MetLife (MET) Q3 2017 Results - Earnings Call Transcript

MetLife, Inc. (NYSE:MET) Q3 2017 Earnings Call November 2, 2017 8:00 AM ET

Executives

John A. Hall - MetLife, Inc.

Steven A. Kandarian - MetLife, Inc.

John C. R. Hele - MetLife, Inc.

Michel A. Khalaf - MetLife, Inc.

Analysts

Jamminder Singh Bhullar - JPMorgan Securities LLC

Thomas Gallagher - Evercore ISI

Suneet Kamath - Citigroup Global Markets, Inc.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Sean Dargan - Wells Fargo Securities LLC

Erik Bass - Autonomous Research

Alex Scott - Goldman Sachs & Co. LLC

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Operator

Welcome to the MetLife Third Quarter 2017 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 John Hall, Head of Investor Relations

John A. Hall - MetLife, Inc.

Thank you, Greg. Good morning, everyone, and welcome to MetLife's third quarter 2017 earnings call. On this 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 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. Also here with us today to participate in the discussions are other members of senior 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 to Steve

Steven A. Kandarian - MetLife, Inc.

Thank you, John, and good morning, everyone. Last night we reported third quarter operating earnings per share of $1.09, down from $1.22 per share a year ago. Overall, it was a solid quarter, with good underwriting and volume growth. Low interest rates continue to pressure recurring investment margins, while equity markets and foreign currency had limited impact on quarterly operating results.

Operating return on equity in the quarter, adjusting for Brighthouse, was 11.3%. Adjusting for notable items, operating earnings were $1.13 per share, which compares to $1.27 per share on the same basis in the prior-year period. Net notable items of $0.04 per share included a net tax charge of $0.16 per share due to the repatriation of foreign cash, partially offset by a tax benefit associated with foreign dividends. In addition, we incurred $0.02 per share of cost to achieve our target of $800 million in pre-tax savings by 2020. These items were largely offset by favorable deferred acquisition costs unlocking associated with our annual actuarial assumption review and other positive insurance adjustments totaling $0.14 per share.

MetLife's annual actuarial assumption review was completed during the quarter. To summarize, the review was positive to earnings, with improved expense assumptions and our traditional U.S. life insurance block being the largest contributor. Outside the U.S., there were small offsetting pluses and minuses. The net loss for the quarter was $87 million, compared to net income of $571 million a year ago. The current period net loss was driven by previously disclosed Brighthouse separation costs of $1.1 billion. John Hele will discuss the assumption review and separation costs in greater detail.

During the quarter, MetLife successfully spun off 80.8% of Brighthouse Financial. This transaction was the product of the hard work and dedication of our associates and represents a key milestone in the nearly 150-year history of MetLife. Going forward, MetLife is well-positioned to grow profitably in protection and fee-based businesses, with less volatility and a more predictable and sustainable free cash flow ratio.

As we have said, we are targeting a return on equity of 800 to 900 basis points over the risk-free rate, as measured by the 10-year Treasury. At the same time, we believe our new business mix will lead to a lower cost of equity capital for MetLife. The combination of higher returns and a lower hurdle rate should improve our valuation over time, and we are encouraged by the positive market reaction since the Brighthouse separation.

Moving to business highlights. Within the U.S. business segment, Group Benefits reported another quarter of strong underwriting results, demonstrating our commitment to pricing discipline. Retirement and Income Solutions PFOs rose by more than 70%, driven by forward pension risk transfer sales in the quarter. Despite a quarter marked by significant storms, Property & Casualty earnings were down only 12% from a year ago, with total catastrophe losses of $86 million pre-tax. As a result of past risk mitigation efforts, MetLife's market share in the storm-impacted areas of Texas and Florida is well below our national market share.

For our largest international segment, Asia, operating earnings benefited from volume growth, offset by higher taxes. As you saw earlier this week, MetLife Asia President, Chris Townsend, is leaving the company. The region will be run on a interim basis by Chief Investment Officer Steve Goulart. I am confident that Asia will remain a key driver of profitable growth and shareholder value creation for MetLife.

Latin America operating earnings were aided by strong underwriting, volume growth, and foreign currency, offset by the impact of fee reductions at Provida in Chile. Last week, we announced the divestment of our Mexican Afore, a business where we lacked critical mass. This is another example of our strategic approach to the portfolio, carefully balancing internal rate of return, payback periods, and capital intensity. We determined that the capital required for this business could be put to better use supporting organic growth or funding capital management.

EMEA operating earnings in the quarter reflected volume growth and disciplined expense management. Finally, MetLife Holdings operating earnings benefited from the rise in equity markets and favorable life insurance underwriting, offset by lower investment income.

Turning to total company investments, recurring investment income was down 2% from a year ago, as the drag from historically low interest rates outweighed asset growth. In the quarter, our global new money yield stood at 3.53% compared to average roll-off rate of 4.29%. Pre-tax variable investment income totaled $236 million in the quarter, within our quarterly guidance range of $200 million to $250 million. As has been the case for most of 2017, private equity returns were the largest contributor to performance in the third quarter, international and global buyouts in particular.

Regarding capital management, since we announced our $3 billion repurchase program in 2016, we have bought back approximately $2.8 billion of our common stock, including $505 million this quarter. We announced last night that our board of directors authorized an additional $2 billion share repurchase program. We also indicated our intent to dispose of our remaining Brighthouse Financial stock through an exchange offer for MetLife common stock during 2018, subject to market conditions and regulatory constraints. The exchange offer is governed by a separate board authorization and shares potentially exchanged will be additive to our newly announced $2 billion repurchase program.

We have been very clear; cash in our balance sheet above our liquidity buffer of $3 billion to $4 billion represents excess capital and belongs to our shareholders. Absent a compelling use, such as a strategic acquisition that exceeds an appropriate risk-adjusted hurdle rate, we will return excess capital to our shareholders in the form of share repurchases and common dividends. We are on track to return approximately $4.5 billion of capital to our shareholders in 2017, including common dividends.

I'll now turn to regulatory matters. In a positive development, the U.S. Treasury Department released a report last week on how to regulate the insurance and asset management industries. The key recommendation was that primary regulators should focus on potentially systemic products and activities throughout the financial sector, as opposed to singling out individual firms for designation as systemically important financial institutions.

Combined with the Financial Stability Oversight Council's recent de-designation of American International Group as a SIFI, we believe this report demonstrates the administration is committed to maintaining a level regulatory playing field in the insurance sector. We anticipate the Treasury Department will issue another report later this month examining the Financial Stability Council's (sic) [Financial Stability Oversight Council's] (11:01) standards and procedures for designating SIFIs. In the government appeal of the U.S. District Court decision overturning our SIFI designation, MetLife and the Financial Stability Oversight Council are scheduled to file motions on November 17 indicating how each party believes litigation should proceed in the wake of that Treasury report.

MetLife's regulatory goal is to preserve fair competition within the insurance industry, which will lead to a more affordable financial protection for consumers. This point is critical. The insurance industry exists to provide people with financial help after life's most destabilizing events. MetLife's corporate forum has changed over the years. We were a stock-traded company from 1868 until 1915, and mutual from 1915 until 2000, and a stock company again for the past 17 years

What has remained constant is our core purpose of providing financial protection to our customers when they need it most. This was evident after hurricanes Harvey and Irma in Texas and Florida, where MetLife dispatched its catastrophe action team to process claims on-site. Our investments in technology and data analytics, combined with our learnings from Superstorm Sandy, have allowed us to cut our processing time for auto claims in half.

Our purpose is also evident in the tens of billions of dollars we pay out in claims and benefits each year. And is evidenced in our asset management business, where we use our expertise to help pension plans, insurance companies, and other financial institutions keep their promises to their customers. Our mission is protecting people against financial risks they are not able to bear on their own. That is the mission our employees are extremely proud of and it keeps us focused on our goal of ensuring that MetLife will be as successful in the next 150 years as it was in the first.

Before I turn the call over to John Hele to discuss our third quarter results in greater detail, I would like to let you know that we're hosting this year's annual outlook call on December 15. I hope you will join us.

Now to John.

John C. R. Hele - MetLife, Inc.

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

In addition to our earnings release and quarterly financial supplement, last evening we released disclosure labeled 3Q17 Supplemental Slides that provide a walk from net income to operating earnings, as well as a schedule of our separation-related losses in the quarter. I will speak to these slides later in my presentation. The results of Brighthouse Financial were previously included as a separate operating segment. For the current quarter up to the separation date, as well as prior periods, Brighthouse Financial results have been reclassified to discontinued operations.

Operating earnings in the third quarter were $1.2 billion, or $1.09 per share. This quarter included four notable items, which totaled negative $41 million that we highlighted in our news release and quarterly financial supplement.

First, the actuarial assumption review completed in the third quarter for all products and other insurance adjustments increased operating earnings by $153 million after tax, or $0.14 per share. The key drivers were lower maintenance expense assumptions, positive impacts and updates to closed block projection, favorable U.S. (sic) [U.S. Life] mortality, and higher persistency in Mexico worksite marketing. In addition, favorable refinements resulted in reserve releases for life products and long-term care. We've completed loss recognition testing on long-term care that resulted in positive margins, so no need to strengthen reserves. The non-operating portion of the assumption review was a negative $41 million, mainly driven by changes in labs and other assumptions for GMIB variable annuities.

Second, higher taxes due to certain discrete items totaled $167 million after-tax, or $0.16 per share. This included $180 million related to the previously announced non-cash tax charge resulting from future repatriation of approximately $3 billion of cash following the post-separation review of our capital needs. This was partially offset by a tax benefit associated with dividends from our foreign operations. In addition, favorable audit settlements in the quarter were partially offset by higher taxes related to internal financing associated with the 2003 (sic) [2013] acquisition of Provida. Adjusting for these items, the company's effective tax rate in the quarter was 22.4%, roughly in line with guidance.

Third, expenses related to our unit cost initiative decreased operating earnings by $17 million after-tax, or $0.02 per share. And fourth, catastrophe experience above plan and prior-year development decreased operating earnings by $10 million after-tax, or $0.01 per share. Cat losses, primarily due to hurricanes Harvey and Irma, were $86 million pre-tax and $56 million after-tax, which was above the 3Q 2017 cat budget of $42 million after-tax. Adjusting for all notable items in both periods, operating earnings were down 14% year-over-year on both reported and constant currency basis. On a per share basis, operating earnings were $1.13, down 11%, and 10% on a constant currency basis.

Turning to our bottom line results. We had a third quarter net loss of $87 million, or a loss of $0.08 per share. The net loss was $1.3 billion lower than operating earnings, primarily due to the loss at separation of $1.1 billion related to the spin-off of Brighthouse Financial on August 4. In addition, net derivative losses after-tax were $124 million, primarily due of the weakening of the U.S. dollar against the euro, British pound, and the Canadian dollar. Our refreshed hedging program performed as intended in the quarter. For more details about the difference between net income and operating earnings, please refer to page 3 in our supplemental slide disclosure this quarter.

Page 4 in the supplemental slides reflects the key elements of the net realized investment loss of $1.1 billion at separation. The loss was primarily due to a $1.1 billion charge to reflect the fair value of the company's retained interest in Brighthouse Financial. Simply put, this reflects carrying Brighthouse at around 60% of book value. The balance of the other items largely offset.

The $1.1 billion cost of separation is approximately $300 million lower than the previous guidance in the company's 8-K filed on August 9. The difference mostly relates to intercompany deferred acquisition cost balances. The initial accounting interpretation suggests that certain DAC balances be written off post-separation, which was reflected in the $1.4 billion separation cost estimate. Upon further review by MetLife and our advisors, the DAC balances in question were determined to be attributable to MetLife, and therefore not subject to be written-off post-separation. Book value per share, excluding AOCI other than FCTA, was $40.96 as of September 30, down 20% versus the sequential quarter due to the spinoff of Brighthouse Financial.

With respect to third quarter underwriting margins, total company operating earnings were higher by approximately $0.10 per share versus the prior quarter, after adjusting for notable items in both periods. This was primarily due to lower mortality and dental claims in the U.S., as well as favorable claims experience in Latin America, primarily in Mexico. The group life mortality ratio was 85.0%, favorable to the prior-year quarter of 89.3% and at the low end of the annual target range of 85% to 90%. Overall, group Life results reflected lower claim incidents and severity.

The group non-medical health interest-adjusted benefit ratio was 74.7%, favorable to the prior-year quarter of 76.9% and below the 2017 annual target range of 76% to 81%. Favorable underwriting results were primarily driven by dental. MetLife Holdings interest-adjusted benefit ratio for life products was 48.0%, and 51.2% after adjusting for notable items discussed earlier. This result was favorable to the prior-year quarter of 59.9% after adjusting for notable items, and below the annual targeted range of 53% to 58%.

Turning to investment margins, the weighted average of the three product spreads presented in our QFS was 144 basis points in the quarter, down 23 basis points year-over-year. Pre-tax variable investment income, or VII, was $236 million and within our 2017 quarterly guidance range of $200 million to $250 million. Strong private equity performance was offset by weak prepayments. Product spreads, excluding VII, were 110 basis points this quarter, down 28 basis points year-over-year. Lower core yields accounted for most of this decline. Overall, lower investment margins in the quarter reduced EPS by approximately $0.12 per share.

The operating expense ratio was 18.5% in the current quarter, after adjusting for the notable item related to the unit cost initiative. The 30 basis points improvement in the operating expense ratio year-over-year was largely due to strong pension risk transfer sales. Excluding pension risk transfer sales, or PRT sales, in both periods, the operating expense ratio was 109 basis points unfavorable to the prior-year quarter. This was primarily due to higher employee benefits catch-up, as well as higher expenses related to growth in Latin America and Asia. Overall, less favorable expense margins contributed to $0.11 of EPS decline year-over-year.

I will now discuss the business highlights in the quarter. Group Benefits reported operating earnings of $241 million, up 30%, and 39% adjusting for notable items in the prior year quarter. The primary drivers were strong group life and non-medical health underwriting. Group Benefits operating PFOs were $4.1 billion, up 1% year-over-year. PFO growth was negatively impacted by the loss of a large dental contract in May. Excluding its impact, PFO growth was 4% and within our guidance range of 3% to 5%. Group Benefits sales were up 22% year-to-date, with growth across all products and markets. Sales are at near record levels, as a large case market has seen more activity in 2017, and we are winning in line with our expectations. We've also seen persistency continue to be favorable, and good sales growth in our midsize and small employer markets, fueled by continued strong voluntary sales momentum.

Retirement and Income Solutions, or RIS, reported operating earnings of $254 million, down 18% year-over-year, and 20% excluding all notable items. The primary drivers were lower investment margins, driven by continued spread compression and less favorable underwriting. RIS operating PFOs were $2.5 billion, up 71%, driven by four large pension risk transfer sales in the quarter. We continue to see a good PRT pipeline of all sizes and structures. Our approach will continue to balance growth with an efficient use of capital. Excluding PRT sales, RIS PFOs were up 40%, primarily due to a large post-retirement benefit case in the quarter.

Property & Casualty, or P&C, operating earnings were $51 million, down 12% year-over-year due to higher cat losses. Adjusting for notable items in both periods, operating earnings were up 45%, driven by non-cat auto results. Our P&C combined ratio, excluding cats and prior year development, was 88.9%, better than the prior year quarter of 91.3%. We continue to see improvement in our underlying auto results, which posted a combined ratio excluding cats and prior year development of 94.2%, well below the 98.2% in the prior year quarter.

Auto results have benefited from targeted rate increases over the last 12 months of 9%, and we expect to take rate increases that are in line with industry in the near future. P&C operating PFOs were $899 million, up 2% year-over-year, and sales were up 1%. P&C top line growth has been pressured in the short-term from price increases and management actions to create value.

Turning to Asia, operating earnings were $314 million, down 3% year-over-year and 6% on a constant currency basis after adjusting for notable items in both quarters. Volume growth was offset by a higher Japan tax rate. Asia operating PFOs were $2.2 billion, down 3%, but up 4% on a constant currency basis, including a proportion of share of operating joint ventures in the region. Asia sales were up 3% on a constant currency basis, reflecting management actions to improve value in targeted markets.

In Japan, sales were down 4% as the shift to foreign currency whole life has proven successful. FX life sales were up 26%, while Yen life sales were down 76%. FX life sales accounted for 90% of total life sales in Japan this quarter. Accident and health sales in Japan were down 4%, but we're seeing good traction in our refreshed medical products, Flexi S and Flexi Gold S, which were launched in July. We expect A&H sales to continue to gain momentum heading into the fourth quarter.

Emerging market sales in Asia were up 14%, driven by continued growth in China, which was up 13% due to agency growth and the strong momentum from its new whole life critical illness product, Safeguarding Your Health.

Latin America reported operating earnings of $163 million, up 23% and 13% on a constant currency basis after adjusting for notable items in both quarters. The key drivers were favorable underwriting and volume growth. Latin America operating PFOs were $937 million, up 5% and 2% on a constant currency basis. This growth reflects the nonrenewal of a low margin large group contract in the second quarter of 2017. Excluding this nonrenewal, PFOs were up 8% on a constant currency basis, driven by strong growth in Mexico. Total sales for the region were up 6% on a constant currency basis, driven by growth across the region.

EMEA operating earnings were $71 million, down 4% year-over-year and 10% on a constant currency basis after adjusting for notable items in both quarters. The year-over-year decline was due in large part to several favorable nonrecurring items in 3Q 2016, which totaled $10 million. Adjusting for notable and nonrecurring items, EMEA's operating earnings were up 9% on a constant currency basis, driven by favorable expense margin and volume growth, partially offset by less favorable underwriting.

EMEA operating PFOs were $634 million, up 2% on both a reported and constant currency basis, driven by growth in Western Europe and Turkey, partially offset by group medical in the Gulf. Excluding the impact of the actuarial assumption update in both periods, PFOs were up 5% on constant currency basis and in line with guidance. Total EMEA sales were up 9% on a constant currency basis, driven by strong growth in the Gulf and Turkey.

MetLife Holdings reported operating earnings of $410 million, up 54% year-over-year, but down 12% after adjusting for notable items in both periods. The key drivers were lower investment margins, partially offset by favorable underwriting and strong equity market performance. MetLife Holding's operating PFOs were $1.4 billion, down 12% mostly due to separation-related impacts and runoff of the business, in line with previous guidance.

Corporate & Other reported an operating loss of $336 million compared to operating earnings of $6 million in the third quarter of 2016. Adjusting for notable items in both periods, the operating loss was $152 million compared to operating earnings of $12 million in the prior year quarter. The year-over-year variance was primarily due to higher employee benefits and changes in incremental taxes to true-up the company's effective tax rate.

I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $6.5 billion at September 30, which is up from $4.6 billion at June 30. The $1.9 billion increase in HoldCo cash in the quarter reflects subsidiary dividends of $3.4 billion, including the $1.8 billion cash remittance from Brighthouse Financial prior to the spinoff, as well as share repurchases, payment of our common dividend, the acquisition of Logan Circle Partners, and holding company expenses.

Next, I would like to provide you with an update on our capital position. For our U.S. companies, preliminary year-to-date third quarter statutory operating earnings were approximately $2.5 billion and net earnings were approximately $1.7 billion. Statutory operating earnings increased by $102 million from the prior year, primarily due to favorable underwriting mostly offset by lower net investment income and higher taxes. We estimate that our total U.S. statutory adjusted capital was approximately $19 billion as of September 30, essentially unchanged from December 31. Net earnings were largely offset by dividends paid to the holding company.

The Japan Solvency Margin Ratio was 854% as of June 30, which is the latest public data. Overall, MetLife had a good third quarter in 2017, highlighted by favorable underwriting and volume growth. In addition, our cash and capital position remains strong and we remain confident that the actions we are taking to implement our strategy will drive free cash flow and create long-term sustainable value to our shareholders, and allow us to always be there for our customers in their time of need.

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

Question-and-Answer Session

Operator

Okay. And one moment, please, for your first question. Your first question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead

Jamminder Singh Bhullar - JPMorgan Securities LLC

Hi. Good morning. First, I just wanted to clarify, I think you mentioned there was – part of the reason that the separation costs were lower was that there was a $300 million roughly lower than assumed DAC write-off. So should DAC expense be higher than otherwise as a result in the future? And if yes, what's the rough DAC write-off period for the related business?

John C. R. Hele - MetLife, Inc.

Hi, Jimmy, this is John. This is dealing with the riders, so this will amortize through net income over like 30 years.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. Not operating, though.

John C. R. Hele - MetLife, Inc.

That's correct.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. And then on MetLife Holdings, what's your sort of desire and ability to do an annuity exchange offer, as I recognize it's harder, given that it's New York business, but is that something that you've contemplated?

John C. R. Hele - MetLife, Inc.

It's something we're always looking at, but we always balance with the customers' interests and what's appropriate, so, e study this carefully, but we've not done anything to-date.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. And then just lastly, any comments on the timing of the completion of the $2 billion buyback program?

John C. R. Hele - MetLife, Inc.

The additional $2 billion, we still have just a little over $200 million left from the existing $3 billion authorization and we've announced an additional $2 billion and we would expect that all this will be done by the end of 2018.

Jamminder Singh Bhullar - JPMorgan Securities LLC

Okay. Thank you

Operator

Your next question comes from the line of Thomas Gallagher from Evercore. Please go ahead

Thomas Gallagher - Evercore ISI

Good morning. Steve, after announcing the capital plans for buybacks in the exchange offer, is it fair to say that that takes off the table much in the way of M&A over the near term? Like Australia in life insurance I think there's been some news flow on that. Or is M&A still on the table? And also, why do the exchange offer versus secondary?

Steven A. Kandarian - MetLife, Inc.

Hi, Tom. As we've said consistently, excess capital above liquidity buffer belongs to our shareholders and we kind of go down the list of things that it could be used for, dividends, share repurchases, and strategic acquisitions that clear the hurdle rate. So, all those remain on the table. I won't comment on any specific transaction, but all those uses of capital are still on the table. As to the exchange offer, that's our current intent to exchange our shares in Brighthouse for MetLife shares and our hope is to do that in the year 2018. That is subject to market conditions and regulatory issues, constraints, but that is the intent currently.

Thomas Gallagher - Evercore ISI

Okay. And just follow-up question is, in terms of the news of Chris Townsend joining AIG and Steve Goulart becoming the interim head, how should we be thinking about that? Steve has dual roles now. Is that truly going to become temporary? Is it possible he might take that role over? Or should we be thinking more about more extensive process, where you're looking at external and internal candidates, before making a decision on Asia?

Steven A. Kandarian - MetLife, Inc.

Chris Townsend had come to me a while back and – just to, I mean, give you a little background on this. Chris was the longest serving President of that region for a non-Asian company. So my point is that people go to those regions typically at some reasonable number of years, before people move on to do other things. So, this is not something that was a big surprise in terms of Chris doing something different. We wanted to retain Chris, but he found another opportunity.

We've already begun the process for a search. We'll look both internally and externally. The search was actually already ongoing. It wasn't after Chris' announcement. It was before, the search began. So we're in process. Steve Goulart, who has experience with the Alico transaction, Steve was running M&A and he's, of course, Treasurer of our company, he was involved directly in the Alico transaction, understands that business, and he'll be overseeing the region on an interim basis, temporary basis, as we complete our work finding a replacement for Chris.

Thomas Gallagher - Evercore ISI

Okay. Thanks.

Operator

Your next question comes from the line of Suneet Kamath from Citi. Please go ahead

Suneet Kamath - Citigroup Global Markets, Inc.

Thanks. I wanted to start with your comment about the 800 to 900 basis points above Treasury ROE target. I thought that that was sort of the guidance that you gave before you spun-off Brighthouse, so I would have expected, all else equal, that maybe that would have gone up ex-Brighthouse. Is my understanding correct, and any thoughts on that?

John C. R. Hele - MetLife, Inc.

Hi, Suneet, this is John. When we did our Investor Day last year and gave that guidance, that was for RemainCo, that was for – excluding Brighthouse. So the 800 to 900 is for the new MetLife, and we're on track for that.

Suneet Kamath - Citigroup Global Markets, Inc.

Okay. And then my follow-up to that is, should we be thinking about that as the way that you guys price your products? In other words, a spread to Treasury, because I'd always thought that the way you approach pricing was more on an absolute ROE basis?

John C. R. Hele - MetLife, Inc.

We approach pricing to get a margin above what we expect to be the hurdle rate required by our shareholders. And that can vary around the world, because, obviously, what you invest in does change, but we seek spread and we call that value. So, as we add value to get a return on your capital that we invest in the business, we seek to get a margin above that.

Suneet Kamath - Citigroup Global Markets, Inc.

Okay. And then just lastly, if I could, you'd mentioned in your prepared remarks the refreshed hedging strategy. Should we be thinking that the sensitivity, just with the marks on the interest rate derivatives now, will be lower as interest rates move, versus what we've seen in the past?

John C. R. Hele - MetLife, Inc.

With the separation of Brighthouse, we are less sensitive in total, and we also have restructured some of our derivatives that particularly make it less sensitive to – on a statutory basis, to interest rates being between – 10-year Treasury being between 1.5% and 4%, which should still fall within our stated cash flow guidance.

Suneet Kamath - Citigroup Global Markets, Inc.

Okay. Thanks.

Operator

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

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Hi. Thanks. Good morning. Following up on the ROE, I think at Investor Day last year, you talked about 800 to 900 basis points over the near term, but that increasing to 900 to 1,000 basis points after the cost saves are phased in and you return excess capital. Can you comment if that 900 to 1,000 is still the longer-term expectation?

John C. R. Hele - MetLife, Inc.

Yes, but we were speaking longer term, and our cost save program goes out to 2020, so...

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay. But no – we shouldn't think about any change to that?

John C. R. Hele - MetLife, Inc.

No change.

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay. And then, just given the moving parts this year, can you just help us think about where you'd expect HoldCo cash to end the year, after free cash flow in the fourth quarter? And I think you also have a debt maturity?

John C. R. Hele - MetLife, Inc.

Well, Ryan, we don't give guidance on detailed elements like that. There are a lot of moving parts, and I leave it to – you'd have to calculate those out of (40:00).

Ryan Krueger - Keefe, Bruyette & Woods, Inc.

Okay, got it. All right. Thanks.

Operator

Your next question comes from the line of Sean Dargan from Wells Fargo. Please go ahead

Sean Dargan - Wells Fargo Securities LLC

Yeah, thanks. I'm just wondering about the $3 billion to $4 billion liquidity buffer, given the motions on November 17. I guess my question is, if your SIFI status is settled once and for all in a manner that you would like, can that liquidity buffer come down?

John C. R. Hele - MetLife, Inc.

Hi, Sean. The $3 billion to $4 billion is what we've done with our own internal targets for liquidity and stress testing. That does not include a SIFI buffer on it, as it stands now. Of course, we examine this on an ongoing basis as to what we think, but we always want to be certain that, in a wide range of scenarios, that we have sufficient cash to get through, and that currently our buffer is $3 billion to $4 billion.

Sean Dargan - Wells Fargo Securities LLC

Okay, thanks. And then in a couple hours, we're going to get a tax bill allegedly. I'm wondering if you have any thoughts on how tax reform proposals could impact you, namely around the DAC tax, as well as global minimum tax, and if that would impact pricing or free cash flow.

Steven A. Kandarian - MetLife, Inc.

Hi. It's Steve. What we've said for some time now is that we support a pro-growth tax reform package, a significantly lower marginal rate, and we're prepared to see certain preferences changed or eliminated. And we think that will be acceptable to us as a company overall. We think that will drive economic growth, which is a key factor in terms of our growth as a company, especially in the U.S. group insurance market. So that's what we're supportive of.

We've also said that if there are changes in the tax code that truly put at risk our business model, then we have to press forward with our case as to why we think that would not be a positive change for not only MetLife, but for the economy. But we are not really focused on any one specific preference or provision of the code as it relates to our business.

Sean Dargan - Wells Fargo Securities LLC

Okay. Thank you.

Operator

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

Erik Bass - Autonomous Research

Hi. Thank you. RIS core spreads declined materially on a sequential basis, and it's well below the recent run rate. Is this quarter spread just a function of low interest rates and the flat yield curve, so it's a reasonable run rate, or was there any other noise in the quarter?

John C. R. Hele - MetLife, Inc.

Hi, Erik, this is John. So last year we gave guidance that the spreads we thought for the full year in 2017 for RIS would be between 1.15% and 1.40% including VII, and VII could swing between 15 to 30 basis points. So we are within those ranges so far this year. It is less than a year ago. We are seeing, of course, some spread compression both on the long end as things slowly wear off, and then also LIBOR is up a little year-over-year, so that also squeezes the business as well. But we are in line with the guidance that we've given.

Erik Bass - Autonomous Research

Got it. So you just suggest it's a little bit of a noisy quarter and not sort of to overweight this quarter's spread as the run rate?

John C. R. Hele - MetLife, Inc.

Well, this quarter's spread was 1.35%.

Erik Bass - Autonomous Research

I guess I was looking at the 99 basis points ex-VII.

John C. R. Hele - MetLife, Inc.

Well, if you take -- our low end is 1.15% to 1.40% and the minus 15 to 30 basis points, you'd see even the 99 is within our guidance.

Erik Bass - Autonomous Research

Okay. And then just a question on group, where you and the industry have seen another quarter of very strong underwriting results. And I was just hoping you could comment on what you see is driving the trends for this, and do you see anything that suggests results could continue to trend favorably versus your target benefit ratios?

Michel A. Khalaf - MetLife, Inc.

Hi, Erik, this is Michel. So, as you mentioned, this has been a strong underwriting quarter in Group Benefits. Group life mortality in particular was very favorable, at the low end of our target range. This was driven by lower incidents and a positive prior year development in IB&A (44:40) reserve release. So, I mean, I would expect longer-term trends to be at the midpoint of the range that we had provided, 85 to 90. Our non-medical health results were also favorable and below the low end of the range, and that's been driven by dental trends. So group underwriting results can be volatile, as we know, quarter-to-quarter. So I wouldn't choose the third quarter as a trend, I would say.

Erik Bass - Autonomous Research

Okay. Thank you.

Operator

Your next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead.

Alex Scott - Goldman Sachs & Co. LLC

Hi. Thanks for taking the question. My first one was just on the expense initiative costs in the Corporate segment. Could you just provide an update on, I guess, how much of the expected $300 million for 2017 have been experienced year-to-date, and sort of how much is left thinking about the fourth quarter?

John C. R. Hele - MetLife, Inc.

Hi, Alex, this is John. So we are running a little less on the investment side. The savings that we gave in the guidance to you some time ago last year at our Investor Day are flowing through. The strength of the (46:05) save is about the same as we had said, but we are spending a little less and we do expect the fourth quarter will pick up a little, we'll make some of that up. We'll probably be, when we end the whole year, maybe $70 million short of the whole amount, but we do expect to catch this up and be able to still deliver the savings as we promised out to 2020.

Alex Scott - Goldman Sachs & Co. LLC

And are all of the year-to-date expense initiative costs in that notable item that you guys provide, or are there other costs in the Corporate segment outside of that?

John C. R. Hele - MetLife, Inc.

There's another piece in panorama, which is in net income, so it's booked a little lower. That's also added to it as well.

Alex Scott - Goldman Sachs & Co. LLC

Okay. Thank you.

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 and thank you for taking my questions. I have a question related to Group Benefits. So you talked about getting good momentum in voluntary products, especially in the small end of the market. Can you just talk about the overall kind of RFP activities, especially (47:30) around the corner? Where do you see in terms of potential pricing and quotes?

Michel A. Khalaf - MetLife, Inc.

Yeah, hi, Humphrey. Michel again. So we're having a good year in Group. On the competitive landscape front, the market environment is competitive. I would say in dental it's highly competitive. But we continue to be disciplined in terms of our approach. We tend to focus also on distributors and employers that see value beyond the lowest price. So we're able to get terms that we're comfortable with, and that's reflected in our results so far this year in terms of sales and earnings. So that's a little bit on the competitive environment.

As you mentioned, voluntary is a major focus area for us and we're seeing very good momentum on this front this year. That's also helping us grow in the mid-market and we're seeing good growth in small market as well, and we think that that's sustainable.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Okay. Thank you. And then a question related to the exchange offer. Is there any kind of potential tax implication that we need to be aware of either from a shareholders' perspective or from MetLife's perspective?

John C. R. Hele - MetLife, Inc.

This is John. It's an exchange, it's actually disposition of shares.

Humphrey Hung Fai Lee - Dowling & Partners Securities LLC

Okay. Thank you.

Operator

And at this time there are no further questions. I'd like to turn the call back over to Mr. Hall.

John A. Hall - MetLife, Inc.

Great. Thank you very much, Greg, and thank you to everyone for joining us. We look forward to speaking to you again at our December outlook call on December 15. Thanks very much.

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.