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Executives

John McCallion - Head of Investor Relations and Vice President

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

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

William J. Wheeler - President of The Americas

Steven Jeffrey Goulart - Chief Investment Officer and Executive Vice President

Christopher Townsend - Head of Asia Region

Analysts

Nigel P. Dally - Morgan Stanley, Research Division

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

Suneet L. Kamath - UBS Investment Bank, Research Division

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

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

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

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

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

John A. Hall - Wells Fargo Securities, LLC, Research Division

MetLife (MET) Q3 2012 Earnings Call November 1, 2012 8:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2012 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. 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 John McCallion, Head of Investor Relations.

John McCallion

Thank you, Greg, and good morning, everyone. Welcome to MetLife's third quarter 2012 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, our quarterly financial supplements and in the other Financial Information section.

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, John, and good morning, everyone. Before we discuss our financial results for the third quarter, I want to express my condolences to those who have suffered great loss as a result of Hurricane Sandy. At MetLife, we are doing everything we can to help our customers cope with the impact of the storm. Our claims associates are on the ground helping customers find shelter, facilitating temporary repairs and issuing advance payments for immediate expenses. We know there is still a tremendous amount of work to do before life returns to normal, and our thoughts are especially with those who are hardest hit by the storm. I also want to thank all of you for being on this call under these difficult circumstances.

Now let me turn to MetLife's financial performance. I would like to begin this morning by discussing the goodwill impairment we recorded in the third quarter of 2012. As we've indicated on previous earnings calls, as well as during our interest rate call last November, a prolonged low-rate environment might cause us to impair some or all of the goodwill in our U.S. retail annuity business. In the third quarter of 2012, we took a $1.6 billion after-tax goodwill impairment in this business to reflect the expected market impact of continued low interest rates, changes in the regulatory environment and other market and economic factors.

MetLife delivered another solid quarter with operating earnings of $1.4 billion or $1.32 per share, up 47% from the third quarter of 2011. Adjusting for certain onetime items that depressed the results in the prior year quarter, operating earnings still rose by 23%. John Hele will discuss our third quarter results in greater detail in a few moments.

I would like to highlight a few aspects of MetLife's performance that tie to our enterprise strategy, which we developed to address the external economic environment facing life insurers.

As you know, one of our strategic goals is to refocus the U.S. business by shifting our business mix from more capital-intensive and interest rate-sensitive products to simpler protection and fee-based products. Our results and activities in the third quarter were consistent with this strategy. Premiums, fees and other revenues rose by 9% in our Group, Voluntary & Worksite Benefit business on strong sales and on revenues from the TRICARE Dental contract. Variable annuity sales in the United States declined by 46% from the prior year quarter to $4.6 billion, in line with our plan. We continued to manage the risk associated with this business.

During the quarter, we launched a new product with lower withdrawal and payout rates. In addition, we limited the ability to deposit new money into a number of our existing contracts that have more generous guarantees.

In our Corporate Benefit Funding business, sales of structured settlements and pension closeouts were both down, reflecting the lumpy nature of this business segment. We see tremendous opportunity in the pension closeout business, especially as interest rates rise over time. However, as with any use of capital, we are committed to ensuring that the new business in this segment clears our hurdle rate.

During the quarter, MetLife also announced the creation of our new third-party asset-management business. This fee-based business requires very little capital and leverages the strong investment expertise we've built up over the decades. We have well-established business platforms for originating commercial mortgages, investing in real estate equity and sourcing private placements. We also possess the talent, scale, reputation and in-market presence to acquire high-quality assets with the potential for strong returns.

Finally, I would point to our pilot project with Walmart to sell term life policies to the middle market. While we are in the very early days and do not have reportable results, we will continue to pursue these kinds of innovative approaches to selling simple protection products through new direct channels.

Another strategic imperative for MetLife is to grow our business in emerging markets. The third quarter saw progress on this goal as well. In Latin America, sales rose 28% year-over-year, led by large group life cases in Mexico. And in EMEA, sales rose 15% year-over-year, driven by our acquisition in Turkey and higher credit life sales in Russia.

Regarding the sale of MetLife Bank, 2 key developments occurred during the quarter: first, we amended the purchase agreement to sell the bank to GE Capital Retail Bank, which has submitted its application for approval to the Office of the Comptroller of the Currency. The key terms of the agreement remain unchanged.

And second, MetLife received a letter from the Federal Reserve granting us an extension until January 5, 2013, to file a revised capital plan.

Until our debanking process is complete, we remain regulated by the Federal Reserve as a bank-holding company. After our debanking process is complete, we face the possibility of being named a non-bank systemically important financial institution, or SIFI, which would place us back under Federal Reserve supervision. As we have said many times, we do not believe regulated insurance activities pose systemic risk to the U.S. financial system. However, in the event that MetLife and other insurance companies are named SIFIs, the impact will depend on how the final prudential rules are written. It will be important that the prudential rules be tailored for the life insurance business model, which differs dramatically from that of banks.

Overall, I am pleased with the results MetLife delivered in the third quarter. Our continued solid operating earnings performance reflects the fundamental strength of our diverse global business. Our focus on pricing discipline and risk management is especially important in this challenging economic environment, which shows few signs of abating. We will continue to monitor the external factors impacting our business and respond accordingly.

In the coming weeks, we'll be finalizing our 2013 plan projections, which we will share with you on our next Investor Day call this December 13.

Before I conclude, I want to mention that this will be John McCallion's last earnings call as Head of Investor Relations. John is becoming the CFO of our EMEA region, and I want to thank him for his help in communicating our value proposition to MetLife's investors over the past 2 years. John will be handing the reins to Ed Spehar, who has covered the insurance industry for more than 20 years as an equity analyst.

It is now my pleasure to introduce John Hele, our new CFO. John has more than 30 years of experience in the financial services industry, having worked for Arch Capital Group, ING Group and Merrill Lynch, among others. His deep technical expertise of world markets -- knowledge of world markets and strong risk management skills are a welcome addition to our global leadership team.

With that, I will turn the call over to John.

John C. R. Hele

Thank you, Steve, and good morning. I wish to add to Steve's comments of our concern for those still without power and/or heat and for those who have had damages or losses in this historical storm. As for the potential financial impact to MetLife from Hurricane Sandy, at this time, it is too early to develop a reliable estimate.

Before I review our results in the quarter, let me provide some color on the key macro factors impacting our financial performance. Interest rates continue to remain low in the U.S., assisted by another round of quantitative easing and also in most countries in which we operate. While the 10-year Treasury yield was essentially flat in the quarter, closing at 1.63%, it is down nearly 30 basis points versus the year-ago period. In addition, and perhaps more significantly, U.S. corporate spreads further tightened in the quarter across most asset classes in which we invest, generally by 10 to 50 basis points. While asset spread tightening is not readily apparent in our product net spreads as provided in our quarterly financial supplement, they do impact our new money rates and will pressure product spreads over time.

On the plus side, the U.S. equity market performed well this quarter with the S&P 500 up 5.8%. By comparison, the S&P 500 was down 14.4% in the third quarter of 2011. This change in the S&P 500 performance resulted in a positive year-over-year variance of approximately $120 million of after-tax operating earnings in our retail annuities segment.

With that as a backdrop, let me now discuss our results for this quarter. MetLife reported operating earnings of $1.4 billion or $1.32 per share, up 47% over the third quarter of 2011. This quarter's results included a few offsetting significant items. However, the prior year third quarter had several significant items, which had a net negative impact on operating earnings per share of $0.17. Adjusted for those items, operating earnings were up 23% year-over-year.

In addition, as noted in our 8-K filed on October 24, in the third quarter of 2012, we began to report all MetLife Bank operations as divested businesses. This change in reporting positively impacted operating earnings per share in the quarter by $0.02 while lowering operating earnings per share in the prior third quarter by $0.02.

On a U.S. GAAP basis, MetLife reported a net loss of $984 million or $0.92 per share, which includes a $1.6 billion after-tax goodwill impairment and net derivative losses of $467 million after tax.

As previously disclosed, we perform our annual goodwill impairment testing in the third quarter. This year, the testing indicated a full impairment of the goodwill associated with the U.S. retail annuities business, resulting in a noncash charge of $1.9 billion or $1.6 billion after tax. This includes $176 million of goodwill recorded in the Corporate & Other segment, representing tax benefits related to this annuity business.

Goodwill testing starts with the -- estimating the fair value of the business based on a market participant view. While interest rates have been low for some time, during the third quarter, U.S. Treasury rates hit their lowest point since World War II. Also, the Federal Reserve extended the time frame they see low interest rates being warranted until 2015 and also initiated Quantitative Easing 3. These factors indicated that an extended period of low interest rates needed to be reflected in the fair value estimate, particularly on the return to market buyer may assume associated with the fixed income portion of the separate accounts. We believe buyers of an annuity business, particularly a variable annuity block, will be looking for a capital-efficient structure, most likely one involving captive and/or offshore strategies. Given the industry-wide inquiries on the use of affiliated captive reinsurers, buyers may now discount the ability to fully utilize these structures. These, and other market conditions, led to a significantly lower fair value for the business than in prior years.

And when you follow through to the measurement step in the goodwill accounting process, this lower value resulted in full impairment of the recorded goodwill. This charge does not have an impact on the bank holding company capital ratios, which exclude goodwill from the calculations nor on our U.S. statutory results.

As for the potential DAC and GAAP loss recognition impairments, while we review these each quarter, we conduct a comprehensive annual review of all the model assumptions in the fourth quarter, which include interest rates, equity returns, policyholder behavior, mortality, et cetera. We will need to complete our analysis before determining if there would be any impact in the fourth quarter.

As for the net derivative losses in the quarter, it was primarily due to: one, the impact on the value of embedded options in our VA hedging program as a result of MET's own credit spreads tightening in the quarter; two, the rise in long-term rates; and three, the weakening of the U.S. dollar against certain currency such as the euro, Canadian dollar and British pound in the quarter.

Next, I would like to discuss some of the key financial metrics we focus on each quarter. First, as I mentioned earlier, our investment spreads remain stable despite the low-rate environment and tighter corporate spreads. As stated on prior calls, there are several factors contributing to our stable spreads, including our ALM discipline, use of interest rate floors, private asset originations and the performance of our variable investment income.

In the quarter, pretax variable investment income was $260 million, just above the top of our 2012 quarterly guidance range. After taxes and the impact of deferred acquisition costs, variable investment income was $165 million.

Next, expenses remain well controlled. Operating expenses in the quarter were $2.8 billion, up only 0.4% over the prior-year period. While the operating expense ratio did increase 30 basis points to 24.4%, the increase was primarily driven by lower revenues as a result of pension closeout sales in the third quarter of 2012. Excluding closeouts, the expense ratio would have been unchanged at 24.8% between the 2 periods.

Turning to the top line revenue. Premiums, fees & other revenues, or PFOs, were $11.6 billion in the quarter, down 1% year-over-year. Excluding the impact of foreign currency and lower pension closeouts, PFOs were up 2% year-over-year.

Book value per share, excluding AOCI, was $47.70 as of 9/30/12. This reflects growth of 2.6% year-over-year despite the goodwill impairment and net derivative losses discussed earlier.

And finally, year-to-date 2012 operating ROE was 11.4%, up 140 basis points as compared to the comparable period for 2011. This improvement was driven primarily by higher operating earnings, up $880 million on a year-to-date basis.

Now let's discuss the business segments, starting with the Americas. The Americas operating earnings were $1.2 billion in the quarter, up 58% year-over-year with growth across all segments. Retail, life and other reported operating earnings of $204 million, up $83 million year-over-year due to higher net investment income. In addition, the prior year third quarter results of this business included $29 million after tax of catastrophes in excess of plan in our retail, property & casualty business and $27 million after-tax charge to increase reserves in connection with the company's use of the U.S. Social Security Administration's Death Master File to identify potential life insurance claims that had not been presented to the company.

Retail annuities reported operating earnings of $288 million, up $195 million year-over-year. As noted earlier, $120 million of the variance was due to the initial market impact related to the performance of the S&P 500 in their respective quarters. In addition, this business had an increase in separate account fees, improved interest margins due to wider spreads on the general account and lower expenses.

Also, I should note that variable annuity sales were $4.6 billion in the quarter, down 46% year-over-year. We continue to see sales trend down due to the pricing and derisking actions that we have taken this year. We would expect to see sales continue to decline in the fourth quarter, in line with our full 2012 guidance of $17.5 billion to $18.5 billion.

Group, Voluntary & Worksite Benefits reported operating earnings of $283 million, up $130 million year-over-year, largely due to the segment's prior year third quarter results, which included an $82 million after-tax charge related to the aforementioned Social Security Death Master File and $20 million after-tax charge for catastrophes in excess of plan in our group P&C business. In addition, this segment had favorable claim cost trends for dental, favorable catastrophe and non-catastrophe experience in group P&C, as well as improved interest and expense margins and disability.

Corporate Benefit Funding reported operating earnings of $303 million, up $31 million year-over-year due to higher interest margins as a result of general account asset growth and lower expenses. Spreads remained stable for this segment.

Latin America reported operating earnings of $152 million, up $11 million year-over-year and 15% on a constant currency basis. The key drivers were growth in Mexico and direct marketing in the region; higher net investment income, driven by growth in the general account; and a onetime tax-related benefit.

Moving to the top line. The Americas' PFOs were $8.3 billion in the quarter, down 2% year-over-year, primarily due to lower pension closeouts and structured settlements. Excluding closeouts and structured settlements, PFOs would be up 3% year-over-year.

The next segment, Asia, reported operating earnings of $259 million in the quarter, up $37 million or 17% year-over-year, due to premium growth in Japan and Korea, as well as higher net investment income, driven by asset growth and higher yields. PFOs for the region were up 7% or 9% on a constant currency basis. On a reported basis, Japan PFOs were up 9% due to an increase in life and A&H sales and improved persistency, while Korea's PFOs were up 11% due to higher fee income.

In the third segment, EMEA, operating earnings were $62 million in the quarter, down $3 million year-over-year. However, on a constant currency basis, operating earnings would have been up $10 million, driven by our acquisition in Turkey and Russian credit insurance. PFOs were down 10% year-over-year and flat on a constant currency basis. The Turkey acquisition benefited the top line, which is offset by weakness in Western Europe and Greece.

Finally, let me discuss our capital position. Cash and liquid assets at the holding companies at September 30 totaled approximately $5.7 billion. This includes proceeds from the issuance of $750 million of 30-year senior debt, which was completed in August, which will be used to pay off maturing debt next year. I should note the balance sheet excludes the $1 billion of proceeds received in October from the remarketing and settlement of our common equity units. We also have $400 million of senior debt maturing in December, which we would expect to repay at that time.

Lastly, as we announced last week, we will be paying approximately $800 million in common dividends in December.

Our preliminary U.S. statutory after-tax operating earnings and U.S. statutory net income for our domestic insurance companies for the third quarter of 2012 was approximately $1.1 billion and $1 billion, respectively. For the 9 months of 2012, U.S. statutory after-tax operating earnings and statutory net income were approximately $2.8 billion and $2.9 billion, respectively, in line with our full year expectations.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Nigel Dally from Morgan Stanley.

Nigel P. Dally - Morgan Stanley, Research Division

These variable annuities, still seeing very strong sales and net flows. I think a lot of investors would've preferred to see the pace of sales decelerate at a faster pace. Appreciate the comments that you made with regards to some of the steps that you're taking, but why not get significantly more aggressive in putting in place quotas, rate and prices over using guarantee rates? And then, second on Corporate Benefit Funding, one of your competitors are continuing to land large pension closeout transactions. I think a lot of us have been surprised that MET hasn't been a participant as well. So perhaps if you can explain to us why that's been the case. These deals are not hitting your hurdle rate, or are there other factors at play?

William J. Wheeler

Nigel, it's Bill Wheeler. Okay. With regard to the VA business, sales this quarter were $4.6 billion and that's probably a little misleading because we, as both Steve and John alluded to, we changed our pricing and adjusted some of our features this quarter and that resulted, I would say, in some many fire sales for lack of a better term. And so sales were a little inflated. We're -- our run rate in the fourth quarter is meaningfully below the $4.6 billion that we recorded in the third. And so we are seeing changes in that number, and that's why we're confident that we'll be at $18 billion. With regard to Corporate Benefit Funding or the closeouts, as we've talked about on a number of calls, we are seeing more large closeout activity and I expect that to continue, though the deals are lumpy and there won't necessarily be one every quarter. We are competing for that business, but we are being very disciplined about achieving our hurdle rates, something that we're doing across-the-board in all our businesses, and this is no different.

Operator

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

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

I just had, first, some unsolicited feedback. I think your disclosure changes, I don't know any large company that changes its disclosure as often as you guys have done, and no one really lumps P&C products with the life insurance, so they're actually making it difficult to analyze the performance of some of your business and track them over time because these are long-term businesses. But when the disclosure changes every 3, 4 quarters, it's just hard to keep track of stuff. But the question that I have is on the international business. The results obviously have been moving around by division. Europe hasn't been that great; Asia has been strong, weak in other quarters. But maybe you could talk about how the ALICO business has done since the acquisition and where it's done better than maybe what you would have expected and where it might have not done as well. Because if you look at -- look back a year or so ago, the Asian business seems like it's actually the earnings are emerging a little bit weaker than I would have thought. And I have another question after that.

Steven A. Kandarian

Jimmy, it's Steve. ALICO is tracking what we expected. Obviously, there are some pluses and minuses country-by-country, but overall, the transaction has come in very much on plan, and we're still very encouraged about the prospects of those business long term. It's now given us exposure to markets that obviously we weren't in before that have significant growth associated with them. It increases significantly our exposure to the emerging markets. We've mentioned before that we're now up to about 14% of our profits from emerging markets, and we anticipate by 2016 that number will exceed 20% given its growth trajectory and our likelihood of doing at least some small transactions in those kinds of countries.

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

Okay. And then another one just on interest rates. You mentioned, obviously, overall, you've -- in the past year, you've mentioned or you've expressed comfort that you can -- your results can hold up despite the rate environment. But as you indicated, corporate bond spreads coming in, new money yields probably dropping faster than you would have thought a few months ago. How much of this do you expect overall to be offset by your hedges? And if you could just give us some details on when the hedges begin to run off, is it more beginning in 2014, beginning in 2015? And then if rates do remain low, just your level of comfort with the rest of the goodwill on the balance sheet. I think it's around $10 billion, and some of that relates to businesses that are interest rate-sensitive as well.

John C. R. Hele

This is John. The -- as you can see, our spreads have held up well this year even though rates have been lower than, say, projected a year ago and that's -- you've seen the impact of the floors and the other hedges that are in place, and that's helping quite a bit this year and our spreads are -- have been maintained. So that's the good news. As you point out over time, those hedges will slowly wear off, and I think there have been various projections in the past last year that tried to project that out at a level of 2% treasury rate. And that -- those projections still stand. The impact of the other side's thinner corporate spreads, as well as other economic factors, we'll have to take into account going forward. And Steve can probably add a little more on how these wear off over time.

Steven Jeffrey Goulart

Jimmy, it's Steve Goulart. A couple of things. One, just on spreads, let me add one thing. Remember, spreads are basically at their long-term averages right now. Yes, they've tightened significantly over the course of the year, but that's from very, very wide levels. So we're not surprised at all at the levels of spreads, and we continue to practice good ALM around that. Regarding hedges, also think back to the presentations that we made earlier this year and even last year where we did show you the fact that our protection runs out for a number of years, in fact, even into the next decade. So we have a lot of protection in place, and certainly for the next several years, we're very well protected.

John C. R. Hele

Lastly, you had a question on goodwill. In the third quarter, we test all of our units with goodwill and applied the same logic and thinking that we applied to the retail annuity segment to the other segments that were also interest rate-sensitive. The most sensitive one of all, though, is the retail annuity segment and that's why the market value or the fair value was most affected by it, and the other units we still have some buffer on before we would have any issues there on the remaining $10 billion.

Operator

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

Suneet L. Kamath - UBS Investment Bank, Research Division

I wanted to pick up on the goodwill question or issue again. Can you give us a sense of sort of where you had been valuing the goodwill in terms of a multiple -- maybe multiple on book or something and kind of where you're valuing the business now? I just want to get a sense -- I know the write-down was $1.6 billion after tax, but I just want to get a sense of how you're thinking about the valuation of that business.

John C. R. Hele

Right. Well, we don't -- It's John, Suneet. We don't give out the details of this. But in reviewing the prior year's goodwill analysis, it was passing, but not by a large amount, so the price-to-book was just above from a fair value perspective, and now, it is below. And in a goodwill test, it's an assessment or trying to come with a fair value, meaning what would a -- this block or this business transact in the current environment between a willing seller and a willing buyer. It doesn't have to be a distressed price, and it doesn't have to be literally at that month or even in that quarter. But as you factor forward and think about it over the course of a year or 2 years, you have to take into account reasonable transaction prices. Given there haven't been any variable annuity blocks sold is another key factor that there's pressure on prices clearly, even though there perhaps have been some willing sellers. So you have to take all these into account and when we came up in really many different measures of it and ways of thinking about it, really, as if you were thinking of buying a block of business, people use different techniques to value businesses, including multiples, price-to-book multiples, price-to-earnings multiples, actual appraisals. We did all those and came up with a fair value that was less than our carrying value, and thus, the goodwill had to be written off.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay. I mean, I guess, to follow up on that, if you're valuing the business below book value now, which is I think what you said, kind of getting back to what Nigel's line of questioning was, I mean, what does this say about your commitment to the variable annuity business and your willingness to put more capital in the business for growth when clearly the valuation of that business is not being recognized by the market?

John C. R. Hele

Well, this is John again. Let me just stress that the goodwill test is a market view. It's a fair value and it's what we believe if we tried to sell that business today, that you would be able to transact in the business today. That can be different from our long-term assumptions and how we see value over a longer period of time. There are 2 different tests. They're somewhat related. You have to make sense between the 2, but markets can over and under price true value, which is, I guess, why we all buy stocks.

Suneet L. Kamath - UBS Investment Bank, Research Division

Okay, got it. And then just on capital management, I realize that there's not a whole lot you can say on that, but the converts that, I guess, converted earlier this quarter, in the fourth quarter, I think there was an expectation at some point that you'd be able to repurchase those or offset that dilution. I just want to clarify, I'm assuming that, that potential is essentially the same as normal share repurchases, so we should think about your not being able to offset that dilution unless you get out of bank holding company status and get permission from the Fed. Is that a fair read?

John C. R. Hele

This is John. Until we have clarification on the future as a bank and the future being a non-bank or debanking and the future of a non-bank SIFI as well as what the rules would be under that, we can't give any guidance on capital.

Operator

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

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

Two questions, if you will. So following this goodwill impairment, how much equity are you now allocating to the annuity segment, and more specifically, to the VA business?

John C. R. Hele

We don't give out equity by business line.

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

Okay. And then the second question is one more for Steve. A few months ago, I think most insurance executives, including yourselves, were getting perhaps more hopeful, if I can characterize it that way, that Fed officials and other key folks in Washington were recognizing some of these key differences between insurance companies and banks, and thus, it was looking like the stress testing for insurance companies, SIFIs might be under a different methodology than what's been applied to banks and what's been applied to you as a bank holding company. Steve, just do you have any incremental thoughts as a couple of months have passed or on any sort of more recent observations that you can share around that?

Steven A. Kandarian

John, no, I think really not a lot has changed since that point in time when I made those statements. Treasury and Fed officials have said in different settings, both in speeches and before congressional hearings, that they plan to acknowledge the difference in the business models between banks on one hand and other industries that might become non-bank SIFIs under their supervision. So those words were encouraging. But as we've mentioned, the rules have not been written. There is a draft out there. Comments have been provided back to the Fed. We provided comments, others have as well. And until this clarification around what those actual rules will be, it's very difficult to provide any sort of clarity to you and others. So we're really just standing by, waiting, monitoring. We're in discussions, where appropriate, with federal officials, but we certainly have to wait and see where all this comes out, both as to whether we become a non-bank SIFI once we dispose of our bank and debank as a holding company and then what kinds of prudential rules they put in place to regulate non-bank SIFIs should we become one.

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

Okay. If I can sneak one more in, just thinking about Asia, following up maybe a little bit on Jimmy's question. On a year-to-date basis, if I sort of take those results and annualize them, it looks like Asia, overall, is tracking about 5% or more below your original guidance for 2012 for that segment, at least from an earnings perspective. Just curious as to what areas of pressure you might be seeing relative to what you were expecting and whether you expect that pressure to dissipate as you look forward.

Christopher Townsend

It's Chris Townsend here. If you look at the overall operating earnings for the quarter, we're 17% up year-on-year. You break that down to the key components, which obviously are driven by Japan and Korea. Japan's up 14% and Korea's up 52%. So Japan's performed strongly in terms of PFO growth, expense control, and Korea's up in terms of equity markets and higher surrender value. If you look at it sequentially, which is, I guess, where you're going with this, there's 2 key issues which have impacted the earnings this quarter. One is some beneficial VII that came forward in the prior quarter. And secondly, there's a number of items which are really a true-up of lapse assumptions and expense items for Japan and Hong Kong, which have impacted this quarter, which are one-off issues.

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

Okay. So as we look out to the full year, I guess the question is, how do you expect the results to fare versus that original guidance? And do we just have to expect that there's a new baseline that's perhaps a little bit lower despite the strong year-over-year growth in Japan and Korea?

Christopher Townsend

Yes, I think you need to look at the broader picture. The PFO growth is very strong across the region, we're up 7%; in Japan, we're up 9%; in Korea, we're up 11%. And some of the other factors are quite beneficial for us, particularly in terms of persistency. We're up 1.5 points to 89.5 in Japan, which is a consistency, which we articulated to you at the Investor Day in Tokyo.

Operator

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

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

I have a couple of follow-ups. First, on goodwill, just to hit that from one different angle, you mentioned in the comments that buyers may have to discount using kind of a captive or an offshore structure, and I just wanted to clarify why that would be the case. Is that due to kind of regulatory concerns that are emerging around VA runoffs?

John C. R. Hele

Randy, this is John. There are various -- some states have launched investigations and are reviewing captives. Although there's been no conclusions or points of view on this yet, we think buyers would be more cautious. Historically, some transactions we know were viewed being optimizing fully the offshore structure and others take a range. We, at MET, we do use an offshore captive, but we allocate economic capital fully against all the risks in the company. So we run at, I would say, on a conservative basis. Other buyers may take different views. And we think with these investigations underway, that buyers would be more cautious now in terms of valuing these types of businesses.

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

Okay, so it's more of the kind of a captive review. It's not necessarily kind of regulatory concerns about the insolvency fund being on the hook or something like that?

John C. R. Hele

No, not at all.

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

Okay, and then if I could, just a follow-up on the pension closeout conversation. You mentioned that some of these large blocks that have gone -- have not met your hurdle rate objective, I guess, my question is if you could clarify for us what that hurdle rate objective is and if it may be subject to change given your low-for-long rate outlook.

William J. Wheeler

Don't put words into my mouth, Randy. I didn't say -- I said we competed for that business and we have pricing discipline about, and obviously, we didn't win those closeouts, but that's the way it goes. I think there'll be more. In terms of our pricing objectives, and I think we actually talked about this on the last earnings call, we view our cost of capital today domestically as 12%. So that's our hurdle -- minimum hurdle rate. So if we don't beat 12%, we're not adding any economic value at all. We generally are trying to price business with a target of a 15% return. And you have to remember, a lot of these liabilities are going to be around for a very long time and it's important that we -- if you price it poorly, you're stuck with that for a long time. You don't get an opportunity to change the numbers a couple years from now. So that's why we're maintaining our discipline here.

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

Do you think as we look at these deals from the outside, is there a good rule of thumb we can think of about like the capital you would allocate to a book as a percentage of assets and liabilities? I mean, generally, and I think annuity books are kind of like 5%. I mean, is that how we should look at the capital allocation to try and get to those returns?

William J. Wheeler

It's tricky. I guess I'd hesitate to give you a rule of thumb because what we've seen already is that the mortality differences between these various blocks that have -- had transacted are quite material. You think -- you would guess sort of they're generally retirees so they would be the same, but they're not. The mortality differences were quite different, so -- and that has a pretty big impact on whether or not what the capital allocation would be. So I guess I would hesitate to give you a rule of thumb.

Operator

Your next question comes from the line of Mark Finkelstein from Evercore.

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

Actually, my first question is a follow-up for a comment or question that Suneet had. And I guess I'm just curious, back to the annuity business, the original intent behind the sales target for the year of, call it, $18 billion was to be capital-neutral in terms of the statutory capital that was allocated, at least that's my understanding. And I guess I'm just kind of curious, you've had a few quarters since that was put out, you've had some market movements. Equities up, rates volatile. Is that, in fact, holding out, or are you continuing to add capital to the annuity business?

William J. Wheeler

This is Bill. I think rate-neutral is still a fair assumption here or capital-neutral. Obviously, the business is performing better than planned, mainly because of the market environment and our sales targets are basically where they -- we expected them to be, so -- but I think neutral is still a good term for this. Just if you pull back a minute, obviously, with this low interest rate environment, the VA business, especially the in-force block, is not performing terribly well with regard to the exposure to interest rates and such. On our new sales, our new sales this quarter had a 14% ROI, and that's with a full economic capital allocation using today's environment. So we view that as pretty attractive business, and so we're being tough-minded about annuities and making sure that our risk exposure there doesn't grow too much relative to MetLife overall. But this business is profitable for us. And certainly, today's sales are profitable. And this is a consumer need, which is isn't going to go away and is a part of all our customers' financial planning as they deal with retirement. And so this is a business we like. We can't let it get too big relative to the size of MetLife. I mean, I think that's why you see the big pullback.

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

Okay. All right, that's helpful. And then, I guess, still a few. On Latin America, constant currency growth may be a little bit late. I think there may been a group case that was lost. But could you just talk a little bit about the growth outlook in Latin America and what expectations you would have for that?

William J. Wheeler

Yes, so Latin America on the surface looks like it had a pretty weak top line quarter. But of course, we did elude to the fact that sales growth was actually very good this quarter, it was up 28%, and we're seeing very strong sales. Interestingly, the strongest area of growth is in direct marketing in Latin America, and that's in a number of different countries. So top line is actually good. The premiums fees and other income this quarter are -- certainly, the currency adjustments hurt us and there were -- as you alluded to, there were a number of sort of anomalous factors. There were some group cases that didn't renew where the revenue was probably more important than the -- it was more impactful than the profits were. We had a reinsurance adjustment, which affected the top line, but didn't have a bottom line impact. So I view Latin America top line growth when you kind of parse through all that is something like 6%. That's probably a little bit -- year-over-year. That's probably still a little slower than normal. I would think -- I think of Latin America, in total, of being sort of a high single-digit revenue grower. We've certainly hit 10% in certain quarters. We probably average to something like 8% or 9%, and that would be my long-term outlook.

Operator

Your next question comes from the line of Joanne Smith from Scotia Capital.

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

So I want to go back to something that was stated at the ACLI's conference last week, and that was with respect to the non-bank SIFI rules that have yet to be written, there was a presentation where somebody characterized separate accounting assets as general account assets waiting to happen and that the capital ratios that some of these life insurance companies are putting up are not necessarily truly reflective of the real capital status of those companies. And I was wondering if you could comment on that and how, in your discussions with the Fed, they are talking to you about separate account assets.

John C. R. Hele

Joanne, this is John Hele. There are many discussions, of course, and submissions going on to the regulators about the future rules for non-bank SIFIs. We're participating in that as is the ACLI and other people in the industry. But as of right now, we can give no feedback or guidance on where these will end up.

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

I guess, just in terms of the comment that was made about separate account assets being general account assets waiting to happen, how do you respond to something like that?

John C. R. Hele

I wasn't there and don't have the context for all those points. The bank rules, if you strictly apply bank rules today, separate accounts are included as general accounts. We are saying they should be excluded because it makes sense from a legal structure as an insurance company. It's quite a different framework from the banking frameworks and the legal structures of banks. And that's a key point that we are making continually to the regulators, and we'll have to see where all this ends up.

Operator

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

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

My first question -- I have 2. My first question is probably best directed to Bill Wheeler. Bill, why are these pension closeouts taking now -- taking place now? The reason I ask is that some plans have been underfunded for a while. The supposed new accounting rules that create all this volatility on balance sheets and income statements, I don't think are new, they're 3 years old. The Pension Protection Act, which makes it harder for companies to maintain underfundedness, was passed 7 years ago. So why now on these pension closeouts, especially given the extremely low level of interest rates, which, I believe, will act as an impediment to them?

William J. Wheeler

That's a great question, Eric. We -- if you remember, and I know you do, we've been a big -- talking about large pension closeout opportunities for a long time, and of course, nothing happened until very recently. And in talking to the treasurers of companies who have these large pensions, one, they're not being -- in most cases, they're obviously not being used as a benefit anymore. Their pensions are closed and the blocks that have been closed out are on retirees, in any case. so I think what's going on is even if -- I think companies have said, you know what, I can't wait any longer for interest rates to improve. By the way, I have a very large pension obligation here. I can just start closing out pieces of it and maybe average into better interest rates over time. I also think they recognize that being a first mover here is probably a good thing. There is not an unlimited amount of capital today that's available to support pension closeout business, and I think those who feel like they go early are probably going to get better deals than those who go late. And who knows how that will play out. But I know that's the sentiment out there. So you're right. In some cases, you would think that this would not be an ideal time, but I think what's happening is companies have decided they just can't wait any longer and they should get going.

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

Okay. And with respect to the goodwill write-off or, I guess, it's not a write-down. You've written off, I believe, please correct me if I make an error here, 100% of the goodwill assigned to the retail annuity business. Why is the stock market entering into this in the sense that the stock market is -- the reason I asked the question again is that the stock market has pretty much recovered to its pre-crisis peak or is close to it. We've got a good year. Why is the current level of the stock market -- or maybe it had to do with when we've come to where we are. Why has that depressed the value of the business?

John C. R. Hele

Eric, this is John. Yes, the stock market's back up, so the equity returns, say, in the variable annuity business within the retail annuity business, overall, has recovered. When we speak of the market impact, we're speaking of how buyers view, if you had a pure annuity company, a retail annuity company traded on the stock exchange, what price to book would that be trading at today. So it's the valuations that -- of retail annuity business that would have to purchase that business. So when I refer to the market environment, I'm referring to, call it, the high betas or the low price-to-books -- lower historical price-to-books that people have today and have been here for some time on these type of business.

Operator

And your final question today comes from the line of John Hall from Wells Fargo.

John A. Hall - Wells Fargo Securities, LLC, Research Division

And I guess since Ed's probably not going to ask a question, I might just ask a fill in about the risk-based capital for him. Could you give that out, John, please?

John C. R. Hele

John, I have to tell you that the risk-based capital calculations MET does annually, and we'll be giving that in our December forecast.

John A. Hall - Wells Fargo Securities, LLC, Research Division

All right, great. For Steve Goulart, the Baa assets have been moving up progressively in the fixed maturities portfolio over the course of the year. Is that because of an allocation in that direction or are you just -- or is that a result of credit changes?

Steven Jeffrey Goulart

No, that's our own action as we've looked at portfolio opportunities in this market, and we have modestly increased our BBBs. We think that's a good place to gain extra yield and still be comfortable with credit.

John A. Hall - Wells Fargo Securities, LLC, Research Division

All right, great. And then just lastly, Steve Kandarian, you mentioned in your comments at the outset the agreement that you have with Walmart. And it's an intriguing, I guess, venture. Could you just describe a little bit more about what you're doing there and perhaps the cost that might be associated with that? I mean, how are you going to be accessing the Walmart customer?

Steven A. Kandarian

John, as you mentioned, it's a pilot program, so it's early days. There isn't a great deal of capital associated with it at this point in time, but that obviously could grow over time as sales increase. And I really don't have much to mention at this point in time from a financial perspective because it is very much in its incipient stage. I think the most important thing here is that MetLife is going to innovate. MetLife's going to find new ways to get to market and provide these kinds of products to our customers. And we know there's a tremendous need by people in the United States to get greater coverage and protection from life insurance products. But perhaps we, as an industry, haven't made it easy enough historically for them to complete a sale, and this is one of the ways we are looking to increase participation rates out there in the public in the arena of life insurance.

John A. Hall - Wells Fargo Securities, LLC, Research Division

I guess, what I'm asking is, is this a direct effort off of their website? Is this a kiosk in the store that's automated? Is this a person who works for MET standing there selling policies? I mean, what's the access point?

Steven A. Kandarian

It's in the store. It's more of a kiosk sort of environment. You walk in there, you'll see displays with basically like a card on there that you can go when you check out at the counter. It's prepaid, and then there are a few questions that they answer and phone calls to be made by the customer to activate the life insurance. John, we'll walk you through one if you like. We'll go with you.

John McCallion

Great. Well, thank you, everyone, for joining us today. And if you have any follow-up questions, feel free to give us a call in the Investor Relations, and Ed Spehar will be able to answer all your questions. Thank you.

Operator

Ladies and gentlemen, 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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