Ladies and gentlemen, thank you for standing by. Welcome to the MetLife second quarter earnings release conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of federal securities laws, including statements relating to trends in the company's operations and financial results and the business and products of the company and its subsidiaries. MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with U.S. Securities and Exchange Commission.
MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise. I would like to turn the call over to John McCallion, Head of Investor Relations. Please go ahead, sir.
Great. Thank you, Brad, and good morning, everyone. Welcome to MetLife's second quarter 2012 earnings call. We'll be discussing certain financial measures not based on generally accepted accounting principles, so-called non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures may be found on the investor relations portion of metlife.com, in our earnings press release, our quarterly financial supplements, and in the other financial information section. A reconciliation of forward-looking information to the most directly comparable GAAP measure is not accessible because MetLife believes it is not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Joining me this morning on the call are Steve Kandarian, Chairman, President, and Chief Executive Officer, Eric Steigerwalt, Interim Chief Financial Officer.
After their prepared remarks, we will take your questions. Also here with us today to participate in the discussion are other members of management, including Bill Wheeler, President of Americas, Steve Goulart, Chief Investment Officer, Michel Khalaf, President of EMEA, and Bill Hogan, Executive Vice President and Head of our Japan operations. I would like to turn the call over to Steve.
Thank you, John, and good morning, everyone. MetLife continued to perform well in the second quarter, particularly in light of the current environment. We delivered operating earnings of $1.4 billion, or $1.33 per share, up 18% year-over-year. Book value per share, excluding AOCI, rose to $48.60, a 12% gain year-over-year. MetLife's story in the second quarter is one of sound execution on the fundamentals. Our underwriting results remain solid, with strong performance in dental and improving results in disability. MetLife's commitment to underwriting discipline demonstrates that we will not chase sales at the expense of margins, which has proved over time to be a competitive strength. Consistent with our strategy of balancing growth and risk, we have reduced variable annuity sales in the quarter by 34% year-over-year and by 6% sequentially.
Emerging market growth, another strategic priority, was very strong in Latin America, with earnings up 5% on a reported basis and by 19% on a constant currency basis. Perhaps no area better reflects the disciplined approach we take to the business than our actions to manage interest rate exposure. As you know, we provided extensive disclosure about our interest rate risks in conjunction with the third quarter 2011 earnings call. Interest rates have come down further since then, we have done additional analysis on the impact to MetLife's earnings. I would like to share those results with you today. The interest rate scenario we discussed last fall assumed a rate curve with a 10-year treasury rate held flat at 2% for five years. We reran that scenario using a more recent yield curve with a 10-year treasury at a record low 1.4%.
The result was essentially no incremental impact on MetLife's earnings per share for 2012 and 2013, only roughly $0.05 per share in 2014. We also examined the impact of the low interest rate environment on MetLife's return on equity. At our Investor Day in May, we said we expected to have an ROE of 12%-14% by 2016. Even if the 10-year treasury rate were to remain at 1.4% through the end of 2016, we would expect to hit the lower end of that range, adding roughly 100 basis points of ROE from this year's expected level, despite the low interest rate environment. The impact of low interest rates on MetLife's earnings is more benign than many suspect for two main reasons. First, we still have room to adjust crediting rates on a number of our products in response to changes in interest rates.
Second, our hedging program has been highly effective. We made a forward-looking call in 2004 to start buying low rate protection when the 10-year treasury was trading above 4%. We are reaping the benefits today, we will continue to do so for a number of years to come. Now let me discuss a few regulatory issues facing MetLife. With regard to debanking, regulatory approval for the sale of the depository business of MetLife Bank to GE Capital needs to be obtained from the FDIC, the application for sale is pending with them. I know that investors are eager for a resolution of this issue, the timing is outside of MetLife's control. As I said last quarter, I'm not going to speculate as to when the FDIC will take final action. As soon as we have something to report, we will.
Until then, we are not responding to questions about the status of the FDIC process. Looking ahead, a central regulatory issue for MetLife is whether we'll be named a non-bank systemically important financial institution and what the new prudential standards for non-bank SIFIs will look like. The Financial Stability Oversight Council has begun designating non-bank SIFIs. On July 18th, FSOC applied the designation to eight financial clearing houses. As we have said many times, we do not believe regulated insurance activities pose systemic risk to the U.S. financial system. In the event that certain insurance companies are named SIFIs, the impact is a matter of public debate, with some policy analysts focusing on the benefits and others focusing on the costs. My view is that the impact will depend on how the final prudential rules are written.
Federal Reserve officials have signaled their intention to adapt the rules to the unique circumstances of non-bank financial firms. In recent congressional testimony, Fed officials have said that bank-centric capital rules would likely be a bad fit for insurance companies. There is a recognition that insurance companies have different asset and liability structures than banks, and that appropriate regulation needs to take that into account. Let me provide an update on recent M&A activity. As I've said previously, we take a portfolio view of our business, investing in markets we consider core and divesting from those that do not meet our strategic priorities or financial requirements. Earlier this week, we closed on the sale of a significant portion of our Caribbean and Central American operations to Pan-American Life Insurance Group, which was initially announced last November.
This week, we closed on the acquisition of Aviva plc's life insurance operations in the Czech Republic, Hungary and Romania, which expands MetLife's presence in growth markets in Eastern Europe. Our views on M&A remain consistent. Any transaction we pursue must compare favorably to alternative uses of capital. Before I hand the call over to Eric, I also want to take a moment to highlight the completion of the senior executive team here at MetLife. Yesterday, Chris Townsend started as our President for Asia, based in Hong Kong. Chris comes to us from Chartis, where he served as CEO of their Asia Pacific region with 4,700 employees in 15 countries. Chris has a strong background in the area of capital management and portfolio optimization, as well as the direct-to-consumer business, which is an important part of our Asia operations.
Right after Labor Day, John Hele will be starting as MetLife's new CFO. John is a highly qualified chief financial officer with over 30 years of broad experience in the financial services industry. He comes to us from Arch Capital Group, where he was chief financial officer and treasurer. Previously, he was chief financial officer of ING Group, one of the largest financial services companies in the world. Earlier in his career, John spent 11 years with Merrill Lynch in investment banking, marketing, and finance positions. I want to thank Eric Steigerwalt, who has done an excellent job as interim CFO. Upon the arrival of John Hele, Eric will devote himself full time to leading our retail business and reporting to Bill Wheeler, President of the Americas division. I will hand the call over to Eric.
Thanks, Steve, and good morning, everyone. MetLife reported operating earnings of $1.4 billion, or $1.33 per share for the second quarter. This quarter's results included a few significant items, which I will discuss shortly, that benefited operating earnings by $0.02 per share. Overall, our strong results continue to demonstrate the resiliency of our businesses and our focus on pricing, underwriting, and expense discipline across all of our regions. Interest margins were favorable due to strong variable investment income, which was significantly above our plan range and higher recurring net investment income. As we have stated in prior calls, we have been able to maintain strong spreads despite this low rate environment due to our ALM discipline, private origination capabilities, and the effectiveness of our hedging programs. In addition, we continue to manage crediting rates prudently and have additional capacity to lower rates on our interest rate sensitive products.
In the Americas, we saw favorable underwriting results in non-medical health and had significant improvement in property casualty as compared to the record catastrophes in the prior year quarter. We also had solid results in Latin America, particularly in Mexico and Argentina. In addition, expenses remain very much under control. Our overall expense ratio was 24.1% on a reported basis in the quarter, and 23.2% when adjusting for pension and post-retirement benefits. I'll walk you through our financial results and point out some of the highlights. First, let me discuss some significant items included in the second quarter results. Pre-tax variable investment income was $371 million. After taxes and the impact of deferred acquisition costs, variable investment income was $242 million, or $0.07 per share above the top of our 2012 guidance range. This performance was primarily driven by strong private equity returns.
I should remind you that we report our private equity funds on a one-quarter lag. Therefore, we would expect that returns in our private equity portfolio in the third quarter will be impacted by market performance in the second quarter. In the Americas, our property and casualty business incurred catastrophe losses of $94 million after tax, which was $44 million after tax, or $0.04 per share above our second quarter planned provision of $50 million after tax. These higher than expected catastrophes were partially offset by a favorable non-cat prior year development reserve release, primarily in our auto business of $25 million after tax, or $0.02 per share. In our Asia region, operating earnings were negatively impacted by $17 million, or $0.02 per share, due to a DAC model refinement in Japan.
In our EMEA region, operating earnings benefited from a $12 million after tax, or $0.01 per share release of negative VOBA in Greece as customers have shifted away from interest sensitive pension products to products with more liquidity. Finally, our corporate and other segment had two individual items, which each negatively impacted earnings by a little over $0.01 per share. These items relate to expenses from our efficiency initiative and our Japan JV runoff book of business. Let's take a look at the results in the quarter by region. For the Americas, reported operating earnings were $1.1 billion for the second quarter, up 11% versus the prior year quarter. The primary drivers for this earnings growth were in our retail and group, voluntary, and worksite benefit segments.
The retail segment reported operating earnings of $380 million for the second quarter, up 14% as compared to the prior year quarter, driven primarily by the annuity segment. Operating earnings for annuities were $226 million in the quarter, up 25% year-over-year as the business continues to enjoy strong core spreads, higher fee income due to separate account asset growth, and lower expenses, partially offset by market drops in the quarter. Deferred annuity spreads as reflected in our quarterly financial supplement were 301 basis points in the quarter, down modestly from the record spreads in the first quarter, but up 44 basis points year-over-year. This improvement was due mainly to higher derivative income, primarily from interest rate floors, as well as lower crediting rates.
Our group, voluntary, and worksite segment reported operating earnings of $295 million for the quarter, up 29% versus the prior year quarter, driven by the non-medical health and property casualty businesses. Non-medical health reported operating earnings of $133 million in the quarter, up 22% year-over-year, mainly on improved underwriting earnings across the product set. The non-medical health benefit ratio for the quarter was 86.1%, a 140 basis point improvement in the ratio as compared to the prior year quarter of 87.5%, and well within our expectations. In dental, our underwriting trends remain favorable as a result of stable utilization combined with our disciplined pricing strategy. Disability results improved due to a lower LTD incidence rate compared to the prior year quarter and plan. However, recoveries, while better than the prior year, continued to remain below plan in the second quarter.
Property and casualty operating earnings were $44 million in the quarter, up $100 million versus the prior year quarter, primarily due to lower catastrophes as compared to the record prior year levels. That said, pre-tax catastrophe losses of $144 million were above our plan. The combined ratio for property and casualty was 102.3%, or 83.4% excluding catastrophes in the quarter. This result was significantly better than the combined ratio of 121.7%, or 85.9% excluding cats in the second quarter of 2011. Latin America operating earnings were $135 million, up 5% year-over-year. On a constant rate basis, operating earnings were up 19% due to business growth across the region, operating synergies, and higher investment yields. Underwriting results were favorable to plan, primarily in Mexico. We expect underwriting in Latin America to continue to be favorable for the balance of the year.
Mortality results in the U.S. were modestly unfavorable in the quarter compared to the prior year quarter. Group life's loss ratio for the quarter was 87.3%, higher than the very strong prior year quarter of 82.1%, but right within our expectations. Retail life's mortality ratio was 85.6% in the quarter, higher than the prior year quarter of 84.4%. However, reinsurance recoveries were better in the quarter, resulting in an improvement of overall underwriting results year-over-year. Premiums, fees, and other revenues for the Americas were $8.4 billion, down 1% from the prior year quarter. Higher separate account fees and retail annuities, solid dental premiums, and non-medical health were offset by lower pension closeouts. In non-medical health, results this quarter reflect nearly $100 million of premiums from the TRICARE Dental contract, which became effective May 1st.
Also, in Latin America, while revenues were up 1% year-over-year, they were up 13% on a constant rate basis, driven by growth in accident and health and strong immediate annuity sales. Let me turn to the Asia region. Operating earnings in the Asia region were $275 million, up 61% from $171 million in the prior year quarter, and up 25% after adjusting for one-time items, most notably, $44 million of higher claims and expenses in the second quarter of 2011 as a result of the earthquake and tsunami in Japan. We are seeing solid growth in new business in Japan, as well as strong persistency gains year-over-year, particularly for accident and health products. Premiums, fees, and other revenues in Asia were $2.3 billion, up 6% from the prior year quarter on both a reported and constant rate basis.
Growth was driven by new business in Japan and persistency gains in both Japan and Korea. Total sales for the region grew 13%, driven by Japan, which was up 33% year-over-year, as well as strong growth in China and Australia. For the region, key product drivers were life and accident and health sales in Japan and A&H sales in China, as well as group sales in Australia. In EMEA, operating earnings were $82 million, up 28% from the second quarter of 2011 and up 46% on a constant rate basis. This increase was due to expense improvements, business growth in several countries, and the benefit of a one-time item in the quarter that I discussed earlier. EMEA premiums, fees, and other revenues were $815 million, down 4% versus the prior year quarter on a reported basis and up 3% on a constant rate basis.
EMEA sales grew 13% compared to the second quarter of 2011, driven by Turkey, credit life sales in Russia, and strong sales in our Gulf countries. This is a solid result despite the challenging market conditions across the region. Let me turn to investments. Let's start with our realized investment gains and losses. In the second quarter, we had after-tax investment portfolio net gains of $4 million. Included in this net gain were impairments of $36 million after tax. We expect investment portfolio net losses to remain relatively modest for the remainder of the year. Moving to our commercial mortgage holdings. This portfolio continues to perform well. As of June 30th, our valuation allowance was $300 million, down from $368 million at the end of the first quarter.
The loan-to-value ratio of our portfolio improved again this quarter to 59% from 60% as valuations continue to improve in the markets where we invest. As of June 30th, there were no delinquent loans in the portfolio and no losses recorded during the quarter on this $41 billion portfolio. With respect to our derivatives portfolio, we had after-tax gains of $1.3 billion that were driven primarily by lower interest rates and the impact of MetLife's credit spreads. As a reminder, derivative gains or losses related to MetLife's credit spreads do not have an economic impact on the company. Let me discuss the balance sheet and capital position. Cash and liquid assets at the holding companies at June 30th totaled approximately $5.3 billion, which is on track with our 2012 guidance.
This includes a $1.5 billion residual capital remittance from our Japan operation in May as it converted from a branch to a subsidiary, offset by the deployment of $397 million as we repaid senior debt that matured in June. Our Japan solvency margin ratio on the new basis was 847% as of March 31st, 2012, and well above our target ratio of 600%. Due to accounting rules, this included the effect of the planned residual capital remittance, which was largely offset by a surplus relief transaction that occurred in the first quarter. Next, I would like to provide you with an update on our U.S. stat earnings and capital position. Our preliminary second quarter 2012 statutory operating earnings and net income for our domestic insurance companies were approximately $230 million and $630 million respectively. The results were impacted by higher reserves related to the market performance in the quarter.
While reserve adjustments go through the income statement, the hedges in our derivatives portfolio do not go through the income statement, but instead are reflected in unrealized gains. Therefore, our total adjusted capital or TAC increased by $2.1 billion in the quarter, primarily due to unrealized gains on derivatives and other invested assets, and now stands at approximately $30 billion as of June 30th. For the first six months of 2012, statutory operating earnings and statutory net income were approximately $1.7 billion and $1.9 billion, respectively. In conclusion, MetLife had another very good quarter. Our margins remain strong as we continue to focus on generating profitable growth through pricing, underwriting, expense, and investment discipline. As a result, we have been able to grow earnings, maintain a strong balance sheet and capital position in a very challenging environment.
With that, I'll turn it back to the operator so we can take questions.
Ladies and gentlemen, if you do wish to ask a question at this time, please press star then one on your touch tone phone. You'll hear a tone indicating you've been placed in queue, and if using a speakerphone, please pick up your handset before pressing the numbers. Once again, if there are any questions from the phone lines at this time, please press star followed by the one on your touch tone phone. Our first question today comes from the line of Suneet Kamath from UBS. Please go ahead.
Thanks, and good morning. Question, I guess, for Steve. On the capital, I appreciate that you can't really talk about what the Fed or the FDIC might do, but this is a management team that's always been sort of planning for contingencies, and as we think about the capital that's building here, I think you're pretty much on track, as you said, in terms of where you're going to be at the end of the year. If you can't return capital to shareholders, what is plan B in terms of redeploying that capital? I mean, does M&A all of a sudden become a lot more compelling, and do you think there's opportunities out there or anything in the pension transfer market? I mean, just kind of get a sense of what's going to happen in this capital that's clearly building and is not needed for your core business right now.
Thanks.
I think it's premature for me to say that we'll do one thing or another. We're still working hard to de-bank and be able to take capital actions. In terms of M&A, I wouldn't say that if we have an interim period where we can't return capital or raise our dividend, that that somehow changes our analysis around whether we should buy or not buy a company that's for sale at some price. I would still look at it as it needs to be accretive to earnings. We're not going to kind of let our standards slip based upon our inability in the short term to return capital to our shareholders above the current levels of our dividend.
That's great. Is there anything out there that you're seeing versus perhaps the last time you spoke to us in terms of M&A opportunities? Is it pretty much the same?
As you know, we look at most anything that is in our general scope of businesses we're in currently. I'm sure you're aware there are a number of properties today for sale. I anticipate there'll be a number of other properties available for sale in the coming months and years as well, particularly in light of capital rules in Europe and elsewhere. We're remaining disciplined. I think MetLife has proven over the years that we don't get caught up in the frenzy of the moment in terms of buying properties. I've said before that we're not going to adjust our standards around what is a good transaction or not a good transaction, either strategically or in terms of pricing of a deal based upon what the competition is doing.
We're going to remain disciplined, and we're confident that we can, over time, make appropriate acquisitions at prices that make sense for our shareholders.
Great. My follow-up question or second question is for Bill Wheeler. Obviously, the underwriting results in the Americas were strong. I think we're seeing some mixed results from some of your peers. Can you just talk about what you're seeing in terms of pricing, particularly in some of the group insurance lines? If you think that kind of what you're seeing in the market is truly reflective of the current interest rate environment, or are people sort of pricing based on an expectation that eventually rates will rise? Just any color there would be helpful. Thanks.
Sure. You kind of mixed two ideas there. In terms of sort of group underwriting, I would say that the environment is clearly better, and the number of people who I think were probably too aggressive, I think it's caught up with them in their results. I think they're showing a lot more discipline now, and that's just good for us. I think the other thing, too, obviously, is that our underwriting discipline over the last couple of years, the contrast is pretty stark with some of our peers. I think that's good. In terms of interest rates and how that might be influencing pricing.
We've seen yet another kind of dip here in interest rates, from the 10-year treasuries, sort of the two-ish range down to one and a half. I'm not sure everybody's caught up yet with that reality in terms of their pricing. I would guess you're going to see more pricing adjustments coming from the industry because of it. I think when interest rates get this low, obviously that really starts to pressure ROIs on product sales. It takes a little bit of time, I think, for pricing to adjust. I'm sure some people probably think that, "Gee, I'll just wait and I'm sure it'll get better. How could it possibly get lower?" I think people have been saying that line for quite a while now, and it's not come true.
We view this as an opportunity, obviously, to change prices if we need to in certain areas. We've been pricing pretty aggressively in places like UL and obviously the variable annuity business for quite some time now. That's had an effect on our sales levels there, but I think that's made good sense to do.
Okay. Thank you.
We do have a question from the line of John Nadel with Sterne Agee. Please go ahead.
Good morning, everybody. Maybe for Bill, I was hoping we could revisit a slide from your investor day and get a sense for how things maybe have or haven't changed, given the first half of the year results. The slide I'm referring to is the one that showed sort of three different categories of return on equity with a bunch of different businesses categorized in 15% or greater, 10%-15%, and then under 10. In particular, focused on the group disability and the annuity business, both of which were under 10. I'm wondering if there's been any change there.
I think with regard to the annuity business, the answer is probably no. Our new product sales ROIs in this quarter, even with relatively low interest rates, we calculate our ROI to be about high 13s as an average for the quarter. Probably by the end of the quarter, given where interest rates have moved to, it would probably move to something more like 13. We're changing some more of our features on our VAs. We're altering the dollar-for-dollar feature, which I think will improve the ROI in the out quarters. It's a big block, so it's hard to move the overall ROE there, but new product pricing is good. Secondly, with regard to disability, our book is really starting to turn, and you can see that in terms of our underwriting results and the profitability of it.
Again, this is in pretty stark contrast to most of our peers in the group disability business, I'm hard pressed to actually explain why. Our book is different than theirs, and if you've been aggressive, I think you're getting punished for it. Incidence rates are down. Claim closure rates are still elevated. Underwriting isn't yet where it should be or could be, we think in the future. Clearly, the ROE of that book is improving.
Bill, just as a quick follow-up on that. In the group disability business, how do we think about 100 basis points of loss ratio improvement there? How much does that move the ROE, roughly?
I'm not sure off the top of my head. Crudely, something like a point.
Okay. Separately, I guess the question for Eric. Just thinking about Asia and EMEA, those are the two other primary segments where I don't think we really have any strong or any real idea what the ROEs are today. Can you give us some sense?
That's an interesting question, John. We have not been giving any returns out on the segments, as you know. We've been working through our economic capital that is associated with how we allocate equity. The returns, I would say, in both of those operations are quite good, but I'm not going to give out a number.
Okay. Understood. Maybe some further disclosure going down the road. Last one's just a quick one. Given the severity of drought conditions, is there any reason we should be thinking about potential losses on the agricultural mortgage portfolio?
John, it's Steve Goulart. The answer is no.
Okay.
We obviously have been following that closely in our portfolio, but we don't think it would have any material impact. Also remember, an advent in that market has been crop insurance over the last few years. Most of our borrowers are insured through their crop insurance programs as well, but we don't think it'll have any material impact on us.
Okay. Thank you. Was just curious. Thank you.
Bank of America. Please go ahead.
Thank you. Good morning. I think my first question is for Steven Kandarian. There is a debate about whether GAAP or statutory will be the basis for regulation of insurance companies if they are designated non-bank SIFIs. I'm just wondering, is it reasonable to assume that the bank capital model framework that underpins the CCAR analysis would be a workable model for life insurers as long as there are revisions to how separate accounts are treated, the capital charges are designed to appropriately reflect the risk of corporates? Just that there's generally a clear understanding that derivatives are used exclusively to hedge economic risks, an approach that can introduce, I guess, what we would call uneconomic outcomes on a GAAP basis from quarter to quarter.
We've said that our feeling is that the RBC framework really makes the most sense in terms of regulating the industry. Obviously, there's improvements that have been made to the RBC framework over a number of years. There could be further improvements made, but we think that's the best way to look at the risks in our industry. If it is decided that insurance companies are deemed as being systemically risky, then the framework will come out of the Federal Reserve. At this point in time, we really don't have a great deal of insight as to how they will sort all that out. If they use more of a bank framework with a modification, we want to see the details of that to determine whether or not we think that is an appropriate way to regulate a company like ours.
They have made statements on the record out of Washington at the most senior levels of the Fed, the Treasury, that a purely banking model would not make sense in terms of regulating the insurance industry. Those are favorable comments from our perspective. Again, the detail is going to be the key here, and those details have not been sorted out. They have not been finalized. It's very early days on the details of the regulatory framework, if there is one for us.
Okay. Thank you. My follow-up is for Bill Wheeler on the interest rate assumption behind product pricing. Bill, I think you mentioned that VA marginal returns, it sounds like came down only slightly during the quarter despite a material decline in the 10-year Treasury yield.
Maybe some further disclosure going down the road. Last one's just a quick one. Given the severity of drought conditions, is there any reason we should be thinking about potential losses on the agricultural mortgage portfolio?
John, it's Steve Goulart. The answer is no.
Okay.
We obviously have been following that closely in our portfolio. We don't think it would have any material impact. Also remember, an advent in that market has been crop insurance over the last few years. Most of our borrowers are insured through their crop insurance programs as well. We don't think it'll have any material impact on us.
Okay. Thank you. Was just curious. Thank you.
Bank of America, please go ahead.
Thank you. Good morning. I think my first question is for Steven Kandarian. There is a debate about whether GAAP or statutory will be the basis for regulation of insurance companies if they are designated non-bank SIFIs. I'm just wondering, is it reasonable to assume that the bank capital model framework that underpins the CCAR analysis would be a workable model for life insurers as long as there are revisions to how separate accounts are treated, the capital charges are designed to appropriately reflect the risk of corporates, Just that there's generally a clear understanding that derivatives are used exclusively to hedge economic risks, an approach that can introduce, I guess, what we would call uneconomic outcomes on a GAAP basis from quarter to quarter?
We've said that our feeling is that the RBC framework really makes the most sense in terms of regulating the industry. There's improvements that have been made to the RBC framework over a number of years. There could be further improvements made, we think that's the best way to look at the risks in our industry. If it is decided that insurance companies are deemed as being systemically risky, the framework will come out of the Federal Reserve. At this point in time, we really don't have a great deal of insight as to how they will sort all that out. They use more of a bank framework with a modification, we want to see the details of that to determine whether or not we think that is an appropriate way to regulate a company like ours.
They have made statements on the record out of Washington at the most senior levels of the Fed, the Treasury, that a purely banking model would not make sense in terms of regulating the insurance industry. Those are favorable comments from our perspective. Again, the detail is going to be the key here, and those details have not been sorted out. They have not been finalized. It's very early days on the details of the regulatory framework, if there is one for us.
Okay. Thank you. My follow-up is for Bill Wheeler on the interest rate assumption behind product pricing. I think you mentioned that VA marginal returns, it sounds like came down only slightly during the quarter despite a material decline in the 10-year Treasury yield. Did I hear that correctly? If I did, I guess that's implying that this product is not nearly as interest sensitive maybe as some people anticipate?
Well, okay. First, you used the phrase word marginal. I just need to correct you. These are not marginal returns. These are fully allocated, fully costed returns on the product.
Oh, yeah, I'm sorry. I meant marginal as meaning new business returns.
No, I know. It was a good chance. I took the opportunity. Well, look, they're obviously somewhat interest rate sensitive, but remember now, the underlying guarantees and the minimum interest rates for annuitization are still very low. I think the minimum annuitization rate now is 1% in the guarantee. Even though, yes, they came down, there's still a cushion there, obviously. There's a lot of parts of the economics of these products. It isn't all about the guarantee, of course. The base fee itself is very profitable. Sure, when I say there's no interest rate sensitivity, a couple of quarters ago or two quarters ago, the ROI here was in the 15s or higher. We have seen it tick down. I'm not real happy with high 13s, but I think given where interest rates are, that's pretty good.
There's been some sensitivity, but the point of it is this is still a product which earns above our cost of capital. We think we're still adding value with each sale. That's the most important thing.
Just one quick one on the life side. If you were to look at what you would view to be the appropriate pricing of interest-sensitive individual life products, I know that's a broad category, but how much do prices have to change if we were to assume 1.5% 10-year treasury versus 2.5%? Is that a very significant change given how the products are already designed with the minimums that are in place today?
I think it's a reasonably significant change. We just priced one of those interest rate sensitive products. We raised prices 15%. Okay, now that was not just based on interest rates in the last couple of quarters, but pricing in the UL category has been moving up aggressively now for a couple of years, and I don't think that's going to stop.
Okay. Thank you very much.
We do have a question from the line of Mark Finkelstein from Evercore Partners. Please go ahead.
Hi. Good morning. Thank you for the rate disclosure. I guess I'll ask the somewhat obvious follow-up, which is, are there any capital impacts with this lower rate as you look out to 2016 above and beyond what you kind of told us in your interest rate disclosures at this lower rate?
Hey, Mark, it's Eric. Let's just review the bidding on what we did previously. We said that in the.
Did I hear that correctly? If I did, I guess that's implying that this product is not nearly as interest sensitive maybe as some people anticipate?
Well, okay. First, you used the word marginal. I just need to correct you. These are not marginal returns. These are fully allocated, fully costed returns on the product.
Oh, yeah, I'm sorry. I meant marginal as meaning new business returns.
No, I know. It was a good chance. I took the opportunity. Well, look, they're obviously somewhat interest rate sensitive, but remember now, the underlying guarantees and the minimum interest rates for annuitization are still very low. I think the minimum annuitization rate now is 1% in the guarantee. Even though, yes, they came down, there's still a cushion there, obviously. There's a lot of parts of the economics of these products. It isn't all about the guarantee, of course. The base fee itself is very profitable. Sure, when I say there's no interest rate sensitivity, a couple of quarters ago or two quarters ago, the ROI here was in the 15s or higher. We have seen it tick down. I'm not real happy with high 13s, but I think given where interest rates are, that's pretty good.
There's been some sensitivity, but the point of it is this is still a product which earns above our cost of capital. We think we're still adding value with each sale. That's the most important thing.
Just one quick one on the life side. If you were to look at what you would view to be the appropriate pricing of interest-sensitive individual life products, I know that's a broad category, but how much do prices have to change if we were to assume 1.5% 10-year treasury versus 2.5%? Is that a very significant change given how the products are already designed with the minimums that are in place today?
I think it's a reasonably significant change. We just priced one of those interest rate sensitive products. We raised prices 15%. Okay, now that was not just based on interest rates in the last couple of quarters, but pricing in the UL category has been moving up aggressively now for a couple of years, and I don't think that's going to stop.
Okay. Thank you very much.
We do have a question from the line of Mark Finkelstein from Evercore Partners. Please go ahead.
Hi. Good morning. Thank you for the rate disclosure. I guess I'll ask the somewhat obvious follow-up, which is, are there any capital impacts with this lower rate as you look out to 2016 above and beyond what you told us in your interest rate disclosures at this lower rate?
Hey, Mark, it's Eric. Let's just review the bidding on what we did previously. We said that in the last interest rate presentation that Steven referred to, that we would have no stat reserve strengthening, but that we expected to have modest actions year after year after year. We said there would be no GAAP loss recognition in the U.S. We said we would probably have, let's call it $400 million to $450 million after-tax impact on DAC, mostly incurring in the back end of that five-year outlook. We said there is potential pressure on retirement products goodwill. At this point, I am just going to make a blanket statement here. Anything I say here is going to be subject to what we learn in actual testing, okay?
Right.
Which is beginning both for CFT, loss recognition, goodwill testing, et cetera. Okay? Having said that, I think maybe the change here would be, I feel compelled to say that modest stat reserve strengthening could be required if rates stay low. For GAAP loss recognition, as we think about it from the point of view of August 1st here, August 2nd, whatever date this is, we do not see a lot of loss recognition in the near term, but again we will have to see what happens as we go through testing. We still do not see, given our current methodology, a big DAC impact in the next couple of years. I would certainly then finally add that there remains pressure on our goodwill, specifically for the retirement products.
We are starting goodwill testing now, and we will have to see where we come out as we get to the end of the year here. I am increasing it using the word modest, but always subject to what we learn as we go through all the various tests.
Okay. That is helpful. Question on corporate benefit funding, and I guess more directly on the pension closeout market. Obviously, you saw Prudential do a big transaction in the quarter. AIG has talked more constructively about this market. I am interested in how you are thinking about, one, the opportunities with pension closeouts, and two, I guess how you are thinking about the opportunity in terms of capital deployment. They can be larger transactions, but on the other hand, it also adds significant asset to equity leverage. If you could just comment on the opportunities and broadly how you are thinking about that business for now.
Sure Mark. Look, I think you framed it out really well. The General Motors transaction, I think it's fair to view that as a bit of a catalyst. I think that's causing other corporate treasurers of large traditional companies with old traditional pension plans to think hard about what they should be doing. Certainly, there's a lot more conversation now than there was pre-GM. The counter to that, of course, is interest rates keep ticking down, and I think that makes pension closeouts more difficult. There's contrary trend influences there. I do think you'll see more deals, more big deals, despite the low interest rates.
In the last interest rate presentation that Steve referred to, that we would have no stat reserve strengthening, but that we expected to have modest actions year after year after year. We said there'd be no GAAP loss recognition in the U.S. We said we'd probably have a, let's call it $4 million-$450 million after-tax impact on DAC, mostly incurring in the back end of that five-year outlook. There's potential pressure on retirement products goodwill. At this point, and I'm just going to make a blanket statement here. Anything I say here is going to be subject to what we learn in actual testing, okay?
Right.
Which is beginning both for CFT, loss recognition, goodwill testing, et cetera. Okay? Having said that, I think maybe the change here would be, I feel compelled to say that modest stat reserve strengthening could be required if rates stay low. For GAAP loss recognition, as we think about it from the point of view of August 1st here, August 2nd, whatever date this is, we don't see a lot of loss recognition in the near term, but again we'll have to see what happens as we go through testing. We still don't see, given our current methodology, a big DAC impact in the next couple of years. I would certainly then finally add that there remains pressure on our goodwill, specifically for the retirement products.
We're starting goodwill testing now, and we'll have to see where we come out as we get to the end of the year here. I'm increasing it using the word modest, but always subject to what we learn as we go through all the various tests.
Okay. That's helpful. Question on corporate benefit funding, I guess more directly on the pension closeout market. Obviously, you saw Pru do a big transaction in the quarter. AIG's talked more constructively about this market. I'm interested in how you're thinking about, one, the opportunities with pension closeouts, and two, I guess how you're
Thinking about the opportunity in terms of capital deployment, they can be larger transactions, but on the other hand, it also adds significant asset to equity leverage. If you could just comment on the opportunities and broadly how you're thinking about that business for now.
Sure, Mark. Look, I think you framed it out really well. The General Motors transaction, I think it's fair to view that as a bit of a catalyst. I think that's causing other corporate treasurers of large traditional companies with old traditional pension plans to think hard about what they should be doing, and certainly there's a lot more conversation now than there was pre-GM. The counter to that, of course, is interest rates keep ticking down, and I think that makes pension closeouts more difficult. There's contrary trend influences there. I do think you'll see more deals, more big deals, despite the low interest rates. In terms of how we're approaching it, a big pension closeout is a big sort of one-off transaction. It's not unfair to think of it like a big M&A deal. It's a large transfer of assets.
The capital considerations there are significant. We, just like an M&A deal or anything else which is a big capital transaction, have to evaluate that capital that would get allocated to that deal versus other alternatives that are available to the company. We will not do a big closeout just so we can print a big deal. Okay. If it doesn't add shareholder value and get us the right kind of returns on our capital, we will not do it. That's got to be our discipline. Look, I think our track record about being disciplined about those kind of decisions is pretty good. That's got to be how we look at it.
Okay. That's helpful. Finally, just a follow-up on annuities. When do you expect the pricing changes that you've announced, including, I guess, changes to the dollar-for-dollar withdrawal benefit, to be implemented? Would the IRRs on the product at this rate environment be pushed over 15% with those changes?
The dollar-for-dollar adjustment, I think, is implemented in August. I think there are other changes we're making. Some of those are occurring this month. I guess we're in August, technically, I meant some of them were implemented in July. I don't think the dollar-for-dollar change, given where interest rates are, will push it back to 15%, but it'll push it, I think, closer to 14%.
The overall changes, do you get over 15%?
Well, no. The other changes won't necessarily improve the ROI because they're more about the in-force.
Interesting.
The ROI on new sales.
Okay.
Okay.
Thank you.
We do have a question from the line of Chris Giovanni with Goldman Sachs. Please go ahead.
Thanks so much. Most have been asked, but I guess a question for Bill Wheeler on Latin American business. This is obviously a region that you guys like. I think you want to get bigger here, given that you didn't get a lot with the Alico acquisition. I guess, how are you thinking about the opportunity there, given the decline in short-term rates, how they've moved noticeably lower, and does that really begin to push consumers to begin to venture closer to the products that you guys are offering in that region?
I think in most of the countries, the interest rates aren't having, I'd say, a big impact on our insurance sales. I think the one area where you see this phenomenon, where it's a real trade-off between an insurance product and a bank deposit is in Brazil. We're not really very much in that, where insurance products obviously have sort of a built-in interest rate. We're not very heavy into that market, and we're certainly not trying to compete with those kinds of products. The reason Latin America in terms of how we're approaching it, a big pension closeout is a big sort of one-off transaction. It's not unfair to think of it like a big M&A deal. It's a large transfer of assets. The capital considerations there are significant.
We, just like an M&A deal or anything else which is a big capital transaction, have to evaluate that capital that would get allocated to that deal versus other alternatives that are available to the company. We will not do a big closeout just so we can print a big deal. Okay? If it doesn't add shareholder value and get us the right kind of returns on our capital, we will not do it. That's got to be our discipline. Look, I think our track record about being disciplined about those kind of decisions is pretty good. That's got to be how we look at it.
Okay. That's helpful. Then finally, just a follow-up on annuities. When do you expect the pricing changes that you've announced, including, I guess, changes to the dollar-for-dollar withdrawal benefit, to be implemented? Would the IRRs on the product at this rate environment be pushed over 15% with those changes?
The dollar-for-dollar adjustment, I think, is implemented in August. I think there are other changes we're making. Some of those are occurring this month. I guess we're in August, so technically, I meant some of them were implemented in July. I don't think the dollar-for-dollar change, given where interest rates are, will push it back to 15, but it'll push it, I think, closer to 14.
The overall changes, do you get over 15?
Well, no. The other changes won't necessarily improve the ROI because they're more about the in-force.
Interesting.
The ROI on new sales.
Okay.
Okay.
Thank you.
We do have a question from the line of Chris Giovanni with Goldman Sachs. Please go ahead.
Thanks so much. Most have been asked, but I guess a question for Bill Wheeler on Latin American business. This is obviously a region that you guys like. I think you want to get bigger here, given that you didn't get a lot with the Alico acquisition. I guess, how are you thinking about the opportunity there, given the decline in short-term rates, how they've moved noticeably lower? Does that really begin to push consumers to begin to venture closer to the products that you guys are offering in that region?
I think in most of the countries, the interest rates aren't having, I'd say, a big impact on our insurance sales. I think the one area where you see this phenomenon, where it's a real trade-off between an insurance product and a bank deposit, is in Brazil. We're not really very much in that, where insurance products obviously have sort of a built-in interest rate. We're not very heavy into that market, and we're certainly not trying to compete with those kinds of products. The reason Latin America is really attractive to us is it's all about an emerging middle class that are first-time purchasers of life insurance. Life insurance, as a % of GDP, is growing very nicely, and then GDP itself is growing nicely. There are markets that are developing. Our fastest-growing segments in Latin America right now are in direct marketing, okay?
Which obviously has nothing to do with interest rates, really. It's all about the channel management and driving growth. In general, I would tell you that we really do like Latin America. Obviously, it's a big segment for us. The returns are very good. The growth rates are good. Our top-line growth, adjusting for currency, was 13% this quarter. We have very good management teams down there. They're seasoned. Our market position, we're number one in four of the six Latin American countries we participate in. We're very well-positioned. Obviously, it's an area where there'll be a lot of emphasis going forward.
A question for Steven Goulart. Given the challenge to find yield, I guess coupled with the challenge to deploy some of the capital that you guys have, curious if you're at all enticed by the yields in Europe and if you'd consider putting more money to work there to offset some of the lower new money rates you guys are seeing.
I think you know we've always been a pretty conservative investor, and it's always most important to make sure that we can pay off our liability. We're always looking for relative value propositions, but I don't think we're comfortable with, by and large, what you'd see in peripheral Europe. Just given our European portfolios, though, we continue to invest in Europe, but they tend to be in the safer economies and in very strong corporates.
Thanks so much.
Our next question comes from the line of John Hall with Wells Fargo. Please go ahead.
Good morning, everyone. In Bill's commentary, he mentioned cost of capital, and I was just wondering, what is it that you consider to be your cost of capital? In that construct, what are you using and considering your beta as right now?
Oh, boy, I stepped into that one, didn't I? That's a very interesting question. Maybe I'll talk a little bit, maybe Mr. Kandarian, because obviously, this is a big focus inside MetLife right now. I would just say our cost of capital, I would say in general, sort of the rule of thumb we're looking at in terms of how we price products is roughly 12%. That's sort of a blended cost of capital across all products. That's obviously up over what we, I would think most people would have said it was a couple of years ago. When we price products, in our minds, if they don't earn at least 12, we think we're destroying value. That's guiding us in our pricing. In terms of sort of the general philosophy and where we are, let Steve do that.
Hi, John.
Attracted to us is it's all about an emerging middle class that are first-time purchasers of life insurance. Life insurance, as a percentage of GDP, is growing very nicely, GDP itself is growing nicely. There are markets that are developing. Our fastest-growing segments in Latin America right now are in direct marketing, okay? Which obviously has nothing to do with interest rates, really. It's all about the channel management and driving growth. In general, I would tell you that we really do like Latin America. Obviously, it's a big segment for us. The returns are very good. The growth rates are good. Our top-line growth, adjusting for currency, was 13% this quarter. We have very good management teams down there. They're seasoned. Our market position, we're number one in four of the six Latin American countries we participate in. We're very well-positioned.
Obviously, it's an area where there'll be a lot of emphasis going forward.
Okay, maybe a question for Steven Goulart. Given the challenge to find yield, and I guess coupled with the challenge to deploy some of the capital that you guys have, curious if you're at all enticed by the yields in Europe and if you'd consider putting more money to work there to offset some of the lower new money rates you guys are seeing.
Well, I think you know we've always been a pretty conservative investor, and it's always most important to make sure that we can pay off our liability. We're always looking for relative value propositions, but I don't think we're comfortable with, by and large, what you'd see in peripheral Europe. Just given our European portfolios, though, we continue to invest in Europe, but they tend to be in the safer economies and in very strong corporates.
Thanks so much.
Our next question comes from the line of John Hall with Wells Fargo. Please go ahead.
Good morning, everyone. In Bill's commentary, he mentioned cost of capital. I was just wondering, what is it that you consider to be your cost of capital? In that construct, what are you using and considering your beta as right now?
Oh, boy, I stepped into that one, didn't I? That's a very interesting question. Maybe I'll talk a little bit. Maybe Mr. Kandarian, because obviously, this is a big focus inside MetLife right now. I would just say our cost of capital, I would say in general, sort of the rule of thumb we're looking at in terms of how we price products is roughly 12%. That's sort of a blended cost of capital across all products. That's obviously up over what we, I would think most people would have said it was a couple of years ago. When we price products, in our minds, if they don't earn at least 12%, we think we're destroying value. That's guiding us in our pricing. In terms of sort of the general philosophy and where we are, let Steve do that.
Hi, John. We look at this very closely, and we've talked about it internally in terms of not just the product pricing, but overall strategy at MetLife. I'd say if you kind of impute a cost of capital to MetLife's equity right now, it's higher than the 12% number that Bill just referred to. We believe that is a temporary level of equity capital cost to us, and we have to really look at this at a longer timeframe because basically right now the markets are very volatile, probably driven by things like low rates, obviously, for industry, regulatory overhangs of larger insurers, and so on. That's driven up the perception in the marketplace about what our beta is. It certainly is now closer to a two beta as opposed to historical norm closer to one or 1.1.
As we think of our business, I wouldn't, for example, on the flip side, say if our beta dropped just hypothetically to below one, let's say 0.6 or something, that all of a sudden we're going to print a bunch of business at 8%. We wouldn't think that would be the prudent thing to do longer term. Similarly, if things are spiking up because of near-term volatility out there, we have to kind of look past that in a short timeframe. Bill gave the answer about how we're looking at our products right now. Clearly, our cost of capital is higher than historical because our beta is significantly higher than the historical 1.1 times that we've seen.
Thanks, Steve. Just sort of to follow up, and this is going out the plank a little bit. Say MetLife is designated a non-bank SIFI. What effect do you think that would have on your cost of capital?
John, I think it depends on what the rules look like. Analysts have looked at this both ways and said, on the positive side, you get the good housekeeping seal of approval of the federal government. You're too big to fail. You're safe to do business with. It could lower your beta is one theory. The flip side is there could be very harsh rules around the regulation and capital requirements, and that could make you unattractive in some ways that could raise your cost of capital. Until the rules are written, I think it's just we're all speculating as to the ultimate impact. What we have said, certainly on the record, is that we don't think that we really should fall under Dodd-Frank in this regard and should not be designated systemic.
If we are so designated, let's be sure these rules really are appropriate for the risks of our company.
Great. Thanks very much.
Our last question of the day comes from the line of Thomas Gallagher with Credit Suisse. Please go ahead.
Good morning. First question was just on the interest rate impact guidance. I guess this would be for Eric. Is the reason the incremental drop in rates has essentially minimal impact on EPS for the next three years because your initial?
We look at this very closely, and we've talked about it internally in terms of not just the product pricing, but overall strategy at MetLife. Say, if you kind of impute a cost of capital to MetLife's equity right now, it's higher than the 12% number that Bill just referred to. We believe that is a temporary level of equity capital cost to us. We have to really look at this at a longer timeframe, because basically right now the markets are very volatile, probably driven by things like low rates, obviously, for industry, regulatory overhang for larger insurers, and so on. That's driven up the perception in the marketplace about what our beta is. It certainly is now closer to a two beta as opposed to historical norm, closer to one or 1.1.
As we think of our business, I wouldn't, for example, on the flip side, say if our beta dropped just hypothetically to below one, let's say 0.6 or something, that all of a sudden we're going to print a bunch of business at 8%. We wouldn't think that would be the prudent thing to do longer term. Similarly, if things are spiking up because of near-term volatility out there, we have to kind of look past that in a short time frame. Bill gave the answer about how we're looking at our products right now, but clearly our cost of capital is higher than historical because our beta is significantly higher than the historical 1.1 times that we've seen.
Thanks, Steve. Just sort of to follow up, and this is going out the plank a little bit. Say MetLife is designated a non-bank SIFI. What effect do you think that would have on your cost of capital?
John, I think it depends on what the rules look like. Analysts have looked at this both ways and said, on the positive side, you get the good housekeeping seal of approval of the federal government. You're too big to fail. You're safe to do business with. It could lower your beta, is one theory. The flip side is there could be very harsh rules around the regulation and capital requirements, and that could make you unattractive in some ways that could raise your cost of capital. Until the rules are written, I think it's just we're all speculating as to the ultimate impact. What we have said, certainly on the record, is that we don't think that we really should fall under Dodd-Frank in this regard and should not be designated systemic.
If we are so designated, let's be sure these rules really are appropriate for the risks of our company.
Great. Thanks very much.
Our last question of the day comes from the line of Thomas Gallagher with Credit Suisse. Please go ahead.
Good morning. First question was just on the interest rate impact guidance. I guess this would be for Eric. Is the reason the incremental drop in rates has essentially minimal impact on EPS for the next three years because your initial guide was conservative enough in that it didn't assume much benefit from lowering crediting rates, but now you are? Or can you help us get to kind of what's behind those assumptions?
Look, these are big exercises, so obviously everything is thought about within a range. When we went out with that guidance, we thought we had a reasonable range here. Now that we've done a refresh of this, I think it kind of confirms what we thought previously and now just simply adds to that. We've got a couple of things going on here. We always thought when we made that presentation last year, that we not only had room in crediting rates, but that we would take advantage of that if rates continue to decline. That's number one. In some of our portfolios, I think we're probably better cash flow matched than anybody externally would actually think. Third, we've got a lot of interest rate protection. We've got all these floors and swaptions and swaps that we've talked about.
Floor income year-over-year is meaningful and could continue to be meaningful depending on if rates stay here or frankly, even if they went a little bit lower. I guess I'll give you a sense, because I know we've talked about this publicly, like in our UL block, a third of that block is at minimum guarantees. Here, where we are today, end of the second quarter, a third of the block is at the minimum guarantees. I don't know what you would have thought that number was, but that means obviously we've got two-thirds to go. It's in the 70% range on the general account annuity blocks. Putting all those things together, the impact from where we were to here is minimal.
Okay, got it. Just two quick follow-ups, if I could. Eric, you had mentioned retirement products goodwill potentially comes under scrutiny, I guess, at year-end. Can you remind us how big that is?
$1.7 billion.
Okay. Lastly, we're starting to see some of your competitors in long-term care obviously having some pressure because of low rates, and that's just mechanical. In addition to that, you're also seeing adverse claims trends. I'm curious what you guys are seeing, because I think generally you have a newer vintage book. Can you comment at all on what you're seeing on long-term care and sort of the outlook for that business?
Oh, you want to go?
Well, Bill would like to do that one.
I was ready.
I just want to prove I know. Let me start by saying, just to remind everyone, we exited the long-term business a couple of years ago. There was a modest tick-up in claims activity this quarter, so underwriting results were down a little bit, but it wasn't very material. In terms of kind of managing the block, I use the word immunize it loosely.
Was conservative enough in that it didn't assume much benefit from lowering crediting rates, now you are? Can you help us get to kind of what's behind those assumptions?
Look, these are big exercises, obviously everything is thought about within a range, when we went out with that guidance, we thought we had a reasonable range here. Now that we've done a refresh of this, I think it kind of confirms what we thought previously and now just simply adds to that. We've got a couple of things going on here. We always thought when we made that presentation last year, that we not only had room in crediting rates, but that we would take advantage of that if rates continued to decline. That's number one. In some of our portfolios, I think we're probably better cash flow matched than anybody externally would actually think. Third, we've got a lot of interest rate protection. We've got all these floors and swaptions and swaps that we've talked about.
Floor income year-over-year is meaningful and could continue to be meaningful, depending on if rates stay here or frankly, even if they went a little bit lower. I guess I'll give you a sense, because I know we've talked about this publicly. Like in our UL block, a third of that block is at minimum guarantees. Here, where we are today, end of the second quarter, a third of the block is at the minimum guarantees. I don't know what you would have thought that number was, but that means obviously we've got two-thirds to go. It's in the 70% range on the general account annuity blocks. Putting all those things together, the impact from where we were to here is minimal.
Okay. Got it. Just two quick follow-ups, if I could. Eric, you had mentioned retirement products goodwill potentially comes under scrutiny, I guess, at year-end. Can you remind us how big that is?
$1.7 billion.
Okay. Lastly, we're starting to see some of your competitors in long-term care obviously having some pressure because of low rates, and that's just mechanical. In addition to that, you're also seeing adverse claims trends. I'm curious what you guys are seeing, because I think generally you have a newer vintage book. Can you comment at all on what you're seeing on long-term care and sort of the outlook for that business?
Oh, you want to go?
Well, Bill would like to do that one.
I was ready.
I just want to prove I know. Let me start by saying, just to remind everyone, we exited the long-term business a couple of years ago. There was a modest tick-up in claims activity this quarter, so underwriting results were down a little bit, but it wasn't very material. In terms of kind of managing the block, I use the word immunize it loosely, but we put in some very long-term interest rate swaps that are in that block to kind of really protect ourselves from just this sort of scenario. We think we're managing interest rates really well there. That said, it's possible that there might need to be some stat. We might add the stat reserves. We have done that historically, I think you know. Not necessarily because we absolutely had to, but because we were starting to get close to the line.
We've been making installment payments, so all along the way in terms of long-term care, and I think that's been prudent, and the way things have played out, it's really prudent. We're in good shape, I think.
Okay. Thanks, guys.
Great. Thank you everyone for joining us today, and have a great rest of the day. Turn it back to you, Brad.
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We put in some very long-term interest rate swaps that are in that block to kind of really protect ourselves from just this sort of scenario. We think we're managing interest rates really well there. That said, it's possible that there might need to be some stat. We might add the stat reserves. We have done that historically, I think you know. Not necessarily because we absolutely had to, but because we were starting to get close to the line. We've been making installment payments, so all along the way in terms of long-term care, and I think that's been prudent, and the way things have played out, it's really prudent. We're in good shape, I think.
Okay. Thanks, guys.
Great. Thank you everyone for joining us today, and have a great rest of the day. Turn it back to you, Brad.
Ladies and gentlemen, this conference will be available for replay anytime after 10:00 A.M. Eastern today through August ninth at midnight. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 226302. International participants may dial 3203653844, and those numbers again are 1-800-475-6701 and 3203653844. Again, entering the access code 226302. That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.