MetLife (MET) Steven Albert Kandarian on Q4 2015 Results - Earnings Call Transcript

| About: MetLife, Inc. (MET)

MetLife, Inc. (NYSE:MET)

Q4 2015 Earnings Call

February 04, 2016 8:00 am ET

Executives

Edward A. Spehar - Head-Investor Relations

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

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

Steven J. Goulart - Chief Investment Officer & Executive Vice President

Christopher G. Townsend - President-Asia Region

Eric Thomas Steigerwalt - Executive Vice President, U.S. Business, MetLife, Inc.

Maria R. Morris - Executive VP & Head-Global Employee Benefits

Analysts

Seth M. Weiss - Bank of America Merrill Lynch

Jamminder Singh Bhullar - JPMorgan Securities LLC

Thomas George Gallagher - Credit Suisse Securities (NYSE:USA) LLC (Broker)

John M. Nadel - Piper Jaffray & Co (Broker)

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Eric Berg - RBC Capital Markets LLC

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Yaron J. Kinar - Deutsche Bank Securities, Inc.

Erik J. Bass - Citigroup Global Markets, Inc. (Broker)

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the MetLife Fourth Quarter 2015 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. 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, including in the Risk Factor 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 - Head-Investor Relations

Thank you, Greg. Good morning, everyone, and welcome to MetLife's fourth quarter 2015 earnings call. We will be discussing certain financial measures not based on generally accepted accounting principle, 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 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. After prepared remarks, we will have a Q&A session. In fairness to all participants, please limit yourself to one question and one follow-up.

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

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Thank you, Ed, and good morning, everyone. Last night, we reported fourth quarter operating earnings per share of $1.23, which compares to $1.38 per share in the fourth quarter of last year. The year-over-year decline in operating EPS was primarily explained by variable investment income, or VII, which contributed $0.06 per share to operating earnings in the fourth quarter of 2015 versus $0.18 in the fourth quarter of 2014.

Variable investment income can be volatile, largely because it's driven by returns on alternative asset classes. These asset classes have provided strong returns to MetLife shareholders over time. In addition to a challenging quarter for VII, broad-based strength in the U.S. dollar remained an earnings headwind. Foreign exchange rates hurt operating earnings from our international businesses by $0.05 per share in the fourth quarter versus the prior year period. MetLife repurchased $822 million of shares in the fourth quarter. With an additional $70 million of buybacks in early January and the $107 million of repurchases in the third quarter, we have completed our latest $1 billion repurchase program.

As you know on January 12, we announced a plan to pursue the separation of a substantial portion of our U.S. Retail business. Until we are in a position to disclose details of the separation plan, we are not able to repurchase shares. While the separation plan has a negative impact on capital management in the near term, we are confident it positions MetLife to be a more compelling capital management story over the long term.

Exiting a business that has been central to the company since its founding in 1868 highlights our willingness to take bold actions to maximize shareholder value. Two factors drove our decision to pursue this plan: our strategic focus on businesses with capital requirements in higher cash generation and the potential impact of capital requirements on the variable annuity business if it remained part of a systemically important financial institution, or SIFI.

On the first point, as I have said on prior calls, we have learned a great deal about the cash and capital characteristics of our major business lines as a result of our Accelerating Value strategic initiative. One of the key early learnings from this effort was that the capital requirements and potential volatility of cash flows from the VA businesses do not fit well with our overall goal to deliver predictable recurring free cash flow. Following the separation, we anticipate that MetLife will generate a free cash flow to operate earnings ratio above our current target of 55% to 65%, and with less volatility.

In our view, the market does not give us appropriate credit for our higher multiple businesses, because of concern about the potential risk profile of VAs. By separating out of a substantial portion of our U.S. Retail operation, we are addressing this valuation overhang on MetLife.

On the second point, we believe that regulatory risk is significantly diminished as a result of this plan. The Federal Reserve has made encouraging comments on capital rules for so-called traditional insurance lines, but we are concerned that the Fed could view variable annuities as non-traditional, which is how this product is currently categorized by international regulators. Since we believe the standalone U.S. Retail business would not be a SIFI, separation mitigates the risk of onerous capital rules for the VA business.

MetLife continues to challenge its SIFI designation in court, and does not believe any part of our business poses systemic risk. However, we also recognize that the judicial process could take a considerable period of time, especially if either party appeals the District Court's decision. In the meantime, adverse capital rules for VAs could put MetLife at a competitive disadvantage.

Finally, as we said in the press release announcing the separation plan, we believe a standalone U.S. Retail business will be more nimble and competitive, benefiting from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden. We know you want more information on what the new company will look like, including specifics on strategy and capital. However, we are able to provide only limited information prior to finalizing the form of the separation.

Turning to regulatory matters, I would like to report on two developments in New York that will improve MetLife's ability to return excess capital to shareholders. First, in late December 2015, New York changed the law for calculating ordinary dividend capacity for life insurers, creating a more level playing field with other states. Previously, an ordinary shareholder dividend could be distributed annually if it did not exceed the lesser of either 10% of statutory surplus or the statutory net gain from operations in the prior year.

The legislation adds a greater-of test, which is consistent with the existing standard in the majority of states. We had assumed that our New York subsidiary, Metropolitan Life Insurance Company, would distribute meaningful capital to the holding company under the old law. However, that assumption was heavily dependent upon extraordinary dividends, which are subject to regulatory approval. While the new law means more predictable, less volatile dividends, it does not change MetLife's commitment to keeping our businesses very well capitalized. Second, the New York Department of Financial Services [New York State Department of Financial Services] is unique among state regulators in mandating certain actual assumptions and reserve requirements through an annual Special Consideration letter.

For year-end 2015 financial statements, Metropolitan Life Insurance Company is permitted to aggregate all three lines of business, life, annuity, and health, to meet the requirements. Previously, health insurance was excluded. Largely because of this change, we anticipate a reserve release of approximately $1 billion, based on current capital market conditions. While New York's standards remain very conservative relative to other regulatory regimes, the change will make us more competitive with insurers domiciled in other states.

In conclusion, we are committed to making the right decisions to produce substantial and sustainable shareholder value. And we are willing to execute bold moves to achieve this goal. Our separation plan will allow MetLife to focus on businesses that have lower capital requirements and greater cash flow generation potential, while creating a more nimble and competitive U.S. Retail franchise.

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

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

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. Operating earnings in the fourth quarter were $1.4 billion, or $1.23 per share. This quarter included three notable items which were highlighted in our news release and disclosed by business segment in the appendix of our quarterly financial supplement or QFS.

First, variable investment income was $71 million after DAC and taxes, which was $137 million, or $0.12 per share below, the bottom end of our 2015 quarterly plan range. Second, we had higher than budgeted catastrophe losses, partially offset by favorable prior-year reserve development, which in total decreased operating earnings by $9 million, or $0.01 per share after tax. Third, we had a one-time tax benefit in Argentina which increased operating earnings by $31 million or $0.03 per share after tax. This tax benefit was a result of Argentina's currency being devalued by 40% in December, which required the remeasurement of U.S. dollar-based reserves into pesos and resulted in an increased tax deduction.

Turning to our bottom line results, the fourth quarter net income was $785 million, or $0.70 per share. Net income was $591 million lower than operating earnings, primarily because of derivative net losses and losses related to certain variable annuity guarantees where the hedge assets are more sensitive to market fluctuations than the GAAP treatment for guarantee liabilities. The derivative net losses were primarily driven by higher interest rates. The difference between net income and operating earnings in the quarter included an unfavorable impact of $305 million, after tax, related to asymmetrical and non-economic accounting. Book value per share, excluding AOCI other than FCTA, was $51.15 as of December 31, up 3% year-over-year. Tangible book value per share was $42.22 as of December 31, up 5% year-over-year.

With respect to fourth quarter margins, underwriting primarily in the U.S. was less favorable than the prior-year quarter by $0.06 per share after adjusting for notable items in the both periods. Property & Casualty, Corporate Benefit funding, and Retail Life were the primary drivers of the year-over-year result. In Property & Casualty, the combined ratio including catastrophes was 96.1% in retail and 99.8% in group. The combined ratio, excluding catastrophes, was 89.4% in retail and 96.4% in group.

Overall, P&C underwriting was unfavorable versus the prior-year quarter. We experienced higher non-catastrophe claim costs primarily due to elevated frequency and severity in our auto business as well as higher catastrophes in homeowners. We continue to increase prices in Auto which should drive improvement in our loss ratios over the next several quarters. In Corporate Benefit Funding, or CBF, the less favorable underwriting result versus a strong 4Q 2014 was due to lower mortality experience in our payout annuity business and higher claims in our life products.

Fourth quarter underwriting results were within the expected range, and CBF full year 2015 underwriting margins were in line with our expectations. Retail Life's interest adjusted benefit ratio was 54.9%, which is less favorable than the prior-year quarter of 53.9% and 53.0% in 4Q 2014, after adjusting for a one-time notable item. The year-over-year variance was due to higher average net claims. The fourth quarter benefit ratio is high relative to our full year 2015 target of 50% to 55% because of seasonally high premiums and the related increase in reserves. Finally, the Group Life mortality ratio was 86.8%, and the Non-Medical Health benefit ratio was 77.7%, both within their respective ranges.

Turning to investment margins, the average of the four U.S. product spreads in our QFS was 170 basis points in the quarter, down 42 basis points year-over-year. Of this decline, 27 basis points was the result of lower variable investment income. Pre-tax variable investment income, or VII, was $109 million, down $216 million versus the prior-year quarter due to weak private equity and hedge fund performance. For the full year, pre-tax VII was $1.2 billion which was below the bottom end of our 2015 targeted range of $1.3 billion to $1.7 billion. Product spreads, excluding variable investment income, were 168 basis points this quarter, down 15 basis points year-over-year. Lower core yields accounted for most of this decline.

With regard to expenses, the operating expense ratio was 24.4%, unfavorable to the prior-year quarter of 23.7% after adjusting for notable items in the prior-year quarter. The higher operating expense ratio in the quarter was primarily due to lower pension risk transfer sales as well as higher expenses related to one-time items and timing.

I will now discuss the business highlights in the quarter. Retail operating earnings were $582 million, down 19% versus the prior-year quarter, and down 10% after adjusting for notable items in both periods. Life and Other reported operating earnings of $195 million, down 41% versus the prior-year quarter and down 26% after adjusting for notable items in both periods. The primary drivers were less favorable underwriting, primarily in P&C and higher expenses. Life and other PFOs were $2.1 billion, down 2% year-over-year as growth in the open block was more than offset by runoff of the closed block. Retail Life sales were up 9% year-over-year, primarily driven by Term, Whole Life, and Universal Life.

Annuities reported operating earnings of $387 million, up 1% versus the prior-year quarter and up 3% after adjusting for notable items in both periods. The key drivers were improved investment margins as well as favorable lapse experience which were partially offset by higher expenses and negative fund flows. Total annuity sales were $2.5 billion in the quarter, up 23% year-over-year.

We continue to see good momentum in our index-linked annuity, Shield Level Selector. Shield sales were $361 million in the quarter, which were almost triple the sales in the prior-year period. Also, our VA guaranteed minimum withdrawal benefit rider, FlexChoice, continues to gain acceptance in the market and drove VA sales of $1.8 billion this quarter, an increase of 13% year-over-year.

Group voluntary and worksite benefits or GVWB reported operating earnings of $214 million, down 10% versus the prior-year quarter and down 5% after adjusting for notable items in both periods. The primary drivers were less favorable underwriting in auto and lower investment margins. GVWB PFOs were $4.3 billion, up 3% year-over-year. Sales were up 14% year-over-year with growth in core and voluntary products.

Corporate Benefit Funding or CBF reported operating earnings of $286 million, down 21% versus the prior-year quarter and down 18% after adjusting for notable items in both periods. The key drivers were low investment and underwriting margins. CBF PFOs were $886 million, down 39% year-over-year due to strong pension risk transfer or PRT sales in the prior-year quarter. Excluding PRT sales, PFOs were up 39% due to strong sales in structured settlements and institutional income annuities.

Latin America reported operating earnings of $150 million, down 1% from the prior-year quarter but up 24% on a constant currency basis. After adjusting for notable items in both periods, Latin American operating earnings were up 14% on a constant currency basis. The key driver was business growth. U.S. Direct, which is included in Latin America's results, had an operating loss of $8 million versus a $22 million loss in the prior-year quarter, reflecting lower expenses. Latin America PFOs were $1 billion, down 2%, but up 17% on a constant currency basis with growth across the region despite the challenging environment. Total Latin America sales increased 3% on a constant currency basis, primarily due to direct marketing in the region.

Turning to Asia, operating earnings were $290 million, down 15% from the prior-year quarter and down 9% on a constant currency basis. Adjusting for notable items in both periods, operating earnings were up 6% on a constant currency basis driven by favorable business growth and lower taxes primarily due to a change in the Japan tax rate from 31% to 29%. Asia PFOs were $2 billion, down 11% from the prior-year quarter and down 3% on a constant currency basis. Adjusting for the withdrawal of single premium A&H products in Japan which do not meet our hurdle rates in the current interest rate environment, premium fees and other revenues increased 2% on a constant currency basis.

Discontinuing the sale of single premium A&H products is a good example of our focus on cash, return on capital, and payback periods more so than GAAP metrics. We estimate the statutory IRR on single premium A&H is 7% with a 14-year payback period assuming mean reversion for interest rates. The product looks even worse if we assume current low rates persist. While these products could contribute meaningful revenue in operating earnings on a GAAP basis, the economic returns are unattractive.

For full year 2015, Asia PFOs were up 4% on a constant currency basis. Asia sales were down 1% year-over-year on a constant currency basis, representing the net impact of management actions taken across the product portfolio to improve value creation and growth in targeted markets. In Japan, 2015 third sector sales were up 11% versus 2014. Our expectation is for Japan's third sector sales to be down 10% to 15% in 2016 as a result of actions to improve value, including the impact from suspension of our single premium A&H products. Excluding the impact of these actions, our expectations underlying growth in Japan's third sector sales will be consistent with our prior guidance of mid to high single digits.

EMEA operating earnings were $54 million, down 16% year-over-year and down 2% on a constant currency basis. Adjusting for a one-time tax benefit in the fourth quarter of 2014, operating earnings were up 32% on a constant currency basis, primarily driven by business growth, particularly in the U.K. and the Middle East. EMEA PFOs were $625 million, down 7% from the prior year period but up 3% on a constant currency basis. Excluding the impact from the conversion of certain operations to calendar year reporting in the prior-year quarter, PFOs were up 10% driven by Gulf, Turkey and the U.K. Total EMEA sales declined 11% on a constant currency basis due to strong employee benefit sales in the Middle East and the conversion of certain operations to calendar year reporting in the prior-year quarter.

In Corporate and Other, I would like to remind you of the timing of our preferred dividend payments. With our refinancing discussed on our second quarter 2015 call, we now pay dividends on our $1.5 billion Series C preferred stock on a semiannual basis. As a result, you will see preferred dividends paid in the second and fourth quarters of approximately $40 million related to this security. On an annualized basis, the lower dividend will generate a net savings of approximately $20 million during the first five-year fixed term of the security.

I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $6.4 billion at December 31, up from $5.5 billion at September 30. This amount includes inflows from our subsidiary dividends and the issuance of senior debt, offset by share repurchases, the payment of our quarterly common dividend, and other holding company expenses. In addition, our 2015 free cash flow ratio was 63% of operating earnings after adjusting for the third quarter non-cash charge of $792 million after tax.

Next, I would like to provide you with an update on our capital position. While we have not completed our risk-based capital calculations for 2015, we estimate our combined U.S. RBC ratio will be above 450%. For Japan, our solvency margin ratio was 936% as of the third quarter 2015, which is the latest public data.

In conclusion, fourth quarter operating earnings were below expectations as a result of lower investment margins, primarily due to VII, ongoing pressure from foreign currency, less favorable underwriting, and higher expenses. While the current environment remains challenging, we are confident that our strategy will drive improvement in free cash flow and create long-term sustainable value for our shareholders.

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

Question-and-Answer Session

Operator

Thank you. Your first question comes from the line of Seth Weiss from Bank of America Merrill Lynch. Please go ahead.

Seth M. Weiss - Bank of America Merrill Lynch

Hi. Good morning. Thanks for taking my question. Steve, I'd like to just first ask about the comment that you can't buy back stock until more details of the spin are provided. I just want to clarify, is this the registration statement with the SEC in the next six months, or are there other events that we need to wait for before buyback can resume?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Hi, Seth. We are in possession of material non-public information, regardless of the form of the transaction, so we are unable at this point in time to engage in any further repurchases.

Seth M. Weiss - Bank of America Merrill Lynch

Could you just give us an indication of, either what events or timeframe we should be waiting for, for when you will no longer be in possession of this? What's the trigger, I guess, is the question?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Seth, we're working hard toward determining the form of the separation, and until we have determined that, we won't be in a position to do share repurchases. I don't have a specific timeframe for you. The form of the separation could be a public offering. It could be a spinoff. It could be a sale of the business or some combination of these options. And it's still too early to determine which of those it will be.

Seth M. Weiss - Bank of America Merrill Lynch

Okay. And then, maybe just to follow up on the spin, and specifically on comments you made in your December outlook call about no longer needing to build the capital buffer, does those commentaries – and understanding that you're unable to buy shares now – but independent of that, did that comment contemplate the need to potentially capitalize a spin company, and does this alter your view of your HoldCo capital position and adequate capital buffer?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

That wasn't the reason for the comment, and we'll still have to wait to see how the form turns out, of the separation, before we know the capital positions of both remaining company and the new co.

Seth M. Weiss - Bank of America Merrill Lynch

Okay, so...

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

This is John. Want to just add to that that, we are, as Steve said last December for our total business, we are comfortable with our capital buffers that we have here. But there's a lot to calculate out, depending upon the transaction and the form of separation. So that's work that has to be done, and that is underway, and we're working on that. But it doesn't change our view of the total capital we have for our total business.

Seth M. Weiss - Bank of America Merrill Lynch

Okay. So just to clarify, just want to not run the risk of extrapolating any statements here, the comments that you don't need to build a capital buffer related to MetLife as a combined entity, and does not contemplate a potential spin and actions that might need to be taken for that?

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

Well, that's right, Seth. Because we have said there are three – there's various forms that we're looking at. It could be a spin. It could be an IPO with a spin. It could be a sale. So all those have kind of different capital implications for both the separated company and the remaining company. So that's work that has to be done. But we are comfortable with our total capitalization that we have for our total business.

Seth M. Weiss - Bank of America Merrill Lynch

Okay. Great. Thank you.

Operator

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

Jamminder Singh Bhullar - JPMorgan Securities LLC

Hi. Good morning. On the U.S. Retail separation, it seems like many of the details, like the nature of the separation, branding, haven't really been finalized, as you mentioned. So just want to get an idea on your timing of when you announce – made the announcement, why did you make it when you did, versus waiting till you had decided on some of these items?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Jimmy, we did a lot of work before making this announcement to pursue a separation of much of our retail business, U.S. Retail business. But more work had to get done to answer some of the questions you just raised, and many others. And to do that would require a much larger group of people both within the company and outside the company to make those determinations. And as a practical matter, it would have leaked out to the public that we were engaging in this plan to pursue a separation. So our view was once we made the initial determination that a separation was desirable and we were going to pursue that plan, now we're able to bring in many more people to do the analysis that will lead to the answers to the questions you just raised.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. And then can you give us an idea on the expected timing of the separation? Because it seems like an IPO or a sale would be difficult in this environment. So obviously spin is an option, but how do you try to balance doing it in a timely fashion versus maybe being opportunistic and maximizing what you're able to get from the business?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

We're not in a position to give any guidance at this point in time in terms of the timing. I can only tell you that we've been working hard on our strategy for over a year now. We made this announcement about the plan to pursue a separation, and we are working very rapidly on answering all the questions that we need to answer to determine the form of such a separation and we've moving as quickly as one can.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. And then maybe if I can just ask one on the business. Your alternative investment income obviously as you mentioned was pretty weak in the fourth quarter. So just give us some insight into what drove that, whether it's private equity, hedge funds. And how – what's your view on some of those asset classes on how they're performing as it relates to the first quarter? I think you should have some insight given the reporting lag on private equity and on hedge funds.

Steven J. Goulart - Chief Investment Officer & Executive Vice President

Jimmy, it's Steve Goulart. Just recapping the fourth quarter, I mean, certainly we were disappointed in the performance of the alternatives portfolio, both private equity and hedge funds materially underperformed our plan and that's been somewhat unusual. But anyway that's really what happened. Prepayments were still very strong in the fourth quarter. And as we look forward to this year, you talked about first quarter. Obviously the market sort of came out of the gate on the wrong foot perhaps, a lot more volatility than expected. We don't see any reason to change the plan yet. We'll see how it unfolds. Obviously there's a lag in the portfolios, one quarter on PE, one month on hedge funds.

So you can sort of look at what has transpired. But I'd also remind you that when we look at correlation, while there's kind of a directional correlation, the correlation isn't really that high in trying to compare it exactly. So we're sort of sticking with the plan for now. I would also say though that we've engaged in some repositioning in the portfolio during the course of the latter half of last year. We reduced the alternative portfolio by about a billion dollars split between the hedge fund and private equity portfolios, really concentrating on the managers and strategies that have been the longer-term stronger performers for us and that we feel are confident are going to deliver that performance going forward.

Like Steve said in his opening remarks, this is a portfolio that has provided strong returns for us and for our shareholders over some period of time. We expect it will continue to do so. Obviously we're managing it and monitoring it very closely just given what we did late last year. And then particularly the hedge funds, they're a little bit in the spotlight just given the last couple years of underperformance there. So (34:42)

Jamminder Singh Bhullar - JPMorgan Securities LLC

And specifically on private equity, is it more sensitive to the level of market because that drives the marks, or is it more sensitive to IPO activity? Because I can understand fourth quarter being really bad because the S&P was down like 7% in the third quarter but it bounced back and was up almost 7% in the fourth quarter. So is it more the ending level of the market than the previous quarter, or is it actual IPO activity that influences your private equity returns more?

Steven J. Goulart - Chief Investment Officer & Executive Vice President

Yeah, like I said, we've studied a lot of different correlations, and it's hard to really tie any of them. So I think directionally it's a little bit both of what you said.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. Thank you.

Operator

Your next question comes from the line of Tom Gallagher from Credit Suisse. Please go ahead.

Thomas George Gallagher - Credit Suisse Securities (USA) LLC (Broker)

Good morning. First question, Steve, is just based on what you have proposed so far in terms of the split and what remains with Met, which I'll refer to as RemainCo, it looks like close to 20% of the earnings in RemainCo, which would be retail, would essentially be a closed block, if I'm understanding it correctly. How should we think about that conceptually? Is that a business that you also might be open to divesting, or should that be considered a closed block with the remaining business, or is that one still up in the air? That's my first question.

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

Hey, Tom, this is John. It's something that's still under review that we're looking at. And as we develop future plans on this, we'll let you know.

Thomas George Gallagher - Credit Suisse Securities (USA) LLC (Broker)

Okay. And then the next question is a broader one. Steve, is the ultimate goal here really to de-SIFI? I mean, I realize you're still not done with the court case, but let's just assume for a minute that you don't win that. Is the plan here to still get out of SIFI? How critical is that to you? Or do you believe the split kind of eliminates the need to de-SIFI here?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Tom, the decision to separate the U.S. Retail business, a significant portion of it, was really driven by two factors. One, our strategy work that we have talked to you about as well as the regulatory component. And when we do our strategy work, regulatory environment, business environments within markets are very central to that analysis. So those two things in combination led to the decision for the separation in pursuing the separation of the U.S. Retail business. In terms of overall, our view on the SIFI designation, we continue to believe that we are not a SIFI under Dodd-Frank. We are pursuing our appeal rights in the District Court of the District of Columbia. There's a hearing next week Wednesday, February the 10th, on the case, and we look forward to the judge's decision.

Thomas George Gallagher - Credit Suisse Securities (USA) LLC (Broker)

Okay. Thanks.

Operator

Your next question comes from the line of John Nadel from Piper Jaffray. Please go ahead.

John M. Nadel - Piper Jaffray & Co (Broker)

Hi. Good morning. So, John, I appreciate the commentary on the risk-based capital ratio or at least the estimate as of year-end 2015. So it looks like a pretty significant increase on a year-over-year basis from something, I think the adjustment was slightly under 400% for the U.S. at year-end 2014. Can you give us some sense for what the risk-based capital ratio looks like for the three entities that are part of the spin? I believe those entities were somewhere just north of 400% at year-end 2014. Should we think about a similar kind of boost in year-end 2015 for those entities?

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

Hi, John. It's John. I really can't until we finish our cash flow testing and the actuaries sign off on their statements and we follow our blue books to really give you any details. And you'll see that all when it all gets published. You know, because of the impact of the change of the SCL (38:56) that Steve mentioned, that's helped our total ratios, our total combined ratios where we're moving up higher. But that's, until we get all that work done, we can't really give any details such as you're asking for.

John M. Nadel - Piper Jaffray & Co (Broker)

Okay.

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

You know what, we're announcing a week earlier this year than we did last year, so that's why the timing is a bit off here.

John M. Nadel - Piper Jaffray & Co (Broker)

Okay. Appreciate that. I guess my second question is a bigger picture question around Japan. Obviously you guys have taken some action around product offerings given the interest rate environment. I'm wondering, given the Bank of Japan's actions last week and the significant shift in JGB yields across the curve, whether there is something more specifically that has to be done now in response to those actions. I mean, I think there's negative yields all the way up to nine years on the JGB at this point.

Christopher G. Townsend - President-Asia Region

Hi. It's Chris Townsend. Let me respond to that. So in the short term, the falling interest rates are going to have a negative, or sorry, have a positive impact on the SMR (40:06) as the asset values will appreciate, but a potential negative impact on our U.S. GAAP earnings due to lower investment income. And that's very manageable. It's immaterial in the bigger picture of things. Over the long term, a continued lower rate situation, you can accredit drag on earnings impacted by reductions to NII, earnings and distributable cash, but as those Japanese yen yields reduce, foreign currency products may become more popular, supporting our existing strategy to move away from the yen products, the foreign currency products. On the yen products themselves, we've taken significant action on our portfolio well in advance of the recent DOJ announcement.

So what we've done is to de-risk or to reduce the focus on our Yen life portfolio by reducing commissions in that area, doubling the ticket size, continuing to focus on packaging of A&H products to enhance the returns, and also to incentivize some of the FX life products. And we took that action at the back end of the third quarter, and if you see from the sales results in terms of the life business in Japan for the fourth quarter, it was up 2% year on year for the fourth quarter, and the mix of that underneath that is quite interesting because the foreign currency life is up and the Yen life is down, which is exactly what we wanted to happen. And I think you'll see that play out as we go into the rest of 2016.

Operator

Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Hey. Thanks. Good morning. I wanted to follow up on Seth's question on I guess the capital buffer. Is it – I guess, Steve, is it fair to say that when you talked about holding a capital buffer for non-bank SIFI risk that a fair amount of the buffer was related specifically to the variable annuity business?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Well, we don't know what the capital rules will be. The Federal Reserve has not released anything yet. There are some international draft rules out there, but they've already said they'll be changing those. So it's really just a level of comfort, I think, that we have to have. We do a lot of stress testing ourselves. We have an economic view of our risks and feel that this size buffer was sort of where we should be knowing what we know at the time we make that call. And we reassess this on an ongoing basis. As capital rules get announced, we will know what it is. We do know that variable annuities have been discussed by many regulators as being a product that may attract higher capital requirements. So that clearly is one of the larger, say, capital risk products out there which makes the separation quite compelling.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Understood. On the RBC ratio, obviously you talked about the $1 billion reserve release that certainly contributed to the increase in the year-over-year RBC ratio. Were there any other big key factors that you can help us understand at this point?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

That's probably the most major one.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay. And then just lastly, can you guys give us an update on your energy portfolio and where that stands at this point?

Steven J. Goulart - Chief Investment Officer & Executive Vice President

Sure. Ryan, it's Steve Goulart. Just to update on the energy portfolio. We did take the opportunity most of last year to start reducing that portfolio. We sold almost $2 billion out of it. It ended the year just under $12 billion. And, again, 86% of that is investment grade. It's tilted more towards sort of the defensive sectors in the portfolio, mid-stream refiners, that sort of thing. So I think we're comfortable. We're obviously sort of – we run it through constant stress tests, just given the energy environment, and I think, at year-end, there was an unrealized net loss of about $220 million on the portfolio.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay. Great. Thank you.

Operator

Your next question comes from the line of Eric Berg from RBC Capital Markets. Please go ahead.

Eric Berg - RBC Capital Markets LLC

Thanks. Good morning. Thanks very much. You said that on a company-wide basis, you're comfortable with the level of cushion you have, but you've also said that – I don't know whether it was unexpected, but regardless, you had a $1 billion increase in your statutory surplus as a result of the change in New York State accounting rules. Should we infer from these two statements, when we think of them together, that some of this $1 billion is going to be above and beyond what you consider to be your adequate capital cushion, and that therefore some of this $1 billion could become available for redeployment?

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

Hi, Eric. We view capital on a total holistic basis...

Eric Berg - RBC Capital Markets LLC

Sure.

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

Whether it be at the holding companies, within the regulated companies. We had always viewed this amount that was in these reserves as, really capital, but they were in a reserve that would be paid out over time, of course. So, I think the best way to think of this is, this is capacity that we have as we think about our total capital position, and we will have to see in terms of redeployment, as Steve said, we can't make any decisions on that until we get further along with the separation.

Eric Berg - RBC Capital Markets LLC

I have one question related to operations. Because of the decision to pull back in Japan, it seems like even on a, let's call it, just apples-to-apples basis, adjusting for notable items, adjusting for currency, adjusting for the withdrawal of the single premium product, that, well – that growth is quite slow right now in terms of premiums, fees and other revenues. And I guess my question is, once you get through this, let's call it, transition period – product transition period, what do you – how do you think of the sustainable growth rate for the whole Asia region, given that you have sort of cross currents there? You have a very mature market in Japan, but you are rapidly growing markets in Southeast Asia. So on sort of an overall basis, how should we think about the sustainable growth rate, once we get through this transition period, for Asia? Thank you.

Christopher G. Townsend - President-Asia Region

So, it's Chris Townsend. Let me respond to that. So, first of all, there is no change to the guidance we provided in December across all of the key metrics for Asia. And we gave you some, I think, fairly clear guidance in terms of earnings and revenue in the medium term. And we're sticking by that guidance overall.

In terms of Japan, we're doing the right thing in terms of creating value for our shareholders in terms of the product portfolio. And those items I responded to one of the prior questions on, in terms of Yen life (47:40) will definitely increase the value of our business. If you look at A&H and the third sector, where we make some very solid margins, we gave earlier guidance of mid to high single digits. We updated that guidance to a range of 10% to 12%, and we came in at 11%. So I think we've delivered well in terms of that business for this year. And John gave some fairly clear guidance, in terms of his prepared remarks, as to what's happening with that portfolio overall.

So, I actually think we've had a fairly solid year in the Asia region overall, with our normalized constant rate earnings of 15% or 16%, which is again ahead of guidance. So, in conclusion, we're sticking with the prior guidance we've given.

Operator

Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Good morning. I have a question regarding your auto business. Can you provide some color in terms of claims experience in the quarter, excluding cat and prior-year (48:44) development versus 3Q? And also, with 4Q in the books, does it change your view for the outlook for 2016, in terms of the loss ratio expectations?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Humphrey, were you (48:59) talking about the auto business?

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Yes.

Eric Thomas Steigerwalt - Executive Vice President, U.S. Business, MetLife, Inc.

Hi, Humphrey. It's Eric. We took about, I would say, in 2015, roughly 2% rate throughout the year 2015. Going into 2016, we'll slightly more than double that. Auto was clearly up in Q4 2015 versus Q4 2014. We actually – if you want to talk about total combined ratio, homeowners in Q4 2014 was fabulous, frankly, so that was up in Q4 2015. Still a very good result. On the auto side, like many of our peers, or at least one peer that's reported so far, we're still seeing elevated severity and frequency.

As I said in the third quarter – and obviously I'm talking about just retail here. In a minute I'll let Maria comment on group. In the third quarter, I mentioned, and I think so did some of our peers, that miles driven is up. I would also add – and I may have mentioned it in the third quarter as well – that claim costs are up as well, which shouldn't be surprising.

So, even though we saw elevated experience in the fourth quarter on the auto side, we're pretty comfortable that the rate we're going to take in 2016 will offset those results, and we should be right about where we want to be as we get near the end of 2016. Maria?

Maria R. Morris - Executive VP & Head-Global Employee Benefits

Hi. This is Maria Morris. And with regard to the group business, we see the exact same trends as we saw in our retail business, so obviously both frequency and severity up. Eric talked about a lot of the trends underlying that. I would mention one thing on severity, we do notice that, with a lot of new cars on the road, that the cost of actually repairing those is up, with the computerization and other things in new cars. So, in addition to obviously more miles driven, we've got also the issue with regard to severity. And we've been taking rate as well, so – in the mid single digits. And I would note that in group, even as we're taking rate, we still have double digit sales increases year-over-year. So we're focused just as we are in retail on continuing to take rate throughout 2016, and we're bullish on the prospects for growth.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Got it. And then shifting gears to Latin America, the U.S. Direct business continued to be an earnings drag for the segment. How long do you expect the unit to turn profitable? Is it a matter of scale or is it – are there some levers that you can pull to drive improvements in that particular business?

Unknown Speaker

Sorry. So you're referring to currency or to the growth of the business?

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

No, just from the earnings perspective.

Unknown Speaker

Right. Well, as you know, we have been facing to start saying (51:56) currency issues in Latin America, the impact is around 20% during the last year. But if you think about growth, excluding that and excluding the U.S. Direct business and adjusting for notable items in the current and fourth (52:15) quarter, (52:16) were flat year-over-year. But strong growth of approximately 11% happened adjusting for all that. We gave you guidance of upper single digits, and we continue supporting that despite from (52:32) currency. We see further deterioration of local currencies against dollar but not as big as we saw before. So in the core business in local currencies, we sustain our high single digits.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

All right. Thank you.

Operator

Your next question comes from the line of Yaron Kinar from Deutsche Bank. Please go ahead.

Yaron J. Kinar - Deutsche Bank Securities, Inc.

Good morning, everybody. I want to go back to the separation plan and the announcement regarding the buyback cessation for the time being. So first, Steve, I think in your comments to Tom's question, you said that really the separation plan is not just regulatory driven, it's also part of the strategic work you've done. So with that in mind, why go through the court challenge at this point if, ultimately, even if the challenge let's say was accepted, you'd still go through the separation plan?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

Yaron, as we've said many times, we don't believe we are a SIFI under Dodd-Frank. 80% percent of the company remains after the separation, if it were to occur, and that remaining 80% will be impacted by whatever capital rules the Federal Reserve comes out with as well as the number of other matters related to compliance that will relate to being designated a SIFI. So there's still a significant potential burden that'll be placed upon the remaining company that would put us potentially on a unlevel playing field with our competitor who are not SIFIs.

Yaron J. Kinar - Deutsche Bank Securities, Inc.

So why not file the challenge after the separation plan if you're still designated then?

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

You have one chance to file a legal challenge to a District Court, and that is within 30 days of being designated, which is what we did.

Yaron J. Kinar - Deutsche Bank Securities, Inc.

Okay. And then the credit rating agencies came out with a few negative outlooks after the plan was announced. Could you comment on those and maybe what you can do in order to alleviate their concerns?

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

Sure. Often I think you'll see whenever a firm announces a significant transaction where they're buying something or selling, or just separating something, the rating agencies put you on Watch or Outlook just until they get more details and can sort out exactly what's going to happen. We announced a plan to pursue a separation. We have to sort out a lot of details, including how this will all work. And we will present that to the rating agencies when we have that work completed, and then they'll be able to have an appropriate view. So this is – we're in a transition period, a holding period, with the rating agencies until such time as we can get them more information.

Yaron J. Kinar - Deutsche Bank Securities, Inc.

Okay. And then finally, I guess, this is more a comment than a question on my part. In the December outlook call, you basically said that you'd be increasing the capital deployment, given a changing in strategic view and given the buffer that you'd built. I would have thought that at the time, you knew that you were going to go through the plan or announcing the plan of a separation, and it just creates a lot of back and forth here, I think, in terms of how investors think of the buyback program and the timing thereof. So I just – I would have thought that this could have been handled differently. And I guess that's my comment and want to see if you had any reaction to that.

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

What we are doing throughout our work on strategy is to find ways to maximize value for our shareholders. We've talked about a focus on cash and growing businesses that threw off (56:30) more free cash flow and returning any excess capital to our shareholders. We also look at all of our businesses in terms of their viability longer term and how best they may be viable in the marketplace. And it was our determination after a great deal of work that the U.S. Retail business would be more viable long term as a separate entity.

So once we made that determination, we made that announcement that we'd be pursuing a plan to separate. And as I've said earlier in the call, a great deal of work has to still be done to effect that plan and to determine which avenue we take to separate that business. But all this is done through the lens of creating shareholder value.

Yaron J. Kinar - Deutsche Bank Securities, Inc.

Okay. Thank you.

Operator

Your next question comes from the line of Erik Bass from Citigroup. Please go ahead.

Erik J. Bass - Citigroup Global Markets, Inc. (Broker)

Hi. Thank you. In retail, you mentioned higher direct expenses. Can you just discuss the drivers in the quarter? And also should we expect to see any increase in spending in either retail or at a corporate level in anticipation of the separation?

Eric Thomas Steigerwalt - Executive Vice President, U.S. Business, MetLife, Inc.

It's Eric. I'll start out. It was kind of across the board. Corporate overhead was higher, including some advertising costs. We had some legal reserves set up in there. Generally, fourth quarter is higher. So this isn't really out of line with what we would expect. Going forward, I would expect in the first quarter, you'll see something that looks more like a normal first quarter. But maybe I'll let John or Steve comment if they want to add anything.

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

Just want to add about do we expect to have some expenses to do the work on the plan to pursue the separation. Clearly, there will be some cost. But the costs will vary depending upon what ultimate form we take, so it's still too early to give you any guidance on that piece of it.

Erik J. Bass - Citigroup Global Markets, Inc. (Broker)

Okay. And then, Eric, just a question, with the prospect of a final DOL rule seemingly pretty close, can you just talk about what steps you're taking to prepare and maybe if you've had any discussions with third party distributors about their comfort selling products under the current Best Interest Contract Exception (sic) [Exemption] (58:45)?

Eric Thomas Steigerwalt - Executive Vice President, U.S. Business, MetLife, Inc.

I'm sure you've heard this from others as well. We're thinking of every angle based on what was previously put out by the DOL. But as you know, we don't have anything. It's – the regulation is with OMB now. We would expect to see it, let's call it, 40 days to 70 days, something like that. So we're thinking about the various forms that it could take, again, based on what we saw previously. We have talked to a number of distributors. I don't think it would be appropriate for me to share some of those conversations. But suffice to say, we are considering all potentialities from both a product perspective and how you distribute and anything else that would result from the actual regulation coming out. So more to come. And obviously, all of us will be able to add to this dialogue when we see it sometime in the March/April timeframe.

Erik J. Bass - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Steven Albert Kandarian - Chairman, President & Chief Executive Officer

I just want to say at the end of the call here that the key message I want to leave with all of you today is that management is doing everything possible to unlock value for our shareholders. And the things you've heard about recently from us in terms of the U.S. Retail separation and the strategy work we're doing with Accelerating Value is driven by that desire.

Edward A. Spehar - Head-Investor Relations

And that brings us to the top of the hour, so we're going to end the call. Thank you very much for your participation.

Operator

Ladies and gentlemen, this conference will be available for replay after 10:00 AM, Eastern Time today through February 11. You may access the AT&T TeleConference replay system at any time by dialing 1-800-475-6701 and entering the access code 370602. International participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 370602. That does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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