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MetLife, Inc. (NYSE:MET)

May 21, 2013 9:00 am ET

Executives

Edward A. Spehar - Head of Investor Relations

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

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

Lisa Kuklinski

Eric T. Steigerwalt - Senior Vice President and Treasurer

Marlene Debel - Senior Vice President and Treasurer

Analysts

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

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

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Suneet L. Kamath - UBS Investment Bank, Research Division

Jay Gelb - Barclays Capital, Research Division

Ryan Krueger - Dowling & Partners Securities, LLC

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Sean Dargan - Macquarie Research

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

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

Erik James Bass - Citigroup Inc, Research Division

Nigel P. Dally - Morgan Stanley, Research Division

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

Seth Weiss - BofA Merrill Lynch, Research Division

Yaron Kinar - Deutsche Bank AG, Research Division

Mark Salmon - Investec Securities Ltd., Research Division

Edward A. Spehar

Good morning, everyone. Welcome to our 2013 Investor Day. For those joining by webcast, presentation materials are currently available at metlife.com through a link on the Investor Relations page. This is our cautionary statement, I'm not going to read the whole thing, but forward-looking statements, non-GAAP financial information will be discussed. These items will be discussed in further detail in the appendix slides. The Safe Harbor statement contained in the appendix covers the forward-looking statements made here today. Forward-looking statements include 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 contain the appendix includes the information on how we calculate these measures and the reasons we believe these are useful. Reconciliations to the most directly comparable GAAP measures are also included in the appendix.

It sure feels like I did read the whole slide.

So what I'd like to do now is just provide a brief overview of what you should expect today, and then we'll jump right in as we have a lot of material to cover. There will be very brief intros for all the speakers as there are bios included in the back of the presentation book at your desk, at your table.

So first, we're going to start with some comments from our Chairman, President and Chief Executive Officer, Steve Kandarian. We will then move into a discussion on Annuities, kicked off by a presentation from our CFO, John Hele. After the Annuity section, we will have a Q&A session and that will be followed by a short break.

When we return, we're going to turn our focus to earnings and free cash flow. After that section, we will have a final Q&A where all the presenters will come onstage. And we should wrap up around lunchtime.

Now as you probably have noticed from the booklet, we have a lot of new material we're covering today, a lot of it is highly technical in nature, so we expect the we're going to have a lot of questions.

With this in mind, I'm going to strictly enforce the 1 question and 1 follow-up rule. To be clear, that rule is not 3 housekeeping items, 1 question and a 2-part follow-up. That's not the definition. So I'm going to be the bad guy in some cases but it's necessary. We have a lot of people here, we want to make sure everyone has a chance to get their question asked and hopefully answered.

So with that, I would like to turn it over to Steve Kandarian.

Steven A. Kandarian

I think that was the biggest applause I heard from one of our IR guys. I can't imagine why that was but -- all right. On a more somber note, when I extend my sympathies for those who suffered greatly last night in Oklahoma City, our thoughts go out to all those families that were so terribly impacted by that terrible tornado.

Let me turn to our presentation. Ed kind of set up portion in terms of who will be speaking. And for those of you have been coming to our Investor Day over the years, I think you'll notice that we really have kind of narrowed the topics for today's discussion. It really came from, in a sense all of you, as to the kinds of questions you've been asking us over the recent months and quarters. So typically, we go through discussion about our different lines of business, often times, there's something on investments. But today, we really are narrowing in and really focusing very heavily upon a couple of key aspects of the company. One is variable annuities, the other is the free cash flow power of our operating earnings in our company overall. So that really is a response to the kinds of things that all of you in this room have been asking us to focus on and asking us to address.

Okay. So some key messages for today.

Variable annuities, as I mentioned, will be a major focus. And I think the takeaway you'll have at the end of the day is that, yes, there are risks there, there is no question, but they are manageable risks, we are managing them, we are taking proactive steps, we'll talk more about that in a little bit, and then there's actually upside to that business. In a more normal interest-rate environment with equities continuing to perform well over time, that business has significant upside and Lisa later on will talk about some of the numbers around the analysis we've done on that business.

Also, we want to emphasize the attractive mix of our businesses, and we're well diversified in terms of geography, we're well diversified in terms of product offerings, and the kinds of risks we have in the company. There are certain risks we think we probably have too much of, and we're going to try to deemphasize that over time and other risks we can take more of, and we're going to try to get balanced right going forward. We'll talk more about that.

And then as to free cash flow, 35% to 45% of our operating earnings result in free cash flow for the years 2014 through '16, our projections. And a real focus by the company on driving that number as high as possible. Obviously, with a large portfolio that already is on our books, it takes time to move a big ship like MetLife with products that stay on our books for many years, but we're really focused on making sure that number gets as high as we possibly can make it over time.

So I think most of you have seen this slide before, but I think it's worth reviewing. These are kind of cornerstones of our strategy, the 4 key aspects to our strategy. And overall, let me just say that the driver behind this, the kind of why do we have this strategy and the key driver is to increase over time our return on equity and lower over time our cost of equity capital. That's central to all aspects of our strategy that I'm showing you here on this slide. So refocus in U.S. Business. That is really talking about getting the variable annuity and other interest and market sensitive products right-sized and having the products designed in the way going forward that has appropriate risks for the company. Emphasizing protection products and trying to increase that portion of our revenues coming from protection products, getting our expenses in control, becoming more efficient in that business, and Eric Steigerwalt will be talking more about that in a little bit.

And then if you look at the next part of the slide, on the right-hand side, they're building the global employee benefits business. It's really about leveraging our footprint post ALICO, being in over 45 countries around the world, and also leveraging our capabilities. Most of you know how strong MetLife is domestically here in the U.S. in the employee benefit business, and taking the expertise, those capabilities, in essence, exporting that across our global span of operations. We think is a great strategy for us, it's a live open-space right now in the marketplace, no one really has done it well, we're working hard to do it the right way and we're making good progress to date. And those kinds of businesses associated with the global employee benefits business also have good ROEs and relatively our life in terms of Cost of Equity Capital, the risk profile is quite attractive on that business.

The bottom left, growing the emerging markets. Obviously, we are quite large in 2 material markets, United States and Japan, but we do have exposure to a lot of very attractive emerging markets. And I think you've seen more recently the kinds of performance we've had in those markets in the last earnings call. And our goal is to increase that over time, but right now, it's about 14% of our earnings come from these emerging markets. Our goal is to get over 20% by 2016 within the strategy timeframe that we've laid out. And with the Provida acquisition that we announced, the Chilean-based pension business, which is really a fee business, that number will go up to about 17%, so we're making good progress along the lines of getting that number to over 20% of our earnings by 2016.

Bottom right-hand box, drive toward customer centricity and global brand. If you just think about our business, it's so easy for people to kind of knock off a innovative product, what can be your competitive advantages and these are 2 areas where you truly can have a competitive advantage if you do it right. And our brand serving the United States provide that competitive advantage, less so outside the United States where we're less well-known although we're getting traction in places like Mexico. We're the number one life insurer, getting traction in places like Chile, in Korea, we've been there for quite some time, but to do more in other markets that we picked up now through ALICO.

Customer centricity. I think historically, our industry and MetLife included has not done as good a job as we should have in this regard. We have very complicated products, and often times, for a good reason. But I think we sometimes made the experience more complicated and more difficult than it needs to be for our customers. So We're working very hard throughout the company to really drive customer centricity through everything we do and really putting the customer at the center of all of our planning, all of our analysis, designing products, designing forms, how we set our websites, how we service our customers, our sales rep centers, the technology spend that we're engaging in, really is focusing on becoming really proficient in the area of customer centricity.

So this slide is not necessarily a happy slide but it -- this is the reality. We had, during the first part of the decade after going public, our Cost of Equity Capital was less than our returns on equity, which obviously is what you want. And at that point in time, we're trading in a reasonable multiple of earnings, we're trading in a premium to book value. And the financial crisis comes along, lots of uncertainty, and we see not only earnings drop, return to equity, but also our cost of equity capital go up dramatically during the crisis, driven by the uncertainty that point in time. Things bounced back in the year 2010 when rates go back up. The 10-year Treasury at the end of 2010 was 3.3%. Some of the pressure kind of came off in terms of concerns about low rates on the insurance model -- business model. But then over, of course, over time, those 10-year Treasury started coming down again. And by the end of 2012, the 10-year Treasury is back around 1.8%. So during that period of time, 2010 through '12, our return on equity capital is actually going up. We have over 10% in 2010 to a little bit over 12% -- 11% in 2012, that's the good news. The bad news was our beta, in that equation for Cost of Equity Capital was going up as interest rates started to sink again.

So there's things that we can control at MetLife and there's things we can't control but we certainly can react to the environment. So we don't have any control over rates, one big factor in terms of how this slide looks. We can influence, we don't control the regulatory environment, which is a factor for us in terms of whether we're named a nonbank SIFI or not and whether or not the Fed has rules that are appropriate for the insurance industry or not. We can influence, we can't control that. But things we can control include how we run our own business, the variable annuity business, how we manage that, and again, that's where we're going to spend so much time today talking about that component of our business. So again, we're working on both, trying to drive up the return on equity for MetLife and drive down the cost of equity capital, some of which we can control, some of which we cannot control.

Okay. VAs, the biggest lever that we can really control in driving down that cost of equity capital. So I think mostly everyone in this room knows that we sell $28 billion of VAs a couple of years ago, that dropped last year to just under $18 billion in the U.S. And then the year 2013 number for the U.S. VA business is $10 billion to $11 billion, and we're confident we'll come in within that range for the year.

In addition to the volume of sales for VAs, we are also and have also redesigned the product, we derisked the product, and we are taking a number of steps to further derisk this business, including how we're going to organize the business, and including certain products that we're introducing that will be natural hedges to this product. And Eric will come on later and talk about the MetLife Shield Level Selector product that we're introducing.

But just to give you a kind of a high-level view of it. When you think about 2 big parts of our business, we have Life Insurance and we have Annuities, in general. So there is a natural balance between those 2 products for us. If people live longer than we anticipated in our models, the Life Insurance business actually does better since you don't payout as soon. You keep your money longer and get returns on it. But at the same time, the Annuity business gets hurt if your assumptions didn't reflect the actual mortality of people in the future because you're paying out annuities for a longer period of time than you anticipated. But the 2 have a natural hedge. And one of the things we've spent a lot of time at MetLife looking to do here, on the VA business, was to find some natural hedges for that business, and again, Eric will talk about that in a little bit, in addition to other kinds of ways we manage that business including using derivatives to hedge risks in the way we organize the business overall.

So in terms of our structure, we've made a proactive decision to manage the VA risk and provide more transparency both to investors and to regulators. We're merging our offshore reinsurance subsidiary into a more highly capitalize U.S.-based and U.S.-regulated entity. And I should note at this point in time, the New York Department of Financial Services' industry inquiry regarding captives was an important factor in our taking a closer look at our offshore reinsurance subsidiary. So we really -- have looked at this very carefully, we decided given the size of our book, given a number of regulatory factors, including how Dodd-Frank works around collateral for derivatives and the structure we have in place released since 2001, which made a lot of sense in that environment, probably makes less sense today, and therefore, we're going to take steps to bring these businesses back onshore into a more highly capitalized U.S.-based and U.S.-regulated entity. And John Hele will talk more about that in a little bit.

Okay. We're clearly committed to value creation for shareholders and more transparency to all of you, shareholders, and analysts and others.

We are shifting our business mix, as I mentioned, first quarter of sales, just to give you an example of this, up 20% in Latin America, up 40% in the emerging markets, in our EMEA region, driven by very strong sales in places like Turkey, Russia, the Middle East, the UAE in particular. In Latin America, we have very strong businesses there for a number of years, it continues to grow very, very well for us. And those businesses are important to us because not only is kind of a diversifying effect overall for our company but they are lower risk kinds of products versus the U.S. marketplace, which is a more developed marketplace, obviously, in insurance. It has more complicated and riskier products in terms of risks associated with interest rate and equity markets. So the business mix shift we think will service well in the years to come. 60% of our earnings come from products that are largely protection oriented versus market sensitive kinds of products.

And cash flow for 2013 is expected to be 27% free cash flow. That number we anticipate being in the 35% to 45% range for free cash flow for operating earnings in the years 2014 through '16. 2013 has some of demands on the holding company cash. But we think in '14 through '16, you'll see the number in the 35% to 45% range, and again, our goal is to drive that number higher over time as we get our business mix in a different direction.

Okay. So creating shareholder value. The current business is performing well despite the external challenges. First quarter earnings, as you know, $1.48 per share, well above the first call number of $1.30. And again, the kind of earnings we had were great earnings with growth in the emerging markets, very strong performance in the U.S. especially around things like expense saves. Our focus on areas of growth should contribute to higher ROE back to that the whole dynamic that we talked about MetLife on a constant basis, how do we drive up our return on equity, how do we drive down the cost of equity capital, in other words, reduce the risks associated with our overall profile.

And generating cash for you, our shareholders, is central to what we're working on here at the company. And you saw our actions once we were no longer a bank-holding company regulated by the Federal Reserve, where we raised our dividend from $0.74 per share to $1.10 per share, putting us more in line with our peers in terms of payout ratios. And while our numbers for 2013 do not indicate any share buybacks, we're really waiting for some things to settle down and more clarity around the regulatory environment. Our goal over time is to do share buybacks, our goal over time is to increase the dividend and it's a real focus of ours at MetLife.

So I'll be back up here later on at the end of the program. But at this point, I'm going to turn the program over to our CFO, John Hele.

John C. R. Hele

Good morning. It's great to be here as CFO of MetLife at my first Investor Day. It's interesting since I became CFO in September of last year, we've had a lot of meetings with investors and analysts. There have always been 3 important topics brought up at every meeting. The first is about questions about variable annuities, the second is about what happens in low interest rates, what if rates stay level forever, and third is cash, what about cash generation?

Now these 3 topics have really dominated most of our meetings. The only difference has been the order in which you brought them up. Sometimes, it was low interest rates first and then variable annuities. But these have been 3 very big important topics, and as Steve said, we're going to spend some time on this today. A lot of this is pretty technical, so as Ed said, we're happy to answer your questions on all this.

I'd like to start though, and say that we have no change to our earnings guidance that we gave you at our last call, and now we expect to be toward the top end of the range we gave you for 2013. We do though, however, have an update to the cash guidance for the year, and Marlene, our Treasurer, will give you more details on that when she gets up here.

Here have some key messages today on variable annuities, and Lisa and Eric will be talking about this in addition to myself.

The first is that managing this risk remains a top priority for MetLife. The variable annuity risk is a relatively larger risk at MetLife, and we are actively managing that both through risk management programs but also in resizing that risk to our total balance sheet. We also want to make our variable annuity risk more transparent to you, the investor, and the steps we're taking announced today will accomplish that. However, we also want to demonstrate to you that the variable annuity book does have value. And actually it has much more value with slight improvements in the markets and that the risk is manageable in the downside scenarios.

Most importantly, MetLife as a firm remains committed to annuities. This is a product that meets a very important consumer need. It's increasing in importance in total -- in terms of total retirement both on our government's ability to fund supplemental retirement, as well as the demographic trends occurring not only in the United States but throughout the developed world. So this is a key competency that we possess as a firm and we plan to continue working in annuities throughout the world.

Now what we were explaining this morning these actions to address the variable annuity risk. We've redesigned the product portfolio to further improve the risk adjusted return profile. One of the most important elements was introducing managed volatility funds in 2011. And those have grown, they've improved the risk profile. We continued to manage down this reduction of variable annuity sales volume. And last, we are also announcing this morning the merging of our offshore captive reinsure into U.S.-regulated entities, and I'll explain these 3 points in the coming slides.

MetLife has embarked upon now multiple generations of variable annuity product derisking. This has been a combination of price increases, as well as benefit reductions in recent years. The most recent one, GMIB MAX V changed the guaranteed minimum income benefit which is our largest selling rider benefit, where the roll-up rate was reduced from 5% to 4%, and the withdrawal rate was lowered from 4.5% to 4%. So the way I remember this GMIB MAX V has a 4% guarantee, the GMIB MAX IV has a 5% guarantee. But these are important changes are -- that we've instituted and do dramatically impact the overall risk profile to our firm.

In 2011, where the record sales of $28 billion, That's been reduced in 2012 to $17 billion. Our outlook this year is $10 billion to $11 billion. The first quarter '13 was slightly above, if you annualize the first quarter times 4, you came above $10 billion to $11 billion. But our new product, the GMIB MAX V was introduced in February of 2013, so it takes some time for this to phase-in and our sales team is quite confident that they're going to be within this range for variable annuity sales for the year. We think this is a good balance of sales and risk profile for our firm at this level.

Now, a very important announcement we were talking about this morning is the merging of our subsidiaries and the onshoring of our VA risks. MetLife has written variable annuities from several, actually many U.S. statutory companies. Some New York based license and some non-New York based. Today, we'll be taking 3 major companies and announcing that we're going to be merging this to create a larger U.S.-based statutory entity that includes MetLife Insurance Company of Connecticut, MetLife Investors USA, which is a Delaware company, and MetLife USA has been the primary writer of VA risk in the past few years. We also will be including MetLife Investors Insurance Company of Missouri, which also has some VA risks, as well as some other business. So these 3 entities will be put together into 1 larger based U.S.-statutory entity.

We will then be merging into that, exit our reinsurance company, which is a variable annuity reinsurer. And that business we merged within this 1 larger, now consolidated U.S.-statutory company. The New York-based business that's currently in Exeter because we reinsure variable annuities written in New York-licensed entities to Exeter, that will be reinsured out to MetLife Insurance Company which is a New York-based company.

This is a very complex and long process. Work is still underway. But it's progressed enough to announce our plans today and we -- our initial meetings with our regulators have gone very well. This will take some time. We expect most of this to occur in 2014, actually toward the end of 2014. But by the end of 2014, there will be a much larger, non-New York U.S.-statutory company that will have a variety of business in it, as well as the variable annuity risk.

The benefits from bringing all this together are several. You may recall, we spoke about and have reserved from cash for a Dodd-Frank derivative collateral requirements. Because the VA risk was concentrated in a reinsurance company that mainly had only derivatives as its assets to manage that risk. It doesn't have a lot of other assets there to post this collateral for derivatives. There are new margins coming into place, new requirements for initial margins for derivatives, starting in June of this year that will be phased in over these coming years. There have been 2 sets of rules that have been discussed. The United States was discussing having a set of rules that would have been effective in June of this year. The international bodies had a different suggestion where it will be phased in over a longer period of time. It looks like now that international rules will be the binding rules for us, and these initial margin requirements for derivatives we'll be phased in over time. All derivatives as of June 30 of this year, or June of this year are grandfathered, so you don't need to post the initial margin as you have to buy new derivatives and we have longtail derivatives so it will affect us over many years. But nevertheless, this will require collateral to be posted for initial margins. Therefore, by bringing these derivatives into a large statutory capitalized insurance company in the United States with a lot of assets, the collateral is not really an issue. If we have left it in the offshore reinsurance company, we would have to find cash from the holding company to match that initial margin. We also proactively are addressing the recent regulatory interest of captive reinsurers. And importantly, this will make it quite transparent to you, the investor. The bulk of the VA business is moving into the U.S. regulated sub from the offshore captive. It will be in our bluebook at the end of 2014. You'll see how the liabilities are calculated. You will also see all the derivatives we hold against that risk.

The pro forma combined risk-based capital ratio of MetLife for all of our statutory -- U.S.-statutory entities after all these mergers are completed, our pro forma based on 2012 under current market conditions, we expect will be above 400%. As of year-end 2012, that combined risk-based capital number was 466, and we believe bringing all of these businesses together, we'll still be above 400.

In summary, we've had a very active derisking of variable annuity products in recent years. We've had an ongoing process to make sure this business is right-sized to the risk profile of MetLife, and this restructuring will improve the transparency and risk profile for MetLife.

With that introduction on variable annuities, I'd like to introduce Lisa Kuklinski, the Chief Actuary of the Americas and really one of the experts in variable annuities who will take you through variable annuities in some more detail. Lisa?

Lisa Kuklinski

Thank you, John, and good morning, everybody.

Today, we're going to do a deep dive on our variable annuity block. As Steve and John indicated and as we've known over the years, you have a lot of questions on our VA block and wanted more information and we've heard you, so today, we're going to share some new cuts of our data, some new metrics and a lot of sensitivities.

Here is the agenda for my segment. First, we're going to start off by talking about the profile of our domestic block to be able to level set. Next, we'll talk about the net amount at risk and what it means in particular for our guaranteed minimum income benefit or GMIB since that product does have some nuances. Next, we'll talk about cash flow projections, pure cash flow under some different scenarios . And then we'll present our market consistent valuation. Lastly, we'll wrap up by talking about policyholder assumptions and the experience that we've had to date. And what we'll demonstrate this that the risks are manageable and the we're well situated for the future.

I'm going to start off with an overview of our domestic death benefits. As you see at the end of Q1, we had just under $170 billion of annuity account value in force. Taking a historical view on this chart, MetLife has been in the variable annuity business since 1960, and we sold some of the first policies in the industry. In the beginning, the only type of guarantee available was a relatively modest incidental death benefit return of premium to protect against the risk of dying when the market is down. The 5 to 7 years step-up where you look at the account value on each fifth or seventh anniversary and lock in that high watermark also became standard. It coincided with the typical surrender charge on these benefits.

Although the market has evolved over time to have richer benefits, we still see roughly half of new clients selecting these basic death benefits. And you can see these preponderance in the chart between return to premium, 5- to 7-year step-up and the small piece with no guarantee at all, these basic death benefits are 60% of our in-force block.

Now moving around the pie, we have the annual step-up at 18% of our business. 2 things on this block, first, our annual step-ups only run through age 80 so that limits the risk at older ages. Secondly, we would never offer steps-ups more frequent than annual.

And then lastly, we have 22% combined in the compound and enhanced variations, that's the maximum of a rollup ranging from 4% to 6% in an annual step-up. I'll comment more on these later. These do have some key risk offsets.

We do believe that death benefits are a modest risk. This next chart shows our claims since 2007 net of reinsurance. And as you can see, it is heavily driven by the market.

2009 was our highest year, with death claims topping out at $152 million pretax. That translates into about $0.12 per share, so it's modest in terms of amount. Also death benefits have less policyholder optionality because nobody generally chooses to die when the market is down.

So we'll be focusing on living benefits for most of this presentation.

Moving on to living benefits. MetLife did not offer any living benefits until 2001. That's when we developed our guaranteed minimum income benefit which provides a minimum level of lifetime income upon annuitization and that's been our main focus ever since. However, we have evolved this product over time. Our legacy block, GMIB 1, 2 and Plus, the grace life is 39% of our book. And then in 2011, we launched the GMIB Max contract with our protected growth strategies or managed volatility funds. These funds were designed to manage equity market volatility and to hedge interest-rate risk while providing the client with more stable account values over time. Max is already 16% of our in-force.

Moving through the chart, we have offered withdrawal benefits over time, both return and premium and lifetime, and that's 15% of our block.

Lastly, we get to the blue slice, that's the part with no living benefits at 30%, which is a pretty big share for our company of our size. That slice comes from both the old and new business. About 1/3 of that or 11% of our block is our pre-2001 business, which predates the launch of living benefits, and that old business is pretty persistent. We also see a significant number of new clients not electing living benefits. In 2012, we had $2.3 billion in VA sales with no living benefit at all, and that's coming from clients that just want good old-fashioned tax deferral, and also from our participation in the 403B and other qualified plan market where living benefits are not a big piece of the story.

So you might wonder about the interaction of these death benefits and living benefits, and here, we have our Venn diagram. On one hand, on the gray circle, we have our living benefits at about $118 billion. And on the other side, we have that 22% that I mentioned, the $37 billion in enhanced death benefits. So these contracts with the enhanced death benefits have both the rollup and the step-up, and performed in a manner similar to or in some cases the same as the GMIB benefit base. It's been very much a companion product over time. And you could see that in the interaction in the intersection of the 2 circles. Most $31 billion has a living benefit, too. And these contracts with both benefits have a natural hedge built in. First, we've got the mortality and longevity offset similar to what Steve described, but that's within the single contract.

Next, we have an offset on the policyholder behavior risk because clients can either die or annuitize will only pay on 1 benefit stream. And lastly, we price these 2 benefits independently, so we're not looking at the interaction of the 2. And in fact, this overlap is by design. Today, you can't buy enhanced death benefit from MetLife without purchasing a GMIB. We do like that offset.

Before we start talking about net amount at risk and some of the other metrics, I'd like to refresh everyone's memory on the GMIB and how it works, this is something that Bill Wheeler and others have spoken about on past Investor Days.

At its core, GMIB is aimed towards guaranteeing a minimum level of income whether the roll-up rate is 4% or 5% or 6% does get a lot of attention but it's not the whole story. We are not making 4% or 5% or 6% guarantees on the funds. You really have to look at the payout rates to appreciate the whole benefit. So let's say, in this chart, the client has a benefit base of $100, and he arrived there through the roll-up rates. This $100 is not available as a lump sum, it's a lump -- it's a notional amount that the client only use to purchase a lifetime income annuity using the guaranteed basis that's published in the rider. So let's say this client is aged 75 and let's assume that he has a Max 1, that's the version that we launched in 2011 and sold a significant volume of. We disclose the payout basis in the contract. The payout rates are based on a 1% interest risk rate and conservative mortality. We use a 10-year age set back, which means we make the client 10 years younger, more longevity reduces the income and a 65-year-old would get less than the 75-year-old. All of this translates into a guaranteed payout of 5.3% of the benefit base paid out over the client's lifetime with a 5-year certain period. So let's scale this up and say that the client had $100,000 benefit base. It means that the GMIB is guaranteeing him at age 75, $5,300 a year for life. So the real question is, how much is this income of $5,300 a year for life worth? What would be the price tag? So we ran our SPIA, "our single premium immediate annuity" system as of 3/31, and that price tag would have been $60,000. A $60,000 premium would buy a 75-year-old a lifetime income of $5,300 a year for life, that's the same basis that we would provide any client coming to MetLife. It's our street rate, so to speak.

So if you had this contract and had $100,000 benefit base on one hand and a $60,000 account value on the other, the GMIB guarantee would not be in the money. You would, in fact, be indifferent between exercising your GMIB with the $100,000 benefit base or taking your $60,000, withdrawing it and purchasing a single premium immediate annuity at our current street rates. This present value of the $60 will vary from time to time based on current income annuity rates. And let me remind you that this is for GMIB Max versions, 1 through 3. We've actually got $28 billion on this payout basis and you can see that in our 10-Q. With our current contract version 5, this ratio would be even lower.

So in summary, the payout ratio provides a significant offset even in this low-rate environment.

In addition to this age setback, I'd like to comment on some other risk mitigants that we have. We've always said that the first prong of risk management is product design. So first, asset allocation requirements. Our clients do not have free reign to select the riskiest funds. We implemented asset allocation requirements a long time ago in 2005. And at this point, 78% of our living benefit block does have an asset-allocation requirement, either to be in a particular set of funds or to manage a certain equity-bond mix. And we launched GMIB Max in 2011, like I said, with the managed volatility funds. The only way that you could purchase a GMIB from us today is with investing in the managed funds. And at this point, we have 8 different funds that were not too concentrated in any 1 particular funds. These funds have performed well and provide a good customer value proposition. So while it's required on our new block, we've also made we've these funds available on our new block, and we've seen about $1.6 billion in voluntary inflows, which is good for the client and good for the risk of our old blocks.

Next, the 10-year waiting period. On the GMIB, we've always had a 10-year waiting period before the client could annuitize. This is a good risk offset because it means that we're collecting fees for 10 years before we pay a claim. And if the clients elects to step-up, that 10-year period resets. After the waiting period is over, the client has an opportunity to exercise the right around their anniversary. If they decide not to do it, then they have another opportunity on their next anniversary and their next after that. But that opportunity ends at the rider termination date. Our GMIB writers terminate at age 85 on the legacy business and age 90 today. That means that our coverage period is limited. If the writer is not exercised by that date, the writer expires without value and we're off the risk.

Next, as we've mentioned in the past, we've been hedging since 2004, and our hedge program has performed well through up and down markets, and it's been complemented with external reinsurance.

So with these risk offsets in mind, let's talk about our net amount at risk, and first, let's define exactly what we mean. Net amount at risk or I'll be calling it NAR is a point in time measure showing our total exposure if all claims come due at once. On the death benefit, that means that all of our clients die at a particular point, say 3/31/13. We're comparing the death benefit that we would pay versus the account value. And when we talk about the net amount at risk, we're not deducting the value of hedges or any reserves that we're holding.

Next, on the guaranteed minimum income benefit or GMIB, that's the claim that we would pay if all were to exercise the benefit. It's a little more complicated because we're talking about a lifetime income stream instead of a lump sum, so what we're doing is converting the benefit base using the payout ratio similar to what we described a couple of slides ago. And note that not all can exercise because not of all of our clients are through their 10-year wait, but we assume everyone does for purposes of calculating the NAR.

So let's just look at some quick examples before we move on.

On the death benefit, it's very straightforward. If a client has a $100 death benefit and a $50 account value, the net amount at risk would be the difference, $50. On the income benefit, revisiting our diagram from a couple of slides ago, the $100 benefit base would be worth $60 on 3/31. Comparing that to a $50 account value, the net amount at risk would be $10. You can definitely have situations where the benefit base is greater than the account value. But when you deflate that nominal base by the present value of income, the NAR may actually be 0. And one other thing, the income street rates that we use to calculate the NAR are fully loaded for profit, and our single premium immediate annuities are priced again in ROI in the low teens. We're setting up the claims using these fully loaded amounts. However, the income annuity segment would be showing future profits on these annuitized GMIBs, and those profits are not included here.

The next few slides focus on the net amount at risk for the GMIB since that is about 80% of our living benefit block. What we're doing here is showing the net amount at risk by issue here to understand the dynamics. The big drivers are, number one, the volume that we sell, the performance of the funds relative to the guarantee and the interest rates. The dark blue bars show the current value. Our net amount at risk on GMIB as of 3/31 was $2.5 billion. And you could see how it spreads out by issue here. The early years going back to 2000 to 2001, 2005 show small amounts. Even though we had very mediocre market performance over that time period, the S&P has averaged about 2% from 2001 to 2012, we were not selling significant volumes at that time.

Now you see we hit peak NAR for the 2007 cohort, that's where we had ramped up to significant volumes and the market was at a local high. And then you'll notice that those blue bars virtually disappear post 2008. So even though we were selling larger volumes, 2 things, first, the funds have performed well over that time period, and number 2, we greatly scaled back our guarantee's postcrisis.

Now on the slide, we're showing some sensitivities to increases in account value. If we were to get a 5% immediate increase in account value, that's shown by the medium blue bars, the net amount at risk would go to $1.7 billion. With a 10% increase in account value, the net amount at risk would go down to $1.2 billion. Note that with our equity bond mix of about 60 40 right now, equity funds would have to go up about 15% to get that pop up.

Now we all know that NAR is very sensitive to market returns, and this next slide shows how sensitive the net amount at risk is to interest rates especially now that interest rates are low and it's having an impact on the net amount at risk. When you think back to 2001, interest rates have come down about 400 basis points since then. So as I said, to calculate the net amount at risk, we look at the SPIA Rate on each policy, and that goes into the net amount at risk. We ran our SPIA pricing formulas, assuming that the 10-year rate was 100 basis points higher and this was shown by the medium blue. It brings the amount at risk down to $1.0 billion. So the takeaway of this slide is that interest rates are extremely impactful. You can see that 100 basis points has about as much as an impact as a 10% increase in account value. And then if rates were go down to -- go up to 4.5%, which we think is a reasonable long-term rate for the 10-year, the net amount at risk would actually shrink down to $0.4 billion.

This next table shows the interaction. We've got our starting point of $2.5 billion in the gray bar. So looking at the bottom row of this chart, if the account value were to go up 10%, we saw that $1.2 billion a couple of slides ago, combined with 100 basis point increase in rates, it would go down to $0.5 billion . And combined with rates at 2.5%, it would go down to $0.2 billion .

On the other side of the coin, looking at the first row of the chart, if we had a minus 10% change in separate accounts, the net amount at risk today with no change in rates would go up to 4.6%. But combined with 100 basis point pop up, it would bring the NAR down to $2.2 billion, which is lower than our starting point, and this shows how interest can offset the market. And then at a 250 basis point increase, it would go down to $1.0 billion. So that's the net amount at risk and it's one way to measure your exposure and get your arms around the risk, but it's a snapshot at a point in time.

So over the next couple of slides, we're going to be showing some cash flow scenario analysis. We're translating this net amount at risk into claims as we expect them to emerge over time. There is a lot of discussion about GAAP versus debt, and while both are vital and we manage to both, we wanted to focus on the cash flows here because that's kind of an absolute.

So on the slides that follow, we're projecting out all contracts with living benefits. We're looking at the base product fees and expenses, and the expenses that were included are maintenance expenses and trail commissions. This on the 70% with living benefits, we're not including the other 30% because we wanted to show that living benefit block is self contained.

Next, we're looking at all rider fees and all claims on the income benefit, and now we're including the withdrawal benefit and even our small piece of accumulation benefits. We're settling IB claims using our current income annuity payout rates, which, like we said, are loaded for profit and those profits are not included here. We are now showing the impact of hedges or reinsurance unless otherwise noted because we wanted to focus on the absolute contract cash flows. We're going to be showing some present values and those present values are discounted at 4% because that's indicative of typical long-term spread assets that we can invest in today. And we're going to be showing a number of scenarios. As you know, we price these benefits and we do our analysis using stochastic analysis, so using over 1,000 scenarios, Ed Spehar wanted me to present all 1,000 scenarios, but in the interest of time, we got it down to a crucial 6. And to keep things simple, we're playing with a couple of inputs. On the S&P and the stock indices, we are toggling between a 5% return which is as you know what we use for planning and projections, a 0% flat return and then a minus 30% shock, and all of that is before any fees. And then on interest rates, we're varying between flat rates and interest rates going to that long-term rate of 4.5%, and everything that I'll be showing is pretax.

We've ordered the 6 scenarios from best to worst. And the first one is the best one, and that's the base line where we have 5% S&P growth and the 4.5% 10-year swap. This immediate increase in rates causes the capital market loss on the bond funds but then we have a higher income over time. The yellow line on this chart shows the cash flows associated with claims. And what you're seeing on the chart is not discounted, that's the full amount in each year. As you see, claims are low for the next several years and then we get an increase as clients start to emerge from that 10-year waiting period on the GMIB.

The blue line shows all fees on contracts with riders less-expenses. Since we're looking at existing contracts only and not modeling new sales, you see the amounts decline over time as we have lapses, and mortality and annuitizations.

And on the right, we're showing our present values. So as you see, in this scenario, base fees are 11.4%. Again, that's on the 70% with living benefits but you can get a sense of the fees on the nonliving benefit portion by simply grossing up because these 2 kinds of contracts have the same basic fee structure. Then we have rider fees of $8.4 billion so our total fees and base fees and rider fees add up to about $20 billion. Minus claims of $5 billion, we have a margin, we have positive margin of $15 billion. So on the baseline, we're showing a significant margin.

Now let's see what happens when we have flat rates forever. The fees are slightly higher on the base contract from the bond funds. We're not having any upfront loss. However, claims are $3.5 billion higher and that's from the lower SPIA rates affecting the GMIB claims. The total present value of cash flows is still positive at $12.5 billion, so the takeaway here is that even when rates stay flat, we do have margin.

Next worse is the 30% drop followed by a 5% recovery in the S&P and a 4.5% swap rate. With this downturn, we lose about $3.5 billion in base fees. However, you'll notice on the next line that rider fees don't change much, they're going from $8.6 billion to $8.0 billion, not a big drop with this kind of shock, and that is by design. We've always priced and sold our guaranteed living benefits with the fees on the benefit base, and that gives us a lot more stability when we need the fees the most and that's another risk mitigant that we have. Claims are slightly higher and total cash flows are still positive at 6.9%.

Next in order is the same as the prior in terms of stock returns. Again, both with a 30% drop followed by a 5% recovery, and the flat rates. So we've got a pretty -- we've got the stress here and then the base case for the market and rates staying flat. Claims increased about $5 billion, and again, that's from lower SPIA rates. And the total present value of cash flows are still positive at $2.2 billion.

The next slide shows everything staying flat forever, flat equity markets and flat interest rates. This is a pretty dismal scenario because we're looking at over 50 years and we have significant cash flows for about 25 of those. We're seeing slightly more claims costs and total cash flows are just breaking even at $1.6 billion.

The last scenario that we'll show is a 30% immediate drop, and then markets and interest rates staying flat in perpetuity. Base fees go down. Rider fees, as we said, don't change too much. Claims increased to $21 billion, and total cash flows are now negative at $6.4 billion negative.

So let's revisit the items that are not included here. First, we've got the rest of the block, the block without living benefits. The fees would have been shocked by the 30% downturn but would still be a positive. We've got our reserves, and I wouldn't want to overlook the hedges that we have here. Our existing hedges plus the increase in value that they would have with the 30% shock would be worth $4.2 billion on our current holdings. So in summary -- that's a pretty significant offset. So in summary, we showed 6 scenarios, and we had positive margin in 5 out of the 6, and the 6th one, which is pretty extreme had significant offsets.

Next we're going to move on to market consistent value and that's something that we're sharing for the first time. What we do is we take all product cash flows and we mark them to market as though they were derivatives. We model all of the cash flow as over 1,000 scenarios and then we take the average of the discounted cash flows over those 1,000 scenarios to calculate the market value of the guarantees. In this kind of market valuation, those 1,000 scenarios have certain properties. These are not your typical real-world scenarios where the market earns on average, the long-term stock rate of maybe 8% a year and interest rates revert to the -- some normal level. These scenarios are different. They assume that all funds, the S&P, as well as any bond funds are in the risk free rate on average over the scenarios. That's 2% at the 10-year level, and that's before any product and rider fees. So when you take out rider fees on average, the account values are decreasing in the market consistent valuation. And again, that's the average. So half of the scenarios are better and half of them are going to be worse. And that's where the next input volatility comes into play. Volatility determines how bad the bad scenarios go and how high the good scenarios go. The higher the volatility, the more bad scenarios and the more claims we'll generate, and the higher your market consistent liability will be. And the volatility that we use, like the stock performance, is not the volatility that you would observe from looking at S&P price returns over time, that would be about 16.5% going back to the Great Depression. Instead, we look at the implied volatility from equity options. We look at the entire term structure of volatility going out even beyond 10 years. This market is not very liquid so supply and demand really come into play. The 10-year implied VUL as of 3/31 was 25%, which is a lot higher than the 6.5 observed VUL that I referenced, driving a more conservative valuation.

Lastly, interest rates are modeled stochastically. There is no corporate spread implied and no reversion to a long-term mean. Normally, of course, we'd invest in spread assets which would increase our earned rates and also the payout rates and decrease the cost of any claims. So safe to say, this is a pretty conservative valuation. For discounting, we're using an average of the risk free rate and the industrial A and BBB curves to discount back all cash flows. It's slightly higher than the 10-year swap at 2.6%, so a 60 basis point spread. And the reason that we're using a spread is because we're providing lifetime guarantees which cannot be fully replicated using tradable derivatives. And again, these numbers are pretax.

So this chart shows our market consistent valuation by the different kinds of inputs that we have, and we've got our starting point, the MCV, as of 3/31 on the left. So on the first row, we have our base product fees less expenses, that's got a present value of $13 billion market consistent. The next row shows living benefit riders, and we're looking at the living benefit fees versus the living benefit claims. That value is negative right now under the market consistent lens coming in at negative $11 billion. You might ask, looking back at some of the earlier slides, why is the writer value worse than net amount at risk? And the reason is because I explained in the scenarios, we're assuming that the benefits are getting more and more in-the-money each year with the market growing on average at 2% before fees so this is much worse than an immediate exercise. The GAAP is growing larger.

However, we do have an offset of about $2 billion from the hedges and reinsurance. This value is down in 3/31 because of the positive markets. So in summary, the total block of business has a positive value of $4.3 billion. Our total VA block has a positive intrinsic value, even under this conservative valuation.

The next column shows the impact of a 20% change in the market, and that would improve the valuation further. You see the VA product fees go to nearly $15 billion, the living benefit writers, the liability decreases and a lot of that is offset by the hedges, which is how we designed the hedge program to work. That brings the net value to $6.6 billion.

Now the next 2 columns are really key. They show how sensitive living benefits are to interest rates to this kind of valuation. Because remember, we are assuming that all funds are growing at the risk free range. That doesn't affect the base fees too much because you're growing them at the risk rate, and then you're discounting back at a rate that's similar to risk free, and you can see the VA product fees don't move much, they go to $12.8 billion.

However, the living benefit riders, the valuation improves by nearly $7 billion. You've got some offset from hedges in reinsurance. The net value goes to $9.6 billion.

The fourth column shows a further increase in rates to 4.5% which is the long-term base we've been talking about. We see the VA product fees remain about the same, slight degradation. But we see the living benefit rider value swing another $7 billion and it goes from a liability into an asset. And the market consistent value for this entire block gets to the $15 billion level. So the point of this slide is to, number one, present our market consistent valuation, give you the baseline, and then to show how sensitive it is, the interest rates, in this kind of framework.

Now all of these projections, of course, are only as good as the assumptions that go into them. And the key policyholder behavior assumptions are lapsed where we took action in the fourth quarter. Annuitization where it's a little too early to take action as experience emerges, but we have some positive experience which I'm going to show, and then dollar-per-dollar withdrawals which gets a lot of attention, and we're going to show an extreme stress on that assumption. We've got 1 slide on each of these.

First, we changed our lapse assumption in the fourth quarter. This graph shows a typical product in the year following the expiration of surrender charges. That's when you typically see a spike and lapses are at their highest. It's a sample product. We have different lapse functions for each product version and compensation option.

Now first of all, we always price going back to 2001 using dynamic lapse, and we assume that lapse would decrease the more the riders were in-the-money. We had a maximum and a minimum, and we were on target with that maximum. We assume that lapse could be as high as 30% right after surrender charges go away. And we assume that it might get as low as 3% which was unheard of at the time for writers that were deep in-the-money. We assume that the grading down would be pretty gentle as the rider became more and more in-the-money. And that function served us well precrisis. However, postcrisis, we had a sea change in material and a sea change in behavior, and we saw policyholders become a lot more sensitive. As you could see in our current curve, which is what we switched to in the fourth quarter, lapse drops like a stone even before the rider gets in-the-money as it's approaching in-the-moneyness. Now this is very good for the base contract because it means that we're collecting more fees over time. But it is a negative for the living benefit if they are in-the-money because we'd be paying more claims. And the 1 thing that I want to emphasize here is that when we make this change in the fourth quarter, we fully reflected postcrisis experience, we did not assume any reversion to long-term or precrisis levels.

Next, annuitization. Annuitization on the GMIB was another area where we did not have experience but we wanted to be conservative because we knew that it had a great impact on the GMIB pricing. And we also knew, given our history, that clients were historically reluctant to annuitize. People just don't like to lose control of their assets. However, we assumed that the maximum level for in the minus might be as high as 25% and that was per year. So given a couple of consecutive years of in-the-moneyness, you could easily get near 100% annuitization. We had a dynamic function and we assume that they would only annuitize if they are in-the-money. And at this point, we've got 780,000 contracts with GMIBs. But as we said, contracts can only exercise their GMIB after 10 years and there's a 30-day window period to do so.

At the end of the first quarter of '13, we've had almost 18,000 contracts which got through their waiting period and also had GMIB riders that were in-the-money where they could get more from their guarantee than they would from a normal annuitization. Some of these, about 3,000, were pretty deep in the money, over 30%. So I guess you could say the good thing about this lost decade of stock performance is that it gave us a lot of exposure points to calibrate our assumption risk.

Based on our original assumption, we would have expected about 2,700 policies to annuitize, that's shown by the gray bars. And that would've been 14% of the in-the-money contracts. In reality, looking back to when the first contracts that were sold in 2001 had their first chance to annuitize in the second quarter of '11, we've only had 93 GMIB annuitizations, that's in total. It's only 0.2% of the in-the-money contracts. Our peak was in the second quarter of '12 when we had a 1.2% annuitization range.

And the one thing I want to emphasize here is that we're not expecting the clients to tell us when it's their time to annuitize. We don't expect them to have been tracking when they bought the contract and when their 30-day window period is. We are being proactive and customer centric in sending notifications to the clients and to their reps, too, explaining what they bought and inviting them to come in and get quotes on this option.

So I want to emphasize that we ran the cash flow projections and the MCV using the original pricing assumptions on annuitization and using the fourth quarter lapse assumptions. We've not reflected the new experience but this new annuitization experience would reduce the claim cost, nor have we changed the assumption in our GAAP and stat accounting. So we're waiting to get sufficient credible experience before we change the annuitization assumption but we do believe that there is upside here.

The last assumption that I'll talk about is the dollar for dollar feature which has attracted a lot of attention over the years. And what it is, is the ability to take withdrawals from the GMIB and to reduce the benefit base in a predicable way by the dollar amount of the withdrawal. These dollar for dollar withdrawals are limited to a corridor, 4% to 6%, and generally the same as the roll up rate. There's a few exceptions to that. So combined with the roll up rate, it allows the clients to maintain a flat benefit base over time. And one thing I'll say is that it does cost more to hedge the liability if the client is taking dollar for dollar withdrawals, but that is less the case on our new business.

Again, that's something that we price for, and the chart here shows the utilization rate over the years in the blue bars. As you see, it is increasing. It went from about 13% in 2007 to about 19% today. And we've studied what the different drivers are. The driver is not market performance, the big driver here is age and tax market. And you see that with the yellow bar. We're showing the percentage of our book, that's in the IRA tax market where the client is over age 70. So as you see, they are moving pretty much in tandem. And the reason for that is because when you're in the IRA tax market, of course, the IRS requires you to start taking minimum withdrawals to maintain that tax status. So that's what we're finding if that client start dollar-for-dollar for the most part when they reached this triggering event.

Now in order to get us sizing on the total risk, we ran a very extreme stress test. We wanted to show what would happen if the 19% that we're seeing today went to 100% overnight, that all of the clients that we're not taking dollar-for-dollar right now notified us and -- or asked to put on our dollar-to-dollar withdrawal program. We measured the impact on our market consistent valuation, and that increase was $2 billion, which $2 billion is obviously nothing to sneeze at, but compared to the size of the market sensitivities, that kind of gives you a perspective on the size.

So to sum it up, in conclusion, we showed how the profile of our book mitigates risk, and that's thanks to the product design, the hedging and the reinsurance that we've placed over the years. Second, our experience is on target. Lapse rates are fully reflecting the new normal and the annuitization that we have baked in appears to be conservative.

Finally, we showed a lot of analysis and some new metrics. We believe that the downside is manageable and that we have significant upside.

And with that, I'll turn it over to Eric Steigerwald to talk about our new business.

Eric T. Steigerwalt

Good morning, everyone. So Lisa actually priced a lot of that stuff a long time ago and now she's up here talking about how it worked out. And I think a pretty fantastic presentation. You know why we gave it. I hope it was helpful. I actually would like to acknowledge one of the person in here, Liz Forget. You stand up one second, Liz. Liz runs the Annuity business and just think about what it would be like if you had her job. So if you see her, maybe put your arm around her for a second and say, "it will be okay," et cetera, et cetera.

Okay. I'm going to walk you through a little -- some long variable annuities and our new product. But I'm also going to give you a little sense of what's going on in the retail business. You heard Steve talk about refocusing the U.S. business. Obviously, this is the biggest business within Bill Wheeler's empire, and I'm just going to give you a little sense of where we are right now. So we essentially have a brand-new leadership team with respect to the U.S. Business and they're doing a great job. We are focused on everything that you heard Steve lay out. And I think you'll get a little sense of that during my presentation as well. Advisor count is down. When I started this job back in February of last year, we had roughly 7,500 advisors. That number is a little over 5,000 today, and I think we're just about hitting out our bottom. We'll probably start growing from there.

Our -- as you can imagine, our productivity is way up, and we are saving a lot of money, okay, because we're not financing advisors who frankly were never going to make it in this business and we're putting all of our resources into people who have demonstrated that they can do a great job for their clients and a great job for the company, as a matter of fact. And I just got back from all of our conference season. We had various tiers of conferences for all the agency force. And somebody like me can stand up here and say, morale is great and I just want you to know that. But let me give you a quick example of what somebody said to me, one of the advisors. They said, you know, a year ago when you gave your speech here, we were not feeling good. We were nervous. We didn't know where things were going to head. Obviously, most human beings don't like change, maybe advisors are at the top of that list. And following this conference, we feel great. We understand the direction. We can see a lot new life products and the brand-new Shield Level Selector that I'll talk about in a second coming out. We understand why you would enforce minimum production requirements. Here I am at conference, I work very hard to get here, I want to know that everybody else is working hard as well. So it feels pretty good to see that change in sort of the morale of the field force for MetLife over the last, let's call it, 15 months.

Restructure our agency footprint. About it, let's call it, 15 months ago, we had roughly 85 agencies. Today, we have right around 60, that will finally stabilize in the 55 to 60 area. Obviously, more scale, exactly what we've been talking about for the last year here as we've talked about the strategy for MetLife. We've renegotiated a number of third-party distribution agreements. Now look, we want our third-party distributors to make money. We also want to make money as well. So the key word here, I think, is balance. And I've been very pleased with respect to how they're responding to our needs. So we've gone through distribution agreement by distribution agreement, talking through what we need, understanding what they were trying to get with an agreement, maybe that was negotiated 5, 6, 7 years ago, and coming to, I think, a balanced agreement as we go forward.

We've rationalized our wholesaling structure. Obviously, we're selling a little less than we were. We've got, I think, the best wholesaling force in the industry, and we're going to get a sense of their capabilities as we see our new SLS (sic) [MSLS] product roll out over the coming, let's call it, 4 to 6 months.

We've repriced our Variable Annuity products. We've lowered the benefits in there. We're on our fifth-generation of the GMIB MAX. And remember John's little key, right? GMIB MAX V has the 4% roll up, GMIB MAX IV has the 4% roll up, okay? And the current product has the 4% roll up and the 4% dollar-for-dollar feature.

And finally, on April 29, we have exited the lifetime secondary guarantee market for universal life. We felt that was the right thing to do from the company perspective. We are placing our bets going forward on many products, the whole life is one of them, and so we have officially exited that business.

Scale and simplicity initiative that you've heard over the last x amount of months. I'm sure Ed's taking you through some of the details. This is the retail piece here. We are on track to achieve over $150 million net pretax expense savings target by the end of 2014. All the initiatives are on track so a feel very comfortable there. And in addition to that, we're going to relocate the headquarters of the U.S. Retail division to Charlotte, North Carolina. I move in 5 weeks down to Charlotte. My entire management team is coming with me. We've been very pleased with the response that we've gotten across the group of people that we want to come down, want to have come down to Charlotte. We'll have roughly 500 positions in Charlotte by the end of this year, in excess of 800 more by the end of 2014 into that first half of 2015.

It significantly reduces our geographic footprint. I have here existing sites down by 10. Many of you who follow the company for a long time know the U.S. Retail business was built up over many, many acquisitions. We didn't consolidate. This is a perfect chance to do that. And even though I'm not going to talk very much about it, frankly, I'm not going to talk about it all today, our Auto & Home business. I have a model in my head with respect to where we're going and it's to replicate what we have and work, Rhode Island with our Auto & Home business. The cultural synergies that you get out of having a management team and all the partners in 1 area are significant. For those of you who've never done any research on this, in addition, of course, we're going to save a lot of money through this move. So I think this is a terrific opportunity to further align the management of the U.S. Retail division.

Shifting away from capital-intensive products. Part of our strategy here for the last 15 months, you can see in '12 versus '11, variable annuities down 38% on variable annuity sales. For 2013, we expect to be down roughly another 40% from 2012. In the first quarter, we were down about 30%, little flatter sale in here with respect to changing over to GMIB MAX V. So we're on target to hit that number. With respect to ULSG, down 25%, '11 to '12. Down another 35 for '13, and that's kind of baked in since we are out of that business here.

Let me give you a sense on where we are with respect to the risk profile of new sales for our life insurance business. The stacked bar here shows 2012 there of 436, we expect to be down roughly 10%, 2013 versus 2012.

Now remember, underneath all this, you have some third-party distribution, which we are no longer doing business with, and you have 7,500 advisors going down to the 5,000-ish number here, okay? So despite the fact that you see the big degradation in universal life with secondary guarantees, you can see whole life is flat despite those facts that I just laid out. Now 1 important thing I'd like to say here. Everything I've talked about up to this point in the presentation has all been deliberate. All of it. Less advisors, less hiring of new advisors, we'll probably only hire maybe 500 inexperienced advisors this year and maybe 200 experienced advisors, that number was 2,200 only 2 years ago, okay? So all the actions that we're taking here and the results that I'm showing on these slides were all deliberate. And so I expect, in 2014, you are going to see our agency productivity way up and we'll probably see higher levels of whole life sales at the very least.

Moving on to retail annuities. 3 keys here. Reducing risk, obviously lowering sales of what we'll call traditional variable annuities with lifetime living benefits. And by the way, for all the businesses on the books, the old GMIB contracts, we've made the manage volatility funds available to all those in-force contracts. We are not marketing them in any way but over the last x amount of months, we already have $1.6 billion moving into those funds. Clients want to put their money in here, okay? Obviously, the fund performance has to be good and it is quite good. But people are concerned about their account values and they feel very comfortable with these funds. And so far, as I said $1.6 billion has moved in there.

Diversifying risk by shifting our annuity product mix, we're going to talk about that a little more in a second here, that's going to be ongoing for the next number of years. And finally, offsetting risk. So one of the keys with respect to the design of the new product which is an SPD that I'm going to talk about in a second was that it not only covered our return requirements and risk requirements, but could we design something that would be an offset to our lifetime living benefit. And in fact, we've been able to do that and I'm going to take you through that.

So first, I'll talk about GMIB MAX V, the current product, for just a second. Improvement in ROIs, lower hedge costs, lower capital required, and likely, lower utilization of dollar-for-dollar. We priced in higher dollar-for-dollar utilization for the entire max series. In fact, at this point, we're down to 4% dollar-for-dollar and we expect utilization to be lower.

Here's the new product. MetLife Shield Level Selector. We don't let Lisa name products anymore. We might have to sell NAR. But new single premium deferred annuity allows clients to protect their time and assets obviously, participate in growth opportunities while protecting on the downside and personalize their strategy. You can take $100,000 and pick a number of different tenors and downside protection options. I'm just going to show one for a second here. But I'm also going to give you a couple of slides that are going to show you how these -- this product, sales of this product are direct delta offset to the max product.

So let's get into it here. This shows you an example of a single purchase here. Someone has picked the 10% market protection level on a large cap equity index fund with a 6% cap rate, okay, which obviously is the driver for us to be able to protect on the downside. So you can see on the left side there, the maximum growth opportunity here is that 6%, that dotted line that goes across, you can see the index has performed, in this case, let's call this in a 1-year, we have a number of different tenors but this is 1 year. So in that year, this particular index performed plus 4%. And you can say as a result, the client's account is credited with 4%.

Now in scenario B, the index is up 12% for that year but the client gets the MGL of 6%. You can imagine the flipside of this in a down market scenario. So again, 10% protection now, and you can see that on the bottom dotted line with the level of protection dotted line running across. So now, we have the index performing at negative 8 for the year, the client has no decrease in their account value because they have that 10% corridor of protection. Scenario B, now the index is down 15%, the client get -- MetLife will absorb that first 10%, and the client is credited with minus 5 instead of the minus 15 that the index did.

Now very importantly, this is basically a direct offset, delta offset, the delta risk that we put on the books that we have to hedge from the GMIB MAX product. In fact, it's a slight Vega offset, too, when we have residual Vega hedging that we've got to rebalance. So this is like -- these slides are iteration 62 on attempting to give you a feel for this. These particular 2 slides that I'm going to show are from the policyholder point of view, so just reverse that and think about MetLife's liabilities, okay? Now you see on the bottom change in the equity level, I'm valuing the policyholder put here, essentially. When you buy a GMIB MAX contract, you essentially have on that living benefit rider your long put. So what happens? We value it at inception, when you buy it, what is the value of that put and then we run it through the 1,000 stochastic scenarios and say, what happens as the market goes up and down? So as the market moves up, okay, to the right, you can see that the present value of the policyholder option is less. As the market moves to the left there, down, you can see that the PV of the option for the policyholder is higher, okay? Bless you.

Now let's look at SOS here. Obviously, the line is sloping in the other direction. Present value of the option to the policyholder as the market goes up, you can see that option is worth more. And as the market goes down, it's actually worth less. And it actually, if you keep going there, it will become negative because you are essentially selling a put as the policyholder here. So once MetLife has covered their piece of the protection, it can continue to go down.

Now can we just back up 1 second on the slide? Okay? Sloping this way, sloping this way. The slopes are different because in shield (sic) [Shield Level Selector], it's 100% equity allocation, if you will. And in Max (sic) [GMIB MAX V], given the volatility funds, let's call it 60 or 65 in equity, so the slope is different but obviously, they're in offset. And so not only -- and look, this has only been introduced in early May. So we've sold some, we only have anecdotal information here from the wholesalers and from the agency force. We think we could sell -- our aspiration is to sell 500 million of this, this year. We have no idea. There is a product kind of like it from another company. I think we're a couple of generations ahead here but we have reason to believe that we could sell more than that. And obviously, we are encouraged if we can do that. But this not only covers client needs, and so far, back from the wholesalers, both from third-party distribution and with respect to the agency force, we are getting great feedback but obviously, it's a great hedge for us versus the GMIB MAX contract.

So 2 last slides. As we move from left to right here, I'm not -- I'm showing the incidence of profitability. I've shown this slide before. This now shows GMIB MAX IV moving to GMIB MAX V, and then to the new Shield Level Selector product. You can see the force in the midteens on a gross ROI. But the incidence of profitability there, you can see in the rest of the stacked bars. As you move to GMIB MAX V, the gross ROI is rising but the incidence of poor profitability is decreasing. As we move over to shield lever selector all the way on the right, the incidence of profitability is getting even better, and the return is even better than the max 5 product. So this gives you a sense of product development. We've got much more on the drawing board and stay tuned over the next year to see what else we're going to come out with.

So here are the key takeaways. Significant strides to manage our new business risk profile and restructure distribution from '12 into '13. We will manage to the '10 to '11 of U.S. variable annuity sales and launch the Shield Level Selector and it would be wonderful if we could do 500 million-plus there. We have exited guaranteed you well and we're launching new whole life product portfolio as we speak. We have a line distribution both affiliated and third party. And I think through the new management team from my point of view, I've been at met for 15 years in my various jobs, watching the retail division, I think it's very safe to say the management team of this business has never been more aligned. And finally, our product development and everything that we're working on is focused on delivering profitable, risk-informed results while leveraging the foundation that we've taken you through ever since we've gone public. So with that, I think, Ed, you're up and John's going to join me and Lisa's going to join me for Q&A. Thanks.

Edward A. Spehar

Welcome to the dating game, John.

John C. R. Hele

That's right. Here we go. I'm not sure we'd be chosen. How stable are these?

Edward A. Spehar

Okay, if you could please wait for the mics before you ask your question and announce your name and firm, if you would. And again, one question, one follow-up. John?

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

John Nadel from Sterne Agee. I guess, my first question is this, nowhere in here and I don't think we've really discussed it in the past, but can you give us a sense for how much GAAP equity and how much statutory capital supports the variable annuity business today?

John C. R. Hele

We haven't disclosed that by segment. It's complex because of everything split off, the variable annuity risk is in this range here in sub and we have the statutory entities. And by the end of '14, we'll be able to give you that statutory capital much better. We all calculate it under the same basis.

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

To use my follow-up then. On slide -- I guess, it was on John's presentation, having a hard time seeing the numbers, but it was the merging the subsidiary slide. You indicated that risk-based capital for -- I believe, it's these entities or was it the full U.S. combined? I just want to clarify that. But the risk-based capital would still be above 400%. I guess, my question is, above 400%, but how would that compare -- is it going to be lower, equal to or higher than keeping everything else consistent, your 2012 year-end risk-based capital?

John C. R. Hele

So our year end -- what we disclosed is combined RBC, which is our major U.S. writing entities will include the companies we listed on that slide, as well as MetLife Insurance Company, which is you New York-based, and a few other smaller ones. We said it was year end 2012 was 466% RBC on a combined basis, and after we merge those 3 entities, which doesn't change. But bringing Exeter in, we expect it will be still above 400% RBC, that combined number of all the entities.

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

But, I guess, my question is, just order of magnitude, above 400%, are we losing something in this translation, I guess, is really the question, in bringing exit? Or I assume you're going to lose some of the offshore benefits. So risk-based capital will be low or still above 400%, is that fair?

John C. R. Hele

It's lower than 466% but above 400%, so it is requiring additional capital to bring that back onshore.

Edward A. Spehar

[indiscernible] pass it to Mark.

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

Mark Finkelstein, Evercore. I guess, just to follow-up on John Nadel's question. I mean, how should we really think about that? I mean, you're bringing onshore kind of what's in an offshore vehicle. Should we think about how you view the overall capital of the company differently? Would it affect 2014 dividend capacity out of the statutory entity? I mean, obviously, the RBC goes down but theoretically, the risk doesn't change. And so, I guess, I'm trying to understand like what it means?

John C. R. Hele

By bringing it all together by the end of '14, it doesn't change our overall risk profile or how we view our overall risks and how we measure things. There will be the statutory calculations that we have to do, and the statutory capital will be more than what we have today in the statutory entities so we've had the risk over in Exeter already. So it's just going to be a lower number than 466%, above 400%, and you'll be able to see it on an ongoing basis and see all the derivatives that we have against that.

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

I guess, the -- I mean, if you have a certain dividend potential, kind of that you're assuming, should we think that, that cash going to the holding company is different because of what you're doing in 2014? Or should we just think about it as, yes, structurally the RBC goes down, but that's kind of look through, but the rating agencies are slipped through by everybody else and it really doesn't affect either the cash generation or our overall view of capital?

John C. R. Hele

Yes, it's -- we will have the statutory of this carbon [ph] calculations on an ongoing basis within the statutory entities. And as long we don't do $20 billion of sales in the year and do huge amounts of sales, it'll be fairly predictable and I will go [ph] and manage through that. So it should have a material impact on cash flow.

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

Okay. I'll follow it through [ph].

John C. R. Hele

I just like to add. I mean, it is very complex to do these runs. The statutory reserves are extremely complex to run. It take a long time. We've been doing a lot of work on this. And so it's hard to give like simple answers, quick answers for you on that because it is complex. That's the downside of bringing it onshore is we're going to be using a lot more computing work by the actuaries.

Edward A. Spehar

It's Eric in the back.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Eric Berg from RBC Capital Markets. My question is for Lisa. Lisa, since you said it by your own acknowledgment, most consumers don't like to annuitize, you knew that ahead of time. Why were your expectations as high as they were relative to what has actually happened? I mean, after all, you knew this was common sense. And relatedly, this is my related question, since we now had 11 quarters -- not 11 quarters, 8 quarters in which the actual numbers have come in so far below your expectations, can we infer that the reserves are too high and that, therefore, your book value may be slightly understated, I guess?

Lisa Kuklinski

Okay, Eric. So looking at your first question, why did we assume that annuitization would grow so high? So while we knew that people were reluctant to annuitize, that was looking at annuitizing their current value and not getting a bonus or a safety net, if you will, upon annuitization, what we wanted to provide for was that the potential that when there was a significant increase in your income because of this guarantee coming into play, we wanted to make sure that our writers were appraised correctly in that way. And like I said, there wasn't a lot of experience to draw on, but if you think back in the -- going back in the annuity market over time, there were these things called two-tier annuities and we did have some limited experience on that. And we saw two-tier utilization, that's where you have 2 different account balances, one is higher if you annuitize, we did see annuitization under the two-tier going higher. So that was kind of laying the groundwork for the pricing and making sure that it was sufficient, because you just don't know and you want to make sure that you price the guarantees correctly so that you're able to hedge them, and that you're there for their clients when it's time to collect on the guarantees.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

Right. And then...

Lisa Kuklinski

As for the second part, why haven't we shown it today? So as I mentioned, only 3% of our contracts have been out of the waiting period and with the chance to annuitize. The numbers are high but the percentage of the block is low, and what we want to see is the behavior across all the different ages where they're able to. I mentioned that the GMIB terminates on a particular date, that's age 85 for other business that is getting into their window period now, and we want to see how the behavior works out through that whole curve if there is more annuitization at that last opportunity. We need to understand that. But certainly that, if we do reflect this lower annuitization or even start to move closer to what we're utilizing, the reserves would be lower on this.

Edward A. Spehar

You want to stay on the back, Eric, and pass it to Chris.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Chris Giovanni, Goldman Sachs. The cash flow in the MCV sensitivities, I guess, very helpful. But how do you think about the potential, I guess, cash calls under the, call it, the flap market, no change in interest rates from a statutory basis and then also the potential implications on the GAAP balance sheet under that scenario?

Lisa Kuklinski

Right. So what we wanted to focus on was the absolute cash flows and not to get into statutory, whether it's onshore or offshore, which clearly makes a difference under GAAP you get into how much of the FAS 133 reserve versus the SOP. So those are all things that we model over time. We want to understand sensitivities, but it becomes a lot more complicated. In GAAP, you'd be looking at, okay, well, do we change our long-term separate account growth rate and what does that do? So while there are things that we look at internally, we wanted to focus on the cash flow for this.

John C. R. Hele

That makes it much our complex because you can run these scenarios but there's a big timing difference how you set your assumptions [indiscernible] stat to GAAP and the modeling. As I said in stat, it's extensive to do these scenarios. So if the cash is there, ultimately, the earnings will definitely come through. If you have the value, you have the value. Accounting, that can change the timing, but you've got to have the cash.

Steven A. Kandarian

And in general, we're going to help you in the second half of the day on the flat interest rates and the impact of stat and GAAP balance sheets.

Christopher Giovanni - Goldman Sachs Group Inc., Research Division

Okay. And then just to follow up. The 466% RBC to something north of 400%, is your definition of excess capital changing at all, or is the dollar amount changing, or is it purely just geography?

John C. R. Hele

We disclose cash with the holding company and we disclosed our ratio of our major U.S. statutory entities, as well as Japan. And of course, the statutory entities are limited by the dividends that can be paid from those statutory entities, and we have some slides later on, on our statutory earnings that drives this whole cash generation from the statutory entities. However, we have not given definitions of excess capital to you in recent quarters because we're really waiting to see what our regulatory framework will be long-term. So we've held back from that when we understand the regulatory framework, which will be driven by, number one, if we're deemed a nonbank SIFI and if we are what the rules or role will be then, then I think we can give you better guidance on excess capital. But until then, we're going to wait and see what the regulatory framework would be.

Edward A. Spehar

Let's take one more just from Suneet [indiscernible] and then we'll move to the other side.

Suneet L. Kamath - UBS Investment Bank, Research Division

Suneet Kamath from UBS. So just following on the capital, I guess, John, I think it was December of last year, the guidance was to get to the 12% to 14% ROE by 2016. You talked about $5 billion of net buyback, so x the mandatory converts. With this 35% to 45% payout ratio that you're talking about or free cash flow generation, excuse me, ratio that you're talking about and if we assume that you just increase your common dividends sort of in a decent rate, is that $5 billion of share buyback still on the table?

John C. R. Hele

Well, it depends -- buybacks depend on quite a lot of different factors, and we've given quite a range of the 35% to 45% because there are various expenses that happened throughout the years. And we've given you that scenario. The cash flows, you can do the calculations, would allow that to happen. You need, though, to understand what the capital regime would be. So again, we really don't want to give any future guidance on share buybacks until we understand the regulatory regime. Although, as Steve mentioned, good capital management is a core part, and it's very important to us as a management team. So we are still taking key actions. We've decided to buy Provida this year, which is a great business, and that's $2 billion of cash. We've raised the dividend, and we're taking appropriate actions where we can.

Edward A. Spehar

And maybe I would ask, if we could try to keep the questions focused on the VA business for this session. The last Q&A, we can cover anything you want.

Suneet L. Kamath - UBS Investment Bank, Research Division

Can I get just a follow-up?

Edward A. Spehar

Sure.

Suneet L. Kamath - UBS Investment Bank, Research Division

On the VAs, I guess, just a follow-on on Chris' question. So in some of those scenarios, right? The claims payments were quite a bit higher than the fees. So I get that you're doing a present value for a long period of time, but are there scenarios where you're going to be taking big losses in any particular year because those claims are so much higher than the fees that you're taking in?

Lisa Kuklinski

Well, that's where you get into the question of the reserves that you're holding over time and how the hedge assets appreciate in those scenarios. So what we wanted to show was the claims, and you are seeing some of the incidents there. But if you did start to go down a path where you had a minus 30% shocked [ph] to the stock market, then you would start to accumulate a reserve, and that would help.

John C. R. Hele

Right. So we have derivates, we have reinsurance, we also have the other base fees from the contracts not showing within [ph] benefits and all those runs. So there are a lot of offsets that you would factor into your net present value calculations for your GAAP and statutory statements.

Edward A. Spehar

We'll go [ph] to Jay.

Jay Gelb - Barclays Capital, Research Division

Jay Gelb from Barclays. For Lisa, on Page 22, where you talked about the market consistent value, the net value there of $4.3 billion currently, I'm just trying to better understand what is that? What does that mean?

Lisa Kuklinski

That is basically using the methodology that we describe, projecting out all of the cash flows on the block that has living benefits and looking at what the -- it's all benefits combined actually, and looking at it in a risk-neutral framework basically marking its market, looking at the fees, looking at the riders and then the hedges that we hold.

Jay Gelb - Barclays Capital, Research Division

So that's the value of the block?

Lisa Kuklinski

Right. It's like marking it all to mark ends.

Lisa Kuklinski

Okay. And then my...

John C. R. Hele

Well -- but [indiscernible] that, I mean, that's the value under this framework in this calculation. We believe it has a premium to that value because we assume the stock market -- we hope the stock market for the next 50 years will go up by more than 2% a year. And to the extent it does, it will get more fees from that, in that present value. So it's a risk-neutral valuation, consistent with the capital markets, and it's a good test when you price these options. If you price in that way, you can buy hedges and you drive [ph] as a gain status, an easy way to sort of value those options. But we plan to make much more money from that business than that base value.

Jay Gelb - Barclays Capital, Research Division

Okay. Maybe going forward, we could get your assumptions on that as well. And then for Eric, if I look at Slide 11 and 12 of your presentation, looking at the present value of the GMIB Max V versus the Shield, why would a client buy the Shield?

Eric T. Steigerwalt

Look, the Shield is more of an accumulation product, right? The benefit attached to the base rider for GMIB Max is for guaranteed minimum income, okay? So from what I've heard from the wholesalers over the last 3 weeks, it's a GAAP filler; it's for someone who's looking for mostly accumulation; it's for someone who wants to protect the downside, given what they've seen happen to whatever, their brokerage account, et cetera, et cetera. So it's a completely -- it's not necessarily completely different buyer, but probably, the audience at the beginning is different than the audience that would naturally buy GMIB Max. So, so far, both in the wirehouses, the regional firms and in our agency force, people have pretty quickly come up with clients that they believe that, that product, or some iteration of that Shield product, remember because it has different tanners, different levels of market protection, would be perfect for their clients.

Jay Gelb - Barclays Capital, Research Division

So a younger client than your traditional living benefit?

Eric T. Steigerwalt

Probably, but not necessarily. .

Edward A. Spehar

So we'll go to Ryan right there.

Ryan Krueger - Dowling & Partners Securities, LLC

Ryan Krueger with Dowling. I had a follow-up on the MCV calculation. I think it would be helpful since that doesn't include your current reserves, and I know you don't want to talk about the capital back in the VA business right now, but could you help us understand how much statutory reserves you have currently for the variable annuity business?

Lisa Kuklinski

And so MCV really is just a cash flow analysis, and like we said, it doesn't include reserves. It's marking everything to market in a particular methodology, as though they were derivatives, which is it's just one lens [ph] to look at the business and it doesn't include statutory. It's a separate -- it's a view, just like GAAP is a view, stat is a view and then MCV is another view.

Ryan Krueger - Dowling & Partners Securities, LLC

So I guess, my question is, is there anything you can help us with to understand how much statutory reserves you have right now for VA?

John C. R. Hele

Well, most of the risk is reinsured. The vast majority of the risk is reinsured to Exeter, so we're not holding statutory reserves. We're holding reserves in Exeter, which is based on a U.S. GAAP basis and we haven't disclosed those numbers.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay, understood. And then, separately on same -- also on the MCV, does that include the value that you would get from the 30% of account value that doesn't have living benefits?

Lisa Kuklinski

The MCV is on the entire block with living and without. The cash flow analysis were just limited to living benefits, like a self-contained block.

Edward A. Spehar

Do you want to go to Steven back here?

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

It's Steven Schwartz, Raymond James. If we can go to Slide 7, Lisa, this is the slide where you talked about -- you're looking at GMIB Max I age 75, you're comparing the 100 benefit base to the PV income guarantee of $60. You said -- just make sure correct [ph], you said you were different between what and what if your AV is $60?

Lisa Kuklinski

So if your account value is $60 and you're comparing to a benefit base of $100, so at that point in time on 3/31, given our current single premium annuity rates, your indifferent [ph] between taking your GMIB with the $100 and applying that to the guaranteed basis, the guaranteed payout basis in the contract, which is an income of 5.3% of the benefit base, right? So $100,000 turns into $5,300 a year for life, versus taking your account value of $60, withdrawing it and just purchasing us via at street rates. That would also get you an income of $5,300 a year for life.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. Now the understanding that your MCV, as you calculate it, goes down by $2 billion, which isn't the end of the world, right? If I'm looking at this, I've got $5,300, I've got $60,000 in account value, I'm getting $5,300 a year, that's 8.8%. And more likely, this is probably going to be -- this is what it's going to look like for your 2007 GMIB, whatever number that was, right, have a benefit base that much bigger. All right, if I -- so maybe I get 7%, so I could be looking at a return on my current account value of 8.8%, given your example here, to north of 11%, why don't I want to do that?

Lisa Kuklinski

Why would you not want to take dollar-for-dollar withdrawal?

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Yes, why don't I want to take dollar-for-dollar here and get that money out. That's a heck of a return off of what I've got in my account value.

Lisa Kuklinski

That maybe an option, but the question is, first of all, you could start taking dollar-for-dollar withdrawals, but then at that point, you're going to come up on your writer termination date. In this example, the 75-year old would have until age 85 to decide if they want to exercise that benefit. At that point, if they don't, the ability to take dollar-for-dollar withdrawals would end.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

I understand, but...

Lisa Kuklinski

But it doesn't make sense. It may make sense to wait and to reexamine at that point and wait for the next anniversary, and that's why we do want to see the experience emerge over the full range of ages before we make any changes to the annuitization assumption.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

No, I'm sorry, I don't understand. Why do I want to wait a year? Why don't I just want to take this $8,800 now?

Lisa Kuklinski

You might want to, or it would be on -- it would be the dollar-for-dollar corridor [ph] on your $100 benefit base. So if you've got the max, depending on which version you have, that withdrawal rate could be anywhere from 4% to 6%, and that is another alternative, that's not the clients' option.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

But clients just don't do that.

Lisa Kuklinski

Some do, but we find the big drivers really when do you need to start taking withdrawals, and that's mandated legislative birthday.

Steven A. Kandarian

And you're reducing your account value as well, I mean, you're giving potential upside...

Lisa Kuklinski

They would be reducing your account value, and then you would come up against the writer termination date. You'd have to make a decision at that point.

Edward A. Spehar

Want to go on this side, over to Ian [ph]?

Unknown Analyst

My first question is a follow-up to Suneet. So if I look at the base -- if I look at the PV cash flow as a base case or flat rates of $12.5 billion, and cases that are worst than that or down about anywhere from $5 billion to $10 billion worst, right? So I think what we're trying to get at -- and if you can't answer just today, maybe you can answer down the road, but just, is that $5 billion or $10 billion mostly covered by hedges, reserves, et cetera? Or is there a risk of a capital raise in that situation? Or capital contributions down to the subs we have less free cash flows available for buybacks and dividends, et cetera? I think if there's a way to help us understand that that's off the table, that would bring a lot of confidence.

Lisa Kuklinski

Right. So I think the best scenario that shows that is the final one, where we showed the 30% decline in markets and then we're showing how the hedges do help with that.

Unknown Analyst

Right. But if you're at 12 -- I guess, the question is, though, if the $12.5 billion in the scenario that's closest to today's, if that's where you're holding capital today, and that last scenario was $10 billion dollars worse, then maybe you need $10 billion of capital? Or is there a hole [ph], or if the current reserves imply something closer to those worse cases and the $12.5 billion is actually cushioned, right? That's, I think, where we're still unclear off.

Lisa Kuklinski

Right. Well, that's different. Just looking at pure cash flow as opposed to capital. But when we see the cash flows breaking even, that's a good sign that we would be able to self-fund the liabilities win in that block.

Unknown Analyst

Okay. And if I could just ask quickly on the lapse change, I think the charge in Q4, if I recall, is $300-something million, and that was a pretty big move. So is it fair to say that any further move that might be necessary from this kind of 5% type lapse function in the money would be pre-de minimis going from single digits to a lower single digits?

Lisa Kuklinski

Right. Well, getting back to the fourth quarter change, so we had a positive to operating earnings. You saw most of it take place in the fourth quarter, and then there's that catch-up piece in the first quarter that we talked about, so there was a positive 100 to operating earnings, and then the minus 300 that you were referencing was on a non-operating earnings. So the total impact was minus 200. And yes, we do believe that we've gone all the way with that lapse assumption.

Edward A. Spehar

Let's stay on this side. Joanne?

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Joanne Smith, Scotia Capital. I was just wondering if you have discussed these changes in the structure with the rating agencies? And what their views on these are?

John C. R. Hele

Yes, we've had meetings with the rating agencies, and there's no real change throughout [ph] our risk profile, so we're moving risk from one place to another. And the only question I have is this is a very large project bringing together 3 statutory entities, account [ph] policyholders and merging Exeter in. So they did raise the execution point that they do raise when you do major mergers like this. But we have a good plan in place, we have a steering committee. We're approaching this in a very experienced way, and we have a good team from ALICO that's freed up now to help us on the ALICO integration to work on this for us.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Just as a follow-up, I'm just thinking about bringing Exeter on that would impose a little -- some more volatility on the statutory earnings, I would think. So therefore, I would think that the rating agencies would look at this as a little more volatile business and potentially ratings at risk. .

John C. R. Hele

Well, we're looking at optimizing our hedging strategy to reflect the statutory volatility as well under VA carbon [ph], and that's work underway. But we've communicated that with rating agencies as well, and that will be future work that we'll be communicating with them.

Edward A. Spehar

Joanne, would you pass it to Sean?

Sean Dargan - Macquarie Research

Sean Dargan from Macquarie. Lisa, when we look at the NAR bar graph, it looks like the 2007 issue years is the most troublesome. Has there been any thought to mitigated risk by basically paying policyholders to lapse, or taking a strategy that I think some of your competitors have looked at?

Lisa Kuklinski

I'd like Eric to answer that question.

Eric T. Steigerwalt

Okay. So we're in this business, right? You've seen both on the life side and on the annuity side. But particularly, your question on the annuity side, some companies are offering this buyout programs, or whatever you want to call them. As you can imagine from everything that you've heard here today, we are researching everything, okay? But given what you've heard John talked about and what Lisa talked about, we don't need to buy back what we've put on the books. We think that we've got a pretty good risk profile here. And as a result, if we can find a couple of places where it would be appropriate for the client and helpful to MET, we could do something like that. Right now we have not announced anything, we don't intend to announce anything tomorrow, but it's -- we're thinking about every possibility. But as you've heard Steve say, we're still in this business, we're committed to this business, we're committed to running it properly. We believe we've demonstrated today that we have in the past and we intend to going forward. So we'll see we if we could come up with solution that would be both beneficial to the client and to the company.

Edward A. Spehar

From the back.

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

Jeff Schuman from KBW. Actually, just kind of following up on the last question, maybe making more broadly any level of interest in exploring third party transactions, either to kind of change the size or nature of the variable annuity risk or to possibly offload fixed annuity risks or other risk -- other interest of capital-intensive lower ROE businesses?

John C. R. Hele

Well, the question is, regarding variable annuity risk and throwing all, [ph] there's only major player who has a balance sheet large enough to offer variable annuity reinsurance. But it's very pricey warrant energy [ph] do a very high returns on their size, so it really doesn't make economical sense from what we've seen. And so that's why we've decided to bring this together and manage it ourselves, we think we'll get a better return. And you can see, we are in a low interest rate environment. You can see the huge cash flow economic upside by interest rates moving up a bit over time. So we'd rather retain that risk for us rather than doing a transaction now and giving it to somebody else.

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

Second part of that was on fixed annuities. Just [indiscernible] can you have this overarching idea of kind of moving capital from certain types of businesses to certain other types of businesses. Any interest in sort of accelerating that by maybe moving some fixed annuities, or the blocks off your balance sheet?

John C. R. Hele

Well, our fixed annuities are well matched and we have good returns on those today in a relative sense. So taking blocks off those doesn't make a lot of sense to us. We have good margins. It's contributing to our business. And MET's been very selective. We're not selling many fixed annuities now with lower interest rates we can't get the margins. When we can get the margins, we want to be back in that business. It's a very needed products. And when it makes and we can get the right returns, we will sell those products.

Eric T. Steigerwalt

And we felt that way over years on the fixed annuity business. I mean, Jeff, you've been following us for a long time, we've been in or out depending on where we think we can get returns and we'll just continue to do that.

Edward A. Spehar

Can you give it to David [ph]?

Unknown Analyst

Just a quick question. Utilization from your charts has been lower than you anticipated. Can you just help quantify for us the potential benefit, if you trued up your utilization assumptions? Because we had a sense on the negative impact of trueing up lapse. What would be benefit of trueing up utilization base [ph], if you could just help size that?

Lisa Kuklinski

I think it I would be premature, at this point, giving estimate of what that would do to our liabilities. No doubt it would be a positive, but we'd have to look at how we actually recalibrated that assumption. So at this point, I wouldn't want to give an estimate.

Edward A. Spehar

[indiscernible] to Randy here. Over here.

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

Randy Binner from FBR Capital Markets. Just a couple on the cash flows, which are much appreciated. I guess, first in the -- I guess the base case with the flat interest rates on Slide 16, and on the one before that, the kind of the happy scenario of the, kind of up markets and better yield. Can you size first what the hedge impact would be over the totality, this is kind of following up on Ian's question, but we didn't get that kind of that, there would be hedge bad guys in both of those situations, I think?

Lisa Kuklinski

They would be. They'd be relatively small and on an ongoing basis with those, because the markets are not appreciating, they're just moving either 5% a year. So it's not going to be a major bad guy. It's similar to what you'd see in a typical quarter. .

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

Okay. And then so something in like, the low single-digit billions for each of those?

Lisa Kuklinski

To project that out overall these years, I'd have to think about that some more, but it would be small. It would make the -- no doubt it would make the good scenarios slightly worse, that might be reasonable.

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

Okay. And then, again to kind of amplify what he was asking, if there's hiccups along the way in that 50-year look, then the reserves and the hedges would be meant to kick in, to kind of not create significant RBC shortfalls. I mean that's the key message there?

Lisa Kuklinski

Exactly.

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

And what do you with the rider fees in this assumption. Do you treat them as float? Do you invest them? Or do you just kind of take them as cash going through the analysis? How do you model all these fees coming in over the years?

Lisa Kuklinski

So in the cash flow analysis, we projected what the fees would be, and we simply took a present value, but in reality, we use them to purchase hedges, that's to cover reserves.

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

Think you're not projecting any kind of positive yield you get on kind of holding that -- those fees?

Lisa Kuklinski

No, we're not accumulating them. We're just projecting out the incidence year-by-year and then taking the present value of those.

John C. R. Hele

Maybe one last question. I want to pass it back to Eric.

Erik James Bass - Citigroup Inc, Research Division

Erik Bass with Citigroup. Just a question, kind of following up on your comment that you're in the variable annuity business. How do you think about sizing that business over time, either as service, is it a percentage of EPS, a percentage of capital and sort of related to that, given kind of return profile of the new sales that your talking about it, do you think you're at a point where now, kind of $10 billion to $11 billion is a comfortable run rate, going forward?

Eric T. Steigerwalt

There are many dimensions in thinking about risk, just raw risk, earnings, GAAP, stat, and so there's not a perfect, exact number, but I do know and I think we all agree, $28 billion in a year was too high. We spent a lot of time in thinking about the plan for this year, with Bill and Eric and Lisa and our actuaries and our risk people and we came up with this $10 billion to $11 billion, with this new type of product in terms of the risk profile. And for now, we think that, that's a good balance in what we have. Obviously, the more shield we could sell, the more they would naturally balance it. So you could -- you would think about the range that you're doing. But I think in setting this up, and this is a real credit to this management team was one of the key reasons I was happy I joined was, we're talking about setting the sales limit of a product, which hasn't been seen much in the life insurance industry in sort of really thinking about risks. So that's a really great part of being part of MetLife.

Erik James Bass - Citigroup Inc, Research Division

And just a follow up on that, how did you arrive at that $10 billion to $11 billion target? You kind of go through the process that you went through?

Eric T. Steigerwalt

We went through the capital. We expected that, that would consume, in a year for that new product and that risk profile, the volatility through various sensitivities of that, and looked at our capital forecast in cash and the derivatives we need to go against that and triangulate it down to get -- to about this range.

John C. R. Hele

And we did a pre-SLS. So it's pre the new product.

Lisa Kuklinski

Right, basically we're not looking for the annuity business to become a larger portion of MetLife's total risk. So that's another, ones that we look at it through.

John C. R. Hele

Okay, we like to take a short 10-minute break if you could all come back and we'll get in the second half of the presentations. Thank you.

[Break]

Unknown Executive

If we could all return to our seats, we'd like to get started please.

Okay. We're going to head into the second half of the Investor Day, where we're going to focus on earnings and free cash flow.

So I'm going to invite John Hele back up on stage to kick off this segment of the day. John?

John C. R. Hele

I like the music. Okay, we have the next section to start. I just wanted to follow up on one question, Ed suggested, being the good analyst that he is, that we said, in total, by merging these companies together and bringing Exeter on shore, there's no real change in our economic risk, but we do have some benefits to it, due to having collateral that would be required to be posted today with this separate reinsurance company, by having it within the statutory entities we have the assets there that will be able easily post collateral over easily with, and no potential requirement of holding company cash. So that's a real true cash flow economic benefit, if you want to think of it that way. There's another key point in bringing this all together. We have the base fees in the calculations now, because the rider fees and the base fees are all together in one statutory company. This is quite a help when you calculate the statutory reserves. So there's a statutory calculation benefit as well. So those are 2 very important points that I just wanted to clarify.

Our next section that Marlene and I will be covering will be in our earnings and our free cash flow.

Well, first I'm going to show you some slides that breakdown our products into protection margins versus investment margins. And products with -- our products have substantial protection margins, are very key contributors to MetLife's profitability.

And importantly, our growth businesses turning a profit, so they're driven by lower capital-intensive products so it's a very favorable mix occurring over time.

We have some slides of statutory to GAAP results, and so we're showing, for those statutory entities, what the GAAP earnings were for those statutory earnings, so you can compare the statutory to GAAP results, and we believe this validates our operating earnings quality.

Why is this important? Well, statutory earnings, both in the U.S. and worldwide, are more conservative, but these ultimately determine the cash to the holding company.

And of course, we have a lot of interest in cash. So the trend of the statutory earnings is a key predictor of future cash flow.

Lastly, Marlene will give you some information, some views that show that the ratio of free cash flow to operating earnings is expected to improve to 35% to 45% over the 2014 to 2016 period.

So let's look at our operating earnings by reporting segment. This breaks down in the gray slides, businesses, operating businesses that we report on, where the margins from investment margins are the majority of the business -- are the majority of these earnings and protection is less, so that's retail annuities and corporate benefit funding. The other blue slices are where the protection is the majority. Now the investments can be a major component or a large minority component of these normalized operating earnings, but protection is the core margin. We would also include fees in this regard with protection, so really non-investment margin.

We'd broken out 4 of this P&C as a separate segment. So there's -- P&C is the group and individual together. Just broken out, so it's not our true reporting segments in the QFS, and there are many footnotes at the bottom that show how it's all normalized, that you make need some good glasses for, but we try to normalize the overall operating earnings for you.

And if you add all this up, we currently have -- lower risk businesses are 62% of our 2012 operating earnings.

We include in this both property and cash, the -- and the group business. These do have quite significant investment components to the earnings of this business, but they differ from the other gray businesses, because the P&C and the group business can be repriced every year. So it comes up for renewal, it's repriced, it has a different risk profile from an investment perspective, than the Retail Annuity and the Corporate Benefit Funding business.

As we implement our strategy over time, and sell more Protection business and also the emerging markets where you can see Asia and EMEA and Latin America, where these businesses continue to grow and as we execute our strategy this percentage will increase over time, which is really the core to our strategy.

But we're starting from pretty good place here already, with more than 60% of our earnings in these lower risk products.

So let's turn to this stat to GAAP comparison, and we'll go through each of our major areas first, here in the United States.

And this is new information for you, and remember, as I've said earlier, stat drives cash. So it's a very important metric.

However, there is a difference in accounting basis between stat and GAAP. So for the statutory operating earings, for the U.S. major combined subsidiaries, we've adjusted to remove dividends from affiliated entities to avoid any double counting, and we've included some other, smaller businesses, SafeGuard, DelAm and this excludes ALICO because that's really foreign business.

You can see it does vary year-by-year. We've added up all these ratios together, and over a 5-year period, the ratio is 83%.

Let me highlight a few key areas. The 2008 ratio is quite, well, negative, it's -- no statutory earnings yet, but you have GAAP. This reflects the very conserved nature of the U.S. Statutory business. The statutory loss was due to carbon [ph] and reg 128 reserve testing in the crisis, but this came back in 2009, where a great deal just came back from reg 128 and carbon as the markets improved.

In 2011, the ratio is 68%, and this reflects stat increase from VA carbon [ph] . The 2011 business, that record $28 billion of sales was not reinsured to Exeter. It was reinsured to MetLife insurance Company of Connecticut, and you can see the statutory strain that happened from that. So that's one of the factors, when we think about even going forward, how much do -- sales do we want to do in a year, we would take that into account. But I think you can see that averaging out this over time, this is a very solid ratio when you look at our overall GAAP earnings to the statutory on a U.S. basis.

Turning to Latin America. We've highlighted for you here, Mexico and Chile, which are our 2 largest reporting units, and really dominate the earnings throughout Latin America.

Of course, Mexico and Chile have different statutory earning bases. It's different from the U.S., it's also conservative, but it is slightly different. You can see the total is 81% year-by-year, so it's very close to the United States. Mexico's 86%, Chile's 56%.

In 2010, the ratio -- so in 2012, the ratio is 63%, and Mexico had a stat -- FX charge of $60 million in their U.S. dollar portfolio, their Mexican peso strengthened versus the U.S. dollar, and that caused a charge in that year. So that explained some of that difference.

And it will never be perfect, year-by-year. There's always going to be differences in timing between statutory and GAAP, but you can see, over a period of time, it's still a very high ratio.

Now turning to Asia. The Asia statutory, both in Japan and Korea, which are the 2 major entities we're highlighting here, are more conservative than the U.S. and even Latin America accounting.

The FSA base, Japan is quite conservative, as is Korea. We've only shown you 2 years because that's post the ALICO transaction, and the cumulative ratio is 49%. In Japan, in 2011, we did have integration costs and also factored a bit into 2012, so that explains some of the difference.

We did give you some highlights at our Investor Day, that for Japan, a good range is probably 40% to 50%, reflecting the volume of sales we have and the conservative statutory nature of the Japanese statutory accounting.

So different in the 3 areas, and different accounting, but I think this can show just how strong the statutory is compared to GAAP, and that will ultimately drive our cash.

So in summary, more than 60% of our operating products come from products with a lower risk profile, and the execution of our strategy, particularly with emerging markets in less capital-intensive businesses will increase that proportion over time. Again, we include businesses that are mainly fee-based here, such as the Provida acquisition we expect to close later on this year. That's a fee-based business, not an investment margin business, and lastly, our statutory to GAAP results indicate high-quality operating earnings, which is key to generating cash over time.

So in speaking of cash, I'd like to introduce our Treasurer, Marlene, who'll give you some more views on our cash.

Marlene Debel

Okay. Thank you, John, good morning, everyone. So today, I'm here to talk about one of my favorite subjects, and that's cash.

So today, I'm here to talk about one of my favorite subjects, and that's cash. I think you'll probably like it as well. I'm going to provide some updated information about our projected cash position in 2013, and I'll also talk about free cash flow.

Okay. So I'm going to start here which is a slide you should be familiar with. It's the same -- it's the holding company's cash flow forward that we showed you last December. And just to take a second to refresh on how this works, we started with our year-end 2012 cash estimate. We added to that expected dividends from subsidiaries, as well as the expected inflow from our common equity unit remarketing. And then subtracted from that expected expenses and other net flows, as well as debt maturities and the payment of our common dividend. And remember, at the time, that $0.74 a share.

So the net of that, we estimated that we would end cash in 2013 in a range of $4.8 billion to $5.8 billion, and that is before any incremental capital actions.

So let me just give you an update on where we are now. Okay. Previous slide I showed you, $4.8 billion to $5.8 billion. And since then, we've announced 2 significant capital actions; one was the $2 billion acquisition of Provida and the other was the recent 49% increase in our common dividend. So that, in 2013, is worth another $300 million of spend. So had we known about that $2.3 billion when we put our forecast together at the end of last year, we would have showed you a range of $2.5 billion to $3.5 billion. But as you can see in the last bar, we expect that our cash will come in higher than that and our adjusting our forecast to $3.9 billion to $4.9 billion. So the difference, the $1.4 billion is due to a couple of things. First of all, higher dividends from subsidiaries. We're anticipating an additional $750 million of higher dividend, and this is primarily driven by $550 million of release of capital from MetLife Bank as we are unwinding that legal entity. As a matter of fact, just last week, the holding company received a payment of $550 million from the bank. The remaining $200 million is the sum of smaller dividends, various other dividends from across the company, so the total of that $550 million and $200 million is the $750 million of higher dividends.

The rest of that difference is we expect expenses and other net flows to be about $600 million lower than originally anticipated, and about half of that is due to a lower placeholder for the Dodd-Frank collateral. And as John noted, that's primarily due to unexpected longer phase-in period than we originally anticipated. I should just make one note, that this $600 million, we've adjusted that for the $300 million expense carryover. If you recall, we had some expenses at the end of '12 that slid into 2013, which was supported by a higher starting cash balance.

So let me move on from our cash position to talk a little bit about free cash flow. I'll start with the definition and on the next couple of slides, I'll provide some numbers. So these 3 boxes give a good overview of how we think about and define free cash flow. The first most important contributor, of course, is going to be dividends from our subsidiaries, and that provides cash to our holding companies, subject, of course, to regulatory rules and target solvency ratios. The middle box is expenses and other net flows of the holding companies. And this is primarily interest expense, there are some administrative expenses in here, but it also includes other net flows like capital contributions. So think of this as sort of everything that is not a dividend or a capital action falls into this box. And I'll just note that we sometimes refer to this as expenses, and that's really shorthand for expenses and other net flows of the holding companies, which tends to be a mouthful.

And the last box is leverage and just a couple things to note here. First is, we manage our leverage very carefully, and we target a AA financial strength rating. But as our company grows and our capital base grows, so does our debt capacity and that can contribute to free cash flow. So these are the key components of free cash flow generation. It adds to our cash position to support our common dividend, as well as other potential uses like stock buybacks, debt reduction and M&A.

So just a little more detail, here are some -- here are the components and a bit of history. The gray bars are the subsidiary dividends, the blue bars are expenses and other net flows so the difference of those 2 bars is free cash flow. The yellow line is leverage and I'll get to that in a second.

So if you take a quick look at 2011, that was a very strong year for free cash flow, and that was -- remember, we had some catch-up dividends and we also have lower than normal expenses in flows that year. In 2012, dividends were elevated. As you recall, we received $1.6 billion from our Japan subsidiary, and that was offset -- those high dividends were offset by higher expenses and other flows, primarily due to the capital that we provided to our reinsurance subs and we've talked about that previously. And '13 is our current projection, dividends are in more of a normal range. One way to think about '13 is that, that return of capital that we're getting from the bank somewhat offsets the fact that we're not getting a dividend this year from Japan. Expenses are still a bit elevated, some of this is the timing difference we talked about earlier that slipped from '12 into '13, and there are some residual support in these numbers for our reinsurance subs. So the net of these 2 bars in '13 is free cash flow of $1.6 billion, and that is a point estimate within a range. And I'll just note on leverage is, leverage has declined over the period as we repaid maturing debt both in 2011 and 2012. And as you know, we've already refinanced our 2013 maturities.

Okay. So this is free cash flow now in percentage term so shown as a percentage of operating earnings. 2012, 26%, we just talked about some of the reasons, primarily higher than normal expenses. 2013, 27% approximately, that's the midpoint of a range. Again, this includes the release of capital from the bank, does not have a dividend from Japan, and expenses are still a bit higher than we'd expect on a normalized basis. And then just on Japan for one moment, remember when we converted Japan from a branch to a sub, earnings were reset to 0. So while there is no dividend in the '13, dividends will grow to a more normalized basis over the next few years.

So looking forward, expect to be in a range of 35% to 45% free cash flow as a percentage of operating earnings and working to increase it over time.

So just to wrap things up, again, expect to end the year with cash higher than we originally expected, in a range of $3.9 billion to $4.9 billion, and that -- and we will generate $1.6 billion of free cash flow this year. We expect our free cash flow range to be 35% to 45% of operatives earnings through 2016. And As you've already heard from us today, cash generation is a very high priority.

So thank you very much, and I will turn it back over to John.

John C. R. Hele

We're going to move into the final section.

Understanding net income and book value, which could be a very long session if we went through it all, the detail. We'll try to give you a short summary.

We're going to show to you some numbers and come up with a concept of adjusted net income where we try to remove the non-economic and asymmetrical accounting out of net income. And when you even do that, it's still substantially below the operating earnings but we will show you some of the core components from this period of 2008 to 2012 that we would submit are not typical.

The interesting thing is that the suggested book value which is its adjusted net income shows faster growth and much less volatility, so it's much more even growth throughout the period. Finally, we'll share with you a key question I've had since I joined is, what happens if we eliminate the reversion to the mean assumption to interest rates when we do our reserves and calculations, and we would submit that this is a very manageable impact on book value.

So let's first walk through. If you take our operating earnings in total from 2008 to 2012, the operating earnings are about $18.5 billion. The net income was $10.4 billion through that same period. But I should point out that the net income was quite volatile in this period. It went -- the low was minus $2.5 billion to a high of plus $6.2 billion, so quite a swing for year to year.

We've deducted from net income what we are labeling non-economic or asymmetrical accounting. So this includes the non-performance risk on our embedded derivatives. These are the liabilities for our FAS 157, 133 reserves. We also include in this derivative gains on non-VA hedges or derivative losses, these are principally interest-rate driven so they were gains. We exclude inflation adjustments where the asset adjustment is an AOCI, but the liability is in earnings, and we have these products in Chile and Mexico, as well as we exclude pass-through adjustments for experience-rated and parked contracts. So if you total all this up over the whole period and there were pluses and minus in all this, it's about $1.1 billion. So the adjusted net income is $9.2 billion, which is still quite a difference from the operating earnings of 18.4 is still quite a difference from the quite different from the operating earnings of 18.4 to 9.2 gets you to this $9.2 billion which is the difference.

There are 5 key items that are noteworthy to look at this difference and explains about 75% of this difference. The first is net investment losses of $4.1 billion. This primarily occurred in 2008 and 2009, and MetLife, like other financial institutions, did take write downs, financials were $1.4 billion of that, corporate credits were about $800 million and there were series of other single names, no more than $300 million, remember some Lehman bonds, Greek bonds, so these are the credit losses for the time period.

Now, we're not saying that credit losses would be 0. In fact, we plan for approximately $400 million after tax a year of credit losses when we think about this. But this level is twice that level from this time period. But we did come through like a one in 60, one in 80, credit crisis, that was a 2008, 2009, '10 period.

We also wrote down the goodwill of $1.6 billion, that was in the retail annuities, which has no goodwill left in it now. And we did some assumption changes in the fourth quarter, which Lisa spoke about, the major part of that, and we think that's what our reserves in a much better footing. We had some divested businesses. I skipped integration cost of course, it was ALICO, so of the 6 or 7, about $500 million of that was from ALICO which was clearly a very large acquisition for MetLife. There were some small acquisitions which we view as more normal as integration costs and the divested businesses include the bank and the Caribbean business. So if you had those up, it will explain a big piece of this. There's always going to be a difference between our net income and our operating income-based to the volatility of the business but we think this explains quite a big piece of it.

If you take that same adjusted net income and apply it to the book value, you can see a slight change from year to year with compared to our reported book value excluding AOCI. It ends up in the same place in the far right in 2012, the 2 colors are about the same. But you can see the adjusted is a much smoother progression year-on-year. So there's a better growth pattern from the adjusted book value. If you flip ahead and think about it, the average growth of the adjusted book where the actual was 2.25% in the blue in the left, the adjusted is 4.3%, and the standard deviation, importantly, the actual 7.75% and adjusted is just over 2%. So you can see we are growing book value, if you can remove some of this noneconomic and asymmetrical accounting noise that we got.

Lastly, a key question that we got is, what happens if interest rates remain low indefinitely? And it is quite a complex analysis to go through and do. We've reviewed our statutory reserves, cash flow testing, we've looked at our GAAP reserves, loss recognition testing. We looked at our deferred acquisition cost and other intangibles unlocking, as well as goodwill impairment testing. The last 3, of course, all effect, are U.S. GAAP results and we did this globally.

What we did was we held the U.S. Treasury rate constant from September 30, so it was at 1.7%, 1.65% then, so we're only a little higher today. And we removed all mean reversion worldwide, but that's mainly in Korea and the U.S. Japan is flat already in our core assumptions.

So the separate account returns when you factor all this in on interest rates, we told you that at year end, we reduced the separate account total fund performance of 7.25%. This should be now a return of a 6%. And the general account returns which range today in our main reversion assumptions 5.25% to 6% would reduce to 3.5% to 4%. This does vary by product line and by product. It -- because that depends on the duration of the business. The Life business is longer than the Annuity business. And however, this 3.5% to 4% is consistent to the returns we got in new investments in 2012. So this is truly taking in the current interest rates in 2012 and just projecting it forward.

And what was the impact? On statutory capital, our Reg 126 testing would require no major immediate strengthening. We have been strengthening statutory reserves for several years, putting about $300 million a year in our statutory company's pretax toward these reserves, and we would plan to continue on doing that in an ongoing basis. In all of our projections, we assume this is being done anyway going forward through our projections.

Turning to GAAP. We would now expect in loss recognition so you have to test your GAAP reserves for losses, it's separate from . We would not expect a onetime GAAP loss recognition. But in U.S. GAAP, when you -- if you are insufficient in your reserves, you have to come with the plan to strengthen it over time and you can plan to do that. We would need to strengthen a couple of areas, about $400 million net present value pretax in the U.S. and $350 million net present value in Korea. However, you would do this over a period of time. It's a bit more front-end loaded, but still, it's roughly, you take that number, divide it by 10, and put a little more front end, and that's that impact that we would have pretax for our company. For DAC-related items and goodwill, as we think of this over 3 to 5 years, we would anticipate DAC in lockings of approximately $2.5 billion net present value pretax in the U.S. Variable Annuity business, and $350 million pretax in the U.S. Life business.

Now why do we say over 3 to 5 years? It's because we would not wake up tomorrow and say, we're going to go flat interest rates forever in the United States. We still have quantitative easing, our federal government's very actively buying bonds and doing interest rates. If you think about this in a practical way, you would wait till that stopped and wait some more time to see what happens in interest rates. If they don't go up after that, then you may be towards a new more normal and you would ratchet down your assumption. You'd wait another year, you'd see what happens, you'd ratchet down again. You wouldn't go immediately all that way. So that's what we say, in a practical way, over 3 to 5 years, we would be doing this change. In addition, we would not have from a goodwill impairment testing through all of our goodwill worldwide, we would have no goodwill further charges because there's a lot of protection margin in all of our business, in particular, our largest block of goodwill is the ALICO acquisition for Asia and that has its substantial protection margins as we showed from our earliest slides. And we have no goodwill left in our retail annuity business. If you add all this up, tax effect, divided over a period of time, we're speaking $0.35 to $0.40 a share over the next 5 years and less than $0.05 a share for years 6 to 10. So we would summit that's a very manageable risk for the earnings power and the current capital position of MetLife.

In summary, we've shown you about 75% of the difference between net income and operating earnings explained by Adams then we would say no [indiscernible] typical in the last 5-year period. The adjusted book value when you take out some of the asymmetrical and noneconomic factors does show a faster growth and less volatility, and eliminate in the reversion of the mean accounting for interest rates, we believe, has a manageable impact on our overall book value.

And I think with that, we're going to take questions now.

Question-and-Answer Session

Edward A. Spehar

We'll start off with Nigel.

Nigel P. Dally - Morgan Stanley, Research Division

Nigel Dally at Morgan Stanley. I guess back at the end of 2011, you also provided some sensitivities as to what low interest rates have made the DAC. It seems like the DAC impacted substantially larger with today's presentation than it was back then. If you could run through the reasons why.

John C. R. Hele

Well, as to 2011 sensitivities, you know, that was -- I think we spread it over time and didn't reflect going all the way immediately to that number.

Steven A. Kandarian

I don't think it ever had reversion of the mean eliminated in the presentation the fall of '11.

John C. R. Hele

2011 interest rates were higher too.

Edward A. Spehar

Let's go to the back to who haven't had yet. James, I think you have your hand up. No? Jimmy?

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

So on Slide 8, the $3 million of the modest annual strengthening on stat reserve, should we think of that as a reduction to your free cash love guidance of 35% to 40%?

John C. R. Hele

No, that's been included already. We've factored that in.

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

So that's...

John C. R. Hele

Implicit.

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

Okay. And then just for Steve, big picture. Assuming, obviously, you can't comment on capital deployment until you have clarity, but assuming we're in this type of a capital regime longer term and SIFI doesn't materially impact how you manage capital, what the thresholds are, what would you assume -- or how would you use your free cash flow? Because over time, Met has been acquisitive, you've done acquisitions from time to time, maybe some of them were to fill certain holes in your business, but how would you use -- how would you assume you'd use your free cash flow over the next 5 to 10 years?

Steven A. Kandarian

Jimmy, I don't have a specific breakout today. It will be the dividend is something we're really focused on improving over time depending upon our earnings and our repertoire regime. Buybacks are something we want to do going forward. And acquisitions that fit into our strategy, especially in emerging markets, especially in regions like Asia and Latin America and parts of the EMEA region as well, all come into play. So as we've said, it's just too early for us right now to make determinations about the buybacks given the regulatory uncertainty. And rather than me saying, well here is the philosophy we're going to utilize going forward, I'd rather see how those capital rules come out. Also want to see what opportunities are on the acquisition front. So we're looking at both. And as I've said many times in the past, when we look at acquisition, we look at it compared to a share buyback. So even if we're constrained from doing share buybacks, we still use that as a key measure of only price transactions in the M&A market.

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

And maybe just one follow-up on the regulatory environment. I'm assuming that the key theory is that you're subjected to bank standards there, because if you apply Basel III to MetLife, and the result would be a [indiscernible] shortfall, but have you made any progress with the regulators in Washington convincing them of not to do that?

Steven A. Kandarian

So our biggest concern, obviously, is if the Fed applies bank rules and Basel III-like rules to the insurance industry model, which is a very different model, very different liquidity kinds of issues, we think not appropriate to even the investment side of our portfolio, meaning lack of risk based rules and assets. So that's our biggest concern. We've had a number of conversations with people at the Fed elsewhere in Washington, I think we're being heard, I think it's a good dialogue, it's a good discussion back and forth. They're noting the information we're providing to them. We've asked that they consider doing a quantitative impact study before they finalize any rules. They've taken note of that request. We're hopeful they'll do something along those lines, but as of now, we don't know for certain.

Edward A. Spehar

Seth from the back.

Seth Weiss - BofA Merrill Lynch, Research Division

Seth Weiss, Bank of America Merrill Lynch. You talked about the 60/40 split of protection-oriented products versus capital market-oriented products, and you've previously spoken about the desirability of that type of business. Maybe you could talk about the long-term target of where you see that business makeshift and the best way to get there, if that's through organic or opportunities you see in M&A?

Steven A. Kandarian

It's both. So Provida would go along the lines of protection like or fee business, not so interest-rate sensitive. And we're looking for ways both organically and by acquisition to get that balance in the right place. Having said that, we are still opportunistic. There's still parts of the business that are interest rate or equity sensitive, market sensitive products or acquisitions that we're going look at. But we're going to look at those kinds of opportunities with a very high bar as to return requirements, and fully allocating economic capital given these low rate scenarios that we've gone through. So I don't rule out doing more in the 40% bucket, but it's to have a very high bar to clear for us to pursue things in that area aggressively.

Edward A. Spehar

Okay, who hasn't asked a question? Is anybody out there? I will come back. Yes, Yaron.

Yaron Kinar - Deutsche Bank AG, Research Division

Yaron Kinar from Deutsche Bank. As you shift businesses and maybe focus more on emerging markets, what is the stat to GAAP ratio look like in those markets?

Steven A. Kandarian

It varies a lot by the statutory accounting so you can't give a basic rule of thumb. Generally, Korea and Japan probably are the most conservative statutory accounting. Emerging markets are generally not as onerous except as a general rule of thumb. It's probably like the U.S. or perhaps better.

Edward A. Spehar

Come back to Mark.

Mark Salmon - Investec Securities Ltd., Research Division

Just wanted to go back, kind of taking a step back. I mean, the 35% to 40% free cash to operating earnings ratio by '16, obviously you are pivoting to lower capital intensity businesses, you've made the Provida acquisition which is a fee-based business. I get that there's an interest rate hit, call it 5% to that ratio, but what is it, I mean why is it that the top end in '16 after a lot of things have happened is 45% and not somewhat higher? What is it in the businesses that's really causing that strain when you look out to '16?

Steven A. Kandarian

Well, remember, we're changing the mix of our business, but cash is driven by statutory earnings. That's conservative with the U.S. We have Japan, those are big contributors. We have the emerging markets that's new, but it's still moving slowly. If you change your mix of the business, our sales, what we do this year, you'll start to come in the next year and your statutory dividends are based on your prior-year earnings. So it's the third -- from actions we take today, it's the third year by you start to see it, and it moves slowly. Those statutory earnings because of the conservative nature is more conservative on the front end and it releases profits slowly over time. So it's a real shift in the mix of business but it takes time to flow through, and that's why Marlene said, it will be improving, going beyond 2016, but it does take time with the statutory earnings.

Mark Salmon - Investec Securities Ltd., Research Division

I mean, I guess I get that, but the stat to GAAP outside of Asia is a lot higher, number one. But I mean, I made the right question is what should the right ratio be when this mix shift is totally done? We've flowed through all these transitional periods, like what is the structural free cash operating earnings of this business when your strategic initiatives are completed?

John C. R. Hele

Well, we've said the 50% is our goal to get to over time as we shift to this business.

Edward A. Spehar

Go ahead, John?

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

John Nadel from Sterne Agee. I guess, I have a question about ALICO. I know it hasn't really been the focal point today. But as we think about ALICO, the results of ALICO have really disappeared into segment disclosures. But looking back on it, with a couple of years of hindsight at this point, recognizing capitals come out of the Japan, some other things have occurred, can you give us some sense as you evaluate with a couple of years now gone by, how that deal has performed relative to your expectations, how it's performed on the return on investment basis?

Steven A. Kandarian

We did a review of the transaction with our board recently. We looked at the original projections we gave the board before we made the deal. And it performed within the range we provided before we did the transactions. So very much on course. Doesn't gets more and more difficult, John, of course, over time, to track that acquisition because it is now integrated into overall MetLife. There are some markets where we operated prior to the acquisition and we are not going to be running the numbers the same way going forward and everything's going to be combined.

Mark Salmon - Investec Securities Ltd., Research Division

Okay, that's helpful. And then a separate question on just interest-rate hedging. Obviously, going back to the mid-2000s, Met management did an excellent job of sort of protecting the company, recognizing important risk, protecting the company against that risk. I wonder as we've now fast forwarded to 2013 and perhaps the risk is greater that rates rise from here and perhaps quickly as opposed to rates remaining extremely low as you've sort of gone through. I just wonder whether you're taking any actions that could be discussed today to give us some sense for how you're protecting against that scenario?

John C. R. Hele

Well, it's something we discuss monthly, weekly with our investment team. We have locked in -- we have sold some of those derivatives or locked in some of that gains, so we won't participate on that piece on -- if it goes lower, but we have locked in the gains so we don't lose on the upside if rates come back up again. And we're looking at other various techniques by which we could protect on a sharp spike. But it's really where it depends on us economically that really is important. And generally, rising rates over time are good for us. So it is a key challenge. However, for the next period of time, it looks like from all the forecast that we're going to be in low interest rates for a while longer here.

Edward A. Spehar

The girl in the back -- Allan[ph]?

Unknown Attendee

If the SIFI rules become too difficult to manage, how difficult would it be for MetLife to separate the company into a U.S. company and an international company? Is a 2-year process, 10-year process impossible, can you comment on that?

Steven A. Kandarian

Well, let me just answer that in the following way. The regulatory rules we hope and believe will come out in some reasonable way. We have lots of conversations going on with regulators in Washington. As I mentioned, we've asked them to do a quantitative impact study before finalizing any rules. There is some indication that a lease has been considered seriously. So if the rules don't come out the way we think they will in terms of being reasonable, all options have to be put on the table. If we cannot be competitive because of capital rules, the disadvantage a couple of large insurers compared to the rest of the industry, which is still a very fragmented industry in many ways, then we'll have to take actions to address that. And I think that should be part of the calculus that people think about in Washington when they consider these kinds of policy decisions, and I think that it will be considered.

Edward A. Spehar

And in the back. Jeff?

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

Jeff Schuman, KBW. I have very basic scorekeeping question, I guess. A year ago, when you talked about the 2016 ROE goal, you talked about an assumption of $5 billion of net share repurchase of capital management. You still talk about the $5 billion, but we have had $2 billion deployed towards Provida, so does that somehow not fulfill 40% of that assumption or not?

John C. R. Hele

We're also getting earnings from Provida that factor in to that overall calculus.

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

So is that $2 billion of capital deployment that helps towards that goal or does it not help in a way that share repurchase would have and -- I'm wondering because it could impact how we think about acquisitions going forward as well.

Steven A. Kandarian

Our projections had some acquisitions built into them through 2016, but it wasn't a very large number. So I think some of those dollars are going to Provida after we looked upon as in lieu of share buybacks, and that's how we looked at the transaction. We actually analyzed it. So going way back to the comments I made earlier about M&A transactions being weighed against even a theoretical share buyback, if we, at one point in time, couldn't do share buybacks.

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

So [indiscernible] there's different ways to skin the cat, so if you have some frustration in share repurchase, instead you can do acquisitions, you can get [indiscernible]

Steven A. Kandarian

You can -- yes, you can. And I think at the point in time when we're under Fed supervision, they viewed differently. A share buyback was simply cash off the balance sheet, back to the shareholders, no longer supporting the company in terms of a downsize scenario where a reasonable acquisition must be generating earnings going forward and had assets as well to support the company in downsize scenarios. There was a distinction, I think, in the part of policymakers in Washington between those 2 different avenues of utilizing capital, while I'm being viewed as being riskier in their mind than the other. So there is an ability for us to do acquisitions. But I want to state clearly that we're not going to drop our standards around evaluating transactions just because of concerns around returning moneys to shareholders through buybacks in this environment.

Edward A. Spehar

Here in the end.

Unknown Attendee

Could you give us an idea of -- under sort of, let's say, a worse case scenario where they hold you to Basel III standards, what MetLife looks like sort of pro forma because from my looking at the numbers, it doesn't -- I mean, it probably would eliminate a lot of the excess capital I think you have, but I think even under Basel III, it seems like you wouldn't be in such terrible shape.

Steven A. Kandarian

I missed the first part. Could you repeat...

Unknown Attendee

In other words, your concern is that you're held to a Basel III bank like capital standards. So my question is, if you could frame for us on the extreme that you are simply held to that standard, what does the bank -- what does MetLife look like under those standards?

Steven A. Kandarian

So that...

John C. R. Hele

Let me start...

Steven A. Kandarian

I'll start with a high-level. You can maybe add some more details. So a pure Basel III standard applied to an insurance company, which we don't think is where things will end up. It dramatically raises the capital levels for parts of our business, and particularly, the U.S. Retail business would be dramatically impacted by that. So if those standards were applied to us, it would be very difficult for us to be competitive in that marketplace going forward against our peers who would not be regulated in the same way. And again, I don't think that's where it's going to come out. I think people in Washington are now getting a better sense of the real world impact of making a strict application of Basel III to the insurance company model, which is a very different risk profile than a bank model.

John C. R. Hele

Yes. The Basel III applies -- factors only to the asset side of the balance sheet, which can be appropriate for a bank where the liabilities are either term funding or deposits. But for insurance company, it's radically different. So Basel III could penalize businesses where you will match, but you use Baa bonds to match it or variable annuities, we have assets in a separate account. But likewise, it doesn't calculate at all risks taken on the insurance side of the balance sheet, so say, in property and cash insurance, it wouldn't reflect any weighting for earthquake insurance, tornado insurance, commercial liability will be very underweighted on that. So the whole system, the more you look at it, really doesn't fit at all what we do for an insurance company, and we've been communicating that in Washington and they are listening to that.

Edward A. Spehar

Can we get a mic over here?

Unknown Attendee

On that note, can you share what sort of pushback you're getting from the regulators at all when you explain to them your position about why the industries are different?

Steven A. Kandarian

I don't think there is a specific pushback. It's not as much a debate. We're in these discussions with regulators. It's more information gathering. On their side, they're absorbing what we're expressing. We're showing them data. We're showing them models, models that we've run, models run by third parties. I think it's a learning curve for them. And we consider that insurance has been regulated in this country by the states for many decades. There does not exist today, in Washington, a large reservoir of expertise around insurance. There is a lot of very smart people who regulate lots of things, including banks in Washington, have done that historically, have good skill sets in that regard and they're trying to apply their skills to now a new industry to potentially regulate. And -- but I think they are still on a fairly steep learning curve. And I think they are absorbing what we're expressing, and I think they're taking it into account. I think one of the biggest issues that we face as an industry, at least a handful of the large companies, is there's a policy issue and then there's kind of the politics. And the politics relate to a large failure during the crisis by nominally an insurance company, AIG. But of course, the problems that AIG got into weren't in their insurance subsidiaries. It was in their otherwise regulated, not by the state regulated entities. And regulators and policymakers in Washington do understand that. But there is just this public perception that they have to take into account given their job, what happened to this big insurance company, it failed, $180-plus billion bailout by the tax payer, how could you not consider insurance companies as you think about Dodd-Frank? And our response has been, if you look at the law, I mean, Dodd-Frank talks about interconnectedness, and the fact that an institution might fail could result in spillover effects to other institutions and overall to the financial system as a whole. And we've said to them on a number of occasions, both in closed-door meetings, as well as statements that I've made and others have made publicly, is that, yes, we are big, we are important, and no, it's not impossible for MetLife or some other large insurance company to fail, but if we were to fail, we would not take down other financial institutions. And under Dodd-Frank, we don't think we therefore qualify as being a non-bank SIFI. So that's really the extent of the debate, if you will. And the political overlay is a part of that debate. There could be feelings by some, I don't know. In Washington, you'll say it's too difficult for us right now to pass a law that regulates insurance at the national level for a bunch of political reasons, states are not going to let go easily. So this is a backdoor way at least regulate a few of the big ones. Whether they're interconnected or not, the financial system business is an avenue to do it. I hope that's not where things come out. I hope people look at this objectively and say that, under Dodd-Frank, under a letter of that law, we are not systematically important, we're big and important, but not systemically important, meaning spillover effects. And that's the case we've been making for quite some time. Whether it prevails or not, it remains to be seen. People are handicapped. I'd say the politics overwhelmed the objective analysis, but we'll see how that turns out.

Edward A. Spehar

Can you pass it to Ian[ph]?

Unknown Attendee

I think one of the key areas of uncertainty with SIFI rules is separate accounts, and I guess, I'm wondering in the hypothetical where a separate account treatment is onerous, and that basically you and other large competitor of yours, that will be SIFI, are at a disadvantage relative to the rest of the market, meaning you have more strict capital transfer VA than for many of your peers in the marketplace, would that change your appetite further? Would you cut back even further? Or do you think that $10 billion is sort of the plan sink or swim regardless of how SIFI turns out?

Steven A. Kandarian

So we adjust our thinking based upon changes in the external environment on a continuous basis. So if there are capital rules that -- or extremely onerous around separate accounts, we have to take that into account going forward, and we would make adjustments.

Unknown Attendee

Okay. And then as a follow-up to that, just -- I think you've also said something similar about pension closeouts in the past being hesitant to following your competitors until we have more clarity on the environment. I guess, the one concern I have is that I know the designations are coming soon, could the final rules -- maybe it's a year, and maybe it's 2 years, who knows, I mean, how do you sort of operate the company on a day-to-day basis in sort of this vacuum where there may be lines of business where you just don't know what the rules are and how to operate? And how much of a hindrance has that been over the last year? And again, if that -- how -- basically, what the patience level, right? And if it's 2 more years, does -- can you wait that long going in the status quo or do you need to react beforehand at some point and just make your best bets?

Steven A. Kandarian

Well, we've made some significant changes in our desire for product mix over the last couple of years in the face of this uncertainty, so we're not stopping. We are taking into account the current environment, the uncertainty in different scenarios in terms of how this might sort out in terms of actual regulation. And what you heard from us today and you've from us before our strategy presentations reflects that. But we get new information that let's say, gears away from our assumptions -- our overall assumptions, then we will adjust further. I alluded earlier to the possibility that we will still look at parts of the business, not the protection business, but more market sensitive businesses, but they have a high threshold in terms of returns and -- or reflect the current low interest rate environment, and I have rosy scenarios about the 10-year Treasury bouncing back to 4.5% in 12 months. So to your question about pension closeouts, we do look at pension closeouts. We are very conservative in terms of our assumption base when we consider making those kinds of bids and those kinds of transactions.

Edward A. Spehar

We'll go in the back there, take care of that cluster.

Unknown Attendee

So my first question is on the captives. Are there any captives related to other businesses, UL with no-lapse guarantee, et cetera, that you're not folding in as part of this consolidation that you may have to look at down the road?

John C. R. Hele

We do have other U.S. onshore captives that we use for reinsurance structures, as well as life insurance structuring, and those are not being -- those are being kept where they are.

Unknown Attendee

But if we looked at everything holistically, like rolled in all the captives and everything, and looked at a consolidated RBC ratio, would that change from what you told us before? In other words, are these onshore captives that you're talking about included in that over 400% RBC ratio?

John C. R. Hele

The onshore life captives are not included in the combined number that MetLife releases, which is the 4 66 as of year-end. It's the major writing entities that are included in that.

Unknown Attendee

Right. So by extension, they're not going to be included in this pro forma number?

John C. R. Hele

That's correct.

Unknown Attendee

So if we roll them in, can you tell us what that number would be?

John C. R. Hele

We do not disclose that.

Unknown Attendee

Okay. And then on the holding company cash, I guess, when we looked at past lives in past years, you've given us like a buffer or cushion or I don't know what phrase you want to use -- what term you want to use, but I don't think it was included in this presentation. So forgetting about non-bank SIFI because I know that's going to influence it, but if you're just looking at it from a pure insurance perspective, is there a number that you could give us that you'd feel comfortable with in terms of a cushion that you'd have to hold?

John C. R. Hele

We have decided not to give that guidance out to the market now given the uncertainties with non-bank SIFIs and other things. We're thinking a buffer will be inappropriate really at this time to [indiscernible] other rules.

Unknown Attendee

Okay. Can you maybe give us an update, the 12% to 14% ROE that you provided last year, you're a quarter all the way through, just kind of your assessment on the ability to achieve that. And are you more comfortable with that ROE expansion versus the decline in kind of the cost of equity capital?

Steven A. Kandarian

So we've stood by the 12% to 14% range. We've said that in a low rate environment, it's likely to come in at the lower end of that range, not the higher end of that range. We did have a good first quarter. I think our ROE was 12 point -- what was it?

John C. R. Hele

12.7%.

Steven A. Kandarian

12.7%, okay. But that was, I think, an exceptionally good quarter for us, so we're not saying project that for the rest of the year. So I think we still can achieve the low end of that range given what we know today, given the environment as we see it today. It could improve if rates were to go up a little more rapidly than we're anticipating. It could improve if the overall economy picked up a little more rapidly than we're seeing currently. It also could deteriorate if things went in the wrong direction. So as of now and given what we see in the external landscape, we think the low end of that range still is achievable for us in 2016.

Unknown Attendee

Okay. And then just a follow-up is, can you talk about conversations you're having with the state regulators, I guess, around 2 topics? One, the new entrants into the marketplace, and then two, just the discussions you're having with them, if federal regulation were to come down on you, how they're possibly thinking about regulating other insurers now at the federal level.

Steven A. Kandarian

New entrants being private equity firms?

Unknown Analyst

Correct.

Steven A. Kandarian

Okay. So some of the private equity firms are making acquisitions of blocks of business. And I think we have heard from the state regulator in New York is that there is concern in terms of whether those assets are being invested sufficiently conservatively enough so that long-term policyholders are paid out in full. I think, if you step back and kind of look at the situation, private equity firms have an incentive to make strong returns for their limited partner investors. Not every deal is necessarily going to be a strong return, but you have a handful of big returns and some that are pretty good and you have a couple that you lose some or all of your money. The concern in this case would be that business model is one in which if you're shooting for a big upside, you may accept a downside because overall, your portfolio looks good for your limited partner investor. So far, so good. Going forward, and say what happens then if the deal doesn't work and there's not enough capital to pay out those policyholders over time? That goes back into the state guarantee fund, and companies like MetLife and others end up picking up that tab. So obviously, we have a concern about that. We want to make sure that those entities are properly regulated, and that's not simply the case where the upside goes to the private equity firm and the downside, the true downside risk not just losing your capital, which in the private equity capital model is not the worst thing in the world if you have some big winners, the true downside risk of back end of those policyholders doesn't get shifted to a third-party that's not even at the table participating in this, which is other insurance companies in the state guaranty system.

Edward A. Spehar

Is this Bill [ph] in the back?

Unknown Attendee

Yes. So given what's happening in Japan, with the shifts in JGB rates, other investment rates there, as well as consumer commercial confidence changing, how is that impacting or will it impact your business there given it's a substantial portion of overall company?

John C. R. Hele

The lower rates in Japan on a reserve basis won't have a material impact on our -- of the reserves. We -- it is having an impact because -- on our business because the huge equity markets are causing people to cash out all these and the weakening yen. We've sold a lot of foreign denominated annuities in Japan, both Australian dollar and U.S. dollar, and people are harvesting their gains. These are market value adjusted annuities, so they're harvesting their gains in Aussie dollars and U.S. dollars and purchasing mutual funds or equity type. They're flooding into the equity market. So thus you saw in the first quarter, we had higher surrender fees from Japan from that. It's reoccurring again here in the second quarter. This will even out over time, but that's impacting our business today. But the lower rates are not a material impact for us.

Edward A. Spehar

David Small[ph]?

Unknown Attendee

Yes. I just had a question about the upcoming -- the ESUs that are going to come due at the end of the year, it just seems that -- I understand you don't want to comment on the share buybacks as it relates to the cash that you're generating from the company because you don't know what the SIFI rules are going to be, but how do you deal with ESUs? It just seems like that should not be SIFI -- that should be not really dependent on what the SIFI rules could be, so maybe if you could just comment on that.

Steven A. Kandarian

Well, that's factored into all of our cash and capital plan for '13 and as going forward. But as we've said, today, we'd rather be slightly conservative and just wait and see. Maybe we'll know the rules by September, maybe not. But for now, we want to wait and see.

Unknown Attendee

Just to clarify, though, the ESUs are accounted as not -- are not currently counted as 100% equity, correct?

Marlene Debel

I think you mean counted as 100% equity, they...

Unknown Attendee

They're not, right? they're...

Marlene Debel

By which measure?

Unknown Analyst

By rating agencies.

Marlene Debel

It depends. They are by some, and less by others, so it's a mix. So, for example, S&P is 100% equity credit, whereas Moody's is 25%, I believe.

John C. R. Hele

But they're not Tier 1. If you're regulated by the Fed, they would not be Tier 1 yet. When they switch to equity, they'd be Tier 1.

Edward A. Spehar

Steven.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

2 questions, Steve. You've been talking about a quantitative impact study, could you -- for those of us who don't speak Washington, what is that, and what would you expect it to show?

Steven A. Kandarian

Okay. So quantitative impact study would have one who is making up rules to live by going forward, basically apply those rules to the current situation and say what would actually happen if these rules apply to an industry.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. And what do you -- what would you expect that to show?

Steven A. Kandarian

It depends what the rules are. But if you use a pure Basel III base for these capital charges and implied it not to the banking world but to the insurance world, it would dramatically increase the amount of capital necessary for certain kinds of products, in particular, market sensitive products that we sell in the United States in the retail channel.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. And looking at -- tomorrow is the Aflac Day, I mean, so we'll hear more about this. But I think we all know that the FSA accounting standards are very, very conservative relative to U.S. statutory, the 40 to 50 is the same type that you and Dave talked about historically. Why can't you finance those reserves? Does that make any sense whatsoever to get capital out of there? It's very, very redundant. Unum has done a Northwind transaction and a couple of other transactions back in the past for this type of business, does that mechanism exist, can you do that?

Steven A. Kandarian

Well, we just got to -- remember, a large dividend from Japan when we subsidiarize Japan, so now we're going forward on the conservative accounting basis in building up the earnings again, but we dig at that cash flow, so that was a positive.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. But on a go-forward basis, there's...

Steven A. Kandarian

There's not really that much they can do.

Steven D. Schwartz - Raymond James & Associates, Inc., Research Division

Okay. When does this reverse? I mean, cash is cash, obviously. You write a policy today, when does it reverse and become greater than U.S. statutory, say a cancer policy?

Steven A. Kandarian

It depends on the length. It's complex calculations. I mean, in the end, we'll get the money back because when the policy terminates, we will have it. But it varies a lot by product, so it's hard to give you exact guidance. I wish I could, it's just not that easy to do.

Edward A. Spehar

We go to Eric over here.

Eric N. Berg - RBC Capital Markets, LLC, Research Division

My question could be addressed to Steve or to John, whoever feels most appropriate to answer. It occurred to me that there have now been 3 very visible cases of the whole insurance industry, not just MetLife, having a product that offered guarantees, pushing it very aggressively, things didn't work out and then the whole industry pulls back. I'm talking about long-term care, universal life insurance with a no lapse guarantee and now, variable annuities. So I have really 2 questions. I would think that this would be having a very upsetting effect on customers and people who sell the product, they see the product out there then they see it pulled away, is that a fair inference to draw? And my related question is, should we infer from the discussion today that Met will be in the guaranteed business in the future, but the guarantees are going to be different from what -- the nature of the guarantees will be different from what they have been in the past?

Steven A. Kandarian

So to your first part of your question, certainly, we have made adjustments to products we sold or, in some cases, pullback from signing them all together like long-term care. On balance, that's not a good thing in terms of being a customer centric company, and we understand that. At the same time, there is lots of products out there that in different industries that got sold and over time for whatever reason, companies that produce those products decide it no longer makes sense to produce those products. So I think consumers in general are used to things changing over some period of time. So we try to manage -- for example, when we got the long-term care business, we gave a fairly long runway to our producers before we cut off sales. And that was to help with the issue that you correctly pointed out, you don't want to either burn relationships that are with agents and third-party distributors or to damage any sort of potential long-term relationship with a customer, who might be thinking about a product and we announced one day it's no longer being sold. So we did give a fairly long runway in terms of notice in that one case. I think -- the bigger question here, I think, Eric, is our industry was competing against banks and asset managers, and we're losing market share, and I think it probably stretches the industry in some regards. And in fairness to the industry, we didn't take into account, as most people didn't take into account, the current economic environment of historically low yields in a business where much of it's driven by -- our business is driven by where interest rates are. So a lot of us have stepped back and say -- said to ourselves, we have to really look at this very carefully going forward, take into account the tail risk scenarios even more than we did before and make sure we structured products in a way that provide a good value to our consumers, provide an attractive product to sell for our producers, at the same time doesn't put too much risk on the balance sheet of MetLife or others in the industry. So maybe there's been a reset here. It's probably not just the insurance industry; it's the banking industry, it's other industries. So I think we've all learned a lot of lessons through this last decade.

Edward A. Spehar

Okay. I think we're going to need to end the Q&A and go to some closing remarks from Steve.

Steven A. Kandarian

Okay. So I just have one last slide to put up, some key takeaways from today. And at times, it's pretty easy to get downcast about what's going out there, with things like interest rates or regulatory situations or slow growth in the economy and so on, but we still have a very strong company here. We still have significant earnings power. We did $1.48 per share the first quarter, well above expectations from the Street, well above our plan, frankly. So notwithstanding these headwinds, we are taking a lot of actions to better position the company well in the future, but also producing good results right now.

So we are committed to driving up those return on equity numbers. We are committed to doing what we can on our side of the equation, on reducing our cost of equity capital, meaning derisking in many ways our business. And we're committed to delivering shareholder value, which includes a strong dividend going forward, over time, share buybacks and selective acquisitions that fit our strategy that make economic sense even when measured against share buybacks.

So with that, I'll conclude things. And again, thank you very much for coming today. And some of us will be around for a little bit afterwards if you have any further questions. Thank you.

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Source: MetLife, Inc. - Analyst/Investor Day
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