame for us on the extreme that you are simply held to that standard, what does MetLife look like under those standards?
Well, you want me to start?
I'll start with a high level. You can maybe add some more details. A pure Basel III standard applied to an insurance company, which we don't think is where things will end up, dramatically raises the capital levels for parts of our business. In particular, the U.S. retail business would be dramatically impacted by that. If those standards were applied to us, it would be very difficult for us to be competitive in that marketplace going forward against our peers who would not be regulated in the same way. Again, I don't think that's where it's going to come out. I think people in Washington are now getting a better sense of the real-world impact of making a strict application of Basel III to the insurance company model, which is a very different risk profile than a bank model. Anyway.
Yeah, the Basel III applies factors only to the asset side of the balance sheet, which can be appropriate for a bank where the liabilities are either term funding or deposits. For insurance company, it's radically different. Basel III could penalize businesses where you're well matched, but you use PAA bonds to match it, or variable annuities where you have assets in a separate account. Likewise, it doesn't calculate at all risks taken on the insurance side of the balance sheet. Same property and casualty insurance. It wouldn't reflect any waiting for earthquake insurance, tornado insurance, commercial liability. It'd be very underweighted on that. The whole system, the more you look at it, really doesn't fit at all what we do for an insurance company. We've been communicating that in Washington, and they are listening to that.
Can we go to Mike over here?
Yeah.
Thanks. On that note, can you share what sort of pushback you're getting from the regulators at all when you explain to them your position about why the industries are different?
I don't think there is specific pushback. It's not as much a debate or in these discussions with regulators. It's more information gathering on their side. They're absorbing what we're expressing. We're showing them data. We're showing them models that we've run, models run by third parties. I think it's a learning curve for them. We consider that insurance has been regulated in this country by the states for many decades. There does not exist today in Washington, a large reservoir of expertise around insurance. There's a lot of very smart people who regulate lots of things, including banks in Washington, have done that historically, have good skill sets in that regard, and they're trying to apply their skills to now a new industry to potentially regulate. I think they're still on a fairly steep learning curve.
I think they are absorbing what we're expressing, and I think they're taking it into account. I think one of the biggest issues that we face as an industry, at least a handful of the large companies, is there's a policy issue, and then there's kind of the politics. The politics relate to a large failure during the crisis by nominally an insurance company, AIG. Of course, the problems AIG got into weren't in their insurance subsidiaries. It was in their otherwise regulated, not by the state-regulated entities. Regulators and policymakers in Washington do understand that. There's just this public perception that they have to take into account, given their job. What happened to this big insurance company? It failed. A $180-plus billion bailout by the taxpayer. How could you not consider insurance companies as you think about Dodd-Frank?
Our response has been, if you look at the log, Dodd-Frank talks about interconnectedness and the fact that an institution might fail could result in spillover effects to other institutions and overall to the financial system as a whole. We've said to them on a number of occasions, both in closed-door meetings as well as statements that I've made and others have made publicly, is that, yes, we are big, we are important, and no, it's not impossible for MetLife or some other large insurance company to fail. If we were to fail, we would not take down other financial institutions. Under Dodd-Frank, we don't think we therefore qualify as being a non-bank SIFI. That's really the extent of the debate, if you will. The political overlay is a part of that debate.
There could be feelings by some, I don't know, in Washington who say it's too difficult for us right now to pass a law that regulates insurance at the national level for a bunch of political reasons. The states aren't going to let go easily. This is a backdoor way to at least regulate a few of the big ones. Whether they're interconnected or not, the financial system, this is an avenue to do it. I hope that's not where things come out. I hope people look at this objectively and say that under Dodd-Frank, under the letter of that law, we are not systemically important. We're big and important, but not systemically important, meaning spillover effects. That's the case we've been making for quite some time. Whether it prevails or not remains to be seen.
People who handicap it say the politics are going to overwhelm the objective analysis. We'll see how that turns out.
Thanks.
Ian. Do you want to pass it to Ian?
Thanks. I think one of the key areas of uncertainty with SIFI rules is separate accounts. I guess I'm wondering, in the hypothetical where separate account treatment is onerous and that basically you and another large competitor of yours that would be SIFI are at a disadvantage relative to the rest of the market, meaning you have a more strict capital standard for VA than for many of your peers in the marketplace. Would that change your appetite further? Would you cut back even further, or do you think that $10 billion is sort of the plan, sink or swim, regardless of how SIFI turns out?
We adjust our thinking based upon changes in the external environment on a continuous basis. If there were capital rules that were extremely onerous around separate accounts, we'd have to take that into account going forward and we would make adjustments.
Okay. As a follow-up to that, just I think you've also said something similar about pension closeouts in the past, being hesitant to follow on your competitors until we have more clarity on the environment. I guess the one concern I have is that I know the designations are coming soon, final rules, maybe it's a year, maybe it's two years, who knows? I mean, how do you sort of operate the company on a day-to-day basis in sort of this vacuum where there are major lines of business where you just don't know what the rules are and how to operate in it? How much of a hindrance has that been over the last year? Again, basically, what's the patience level, right?
I mean, if it's two more years, can you wait that long going status quo, do you need to react beforehand at some point and just make your best bets?
Well, we've made some significant changes in our desire for product mix over the last couple of years in the face of this uncertainty. We're not stopping.
Okay.
We are taking into account the current environment, the uncertainty, and different scenarios in terms of how this might sort out in terms of actual regulation. What you heard from us today, and you've seen from us before in our strategy presentations, reflects that. If we get new information that, let's say, veers away from our assumptions, our overall assumptions, then we will adjust further. I alluded earlier to the possibility that we would still look at parts of the business that are not the protection business, but more market-sensitive businesses. That's going to have a high threshold in terms of returns, and it will reflect the current low interest rate environment. I have rosy scenarios about the 10-year Treasury bouncing back to 4.5% in 12 months. To your question about pension closeouts, we do look at pension closeouts.
We are very conservative in terms of our assumption base when we consider making those kinds of bids on those kinds of transactions.
Thanks.
I'm going to go in the back there. Take care of that cluster.
Thanks, Ed. My first question is on the captives. Are there any captives related to other businesses, Universal Life with Secondary Guarantee, et cetera, that you're not folding in as part of this consolidation that you may have to look at down the road?
We do have other U.S. onshore captives that we use for reinsurance structures as well as life insurance structuring, those are being kept where they are.
If we looked at everything holistically, like rolled in all the captives and everything, and looked at a consolidated RBC ratio, would that change from what you told us before? In other words, are these onshore captives that you're talking about included in that over 400% RBC ratio?
The onshore life captives are not included in the combined number that MetLife releases, which is the 466 as of year-end.
Right.
It's the major writing entities that are included in that.
Right. By extension, they're not going to be included in this pro forma number.
That's correct.
If we roll them in, can you tell us what that number would be?
We've not disclosed that.
Okay. On the holding company cash, I guess when we looked at past slides in past years, you've given us like a buffer cushion or I don't know what phrase you want to use, what term you want to use, but I don't think it was included in this presentation. Forgetting about non-bank SIFI, because I know that's going to influence it, but if you're just looking at it from a pure insurance perspective, is there a number that you could give us that you'd feel comfortable with in terms of a cushion that you'd have to hold?
We have decided not to give that guidance out to the market now, given the uncertainties with non-bank SIFIs and other things. We think a buffer would be inappropriate really at this time till we better know the rules.
Okay. Thanks.
Can you maybe give us an update, the 12%-14% ROE that you provided last year, you're a quarter of the way through, just your assessment on the ability to achieve that, are you more comfortable with that ROE expansion versus the decline in the cost of equity capital?
We've stood by the 12%-14% range. We've said that in a low rate environment, it's likely to come in at the lower end of that range, not the higher end of that range. We did have a good first quarter. I think our ROE was 12. What was it?
Seven.
Seven. That was, I think, an exceptionally good quarter for us. We're not saying project that for the rest of the year. I think we still can achieve the low end of that range given what we know today, given the environment as we see it today. It could improve if rates were to go up a little more rapidly than we're anticipating. It could improve if the overall economy picked up a little more rapidly than we're seeing currently. Also could deteriorate if things went in the wrong direction. As of now, given what we see in the external landscape, we think the low end of that range still is achievable for us in 2016.
Okay. Just the follow-up is, can you talk about conversations you're having with the state regulators, I guess around two topics, one, the new entrants into the marketplace, and two, just the discussions you're having with them if federal regulation were to come down on you, how they're possibly thinking about regulating other insurers not at the federal level.
New entrants being private equity firms?
Correct.
Okay. Some of the private equity firms are making acquisitions of blocks of business. I think what you've heard from the state regulator in New York is that there's concern in terms of whether those assets are being invested sufficiently conservatively enough so that long-term policyholders are paid out in full. I think if you step back and look at the situation, private equity firms have an incentive to make strong returns for their limited partner investors. Not every deal is necessarily going to be a strong return, but you have a handful of big returns, and some that are pretty good, and you have a couple that you lose, some or all of your money.
The concern in this case would be that business model is one in which if you're shooting for a big upside, you might accept a downside because overall your portfolio looks good for your limited partner investor. So far so good. Roll forward and say, what happens then if the deal doesn't work and there's not enough capital to pay out those policyholders over time, that goes back into the state guarantee fund and companies like MetLife and others end up picking up that tab. Obviously, we have a concern about that.
We want to make sure that those entities are properly regulated, and that that's not simply a case where the upside goes to the private equity firm and the downside, the true downside risk, not just losing your capital, which in a private equity capital model is not the worst thing in the world if you have some big winners. The true downside risk of backing up those policyholders doesn't get shifted to a third party that's not even at the table participating in this, which is.
Other insurance companies in the state guarantee system.
Is this Bill in the back?
Yeah, given what's happening in Japan with the shifts in JGB rates, other investment rates there, as well as consumer commercial confidence changing, how is that impacting or will it impact your business there, given it's a substantial portion of overall company?
The lower rates in Japan on a reserve basis won't have a material impact on our setting of the reserves. It is having an impact on our business because the huge equity markets are causing people to cash out of these and the weakening yen. We've sold a lot of foreign-denominated annuities in Japan, in both AUD and USD, and people are harvesting their gains. These are market value adjusted annuities, so they're harvesting their gains in AUD and USD and purchasing mutual funds or equity type. They're flooding into the equity market. That you saw in the first quarter. We had higher surrender fees from Japan from that. It's reoccurring again here in the second quarter. This will even out over time. That's impacting our business today. The lower rates are not a material impact for us.
David Small.
Yeah. I just had a question about the upcoming ESUs that are going to come due at the end of the year. It just seems that I understand you don't want to comment on share buybacks as it relates to the cash that you're generating from the company because you don't know what the SIFI rules are going to be. How you deal with the ESUs just seems like that should not be SIFI. That should be not really dependent on what the SIFI rules could be. Maybe you could just comment on that.
Well, that's factored into all of our cash and capital plans for 2013 and as going forward. As we've said, today, we'd rather be slightly conservative and just wait and see. Maybe we'll know the rules by September. Maybe not. For now, we want to wait and see.
Just to clarify, though, the ESUs are not currently counted as 100% equity, correct?
Marlene?
I think you mean counted as 100% equity. They-
They're not, right?
By which measure?
By whom? Yeah.
By rating agencies.
It depends. They are by some and less by others. It's a mix. For example, S&P is 100% equity credit, whereas Moody's is 25%, I believe.
Right. They're not Tier 1. If you're regulated by the Fed, they would not be Tier 1 yet. When they switch to equity, they'd be Tier 1.
Steven.
Thanks, Ed. Two questions. Steve, you've been talking about a quantitative impact study. Could you, for those of us who don't speak Washington, what is that and what would you expect it to show?
Quantitative impact study would have one who is making up rules to live by going forward, basically apply those rules to the current situation and say, what would actually happen if these rules applied to an industry?
Okay. What would you expect that to show?
It depends what the rules are. If you used a pure Basel III base for these capital charges and applied it, not to the banking world, but to the insurance world, it would dramatically increase the amount of capital necessary for certain kinds of products. In particular, market sensitive products that we sell in the U.S. in the retail channel.
Okay. Looking at tomorrow is the Aflac day, we'll hear more about this. I think we all know that the FSA accounting standards are very, very conservative relative to U.S. statutory. The 40 to 50 is the same type of number that they've talked about historically. Why can't you finance those reserves? Does that make any sense whatsoever to get capital out of there? It's very, very redundant. Unum has done the Northwind transaction and a couple of other transactions back in the past for this type of business. Does that mechanism exist? Can you do that?
We just got a, remember, a large dividend from Japan when we subsidized Japan, now we're going forward on the conservative accounting basis and building up the earnings again. We did get that cash, that was a positive.
Okay. On a go forward basis, there's.
There's not really that much there you can do.
Okay. When does this reverse? I mean, cash is cash, obviously. You write a policy today. When does it reverse and become greater than U.S. statutory? Say, a cancer policy.
It depends on the length. It's complex calculations. In the end, we'll get the money back because when the policy terminates, we will have it. It varies a lot by product, so it's hard to give the exact guidance.
All right.
I wish I could. It's just not that easy to do.
Let's go to Eric over here.
Thanks very much. My question could be addressed to Steve or to John, whoever feels most appropriate to answer. It occurred to me that there have now been three very visible cases of the whole insurance industry, not just MetLife, having a product that offered guarantees, pushing it very aggressively, things didn't work out, and then the whole industry pulls back. I'm talking about long-term care, universal life insurance with a no-lapse guarantee, and now variable annuities. I have really two questions. I would think that this would be having a very upsetting effect on customers and people who sell the product. They see the product out there, then they see it pulled away. Is that a fair inference to draw?
My related question is, should we infer from the discussion today that Met will be in the guarantee business in the future, but the guarantees are going to be different from what the nature of the guarantees will be different from what they have been in the past?
To your first part of your question, certainly we have made adjustments to products we sold or in some cases pulled back from selling them altogether, like long-term care. On balance, that's not a good thing in terms of being a customer-centric company, and we understand that. At the same time, there's lots of products out there that, in different industries, that get sold, and over time, for whatever reason, companies that produce those products decide it no longer makes sense to produce those products. I think consumers in general are used to things changing over some period of time. We try to manage. For example, when we got out of the long-term care business, we gave a fairly long runway to our producers before we cut off sales. That was to help with the issue that you correctly point out.
You don't want to either burn relationships that are with agents and third-party distributors or to damage any sort of potential long-term relationship with a customer who might be thinking about a product, and we announce one day it's no longer being sold. We did give a fairly long runway in terms of notice in that one case. I think the bigger question here, I think, Eric, is our industry was competing against banks and asset managers, and we're losing market share. I think we probably stretched as an industry in some regards. In fairness to the industry, we didn't take into account, as most people didn't take into account, the current economic environment of historically low yields in a business where much of it's driven by our business is driven by where interest rates are.
I think a lot of us have stepped back and said to ourselves, we have to really look at this very carefully going forward, take into account the tail risk scenarios even more than we did before, and make sure we structure products in a way that provide a good value to our consumers, provide an attractive product to sell for our producers. At the same time, doesn't put too much risk on the balance sheet of MetLife or others in the industry. Maybe there's been a reset here. It's probably not just the insurance industry, it's the banking industry, it's other industries. I think we've all learned a lot of lessons through this last decade.
I think we're going to need to end the Q&A and go to some closing remarks from Steve.
I just have one last slide to put up. Some key takeaways from the day. At times it's pretty easy to get downcast about what's going out there with things like interest rates or regulatory situations or slow growth in the economy and so on. We still have a very strong company here. We still have significant earnings power. We did $1.48 per share the first quarter, well above expectations from the Street, well above our plan, frankly. Notwithstanding these headwinds, we are taking a lot of actions that are positioning the company well in the future, but also producing good results right now. We are committed to driving up those return on equity numbers. We're committed to doing what we can on our side of the equation on reducing our cost of equity capital, meaning de-risking, in many ways, our business.
We're committed to delivering shareholder value, which includes a strong dividend going forward over time, share buybacks, and selective acquisitions that fit our strategy that make economic sense even when measured against share buybacks. With that, I'll conclude things. Again, thank you very much for coming today, and some of us will be around for a little bit afterwards if you have any further questions.