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MetLife, Inc. (NYSE:MET)

December 13, 2012 8:00 am ET

Executives

Edward Spehar

Steven A. Kandarian - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

John C. R. Hele - Chief Financial Officer and Executive Vice President

William J. Wheeler - President of The Americas

Steven Jeffrey Goulart - Chief Investment Officer and Executive Vice President

Analysts

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Thomas G. Gallagher - Crédit Suisse AG, Research Division

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Seth Weiss

Randy Binner - FBR Capital Markets & Co., Research Division

Sean Dargan - Macquarie Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Year-End 2012 Investor Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ed Spehar. Please go ahead.

Edward Spehar

Thank you, Greg, and good morning, everyone. Welcome to MetLife's year-end investor call. Presentation materials for this discussion are currently available at metlife.com through a link on the Investor Relations page.

Now please turn to the agenda of the presentation. On Slide 2 is the cautionary statement on forward-looking statements and non-GAAP financial information. These items are discussed in further detail in the appendix slides. The Safe Harbor statement contained in the appendix governs the forward-looking statements made on today's call. Forward-looking statements include our estimated results for the fourth quarter and full year 2012, our projections for 2013 and any other statements providing information about future periods.

As the statement notes, actual results might differ materially from the projected results we will be discussing today. For a discussion of the factors that could cause actual results to differ, please see the Risk Factors in our 10-K, 10-Q or other reports filed with the SEC.

Let me remind you that we will be using non-GAAP financial measures on today's call. The explanatory note on non-GAAP financial information contained in the appendix includes information on how we calculate these measures and the reasons we believe they are useful. Reconciliations to the most directly comparable GAAP measures are also included in the appendix.

Please turn to Slide 3 for today's agenda. We'll begin the presentation with opening remarks from Steve Kandarian, then John Hele will discuss our financial projections for the fourth quarter, full year 2012 and full year 2013. Then, we'll have some time for Q&A. [Operator Instructions]

Now I'd like to turn the call over to Steve.

Steven A. Kandarian

Thank you, Ed, and good morning, everyone. On this morning's investor call, we will focus on MetLife's financial outlook for the fourth quarter of 2012 and full year 2013. As you will see in our presentation this morning, the impact on our financial performance from low interest rates is tracking closely with the expectations we laid out in the fall of 2011, and we continue to believe this is a manageable risk for MetLife.

You will also see that we intend to accelerate our shift away from capital-intensive products to improve the risk profile and free cash flow generation of the company. For example, our U.S. variable annuity sales target for the next year is approximately 40% below the level of sales we anticipate in 2012. Over time, the resilience of our earnings stream and our continuing actions to reduce tail risk should improve the valuation of MetLife shares.

Before I turn to today's presentation, I also want to share the latest news with regard to our efforts to debank. Yesterday, the Office of the Comptroller of the Currency conditionally approved the application of GE Capital Retail Bank to assume the deposits of MetLife Bank. We do not have an estimate of when the deal will close nor do we have an answer at this time on what this will mean for MetLife's participation in the Federal Reserve's 2013 Comprehensive Capital Analysis and Review. But we are pleased that the debanking process is moving forward.

Turning to Slide 5. Let me emphasize that while macroeconomic factors and regulatory uncertainty deserve attention, we are confident that MetLife has the right strategy in place to create long-term shareholder value. As a reminder, our strategy contains 4 cornerstone initiatives. We are refocusing the U.S. business to improve the balance between growth, risk and profitability. Our actions relating to variable annuities are clear example of this effort.

We are growing our presence in emerging markets, with a goal of increasing the earnings contribution from 14% today to more than 20% in 2016. We are building a global employee benefits business to leverage our expertise in a product line with a highly attractive risk return profile, with a target of $250 million of operating earnings in 2016. We are driving toward customer centricity and a global brand. I believe these can be enduring competitive advantages for MetLife that will drive both revenue growth and better margins over time.

Slide 6 provides a high-level view of our anticipated fourth quarter and full year 2012 financial performance. John Hele will provide more detail later in the presentation. As you can see, 2012 is likely to be a good year, with reported operating earnings per share expected at the top end of our guidance range and normalized operating EPS above the top end of guidance. The most notable unplanned operating item in the fourth quarter is an estimated loss of $85 million to $95 million after tax from superstorm Sandy.

MetLife is proud of the job that our property and casualty claims associates have done on behalf of the thousands of customers affected by superstorm Sandy. Recently, the New York State Department of Financial Services tabulated service results for New York claimants related to the storm. According to the department, as of last night, the homeowner claims that required an inspection -- for our homeowner claims that required an inspection, we are completing the inspection, estimating the claim and issuing payment in average of less than 10 days, the fastest in the industry. The number of MetLife customer complaints reported to the department also ranks among the best in the industry at about 0.1%

Turning back to our 2012 financial results. Operating earnings have benefited from solid investment spreads as variable investment income and interest rate hedges have provided an effective offset to the negative impact from low reinvestment rates. In addition, insurance margins have been favorable, driven by improved underwriting results and good expense management.

While this slide addresses operating EPS, I want to make a few comments about net income. We recorded a goodwill write-off in the third quarter, and as you'll hear from John, we anticipate a DAC and other assumptions-related charge in the fourth quarter, that's almost entirely a below-the-line item. Net income remains a relevant performance measure, so we take below-the-line charges seriously. We understand that growth in book value per share is important to our shareholders, and net income is the primary driver of growth in book value.

Slide 7 provides high-level assumptions on the global economy that inform our 2013 plan. I will highlight a few key points. With regard to the U.S. economy, our general outlook depends on how the fiscal cliff is resolved. A credible long-term solution would be bullish. No resolution or failure to address entitlement reform would be bearish. While we see some risk of recession in the U.S. next year, with the probability linked to the outcome of the fiscal cliff, our base case is GDP growth of 2% to 2.5%, with the second half of the year stronger than the first.

In Japan, our biggest non-U.S. market, we expect slow economic growth. However, even in a flat economy, we expect our business to grow. We are projecting 9% operating earnings growth for Asia in 2013, the vast majority of which will be driven by Japan.

Slide 8 shows the portfolio yield for our U.S. business and the amount of interest rate hedge income included in the yield calculation. We continue to benefit from our decision in the mid-2000s to purchase out-of-the-money protection against the risk of low interest rates. Interest rate hedge income is estimated to be up 45% in 2012, driven by increase in interest rate floor income as a result of lower interest rates. Also, the final tranche of our interest rate floors became effective in 2012. In 2013, interest rate hedge income is expected to remain flat.

Overall, our U.S. portfolio yield is expected to decline by just 9 basis points in 2012. We will be estimating about a 20% basis point decline if not for the offset from higher interest rate hedge income and strong variable investment income. In 2013, the pressure from low reinvestment rates is expected to be more pronounced. I would note that a decline in the portfolio yield does not automatically translate to margin compression.

For example, approximately 1/3 of the estimated decline in portfolio yield next year relates to anticipated new business, which is priced for the current low rate environment and existing floating rate liabilities. Finally, just as we bought protection in the mid-2000s against a potential low rate environment, we have recently purchased intermediate and long-dated protection against higher interest rates.

As you can see on Slide 9, our 2013 operating EPS guidance is $4.95 to $5.35, which assumed no share buybacks. John Hele will discuss our outlook for next year in greater detail. I would like to emphasize that our 2013 guidance is consistent with the projections we shared with you in October of 2011 regarding our likely earnings power if interest rates remain low.

On our October 2011 call, we said that a protracted low-interest-rate scenario would reduce our potential annual operating earnings growth rate from 8% to 4%. As it turns out, interest rates have remained low, and applying a 4% compound annual growth rate to 2011 normalized operating EPS of $4.69 results in operating EPS of $5.07 for 2013. As you can see, this is not far off the $5.15 midpoint of our 2013 operating EPS guidance range, which assumes that interest rates and credit spreads increase modestly next year. If interest rates and spreads remain flat, we estimate a negative impact to 2013 operating EPS of less than $0.05 per share.

Please turn to Slide 10. Our valuation multiple suggests the market is concerned about earnings and balance sheet risk beyond 2013. I want to reiterate that we still believe the low end of the 12% to 14% operating ROE target for 2016 is achievable even if interest rates remain at current levels during the entire period. The write-off of our U.S. retail annuity goodwill in the third quarter of 2012 has about a 30-basis-point favorable impact on our operating ROE expectations for next year. You may recall that in October of 2011, we highlighted the potential for a goodwill charge if interest rates remain low. While we cannot predict potential future charges, our 2016 operating ROE target assumes no material charges between 2013 and 2016.

Please turn to Slide 11. Our 2013 plan translates to essentially flat operating earnings per share next year. This is a function of outperformance in 2012. We continue to believe that our operating EPS should trend upward through 2016 even if interest rates remain low. This view is primarily based on 2 considerations. First, our non-U.S. business accounts for 1/3 of operating earnings in our 2013 plan. Japan accounts for approximately half of non-U.S. earnings. It is worth noting that earnings in Japan have remained strong despite 2 decades of low interest rates. Emerging markets account for approximately 40% of non-U.S. earnings, and we anticipate strong growth in these markets.

Second, the strategic initiatives we unveiled at our May 2012 Investor Day are expected to contribute approximately 200 basis points to operating ROE in 2016. While these initiatives were important in May, we have an even greater sense of urgency above them today, in light of the lower for longer interest rate scenario. While we closely monitor and react to the external environment, we cannot control it. We are focused on what we can control to meet our financial objectives and create shareholder value.

Slide 12 concludes with a few comments on capital generation. While we would prefer to deploy capital sooner rather than later, we believe it is prudent, in light of regulatory uncertainty, to assume no share repurchases in our 2013 plan. I know our investors are disappointed by the lack of near-term capital management at MetLife, but I believe our long-term ability to create shareholder value is among the best in the business.

First, under the assumption that regulatory capital rules reflect the insurance business model, MetLife should generate excess capital. Second, we continue to redesign our products and shift our product mix to improve our risk profile. Our goal is an increased free cash flow, from approximately 40% of earnings today to at least 50% of earnings over time.

Finally, our commitment to returning capital to shareholders remain undiminished. Our plan through 2016 assumes $8 billion in share buybacks, including $3 billion to offset dilution from the mandatory common equity units issued to finance the acquisition of ALICO. We believe this level of activity is feasible even if we assume no current balance sheet capital can be used to fund repurchases.

With that, I will turn the call over to our Chief Financial Officer, John Hele. John?

John C. R. Hele

Thanks, Steve, and good morning. As you will see on Slide 14, I will review our estimated financial results for the fourth quarter and full year 2012 and present our 2013 plan.

Turning to Slide 15. We project operating earnings of $1.2 billion to $1.3 billion and operating EPS of $1.12 to $1.22 for the fourth quarter. Adjusting for 4 notable items in the quarter, we estimate normalized operating EPS of $1.19 to $1.29. The first notable item is a net $0.06 per share from higher-than-budgeted catastrophe losses, partially offset by favorable prior year reserve development. We project a gross loss from superstorm Sandy of between $140 million to $160 million. After reinsurance recoverables and taxes, we estimate losses of between $85 million to $95 million or approximately $0.08 per share.

The second item is related to our annual review of DAC and other assumptions. We estimate a $50 million after-tax charge or $0.05 per share in operating earnings. There's also a charge outside of operating earnings of $550 million to $750 million for a total net income impact of $600 million to $800 million in the quarter. I will cover this more -- in more detail on the next slide.

Third, we expect $0.01 per share of reorganization costs. Lastly, we estimate variable investment income will be $0.05 per share, above the top end of our 2012 quarterly guidance range. As also noted on this slide, we estimate relatively modest net realized investment losses in the quarter. For derivatives, while difficult to predict, we estimate the below-the-line impact will be less significant in the fourth quarter than it has been in prior quarters this year. Finally, we estimate book value per share, excluding AOCI, to be approximately $47 per share.

Moving to Slide 16. As I just mentioned a moment ago, we are expecting a net income charge of $600 million to $800 million after tax in the quarter as a result of our annual DAC and other assumptions review. The estimated charge is primarily due to changes in variable annuity policyholder behavior assumptions, as well as general and separate account return assumptions for fixed income investments.

Let's first discuss the variable annuity assumptions, which account for approximately half of the charge. VAs were originally priced with dynamic lapse assumptions. We have always assumed policyholders would persist longer when their guarantees were more valuable. Our assumptions for deep in-the-money and deep out-of-the-money contracts have generally proven to be accurate. Based on our emerging experience and industry data, lapses have been lower than previously assumed for policies with guarantees that are close to or slightly in-the-money. Therefore, we have modified the slope of the dynamic lapse function to conform with this emerging experience. I should note that the majority of the VA charge is related to our U.S. business. The balance relates to our runoff block of Japan variable annuities.

In addition to the VA lapse rate assumptions that I just discussed, a portion of the total charge relates to long-term fixed income rates. We have decided to reduce the general account earned rate assumptions and the return assumption for the fixed income portfolio of our separate account assets. With the lower assumed return for fixed income investments, our total long-term separate account returns assumption moves from 7.5% to 7.25%.

On Slide 17. We compare 2012 estimated results with both our 2012 plan and our 2011 results. As you will note for all key financial metrics, our full year 2012 estimates are expected to be within or better than the guidance range provided in December 2011. Premiums, fees and other revenues are expected to be up 4% to 5% for the year, a solid result. Operating earnings are expected to grow 18% to 20%, driven primarily by increased investment returns, favorable underwriting results and growth in the business. This is a strong result considering the challenging environment. Finally, our expense ratio looks like it will be at or slightly better than our guidance range, and our operating return on equity will clearly exceed the 2012 plan.

On Slide 18, we have outlined our projection for our year-end capital position. We estimate our combined U.S. risk-based capital ratio to be between 425% and 450%. In Japan, we estimate a solvency margin ratio between 800% and 900%. We estimate cash and liquid asset at MetLife's U.S. and international holding companies at $5.4 billion at year-end. Finally, we estimate our year-end Moody's debt leverage ratio will be 27%.

Now moving to 2013. Slide 19 provides you with our plan assumptions for the year. We assume the S&P 500 Index increases 5% from a base of 1,422 at December 31. Our U.S. interest rate assumption is based on consensus, which assumes the 10-year treasury yield is at 1.65% at year-end 2012 and gradually rises to 2.38% at year-end 2013. Our plan assumes international regions at consensus foreign exchange rates. In Japan, we assume the yen-dollar exchange rate at 79 at year-end 2012 and weakens to 84 at year-end 2013. As Steve indicated earlier, we assume no share buyback activity in the plan, which is consistent with the assumption in the 2012 plan. Finally, we assume an effective corporate tax rate of 28.5%.

As you can see on Slide 20, we project 2013 operating earnings of $5.5 billion to $5.9 billion. Our forecast for average shares outstanding is 1.1 billion, which is up over 2012 due to the conversion of our common equity units. Our operating earnings per share guidance is $4.95 to $5.35. We project a reported operating expense ratio of 23.6% to 24.5% in 2013, essentially flat year-on-year. This, however, understates our progress on expense reduction efforts for 2 reasons.

First, as a result of low interest rates, we projected our 2013 pretax pension expense will be $90 million higher than in 2012. Second, we expect to record $1 billion of pension closeout premiums in the fourth quarter of 2012 from the conversion of a participating pension contract to a nonparticipating closeout. As a result, our 2013 pension closeout premiums are projected to be approximately $900 million lower than in 2012. Excluding these 2 items would improve the 2013 ratio by 70 basis points relative to 2012. Also, we assume net investment losses to be between $200 million to $600 million, as our outlook for credit losses remains benign. Finally, we project year-end 2013 book value per share, excluding AOCI, of approximately $51 and operating return on equity of between 10.2% to 10.9%.

I want to briefly mention our variable investment income outlook, which is on Slide 21. For 2013, we project pretax variable investment income in the range of $800 million to $1.2 billion. This is higher than our 2012 plan of $600 million to $1 billion but below our estimated 2012 range of $1.1 billion to $1.3 billion. We assume private equity and hedge fund returns remain in line with their solid performance in 2012. However, our 2013 plan does not assume real estate returns and prepayment fees will repeat their strong performance of 2012.

Moving to Slide 22. Here is our 2013 outlook for operating earnings by line of business. The midpoint of our 2013 operating earnings guidance of $5.5 billion to $5.9 billion is 1% above our 2012 normalized operating earnings estimate of $5.6 billion to $5.7 billion. The Americas' operating earnings growth estimate of less than 2% is largely related to lower investment returns in the U.S., primarily in corporate benefit funding. In Latin America, underlying earnings growth is dampened by higher spending in 2013, largely related to direct marketing initiatives, and a onetime tax benefit in 2012. Adjusting for these items, underlying operating earnings growth in Latin America will be closer to 9% in 2013.

In Asia, we project 2013 operating earnings of $1.2 billion, an increase of 9% on top line growth of 4%, a strong showing considering that most of the Asia segment is Japan and mature market. In Europe, the Middle East and Africa, the EMEA segment, we project 2013 operating earnings growth of 6%, which is well below the normal growth rate we would anticipate for this business. You may recall, we announced in July 2011 that we had entered into a reinsurance agreement to sell a large portion of our U.K. business, and the sale closed in July 2012. Our EMEA results in 2012 included approximately $50 million of operating earnings related to this business. Excluding this, EMEA's 2013 growth rate would be over 30%.

On Slide 23, let me walk you through a roll-forward of our estimated 2013 cash and liquid assets at the holding companies. As I mentioned on a prior slide, we estimate $5.4 billion at the end of 2012 after payment of our 2012 dividend and debt repayment in the fourth quarter. We add to our 2013 estimates subsidiary dividends of $3 billion, $3.5 billion, which, as expected, is lower than 2012 due to higher-than-normal distributions from Japan and the U.K. in 2012. I should also note that our 2013 forecast excludes the dividend from Japan due to the 2012 conversion from a branch to a subsidiary. In addition, we will be receiving $1 billion from the mandatory common equity units, which we'll be converting in September 2013. This is the second of 3 $1 billion tranches associated with the ALICO financing.

As for cash uses, we estimate 2013 net expenses of $2.5 billion to $3 billion, of which the largest component is total interest expense and preferred dividends. Our net expenses are expected to be higher than normal in 2013 due to some onetime items, including an assumption for increased collateral requirements under Dodd-Frank. Moving to the next bar. We are now including $1.6 billion to pay our current level of dividends and debt maturities in 2013 but are excluding incremental capital actions beyond these. Considering these cash flows, we expect to have $4.8 billion to $5.8 million in cash and liquid assets at the end of 2013.

Moving to Slide 24. The chart illustrates the trend in U.S. variable annuity sales since 2007. As we've discussed in the past, sales increased substantially in 2011 to $28 billion, following the introduction of a new product, GMIB Max, in May of 2011. We subsequently reduced the roll-up rate on this product and made other product changes to bring our sales down to a targeted $17.5 billion to $18.5 billion in 2012, which is at the midpoint -- which, at the midpoint of the range, is a 37% decline from 2011. For 2013, our VA sales target for the current generation of VAs is $10 billion to $11 billion or down more than 40% from 2012. This plan is consistent with our strategy to shift the business mix towards less-capital-intensive products.

Finally, let me summarize on Slide 25. We've had a good year despite the difficult macro environment, with operating earnings growth in the high-teens. While 2013 looks challenging, we still see a double-digit operating ROE without the benefit of stock buybacks. We remain focused on risk reduction and improving the free cash flow as we continue to execute our strategy of shifting the business mix towards less-capital-intensive products. We are well positioned to manage in a tough environment and do not see any material change in our long-term outlook.

That concludes my prepared remarks, and now I would like to take the call -- I'd like to turn the call back to the operator to take your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Mark Finkelstein from Evercore Partners.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

I've got a -- my first question is I just want to understand your kind of cash position of $5.4 billion, which, I assume, includes the $1 billion buffer. I guess, can you just help explain -- last year, Bill talked about year-end '12 cash expectations of $6 billion to $7 billion, $7 billion to $8 billion if you include the $1 billion. What's the variance between where we are at year-end '12 and where we were expecting to be a year ago?

John C. R. Hele

Your $6 million to $7 billion, I think, in -- is before the payment of the dividends and the debt repayments, which would total about $1.6 billion and $5.4 billion is net.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. And the $5.4 billion is gross of the $1 billion of buffer, correct?

John C. R. Hele

It includes the $1 billion buffer.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. And then just my follow-up is on the $2.5 billion to $3 billion. You talked about collateral requirements. How much are the collateral requirements impacting that $2.5 billion to $3 billion number for '13?

John C. R. Hele

We don't really know where it's going to come out yet. The rules are not final on the Dodd-Frank. We've put a placeholder included in that $2.5 billion to $3 billion. The guidance we gave before was that the net uses -- on an ongoing basis, on the 2011 Investor Day, was about $1.5 billion. And this will vary year by year depending upon items going on and the capital we need to put around the company. So you can see this is -- we have an amount earmarked for some collateral requirements for next year.

A. Mark Finkelstein - Evercore Partners Inc., Research Division

Okay. But no kind of specific number you can give us in that $2.5 billion to $3 billion?

John C. R. Hele

It's about half of -- it's about $500 million that we've earmarked of that $2.5 billion to $3 billion.

Operator

Your next question comes from the line of Suneet Kamath from UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

Just one quick follow-up on Mark's questioning. Again, on the cash position, if I start with the $7 billion to $8 billion, which is, I guess, gross of the buffer and I take out the $1.6 billion, which I think is your debt repayment and your dividend, I get the $5.4 billion to $6.4 billion. I don't want to nitpick here, but where is the $1 billion that gets into $5.4 billion?

John C. R. Hele

Could you just repeat that? I just couldn't quite hear your last bit of the question.

Suneet L. Kamath - UBS Investment Bank, Research Division

Sure. I mean I was basically saying, if I just take the $7 billion to $8 billion gross subtract $1.6 billion, which is what you said the debt repayment and the dividend was, I get to $5.4 billion to $6.4 billion. And so I'm just wondering what the delta is between that and the $5.4 billion that you've shown on the slide.

John C. R. Hele

The variable annuity assumption changes that we did, the policyholder behavior assumption changes require that we put some more cash down into our company, where we reinsure all of these risks. So we had to make up for part of that assumption change.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. That's clear. And then, I guess, on the share repurchase, I just want make sure I understand 2013, which I think I do, but then the longer-term ROE forecast. So 2013, obviously, no buyback. But I thought Steve had said to get to the 12% to 14% ROE target by 2016, that assumes, I think, $8 billion of share repurchase. Is that right?

Steven A. Kandarian

That's correct, Suneet. So basically, we said $8 billion gross, $5 billion net and nothing assumed in 2013, correct.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. And then just in terms of the math, how are you factoring in the potential for realized investment losses from your derivatives portfolio? To the extent you assume interest rates rise, I'm assuming you're going to take losses on the mark to market of that portfolio, and that would probably be a benefit to your ROE. Is that included in your -- you said no charges are included in your book value forecast. But are you taking the benefit of that negative mark in terms of your ROE forecast?

John C. R. Hele

No, we don't take that into account.

Operator

Your next question comes from the line of Thomas Gallagher from Crédit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

John, you'd I guess, identified a $500 million number for the increased collateral requirements, but I think that leaves us with still another $1 billion delta or $500 million to $1 billion delta for expenses and other relative to previous guidance in that Slide 23 roll-forward. Can you explain what else is going on there?

John C. R. Hele

We have planned for 2013 some more contributions for lower interest rates testing in other subsidiaries, some of the reinsurance subs that we have and there's just a variety of other expenses going on in 2013 that we expect to be more onetime.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got you. And just a related question to that, when you think about the $2.5 billion to $3 billion number is the normal -- should the normalized number beyond that be closer to $1.5 billion that you'd previously talked about given that -- my assumption would be the Dodd-Frank collateral would be a onetimer, as well as your comment you just made. Is that a fair way to think about it?

John C. R. Hele

In any one specific year, it's always hard to predict these uses. But generally, our guidance of $1.5 billion is what we believe that's sort of the core use on an ongoing basis. But as we see in any one year, you sometimes have the impact of low interest rates kicking in that we have to shore up cash in some subs.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Got it. And then just a follow-up. The interest rate guidance on Slide 19, assuming the 10-year goes from 1.65% to 2.38%, and I think the comment is that's consensus. Can you -- I think that's a bit above the forward curve if I'm understanding that correctly. So I guess my question is if rates actually don't move up and we stay flattish, is that a material EPS delta? And if you can give us some color on that.

Steven A. Kandarian

Tom, it's Steve. In my comments I mentioned we thought it was less than $0.05 for 2013.

John C. R. Hele

And that's if it stays flat, not even going on the forward curve, Tom.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Okay. If I could sneak one last one in. Your purchase of protection against high rates, does that have any material cost or impact to 2013 EPS guidance?

John C. R. Hele

No.

Operator

Your next question comes from the line of John Nadel from Sterne Agee.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

First question, in prior years, we've seen some sizable swings in how you allocate capital between the operating segments on a year-over-year basis. I think you use an economic capital model. Is there any of that going on in 2013, where any of the segments that are seeing big increases or decreases?

John C. R. Hele

There is some slight increase in the retail annuity business in terms of capital, but it's not that huge of an amount comparatively going forward.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

And so no other items, John?

John C. R. Hele

Not really. It was a movement mainly from corporate to the retail annuity to reflect the growth of the business in 2012.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

And is that really the reason why we see a big increase in the corporate operating loss and I guess offset, in all likelihood, in annuities?

John C. R. Hele

No. The corporate is mainly impacted by lower interest rates. There's no offsets in the corporate line, and there's a capital in corporate so that's a direct reduction across the board. That's really the largest contributor to the change in the corporate line.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Okay. And then you guys meet with the rating agencies on a regular basis. I guess my question is this, if the Fed weren't involved right now in evaluating risks and stress testing and we were just looking at an environment where you deal with your constituencies as you did in the past on capital management, how much in the way of buybacks or capital deployment do you think you could do without sacrificing ratings?

John C. R. Hele

I don't really want to answer that question. Right now, it's theoretical, and what I've said before on these calls is that until we're no longer a bank holding company, we're going to hold off in terms of any pronouncements around capital deployment. Things can move fast, and information can come to the marketplace that will impact our thinking on this. So we're going to wait and get to the process of selling our bank to GE, debanking, and then we'll take a close look at it. And we'll go back to all of you with our plans.

John M. Nadel - Sterne Agee & Leach Inc., Research Division

Okay. And last one is just, does your guidance assume any large pension closeout-type transactions? And do you continue to have an appetite for those types of deals?

William J. Wheeler

John, it's Bill Wheeler. No, the guidance does not assume any pension closeout -- or any large pension closeout activity. Yes, if those transactions do appear in the future, we will absolutely look at them.

Operator

Your next question comes from the line of Jimmy Bhullar from JPMorgan.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

I had a couple of questions. The first one is just on your cash generation ability as a company. And I think, Steve, you mentioned that you wanted to go from 40% of earnings to 50%. If I look at last year's slide, you were expecting to end the year with roughly $4.5 billion of cash or so at the holding company. Now you're at $5.4 billion, so that's roughly $1 billion higher. You got $1 billion from the equity units. So assuming that -- taking that out, it's roughly stable. So not a lot of cash generation at the holding company. If I look at your subsidiary, the RBC ratio is expected to be only 5 points higher than where it was at the end of 2011, so 2011 to 2012, 5 points higher. The solvency ratio is actually 50 points lower. The leverage ratio is 1 point higher. So it just doesn't seem like there was a lot of cash generation. And you did obviously pay out the dividends, but it doesn't seem like there is a lot -- as much cash generation in 2012. So that's my first question. Secondly, on just your hedges, can you talk about how -- obviously, you've been getting a benefit from the hedges on rates for the last few years. And can you talk about how and when the hedges begin to run off? Or like, over time, how much does the benefit decline if we're in this type of rate environment, let's say, 2, 3, 4 years from now?

Steven A. Kandarian

Jimmy, let me address the second question first, and John will take the first one. We have provided you with some slides in the past and we can resend those to you regarding the hedges. They run out for a number of years. They extend for quite a number of years in terms of their benefit. So that relates to the low rate environment. As I mentioned today, we have purchased protection against rising rates for both intermediate and longer term. So those hedges are still in place. We showed you the impact on 2012, which was quite a strong impact for us. They flatten out because of the forward strikes are now all struck, and there's no more additional hedges coming in place for low rates. We haven't purchased new low rate hedges, given where rates are today. But we have our protection for the future in case, over time, rates go back up.

John C. R. Hele

And Jim, in terms of the cash generation, cash usage in 2012, we did have, as I just mentioned earlier, a higher allocation of cash down to a reinsurance subsidiary that reinsures these variable annuity risks, these living benefit writers, which we have the DAC adjustment on, and that's the -- this was the major study done on policyholder behavior. This is the first time policyholder behavior for VAs has been updated since they've been sold originally. It takes a long time to look at this experience and develop it, so you can view this as a quite infrequent update of a magnitude of this size.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

And the hedges that you're buying for potential rise on rates, how much roughly are you spending on those? And are you expensing that through operating earnings? Or is that -- is this expense going below the line?

John C. R. Hele

That would be below the line, and we also sold some of these so that's almost neutral, I bet.

Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division

Okay. And the last question I have is on the VA business. Obviously, you'd reduced your exposure in 2012, and now you're expecting to reduce it further in 2013. Are you still comfortable with the return profile of the business that's sitting on your books and what you've sold over the last couple of years? Obviously, the equity markets have done probably better than your assumption so far in 2012. But what is -- the fact that you're backing off of the product so fast, is it just mostly risk management or is it sort of a lack of comfort with what you've sold so far?

William J. Wheeler

Jimmy, it's Bill Wheeler. Look, it's -- we are comfortable with the business we've sold in 2012, and I think we would be comfortable with what we intend to sell in '13 since we've repriced the roll-up rate from 6% to 5% at the beginning of '12. We've -- in this low interest rate environment and given our balance of risks in MetLife, we think it's appropriate that there's less exposure, if you will, to long interest rates or the kind of long-term guarantees that are embedded in our variable annuity business. It doesn't mean we're getting out of the business, it means that we're lessening our exposure to it. And that's consistent with the strategy that we outlined earlier this year. So it's still a business that we think is a good business. It meets an important consumer need, but we are going to shrink our exposure to it a little bit.

Operator

Your next question comes from the line of Jeff Schuman from KBW.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

I think you mentioned it briefly, but can you elaborate a little bit, please, on the revised interest rate assumptions embedded in the actuarial review, please?

John C. R. Hele

Jeff, do you mean these general account, separate account assumptions?

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

The general account assumptions, primarily, yes.

John C. R. Hele

Right. We've not given those details out, and they vary a lot depending upon the line of business because of duration and everything else. We have -- what we have done for the general account is assumed it's going to take longer to revert to our main long-term assumption rates, which lowers your overall earnings on the product line, and that's why we had this DAC adjustment. So because of the -- our expectation of the economic environment that Steve mentioned, we expect rates would be lower for longer than previously had been assumed, so we're taking a longer mean reversion timetable on the general account assumptions, but that varies a lot by duration and by type of business that we're in. But that, generally, was done, and that's part of the charge that we put through -- we expect to put through in the fourth quarter.

Jeffrey R. Schuman - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. But you can't give us any help in terms of what the mean reversion period is on average? Or are you generally just following the forward curve for the next several years? Or what can we look to here?

John C. R. Hele

Well, we start with our current portfolio rates on -- that we have. We know what the maturities are, and we know what the current investment rates are. We then revert the earnings on the portfolio to a current assumption with the current spread profile and revert up to a long-term assumption. The long-term assumption is based on the targeted investment inflation return of the Fed, as well as an appropriate long-term real rate of return. And again, it does a vary. It's multiple years, and we've extended it pretty far out now in terms of reverting back up. But again, it varies by the duration of the product line.

Operator

Your next question comes from the line of Chris Giovanni from Goldman Sachs.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

I guess a question regarding Slide 9 that walks through the low rate environment, the 4% growth walk that you talked about a year ago. And I get why 2011 is the base year, but obviously '12 has been better than expected. And if we base the 4% growth off of the midpoint of '12, we get closer to earnings of $5.50 in '13. So when we continue to think about forward earnings growth and the impact of low rates, are you saying we should continue to base off of that 2011 earnings number or will there be a reset at some point?

Steven A. Kandarian

No, I think you should use the 2011 normalized earnings number, with a 4% growth rate. That's what we said in our previous call.

John C. R. Hele

Chris, this is John. Also, on Slide 8 explains why 2012 was a bump-up and why '13 is a little flatter. You can see it from the portfolio yield.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay, understood. And then, I guess, the next question is why not look to issue hybrids here? I mean, PRU has been active. They've issued 3 billion or so, and it seems to make sense just to qualify this Tier 2 capital under the current CCAR test. The lack of Tier 2 capital is one of the big challenges you guys had compared to some of the traditional banks on last year's stress tests. And also, it seems the other benefit is S&P grants 100% equity treatment so you can kind of follow through on the commitment to deleveraging rates. They're much cheaper than most of the existing debt on your balance sheet. So really, why not look to that to augment the capital you generate to put yourself maybe on the offensive side of the regulatory debate to position yourself to perform better if you have to resubmit for the CCAR and then continue to work with the regulators on why the bank-centric model doesn't work?

John C. R. Hele

Chris, it's John. Clearly, we have -- are looking at this all the time, but we are in the process of debanking. And we are going to probably wait until we get into the year of 2013 and we see how all the rules develop across the board before we take major actions. But this is clearly on our agenda at some point to rethink our capital structure. I guess I'd just like to know what all the exact rules of the road are going to be before we take major actions.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

But I guess, if you have to resubmit, would -- I mean, you'd be based off of your 2012 numbers. So wouldn't -- it may be more prudent to have that capital cushion ahead of the uncertainty if you need to go back to CCAR and avoid the risk of potentially failing for a second consecutive year.

John C. R. Hele

Our plan, as we have said, is to debank, and that's the course that we want to go on.

Operator

Your next question comes from the line of Seth Weiss from Bank of America Merrill Lynch.

Seth Weiss

Quick follow-up question on the hedges in place and the assumption for flat hedge revenue in 2013. Is that assuming the 10-year yield was up to 2.4%. Or is that assuming flat rates?

John C. R. Hele

Yes, that is consistent with our plan. But the increase, if rates go down more, because we've sold some of these floors, we have less upside if rates go down now from where we said because we got more protection if rates go back up again.

Seth Weiss

Got it. And if we look at sort of the general slope of what you outlined in the 2011 call, where we see protection going up in 2016 and beyond, can we think about that general slope still holding up?

Steven Jeffrey Goulart

It's Steve Goulart. This goes from one of the earlier questions, too. We haven't really changed the profile of our protection going out years, and it does run well into the 2020s.

Seth Weiss

Great. And just one follow-up. You mentioned favorable underwriting results from 2012. Does 2013 assume more reversions to normal underwriting results? And any commentary around that would be helpful.

Steven Jeffrey Goulart

It depends upon the line of business. But actually, if you look at some of our lines of business in the retail U.S. line, they are also impacted by lower interest rates but are expecting some better underwriting results in the year. In the group lines of business, they're expecting some good growth in new business to help offset lower interest rates. The one area that doesn't get the benefit of this is corporate benefit funding, and you can see the direct impact of lower rates there across the board.

Operator

Your next question comes from the line of Randy Binner from FBR.

Randy Binner - FBR Capital Markets & Co., Research Division

I wanted to go back to Slide 16 and just understand the dynamics of why there is an adjustment for the variable annuity lapse rates and then there's a change for fixed income returns. And I think the fixed income returns relate to both the separate account and general account. So is that right, there's kind of 3 main buckets in that $600 million to $800 million?

John C. R. Hele

About half is the VA lapse changes. Another major piece is the change in fixed income returns, and there is another catchall that we changed across the board of the broad range of other assumptions we look at throughout the world. And that's, call it, the third piece, but it's -- that's the smallest piece.

Randy Binner - FBR Capital Markets & Co., Research Division

Okay. So that's helpful. So half of them was VA. And then on the fixed income return, was that account -- how much of that was for the general account? And I think Jeff Schuman was asking this, but is that mostly driven by the general account changes? And is it correct that you're not quantifying what that kind of J curve looks like?

John C. R. Hele

We're not quantifying exactly what the J curve looks like. We think that's proprietary. And the separate account and general account, it's about equal in sizes. There's not a major shift one way or the other to it.

Operator

And your final question today comes from the line of Sean Dargan from Macquarie.

Sean Dargan - Macquarie Research

Regarding your goal to increase free cash flow, I think last year around this time, you are projecting that the ALICO operations could be used as sort of a cash cow to maybe fund international expansion. Have the cash flows from the ALICO businesses been in line with your expectations?

John C. R. Hele

In 2012, actually they were above because we got a dividend out of Japan as we moved from a branch to a sub. That move though reduces our outlook for 2013, and we're not assuming any dividend from Japan in 2013. We expect, over time, we'll be able to build up earnings to get back. The prior guidance was Japan, we should get a 50% rough payout over time. It's going to take a few years before we can earn our way back there because it's now a standalone sub, and the other international operations of ALICO are also quite solid in terms of cash flow generation. And those have been consistent with our belief. So we have a dip here in 2013. We had some more in 2012 because of the special dividend from Japan, but we're very pleased with the cash flow generation of these businesses for the long term for MetLife.

Sean Dargan - Macquarie Research

Okay. One follow-up. So I guess we should be thinking about $8 billion of gross share repurchase over the course of 2014, '15 and '16. What gives you confidence that you'll be allowed to do that?

Steven A. Kandarian

I don't have total confidence. So that plan was put together a while back. As things unfold here in terms of regulatory oversight, we'll have to wait and see. So that's in our plan. Those are our expectations and our desire, but this will not be totally within our control given the regulatory environment.

Edward Spehar

Okay. Thank you very much for joining us. If you have follow-up questions, please give the Investor Relations department a call. Have a good day.

Operator

Ladies and gentlemen, this conference will be available for replay after 10 a.m. Eastern Time today through December 20. You may access the AT&T Teleconference replay system at anytime by dialing 1 (800) 475-6701 and entering the access code 273851. International participants, dial (320) 365-3844.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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