Welcome to MetLife's 2012 Investor Day. Please welcome Vice President of Investor Relations, John McCallion.
Thank you. Good morning, everyone, and thanks for being here. We're excited to have a chance to talk through our strategic review. I know there's a number of folks watching us live via our webcast, so welcome, and good morning, afternoon, or evening, depending on where you're watching us from. We're excited. Let me go through a couple of housekeeping items first. This is our safe harbor statement. It's important that you read this. There's a number of statements here that will be forward-looking in nature, and they can all turn out to be wrong. That's the importance of these next two slides, I guess. We'll also be using non-GAAP measures. We think they're useful for measuring our business. These next three slides give you a sense of how we calculate them, and then you can look in your appendix.
There's reconciliations to the most directly comparable GAAP measures. Here's our agenda for today. Steve's going to open up with an overview of the results from our strategic review. He'll also touch on Asia. As many of you know, we have an Investor Day in Tokyo in September. Steve will make some brief comments on Asia, and then more details to follow in September. He'll turn it over to William Wheeler, President of the Americas, and he'll give you a sense of how the strategic initiatives impact the Americas. We'll take about a 15-minute break or so, and Maria Morris, who heads up our Global Employee Benefits business, will come back up and give you a sense of how she plans to grow that business over the next several years. She'll hand it over to Michel Khalaf. Michel is president of our EMEA region.
Not only will he give you a brief overview of EMEA, but he'll also give you a sense of our emerging market strategy, which as you'll see, we're excited about, and we think we're well-positioned to take advantage of that natural growth story there. We'll take another short break, and Steve will come back up, give some closing remarks, and then he'll ask the presenters to join him on stage, and we'll end the day with Q&A then. With that, it is my great pleasure to introduce our Chairman, President, and Chief Executive Officer, Steven Kandarian.
Good morning, everyone.
Good morning.
You may recall we had an investor call in December of 2011. On that call, we described to you our plans for this year, 2012. We went through the financials. Steven Goulart, our Chief Investment Officer, talked about the investment portfolio, how we were positioning that, how we were managing risks and so on, still getting good returns. We said we were in the middle of a strategic review that was going to take a number of months to complete. We'd be talking to our board about that work we were doing on strategy. We'd be back to you now in May of this year with results. That's why we divided things up in two at that point in time. I'm delighted to be here to go through that with you.
As John mentioned, several of my colleagues will be joining me on the stage over time and talking about their part of the strategy that we're rolling out here. Why do we do a review? We've done them before. A number of you probably have seen or heard from us the results of previous reviews. We did a review in 2007/8. We did another one a couple of years later. Now this is the third one in the last six years. Just by a little bit of background here, you may recall, I joined the company in 2005 as the Chief Investment Officer. In 2007, I was asked to take on the additional responsibilities related to overall corporate strategy.
At that point in time, I formed a team of our senior leaders in the company, and we began a review of not just what we're going to do kind of tactically year-to-year and month-to-month in our own businesses, but where we'd go as a company, what direction we'd be heading in, and looking at all kinds of things, including the external environment. We've now done this three times, and I think one thing I should say to you as a starting point is that the MetLife house, if you want to think of it that way, really has been reconstructed over a number of years. You recall in 2005, we bought Travelers, which really extended our reach both domestically, internationally. A large transaction, over $11 billion transaction. Then, of course, in 2010, we purchased Alico from AIG.
Even a greater transformation, taking us from being largely a domestic company with international division that was about 10%-15% overall of our company to now a truly global company. That really begs the question about how do you run a business like that going forward? How do you really focus on the right things in this much larger, much different organization than even seven years ago, pre-Travelers? Things we looked at. We looked at customer trends, macroeconomic environment, the headwinds that all of us are reading about every day in the newspapers. The regulatory environment, the changing regulatory environment, and the impact that has on our business going forward. The key was to position the company to create long-term shareholder value. If you think of the house analogy, it's not knocking down the house, it's not starting over or doing something completely different.
I want to walk through a little bit of thinking that we went through and share that with you, so you have some sense as to what was going through our minds as we devised this strategy. First, we looked at our existing business and a strong foundation. We have a leading presence in a number of markets, number one in the United States, number one in Mexico, Chile, Russia. Strong positions in places like Poland, Japan. That was a starting point in terms of saying, what do we do really well, where are we well-positioned, how do we play off those strengths? Also strong positions in a number of growth markets, and we'll be talking about that more over the course of the day about our presence in emerging markets.
Of course, a very strong distribution force, I'd say second to none around the globe in terms of the breadth and depth of our distribution. It's always been a strength of ours. A sound investment portfolio and strong risk management. That really served us well through the 2008, 2009 financial crisis, enabling MetLife to purchase Alico, when really no one else in our sector could do it. A very well-established brand, and I'll talk more about that in a bit. I think it's a brand that, to some degree, we really haven't fully taken advantage of, and we're going to do more of that going forward. The middle column here, the challenges. The environment is not a wonderful environment. We all know that. Persistent low interest rates.
We've had that for several years now, predictions that the Fed will keep rates low for quite some time. Regulatory uncertainty. MetLife is currently regulated by the Federal Reserve, among others. We are selling our bank. I'll talk more about that in a few minutes. There's still the looming cloud, will MetLife be a non-bank SIFI under Dodd-Frank? If so, what does that mean in terms of what the rules will be? The insurance industry, in terms of share of wallet of the consumer, has lost ground to other sectors in the financial service world.
People that typically might go and buy an insurance policy as a base of their financial plan when they were young and had just gotten married, had some children, I need to have this protection, now sometimes decide, well, I'll just make a contribution to my 401 or my IRA. Buy some mutual funds, or maybe I'll call my broker and see if I can get in the Facebook deal. Didn't work out so well. That's been a negative trend for us, in terms of opportunities, I think that may turn into an opportunity for us. I use the joke about Facebook. I don't really want to pick on them, the point is, that's wonderful for your upside, what about protecting the base?
What about protecting your family, your own retirement, having the income you need in your later years when you either don't want to or no longer can work? That's where our industry really comes in. I think our industry hasn't done as good a job as perhaps we could have addressing those needs and going to market and working with consumers and potential customers in a way they want to be worked with. Insurance penetration also is increasing in emerging markets. Five or six or seven years ago, we wouldn't have this on our slide because we didn't have exposure, really, in those markets to any great degree. Now we do. Corporations are becoming much more global, just like MetLife. I think most of you know that MetLife really is the preeminent player in the employee benefits space here in the United States.
Taking that expertise and really exporting it across our global platform, we think it's a great opportunity. Some more of our thinking before I get into the details of the strategy. Some guiding principles that we said were important to us as we formed this strategy. Putting the customer at the center of everything we do. That sounds basic. It sounds like you must already do it, I'd say we haven't done it as well as we can. Building on our strengths. As I said, this is a renovation of the house. This isn't a whole new house. Leveraging our global footprint. Expanding our presence in these emerging markets and serving our customers globally. Optimizing our portfolio of businesses. This means really the products, the geographic markets, the distribution channels.
MetLife has a great strength that a number of our competitors can't point to. We really are very diversified along all those measures I just gave you. The advantage of that in what is a competitive business, and clearly insurance is a competitive business, is that when we see things in certain segments of our markets that we think perhaps aren't terribly rational from an economic perspective, we can dial down our efforts in that area if we think that's not good business at that point in time. We've seen this before. We've seen where irrational pricing can enter certain niches of certain markets. We're in a position where we don't have to chase that business because we're so diversified, and we can turn the dials up someplace else in our system.
I think for those of you who listened to our earnings call for Q1 of this year, you saw that in terms of our results. In strengthening our functional capabilities, I think not just MetLife, but our entire industry has to kind of crank it up in terms of how we utilize technology, how we operate around the world, being efficient. Again, it goes back to serving your customer well and also our producers well. The strategy. Here are some foundational aspects to that. First being One MetLife, a global company, a truly global company. I announced a number of months ago that we were going to reorganize in light of our Alico acquisition and the fact that we really are a very different company than we were before Alico, operating now in 47 countries.
You have three regions, and you'll note that there's no U.S. business as to three regions. There's no U.S. region. That was done intentionally. One of the reasons, not the only reason, but one of the reasons we did that was to really shift our thinking around being a global company. Historically, MetLife thought of itself as a U.S. company with this international business over here, which hopefully would grow over time. That's a very different way of looking at business than being truly global. Then being a world-class company. Not just a great life insurance company, but a world-class company by any measure. Then scaling our business. This great global platform has lots of advantages, but it also has some disadvantages. When you're that big, you can become slow and bureaucratic if you don't watch how you're organized.
You have to get that right and make sure that doesn't creep into your culture. Additionally, to offset the negatives about being big, you have to take advantage of the positives. Taking that scale to a new level for us is critical. This is in a nutshell, the strategy we came up with. To refocus our U.S. business, and Bill Wheeler will talk about this more in detail, but the key here is balancing growth, profitability, and risk. Those three things. There can't be too much of a focus on any one of those things. It has to be the right balance.
Building the global employee benefits business that Maria will talk about, growing the emerging markets, which Michel will talk about, we have a significant presence there now, which is a part of our business we think will have great growth prospects in the years to come. I'll talk about in a minute, the customer centricity and global brand initiatives. All right, let me talk about customer centricity first. The key here is really developing a deep understanding of our customers' needs and expectations, really doing business with our customers the way they want to do business, and putting the customer at the center of everything we do. I'll just give you kind of a little sidebar here. I and the rest of my executive group colleagues now engage in phone calls on a periodic basis around customer complaints.
Obviously, we're not doing that because we're the most qualified people to answer a customer complaint. We're doing it so we can really live the experience of what it is to be a MetLife customer, and when things go wrong, what that really means to our customers and what we can do about it as a company. I've taken a number of phone calls myself. I've engaged with customers in a number of different settings. I've learned a great deal. The key here is to drive through our entire culture from the top right down through the entire organization, this sense of putting yourself in the shoes of the customer. Let me also mention a couple of the mantras that I heard when I first came here 7 years ago to MetLife, were as follows. Number one, insurance is sold, not bought.
The translation of that is basically, we kind of push out our products. It's hard for people to buy these products because we're talking about things that are a little uncomfortable to talk about, death, retirement, not having enough money in retirement, disability, and so on. I think we have to really step back and look at what our customers really want from us, and the clarity and maybe even more simplicity that they're seeking from us, and helping them make this an easier process, making it easier for them to complete the process of saying, "I know I need life insurance. I know I need some other product.
How do I get from that starting point of knowing I have a need to actually completing the entire process and making it smooth and making it comfortable for me to do it?" The second mantra was, service that's good enough. That one sort of blew my hair back. Service that's good enough. If you're going to be a world-class company, service that's good enough is not good enough. The theory around that when I asked people about that was, "Well, most of our customers only have one product with us, two products with us at most." They might buy a life insurance policy. We don't hear from them for years. You hear from a beneficiary decades later. Yes, you want to provide adequate customer service, don't get me wrong, but you don't have to go over the top with that.
I think that's really not the right way to look at it. The last point on the left-hand side of the slide talks to that. Have customers come to us, stay with us, buy more from us, I should say, also recommend us to family, friends, and others? If you do it right, the empirical research is pretty clear on this one. You drive higher organic growth rates. You actually lower your costs, which is counterintuitive, perhaps. Initially, you spend money around reorganizing yourself to make the customer the center of everything you do, but eventually, you make things simpler. You reduce the number of complaints. You reduce your costs. Okay. Global brand. MetLife, great brand in the U.S., great brand in Mexico, good brand in many other countries now.
I'd say we have not gotten the balance right between sales support, which has been the center of much of what we do in this area, versus true marketing. Sometimes marketing got interpreted as sales support. I'm not trying to diminish the importance of sales support, but I am saying the balance has to get in a different place. When you think about what we do in our industry, it's a very competitive industry. We can create a novel new product, and six months later, five competitors can copy it. There's no long-term enduring competitive advantage on the product side. If you get customer centricity right, if you get your brand right, those are enduring competitive advantages.
Especially in a time of insecurity, financial insecurity, economic insecurity, and when people start buying these longer-term products and think about, "Will this company really be here for me when I need the company to perform on these promises?" Having a strong brand, being able to convey to people the strength of this company, the reach of this company, our balance sheet, our ability to weather storms as we have on numerous occasions, is critical. We've extended the brand in terms of our presence in the U.S. We signed up the former Meadowlands Stadium. It's now MetLife Stadium. It's been a great addition to our branding portfolio. We have, of course, the Peanuts characters, the MetLife blimp, and now MetLife Stadium.
One little-known secret here is that when we cut that deal, we insisted that in the first year, either the Jets or the Giants would win the Super Bowl. That was part of the deal. We got that done. Evolving this brand globally is our next challenge. We've already made great headway in that area, but more to come. What are the outcomes we're looking for? All the strategy stuff and theory is great, what are you really looking for? Here's kind of the bottom line. 300 basis point improvement in our ROE by 2016, and we're assuming still strong macroeconomic headwinds. Significant margin improvements, including a net pre-tax savings of $600 million. Shifting from more, excuse me, market sensitive products to more protection products. Just one second. I get a little choked up going into this.
Increasing our emerging markets presence from 20%, to 20% of operating earnings or more by 2016. Okay. Let me touch upon these in more detail. Expanding ROE in a challenging environment, not easy. Let me start first by talking about the new DAC rules. If you see our 2011 ROE was 11% as reported. When you adjust retrospectively for the DAC rules, we lose 70 basis points off that ROE. We start at 10.3. Now, it's complicated. I won't go through the accounting, but the DAC rules affect different companies differently. Some of our competitors actually got a boost in their ROE based upon the DAC rules because they wrote down their equity sections. With our VOBA creation from the Alico deal, that was actually kind of an opposite effect on us. We actually lost basis points on our ROE as we adjust for DAC.
You start there at 10.3 in an adjusted basis and say, how do we improve things? We're still assuming low rates, gradually increasing interest rates over time, but still relatively low rates historically through that entire period, and especially through 2014. We're assuming some modest net share repurchases, about $5 billion is in the model. Now, before you assume too much with that number, that is not a statement that we're going to do $5 billion of share buybacks by 2016. We had to put something in our model as we determine what this ROE would look like by that year. We think that's a relatively modest number of dollars for share buybacks over that five-year period.
The whole point of this work for us was not to rely upon purely financial levers to say how are we going to get to a higher ROE, but really our true business, our underlying fundamentals of our business. Okay, gain from scale and strengthening our functional capabilities. A $1 billion in total of efficiencies by 2016. A couple of areas. Let me talk first about what efficiencies mean. One would be internal, simplifying how we do work. There's a fair amount of duplication and overlapping things as you buy companies like Travelers, we already did some work around that, and now Alico, an even larger transaction. Simplifying how we do our business, both from a day-to-day process point of view as well as from a management point of view. Also leveraging technology, and I'll talk about that in a second. Then external efficiencies.
We're a big company. As I mentioned, we're in 47 countries across the globe. In some cases, we're not really being terribly efficient about how we buy things from vendors. We're going to take that and really consolidate that effort and get savings from those arenas as well. If there's any vendors in the room, you might want to revise your numbers for next year. $400 million of that $1 billion is going to be reinvested. It's being reinvested into our technology and our platforms and our functionality. That will actually be a positive feedback loop in terms of generating savings. It'll also be critical in terms of meeting our aspirations around customer centricity. If you don't have the right platforms, if you don't have the right technology, it's very difficult to be customer-centric. Okay, moving towards more protection and less capital-intensive products.
Part of what I've talked about is increasing our return on equity. I also talked in the beginning about creating shareholder value over the long term. Those two things come together, return on equity and also your cost of equity capital come into play. If your cost of equity capital is going up, then that raises the bar for return on equity. That differential is really how you create shareholder value. If your return on equity is above your cost of capital, you're really creating shareholder value. If your cost of capital is higher than return on equity, you're destroying shareholder value. We're trading at a discount to book. The market is saying to us essentially, "You have those numbers wrong. Your cost of capital is above your returns." To change that dynamic, we have to work on both.
Increasing our return on equity and decreasing our cost of capital. One of the key elements of decreasing your cost of capital is risk. The riskier your overall portfolio is perceived or is, either one, whether it's is or perceived, it still goes through to your stock price, the higher your cost of equity capital. We're very mindful of that, and the shift is shown on this slide. It's not us withdrawing from certain markets. It's us, again, turning the dials up or down based on getting the right balance between protection products, things like group insurance, accident health, whole and term life, and toward the more capital-intensive products like variable annuities, variable universal life. The goal is to shift towards a more predictable earnings stream and stronger free cash flows. Let's talk about the growth piece of the story.
I don't think the market really fully takes into account our presence, MetLife's presence in emerging markets. As I mentioned, the Alico transaction was transformational for us. It really has inserted us in a much larger way in the sector. This is a market that's growing rapidly for the insurance market. A growing middle class, increased demand for insurance. Today, the emerging markets represent about 14% of our earnings, and our goal is to make it above 20% by the year 2016. Michel will give you more color on that in a little bit. John noted that we'll be doing a investor day in Asia in September. I want to give you a brief overview of Asia today. Let me just start by saying there aren't any really big game changers for me to convey to you about our business today in Asia.
We spent a lot of time on the Alico transaction deciding excuse me, deciding how we felt about certain markets, such as Japan, which is a big piece of Alico. We really configured things up front in terms of that business. I'll go through a few, our presence in Asia and our thoughts around that. The overall trends are actually favorable in the region for our business. Government shifting more of the burden onto individuals, not unlike here in the U.S. An aging population that is more and more centered and focused on finding protection around health solutions. That's our accident health product area. Of course, a growing middle class, a rapidly growing middle class. Our goal is to kind of grow and leverage our accident health business and leverage our multichannel distribution network.
Asia is expected to generate about 40% of the world GDP by the year 2015. In a snapshot, here is our business today, 2011 results, $8.7 billion on the revenue line, $867 million of operating earnings. We're the number 3 foreign player in Japan, a big market for us, number 2 in accident health products in Japan, number 1 foreign life insurer in Korea, and a growing presence in China. Asia contributed nearly 20% of our earnings in the year 2011. Some of the key takeaways around our mature markets, Japan and Korea. Japan is MetLife's second-largest market after the United States. We have strong growth in some high-margin products despite the challenging environment. We look at Japan really as a cornerstone for us, a launching area for our overall Asian strategy. Korea is our fourth biggest market. A very diversified distribution channel approach there.
We have very favorable demographics around accident health products, which we have now introduced in the Korean market. Let's turn now to emerging markets in Asia. We're a top 5 life insurance player in both direct marketing and bancassurance in China. We're expanding the agency model into more Chinese provinces and cities. There are several other attractive, fast-growing insurance markets, obviously, in Asia, which we're looking to enter either by greenfield or by acquisition. Key takeaways for Asia. It's an important segment to us and a big contributor for those 2016 goals that I showed you. We're gaining share in the mature markets, and we think we can gain further share. Then on the emerging side, again, both organic growth and inorganic through acquisition. Let me kind of review things now for overall strategy.
You think about what I've talked about so far, a very strong foundation, really a global platform for our company. We have key initiatives to capitalize on the trends that we analyzed and talked about. We're looking at ROE expansion of 300 basis points from a starting point on a DAC-adjusted basis by 2016. That's even, again, assuming macroeconomic headwinds. Maybe the most important thing in terms of what we're working on as a team here is getting that balance right between growth, profitability, and risk. Essentially, over time, de-risking the overall portfolio and generating greater free cash flow for our shareholders. Okay. With that, we'll turn it over to Bill Wheeler, who will give you some insights into our Americas strategy.
Good morning. I ask for better theme music as I walk up to the stage. Good morning, everyone. It's nice to see all of you. This morning, I'm going to talk about the Americas and what we intend to do in the future with this business. Before I dive in, I'm going to talk a little bit about the trends that are affecting our Americas business, as well as, frankly, the life insurance industry as a whole, and also give you a little bit of a summary of our thinking. Let's look at that first slide. First, direct your attention to the arrows that are on the left. Those are the trends that are influencing on our business today. Now, I think we all know that the U.S. life insurance industry is a relatively mature market. Not a secret.
I think what you have to understand, there are areas in even the U.S. market where there are opportunities to grow faster and earn higher returns than are typical. One good example of that is the middle market, and we define the middle market as those consumers that have less than $100,000 of income. That is a very underserved market with regard to life insurance today, but it will probably take a new distribution channel to reach that market. Another big trend is that benefit costs at work are shifting from employers to employees, and that's not only about what's going on with managing costs, but also the fact that consumers, I think, or employees are much more comfortable buying financial products at the work site than they ever were before. Needless to say, that's a trend that MetLife, I think, is well-positioned to take advantage of.
The agency business, the agent channel, will always be with us, but consumers are looking for new ways to purchase financial products, and especially life insurance. They are looking for it at the work site. They are looking for it online. They are looking for it in other non-traditional ways. We've seen this in other businesses, which are adjacent to the life insurance business, auto insurance, the brokerage industry. Okay? We need to be in those new growth areas where consumers are. Latin America is a fast-growing, high-return market, and we think we are very well positioned for success there as well, and I'll talk more about that in a minute. Let's look at the blue boxes now. Because of these market trends, we intend to refocus our U.S. business. What does that mean?
It means, first, that the mature businesses in the U.S., we will manage in such a way as to improve the free cash flow of those businesses. At the same time, we are going to limit our exposure and increase our hurdle rates on capital-intensive products, you'll see more details about that in a minute. We're also going to significantly focus and invest in voluntary worksite and the direct channels. We've already started that, but that will continue. We're going to drive margin improvement by reducing our costs and adjusting our prices where appropriate. In Latin America, we intend to participate in the growth of those markets, okay, as those economies in Latin America continue to grow. At the same time, I think we can also turbocharge our growth in Latin America.
We're already starting to do that by investing more in the direct channel with accident and health as our lead product. The Americas in 2011 had $33.2 billion of premiums, fees, and other income. Its operating income was just under $3.9 billion. That's about three-quarters of MetLife's overall profits. I expect both of those numbers, by the way, to be nicely higher in 2012. The Americas is the largest life insurer in the U.S. overall, but it's also number 1 in a number of key markets, maybe the most important of which is the employee benefits market. We are also the largest life insurer in Latin America. We are number 1 in a number of key markets there. The Americas by itself is a very attractive insurance franchise, frankly, I'm very honored to have the opportunity to lead it.
We have reorganized the Americas under two guiding principles. If you look at our old U.S. business, it was very, what I would call cross-functional. Now almost every employee in the Americas is tied to one of the P&Ls of these five businesses. We're all keeping score the same way. We're all on the same page, and I think that's going to lead to a lot better results. The second philosophy is these five businesses are focused on channels or end markets. They're not talking about products necessarily. We might sell the same product through different channels. Products is the way we used to organize. Now it's about customers and markets. We will manage these five businesses using a portfolio approach. That means we will manage them differently based on their specific circumstances. Let me give you an example.
Our retail and corporate benefit funding businesses are both relatively mature. Okay. They're also quite profitable. We will manage them using one manner. Group is also mature, but frankly, it has significant opportunities for growth. Latin America is an established growth business. Direct, well, we have some pilots in direct, but it's effectively a startup. Each of these businesses are different. Their financial characteristics are different, so we will manage them differently, and I think that will lead to superior results. One last slide before I move into a discussion of each of the business units. I want to talk to a little bit more about opportunities for ROE improvement.
What I've done on this slide is I've taken every major U.S. product area, oh, by the way, I just put all the Latin American products into one area because, frankly, most of Latin America's products are pretty fabulous. We took all our major product areas, and I've sorted them based on return on economic capital in 2011. Let's start with the better than 15% ROE column. You can see the products listed there, and they're some of our strongest areas of the company. I would also tell you, I think we can improve our ROEs for the products in this column, mainly by reducing costs. If you look at the 10%-15% column, let's just take out individual disability for a minute. Our other products here, UL, structures, closeouts, all have something in common. They're all pretty long-duration liabilities.
They're capital intensive. They're all operating today in a very low interest rate environment. The capital we have to put against those products is relatively high. The way to manage that is to raise our hurdle rates, which we are doing, and be very stringent about new capital allocation to those product areas. Let's look at the under 10% column, I'll take them one at a time. Group disability. We just had the best renewal season in many, many years in group disability. I think given what's happened to our major competitors in the group disability business, I'm expecting several more terrific renewal seasons. I think you'll see our group disability business move to the left if you will, improve its ROE. Homeowners. 2011 was a record year for catastrophes that drove down the ROE in homeowners.
We are raising prices significantly in our homeowners line. That with a, what I would call a normal cat year, should produce an ROE for that product area in the low to mid-teens. The U.K. pension business is effectively a startup. It hasn't reached critical mass yet. That leaves the annuity business. Our variable annuity business generates a significant amount of economic capital today, which is obviously depressing its ROE. Economic capital is a stochastic calculation, which takes into account low probability tail events. Well, think about where we are today. We are experiencing the lowest interest rates in 50 years. Some would argue we are already in a tail event. The economic capital calculation looks at tail events from here, okay, which are pretty extreme. That creates a lot of additional economic capital, and again, that's sort of depressing the annuity business' ROE.
I think the variable annuity business is causing something of an overhang for MetLife stock. I think it may be causing an overhang for many companies in this industry. I'm going to talk more about the VA business in a couple of slides, and I'm confident that after I've done my little bit up here, you'll feel better about our VA business. Okay, let's get into the business units. Retail. Retail is the sale of life and annuities through both our 8,100 affiliated reps, as well as through 700 agreements with third parties that represent over 250,000 independent financial advisors. You can see the split of our sales of life and annuities through those two channels in 2011 on this slide. Okay, the VA business.
Let me first say that we've eliminated most of our old products in the VA business, and now we're pretty focused on GMIB Max, not exclusively, but it's most of our focus. We think GMIB Max is a superior product from a risk management and profitability point of view. It also does a very good job meeting customer needs for lifetime income. We have made a lot of changes to GMIB Max over the past six months. If you follow us, you know that. We will continue to tweak the product to continue to de-risk it and improve its profitability during 2012. We are managing our variable annuity sales to an $18 billion sales target, and we picked that number because we think that that provides a better balance of risk for MetLife overall. At March 31st, we had total variable annuity liability balances of $152.1 billion.
$99.9 billion of that, or roughly two-thirds of it, had a living benefit rider. Of that amount, $78 billion was a Guaranteed Minimum Income Benefit or GMIB rider. You can see from this pie chart that 17% of our GMIB riders were in the money at March 31st. In the money means that if the customer chose to annuitize today, the guaranteed amount is greater than the amount they would receive on a normal annuitization as if they didn't have a rider. By the way, only today, only about 1% of our customers have the ability to annuitize under their contract. You'd have to wait 10 years. If you look at our block overall, the average annuity customer, it's going to be 6.6 years before they can annuitize their contract. Our GMIB net amount at risk at March 31st was $1.6 billion.
Net amount at risk is the additional money that we would need if everyone were to annuitize their GMIB contract and start receiving their benefits immediately. We held a hedge asset of $2.1 billion to offset both our GMIB and other living benefit rider risks, net amount at risk at March 31st. We're covered about our net amount at risk. If you benchmark our in-the-money percentage and our net amount at risk relative to the size of our book, I think you're going to see that our variable annuity liabilities have a very attractive risk profile, especially compared to our peers. Another fact to give you a feel for sensitivity.
If the S&P 500 increased by 10% from here and the 10-year treasuries increased their yield by 100 basis points, our net amount at risk and our in-the-money percentage wouldn't go to zero, but they would go pretty close to zero. Okay. Any kind of break with the market environment and those riders are basically out of the money. One last interesting fact. If you look at the last three years of variable annuity sales for MetLife, that's about just a little over $60 billion of sales. That represents 375,000 contracts. How many of those contracts have a living benefit rider that's in the money today? Well, at March 31st, 250. 250 out of 375,000, even with interest rates this low. This product is designed to effectively meet customers' needs for lifetime income, but it also, frankly, has a very attractive risk profile.
I know a couple of you in the audience have noted the amount of upside leverage that we and maybe others have in the variable annuity business. It's, I think, significant. We will manage this business prudently, carefully, but I think you can understand why we have no interest in exiting the VA business. I want to touch on expenses and the expense reduction initiative in the Americas. You heard Steve talk about a $600 million pre-tax expense reduction goal for the company. Our portion of that is roughly 60% or $350 million. I do expect expense reductions from all of our businesses in the Americas, but the reason I mention this initiative here is I do think U.S. retail will have the largest portion of this contribution to the expense reduction initiative.
I'm not going to get into specifics about what we intend to do, but we will take a portfolio approach, which means that we do expect our mature businesses to shoulder most of the impact of this initiative. At the same time, we will be investing in new resources in areas where we think we can grow, and we'll be investing in a disciplined way. Finally, we expect to leverage scale more effectively in both North and South America. With regard to retail, it's our largest business, and it's obviously an important franchise for the company. I think we've already begun to rebalance our risk and growth initiatives in this business, and because of that, I believe this will allow us to meaningfully improve our profitability and ROE for retail. Okay. Now, Corporate Benefit Funding or CBF. CBF is a mature, steady business for us.
At March 31st, we had $177 billion in general and separate account assets, you can see from the pie chart how those assets are split by various product group. CBF customers have a lot of things in common, or the CBF business has a lot of things in common. The customers are generally institutions or investors, the liabilities are generally long, but not always. There is usually only a modest amount of insurance risk, and the businesses are asset intensive. These attributes make this business very steady and predictable. In fact, if you look period over period, usually the only variance is what was the return on variable investment income in that period. There is a large allocation or relatively large allocation of alternative assets to the CBF investment portfolio. CBF is a major source of earnings for MetLife, but it is also a capital-intensive business.
Because of that, we intend to manage this business in a manner which increases its free cash flow. We are increasing our hurdle rates on certain product areas, that should lower our overall capital consumption and improve free cash flow and drive ROEs up. Turning to group. As we have said many, many times over the years, our group is a key franchise for MetLife. The business has a very attractive ROE, it's an insurance risk business, which mean it is not closely correlated to what's going on in the capital markets. We have an enviable market position, which you can see from the chart behind me. By the way, maybe you recognize this chart. It's the old we stand alone chart that we first used, we've used it many times, we first used it in MetLife's IPO 12 years ago. It's still valid. Okay?
Our position is still as strong. Think about what's happened over the last three years in the group insurance business. By the way, I think we've documented this for you on a number of occasions. Over the last three years, a number of our major competitors became very aggressive with regard to pricing, they did manage to take a little market share from us, but at the expense of drastically reducing their profitability. In this same three-year period, our profits increased. I think there's going to be a little sorting out period, in the marketplace. What I think that means is the pricing environment here should be relatively attractive for the next several years. There is real change coming to this business, and it's change we must prepare for so that we can take advantage of it. Let me first clear this chart.
If you look at the 2010 bar, the employee benefits market was $113 billion business in the U.S. in 2010. $146 billion of that was 100% employee paid, the rest was either partially or completely employee paid. There are predictions that this market will grow something like 4% a year over the next five to six years, I think that's a reasonable projection. If you look at the employer-paid area, what we call the base coverage, there's hardly any growth at all. Almost all the growth is coming from employee purchases and employee decisions. Okay? This situation is being influenced by a couple of things. One is employers are pushing more of their decisions and also the funding of their employee benefits onto employees. That's been a long-term trend. It's frankly been accelerating.
The other thing is consumers are getting more and more comfortable buying products at the work site, maybe that their employer has vetted and now effectively sponsors. We are uniquely positioned to take advantage of this business or this trend in the marketplace because of our very strong position in the group business today. We're already large. We might even be the largest voluntary benefits work site marketing company in the U.S., but we need to increase our capabilities in order to take full advantage of this opportunity. Increasing our capabilities means expanding our product set, which will include accident and health products, by the way. It also means improving our second sale or enrollment capabilities.
You might sign up for voluntary benefits when you do your benefits enrollment each year at work, or you might buy from an enroller who's sitting in your company's cafeteria, or you might buy based on the direct marketing techniques such as we use in our group auto and home business. We need to be good at all three of these second-sale solutions or enrollment capabilities. Also, we need to have the right administrative platform to make this a very easy and convenient experience for the employee, and also, frankly, a platform which will facilitate effective cross-selling. Overall for group, we have relationships with more than half of the large companies in America, and I define large as over 3,000 employees.
If you look at each of those employee relationships, we only have just under two products with each of the customers in the large end of the market. In the middle market, under 3,000 employees, we only have relationships with 5% of employers. We have significant opportunities to grow in this business, and we think that our voluntary benefits work site initiative is going to be a key factor to drive that growth. Let me talk a minute about Latin America. We're the leading life insurer in Latin America, and this isn't just about our big Mexican business, by the way. We operate in six countries in Latin America, and we're number one in four of them. We have over 20 million customers in Latin America, and you can see that our statutory premiums in 2011 were just under $5 billion.
Our revenue growth has been 11%, and our operating earnings growth rate has been 14% for the past five years. Just to remind you once again, the ROE in Latin America is very attractive. We expect our Latin America business to grow nicely as the economies in Latin America also grow. We can turbocharge, and we already are doing this, we can turbocharge our growth through the direct channel. When we acquired Alico's Latin America business, we acquired good direct marketing capabilities and an experienced management team. We spent 2011 rapidly growing our direct business in Chile, Argentina, Brazil, and Uruguay. We're going to do that again in 2012, we're also going to add Mexico, which is the second largest economy in Latin America. Accident and health will continue to be our lead product.
Michel Khalaf's going to talk a little bit more about our emerging markets later this morning. We're also developing a direct business in the U.S. Direct is expected to grow rapidly here. If you look at the bar chart, this shows total sales of individual life insurance in the U.S. 2010 compared to a projection for 2016. You can see overall sales are expected to grow only modestly. Look how much is coming through direct. It's almost going to double in that five or six-year time frame. That's where the growth is. That's where we need to be. We've already started. You can log on to metlife.com today. I'd recommend you do it this afternoon. If you've got the right characteristics, we will sell you $500,000 of term insurance in about 20, 30 minutes. Okay, you'll never have to talk to a human.
Don't lie on the questionnaire, though, because we do check. You might want to look at it. We sold $5 million of new premium through that channel in the first quarter. We have a number of other pilots going on right now with our direct marketing. I don't want to talk about the details right now. It's still a startup for us, okay? We won't be breaking out its financials for a little while yet. We will leverage our international capabilities here because frankly, we have very successful direct businesses around the world and including Latin America. We will also leverage our accident and health expertise, and that's a very relevant consumer need in this market. Also, this is obviously an area where we can leverage MetLife's very strong brand. My time is almost done.
You heard me speak about our growth businesses and our mature businesses and how we'll be managing them differently. We think that will lead to superior results. We have an aggressive expense reduction target. We'll also take other steps to improve our margins. Our actions will reduce our market-based risk and increase our non-correlated insurance or protection risk. All of these actions will drive earnings growth and significantly improve our return on equity. Thanks very much for your time. I get to announce a 15-minute break. Please, we'll start again in 15 minutes.
[Break]
Ladies and gentlemen, please take your seats. Our meeting is about to resume.
Ladies and gentlemen, please take your seats. Our meeting is about to resume.
Please welcome back John McCallion .
Great. Okay, well, welcome back. Hopefully, you enjoyed the first part of our Investor Day. Now I'm going to ask Maria Morris to come up and give us an outline of how she plans to grow what we think is an exciting opportunity for us here at MetLife, the Global Employee Benefits business worldwide. Maria.
Thanks, John, and good morning, everyone. I got nice music as well, so thank you for that. I'm quite pleased to be here today to speak about growing our Global Employee Benefits business. I'm particularly excited about having the opportunity to lead this important focus for MetLife. Having had the background in the U.S. business in both product and distribution in employee benefits, I have a deep respect for what Bill spoke about, our unbelievable leadership position in the U.S. and our strong, long-standing relationships. I've also recently had the opportunity to do the Alico integration as the executive sponsor of Alico integration, I can tell you, we saw, as we went out across the country, the very strong capabilities already in place in employee benefits around the globe, as well as the real growth opportunity for the future.
As we move forward, we're starting from a position of strength. As we look at how we want to grow both globally and in the local markets outside the United States, we plan to capitalize on several very important market trends. Similar to Bill, we're going to start with the arrows. The first is that many of the local markets outside the U.S. for employee benefits are growing at very attractive double-digit growth rates. Second, corporations are becoming increasingly global, and that's really from two perspectives, both a geographic footprint perspective as well as talent perspective. That's important because what we're finding is that employers are increasingly looking for global employee benefit solutions. They really want benefits to be a lever for their global war on talent.
They're either asking us to actually put together global benefit packages, or some companies are saying, "We want to be able to really deliver locally, and we want to have the best, most competitive local benefit offerings as well." All of these corporations that are multinational are asking for more transparency, more reporting, so they can proactively manage both their global and their local benefits needs. What we're finding is that as you ask employers about why benefits are such a lever, they're telling us that it's really to attract and retain employees. A recent Towers Watson study of multinational corporations around health and wellness benefits said retaining employees was the number one objective of those benefits. It's not surprising that you're seeing our two areas of growth focus.
The first here in the blue box, to accelerate our local employee benefits businesses outside the U.S. Specifically, I'm speaking about local benefit programs written in country to employers and employees in those countries. We also plan to grow and scale our global benefits businesses. Let me define those for you. We have our multinational risk pooling business. We have our local solutions that are written through our U.S. and around the world headquarter relationships in either HR or finance. We have our expatriate solutions, which is expat benefits right now written for expats of U.S. companies. You may wonder why this is such a strategic imperative outside the U.S. There are very few businesses like this across MetLife and truly in the industry. We have the proven capabilities around the globe already.
You're going to see our very deep customer relationships, which are important to really grow these businesses. These are high ROE businesses. They're low capital intensity. When we grow and incrementally add to the bottom line of MetLife, we will be lowering that risk profile that Steve and Bill spoke about. At the end of the day, they're very good in terms of our focus on our customers and driving shareholder value. We're starting from a position of strength. Bill shared with you the financial results in 2011 of our U.S. Group Voluntary and Worksite business. I'd focus your attention on the bottom of this box, where you see our employee benefits business outside the U.S., which is a healthy $3 billion on a PFO basis and $280 million on an operating earning basis.
What you may not know is that we have some form of employee benefits business in almost every country that we do business in. As I mentioned, the ROEs, like the U.S. in this business, are quite attractive. Our product mix, if you look at it, is really pretty evenly distributed between life, health, and credit, with a smaller but growing pensions business. I should take a minute on credit. You may wonder why credit insurance is part of our employee benefits portfolio. It's usually written on a group contract, and it's an important door opener for our important bancassurance business, which Michel will talk about in a couple of minutes. You heard that we were the leader in U.S. in this business.
We're also the leader in Mexico in the employee benefits business, and we have meaningful share in very fast-growing economies, like Poland and the UAE and Turkey. You heard about our relationships from Bill, where we have over 90 of the Fortune 100. What you may not know is that we have relationships with close to 60% of the Global 1000. Obviously, that's going to be critical as we continue to grow this global business. I wanted to take you through the market because obviously when you have capabilities, you need a big market to grow. What I'm showing you here on the left is the life and health market on a gross written premium basis. You can see it's a very large $258 billion market, and this actually excludes traditional medical in the U.S., where MetLife does not play.
Let me break down the market for you. You see $140 billion of the local U.S. and Western European market. Bill spoke to you about our growth plans on U.S., I don't plan to talk about that in this presentation. I also should mention that Western Europe is out of our focus today as well, because while it's a large developed market, we have limited capabilities there today, we're not focused there for growth in the short term. You see our two focus areas, the $96 billion local market opportunity outside U.S. and Western Europe, and the $22 billion global business opportunity. I should mention that these two growth areas are actually highly complementary. As we build out our capabilities to grow locally, we actually enhance our global value proposition for multinational companies.
As we grow our global reach with multinational companies, we obviously are also growing our business locally. These are important to be focused on together. I want to start with the local benefits opportunity, you can see here the $96 billion local benefits opportunity is due to grow on a 10% compound annual growth basis to $187 billion in 2016. That growth is actually the underlying growth rate of the life insurance in the emerging economies and medical trends. Here you see our business in these local markets today, which is a combination of life, health, pensions, and credit. It's a $2.1 billion business, and we plan to grow this business to $3.2 billion-$3.6 billion by 2016, in line with that life and health growth rate that I mentioned to you earlier.
We understand that this is a very important business to grow, and we believe this growth rate is very achievable. We will have to pick our spots, and we will need to make sure that we are leveraging the expertise that Steve talked about across many markets. The way we plan to do that is we plan to tailor our approach to local markets where we have, number 1, strong capabilities today, and number 2, incremental opportunity for growth. Let me take you through a couple of examples. In our developed markets, like Japan and Australia, we will be focused on high-growing niche markets. We're exploring in Japan, actually leveraging these relationships with multinational corporations and targeting them for growth.
In our growing markets, we plan to gain market share, this is actually through several different strategies, whether it's product expansion, distribution expansion, better service delivery. I'll give you a few examples here. In Mexico, like in the U.S., we do believe that there's an opportunity for voluntary and work site to supplement our strong and growing private employee benefits business there. In Poland, we're launching new pension products in response to the changing regulations to supplement the social programs that are offered there in Poland. In U.A.E., we just launched a disease management program to continue with the innovation in that market around healthcare and healthcare management. Of course, emerging markets are also important for us, I'm going to give you a couple of examples of things that are going on in those markets. Michel will talk about Turkey in a couple of minutes.
Specifically, we're focused on growing pensions and credit through our broader bancassurance network that we actually acquired through a recent acquisition that he'll speak about. In Russia and Brazil, we're actually already in the employee benefits businesses. We're growing our local capabilities, but we've also been growing through the multinational relationships there. In China, we're launching medical on a pilot basis to supplement our group life offerings in that market. Of course, we will continue to pursue strategic acquisitions across the markets as appropriate, and we will also be growing through these multinational corporations I spoke about earlier. Let me really move now toward our global opportunity. What I highlighted on this side is our Global 1000 companies, where MetLife actually has relationships with close to 60% of them.
There are 870 distinct companies on this list, you can see that 65% of their employees are outside the United States. While we do do a good job really servicing the employees of most of these companies in the United States, we have an opportunity to serve 45 million employees outside the U.S., many of them in these developing and emerging markets that I just spoke about. The way that we'll do that is we're going to be leveraging our very strong capabilities and really these extensive relationships to win, and we're in such a unique position to do it. No one else has the relationships, and few have the capabilities globally to make this happen. Let me spend a couple of minutes on the products and solutions we'll have in this market.
I mentioned that we have a multinational risk pooling business on a global basis. We are actually partnering with an industry-leading European insurer to offer solutions in over 100 countries. Now, what's great about that is we own 60% of the underlying companies in our network, so we can deliver the power of MetLife and our partner to our customers. Another one of our businesses in this space is our expatriate business that I mentioned earlier. Here, again, we're able to offer benefits in over 100 countries to expats of U.S. companies. We're doing this through leveraging our strong global brand and capitalizing on what we've built both locally as well as through partnerships with our networks, and really focusing and segmenting the Forbes 2000 group of companies. I mentioned the Global 1000.
We're actually expanding our focus to the full Forbes 2000 in order to be able to really take advantage of the opportunities in the marketplace. Here you can see our business, though small today, is expected to grow faster than the market from $600 million to between $1.4 billion and $1.6 billion in 2016. We believe we truly are uniquely positioned to grow faster than the market because of just what I outlined previously, but also because we have the opportunity to expand the solutions in this marketplace. Let me give you a few examples. The expat business we talked about is an $8 billion market opportunity in the U.S. There is another approximately $8 billion market opportunity to cover expatriates of non-U.S.-based companies. This is powerful for us because we already have the capabilities.
Leveraging the capabilities we've built and expanding into markets outside the U.S. is a big growth opportunity for us. I'll give you another example. We're building out our healthcare management, disease management, and wellness programs that we spoke about locally. Being able to offer them on a more globalized basis is something that employers are really looking for. That's another way that we'll be expanding our product sets for the future. We're quite pleased about this growth opportunity. The combination of what Bill will be doing in the U.S., as well as what we're going to be doing here from a global and local perspective, enables us to really grow for the future. In summary, I'll leave you with this.
We'll accelerate our local businesses outside the U.S., we'll grow and scale our global businesses, and in doing so, we'll be driving growth in all of our markets, developed, growing, and emerging markets. Again, we're going to be improving the risk profile for MetLife with these high ROE products, low risk profile products. In the end, this initiative will actually be focused on delivering incremental $250 million of operating earnings by 2016. Again, I'm pleased to be here, and I look forward to answering your questions later on. With that, I will turn it over to Michel Khalaf, who will speak about EMEA and our emerging markets.
Thank you, Maria. Good morning. It's great to see everyone. It's my pleasure to introduce you to EMEA and to discuss with you our emerging market strategy. Yes. Two parts to my presentation. First, I'll provide an overview of EMEA, talk about some of the key trends, opportunities that we see in the region, and also present some of our strategies and key initiatives. Second part will focus on emerging markets overall, expand on what Steve presented earlier, and discuss how our strategy in terms of capturing the opportunity and driving earnings from emerging markets. Let me start by pointing out that EMEA is a very diverse region. As you see, many countries, markets in very different stages of development from an economic, from an industry perspective. It's very hard to generalize and talk about any singular trends or market dynamics.
This is the way that I tend to look at the region. I tend to look at it in terms of two main clusters, if you like. We have some developed mature markets in EMEA, Western Europe in particular. Here, what we have is high levels of insurance penetration. Traditional life insurance growth is slow. There are obviously some economic and regulatory challenges. On the regulatory front, Solvency II is obviously a major initiative, one in which we are deploying very significant effort resources to ensure readiness. Also we see Solvency II as an opportunity to drive some operational efficiencies. We are creating a super carrier that will be based in Ireland and deploying a hub-and-spoke model where we will branch our Western European entities into the Irish super carrier. This create possibility of synergies and will help us drive efficiencies in that part of the world.
As far as the economic headwinds are concerned, the good news for us is that our business is holding up quite well. We continue to see strong persistency in Europe and other parts of EMEA, and our portfolio renewability is quite good. The other main cluster in the region is really comprised of emerging markets, again, at different stages of development. Here, what we see is the emergence of a middle class. This is creating a mass market of consumers that are looking for protection, health, and savings solutions.
Then across parts of the region, either in areas where you have an aging population or in other markets where the state is trying to shift the burden of retirement onto the private sector or individuals, we also see some retirement opportunities, and that's reflected in the fact that we have some pensions businesses in parts of the region as well. Our approach in terms of how we manage our business and how we strategize in the region is that in high growth markets where we have a significant presence, our focus is on expanding, on building on that presence. In slow growth markets, where we have a limited presence, we tend to focus on niche segments, where we believe we can leverage some capabilities, some expertise, and we can also achieve some attractive ROEs.
We see this diversity that I'm talking about, and it's a theme that I'm going to come back to in terms of diversification. We see it as an important differentiator for us in the region. This is a quick snapshot at our financial results. I guess you can take Wheeler's numbers and divide them by 10 or more, or you can look at this as an emerging region. Obviously, we will need to grow at a much faster pace than the Americas and become an engine of growth for the organization. $264 million in operating earnings on GAAP revenues of $3.3 billion. A lot of countries in the region, 35 countries. If you think about it ranges from Ireland in the west to Russia in the east to India and South Asia in the south. Quite a wide geography in terms of number of countries.
We have 13 time zones in EMEA, 25 million customers, so an important customer base, 12,000 employees and 50,000 captive agents. We have a rich history in the region. If you look at certain parts of the region, such as the Middle East, for example, we entered those markets in the late '50s, early '60s, so quite well established. We were also first movers into Central Eastern Europe, where we entered many of those markets. We were first to enter right after the fall of communism, which has helped us build some significant businesses in those areas as well. And really, this is reflected in the fact that we do have leadership positions, top 10 positions, in many of the markets that we serve in the region.
We're also an important pensions player in Poland and Romania, a top four pensions player, and we're now in the pensions business in Turkey as well, and we have a thriving pensions business in Egypt. Let me just try to give a few more examples that hopefully will give you a better idea about how we're positioned in the region. I mentioned that we have some developed markets in Western Europe, and here, really our approach is to focus on attractive niche segments. If I take France, for example, in France, we have a strong direct marketing, direct consumer business. A&H is our main product line there. We're also quite strong. We have a strong presence in the substandard and preferred life space where we distribute our products through a network of over 3,000 brokers.
Again, attractive segments, high ROEs, where we can leverage and bring some important capabilities. Then if we look at some of the more emerging markets, and again, I'm grouping them in two buckets here. Some that are sizable today but with high potential to continue to grow. So talk about Poland, for example, and the UAE or the Gulf. As I mentioned, Poland is an important market for us. We have a top eight position in that market. We're top three in terms of market share with a 5% market share there. And again Poland is our biggest earner in the region in all of EMEA. As I said, life pensions and mutual funds business there. We've been recognized in Poland as a leading company 10 out of the last 11 years. The Polish Academy of Sciences has recognized us as a pearl of the Polish economy.
So well positioned and really a market of the future. Then the UAE, where we will celebrate this year our 50th anniversary. Again, we are market leaders there. We have a number one position with over 20% market share. And again, a very good mix of business in terms of distribution channels and retail and corporate product lines as well. If we look at some of the more emerging markets, Russia, I was in Moscow last week celebrating with our team there our 15th anniversary. We're a top three player in that market. We're seeing very high growth. It's an attractive market. Obviously, there are some challenges in terms of political risks and economic risks in Russia, but really a high growth market in which we are quite well positioned. Turkey, where historically, and I'm talking about legacy Alico here, we were a niche player.
We had about the 12th position in terms of market share. Through the deal that we concluded last year, whereby we acquired Dexia's life insurance business in Turkey, Deniz Emeklilik, and we struck a 15-year exclusive distribution agreement with DenizBank. That was really a transformational deal for us. Moved us into a top six market position in Turkey. Gave us access to bancassurance, which is the fastest growing segment channel in that market, and also gave us access to the lucrative pensions market, which is a nascent market in Turkey, but one that we expect will grow significantly going forward. Well positioned in an exciting emerging market in Turkey. Then a few words on India.
In India, we announced late last year the deal with Punjab National Bank, one of the leading banks in India, whereby we struck an agency agreement for the bank to distribute our product. Our focus there right now is really on ensuring that we secure the regulatory approvals in terms of capital restructure so that we can reestablish the JV with PNB as a partner and rebrand the company to PNB MetLife. Okay. I talked about the diversification from a geographic perspective. Diversification is also important to us from a line of business or product, as well as the channel perspectives as well. Really here, we are focusing on addressing multiple customer needs and making sure that our customers can access MetLife in as many ways and as easy ways as possible.
What you see here on the right-hand side is that we have a healthy mix of group and retail businesses, and the majority of our business is in protection and savings products. In most markets, we sell traditional life, A&H products, savings products, health products, and in some markets, we do sell retirement and pensions products as well. The other thing I would say about our approach when it comes to products is that we are quite disciplined when it comes to the returns that we expect on our products. We do not hesitate to take action if we feel that a product is not meeting our hurdle rate minimum of 15% return.
We've recently announced that we are repricing our fixed term annuity business in the U.K., which effectively means dialing down that business in that market because we didn't feel that we were getting the returns that we should be getting on it. That discipline is very important for us. Then if we look at our channels, again, a good mix between captive or tied channels representing about 30%, and then third party, primarily bancassurance and brokers. Again, channel diversification, product diversification, equally important to us in addition to geographic diversification. Let me now take you through some of our strategic focus areas, and again, I mentioned EMEA as an engine of growth. These are some of the initiatives and areas that we think will help us achieve this. Bancassurance is an important channel for us.
It will constitute this year over 30% of our new business, and that is up from 18% in 2010. We've seen significant growth in this channel in the last few years. We have over 300 partners, financial institutions, and bank partners in EMEA. Again, here our strategy is focused on expanding, on growing this business, but also on diversifying this business from a product perspective. Currently, about 70% of our bancassurance business is in credit life and credit-related businesses, and 30% is in retail. We are focused on ensuring that we have the right balance from a product perspective. Again, another example of diversification within a channel. On the DM front, DM is currently a small contributor, 7% of new business. However, it is a fast growing channel and one where we see significant opportunities.
Our focus here is on transferring our expertise, our knowhow, West to East. We have some well established direct marketing, direct to consumer businesses in Western Europe and France and Spain in particular. Those markets are challenged from an economic and a regulatory standpoint. Our efforts are focused on transferring this knowhow into attractive markets eastwards. Think about Poland, Turkey, Russia, the UAE. Attractive markets where we have significant DM opportunities and where we can accelerate the development of this business by transferring this knowhow and this expertise. A&H is an important product line for us, about 13% of our business in the region. It is a line of business, obviously low capital, high ROE. One that is in demand in the markets that we serve. It is a product line that we continue to emphasize across all distribution channels.
Obviously, bancassurance and direct marketing are natural channels for this product, but we also promote A&H heavily across our agency channel through bundling with other products or on a standalone basis. These are all organic growth opportunities that we think will help us accelerate our growth in the region. We complement that as well with some inorganic growth. I mentioned to you the Turkey acquisition, which was an example of an inorganic growth opportunity. By the way, that acquisition is exceeding its plan in terms of what it is delivering and the integration is going very much on schedule. Another example is the acquisition that we announced earlier this year in Central Europe, where we acquired Aviva's Life businesses in Romania, Czech Republic, and Hungary, as well as their pensions business in Romania. Think of this as a bolt-on type acquisition.
It gives us access to additional distribution. It helps us improve our market standing in markets that we consider attractive for the future. It also allows us to achieve some important synergies and derive some efficiencies as well. We continue to look for these types of opportunities. As an example of a new market entry, or in this case re-entry, here the example is the Kingdom of Saudi Arabia, where we are in the process of forming a joint venture with one of the leading banks there, Arab National Bank. We expect to be operational by the first quarter of next year. I said re-entry because we had a history in the kingdom until the regulation changes. It is a 25 million people market with very low levels of insurance penetration, but a growing health segment. An attractive growth prospect for the future as well.
In summary, hopefully the takeaways will be that we have a strong presence in EMEA. We're focused on high growth markets. We are looking to leverage our unique geographic footprint. We don't have a single competitor in all of EMEA. We have competitors in specific markets or in specific areas, but no competitor has the geographic breadth that we have. We think that this is an important advantage, and one that we try to continue to leverage and obviously drive efficiencies. Despite the economic challenges, as I mentioned, our business is holding up quite well. We're going to continue to pursue organic and inorganic growth opportunities in the region. We will continue to emphasize diversification because we believe it's an important differentiator and one that holds us in good stead.
Consider that last year with the political unrest in the Middle East, with the Eurozone crisis in full swing. Despite all of these events, which affected many parts of the region, other parts overachieved. In total, the region still managed to accomplish its plans. That's really due to the fact that we're quite diversified from a geography, from a product, from a channel perspective. That's what I had on EMEA. I'd like now to turn to our overall emerging market strategy and really expand on, provide more color on what Steve presented earlier. A lot of the same trends that I described for EMEA from an emerging markets perspective apply also globally. I'm going to share with you how economic growth plus an emerging middle class are leading to an increase in insurance penetration in emerging markets. Many of these markets offer attractive ROEs.
I will take you through how we intend to increase our earnings from emerging markets from a base of 14% currently to 20% plus, so over 20% by 2016. Let me just mention here that, and this is just a personal thought, that one of the best kept secrets I think about MetLife is the fact that we derive a very significant portion already of our earnings from emerging markets, $1 billion pre-tax. Much more so than many other competitors whose story is much more closely associated with emerging markets. I don't say that to brag, I say that to specify that we think we're well positioned to grow in emerging markets because we're starting from already quite a good base. Let's look at the opportunity in emerging markets. This is a McKinsey analysis just to help size up the emerging markets opportunity.
What we see here is that over the next decade, over 60% of the industry growth in terms of GWP will come from emerging markets. Two-thirds of this growth will come from China and India, two very important markets where we already have a presence. One-third will come from emerging markets where, for the most part, we have quite a well-established presence. It would seem that we're well-positioned vis-à-vis this opportunity, but hopefully the next slide will further confirm this. This shows how as people's incomes increase with economic development, typically what you see is their propensity to buy insurance to cover their protection, their health, their savings need increases. What this chart shows is how with economic development, while there is a time lag, the level of insurance penetration is going to increase as well.
What we've done here is we've plotted our portfolio of countries, again as a backdrop against this evolution of the insurance industry. What we see here is that if you look at the top right-hand corner, you see developed mature economies that already have quite a high level of insurance penetration, and we are in several of these markets, and some of them were covered earlier by Bill and by Steve. We're also on the bottom left in many markets around the world where insurance penetration is low, and that's simply because those are emerging markets, economies are developing. Typically what happens, and obviously the pattern changes from market to market, is that there's a trajectory, there's an inflection point where the industry starts to catch up with this economic growth and development. It's important to catch that at the right point in time.
We seem to have a significant number of countries, so think about Poland, Chile, Hungary, Slovakia, Czech Republic, Mexico, that are nearing this inflection point where the progress, the growth in their industry is going to become significant. From this perspective as well, we seem to be well positioned vis-à-vis the opportunity. Now, we've looked at this from a growth angle. Let's look at it from a market attractiveness angle. How attractive are emerging markets? What we've done here is that we've grouped emerging markets into three buckets. One are markets where MetLife already has a strong, well-established presence. So think about Central Eastern Europe, Latin America, the Middle East.
What we see here is that these are high growth markets, but also these are markets that offer very attractive ROEs, and these are markets where MetLife's ability to win is quite high because of our established presence there. I would also, although Russia is one of the BRICS, so it belongs in the second category, I would add Russia to this first group simply because, again, it's a high growth market, high ROE market. We have a leading top three position in that market. Again, our ability to win is quite significant. If we think about the BRICS, which is the second group. Obviously difficult to generalize because each one of these markets has its own structural challenges and opportunities. We're talking here about Brazil, China, and India. Steve covered China to a certain extent.
These are markets where we have to look at the ROEs from the perspective, obviously, of high growth, but we have to look at ROEs from the perspective of how they apply to foreign players. The playing field is not always level if you're a local player or a foreign player. If you think about China, 95% of the market is dominated by local players. You have province by province licensing requirements, so you're in a perpetual startup mode, especially if you're a foreign player. We tend to do very well in terms of the space that we play in, but it's a small space. It's 5% of the market. The ROE that you see there doesn't necessarily apply to all players.
India, where there are restrictions in terms of foreign ownership, a challenging regulatory environment as well, a high growth market, again, perpetual startup mode, which impacts ROEs. Brazil is a different case in the sense that Brazil is an attractive market. It's a highly concentrated market. Banks tend to dominate, but there are very attractive niche segments in Brazil. I think Bill touched on that earlier. We're doing extremely well in those segments, and we continue to be focused on growing our business in those attractive areas. BRICS, significant growth. We have a presence. Building on that presence. A mixed picture when it comes to ROEs and returns in those markets. The third bucket is really markets where we have no presence, but still high growth, high ROE type markets.
Let's look now at what's our path to grow in emerging markets given this backdrop. If we think about the first group, about the markets where we already have a well-established presence, strong ability to win, then our focus will be on accelerating our business as usual growth. We think that we can do that. We think that bancassurance, I'm going to come back and talk about bancassurance in a minute, can be a major enabler for us in this regard. Maria touched on the global employee benefits opportunity, another major driver of this growth. As I mentioned earlier, we will continue also to seek some opportunistic M&A opportunities to complement our organic growth. If we think about the BRICS, the BRICS really we need to focus on opportunistic and measured expansion.
Look, these are long-term plays, and we have to be disciplined in the way that we grow in these markets. We're committed to these markets. We are in these markets, but we have to be disciplined in the way that we grow. In terms of markets where we have no presence, obviously we will look to enter those markets. This may require some form of M&A. Bancassurance may be a vehicle for us to try to enter and scale up fairly quickly. Again, this is dependent on us finding the right opportunity at the right economic terms for the company and for our shareholders. Those are the key strategies for us. Let me now tell you a little bit more about the bancassurance opportunity.
I mentioned earlier when I showed how a lot of the growth is going to come from emerging markets in general, and bancassurance is going to be a major component of this growth. If we look at this chart, what we see is that ex U.S., 1/3 of GWP is already produced through the bank channel. One third of GWP outside of the U.S., industry premium outside the U.S., is produced by the bank channel already. 60% of that are in mature markets where we are present, and some are emerging markets where we're not present, while 40% is in emerging markets where we already have a presence. A significant portion, $210 billion, in markets where we already have a well-established presence.
There are some macro trends that we believe are going to basically result in this channel continuing in its prominence and its importance. Let me share some of those with you. What are some of the key changes? Some are regulatory changes. If you think about Basel III, that's basically imposing some stringent requirements on banks that manufacture insurance or that own insurance companies. It's forcing a rethink on bank strategies in this regard. We've recently seen HSBC exit from the non-life business in Asia, thinking about their life business now. That's an important development. Again, if you think about it in the context of well-positioned insurers creating some opportunities on this front. Another important development is the fallout from the financial crisis, where many banks had to rely on state aid to get through the crisis.
They're having to repay some of that by raising capital, refocusing on their core businesses, and in some instances, exiting their insurance holdings. We see that in the case of ING, for example. We see that also in the example that I gave on Turkey with Dexia. That's also creating some opportunities for insurers to step in and to partner with these banks. Then the volatility in the credit market is also pushing banks to driving them towards increasing their fee-based income or their commission-based income. That's also creating some opportunities in terms of how banks look at insurance business and how they consider partnering with insurers. What we've really seen over the last few years is an evolution. Typically, we had two models and two extreme, if you like. We had an open architecture model where banks basically distribute products of multiple insurers.
We had, at the other end, banks manufacturing insurance, so owning insurance companies. What we're seeing now is sort of a middle ground where banks are choosing to partner with a single insurer on an exclusivity basis without necessarily putting up equity, so no capital requirements. With the type of arrangement, a virtual JV type arrangement, where they can share in the profit and have skin in the game. Opportunities for well-positioned insurers. We think we are well positioned in terms of what banks look for, in terms of our brand, in terms of our geographic footprint. Banks also are looking to serve multiple customer segments and meet multiple customer needs, so product manufacturing is important. Obviously, support infrastructure and technology are also important enablers, all areas in which MetLife is well positioned.
Our strategy here is to continue to focus on this area, continue to expand in it. I mentioned to you earlier the PNB deal in India, ANB, Arab National Bank in Saudi, DenizBank in Turkey. We have also a number of local champion banks, BancoEstado in Chile and Standard Chartered Bank in the UAE on an exclusivity basis. We also have a global relationship with Citi that we will look to continue to build on and to develop. In summary, I hope that the takeaway here would be that expanding in emerging markets is going to require us to continue to be focused and disciplined, but we're quite determined to succeed here. We will do so by accelerating our base of earnings from markets in which we already have a strong presence. We will do so organically and inorganically.
We'll continue to expand in a disciplined and measured manner in the BRICS. We will try to enter new markets provided the right conditions present themselves. Executing on this should allow us to increase the contribution of emerging markets to earnings from a current base of 14% to over 20%. It should help us improve enterprise ROE. It should also help us from a risk profile perspective by lessening our dependence on the U.S. and Japan. Last but not least, hopefully it will also serve as a catalyst for long-term sustainable growth for the organization. With that, thank you. I think I get to also announce a 10-minute break this time, then we're going to come back for Steve's summary and Q&A. Thanks.
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I'm buying into skeptics. Skeptics mess with the confidence in my eyes. I'm seeing all the angles, thoughts get tangled. I start to compromise. My life and my purpose, is it all worth it? Am I going to turn out fine? Oh, you turn out fine. Fine. Oh, you turn out fine. You got to keep your head up, oh. You can let your hair down, hey. You got to keep your head up, oh. You can let your hair down, hey. I know it's hard to remember sometimes. You got to keep your head up, oh. You can let your hair down, hey. Only rainbows after rain. The sun will always come again. It's a circle circling around again. It comes around again. I said only rainbows after rain. The sun will always come again.
It's a circle circling around again. It comes around. You got to keep your head up, oh. You can let your hair down, hey. You got to keep your head up, oh. You can let your hair down, hey. I know it's hard, know it's hard to remember sometimes. You got to keep your head up, oh. You can let your hair down, hey. Keep your head up. You can let your hair down. Keep your head up. You can let your hair down. Keep your head up. You can let your hair down. I said oh. No, no, no, no.
Do you hear me? I'm talking to you. Across the water, across the deep blue ocean. Under the open sky, oh my. Baby, I'm trying.
Boy, I hear you in my dreams. I feel your whisper across the sea. I keep you with me in my heart. You make it easier when life gets hard. Lucky I'm in love with my best friend. Lucky to have been where I have been. Lucky to be coming home again. Ooh. They don't know how long it takes. Waiting for a love like this. Every time we say goodbye. I wish we had one more kiss. I'll wait for you. I promise you, I will. Lucky I'm in love with my best friend. Lucky to have been where I have been. Lucky to be coming home again. Lucky we're in love in every way. Lucky to have stayed where we have stayed. Lucky to be coming home someday.
I'm sailing through the sea. To an island where we'll meet. You'll hear the music
I'll put a flower in your hair
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Wonder if you ever think of me. 'Cause everything's so wrong and I don't belong. Living in your precious memory. 'Cause I need you. I miss you. Now I wonder. If I could fall into the sky. Do you think time would pass me by? 'Cause you know I'd walk 1,000 miles. If I could just see you tonight.
Ladies and gentlemen, please take your seats. Our meeting is about to resume.
Drowning in the memory. I wonder if this is why I come. Making my way downtown, walking fast. Faces pass and I'm home bound. Staring blankly ahead, just making my way. Making a way through the crowd. I still need you. I still miss you. Now I wonder. If I could fall into the sky. Do you think time would pass us by? 'Cause you know I'd walk a thousand miles. If I could just see you. If I could fall into the sky. Do you think time would pass me by? 'Cause you know I'd walk a thousand miles. If I could just see you. If I could not hold you tonight.
Never been in a fighter or a Hyundai. On a hippie trail head full of zombies. I met a strange lady, she made me nervous. She took me in and gave me breakfast. She said, "Do you come from a land down under? Where men glow and women plunder? Can't you hear the thunder? You better run, you better take cover." I met a man from Brussels. He was six foot four and full of muscle. I said, "Do you speak my language?" He just smiled and gave me a Vegemite sandwich. He said, "I come from a land down under.
Ladies and gentlemen, please take your seats. Our meeting is about to resume.
I come from a land down under.
Ladies and gentlemen, please welcome back Steve Kandarian.
Okay, we can try to wrap things up before Q&A. Welcome back. All right, this slide really encapsulates our overall strategy. We've shown this to you early in the presentation, but we thought it made sense to put it back up for people to look at. Again, it's refocusing the U.S. business, getting that right balance between growth, profitability, and risk, and Bill Wheeler spoke to that extensively. Building our global employee benefits business, which we think is a core strength of ours, and at the same time, a great market opportunity for us, and Maria spoke to that. Growing the emerging markets where we already have a meaningful presence. Michel described that to you. Then driving toward a customer centricity model for the company and playing off our global brand. These really are the cornerstones of our strategy. Now, what sets MetLife apart from the competition?
Well, first is our global platform. Again, we're a very different company than we were seven years ago with the two major acquisitions of Travelers and Alico. We now operate in 47 countries around the globe. Some are mature markets that provide steady, predictable cash flow. Some are emerging markets that provide the growth of the future. We really have a balance between the different kinds of markets geographically. Our leadership position in the U.S. for employee benefits really is unparalleled. Again, playing off of that and expanding across the globe in that sector, we think sets us apart from others. In our proven risk management. Now you know how we came through the crisis in 2008. It was a tough period, MetLife came through extremely well. I'd say from a relative position in the marketplace, we really improved our standing.
That culture is really embedded into our company. Finally, a strong and growing global brand. Very strong right now in North America, and getting much stronger elsewhere around the globe. Let me kind of wrap it up in terms of the key messages for today. For 2016, these are our aspirations. Be better positioned to meet our customer needs, really that real focus on the customer. Higher ROEs driven by underlying operating earnings growth despite the macroeconomic headwinds. Again, we talked about the share buyback component of this, which is relatively modest. It really is a operating profit-driven story. 20% or more of our earnings we anticipate coming from the emerging markets, which will be growth engines for the future, even beyond 2016. Having a sustainable competitive advantage through our global platform, our scale, and our brand.
Overall, a key takeaway for everyone in this room who follows us from the point of view, either a shareholder or analyzing our company, is that we're going to get the right balance in terms of our risk profile around the products we offer, around the geographies, and making sure we have strong free cash flow in the future. The last thing I want to just leave you with is that we've taken a look at our dividend policy, and over the years, we have paid our dividend annually. One of the reasons we did that was because we had a very large base of small shareholders from the time of demutualizing. I want to announce today to you that going forward in 2013, starting in March of next year, we'll begin paying our dividend on a quarterly basis.
We think it's a shareholder-friendly approach to paying dividends, and we're delighted to be able to announce it today to all of you. With that, I want to thank you and have to call up Bill, Maria, and Michel, and we'll take your questions. I think, Bill, you're next to me.
Yes, sir.
Then, yeah, there we go. Okay. Well, these are pretty comfy. All right. Yes, first question
Thank you. Jay Gelb from Barclays. My first question is on the SIFI issue. Can you update us on the sale of the bank to GE, when the Fed would deregister the bank holding company, and when the share buybacks could start? I have a follow-up.
I should have said, but thank you for doing it. Please, if you ask a question, state your name and the organization you're with. We announced back in July of 2011 that we'd be selling the depository aspect of our bank, and we would be changing our structure once we were allowed to no longer be a bank holding company. In December of last year, we announced that we had an agreement with GE to buy the bank. There are a number of different steps in the regulatory process to complete that transaction and to ultimately debank. GE and MetLife both have submitted the requested information to the appropriate regulators. That information has generated some questions that are just typical kinds of questions you would get in that process. Those questions have been answered, addressed.
We're waiting for our submission and our proposal to be put on a docket of the key agency in this case, which is the FDIC, for approval of the actual sale. Once it's on the agenda, and assuming it's approved, the next step would be to go through the other aspects of the process to debank. It involves other regulators, including the OCC. Includes the Department of Justice, which under the statute, has to opine from an antitrust perspective. We see no issues there. It has to go eventually back through the Fed, and then even back at that point to the FDIC, where we pay premiums as a depository institution. There are a number of steps there. I don't have any greater visibility today than I did the earnings call discussion we had in terms of when that will be completed.
Obviously, we have done everything on our side. I believe everything that GE could do has been done on their side, and we're waiting for the regulatory bodies to complete their process. In terms of share buybacks, we've not announced what we'll do. That's intentional. Our view is, let's wait and see where the process sorts out in terms of the actual sale of the bank and the debanking in terms of our organizational legal structure. We learn new things all the time. The environment changes quickly here. I don't want to make some pronouncements about share buybacks today, wait several months for the process to complete. Perhaps there's a different landscape, positive or negative either way, and then reverse what I said at an earlier point in time. We're going to wait until the process is completed, and we'll make announcements at that time.
Okay, thank you. My next question was on the pace of improvement for return on equity. You said 300 basis points over the next few years through 2016. At what level should we expect that pace of improvement to occur? Should it be steady? Should it be back-end loaded?
Yeah. We intentionally did not lay out a specific year-by-year plan in this case. We put that benchmark out there in terms of how many years out it would be because that is how we're thinking about running the business. It's what we think is realistic in this environment. We've noted a couple of times that we think the headwinds are strong, and we think they're especially strong in the first couple of years. Through 2014, given pronouncements from the Fed, just given our own economic analysis in terms of how fast the economy will snap back, we think there's probably going to be some headwinds here for the first couple of years for sure. Okay, over here. Joanne. It's Joanne.
Joanne Smith, Scotia Capital. Just going back to the emerging markets discussion. I was just wondering, you say that you want to go from 14% to 20% of the total operating earnings for the company. How are we supposed to judge that as we go through the process? You don't give that data to us each quarter. How are we going to be able to analyze whether or not you're getting to those targets faster or quicker, faster or slower, whatever?
Michel, you want to start, and I'll finish?
I think, if you look at from a geographic perspective where these emerging markets are, we're talking about Latin America, parts of EMEA, mainly Central Eastern Europe and the Middle East, and then Asia. Asia would be predominantly some expansion opportunities. I understand the point around the fact that we provide right now our financials by region. I guess we'll have to figure out a way to provide more color around emerging markets, in particular, on how we're progressing against the target that we've set for ourselves.
We don't break it out that way, obviously, in our segmentation, but we can certainly provide updates over time on that. Let's go in the very back.
Thank you. John Nadel from Sterne Agee. Two questions. One, yesterday at PRU's meeting, management seemed to indicate that signals from Washington were getting a little bit better as it related to non-bank SIFI, perhaps insurance companies being treated more like insurance companies as opposed to banks. I'd be interested, since you were there last week, what your take is in that regard.
I got the chance to testify at this hearing last week. There were two panels. The first panel was a Fed rep and an employee of the Treasury. The Federal Reserve guy was pretty clear. He said, "We will tailor our regulatory formulas for non-bank SIFIs to more reflect their industry. We won't just use bank stuff." He was pretty adamant, pretty clear. Not a lot of hedging going on. That's obviously good. I also think it makes sense. I do think the devil's in the details. This is something we're going to be continuing to work on with the Fed and the right people at the Fed to kind of talk about what will happen here. The Fed actually solicited comment letters about what should be the prudential rules for regulating non-bank SIFIs.
We submitted a letter, I think it's a matter of public record, about the adjustments we thought they should make.
Thank you for that. My second question is about free cash flow and capital deployment over this four or five-year time horizon. If I hold your earnings even flat over this four or five years, you've talked in the past about 40% or 50% of earnings being free, that's a $13 billion-$14 billion of free cash flow in aggregate over that period. Does the 12%-14% ROE aspiration, does that assume that all of that is deployed?
No, it doesn't assume all of it's deployed. Some is deployed in our model in terms of some M&A activity. Not large, but some. Michel was talking to that earlier in terms of the emerging markets in particular, where we grow our business from 14% of earnings to over 20%. You get to about 19% of earnings organically, there's assumption there that we'll do at least some M&A activity. We weren't assuming big numbers there, obviously. You could assume that the way we look at excess capital, historically, you'd see that number going up over time in that model we showed you. Again, when I talked about why do we use a number of $5 billion net of stock repurchases, that's net after $3 billion of retirement of the convertible securities.
It really was determination on our side of saying, we need something in the model just to generate numbers that make sense, we want to be relatively conservative just given the uncertainty in the regulatory environment. We felt that was the appropriate number to put in the model given the external environment. I'll just add one last thing. There's about a 20 basis point improvement in ROE, roughly, for every $1 billion of share buybacks.
Hi. Thomas Gallagher, Credit Suisse. First question for Bill, just on your comment on the variable annuity ROE being sub 10%, can you provide a little more of what's behind that? From your comments, I took that to mean you were holding an exceptionally high RBC behind it because of the way you guys are calibrating your economic capital model. Maybe you could just talk a little bit about why that ROE is so low, and is it as simple as if interest rates improved materially, it'll be back in the mid to high teens?
Yeah. Part of the reason this is a little arcane is the way we price business and the way we allocate capital to our business segments is not RBC-driven, it's economic capital-driven. We think that that's a superior formulation. The issue when you get sort of in a low probability event, like very low interest rates, for a product that is interest rate sensitive, like variable annuities, is it does generate a ton of economic capital. I think that's a little deceiving because you're absolutely right. If interest rates went up 100 basis points, yeah, a lot of the economic capital calculation would be quite a bit lower, and therefore that all just by itself would drive up the ROE of the business. It's a little squishy, okay?
In terms of how the business is actually performing, I gave a little example which said we obviously like the profitability of what we're selling today and what we've sold in recent years. If you think back, though, we sold a lot of business seven, eight, nine, 10 years ago, and what's happened? Well, interest rates have headed south. Stock market has been a very modest gainer. That's the business that's less profitable today for us. I'd say the attractiveness of that business is only so-so. It's profitable, it makes us money, in terms of giving us the kind of return we want, it's not where it needs to be. Over time, as this kind of cohort of business grows the last three years, even if interest rates don't go up very much, the ROE should drive forward, and should improve.
I know that's still a little arcane, I think that gives you a little color behind it.
The next question on the $600 million of cost saves, should we think about that kind of evenly spread out or more front-end loaded? How will those develop over the next 4-5 years?
The $600 million net of savings? Our plan has that being fully realized by the end of 2014. Okay. In the very back of the room. Right there. No, I'm sorry, in the very back. Right there. Yeah.
Thanks. Jeff Schuman from KBW. I was wondering if you could speak a little bit to the giant elephant in the room, which is the stock price and really the disconnect between your key message today. You're today kind of conceptually articulating driving the ROE from 10 to 12 to 14. I think what the market's discounting is not 12, it's not 14, maybe it's not 10. I'm wondering what you think is discounted in the stock price today. Is it an astronomically high cost of capital or is it a seven ROE? Based on that, whether maybe we should have a different discussion about defending the 10 ROE or changing the cost of capital. I mean, I realize you're talking about incrementally adjusting the business mix, and you have some sensitivity there, but clearly, it's not enough to move the market off of 65% of book valuation.
I tried to touch upon that in my comments. Let me expand a little bit. Essentially, if you have a ROE of 11%, you have a cost of capital of 14% or whatever number you want to come up with, you're viewed as not creating but destroying shareholder value. You're going to trade at a discount to book value. Your P/E ratio will be low. That was central to our thinking in terms of creating this strategy because again the key aspect of creating a strategy is deriving good returns for your shareholders. We looked at improving both numbers, increasing ROE and decreasing the cost of equity capital. We've tried to address both those aspects with the different components of our strategy.
Going into markets and expanding in markets where the ROEs are higher, finding ways to reduce the cost of capital to our company, some of which we can control and some things we can't control. In a very low interest rate environment, the market looks at insurance companies and says there are risks there in terms of asset roll-off, in terms of tail risk and products, depending how they're designed, and that's going to increase the beta of your stock, increase your cost of equity capital because of that higher beta. There's some things we can control and there's things we cannot control.
If interest rates drifted back up to more normal levels, the stock market improved in terms of its performance, if the overall world economic scene became less volatile, all those things would contribute to our beta going back to more normal levels, which for us has been around one or 1.1 times. Pretty close to the market overall. Today, our beta's probably at two or maybe even higher. I mean, there's different ways to measure it. I'd argue to you that our beta should be higher than 1.1, our historic number. I'd argue, though, that it shouldn't be two or higher. I think the market has misjudged the impact of these low rates, even the equity market volatility on our portfolio of liabilities. We've talked about the hedges a number of times with you and others.
I don't think that's been totally factored into our beta and our cost of equity capital. That aside, all we can really do is in addition to communicate what we've done to protect the company, is find ways to make adjustments, again, this portfolio of products, geographies, and distribution channels to bring down that cost of equity capital, to drive up the return on equity, to get that relationship in the right place for ROE that's higher than your cost of equity capital. If you can get to that place, you should trade at a premium to book value, not a discount to book value, and presume your P/E ratio will return to more normal levels. Obviously, the headwinds economically are not helpful.
One of the reasons we had a strategy that ended in 2016 as opposed to a sooner date was we want to do the right thing over the intermediate and long term for the company. If we focused everything on the next year or two, given our assumptions around the economy, we may have taken actions that I think could have been harmful to the company longer term. We try to leave enough years for the economy to kind of get back to a normal path of growth, settling down in terms of overall world economic issues and plan around that kind of a scenario. Not as if the world is going to be what it used to be pre-crisis, but also not the immediate economic environment that we're facing today. I don't know if that answers your question fully.
If you have any follow-up on that, I'd be happy to try to further clarify.
Yeah, I think that's helpful. I guess just maybe the tension in the market is whether there are things that should be done, I guess, near term more dramatically as opposed to some of the gradual changes in business mix and other things that you're proposing to move the cost of capital, I guess.
Yeah.
I think I understand your point. Thanks.
All right. Well, let me come back on that too, though. Would you do more radical things? What I've said internally, and I think a number of times externally is, nothing is off the table, but there are steps here. There are actions we can take now that we think will positively and significantly impact our ROE and should impact in a major way our cost of equity capital, at least over time. Those are things we do in any case, we should be doing in any case. We are starting there. If three years from now or two years from now or some other period of time from now, we are executing well on that strategy, but our assumptions around the macroeconomic environment don't come to pass, and let's say they're worse than we anticipated, then we'll take additional actions.
Let's go to that side of the room. We've ignored this side. Go ahead. Sit down the middle there. Yep.
Thank you. Thanks. Ed Spehar from B of A Merrill. I think late last year was the first time you showed a slide on normalized free cash flow, and I think it was around 40% of GAAP earnings. If you look at the first quarter of this year, you had very strong stat earnings in domestic businesses. You talk about efforts to maximize free cash flow in the U.S. businesses. Has the strategic review changed your expectation about what the ratio of free cash flow to GAAP earnings is on a normalized basis?
Right. Historically, we've talked about free cash flow equals, as a rough number approximation over time, 40% of GAAP earnings. Ed's question is, will that change based upon the strategy? The answer is it should change, it should go up. I don't have a number for you. A lot of things can impact that number, but our hope is to get that to 50% or higher over this period of time.
Thanks.
Next to you. Actually, there's a question right next to you. Just stay right there.
At various points in the presentation, you mentioned growth through inorganic means. Could you talk more about the criteria you would use in evaluating acquisitions? For example, what you would look at in terms of size, EPS accretion requirements, ROE accretion, et cetera.
Okay. M&A philosophy, I'm not going to say anything different than I think you've heard from us before. We're very disciplined about M&A. You think about our major transactions in the last decade, let's say, Hidalgo in Mexico, Travelers, the Brazil dental business, Alico. Those are four I'll call out. All tied into our strategy, all were done on a basis that were accretive either immediately or very quickly, and all were transactions that we both either had capital or access to capital for and also had the ability to integrate. Those are the basic tenets that we think about when we look at deals. Look, we've been on a lot of transactions over the last 10-year period I'm referencing where we didn't win. We remain disciplined.
There are properties in some cases that strategically we really liked a lot, but we were outbid by, in some cases, a great deal. In retrospect, we're okay with that because some of those transactions have not proved out very well for the buyers on a financial basis. We don't feel pressure to do a deal, but we look at anything that's on the market that makes sense from a strategic point of view, and which is of a size that we feel we can assimilate both financially and operationally. Alico closed November of 2010. We've done, I'd say, the lion's share of integration work. It's gone well. The performance of the businesses that we took on have been within the range that we anticipated when we did the deal.
We are in a position, from a capital perspective, in terms of management time perspective, to do a transaction again. I don't anticipate a transaction the size of Alico in the near term, but there are certainly meaningful transactions, $2 or $3 billion transactions that I think we could take on both financially and from a point of execution. Having said that, we don't feel the need to do one. It has to make sense to us.
Bill, you alluded earlier to the
Name and institution, please.
Oh, Andrew Kligerman.
We know you, but the audience
UBS
guys and girls.
Yes.
Say it again.
UBS. I'm not going to be saying it that much more times. Anyway, Bill, you in talking about long-term disability, alluded to the fact that the competition had mispriced the business. First, could you give us a little more color? I know you don't want to name names, but maybe a little more color on how that happened. Then more importantly, what's the trend line for Met's guided benefits ratio in long-term disability?
How did the misprice happen? I'm probably not the right guy to ask that.
Look, it started shortly after the financial crisis. I think my feeling at the time was there were certain carriers who felt the need to kind of prove their continued viability, right? Generate some sales, generate some revenue to show they were still in the game, so to speak. An easy way to do that is to misprice a group case, okay? Because it'll come right over. Unfortunately, with group insurances, if you make a mistake, it shows up almost immediately in terms of underwriting because the claims come right in and there's no waiting period. I think as I mentioned, I think we showed for a couple of years now, those carriers that got really aggressive about growing their group revenue at a time when probably group revenue for the industry was pretty much flat, but their growth rates were double-digit.
It shows right up in their earnings at the same time. This isn't really a surprise, okay? We've sort of seen it coming, and it's just a question of where's the bottom. I don't know. Maybe there were kind of other reasons why they mispriced cases. I don't know. Look, the underwriting skills here you learn over time. I think the players in this business have all been here a while. I think we all probably have pretty good underwriting skills. We obviously think we do. One of the great things about being a big diversified company is we don't have to chase every disability case. I'm not sure everybody else has that luxury. That's a little bit what's going on. In terms of guiding for loss ratios this year, boy, you put me on the spot.
I think our range is 90%-95%. Is that right? Our group guy isn't here, but I think that's what we said, or just a little lower. Maybe 88%-93%. Oh, it's 86%-90%. Thank you. It's 90%-95% the year before. It came in right at the bottom. Yeah. Right. It came in right at the bottom end of the range in the first quarter. Our disability underwriting experience this first quarter was pretty good, and obviously that wasn't true for everybody. I'm sorry, Andrew, one more time?
Can't hear you.
Bill, you think that that can kind of trend down the benefits ratio over the next three years?
I do think it will. It won't be smooth. Okay? Disability is pretty volatile. I do expect claims trends and claim closure rates to improve over the next two to three years.
Before we move on, when you ask a question, please have the microphone close to your mouth. It's a little hard up here for us to hear you. Back there.
Mark Finkelstein, Evercore. On the U.S. businesses, obviously, you cut your sales targets in VA. You're talking about raising return thresholds and corporate benefit funding. I guess my question is, do you expect the capital allocation to the U.S. businesses to increase, be relatively flat, or even go down a little bit through the modeled period?
Why don't you take it?
Yeah, I think it's going to go down. The businesses will continue to grow. The mix of business will change a little bit. The business it's evolving to is much less capital intensive. Of course, things like we talked about the VA business which is its own special story. My expectation is that kind of net of all that, the capital allocated to U.S. will go down. It'll certainly go down as a percentage.
Okay. On the expense saves, I think the U.S. business was $350. What's the other $250 million net?
What's the other $250 million of expense?
Of your piece? Who wants to answer that? Overall?
Operational efficiencies, primarily. Operational efficiencies
In the shell.
across the business. Not only U.S., but internationally as well.
The final piece is.
Yeah, technology.
Yeah. Global tech and ops.
That's a big piece of it.
has a big piece of the remaining 250. Theirs is 150. Obviously a lot of that'll end up in the U.S., okay, or in U.S. P&Ls, but it's their own dedicated goal.
It's U.S., international, tech and ops.
Thank you.
The reinvestment, a lot of that's around tech and ops, the $400 million. Want to shift other side again? We'll go back and forth. Over here.
Thanks. Chris Giovanni, Goldman Sachs. Question for you on CCAR. Curious kind of what you've heard from the Fed since your submission, and I think there's been some commentary that you and others may need to resubmit plans by the end of June. Curious if that's the case, sort of how you're thinking about this next submission.
In the CCAR process, the Fed told us that we had until mid-June to resubmit a plan. Obviously, they're aware that we're in the middle of selling the bank and potentially changing our structure to no longer be a bank holding company, at which point we would no longer be regulated by the Fed at that point in time. We are in discussions with them as to timing around that. Really talking about now two parts of the federal government, in this case, CCAR, the Fed. Also in terms of de-banking other agencies in addition to the Fed. We're trying to just get coordinated in terms of all those agencies and getting the timing figured out. We are in discussions right now. I don't have anything specific to say beyond that in terms of whether we'll have to ultimately resubmit to the Fed.
Okay. This might be a little difficult to answer, you mentioned sort of your commentary about trying to enhance the ROE as well as reduce your cost of capital, and you gave the target for the ROE expansion. Curious how you're thinking about sort of the path of your ability to reduce your cost of capital in terms of basis points types decline based on what you can control.
Yeah. I think Bill, in particular, spoke to that around the risk profile of the products that we're looking to sell in the future. There are things you can even do with your existing block of business, and there's the external environment. All those factors come to play in terms of trying to bring down your cost of equity capital, and we're focused on certainly the things that we can affect. Over here.
Hi, Steven Schwartz, Raymond James. Just to follow up on the whole capital issue, non-bank SIFI issue, what have you. You have been, although it seemed that you just made a statement that said maybe you're not, but you have been widely rumored to be a bidder in the ING Asia transaction. I know you don't want to comment any specific transaction, but you're in kind of this never never land in terms of capital deployment with trying to sell the bank, non-bank SIFI rules coming in. How do you deal with the situation where if something is coming up that would be really, really attractive to you but would take some capital to use sometime in the near term?
Okay. Again, it's a little hard to hear up here, but I think I understood the question. As you correctly mentioned, we're not going to comment about any transactions out in the marketplace right now. When we think about M&A philosophically, I mentioned our tenets, our general tenets, but let me go beyond that and say the external environment does impact at a point in time how you would necessarily bid or not bid or what price you'd bid at for a transaction. We are mindful to the question earlier about the elephant in the room that the stock price of MetLife as we look at acquisition opportunities. In all candor, it's not a positive for us. That is taken into account. We look at certainly a point in time in the future when we can repurchase shares.
We compare a transaction opportunity with that right now theoretical, but hopefully soon actual ability to repurchase shares. We look at it not just in kind of a year one analysis, we look at it over some reasonable period of time, and we consider also what it means from a strategy point of view. Is there a region that we really think is important for us to play in in a bigger way that we're not playing in a big way today? That could have some weighting. Is it in a region where we think we have a lot of exposure today, we like the exposure but don't necessarily feel compelled to have a lot more exposure? That can affect how we bid on something. All those factors go into our analysis as we look at these M&A opportunities.
No. Steven, I understand that. Thank you. I think you missed the point I was trying to make or trying to get at, which is, given your regulatory situation in this never never land that you are, how do you deal with that? Can you use capital-
No
to go buy something
Got you
where you're stuck today in this quicksand kind of?
Well, even when we did the Alico transaction, we did speak to our regulators before we
Those were semi-rational people. Those were
They were getting the money. I'll let that comment come from the floor. I won't reiterate it here. We're still regulated. We have to go through that process of informing our regulators, letting them know what we are intending to do, what our aspirations are, what our goals are in a situation like that. I can tell you, we certainly haven't been told you cannot look at M&A transactions. That has not been the message back to us. That's really, I think, as far as I can really go at this point in time. We certainly communicate with our regulators, yes.
Okay, thank you.
Eric?
Eric Berg from RBC Capital Markets. One question. Normally, I would think that it would be the emphasis on fee-based businesses, capital markets-based businesses, but certainly fee-based businesses that shift risks to the customer that would lead to more free cash flow, not the de-emphasis of these businesses in favor of insurance products which have their own risks. My question is, what is it about the insurance products that you will be focusing on prospectively that will free up cash flow?
Sure. It all comes down to what's capital intensive, right? If you kind of think about the type of risks that an insurance company takes on, there's a lot of asset risk, right? There's insurance risk. The framework is such that asset risk gets a much, much higher charge.
That's why Group, for instance, is such a terrific business because it requires very little additional capital in terms of growing that business. That's why things like accident and health are so attractive to us. One of the nice things about buying Alico was we inherited one of the best accident and health franchises in the world. The business really started in Japan in the '70s, Alico had done a very good job of kind of sending that around the world. What's interesting is, what we're really doing is taking what they did very well and moving it into the U.S.
Right next to Eric.
Hi, thanks. It's Jimmy Bhullar from J.P. Morgan. I think other than SIFI, one of the big reasons for the discount that you trade at is just concerns around your exposure to low interest rates in the U.S. A little bit surprised that you haven't discussed that. Maybe if you could talk about-
Discussed the low interest rates.
Maybe just talk about how, if we're in this environment for the next three to four years as is assumed in your plan, quantify what the impact is on your EPS with and without the hedges you have in place, and then also talk about how the hedges are actually running off over time and how much the impact goes up.
We have gone over that. I think we went over that in the investor call in December, and we've gone over that before. The slide we show you the hedges, how they're built up, what kind of things they are, whether it's interest rate floors, swaptions and swaps. We show a number of years out. It shows essentially, I'm doing this from memory, a decade of relatively high levels. I think it's $500 million to maybe $800 million, $900 million pre-tax protection for that period of time, then falling off, but not totally away for the next several years. That really is what has been helping keep our earnings at the levels we've seen in the recent past, given the low rate environment we've been living through.
I did mention a number of times that our strategy model still has relatively low rates over that entire period through 2016 based upon historical versus where we are today. We're not assuming some big jump back in terms of rates in the near term. Clearly, I think I mentioned this as well, when you look at our stock price which is impacted by our cost of equity capital, low rates is a factor in that higher perceived cost of equity capital, higher perceived beta volatility for our company and our industry. If you look at the insurance industry overall, you see some companies impacted less and some companies impacted more than MetLife. We're someplace in the middle by rates, low rates.
We want to work toward the end of the spectrum where not just today but at a point in the future, if low rates were to continue, we'd be in the side of the spectrum where the rates impact us less than they do today. That goes to the things that Bill Wheeler's been talking about and others around shifting the risk profile of our liability portfolio. We're mindful of all that. The strategy was informed by that. We do have a block of business that we've written in the past. We can make some modifications in some cases, but not in all cases. We do have that as a legacy, but the shift going forward is toward a profile of liabilities that'll be less interest rate sensitive than has been the recent past.
Another one just on M&A. You spoke briefly about it earlier, but your name's come up on bidding on potential deals in the past. Most of them have been international deals, but maybe just talk about where are you focused on for potential M&A opportunities, either by product or by geography. If SIFI or if the Fed capital rules were not a concern, would you be open to financing a deal with stock or is that less likely until your stock price goes a little bit higher?
In terms of what type of M&A deals would be most of interest to us, I think if you step back and look at the strategy presentation today, that will inform you to a large degree. Obviously, we're looking for exposure in fast-growing markets, increasing that exposure. We talked about emerging markets going from 14% to over 20%. That would be some M&A activity, not a lot, but some is built into that. There are markets still in Latin America where we'd like to grow even faster. Central Eastern Europe, Middle East, all those are of interest to us. Certainly Southeast Asia. The issue around Southeast Asia is that we aren't the first one to say that's interesting for us to grow in, and we're going to remain disciplined and want to see what properties are available and what kind of pricing can be realized in those markets.
One thing I certainly have taken away from my career in the area of M&A is that when everyone's trying to do something at one time, it's a pretty tough market to buy into and actually have a good financial outcome at any time soon in terms of a time frame. We'll remain disciplined. If we're able to pick up a property in Southeast Asia at a price that makes sense to us, that can be accretive in a relatively short period of time, we'll certainly do that. We're not going to simply chase blue sky deals. Peter Yeah. I'll cut it off at 11:50.
Thanks. Ryan Krueger with Dowling & Partners Securities. Bill, on your new VA product, you sell it with a Protected Fund, you've mentioned in the past that the Protected Funds meaningfully increases your new business returns. Do you think there's an opportunity on the existing policies to try to transfer some of the policyholders into those Protected Funds?
It's a good question. We have already started putting the Protected Funds on the old book. Okay? Of course, we can't compel contract holders to move their funds. What's surprising to us is our movement into the guaranteed funds is better than our expectations. The performance of those funds, the track record isn't long, the performance so far has been very good. I wish I could give you a more quantified number. Maybe we can follow up and give you a sense of how many funds have come across, we're surprised how much has actually gone in.
Do you have to get every specific policyholder to agree, or is there a way to go at it from an entire product?
We don't need policyholder approval to change separate accounts. Need fund board approval, for the people on the board of the series funds. That's generally not a big deal. Merging funds can be a big deal. We haven't tried to merge funds yet. We've just made them available and talked to people about it, had a communication strategy, the fund flows have been pretty good.
We'll take one more from this other room. Here. Be our last question.
No pressure.
It better be a good one.
All right. Randy Binner from FBR Capital Markets. I think this question is for Bill. On variable annuities, you said that the hedge asset's $2.1 billion over the NAR of $1.6 billion. I just wanted to clarify, is that the product level hedging you're talking about, or is it the macro hedge? What scenario would there be where the NAR could exceed that hedge value? Should the hedge value always be bigger than the NAR?
Yeah. I did say this, it was probably a little subtle. The $2.1 billion isn't just for the GMIB rider, it's for all of our living benefit riders. Remember, GMIB is about 80%-85% of the total riders we have. That's the hedge asset for all the living benefit riders. The risks are managed all together. I would say that the net amount at risk and the hedge asset basically equal each other, and they should track each other over time. Okay? By the way, our death benefits, we generally don't hedge using derivatives. We hedge using reinsurance contracts because that's a much better accounting fit. I'm not counting any protection for the death benefit riders in that number.
The bottom line answer is that it would track. Do you hedge it all the way for a really bad economic scenario, or is there kind of more of a target where you let it go to?
There is a target range. It can bounce around the target a little bit within a range. It should track all the way, one way or another.
All right. Thanks.
Let me just wrap up by first thanking all of you for coming today, listening. Second, let me just point out that one of the key things we told you today was that going forward, especially part of our efficiency initiatives, that we'd be very efficient. I think we demonstrated that today. We ended 15 minutes ahead of time. Hopefully, we gave you a comprehensive overview of strategy, and we give you back 15 minutes of your day. Again, thanks very much for coming. Look forward to seeing you again soon.