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MetLife (NYSE:MET)

Q4 2013 Earnings Call

February 13, 2014 8:00 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

William J. Wheeler - President of The Americas

Christopher G. Townsend - President of Asia

Steven Jeffrey Goulart - Chief Investment Officer and Executive Vice President

Analysts

Thomas G. Gallagher - Crédit Suisse AG, Research Division

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

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

Ryan Krueger - Dowling & Partners Securities, LLC

Suneet L. Kamath - UBS Investment Bank, Research Division

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

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

Operator

Ladies and gentlemen, welcome to the MetLife Fourth Quarter 2013 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the Federal Securities Laws, including statements relating to trends in the company's operations and financial results and the business and the products of the company and its subsidiaries. MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission included in the Risk Factors section of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement whether as a result of new information, future developments or otherwise.

With that, I would like to turn the call over to Ed Spehar, Head of Investor Relations.

Edward A. Spehar

Thank you, Gail, and good morning, everyone. Welcome to MetLife's Fourth Quarter 2013 Earnings Call. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so called non-GAAP measures. Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the Investor Relations portion of metlife.com, in our earnings press release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.

Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John Hele, Chief Financial Officer. After their prepared remarks, we will take your questions. Also here with us today to participate in the discussions are other members of management including Bill Wheeler, President of Americas; Steve Goulart, Chief Investment Officer; Michel Khalaf, President of EMEA; and Chris Townsend, President of Asia.

With that, I'd like to turn the call over to Steve.

Steven A. Kandarian

Thank you, Ed, and good morning, everyone. We are pleased to report strong fourth quarter and full year results for 2013. Fourth quarter operating earnings were $1.6 billion, up 14% from the fourth quarter of 2012; and operating earnings per share were $1.37, a 10% increase over the prior year period.

Growth in the per share basis was dampened by the conversion of equity units issued in 2010 to fund the acquisition of Alico. Operating return to equity was 11.5% in the quarter. Full year 2013 operating earnings were $6.3 billion, an 11% increase over 2012; and operating earnings per share, which were also affected by the conversion of equity units, were up 7% from the prior year period. Operating return on equity for the full year 2013 was 12% or at the low end of our 2016 goal of 12% to 14%.

Operating earnings benefited from the favorable capital markets environment last year. Equity market performance added 50 basis points to return on equity in 2013 and above planned variable investment income added 40 basis points. In addition to strong variable investment income, recurring investment margins were above our expectations, with the favorable variance equating to 50 basis points on 2013 operating ROE. Together, recurring investment margins and variable investment income explain the resilience of MetLife's investment spreads despite a prolonged period of low interest rates.

Recurring investment margins have benefited from effective asset liability management and income from derivatives, many of which were purchased in the mid-2000s to protect earnings under a low interest rate scenario. However, there were also factors that depressed operating ROE in 2013. The combination of weaker-than-anticipated underwriting results, elevated legal costs and some pressure from currency weakness exerted a drag on ROE of almost 100 basis points. While MetLife's results benefited from a favorable capital markets environment in 2013, achieving the low end of our 2016 operating ROE target 3 years early is nevertheless a noteworthy accomplishment.

MetLife's financial performance last year highlighted the strength of our diversified business model. In addition, I believe the quality of MetLife's operating return on equity has improved because the upward trend in ROE has been accompanied by a decline in balance sheet leverage. Operating return on equity increased from 9.8% in 2010 to 12% in 2013, while the ratio of common equity to assets increased from 8.1% at year end 2010 to 9.9% at year end 2013. This ratio, which excludes separate account assets and the impact of accumulated other comprehensive income, is one way to look at leverage. We believe it is appropriate to exclude separate accounts from the leverage calculation because the investment risks and rewards of these assets are borne by the contract holders.

To the extent there is a guarantee in these contracts, the associated reserves are held outside of the separate accounts. These reserves and the related capital are included in the leverage ratio calculation. We have taken a cautious approach to balance sheet leverage because of uncertainties surrounding potential capital requirements, if MetLife is designated a nonbank systemically important financial institution or SIFI. In particular, we are concerned about the risk of bank-centric capital rules. MetLife remains under Stage 3 review by the Financial Stability Oversight Council for potential designation as a SIFI, and the timing of the decision from FSOC remains unknown. We believe the evidence clearly demonstrates that we do not pose a threat to the financial system of the United States. At the same time, we continue to make the case that, if designated, applying bank-centric capital rules to the business of insurance would constrain our ability to issue guarantees and increase the cost of financial protection for consumers.

Turning to our strategy. We made significant progress in 2013 on our efforts to shift MetLife's business mix away from capital-intensive, market-sensitive products to our protection-oriented products. Our full year 2013 variable annuity sales of $10.6 billion were down 40% and were consistent with the $10 billion to $11 billion target we provided in December of 2012. In contrast, emerging market sales, which consist predominantly of protection-oriented products, rose 28% in our Europe, Middle East and Africa segment and 18% in Latin America.

2013 was also a good year for our strategy to grow emerging markets. In addition to a significant increase in sales, we expanded our geographic footprint through partnerships and acquisitions in Asia and Latin America. In December, we reached a deal to acquire a stake in the insurance business of AMMB, Malaysia's fifth largest bank. The deal complements agreements reached earlier in the year to enter fast-growing markets in Vietnam and Myanmar.

In Latin America, we successfully completed our acquisition of Provida, the largest pension plan administrator in Chile. The earnings contribution in the quarter from Provida, which closed on October 1, was in line with our plan, and our outlook for earnings remains $190 million to $210 million for 2014. The acquisition of Provida is a great example of what we believe is a prudent approach to capital management given the uncertain regulatory environment. We used cash to acquire a fee-based business with limited market sensitivity and strong free cash flow. We priced the acquisition to create value based on our stock price in the high-30s, so the assumed cost of capital was higher than it is today. I also want to provide a framework for how we think about share buybacks versus dividends during this period of regulatory uncertainty.

We are not repurchasing shares at this time because we want to avoid the potential need to issue equity if there is an adverse regulatory outcome. With regard to the dividend, however, an increase typically represents a much smaller dollar commitment than a share buyback. For example, even though we increased our dividend almost 50% last year, a sizeable move because we have not raised the dividend since 2007, the incremental annual capital outlay was only $400 million. It is our practice to review MetLife's dividend policy with the Board of Directors annually.

Finally, I want to comment on recent concerns about volatility in emerging markets and the potential impact on MetLife's earnings. Recent turmoil in certain emerging markets does not change our view of the long-term attractiveness of our emerging markets business. Nothing has changed regarding the key macro drivers of middle-class growth and low levels of insurance penetration. Also, we believe that reforms instituted since the crises of 1990s should lead to less volatile economic cycles in emerging markets. These reforms include floating currencies, more independent central banks and better banking regulation. In addition, we believe emerging market sovereign debt is less risky today as a result of reduced external ownership, more longer-dated maturities and less reliance on foreign currency denominated funding. Volatility in emerging markets could mean more currency translation risks in the near term, but we expect the immaterial earnings impact relative to our plan for 2014.

Our exposure to a diversified basket of currencies explains a limited risk from recent moves in exchange rates. For example, the largest currency exposure in EMEA is the euro, which has strengthened modestly relative to the U.S. dollar for the year-to-date.

As I said in the third quarter earnings call, we know we must accept risk to earn an appropriate return for our shareholders, but determining the type of risk is a critical management decision. On balance, we believe the emerging market risk is acceptable for MetLife because it is diversifiable and the products sold in these markets generally have more favorable risk return profiles and growth outlooks than those sold in developed markets.

In closing, let me reiterate that 2013 was a strong year for MetLife. Full year operating earnings were up 11%, which followed the increase of 22% in 2012. Operating ROE improved from 9.8% to 12% over this 2-year period. While regulatory uncertainty remains a challenge, we feel very good about our fundamental business prospects.

With that, I will turn the call over to John Hele, to discuss our financial results in detail. John?

John C. R. Hele

Thank you, Steve, and good morning. Today, I'll cover our fourth quarter results, including a discussion of insurance margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash and capital.

As Steve noted, MetLife reported operating earnings of $1.6 billion, up 14% year-over-year; and operating earnings per share of $1.37, up 10% year-over-year. This quarter included a few notable items: First, pretax variable investment income was $460 million, reflecting strong private equity and hedge fund returns, as well as higher mortgage and bond prepayments. After taxes and the impact of DAC, variable investment income was $296 million, which was $101 million or $0.09 per share above the top end of our 2013 quarterly guidance range.

The second item relates to the strengthening of our asbestos litigation reserves, which reduced operating earnings in Corporate & Other by $101 million or $0.09 per share. As noted on the December outlook call, we have asbestos litigation reserves as a result of claims related to certain research and other activities by MetLife from the 1920s to the 1950s. As the frequency of severe claims related to asbestos has not declined as expected, additional reserves were required.

The third notable item relates to an increase in other litigation-related reserves, which reduced operating earnings in the Americas by $46 million or $0.04 per share.

The final notable item -- items were in our P&C business and EMEA. In our P&C business, we had a $15 million benefit from favorable prior year reserve development and lower-than-budgeted cat losses, while EMEA had an $11 million benefit from tax-related items. In total, these 2 items increased operating earnings by $26 million or $0.02 per share.

Turning to our bottom line results. Fourth quarter net income was $877 million or $0.77 per share and included net derivative losses of $242 million after tax. The net derivative losses in the quarter were driven primarily by 3 items that we consider to be either noneconomic or a cause of asymmetrical accounting treatment: number one, an increase in interest rates; number two, changes in foreign currencies, principally the strengthening of the U.S. dollar versus the yen; and number three, the MetLife own credit impact associated with our VA program.

Changes in interest rates in the quarter contributed slightly to more than 50% of the net derivative losses, while foreign currency in MetLife's own credit impact combined for most of the remaining balance. The combination of these derivative losses and other asymmetrical accounting impacts explains most of the difference between net income and operating earnings in the quarter. Book value per share, excluding AOCI, was $48.49 at December 31, up 1% from $47.99 at September 30.

Turning to fourth quarter margins. Underwriting in the U.S. improved on a year-over-year basis but was less favorable than planned. The mortality ratio in group life was 87.9%, unfavorable to the prior year quarter of 84.6%, which included a benefit of 2.7 points from 2 nonrecurring reserve refinements. The ratio this quarter was within the target range of 85% to 90%.

The mortality ratio in Retail Life was 74.8%, better than our expectation and the 99% ratio in the fourth quarter 2012, which experienced a number of high face amount claims. The mortality ratio this quarter reflects favorable direct mortality results and the benefit of nonrecurring items. However, mortality earnings were not as strong as the direct mortality ratio would suggest because the favorable experience was concentrated in claims that were more heavily reinsured.

The nonmedical health benefit ratio was 90.8% favorable to the prior year quarter of 91.6%, but worse than our plan and just above the top end of the target range of 86% to 90%. The shortfall versus planned was caused by an increase in utilization in dental and lower-than-expected offsets in our open block of long-term disability claims. Disability incidents and closure rates were within expectations.

In our P&C business, the combined ratio, including catastrophes, was 88.6% for retail and 97 -- 93.7% for group. Year-over-year results were slightly better in both Retail and group versus the prior year quarter, which was adversely impacted by Superstorm Sandy. The combined ratios, excluding catastrophes, were 85.2% in Retail and 92.9% in group.

Moving to fourth quarter investment margins. The simple average of the 4 U.S. product spreads and our quarterly financial supplement was 241 basis points, including variable investment income; and 199 basis points, excluding VII. This result showed only a modest decline versus the prior year quarter of 246 basis points, including VII; and 206 basis points excluding VII. The story is generally the same on a full year basis. As Steve mentioned, the resiliency of our investment spreads is attributable to effective asset liability management, good variable investment income and income from derivatives.

With regard to expenses, the operating expense ratio was 25.4% in the fourth quarter as compared to 22.4% in the year ago quarter. Adjusting for the onetime asbestos and other litigation-related expenses, the normalized operating expense ratio was 23.7%, in line with our expectations but still slightly higher than the prior year quarter. There were several factors that contributed to the higher ratio this quarter, including opportunistic reinvestment in the business such as higher advertising and IT projects. In addition, costs associated with new business such as Provida and U.S. Sponsored Direct, as well as the impact of lower closeouts, higher pension expenses and timing of certain items contributed as well.

For the full year of 2013, the operating expense ratio was 24.3% versus 23.8% for 2012. Excluding the negative impact from the asbestos and other litigation-related items, the expense ratio would have been 23.8%, equal to the prior year and slightly better than our full year plan. For 2013, gross expense saves were $571 million, which is consistent with the target we discussed on our December outlook call. Net saves were $332 million after adjusting for reinvestment of $56 million and onetime cost of $183 million. Overall, we are pleased with our expense performance as we remain on track to deliver gross saves of $770 million to $800 million in 2014 and $1 billion in 2015 and net saves of $600 million in 2015.

I will now discuss the business highlights in the quarter. Retail operating earnings were $658 million, up 4% versus the prior year quarter and up 15% when adjusting for notable items in both periods, including net positive DAC unlocking and higher catastrophes in the prior year quarter.

Life and other reported operating earnings of $285 million, up 67% year-over-year and 17% when adjusting for notable items in both periods, including higher catastrophes of $37 million after tax in the prior year quarter. The primary drivers were more favorable underwriting, higher net investment income and lower DAC amortization.

Annuities reported operating earnings of $373 million, down 19% versus the prior year quarter. Adjusting for a positive DAC unlocking of $133 million in the prior year quarter and other notable items in both periods, operating earnings were up 13%. The drivers included higher fees from separate account growth, resulting from strong investment performance and lower DAC amortization. The initial market impact was favorable to operating earnings by $32 million after tax, which was $11 million higher than the prior year quarter. Variable annuities sales were $1.7 billion in the quarter, down 53% year-over-year and 38% sequentially. As Steve mentioned, full year VA sales were $10.6 billion and within our planned range of $10 billion to $11 billion.

Group, Voluntary & Worksite Benefits reported operating earnings of $231 million, up 38% year-over-year and essentially flat when adjusting for notable items in both periods.

The prior year quarter included favorable reserve releases, higher catastrophes and intangible write down. The primary drivers in the fourth quarter of 2013 were higher net investment income offset by higher expenses, primarily due to pension and postretirement benefits. Underwriting results were essentially flat year-over-year, with an improvement in long-term care offsetting less favorable performance in group, life and dental.

Corporate benefit funding reported operating earnings of $358 million, up 17% year-over-year and 25% when adjusting for access variable investment income in both periods and a legal reserve increase in the current quarter. The year-over-year growth was due to favorable investment margins, primarily driven by Capital Market investment products.

Latin America reported operating earnings of $173 million, up 17% year-over-year and 22% on a constant currency basis. These results reflect the 2013 Provida acquisition, which was in line with expectations and improved underwriting in Mexico, partially offset by higher expenses due to business initiatives, inflation adjustments and volume-related growth.

Premium fees and other revenues were up 28% year-over-year, 34% on a constant currency basis and 23% excluding Provida. The strong growth across the region was primarily due to worksite marketing in Mexico and growth in our agency and group business in Chile. Sales growth was also strong in the region, up 27% driven by Mexican group and worksite marketing, as well as growth in the agency sales force and direct marketing in Chile.

Turning now to Asia. Operating earnings were $324 million, up 64% year-over-year and 74% on a constant currency basis. Adjusting for notable items in both periods, which included negative DAC unlocking in the prior year quarter in Japan and Korea and excess variable investment income in the current quarter, operating earnings were up 19%, reflecting higher investment income and business growth.

Premium fees and other revenues were down 8% year-over-year, but up 9% on a constant currency basis, driven by growth in Japan, Korea and Australia. Sales were up 44%, primarily driven by a large group case in Australia, as well as higher life sales in Japan.

In Japan, we experienced higher-than-planned sales in the fourth quarter in advance of pricing changes on 2 of our yen-denominated life products. These products were not achieving our targeted return as a result of low interest rates in Japan and mandated regulatory reserve changes. Adjusting for the Australia group sales, which can be lumpy, and the higher-than-planned sales in Japan, Asia sales would have been essentially flat year-over-year.

Finally, in EMEA, operating earnings were $89 million, up 51% year-over-year and 48% on a constant currency basis. Adjusting for favorable tax items in the quarter, operating earnings were up 32%, driven by business growth across the region. Premium fees and other revenues were up 3% year-over-year and 2% on a constant currency basis, driven by growth in Russia, Poland, the U.K., the Gulf and Turkey. There are items in both periods depressing year-over-year growth. Adjusting for these items, underlying growth was 8% and consistent with the near-term guidance we provided during the December 2013 outlook call.

Sales declined 1%, driven by regulatory developments in the U.K., which we discussed on the second quarter 2013 earnings call. Sales from emerging markets increased 21% due to growth in the Middle East, Russia and Poland.

Now I will discuss our cash and capital position. Cash and liquid assets of the holding companies were approximately $5.9 billion at end of the fourth quarter, which is at the top end of the range that we provided at our May Investor Day after adjusting for the benefit from $1 billion of senior debt issued to prefund 2014 maturities. In addition, our 23 -- our 2013 free cash flow ratio was 36%.

Turning to our capital position. While we have not completed our risk-based capital calculations for 2013, we estimate our combined RBC ratio will be in the 440% or 460% range. Our Japan solvency margin ratio, which we file quarterly, was 945% as of the third quarter, and we estimate that our fourth quarter ratio will be above 900%.

For our domestic insurance companies in the fourth quarter, preliminary U.S. statutory results are operating earnings of approximately $900 million and net income of approximately $800 million. For the full year of 2013, U.S. statutory earnings were approximately $3 billion, and U.S. statutory net income was approximately $2 billion. U.S. statutory operating earnings were down $1.4 billion as compared to the prior year, primarily due to higher taxes, reserve strengthening on our long-term care business in New York due to mandated lower investment return assumptions and increased legal reserves. Our total U.S. statutory adjusted capital is expected to be approximately $26 billion as of December 31, 2013, down 9% compared to the prior year as dividends for the holding company and unrealized losses and derivatives more than offset statutory net income.

In conclusion, MetLife had a good fourth quarter, completing a strong 2013. Our margins remain healthy, and we continue to focus on generating profitable growth. The financial results MetLife delivered in 2013 demonstrate the strength of the franchise, the benefit of diversification and the ongoing successful execution of our strategy.

And with that, I will turn it back to the operator for your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go to the line of Tom Gallagher with Crédit Suisse.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

First question, just on group benefits, I guess, for Bill or John. Can you comment on the increase in claims on dental and disability? On the dental side, I hear what you said on -- just higher claims being submitted. In disability, it sounds like it's more lack of social security offsets. Do you think those issues stay with you for a bit here, or is there some reason to think those are going to lessen over the near term?

William J. Wheeler

Tom, it's Bill. So we'll take them one at a time. With regard to dental, yes, dental claims experienced was a little higher than we would normally predict. And the reason for that is we saw higher dental usage at the lower end of the market with small employers. And we -- I guess our theory about that is that it's likely due to employees who are worried about losing their dental coverage because their companies will either change their benefits because of the Affordable Care Act or something is likely to happen. And so I think they felt, while they still had their dental coverage, they'd go get some work done. The -- we do see this kind of behavior from time to time. And I guess, while there's no assurance that it'll abate in 2014, our expectation is it probably will a little bit. You do generally see higher utilization at the end of the year anyway for kind of the same reasons. So -- and that, by and large, was not the biggest driver of the ratio. With regard to disability, let's be clear. So the block, in my mind, actually performed quite well. And by that, I mean incidents rates were good, severity was good, claim closure rates were fine and reopens of closed cases were also fine. So all that was sort of in tolerance, if you will. What the -- but the significant difference was our, as you alluded to, our social security offsets were quite low. And they're always low in the fourth quarter, but they were extremely low this time. And we -- obviously, we've listened to some of our competitors in terms of what they've talked about in the quarter. A few of them have mentioned the same -- having the same experience. We know some others have as well. So I don't -- the question is, is this systemic, or is this sort of a kind of a blip? Because occasionally, the Social Security Administration does have a blip in terms of its claim approval rates. And our feeling is that this is just an unusual quarter and not indicative of what's likely to happen next year. And I guess, I also think that therefore, the kind of recovery and underwriting that we've been predicting for 2014, I think that story is still intact.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

So no backing away from the guidance you put out back in December about what you expect from group?

William J. Wheeler

No. You know, look, we're obviously a little wary, but no. We aren't backing away from that guidance.

Thomas G. Gallagher - Crédit Suisse AG, Research Division

Okay. And then just -- if I could shift to Chris Townsend, just a question on Asia and Japan in particular. Can you comment a bit about what's going on behind the scenes between first sector and third sector sales there? I believe you guys have a push of a new cancer product. It sounds like sales are flattish right now in that market. Is that still the expectation there?

Christopher G. Townsend

The cancer products we launched in the third quarter of the year is going very well for us. The sales in November, we sold about 20,000 products. And the good thing is that we are not cannibalizing any of the rest of our business. So as you well know, we make a good amount of our operating earnings in Japan out of the third sector products. Overall sales were relatively flat quarter-on-quarter, but for the fourth quarter, we believe that, throughout 2014, the sort of numbers we're looking at probably are low- to mid-single-digit growth for the third sector, which is probably in excess of the market growth we'd expect there.

Operator

We'll go to the line of John Nadel with Sterne Agee.

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

Steve, a question for you. At your opening commentary, you focused a bit on leverage there and why we should maybe be looking at leverage excluding separate accounts. While I think most of us on this call and most of us that have been following you in the industry certainly agree with that. I guess, the question I'd pose is do you think you're gaining some traction with the regulators in Washington around this issue?

Steven A. Kandarian

John, I think it's still early days to make any predictions on what comes out of Washington. First, we have not been designated at this point in time, we're still in Phase III. And as of now, there are no drafts outstanding regarding what the rules will look like. So that's why we're remaining cautious at this point in terms of our leverage. And as we mentioned in the call today, that not only did we achieve a 12% ROE, but we are less leveraged today than we were several years ago. So both earnings are up as well as the quality of earnings in our judgment.

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

Okay. Turning to the international operations. I just wanted to think about tax rates here just a little bit. And I know your overall guidance for 2014 -- I believe, if I recall correctly, it's a 27.5% effective rate on a consolidated basis. Should we think about the tax rates that we saw in 2013, even adjusting for the $11 million item in EMEA, as a reasonable run rate for the international operations, Asia, LatAm, and EMEA, respectively? Because even if I adjust for that EMEA tax item this quarter, it looks like the rates outside the U.S. were pretty low. Can you help there?

John C. R. Hele

This is John, John. I would caution you, the consolidated is correct on our business. And, of course, it's 35% in the U.S. and essentially 35% in Japan, but EMEA has had some lumps this year due to APB elections and it's had some gains throughout the year. So they're going to be in the mid-20s, I believe, is the sort of combined EMEA tax rate for the year.

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

Okay. And then is there any -- LatAm looks -- Latin America looked pretty low this quarter as well. Is there anything there that was really driven by Provida? Or just some onetime items and we ought to think about the tax rate as being higher going forward there as well?

John C. R. Hele

So it's the same story. We've had some lumpy gains here and there. You know how taxes work, so you have to average it out over the year.

Operator

Our next question comes from Mark Finkelstein with Evercore.

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

Actually, I want to go back to the leverage question. And Steve, you articulated how you've taken down leverage. I think you gave ratios of 8.1% to 9.9%. And what I'm curious about is, do you have an objective of where you'd like to get that ratio to? And what I mean is, on the one hand, you're talking about more opportunities, say in the pension closeout market which add leverage maybe a little bit on the non-VA annuity side, but you're also looking to -- you've also taken down the leverage ratio. So how do those 2 balance? And what are your objectives going forward?

Steven A. Kandarian

Mark, we don't have a specific number as a target going forward. We just think that, overall, it made sense for us to take the actions we've taken and not take certain actions that we may have taken absent the Dodd-Frank consideration. So by now, we would've engaged in share buybacks most likely. But given the uncertainty, we've held back and, obviously, that's added to our balance sheet, and it has resulted in less leverage for the company at this point in time. So I don't want to put any specific numbers out as a target because it is a fluid situation and is very dependent upon the environment in which we're operating from a regulatory perspective.

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

Okay. And maybe just on the pension closeouts. I think, on the outlook call, you talked about a study by Towers Watson talking about 40% of sponsors looking to divest of plans under $1 billion or -- I can't recall the exact number. But there's obviously a time line in getting these things done. Are you seeing more opportunities, more activity? And what is the pipeline looking like in that area?

William J. Wheeler

Mark, it's Bill. So the general answer to your question is yes, we see a kind of momentum building in this sector, and there is sort of a couple of ways to think about momentum. You know there are the big jumbo deals that come very sporadically. And I don't think the industry right now sees any big jumbo deals that are out there ready to get bid on anytime soon, but we don't have, obviously, complete transparency into the next 12 months or so. In terms of what I would call the more normal flow business, clearly, momentum is building. Clearly, the pipeline is growing. We did, I think, $1.7 billion, $1.8 billion in pension closeouts in 2013. By the way, that made us the market share leader in 2013. So obviously, no jumbo deals in -- last year. But there's still a nice flow business that we can bid for with good returns. We do see this as an area of growth and I think in the U.S., and I think that's going to continue for quite some time.

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

Okay. And then just finally, John, cash at the holding company, I don't recall that being mentioned at year end.

John C. R. Hele

Yes. So I mentioned $5.9 billion, which is in the high end of our range. We prefunded -- we issued some debt to prefund a redemption, a maturity coming due in 2014. So the guidance we had given before was at the high end of the range of $4.9 billion. So we're essentially, on a net position, right at our high end of our range.

Operator

Next question will come from Ryan Krueger with Dowling & Partners.

Ryan Krueger - Dowling & Partners Securities, LLC

Just first, a quick follow-up on the holding company liquidity. Is the target still about $1 billion at this point or has that changed over the last year or so?

John C. R. Hele

I'm sorry. I couldn't hear what you said at the very end of your question.

Ryan Krueger - Dowling & Partners Securities, LLC

Is the holding company liquidity target still $1 billion or has that changed in the last year?

John C. R. Hele

We haven't given precise numbers on that recently. With the uncertainty with the regulatory framework and everything else out there, we are just reporting how much cash we have at the holding company. We're happy with the amount of cash we have at the holding company, but that's all the guidance that we feel comfortable right now. Just the rules are so uncertain, we don't know what's going to happen with federal regulation, the whole potential of that. So for now, until we have certainty on regulatory frameworks, we're just going to report the cash we have.

Ryan Krueger - Dowling & Partners Securities, LLC

Okay, understood. And then a question on annuity earnings. I think if I adjust for the items, as well as the equity market lift, it was about $328 million or so normalized, which was down a bit from more like $350 million in the last couple of quarters. Can you just comment on the driver of that? And should we view the 4Q earnings as a better run rate looking forward?

William J. Wheeler

Ryan, it's Bill Wheeler. So with regard to earning -- annuity earnings, I think, and I -- somebody really pressed me on the -- on our fourth quarter guidance call that we did last December. And I think we said, look, the earnings rate in the third quarter is pretty consistent with what we see at the outlook given sort of moderate stock market growth over the next year. So I -- and obviously, in the fourth quarter, performance was very consistent with that. A couple of things you always got to keep in mind: one is we had DAC -- we had positive DAC unlockings both in the sequential comparison periods as well as the year ago period, and that kind of obviously makes the numbers a little hard to compare. Secondly, remember now that half -- almost half of our separate accounts in the variable annuity business are not in equities anymore. It's a much more diversified asset mix with a lot of fixed income. So the S&P 500 is not going to be the only driver of variable annuity earnings performance. It's much more conservative than it used to be. And so I think that gives you a little feel for what's going on in the annuity business.

Operator

Our next question comes from Suneet Kamath with UBS.

Suneet L. Kamath - UBS Investment Bank, Research Division

I wanted to talk about spreads, particularly in the Corporate Benefit Funding business. I think, in your prepared comments, you had mentioned that they were strong both including and excluding variable investment income. So I just was wondering what the underlying drivers are, and if there's any change to your thought process in terms of what that might look like going forward versus the outlook conference call.

William J. Wheeler

Okay, I guess, I'll take that one. The -- so with regard to Corporate Benefit Funding spread, yes, they were strong. Yes, it was driven by both strong variable investment income, but honestly, the underlying investment performance is strong as well. The strong variable investment income, and maybe my colleague Steve Goulart will comment as well, is really -- obviously, hedge funds performed very well in the quarter. We also had very strong mortgage loan prepays experience. And so -- and I guess when you think about our outlook for the next year, we -- so we had -- I guess I'd say we had quite a good beat with regard to variable investment income in the quarter. We don't have -- the reason we call that out is we don't necessarily think it's sustainable. It's not in our base projection. And with that, maybe I'll let Steve talk a little bit about the outlook.

Steven Jeffrey Goulart

Sure. Thanks, Bill. We do have a solid outlook. I think we talked a little bit on the earnings guidance call about our plan for 2014. We've said that we expect $900 million to $1.3 billion in VII for next year or $225 million to $325 million a quarter. Obviously, the fourth quarter was very strong, Bill went through some of the highlights. Nearly every component of VII outperformed our expectations and plan in the fourth quarter. Both sets of alternatives hedge funds and private equity as well has very strong prepayments. Looking forward to the first quarter, though, we don't expect to see that same sort of performance, but we're still very confident about our plan and our outlook for the first quarter and for all of 2014 as well. Remember, there's a lag in private equity and obviously, there's a strong fourth quarter in the equity markets. I think that will help us through the first quarter. But again, I think we're very confident of being within our plan for VII for '14.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. I -- and then maybe for John. Can you remind us about how we should think about the glide path for the interest rate derivative sort of roll-off? I know we talked about this a couple of years ago, but I don't know if we've gotten an update in a while.

John C. R. Hele

We haven't -- it really hasn't changed much. It's quite long. It's -- we've had small amounts. It's been quite small actually impacting us so far up until -- including 2013. And as we hit 2015, in the next 5 years or after, it starts to slowly glide down over the 2020, unless Steve wants to add more to that? That's -- yes. And I just wanted to add on Corporate Benefit Funding. The -- also, I mentioned in my comments about -- it was helped also by Capital Market investment products, both [indiscernible] and some other products. We've been able to fund it at cheaper rates because they're short in [ph] the curves and there's been solid demand for products, so that's helped our earnings on a year-over-year basis.

Steven Jeffrey Goulart

It's Steve Goulart again. Let me just add a little bit on the derivatives piece that John just commented on. I guess -- the thing I'd point out, I think there have been some questions, "Gee, we're in a rising rate environment now. But yet, you're still having strong derivatives income. What's going on?" The thing to remember about this is this is all part of our asset liability management process, and it's a dynamic process. So we're always looking at what are the needs within our portfolios, what are the market opportunities that are available to us, and so the program is actively managed. Just keep that in mind.

John C. R. Hele

Thanks.

Suneet L. Kamath - UBS Investment Bank, Research Division

Yes, got it. And then maybe on the same topic. Can you talk about your new money investment rate in the quarter, and maybe how that compares to sort of the overall portfolio yield on a book basis and also, the yield on maturing securities?

Steven Jeffrey Goulart

Let me start with that. Again, I think our new money yield was kind of in line with the market. I think $329 million is what we've said in that order. And, of course, our portfolio continues to run off with higher yielding securities. So there's probably, call it, 100 to 150 basis points difference between new money yield and what's rolling off in the portfolio. But that's sort of as we would expect. Again, we make -- we've made up for a lot of it. And when you look at our portfolio yield being sort of flatter or even up quarter-to-quarter, a lot of that was due to the VII performance that we saw in the fourth quarter. So the yield roll-off is as we expect, and we're making up for it so far in different pieces like VII.

Operator

Our next question comes from Jeff Schuman with KBW.

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

I just want to ask a couple of top line questions. I think there was a large group sale in Australia. I was wondering how much that was, and wondering how we should sort of think about that in the context of a lot of difficult challenges in the Australian group market. In particular, I'm wondering if this was deeper annuation related.

Christopher G. Townsend

Yes, let me take that question. It's Chris Townsend here. The -- there was one single account which was a little over $200 million, and it's a mixture of both life and total permanent disability. And the mix is about 60/40 in favor of TPD in terms of the mix of risk we take. And I guess your question is in relation to the reserve that we took in the third quarter. So we -- there's been a fair amount of dislocation in the market in terms of competitors coming in and going from the market and a fair amount of change in the reinsurance market as well. And I can assure you that we're very careful in terms of pricing to make sure we meet the appropriate hurdles, and we have a number of sets of eyes on every significant risk we write there. So it's our country team in Australia, it's our regional team based out of Hong Kong, and it's Maria Morris's team at Employee Benefits that assist us globally as well. So there are a number of people looking at it to make sure we're getting the appropriate return on our capital in terms of the pricing we're deploying.

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

I mean, is it safe for us to assume that the pricing is much differently than it would have been before developments over the last year or so?

Christopher G. Townsend

That would be a safe assumption, that there's a significant increase in that particular account.

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

All right. Then in Group and Voluntary, I think PFO growth was 1%. I think the outlook for 2014 was mid-single digit, so a bit of a spread there. I'm just wondering how you feel about sort of accelerating that into 2014 and whether it's dependent on some economic assumptions that we should be sensitive to.

William J. Wheeler

Jeff, it's Bill. The -- keep in mind that a lot of our -- certainly, at the large end of the market, a lot of our sales are already done, right? So we have a pretty good feel for therefore, what will flow through on the income statement. And what we've seen is there's a kind of increasing momentum in group now for a couple of years. A couple of years ago, I think our group revenues actually shrunk. And so you're seeing a much more benign regulatory environment -- or competitive environment, not regulatory, competitive environment. And that means that pricing is more attractive, and we're getting a fair amount of that business. So that's already a little bit in the can already. The second thing that's driving the revenue growth is really our Voluntary Benefits & Worksite strategy. And that is -- we have some pretty aggressive goals there. I would say, in 2013, we did a very good job of hitting those goals. Maybe the best example of what's going on is in auto insurance. We are the largest provider of auto and homeowners at the Worksite. And our revenue growth there was over 5% last year, and we actually expect that to grow faster this year. So -- and that's -- for a pretty mature market -- the auto market hardly grows at all -- that's quite strong performance. So there -- so I would say a lot of the growth, we already kind of know. And -- but obviously, at the Voluntary Worksite part of it, we have some ambitious goals but good momentum.

Operator

Our next question comes from Jimmy Bhullar with JPMorgan.

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

So first, a question for Steve. You mentioned not wanting to buy back stock and then have to issue equity at SIFI standards that have [ph] 2 owners. But your stock was trading below book value for an extended period, also, relatively attractive now in valuation. So buying back earlier and issuing later wouldn't really be so bad. So just trying to get a sense of how long will you continue to accumulate capital if there's no visibility on SIFI standards this year. Would you, at some point, if you don't find any deals, decide to reevaluate your decision or not? And then, secondly, on pension closeouts, you signed the ASCO noble pension closeout deal this quarter, but maybe, Bill, if you could talk about -- you spoke about the pipeline, but maybe talk about what type of returns you're getting in this market, what the competitive environment is, have you seen other companies sort of pursue this business more aggressively. And then, lastly, on the annuity business, you're obviously pulling back from variable annuities. Fixed annuity sales are still modest, but they more than doubled from the previous quarter. So I'm just trying to get a sense of how much of this was indexed annuities and what your goals are for the traditional fixed and the fixed-index annuity business over the next few years.

Steven A. Kandarian

So I'll start, Jimmy. As to capital management, it is fluid. We are observing what's going on in the regulatory environment. We did, as you know, raise our dividend by nearly 50% last year. I did mention that we looked at the dividend on an annual basis. I have nothing to report, obviously. I have to talk to my board before announcing anything on that front. We did spend $2 billion in cash on Provida a few quarters ago, so we are I think managing capital within the context of the environment in which we're operating today from a regulatory perspective. And I think you'll see us continue taking actions that make sense in the coming quarters and years as this regulatory environment unfolds. And it's taking a while, obviously, for things to unfold around Dodd-Frank, and we have to be sensitive to what potentially can come out in terms of rules. And right now, there is just very little visibility. We've had comments coming out of people from the Fed, in hearings on Capitol Hill, saying they would like to tailor the rules to be appropriate for the insurance industry, but they followed that up with comments about the Collins Amendment, so-called Section 171 of Dodd-Frank. It ties our hands to some degree in terms of how much they can tailor those rules. That just leaves a lot of uncertainty in terms of how much capital is going to be required of us if we are designated a SIFI and if any appeals we take aren't successful. So I think we have to be prudent here. We have to do what makes sense for the company, not just in the long term, but we have to look at the near term here as well. And we don't want to be in a position where we buy back shares and then end up reissuing equity down the road. We think that would be a bad outcome.

William J. Wheeler

It's Bill again. So let's see if I get all your questions answered. So with regard to pension closeouts, yes, we did a pretty large transaction in the fourth quarter, a little under $700 million of deposits. So that was a big deal. However, just keep in mind, when you think about revenue growth rates and stuff, that in the year ago period, we did a $1 billion pension conversion, which flowed through as revenue on our GAAP income statement. And so even there -- even though we did a big one this quarter, it's-- revenue from pension closeouts actually still look like it was down year-over-year. With regard to returns, the block -- and I don't like to give or -- the block is actually performing very well. I don't like to give ROIs on new sales, obviously, because that's a competitive issue, but we think they're attractive and above our cost of capital, though, I would say at the smaller end of pension closeout market, it's much more competitive, I think, than it would be necessarily for jumbo deals. There's a half a dozen or so players who compete for this business, and I'm not sure if pricing is getting more aggressive or not. I would say it's pretty stable, but it's a pretty competitive, efficient market. And with regard to kind of the fixed annuities end of the business, a couple of things are going on there. One is we've repriced our SPIAs, our retail SPIAs, in that we had increased sales there. Remember the way a SPIA works is the whole deposit comes through as GAAP revenue. And so that sort of accentuates how much that impacts our income statement that you could see it in the sales numbers. So SPIA sales were better. We expect that to continue, frankly. We've also -- we have introduced an indexed annuity product earlier this year called Shield. Shield sales so far this year are, I would say, a little weaker than we would have liked. We've -- it has been a little slow getting approval for Shield in a number of big states, but we're building momentum every quarter there, and I think Shield will end up being a fairly big seller for us in 2014. So the strategy here is to continue to diversify our product portfolio. It isn't just about a guaranteed income benefit writer all the time. It's -- we want to make sure we meet a variety of client needs with regard to annuities and tax deferral and investment performance.

Steven A. Kandarian

Okay. Thank you very much. We're at 9:00, and we'll talk you soon. Thank you.

Operator

Well, ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T TeleConference service. You may now disconnect.

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