Ladies and gentlemen, thank you for standing by. Welcome to the MetLife year-end 2011 investor conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John McCallion. Please go ahead.
Thank you, Greg, and good morning, everyone. Welcome to MetLife's year-end investor conference call. Presentation materials for this discussion are currently available at metlife.com through a link on the investor relations page. If you'll please turn to the agenda for this presentation. On slide two is a safe harbor statement. This governs the forward-looking statements made on this call. Forward-looking statements include our estimated results for the fourth quarter and full year 2011, our projections for 2012, any other statements providing information about future periods. As the statement notes, actual results may differ materially from the projected results we'll be discussing today. For a discussion of the factors that could cause actual results to differ, please see the risk factors in our 10-K and 10-Q reports filed with the SEC.
Starting on slide three, let me remind you that we will be discussing non-GAAP financial measures on today's call. Slides three and four explain how we calculate these measures and the reasons we believe they are useful. Reconciliations to the most directly comparable GAAP measures are included in the appendix. If you'll turn to slide five, here's our agenda for today. We'll begin the presentation with some opening remarks from Steve Kandarian. Then Steve Goulart will provide an overview of our investment portfolio, finally, Bill Wheeler will discuss our financial projections for the remainder of this year and into 2012. Then we'll have some time for Q&A. As we mentioned last time, please limit yourself to one question and only one follow-up, which relates to your initial question. I'd like to turn the call over to Steve.
Thank you, John, and good morning, everyone. MetLife faced several challenges during 2011: a volatile macroeconomic environment, several natural disasters, an uncertain regulatory environment. Our results this year reflect the strong underlying fundamentals of our business, with estimated earnings per share and operating ROE both up from 2010. Our outlook for 2012 assumes continued softness in the global economic environment. As we've seen throughout 2011, our diversified business mix is resilient in the face of headwinds, we expect to continue to produce strong results. You'll hear more shortly about our 2012 outlook and plan from Steve Goulart. In light of our strong track record and attractive growth prospects, I am frustrated, as I am sure you are, with the performance of our stock. We have a diversified business mix with high return opportunities, many of which are outside the United States.
We have shown through the financial crisis and in the current low-rate environment that managing risk is one of our core competencies, and we have a strong balance sheet to support our growth. This is not to suggest the path before us is an easy one. All of us in the life insurance industry face challenging macroeconomic forces that are beyond our control and are impacting our stock prices. At MetLife, we are focusing on what we can control. By the end of today's call, I hope you will have a deeper appreciation of MetLife's attractive growth opportunities, our fundamental earnings power, our superior investment and risk management abilities, and our commitment to create shareholder value. To begin, please turn to slide two of the presentation. We believe MetLife has the strongest platform for growth and shareholder value creation in the life insurance industry.
That platform is built on four pillars. First, we are one of the most geographically diverse insurance companies in the world, spanning 90% of the global insurance market. We have leadership positions in highly profitable businesses in the two largest insurance markets in the world, the United States and Japan. We have strong and expanding positions in high-growth markets with attractive demographics and increasing demand for insurance products. Overall, we are top five by revenue in almost half the markets in which we do business. Second, we believe we have the strongest brand in the industry, built not just on advertising, but on our 140-year history of doing what is right for our customers. We are extending the reach of MetLife's iconic brand to access new customers in key markets.
Our rebranding efforts for the combined MetLife/ALICO companies are now complete and have all been well received across the globe. Third, we have one of the broadest and most diverse product and distribution networks. We can leverage our product expertise to meet the needs of a broader set of customers. For example, as I mentioned on the third quarter earnings call, our accident health products are making a strong contribution to our bottom line in regions outside of Japan. Recently, we launched a new standalone whole life cancer product in Korea that is the only product on the market to offer a whole life feature with additional protection for secondary cancer diagnosis. Finally, we have what we believe is the best risk management culture in the business, which has served us well throughout the financial crisis and enabled us to buy ALICO.
Today, that same commitment to risk management is allowing us to weather the low interest rate environment with a far smaller impact on earnings than many expected. Indeed, even under an extended low rate scenario, we are expected to continue to generate excess capital. Turning to slide three. You can see MetLife's diversification across different types of markets. We are a leader in the top two insurance markets in the world. We are the number one life insurer in the U.S., the largest life insurance market. We have one of the top insurance operations in Japan. While these are relatively mature markets, we see opportunities for growth due to demographic trends, pressure on government finances, and changing consumer preferences. In addition, these operations will continue to produce strong profits and excess cash flow that can fund growth opportunities elsewhere or be returned to shareholders.
We are also in markets that are already significant, yet still capable of growing at a double-digit pace. For example, Mexico, Poland, Korea, and Chile all contribute significantly to our earnings, all generate returns in the high teens, and all have strong growth rates. We are in emerging markets such as the BRICS, where we expect revenue to grow by approximately 20% annually through 2015. Brazil is becoming an increasingly significant contributor. In Russia, we are already the number one life insurer. In India, we've expanded our presence through a partnership with PNB, the second largest bank in the country. In Turkey, we have acquired a life insurance and pension company that's taken our market position from 12th to 9th. In China, our business is now profitable even as we invest for future growth. Moving to slide four.
In an industry in which many products are easy to replicate, brand becomes a key differentiator. With our goal of becoming the leading global life insurance company, we are adding to the portfolio of powerful marketing assets we've cultivated over the years, including the MetLife blimps and our association with the Peanuts characters. In August, we secured the naming rights to the new Meadowlands Stadium in East Rutherford, New Jersey. For the next 25 years, the New York Giants and New York Jets will play their home games in MetLife Stadium, which will extend the reach of our brand. MetLife Stadium is the highest grossing stadium in the world, is the only stadium that is home to two NFL teams, and has been selected as a site of the 2014 Super Bowl. In Japan, our second largest market, we have successfully completed our rebranding effort after the ALICO purchase.
Customer purchase consideration has increased from 21% to 29%. One of our principal brand assets, Snoopy J, the only blimp in Japan, has been seen by 10% of the Japanese population and has an avid following on YouTube and Twitter. In Poland, our recent campaign to advertise the new MetLife Amplico brand raised awareness 11-fold. In just one year, we have gone from being virtually unknown to being recognized by a third of all consumers. In Russia, we are the first American company ever to sponsor the Bolshoi Theatre, a national treasure that represents the height of quality to Russian consumers. The progress we are making in expanding our brand is helping to drive consumer preference for our products and we believe will ultimately create greater shareholder value as well. Turning to slide five. MetLife also has one of the most diverse distribution platforms in the business.
Across the company, face-to-face distribution accounts for 26% of our 2011 sales. Bancassurance accounts for about a third, and the remaining sales are principally through brokers with direct-to-consumer, a small but growing share. I believe having multiple distribution channels is one of our core strengths, as customers are able to do business with us in the manner they prefer. The conventional wisdom in our industry has long held that insurance is sold, not bought. Yet our products are incredibly valuable, offering what others cannot, true financial protection and guaranteed income. When we combine world-class marketing, outstanding customer experiences, and in some cases, more simplified products, I believe insurance will also be bought, not just sold. That means looking at ourselves through the eyes of our customers and becoming easier to do business with. I don't view exceptional customer service as a cost center.
I see it as a revenue and profit driver. We will attract more customers through word of mouth. We will achieve higher persistency rates with the most desirable customers, and we'll be able to cross-sell and upsell to a greater degree than we do today. MetLife is committed to becoming a more customer-centric organization, which I believe will be one of our core competitive advantages going forward. Please turn to Slide six. While Bill Wheeler will cover our capital position in greater detail shortly, let me emphasize that MetLife is well-capitalized and continues to generate excess capital. We expect to finish the year in a very strong capital position with $3.5 billion of deployable cash above the $1 billion cushion we are keeping at the holding company. Moreover, we will continue to generate deployable capital even in a low interest rate environment.
Over the longer term, we expect that roughly 40% of our GAAP operating earnings will translate into free cash flow. I also want to reemphasize that MetLife is committed to returning excess capital to shareholders. As most of you are well aware, in late October, the Federal Reserve denied our request to increase our dividend and resume stock repurchases. Our analysis showed that the company's capital level and financial strength supported our proposed capital plan. Moreover, increasing our capital actions during a time of high unemployment would benefit the economy as shareholders redeploy this capital in a productive manner. We'll be submitting another capital plan to the Federal Reserve in early January under its revised guidelines and anticipate hearing back by the end of the first quarter. At the same time, we continue to move forward with our plans to cease being a bank holding company.
This is essential to ensure that MetLife operates on a level playing field with other insurance companies. Turn to Slide seven. The reason MetLife will continue generating excess capital is because of how we manage the business. As you know, we supplemented our third quarter earnings call with a discussion of how MetLife positioned itself to successfully weather a protracted low interest rate environment. The actions we took were consistent with MetLife's longtime commitment to sound risk management, including a strong focus on asset liability management and prudent hedging practices. As a result, even under an extreme low interest rate scenario, we expect that MetLife's earnings will continue to grow, just at a slower rate. Please turn to Slide eight. MetLife's global presence is among the broadest in the insurance industry and differentiates us from most of our peers.
Not only do we have access to high growth markets, but our economies of scale give us a tremendous opportunity to reduce expenses and generate higher margins. We also have dozens of markets where we can explore which products and distribution channels perform the best, many of which will be exportable to other markets where we do business. We believe this adds up to a competitive advantage that is very difficult to replicate. Turn to Slide nine. The organizational structure we recently announced is the first step toward taking full advantage of our global presence. To realize our full potential, we needed a structure that would achieve a number of goals. It had to create a foundation for a truly global company by eliminating the distinction between the U.S. and the rest of the world.
In addition, we wanted each region to have both mature and developing markets, which we believe will lead to the greater sharing of best practices. Finally, we wanted a structure that would drive cost efficiencies. The solution was to organize our business segments by three regions: the Americas, run by Bill Wheeler, Europe, the Middle East, and Africa, or EMEA, run by Michel Khalaf, and Asia. I am overseeing Asia while we conduct a search for a president of the region. We have also created a new global employee benefits business unit led by Executive Vice President Maria Morris. With corporations becoming ever more global, MetLife is leveraging its reach to provide global solutions to employee benefit clients. On Slide 10, we add a little color to the opportunities we have with multinational corporations.
MetLife is the premier provider of employee benefit solutions in the United States, and we have a tremendous opportunity to extend that leadership position globally. As you can see, the world's largest companies have 22 million employees in the U.S. and almost double that number, 40 million employees, outside the U.S. Our global footprint has given us some early successes in this area. Going forward, Maria Morris will work with the regional presidents to significantly expand our franchise in this space. Slide 11 provides another example of the strong opportunities we are seeing. MetLife is beginning to leverage its global knowledge base to meet customer needs. In Japan and China, MetLife has built a very successful business selling accident and health products, which have low capital intensity and high ROEs. We are now using our expertise to expand this business to other markets.
For example, our new product offering in Korea and our increasing focus on Latin America have helped boost A&H sales outside of Japan. Next year, we expect MetLife's A&H sales, excluding Japan, to rise by 30%. Please turn to Slide 12, which details our guiding principles at MetLife. First, we will consistently take a portfolio view of our business. We will invest in those markets we consider core and divest from those that do not meet our strategic priorities or financial requirements. That is why we exited businesses in the Caribbean, Taiwan, Venezuela, the Isle of Man, and certain blocks of business in the U.K., freeing up over $1 billion of capital. That is also why we expanded our presence in Turkey and India, as mentioned earlier, thereby strengthening our positions in markets with high growth rates and favorable demographic trends.
Second, it is imperative that we continuously reassess our strategy, especially given the rapidly changing external environment. We pay close attention to broad business and regulatory trends shaping our industry, and we respond accordingly. As you know, we have done strategic reviews of our businesses on an ongoing basis. Our strategy efforts in 2007 and 2009 identify key priorities for MetLife, including operational excellence and increasing the percentage of our earnings from outside the U.S. Consistent with past practices, we are currently conducting a strategic review. We will provide an overview of our findings at our next investor event in the second quarter of 2012. Third, we will strike an appropriate balance between growth, profitability, and risk. We will not pursue growth for growth's sake. We will not chase market share at the expense of operating margins.
On the contrary, we are committed to achieving ROEs in excess of our long-term cost of capital. We will not achieve this goal overnight. For example, in many cases, we cannot go back and reprice business that's already on the books. Over time, we will fix or exit businesses that cannot consistently clear our hurdle rate. Fourth, we will treat capital as precious. MetLife is highly diverse by geography, by product line, and by distribution channel. With the luxury and the obligation to deploy capital to those businesses, the highest risk-adjusted returns. MetLife's businesses are not automatically entitled to capital. They must compete on the basis of which will deliver the most value to shareholders. Any capital that cannot be invested in a productive manner should be returned to shareholders. Please turn to slide 13.
Let me conclude by summarizing the ways in which MetLife will create shareholder value for years to come. We have leadership positions in the largest life insurance markets in the world and a strong and growing presence in high-growth markets. We have one of the strongest brands in the entire industry to drive customer preference for our products. We are leveraging our scale to grow our highest margin businesses across the enterprise. We are committed to profitable growth that exceeds our cost of capital. We are committed not only to generating excess capital, but to returning that capital to shareholders. With that, I will turn the call over to Steve Goulart to discuss our investment outlook and portfolio. Steve?
Thank you, Steve, and good morning, everyone. Today, I'll begin with a brief overview of the macro environment in the major regions in which we invest. I'll walk you through some key aspects of our investment portfolio and conclude with summary takeaways of our investments operation. Turning to slide three. As you know, the global macro environment has been working through a number of long-term structural issues, namely recovering from a financial crisis, deleveraging pressures, and a period of sovereign stress. Governments and central banks are focusing intensely on seeking ways to better stabilize global economies. We expect continued market volatility, but you will hear that our portfolio is healthy and well-positioned. In the U.S., we see a period of low growth, some fiscal policy risk, and managed interest rates.
The U.S. economy is growing at a moderate pace, between 2%-2.5%, and unemployment is expected to drop below 9%, with consumer spending remaining stable. We expect the Federal Reserve to remain on hold, keeping rates low until at least 2013. As for Latin America, we think the region is doing well with growth above 4% for the past two years. Fiscal and external deficits are low, inflation has been rising, but not uncontrollably, and monetary policy has been tightened accordingly. Future performance for this region will depend heavily on the global economy. In Japan, we expect the economy to grow by about 1.5% in 2012, which is better than the near flat growth of 2011. Growth will be subdued in the first half of the year and then pick up later in the year when public sector-led reconstruction gains traction.
We expect that deflation will persist and that the Bank of Japan will remain accommodative. The rest of Asia is stronger. China and India should continue to drive overall regional growth. Inflation is easing but remains high. We expect monetary policy to become more accommodative on lower inflation expectations. China, in particular, enjoys ample fiscal ammunition to loosen if necessary. Within EMEA, let me highlight Europe. Growth is mixed across the region, with peripheral economies like Portugal and Greece experiencing recession, while from a purely macro perspective, Northern Europe is stronger on a relative basis. The European Central Bank is the most important factor in stabilizing Europe right now, especially since the health of the banking system is at risk. The real story is a need for some form of fiscal harmonization.
We believe recession risk exists for Europe if leaders there cannot reach a resolution that sets the framework for greater fiscal union. As are many other multinational companies, we have been developing contingency plans for different potential outcomes in Europe. Before I leave this slide, let me just point out that we show the full interest rate forecast that serves as the input for our 2012 plan in the appendix. These rates reflect our model estimate, which is generally derived from Bloomberg consensus or forward rates, which we use to estimate consensus when it is not available. Our model projects the 10-year U.S. Treasury at 3.01% at year-end 2012. We may have views during the course of the year that differ from our plan model, and we might position our portfolio accordingly. In terms of constructing the plan, these are the rates we use.
Let me turn to our investment portfolio. Organizationally, one of our key strengths is MetLife's global reach. As you see on slide four, we've established five regional hubs for investments. With more than 750 staff across the globe, our largest operation remains the United States. Over the past year, we've expanded our platforms and integrated staff in our regional offices, located in London, Tokyo, Santiago, and Hong Kong. We now have about one-third of our investment staff located in a total of 24 local country and regional investments offices. Let's now cover some key aspects of our portfolio. As you can see from the pie chart on slide five, MetLife's managed assets totaled nearly $458 billion at September 30th.
Our size ranks us among the top fixed income investors in the world and gives us breadth across virtually all asset sectors that most other institutions are not able to achieve. We manage a well-diversified portfolio across fixed income, real estate, agricultural mortgages, and certain equity sectors. Underpinning our investment strategy is disciplined asset-liability management. In investments, we pride ourselves on deep credit expertise. We employ top-down and bottom-up approaches to credit analysis and develop fundamental views on sectors and individual securities. Our credit research team supports our corporate bond traders and sector specialists who originate assets in public fixed income and private asset markets. We manage credit risk aggressively with a bias to sell credits that are deteriorating or have above-average event risk. Risk management is part of our culture. It's everybody's job, and it is woven throughout our investment processes.
We continually refine our approach to risk management as the scope of our business and markets change. Now let me highlight aspects of our portfolio that I think will give you a good flavor for why I say our portfolio is healthy and well-positioned. Let's begin with our story around gains and losses on slide six. As you can see from the left part of the slide, pre-tax net realized losses have been minimal at under $200 million in 2010, and we expect them to come in below our guided range of $200 million-$600 million this year. We believe this is a good result, especially when you consider that we performed a lot of rebalancing during the first three quarters of 2011, related to programs such as the sale of financials and sovereigns and repositioning of the ALICO portfolio.
Our pre-tax net unrealized gain position of nearly $20 billion as of September 30th is strong. Obviously, interest rates have been a key driver in 2011. While this number will fluctuate with swings in rates and spreads, there are also liability offsets to those swings. On slide seven, we show our $236 billion global corporate credit, foreign government, and municipal security holdings, which together make up just over half of our assets. These segments of the portfolio are very high quality, with approximately 91% of them being investment-grade. As part of our risk management process, we hold ourselves to both single name and overall sub-sector limits. A general theme in this segment of our portfolio has been that despite macro challenges, corporate credit fundamentals remain strong. This, coupled with our disciplined underwriting across all sectors, positions us well. Moving on to European bank exposure on slide eight.
As was shared during our October 28th conference call, MetLife's total exposure to European banks is approximately $6.9 billion, or only about 1.5% of our total portfolio. That's down from $9.3 billion at last year-end. In fact, we've sold nearly $3.5 billion in book value since the beginning of 2010 at average prices in the mid-90s. Our sales have largely focused on banks with exposure to peripheral Europe, lower preference capital structure instruments, hybrids, preferreds, and large exposures or credit concerns. In addition to sales, we also have nearly a half billion dollars of notional CDS in place to help protect this segment of our portfolio. I would also highlight that over 95% of our European bank portfolio is investment grade. Our European bank hybrid exposure is approximately $1.4 billion and is concentrated in banks in the U.K., Netherlands, and Switzerland.
Now let me touch on our holdings with respect to peripheral sovereigns. As you can see from slide nine, at year-end 2010, we held approximately $1.6 billion in book value of peripheral sovereigns. Nearly all of this exposure came to us as part of the ALICO acquisition. Since then, we've sold approximately $1 billion in book value, as well as taking credit impairments primarily related to Greece. Our remaining book value exposure to peripheral sovereigns is now $571 million. Of which $377 million is Greece, which we believe is a very manageable number. On to structured finance on slide 10. Our structured finance portfolio at September 30th totaled nearly $76 billion, which represents 17% of managed assets. The most significant structured finance sector is residential mortgage-backed securities at $41.9 billion, which includes agency-backed and non-agency backed bonds.
Our commercial mortgage-backed securities portfolio totals $19.6 billion in size, and our asset-backed portfolio makes up $14.4 billion. Our sector specialists in structured finance focus on collateral characteristics and tranche selection, which has enabled our portfolio to perform very well over time. For the combined portfolio, 95% is investment grade. I just want to emphasize that we've positioned MetLife's structured finance portfolio well, and as a result, have experienced minimal losses versus the overall market. Turning to slide 11, let me cover our strengths in private asset origination. This is an area where we believe we are uniquely positioned in the industry. As we said last year, our core capability and competitive advantage in private asset origination becomes especially important in a low rate environment. That is, we can increase our private asset production and achieve higher investment income compared to public asset alternatives.
Private asset sectors include real estate loans, agricultural loans, private corporates, and alternative investments. In each of these areas, we have experienced dedicated teams, all of which have the same strong underwriting culture that persists throughout our department. On slide 12, you can see our real estate and agricultural investment portfolio totaled $68 billion at September 30th. It is well-diversified among commercial and agricultural mortgages and real estate equity. Our commercial mortgages and real estate equity focus on Class A properties in primary markets with experienced, well-capitalized owners. Our agricultural mortgages are in permanent and annual crops, timberland, and agribusiness sectors with a focus on low leverage and high quality as well.
Today, we have more than 200 people involved in originating and managing our investments in the real estate and agricultural sectors, working out of 17 regional offices across the United States, as well as in the United Kingdom, Mexico, Chile, and Japan. Let me direct you to slide 13. This table further illustrates our strong credit capabilities and strength in sourcing commercial mortgages. The loan-to-value on our commercial mortgage portfolio is approximately 62%. At the end of the third quarter, the portfolio's debt service coverage ratio was a healthy 2.2 times, and delinquencies have averaged just 23 basis points over the last two years, with the most recent quarter coming in at 42 basis points.
To further my point here, over the last 10 years, we've originated over $74 billion of commercial mortgages, and in that time period, our total credit losses are well less than one half of 1%. This year, we've been able to capitalize on that performance to increase new production at very attractive spreads with a lower risk profile. As you heard on our recent earnings call, our valuation allowance was also taken down during the third quarter from $469 million to $428 million. This brings total releases to $158 million since we began releasing in the last year, a sign that the markets in which we invest continue to improve. On the next slide, you can see that the loan to value on our agricultural mortgage portfolio is approximately 48%. In addition to sector diversification, this portfolio is also diversified across the eight major agricultural regions in the United States.
We also have some small global holdings. This is an area we expect to grow, particularly given our global presence. Overall, our agricultural investments team has also been able to capitalize on past performance and current market conditions to increase its production, which in turn has continued to provide attractive relative value and risk diversification to the investment portfolio. As the pie chart on slide 15 shows, the $50.8 billion private securities portfolio includes four primary asset classes. The two largest pieces of the pie represent domestic and international private corporate bonds totaling approximately $45 billion. These privately negotiated bonds are structured with protective covenants that provide downside protection, such as minimum equity tests or maximum debt versus cash flow measures. In lease equity, we generally lease hard assets such as locomotives, rail cars, airplanes, power plants, and real estate. Most of the lessees are investment grade credits.
The smallest piece of the pie chart is project finance, which includes debt in electric generation and transmission, pipelines, oil and gas, railroads, and airports. MetLife has a very strong reputation in the private placements market as one of the largest investors for nearly 100 years. We are the lead investor on over 75% of our deals, which is important because the lead investor drives the primary terms of the structure. Our size allows us to provide entire financing solutions in all private asset sectors, including deals at the large end of the market that very few others can do. Let me remind you what makes up our alternative investments portfolio shown on slide 16. Our high-quality $9 billion portfolio is well-diversified among buyout funds, hedge funds, other alternative funds, which include mezzanine, distress, infrastructure, and energy and timber funds, and real estate funds and joint ventures.
I would highlight here that we employ the same stringent underwriting processes for these funds as we do for all of our investment sectors. Alternatives are admittedly more volatile, but over the long run, we have found them attractive from the perspective of total economic value added. Let's take a look at variable investment income on slide 17. You will notice that we have moved our securities lending program out of variable investment income this year. Since the financial crisis, and particularly given the program restructuring at that time, the income characteristics of this program are actually not all that variable. Therefore, in order to focus on components that are indeed more variable, we have removed securities lending. The 2011 numbers on the slide have been adjusted to remove sec lending also.
As you can see from the slide, our 2012 expectation is for variable income to remain fairly stable. Private equity returns will likely return to a more normalized level given the economic outlook for next year, but this will be offset somewhat with expected improvements in real estate. Overall, we expect net results to be slightly above 2011 plan with a range of $600 million-$1 billion. Let us turn to slide 18 and touch upon something that I mentioned earlier, our low interest rate protection. As part of our disciplined asset liability management, we've implemented a number of actions to hedge against low interest rates. In 2004, we started adding interest rate floors. They were very cheap at the time, and we thought they added prudent protection against a low interest rate environment.
I do not think many people were concerning themselves with this kind of an environment at the time. We added over $47 billion in notional amounts through interest rate floors, swaps, and swaptions over the ensuing years. In 2012, this protection will provide nearly $500 million in pre-tax income at current interest rate levels. Almost as important, you should note that this protection extends beyond 2020 and well into the next decade. Consistent with our practices, we continue to look at different scenarios and what they mean to us. As an example, we've been modestly adding protection against rising rate scenarios. Well, that's pretty much what I wanted to cover today, but before I turn the call over to Bill Wheeler, let me leave you with a few key points that are summarized on my last slide, 19.
First, we will adhere to the same consistent, highly disciplined approach to investing, asset liability management, and risk management that we always have. This is our focus and something that we do very well. Second, we have made meaningful reductions to our European exposures, and what we have remaining is very manageable going forward. Third, we will continue to expand our commercial mortgage platform as well as agricultural lending, real estate equity, and private placements programs, particularly given the benefits they provide in this environment. Last, perhaps the most important takeaway, our portfolio remains very healthy and well-positioned. That's what should come to mind whenever you think of MetLife's investment portfolio, healthy and well-positioned. Thank you for listening today. I look forward to any questions that you might have, and I'll now turn the call over to Bill.
Thanks, Steve. Good morning, everyone. Here is my agenda on slide two. I will review our estimated financial results for both the fourth quarter and full year 2011. I have a few slides in which I will be discussing our capital position. Finally, I'll provide you with a review of our 2012 plan. Let's turn to slide three. Before I get into the numbers, I want to make a few observations. First, I believe MetLife has had a strong year despite the challenging environment. Our full-year operating earnings per share are expected to grow 10% on a reported basis and 17% when we normalize for non-recurring items such as a record catastrophe year in our auto and home business and the tragic events in Japan. Also, we had good top-line growth and a strong recovery in our operating margins.
Finally, ALICO performed as expected, and the integration remains on track. Our 2011 performance is a great example of the strength and resiliency of the MetLife franchise in these difficult conditions. With that as a backdrop, let's turn to our fourth quarter results on slide four. We are projecting operating earnings of $1.2 billion-$1.3 billion and operating earnings per share of between $1.16-$1.26 for the fourth quarter. After adjusting for some of the non-recurring items in the quarter, we are estimating a normalized earnings per share between $1.22 and $1.32.
These non-recurring items include $0.03 from variable investment income, which is expected to be slightly weaker than the bottom end of our plan range of $225 million per quarter, $0.02 due to the ALICO integration expenses and other items in our corporate and other segment, and $0.01 related to DAC unlockings and other reserve adjustments as a result of our annual review of our DAC and reserve assumptions, which we do in the fourth quarter. I should point out that the estimated DAC adjustment is not related in any way to the new accounting pronouncement, which, as many of you know, are probably aware, takes effect on January 1st, 2012. I will be discussing the new DAC accounting change later in the presentation. Net realized after-tax losses are expected to be relatively modest in the quarter, as they have been throughout the year.
Also, at this time, we expect a fairly benign result for derivatives in the quarter. However, I would caution that we know derivative gains and losses can move around quite a bit, particularly in this environment. Finally, I would note the increase in our book value per share, both including and excluding accumulated other comprehensive income or AOCI. We are estimating book value per share including AOCI of $56.15-$57.25 and excluding AOCI of $48.90-$49.40. This reflects solid year-over-year book value growth of over 17% and 9% respectively. Turning to slide five, let's look at our full year 2011 results. This slide compares 2011 estimated results with both our 2010 results and our 2011 plan.
You will note that for all key financial metrics, our full year 2011 estimates are expected to be within the guidance range provided to you at last year's Investor Day, even though our results were significantly impacted by the adverse weather in the U.S. and the tragic events in Japan. The other takeaway from this slide is that we have had solid top line and bottom line growth in 2011. To be sure, ALICO has contributed significantly to this result, but that's not the entire story as we have had solid organic growth as well. For example, Premiums, Fees and Other revenues, while up over 32% on a reported basis, were still up a solid 6% when you include ALICO's results in both periods. Slide six is a waterfall chart depicting our 2011 results on a normalized basis.
On the left-hand side of the chart, you can see our full year 2011 operating earnings at between $4.83-$4.93 or 10% year-over-year growth. As you will note in the chart, the key normalizing items. First, we had strong performance from variable investment income this year, which is expected to be $0.10 above the guidance range. Conversely, we had a number of negative items that dampened earnings, most notably the record catastrophes in auto and home and the earthquake and tsunami in Japan. Both catastrophic factors cost us $0.24 of earnings per share this year. In addition, an adverse reserve adjustment in connection with our use of the U.S. Social Security Administration's Death Master File cost us $0.11 of earnings per share. Finally, we had a number of other smaller non-recurring items throughout the year, which had a net earnings per share impact of $0.06.
When you adjust for these non-recurring items, they total $0.31 for the full year, you get to a normalized operating earnings per share of $5.14-$5.24, comfortably above the top end of our original guidance range for 2011. I would attribute this overperformance to solid investment returns from both variable investment income and core spreads, coupled with solid underwriting discipline and expense management. Now let's switch gears and discuss our capital position on the next three slides. First, on slide seven, here are the key year-end 2011 estimates. We expect our combined U.S. RBC ratio to come in between 420%-445%. In Japan, we are estimating a year-end solvency margin ratio of between 850%-950% based on the new SMR that does not become an official reporting metric until the first quarter of 2012. We believe 600% on this new basis is a reasonable target ratio.
Therefore, our estimated range clearly reflects the strong capital position in Japan. We also estimate the combined cash at MetLife's U.S. and international holding companies to be $4.5 billion at year-end, $3.5 billion of which we would characterize as readily deployable capital above a $1 billion liquidity buffer. As a global company, we have holding companies both in the U.S. and the international segment. In some cases, we may determine that it would be more tax efficient to leave capital outside of the U.S. to fund specific international growth and expenses. With regards to debt leverage, we estimate our Moody's leverage ratio to be 26% at year-end, which includes a pay down of a $750 million senior note that is maturing at the end of the year.
You may recall that at our 2010 Investor Day, our Moody's ratio was estimated to be 32.3% at the end of 2010, and we had guided to achieve a 300 basis point improvement to that ratio. The primary reason for the additional 300 basis point improvement is due to the strong AOCI position projected on the balance sheet at year-end, which is driven largely by low interest rates. On slide eight, we show a roll forward of our cash at the holding companies before any capital management activities in 2012. As I mentioned in the prior slide, we estimate $4.5 billion of cash at the holding companies at the end of the year or $3.5 billion of deployable capital after our 2011 dividend and debt repayment in the fourth quarter. In 2012, we are projecting subsidiary dividends to the holding companies of $4 billion-$4.5 billion.
As I will show you on the next slide, our 2012 dividends are expected to be higher than normal. This is due to incremental dividends in 2012 from Japan and the U.K., as we have discussed with you previously. Also, in October of 2012, we will receive $1 billion from the conversion of mandatory common equity unit securities. You may recall we issued $3 billion of the common equity units as part of the ALICO financing. This is the first $1 billion tranche. The other two $1 billion tranches will convert in September of 2013 and October of 2014. We are projecting expenses of $2 billion-$2.5 billion for the holding companies in 2012. The biggest component of that total is interest expense in preferred dividends and certain other holding company expenses. The remainder is primarily from non-recurring integration related expenses and certain non-U.S. subsidiary reorganization activity.
We would expect to have, therefore, $7 billion to $8 billion of cash at the holding companies by the fourth quarter of 2012, or $6 billion to $7 billion of deployable capital that could be used for capital management activity. In slide nine, here is a look at what we would consider our normal run rate for capital generation to be going forward. In any given year, there always seems to be some unusual cash flow items, higher dividends, integration expenses, et cetera. This table represents a normal run rate for capital generation for MetLife. We would expect the U.S. to generate, on a normalized basis, subsidiary dividends of $2 billion to $2.5 billion annually, and the international subsidiaries to generate in the neighborhood of $1.2 billion to $1.4 billion annually.
As for total net uses, we would expect the holding company's annual expenses to be around $1.5 billion on a run rate basis. A little more than $1 billion would be to pay interest in preferred dividends, with the remainder going to other holding company expenses. Overall, we would expect to generate approximately $2 billion of deployable capital each year, which is roughly 40% of GAAP operating earnings. Let's discuss our 2012 plan. Before I discuss the specific assumptions on slide 10, I should note that we are providing you the plan based on the old business structure and not the newly formed organization that Steve discussed earlier. We will adjust our financial reporting to coincide with the new business structure in 2012. Let's discuss the 2012 assumptions. We are assuming the S&P 500 grows 5% from a base of 1,200 at December 31st of this year.
This equity growth rate is consistent with our prior plan assumptions. As Steve Goulart pointed out, we are assuming U.S. interest rates based on consensus, which implies a modest rise from current levels. With regard to exchange rates, MetLife is operating in a number of different foreign currencies, as you know. Our plan assumes international regions at consensus exchange rates. In Japan, the yen-dollar exchange rate in our plan is at 79.75, and we have opportunistically hedged approximately 80% of Japan's earnings for 2012 at an average floor of 82. We are assuming no buyback activity in this plan. We will announce any buyback or change in dividend actions upon approval from the Fed and our board. We are assuming an effective corporate tax rate of 28.5%. Our 2012 plan reflects the impact of the new DAC accounting, which is effective January 1st, 2012.
Let's discuss the impact of the new DAC accounting on slide 11. We will apply the new standard retrospectively, meaning that we will record a one-time charge to adjust the existing DAC balance. We anticipate this one-time, non-cash, after-tax charge to equity of $2.1 billion to $2.6 billion. We will also recast the prior period operating results to present income statements on a consistent basis. Thus, when I compare our 2012 plan to the 2011 expected results in the upcoming slides, the 2011 results have been recast to reflect the accounting change. We estimate that there will be a negative impact on 2012 operating earnings in the range of $375 million to $475 million, primarily in the international part of our business, most of that in Japan.
One thing I need to remind you about is the interaction of this accounting change and purchase accounting in an acquisition, such as the ALICO acquisition. The accounting change only impacts DAC balances. It does not impact VOBA or other intangibles recorded in PGAAP, despite how VOBA somewhat replaces DAC on an economic basis in an acquisition. Therefore, this new DAC accounting has less of an impact on equity and more of an impact on our operating earnings on a relative basis. Finally, you should keep in mind that this accounting change has no impact on cash or stat capital, and this negative impact on earnings will decline gradually as the purchase accounting impact lessens and new business is added under the revised accounting model. Turning to slide 12, we are projecting operating earnings of $5.1 billion-$5.6 billion.
We also project that our average shares outstanding will be 1.07 billion, giving us operating earnings per share between $4.80-$5.20. Also, we expect another fairly modest year of investment losses of between $200 million and $600 million after tax. We project book value per share excluding AOCI to be between $50-$51.15, and operating return on equity to be between 10%-10.6%. You will note that ROE is expected to be below 2000 levels, due largely to the impact of the new DAC accounting guidelines, which I have just discussed. Turning to slide 13. Starting on the left of the slide, we see our 2011 estimated normalized earnings per share of $5.14-$5.24 that I showed you on an earlier slide.
We adjust 2011 normalized earnings for the impact of the DAC accounting change of $0.51, as if it were in place for all of 2011, in order to show an apples-to-apples growth comparison between 2011 and 2012. After adjusting for DAC, we get to 2011 adjusted normalized earnings per share of $4.64-$4.74. In our 2012 guidance, we expect to have business growth in the U.S. and international, contributing to earnings per share growth of $0.24 and $0.27 respectively. In addition, we are assuming that interest rates will dampen earnings per share by $0.21 relative to 2011. As you may recall, this number is the same as we previously discussed with you during our low interest rate presentation as part of our third quarter earnings call. About 25% of this figure relates to an increase in our pension and post-retirement benefits expense.
Finally, we estimate that all other items will have a net positive impact of $0.01 to 2012 earnings. When you add up all these pieces, you will get to the midpoint of our 2012 guidance of $5. This represents 7% growth from the comparable 2011 figure. I view that as solid underlying growth in an environment which remains challenging. Of course, as I reviewed with you in our plan assumptions, we are not expecting any recovery or snapback either in interest rates, equity markets, or the overall macro environment. Also, to remind you, this doesn't assume any buybacks, which would of course increase the EPS growth rate. Now, let's look at our projected 2012 top-line growth by line of business, which we measure by Premiums, Fees and Other revenues on slide 14. I would just point out a few things to you on this slide.
We are projecting PFOs to be between $47.3 billion and $48.6 billion for 2012, which represents roughly 5% growth for the year. As far as the businesses go, I would take note of a few things. U.S. business estimated growth of 4% is primarily driven by insurance products growth of 5%. We are seeing an increase in our group insurance PFOs as we are expecting a sales pickup for more rational pricing in the group insurance marketplace across all products, group life, disability, and dental. Also, in dental, we sold a large case to TRICARE, accounting for nearly $400 million of premiums in 2012. Retirement products estimated growth of 8% is driven by higher fees on growth in separate account balances. You should also note that we will manage to a variable annuity sales plan in 2012 of $17.5 billion to $18.5 billion. This represents a 35% decline from estimated 2011 sales.
Corporate benefit funding's top line is expected to be down 7%, mainly due to lower year-over-year structured settlement sales. Auto and Home growth rate at 2.5% is solid, mainly driven by a hardening of pricing in our homeowners business. Turning to international, overall growth at 6%, with over 5% growth in Japan and 7% in other international regions, is solid, but in my view, doesn't reflect the true underlying growth in this business. International PFO growth is being partially offset by the strengthening of the U.S. dollar against certain currencies, such as the Mexican peso, Korean won, and the euro. Also, the macroeconomic challenges in Europe, where we are seeing significantly lower demand for traditional life products, is adding pressure to our growth. Overall, we estimate that exchange rates and weaker demand in Europe is dampening international's 2012 top-line growth by one and two percentage points respectively.
Let's talk about expenses on slide 15. We are projecting an operating expense ratio of 23.9%-24.5%. Excluding the impact of pension and post-retirement benefits, the estimated ratio is projected to be 22.8%-23.3%. You will note this plan is slightly better than the performance in 2011. Overall, I believe we have exhibited expense discipline over the past several years and will continue to do so in the future. We remain focused on the ALICO integration, and that continues to perform as planned. Finally, our reported operating expense ratio is negatively impacted by the increase in our pension and post-retirement benefits costs of $90 million, primarily driven by low interest rates. With regard to operating earnings by line of business, here's the detail on slide 16.
Overall earnings of $5.1 billion to $5.6 billion are 7% above our 2011 normalized operating earnings of $5 billion to $5.1 billion, which are also adjusted for the new DAC accounting pronouncement. I would point out a few other things on this slide. U.S. operating earnings growth at 3% is a bit light due to lower core yields and higher pension and post-retirement benefits. On the plus side, we are expecting improved underwriting in insurance products, primarily individual life and the disability portion of non-medical health. Higher fees in retirement products are expected to contribute almost $100 million to the year-over-year growth due to higher separate account balances. International's expected 2012 growth of over 14% is very strong, with 21% in Japan and nearly 9% growth in the other international regions.
Certainly, we have seen strong recovery in sales and persistency in Japan following the crisis, and we expect that that will continue into 2012. The key earnings drivers for the other international regions are improved persistency in Asia Pacific and Latin America, a focus on operational and expense efficiencies, and accretion from the strategic transactions in India and Turkey. Finally, let me summarize on slide 17. We've had a strong year despite the ongoing macro environment. Our operating earnings grew 10% on a reported and 17% on a normalized basis. I also believe 2011 was a year in which we have accomplished a lot as an organization. We have made great progress integrating ALICO into MetLife and executed several key strategic acquisitions and divestitures. I believe in many ways, 2011 was a great transition year for us as a company, setting the stage for future growth.
Our capital position is very strong, and we continue to generate excess cash even with interest rates remaining low. Much of the excess capital we mentioned when the ALICO acquisition was announced will be coming up to the holding companies next year. Looking ahead to 2012, I believe our strong fundamentals will drive earnings growth as we focus on key markets and products that provide attractive risk-adjusted returns. With that, I conclude my prepared remarks. I'd like to turn the call back to the operator to take your questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star then one on your touch tone phone. You will hear a tone indicating you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. Your first question comes from the line of Edward Spehar from Bank of America. Please go ahead.
Thank you. Good morning, everyone. Two questions. First, Bill, you gave the slide where you talked about what you think your normal free cash flow generation is, and if we think about that 40% of GAAP earnings as deployable capital generation, can you just give us some idea of what the thought process is around how you deploy that? Is that a number that you would anticipate paying out to shareholders in some combination of dividends and buybacks on an annual basis if we look out over time? I have one follow-up.
I think that's right, Ed, with the possible exception of some of that may be used for acquisitions. That's always a possibility. The idea is that's capital that should be returned to stockholders.
I guess, related to acquisitions, how do you decide on distributions, though? I guess the idea is that you never know when an acquisition is going to come, so you could always make the case internally if you're looking at acquisitions of not paying out capital because you're waiting for a deal.
Well, I don't think the theory is we're going to build war chests. I should say, look, this is a really dynamic decision-making process. Buyback activity will also obviously just depend on what the stock price is. Today it's very compelling to buy back your stock. I hope that will not always be true. There'll be a lot of decisions that will have to be made. The idea is that's capital we don't need to run the business today that's generated, therefore it should seek its best use.
Okay, then one last one. In terms of your guidance, if interest rates stayed at the current level, should we refer back to the presentation you did after the third quarter, which I think said a $0.20 impact? Does that mean you would be talking about $0.20 lower range, or that's kind of how you've come up with getting from $5 to $4.80? Midpoint to low end.
Yeah. Even though we have a plan which shows interest rates going up in 2012, that's obviously good, that doesn't have a lot of near-term impact. The near-term impact in terms of that improvement is not $0.20. Okay? In fact, remember when I talked about how we arrived at our number for $5, we're assuming that this interest rate environment that we're in today is effectively going to stay with us, even though over time we might see the 10-year move up later in the year. I think you should assume that if interest rates stay just where they are today, the 10-year 2%, for example, the additional impact on our earnings would be very modest and obviously fits well within the guidance range.
Okay, thank you.
Your next question comes from the line of John Nadel from Sterne Agee. Please go ahead.
Good morning. Excuse me. Your Corporate Segment guidance indicates, I believe in the footnote, that it assumes the sale of the bank. It kind of begs the question, what's the status on the sale of the bank? Where's your confidence level on being able to get that property sold? Any color you can provide on the number of potential buyers would be very helpful because from the outside looking in, it just appears that this property wouldn't provide much to the buyer or a potential buyer other than a possibly attractive financial transaction.
Yeah. John, there's not much to say on the bank right now, other than that the process is on track. With regard to corporate and other
Remember, the bank is composed of a number of different businesses, and what we've assumed is the sale of or disposition of the businesses we've announced that we're exploring for sale, which is basically the depository institution as well as the forward mortgage origination activity. Any remaining bank activity, which is basically mostly mortgage servicing, and then the reverse mortgage business is still in our results in Corporate and Other. It's in Corporate and Other. It's not a separate segment.
Yeah. Understood. Is there any additional color that you can provide? I think your bank by ranking is something like the 70th or 75th largest bank by deposits. That would imply that there's a lot of potential buyers, those ahead of you on that list. Are you in the process? Are you seeing a lot of interest? Or is this something where we're likely looking at one or two or three potential buyers and that's it?
It's just not the right time to give any color on that.
All right. Can I try one on cost of capital then? Steve, you had made the comment, I think in your prepared remarks, that achieving an ROE above your long-term cost of capital won't happen overnight. As you assess the different businesses, which of them is currently, I guess, either on your 2011 or 2012 plan not producing returns above that cost of capital? I ask you this because we don't actually see the allocated equity by segment or product line as part of your disclosure.
John, right now, the reason I use that term long-term cost of capital is right now our beta in the industry is very high. We gave a presentation about a month ago about the low interest rate environment. We said, yes, there is some correlation with our business to low interest rates, but it's not as great as the marketplace seems to be assuming. Nevertheless, our beta right now in terms of market volatility is quite high, as are most of our peers. Today, the cost of capital is quite high given just how that formula works. It's the risk-free rate of return plus the long-term return on equities in the U.S. times your beta. Today, not a lot of businesses look great on that measure because our beta is so high given volatility in the marketplace.
Longer term, if you go back to the kinds of beta that our industry has seemed to gravitate toward, closer to a one beta, then most of our businesses look quite attractive in terms of beating our cost of capital. Nevertheless, as I mentioned, we're doing a strategic review. We anticipate that being concluded sometime in the second quarter of 2012, we're reassessing everything. Everything in this business in our company will be looked at in that strategic review. We'll make judgments at that time based upon our analysis and the facts associated with that review. We'll have more to say about that at our next investor event, which we anticipate being in June of 2012.
I guess, Steve, if I could just ask a quick follow-up then to that. If we assume that over the longer term, for some reason, the beta of the life insurance sector does not fall back toward one. Let's say the long-term beta is somewhere between that historical one and today's maybe closer to two at one and a half. How does that change your view of certain businesses?
One thing I said in my prepared remarks was we'll look at all of our businesses. We either fix them or we'll get out of the businesses. We have to look at our business model based upon the external environment and the realities that we face in the marketplace. If we think this ends up being a 10-year, 15-year long, long slog in terms of economic recovery and very, very low interest rates, we have to take that into account in terms of our business model, as will all of us.
Yeah.
Look, we're seeing this in the banks right now in terms of what people are doing in that sector. In many cases, spinning off businesses or winding them down, et cetera. It's no different for us. We'll have to take a look at that based upon our judgment of where this economy is going, the policy outcomes that are occurring in Washington and elsewhere in Europe. We'll have to make some judgments, and some of those judgments will be tough judgments. We have to make them based upon the external realities.
Thank you very much. Appreciate the views.
Your next question comes from the line of Thomas Gallagher from Credit Suisse. Please go ahead.
Good morning. First question I wanted to circle back on is capital deployment. If you think about your starting on-balance sheet excess of three and a half billion, and then looking at the free cash or capital generation throughout the year. I guess what I wonder is from talking to my bank colleagues, the default assumption now appears to be that the Fed is only going to allow buyback or common dividends for that which you generate in a given year in terms of using retained earnings. Apparently won't allow any consideration for usage of on-balance sheet excess. Anyway, any general comments you can make on usage of on-balance sheet excess versus retained earnings would be helpful. Thanks.
Well, we've heard those sorts of discussions too, but I think, Thomas, what that means, or certainly how I've interpreted that is, since we think about it, we'll generate roughly $5 billion of net income next year, is that our capital management activities couldn't exceed $5 billion. Okay. I've also heard that the Fed doesn't want to have banks with more than a 30% payout ratio. Obviously, in our case, that'd be 30% of $5 billion. In my mind, that limit, if you will, I think that works for us.
Got it. Bill, that's a GAAP earnings limit as opposed to a statutory capital generation type of constraint in terms of your understanding.
Oh, absolutely. Oh, I'm sure that's the case. The Fed, they're focused on U.S. GAAP earnings and capital.
Got it. Yeah. That's, to me, a very important point of distinction. Okay. That's all I had. Thanks.
Your next question comes from the line of Andrew Kligerman from UBS. Please go ahead.
Hey, thank you. First question. In past investor days, or at least last year, you cited an ROE objective of 12%-14% by 2013. Could you give a little color on where you stand with that ROE outlook?
Andrew, right now we're kind of in the 11-ish kind of range, just below that. In this low interest rate environment in terms of opportunities on the investment side, it's going to be hard to get up to the higher end of the range in the short term. We are, again, focused on doing a review. We'll look at everything to say under different scenarios, how do we get our ROE up to the level it needs to be at? Today, we're not there. We know that. We are going to look at every lever possible to get the ROE over time to the level where it needs to be.
needs to be would imply 12%-14%?
Part of our review is discuss that issue and make an informed judgment about what that number should be. I'm not saying that is or isn't the right number going forward. We're going to review that and take a look. One thing I should point out to people, because sometimes I hear these numbers, 12-14, 13-15, not just for us, but for lots of companies. We have to remember the external environment and the interest rate environment. That is, if you have inflation at 3% or 4% versus having it at 1%, that's a very different ROE number on a real basis. You would expect, just for any company, that if you have a very low interest rate, low inflation environment, those numbers on a real basis would be different, therefore, on a nominal basis, you'd see those numbers come down.
If inflation goes back up, you'd expect those numbers to go back up. I hear these numbers kind of bandied about over long periods of time as if they're carved in stone and have no impact upon them by inflation. I think that's actually not the right way to look at it.
Got it. We'll stay tuned until June.
Yes.
Okay. With regard to the $6 billion to $7 billion of deployable capital by the end of 2012, would you really want to deploy the capital excess of the billion-dollar buffer? Would that be your objective over time to maintain just a billion dollars?
Well, I think it would certainly depend on the situation. Certainly, I could see at a point in time of us only having $1 billion of cash at the holding company. Sure. There's certainly circumstances that would lead to that. I think the point of that number is that that doesn't mean we're going to spend it all at once or at one place. That's available to do other things with. It shouldn't just sit at the holding company earning 1%. That would not be a good thing.
Bill, at the opco level, where would you like to maintain the RBC and SMR levels?
SMR, I think on the new basis, we are going to target a 600 level, which we think benchmarks us with the very best companies in Japan in terms of capital adequacy. With regard to U.S. RBC, I think the answer is going to be, and obviously this always can shift around a little bit, is 350 plus a cushion, but I think in practical reality, that means something around 400.
Got it. I guess lastly.
Andrew, we're going to have to move on.
Okay, one last one then. The $17.5 billion-$18 billion of variable annuity budget for the year, down 35%. Does that indicate some concern around the business?
Well, no. I think if you go look at a year ago, we told people our VA plan was $18 billion. Now, obviously, we'll end up selling a number in the high 20s. That's obviously much more than we had expected. We're going to take the steps necessary to get that back into its proper risk profile inside MetLife. I think we've done a lot of good things with the VA business in terms of how we've adjusted the product and such. Market conditions have changed. The competitive environment is different, and we need to make sure we get that back where it needs to be inside MetLife.
Thanks.
Your next question comes from the line of Suneet Kamath from Sanford Bernstein. Please go ahead.
Thanks. Good morning. First question on the holding company cash. Bill, I think you said some of the $3.5 billion redeployable, then some of the, I guess, $6 billion-$7 billion of redeployable is in international holding companies, and you may choose to leave it there for tax purposes, I guess. Can you maybe give us a breakdown of how much of that is at the U.S. holding company versus international, either at the end of this year or what's in the 2012 plan?
Sure. At the end of this year, of the $4.5 billion, $400 million is in international. I'm not sure I have the number right off the top of my head, what will be in international under this scenario, at the end of 2012. A lot of what we're spending money on internationally is the ALICO integration costs, which are paid out of this pot of money. Obviously the international holdco will be funding a lot of that.
Okay. Just same topic. In the roll forward, you have holding company interest and expenses of $2 billion-$2.5 billion, I guess, for 2012. In your run rate on the next slide, it drops to about a billion and a half. Wondering what the difference between those two are.
Well, the biggest difference is ALICO integration. Remember, when we announced ALICO, we said that over a two and a half year period, that we would spend $800 million integrating ALICO, and 2012 is kind of a hump year in terms of spending that money. That's where a lot of the funds are going. We also have another initiative which is related to ALICO integration, but not exactly the same thing, where if you recall, ALICO operated as branches, mainly as branches around the world, and we will now convert many of those branches to subsidiaries or create new subsidiary structures. That will also cause some branches or subs to have to merge, especially with existing MetLife subs in many of these countries. In a few cases, we're going to have to put in some more capital in some of those combined entities.
It's not a huge amount of money, that's the next biggest thing going on.
Okay. All that's contemplated in these numbers.
That's right.
Okay, terrific. Thanks.
Your next question comes from the line of Mark Finkelstein from Evercore Partners. Please go ahead.
Good morning. Looking at insurance products, you're expecting them to grow about 5%, yet you're expecting earnings to go down 3.8%. It sounds like the impact of rates isn't expected to be that impactful on 2012. I'm just curious why the growth versus the decline in the earnings number.
Hi, Mark, it's Eric Steigerwalt.
Sure.
We will have core spread compression in insurance products. I would say the two other pieces here are higher pension and post-retirement benefits, as Bill pointed out in his slides. If you take a look at the way the earnings come out on his earnings slide that he showed you can see a pretty big increase in the retirement product business. Part of that increase is due to this interest on economic capital. As we continue to grade into our new economic capital model, as we discussed at last year's Investor Day, we will have more capital being allocated to retirement products, and thus it will receive more interest on that surplus. The other products will actually come down. That gives you sort of the three pieces for what's driving insurance products earnings growth rate a little bit lower.
Okay. Then just on a slightly different subject, thinking about the U.S. RBC ratio, was it 420, 445 as a range? How much do the derivative gains on rates, or I should say interest rate derivatives impact that number, if at all, and how should we think about that RBC in the context of the gains that have been recognized in 2011?
Well, the short answer to that is it's complicated.
Figured.
Yes, some of the derivative gains do obviously help that number. At the same time, remember, Mark, stat reserves are also adjusted because of low interest rates.
Right.
I'm not talking about cash flow testing at the end of the year. I'm talking about other sorts of stat reserves. There is a natural offset. In many ways, this interest rate hedging we've done with derivatives has, obviously it is hedging, and so there's a stat offset in many cases. What the derivatives have done, it helped us preserve the RBC ratio. When the environment improves, it'll obviously change the value of the derivatives, but also the stat reserves will adjust as well.
I guess just, do you think it's a meaningful impact?
I think it's probably been a net positive, but it's not that substantial.
Okay. All right. Thank you.
Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
Great. Thanks, and good morning. First with the guidance, building in the 5% growth on the S&P 500 from 1,200 at year-end, given where markets are this morning, clearly looks conservative. Can you provide some sensitivity of your expected earnings to changes in the equity markets? Just had a follow-up on the VA sales guidance as well. Does that envisage any further price changes or is that just the expected moderation based on the two price changes that you've already announced? Thanks.
Well, 1,200 didn't seem conservative last week. Who knows what next week will bring. Obviously, it's a very volatile number. I think, given where we are, Nigel, in sort of the DAC amortization curve, if you will, how we're bracketed, the changes in the stock market aren't all that sensitive to or are going to affect earnings all that much. I think a good rule of thumb is you should assume that a 1% change in the performance of the market is worth about $0.01.
Got it.
$0.01 to $0.02. Obviously when the market gets more extreme, that can change. With regard to the product changes we've made in VA, is that what's necessary to get sales where they're at to $17 billion-$18 billion, we believe the answer to that is yes. Obviously, that's an educated guess, and we'll have to see how that market evolves over the course of the next 12 months.
Got it. Very good. Thanks.
Your final question today comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead.
Hi. Thank you. Many of my questions have actually been addressed. I think, Steve, you mentioned in your presentation that you expect to be more proactive in how you manage the business and take sort of a portfolio management approach. As you're doing this business review, should we expect any major dispositions or changes as a result of that, or do you expect them to be more modest? Secondly, on the free cash flow generation for 2012, I think you're implying a number, the $1.7 billion-$2.4 billion implies roughly 40% of your earnings are going to be free cash flow pre-dividends. Should we assume the same number going forward over the long term, or is this 2012 number depressed for some reason because of spending related to ALICO or anything else?
Jimmy, in terms of what will our review come up with, I don't have an answer for you yet. We really are in the middle of it right now. Everything is on the table. If we need to make substantial changes to our business model, we will do so. If there are ways that we can modify things in more modest ways and still get to the end result we're seeking, which is a long-term return for shareholders that meets our cost of capital plus, we'll do that. Everything's on the table. Yeah, there could be businesses that we dial down. There could be businesses we don't engage in any longer. But there's no determination today on those points.
Okay.
Nothing's off the table.
Okay. Then on the free cash flow?
I'll turn my mic on. With regard to cash flow, look, the 2012 number, you saw the detail, right? I gave you some color. Lots of unusual things going on in 2012, which by the way, is often the case with regard to these dividends and cash needs. It's kind of a coincidence. It turns out to be sort of a $2.5 billion net number before the conversion of the units. The point of the next slide was really to say that on an ongoing basis, given our current level of earnings, the number would be roughly $2 billion or $1.7 billion-$2.4 billion or $2.3 billion. I think the idea there is, as we grow, that number should grow as well, keeping that same sort of 40% ratio in mind.
The 40 should be roughly close to what you expect going forward, and it should grow with earnings as opposed to you're not expecting 50% free cash flow generation because you're spending more on ALICO or spending more related to the reorganization or restructuring of the business.
Yeah, I would stress on a normalized basis. In any given year,
It'll be different, yeah.
There'll always be something unusual going on.
Okay, thanks.
Jimmy, let me just follow up one other point to your first question about what we may do. One of the luxuries we have at MetLife, especially post ALICO, is we are in a great number of markets, both in terms of products and geographies. You've already seen, as I've mentioned in my prepared remarks, our exiting certain businesses and effectively doubling down or getting large into other businesses in other countries. That is something that we have some flexibility around. If we think there are parts of our business that are not and will not anytime soon meet our cost of capital, there are other things we can do certainly to crank back up or turn up the dials, if you will, in other parts of our company.
We have that luxury by being very diverse geographically, being very diverse in terms of product lines, and I think that that's one advantage for us.
Okay, thanks.
Great. Well, thank you, everyone, I'm going to turn the call back over to Greg to close out. Thanks. Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference Services. You may now disconnect.