Thank you. We are pleased to have with us today Steve Kandarian, Chairman, President, and CEO of MetLife. Steve has served in this capacity now for 18 months. Over this period of time, he has reorganized its businesses, completed a strategic review to focus on monetizing Met's global insurance platform, enhance its ROE, and lower its cost of capital. Previously, many of you know Steve as the CIO of MetLife, where Met was quick to identify the housing crisis, and also emerged from the crisis in a position to use its capital to make the acquisition of Alico. With that, I will turn things over to Steve.
Thanks, Chris. That was most of my presentation right there. We will go on. Let's see. Is this clicking? Forward? Good. Okay. You want me standing or sitting with you?
Standing.
Okay. I am going to go over here. Okay, I just want to tell you a little bit about our overall view of the company in the marketplace. Chris mentioned we went through a strategic review. We have done several of those. When I joined the company in 2005 to run investments, we actually did not have a strategy department. There had been one at one time, but that got disbanded. In 2007, Rob Henrikson, who was the CEO at the time and had just been there on the job a year, said to me, "Steve, why don't you oversee a group of internal people to look at strategy?" That was the first time we really did a big review of strategy for quite a number of years at MetLife. We came out with some plans in 2008, one of which was to increase our global footprint.
We had been in 17 countries at that point in time, 16 plus the United States. They only made up about 10% of our business in terms of the piece that was outside the United States. Our view was the company really needed to be more global for a number of reasons, including, I will show you some slides later on this, the real growth in insurance was coming from outside the U.S., not inside a mature market like the U.S. In 2009, we did a refresh after the financial crisis hit. What does all this mean for us and our strategy? Still, we stuck to one of the key elements of that strategy, which was expand our global footprint.
In 2010, because of the crisis, because of pressures that AIG had felt about returning money to the federal government, we were able to buy Alico, one of the two major non-U.S. businesses on the life side. That really did expand dramatically our footprint around the world. Now kind of roll forward, I become CEO in May of 2011, I went back to the board and said, "Look, we've got to look at this again and say, where are we going in light of a number of factors that are negative in the economy and negative toward the industry," low interest rates being one. We started off by saying, what is MetLife? Very strong foundation, some large markets, U.S., Japan, the biggest markets for insurance in the world. Good footprint elsewhere around the world.
Strong position in Mexico, number one there, number one in Chile, number one in an emerging market, Russia, for insurance. We looked at that. We said, okay, distribution. We had the broadest distribution of any insurance company, certainly in North America and probably the world, in terms of all the different touch points, MetLife agents, third-party distribution, direct-to-consumer, and so on. We had a strong investment portfolio, which got us through the crisis in good shape, allowed us to buy Alico, and a very well-established brand, especially in the U.S., less so outside the U.S. What's the challenging part of the environment? Obviously, if you follow our industry, low rates are a real headwind for us. Of course, regulatory uncertainty, which for us really means being part of the federal government and the Fed Reserve's stress tests for banks.
We were organized as a bank holding company back in 2001. We have a small banking business, which we're now selling, but that threw us into the bucket of one of 19 largest banks in the United States, which got put through the stress test with the Fed. Overall, in the mature markets, insurance as a share of wallet has been decreasing. Consumers buy insurance products, their wealth increases over time, nations become more prosperous, people start doing things like just buying stocks or mutual funds and other banking products, asset management products, and so on. How do we get back some of that share over time? Now the opportunities. The insurance industry in general, MetLife is no different, hasn't really done a great job in terms of selling insurance to customers the way they really want to buy insurance.
There's a lot of traditional ways to sell insurance. They still apply, but there's other ways that people want to interact with companies in our industry. Penetration is increasing in emerging markets. I'll show you a slide shortly about how many emerging markets we're in. Corporations are more and more global and looking for employee benefits on a global basis. MetLife is the largest player in that marketplace in North America by a large factor. This was a strategy we came up with to refocus the U.S. business, by that we really mean get the risk profile right for that, we'll talk about that in a second, including VAs. Build employee benefit business on a global scale, leveraging off the U.S. business, which is a very strong business for us, strong market position there, leveraging that across our entire platform now.
Finally, grow our emerging markets component of our business. Let me talk a little bit about the VA business. This is one of the biggest parts of the refocus the U.S. business aspect of our strategy. You can see the sales there on the chart spiked up dramatically in 2011. I should mention that while sales went up in terms of $, the product that we introduced in that year, which is called GMIB Max, was a lower-risk product. The overall risk profile didn't change that dramatically, but sales certainly went up a lot. We, over the course of the year, took down the so-called roll-up rate on that product from 6%-5.5%, and eventually, in January of this year, dropped that down to 5%.
That has driven sales down, which was our goal, get the sales of that into a more manageable level. It really goes toward the whole issue that we've been focused on at MetLife, which is in this environment with low rates, in this environment with potentially heavier regulation and more stringent capital rules, we have to start shifting our business mix away from capital-intensive businesses and toward protection products which are less capital intensive. We'll be doing our investor day call on December 13th, so I'm a little ahead of that here today, so I can't say too much about specific numbers, but you could expect that that 2012 number of $18 billion for VAs will go down in our plan for 2013. Let me shift to the global employee benefits business.
Again, we're taking a tremendous franchise here in the U.S., leveraging it across this new platform, post-Alico, We believe we can contribute $250 million to the bottom line in 2016. It's a very attractive business from a capital perspective. It is not capital intensive, it's more protection related, We had a very strong start thus far. 2012 to date has really seen this business pick up, and the way we're running it is Maria Morris, who spent most of her career in global benefits, heads up this unit. It's a relatively small kind of SWAT team within MetLife, and they interact with the regional people around the globe.
Really, the regional people will make the sales, really leveraging off of those relationships that they have in-market, taking it to a focal point with Maria and her team to really drive those kinds of sales throughout our entire franchise. This slide talks a little bit about penetration of insurance products around the world, and the countries we list here are countries that MetLife does business in. On the vertical axis, it's gross written premiums divided by GDP, basically how penetrated is the market. The lower the number there means people don't buy a lot of insurance in relation to GDP. The x-axis, the horizontal axis, is GDP per capita, so how rich is the nation.
As you expect, that line indicates that as you become wealthier as a nation and you get to some tipping point where the basics are provided for, housing, food, and the basic things that people need every day, at some point, you have discretionary income to do things like invest or buy protection products from companies like MetLife. You can see there's a number of countries there in the lower left-hand part of that chart that we believe will be moving up market over the years. What you want to do from a strategy point of view is be there first in the sense that you don't want to wait for them to get to that inflection point and then try to enter the marketplace. You're not going to get much market share at that point in time.
The Alico transaction really was put together and executed with this in mind, that this is where the growth will come in terms of new premiums going forward in the insurance industry from those emerging markets that we think are good markets that over time will shift to the right-hand upper right-hand corner there. Today, we're talking about 14% of earnings are from emerging markets, we anticipate that number going over 20% by 2016. We think we can get to 19% just with pure organic growth, the rest of it would be due to M&A. Last thing I'll say on this slide, we're in about just over 30 markets that are considered emerging markets today out of not quite 50 markets in total. Let me talk a little bit about customer centricity.
When you think about our industry and you say, "What kind of competitive advantages can a company have?" Now we can create a really cool new product, then the actuaries at some other company six weeks later have knocked it off, two months later, you see it in the marketplace competing against us. Product innovation is pretty tough to really enjoy an enduring competitive advantage. One place where we think you can really get a competitive advantage in our industry is if you're really, really good at things like customer centricity if you have a really strong brand. Those are things that can really put you in a position of having a true competitive advantage. It's great to put it up on a slide, say we're going to be really customer centric, first, what does it mean?
Second, what does it take to get there? I'll tell you a couple of stories kind of related to when I first joined MetLife in 2005, I was not from the insurance business. I had an investments background. A couple of mantras I heard over and over again. One was, insurance is sold, not bought. What they meant by that was we're a strong MetLife insurance agent-driven distribution company. I don't want to suggest that we're not going to use agents, that won't be a big piece of our business going forward. It will. It shouldn't preclude other ways of going to market and meeting our customers' needs and wants and desires. That was kind of the mentality for a lot of years, not just with us.
One thing we're doing is we're working very hard in terms of ways to make insurance easier for people to buy. One thing we know, and we do all the surveys, is people will say, especially in the U.S., "I know I have a need of X for life insurance or disability insurance or annuity or something else that we sell." Yet when they try to get started, they don't quite find a way to finish the process. When you dig down deeper, what you find is the products are very complicated, it kind of overwhelms people. They're not sure if they're getting a good deal or not a good deal. It's hard to compare between different products, different companies, and so on. They stop the process. They drop out.
One of the things we're doing from an innovation perspective is finding ways to simplify certain of our products, making it easier for people to go online and learn about these things, interact on the telephone if they don't want an agent in their kitchen, talk to an agent ultimately if they want someone to help them through the final parts of the process or not. We're trying to really let people do business with us the way they want to do business. That's a process. It's going to take us a period of time, but we are working hard at that and made a lot of progress to date. Another thing I should say is that, in addition to the mantra of insurance is sold, not bought, the other mantra I always heard was, service that's good enough.
That kind of put me back on my heels. What do you mean service? How can we accept service that's good enough? The theory was, well, we sell on average 1.4 products per customer. Most people buy one product from us, at most two. Oftentimes, these products have a period of time where people engage in a process to get the product, and then years, years later, an event occurs where the product pays off. We don't have to spend a lot of money on the in-between years because it doesn't really pay off. When you really get into the research and look at companies that do customer centricity really, really well, they enjoy higher revenues, ultimately lower expenses, even though there's an initial cost of having good customer service.
Lower expenses because eventually you do such a good job for the customer, there's much fewer complaints, fewer interactions because you've done a great job up front, and much better bottom lines. We have had now but a year of delving into what it means to be a customer-centric company at MetLife. All of us at the executive group level, which is myself and my direct reports, engage in phone calls with customers with customer complaints on a regular basis. I do four, five, six calls every year with customers with major problems. I work the problem through with them. Now, obviously, I'm not the best customer service rep around. There's people who are a lot better than me at this. The point of it is, the people who run this company need to understand what our customers are going through when they have issues.
That will translate to us as leaders driving this down throughout the entire organization. It's a top-down and a bottom-up process for us in terms of becoming a customer-centric company. MetLife is a very large company, nearly 50 markets around the world. Biggest life insurer in North America, depends how you define size, but even the biggest life insurer in the world in terms of written premiums. How was it run for most of its existence? It was run like a lot of big companies. This person has his or her business, another person over here with that business, and so on and so forth. We talk together at different points in time, but largely a siloed organization. Largely siloed. We have broken down those barriers, and we have reorganized the company in terms of geographic lines different than before.
We have new talent joining the team from outside. That was necessary because we were a U.S.-based, U.S.-centric company for 140 years before we bought Alico. We needed global talent that understood those markets. We brought some external talent into MetLife with that kind of experience. We shifted people around in different kind of roles who already were at the executive group level. The point is, we really have made some cultural shifts and talent additions to the team. Even the next layer and the layer below that, there have been a number of moves we've made in terms of putting the right people in the right jobs and reorganizing the company in a way that really goes across our entire platform. The silos are going away, and we have three big regions. We have EMEA, we have Asia, and we have the Americas.
The Americas is the biggest piece of our business because the U.S. still is the biggest part. About 60% of our company. Someday, we may go to a U.S., Latin America structure, two different regions. When I came in as CEO, I wanted to break down that cultural approach of it's the U.S. and everything else. There's no longer a U.S. business at MetLife. That forces everyone In all these different parts of our company to think globally. If you work in the Americas, you're not just dealing with the U.S. business, you're dealing with Latin America. You're dealing with mature markets and emerging markets. Same thing in EMEA and Asia Pacific. We have to really leverage our scale, and we've put out in our last Investor Day long presentation in May of this year that we would save $1 billion by 2016.
We'd spend $400 million of that save by reinvesting in our capabilities and our technology. Again, it's not just MetLife. I'd say the entire industry has been slow to adopt the most modern technology to drive its business. I've been onto a number of our call centers. There's one in Dayton, Ohio, I just went to, and we have terrific people at these call centers. Many of them have been with us for over 10 years. They know our business. They interact extremely well with our customers. They'll get a phone call, and they'll have their headset on, I'll be sitting next to them to see how they interact with the customer. A screen will come up, and they'll deal with an issue for a customer.
If that customer happens to have a second product, that person has to go in and find another screen or transfer them someplace else. When you call one of the large asset management complexes around the world, if you have an account there, and by the time that person picks up the phone, your screen's already up there. They have all your products, everything's listed in terms of the data they have on you. They probably know where you work, how much money you make, all the rest. We need to catch up here in our industry, and we're spending some of the save in getting to that point. The good news is that what used to cost a lot of money to do in these different capabilities we're talking about actually is a lot cheaper today than it was 5, 10 years ago.
Let's turn to our financial performance. The 2011, 2012, the changes. In our business, these numbers have a lot of kind of adjustments to go through. They're kind of tough to follow and make direct comparisons. Overall, I'll just simply say, it is a good year. 2012 has been a good year for us. To date, we've been at the kind of the high end of the range that we put out at Investor Day last year. Strong earnings. These are nine-month numbers. Strong earnings per share on an operating basis. You'll see the net income, net loss. For those of you who follow us, you know there's a lot of movement below the line for us on things like derivatives. We had a goodwill impairment of $1.6 billion on the variable annuity block of business we bought from Travelers in 2005, non-cash expense.
We had a $2.1 billion swing in our own credit spread, which is non-economic. It's just how the accounting works. The key here in terms of our earnings per share, operating earnings, and strength is it's a very good year. How did we do so well in a bad overall environment in terms of slow economy, very low rates, which really puts pressure on insurance companies? There's a lot of answers to that, but I'll give you kind of the high-level ones. This is important kind of to follow along if you think about our company and our industry. In addition to de-risking the investment portfolio pre-crisis, MetLife also bought insurance, which is a good thing for an insurance company to do. We bought insurance for our business. The insurance we bought was, what if rates drop?
What if there's a bad economy and rates go down? Frankly, I don't think we thought it'd be this bad and this low and this long that rates would be low, but we thought it could be low. Back in 2005, actually 2004, 2005, 2006, right up through the crisis of 2008, we were buying interest rate floors and other kinds of derivatives to protect against a low-rate environment. Didn't cost that much. It was a little bit of a drag on earnings. Overall, we thought it was the right bet to make. Out of the money by a lot, that sort of thing. Back when the 10-year was over 4%, 5%, those kinds of ranges. Some of those derivatives had forward starts, so they kicked in year by year by year. The last of those forward starts have now hit in 2012.
Those are all positive numbers to us. Those derivatives are paying off. They're showing up in our operating earnings. Those derivatives stay in place for a number of years. We've shown you slides before on that. You can go back on our website, and you can see how far out they go, like a decade or more, without really diminishing in a major way. That's all the good news. Here's the bad news. Obviously, as an insurance company investing in fixed income instruments largely, with yields coming down, that starts chipping away at our earnings stream. The derivatives have been going up faster than the roll-off of our portfolio and reinvestment of that into lower-yielding securities. As I mentioned, the last forward strike on those derivatives has hit already in 2012.
We're starting to go to the point where it can go sideways unless rates go lower, in which case we're going to pay even more with lower rates. We still see that declining yield on the portfolio occurring. We can't affect that piece of it. We're just recipients of whatever interest rates are out there. That's just a little bit of kind of the high-level aspects of why 2012 still looks really good in a very bad environment in terms of interest rates for us. This last thing I'd say is investment performance has been very strong this year. About $100 million of net losses in the overall portfolio, which is quite small for a portfolio our size. Key takeaways here. We continue to execute on our strategy. The company is very focused on where we need to go.
No one's confused as to the direction of the company. We all know the challenges facing us. Low rates, slow growth, especially in some of the major markets that we participate in. Some wind to our back in certain other markets, which is great. Latin America, certain markets in EMEA, Central and Eastern Europe in particular, parts of the Middle East still doing well, parts of Asia still doing well. The key message I want to leave with you is that this company really has transformed itself in many, many ways, including a mindset. We talk all the time now, but we didn't years ago when I first joined, about things like what's our cost of equity capital today and why. One of the reasons why is tail risk in things like VAs, tail risk in other things like USG, and so on.
We think about those issues as we decide where we're taking the business. How do we reduce our cost of equity capital? What things can we control? We can't control interest rates. We can't control what happens with the fiscal cliff. We can't control where the economy goes in China. Things we can control, how we drive down our cost of equity capital over time by reducing market risk. How do we drive up our ROE, expense saves, becoming more efficient in many ways, new platforms which will pay off in the future, different kinds of businesses in terms of business mix shift that's lower capital intensive businesses and so on. How do we ultimately repay the shareholders for their capital with higher dividends, share buybacks, and the like. I'll leave it there, and I think we have a few minutes for questions.
Sure. Great. Thanks. I'll maybe kick it off. You mentioned 2012 has been a good year operationally. Obviously one of, I guess, the lingering questions that's out there is the regulatory uncertainty for not just you, but the industry potentially as we move to non-bank SIFI. Can you just give an update in terms of conversations you guys are having with the regulators, how you're thinking this may play out for you guys and potentially the industry?
Okay. Under Dodd-Frank, because we're a bank holding company, one of the 19 largest, we went to the Federal Reserve stress test. We're still in that regime until we de-bank. We own a small bank, which we announced almost a year ago now that we're selling to GE. The deal has been restructured in terms of GE using a different bank they own. They own two banks. One's an industrial bank, the other's a retail bank. It's been restructured to shift the sale over to the retail bank. That is going through the OCC process. The interaction in terms of what I know in my direct interaction and the direct interaction of MetLife people in general is limited because it really is GE going through the process of getting approval to buy this bank. It's not MetLife getting approval to sell the bank.
GE has made statements some time ago about the transaction potentially closing in December. I'm not going to speak to that. I made a statement very beginning of this process in December that we had this thing done with the FDIC, with the other bank with GE in June. That was obviously very wrong. I've stopped making predictions about what the federal government's going to do in terms of regulatory approvals. My hope is the deal will happen relatively soon in terms of closing. We'll no longer, at that point, be a bank holding company once we go through the process of de-banking. We'll be subject to Dodd-Frank non-bank SIFI review. It's already been publicly announced that the FSOC is reviewing AIG and Pru U.S. to potentially be a non-bank SIFI. They're in phase 3 of three phases of this process.
I'm sure there'll be some announcements over the coming months as to whether AIG and Pru U.S. become non-bank SIFIs or not. One would expect that if, let's say, for example, Pru becomes a non-bank SIFI, one would anticipate that MetLife will eventually become a non-bank SIFI. We cannot be a non-bank SIFI today because we're already a bank SIFI. Until we de-bank, we're not going to be a non-bank SIFI. That's kind of the good news. The bad news is we're a bank SIFI. Now, what are the rules? If you're a non-bank SIFI, what does that mean? It means you're regulated now by the Fed. FSOC decides, are you one, by two-thirds vote and affirmation by the Secretary of the Treasury. If you are one, the Fed writes the rules. What kind of rules will those be? We don't know.
I don't think they've come to a conclusion themselves. That's in process. There is uncertainties. My first slide, I think, said regulatory uncertainty. That's a big piece of regulatory uncertainty.
Okay. You mentioned variable annuities and what you guys are trying to do there to maybe shrink the sales momentum you've seen, continually de-risking the product. Many of your competitors are doing the same, you're kind of positioning yourselves in, it seems like, a market share position where you're comfortable with, though you did indicate maybe even a little lower next year. One of your competitors last week, Jackson National, talked about returns on their business. They have a different product than you, but they seem to imply maybe the GMIB product characteristics are inherently more risky than a GMWB product. I guess, what would your response to that be and how you evaluate your VA product?
We have taken a number of steps to de-risk our GMIB product. There's some internal hedging that goes on within the underlying asset management components to the product. There's a lot of hedging we do at the corporate level, both individual hedging as well as macro hedging. It's true, all these products, whether GMIB, WB, GMAB, any of them, have risks associated with them. I can assure you that we factor that into our pricing in terms of the cost of hedging, and we factor into things like how much capital we allocate to this product. We've changed that number over the years, meaning higher allocation of capital.
Any questions from the audience?
Can you spend another second talking about how many % in emerging markets do you think that
Sure. Yeah. Today it's 14%, and what we said was by 2016, it'll be over 20%. At that point in time, MetLife will have a significant component of its earnings driven by emerging markets. Again, if we do nothing in terms of acquisitions, we think it gets to 19%. How high above 20 depends upon what we can buy in the marketplace or start in terms of greenfield. Certain markets you can have greenfield sites. Some markets that are emerging markets don't have any more licenses. You have to buy something. Currently, the M&A landscape has been very competitive in Asia, fairly competitive in Latin America, not competitive at all in the U.S. and Europe compared to the past. Everyone's trying to get to Asia first and foremost.
The reality is our stock price on a P/E basis, price to book basis, is low right now. We have a few competitors which have higher P/E ratios, higher price to book numbers and so on. Frankly, they're in a better position if they want to bid very aggressively on a major property in Asia. We have a choice. We can get really aggressive and bid against them, or we can do what MetLife tends to do, which is wait, find the right opportunity at the right price that we think is near accretive. That's the approach we're taking. How high we get above 20? It depends upon that landscape. Do a few of these players with higher P/Es buy some things, say that's enough? The next round of bids and the next property become more realistic from our perspective.
If that's the case, we probably can get well above 20%.
Okay, one more. I think we're over.
Let's do one more.
Yeah. Let's do one more. Yep, go ahead.
Net free cash flow on one of your slides. Can you talk about how you define that? I believe in the past you talked about a number of 50%-60% of operating earnings. Does that percentage go up as you slow down the growth in the VA business because it consumes less capital?
Yeah. I think the number we used has been 40% because of strain from certain products. We're trying to get it up to 50% or higher. That's our goal. That's part of that whole de-risking the portfolio in the U.S. More protection products, less market-sensitive products. Our goal is to get above 50%, but right now we're around 40%.
Okay. Bye.
Thank you very much, Steve.
Thank you.