大都會人壽保險 (MET) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MetLife fourth-quarter 2015 earnings release conference call.

(Operator Instructions)

As a reminder, this conference will 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 in the business, and the products of the Company and its subsidiaries.

MetLife's actual results may differ materially from 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 US Securities and Exchange Commission, including in the risk factor section of those filings.

MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise.

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

Thank you, Greg.

Good morning everyone, and welcome to MetLife's fourth-quarter 2015 earnings call.

We will be discussing certain financial measures not based on Generally Accepted Accounting 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 investors relation portion of MetLife.com, in our earnings release, and our quarterly were 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 and on the call are Steve Kandarian, Chairman, President and Chief Executive Officer, and John Hele, Chief Financial Officer.

After their prepared remarks, we will take your questions.

Also here with us today to participate in the discussions are other members of management.

After their 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.

Thank you, Ed, and good morning, everyone.

Last night, we reported fourth-quarter operating earnings per share of $1.23 which compares to $1.38 per share in the fourth quarter of last year.

The year-over-year decline in operating EPS was primarily explained by variable investment income, or VII, which contributed $0.06 per share to operating earnings in the fourth quarter of 2015, versus $0.18 in the fourth quarter of 2014.

Variable investment income can be volatile, largely because it is driven by returns on alternative asset classes.

These asset classes have provided strong returns to MetLife shareholders over time.

In addition to a challenging quarter for VII, broad-based strength in the US dollar remained an earnings headwind.

Foreign exchange rates hurt operating earnings from our international businesses by $0.05 per share in the fourth quarter, versus the prior-year period.

MetLife repurchased $822 million of shares in the fourth quarter, with an additional $70 million of buybacks in early January, and the $107 million of repurchases in the third quarter, we have completed our latest $1 billion repurchase program.

As you know, on January 12, we announced a plan to pursue the separation of a substantial portion of our US retail business.

Until we are in a position to disclose details of a separation plan, we are not able to repurchase shares.

While the separation plan has a negative impact on capital management in the near term, we are confident it positions MetLife to be a more compelling capital management story over the long-term.

Exiting a business that has been central to the Company since its founding in 1868 highlights our willingness to take bold actions to maximize shareholder value.

Two factors drove our decision to pursue this plan: Our strategic focus on businesses with capital requirements and higher cash generation; and the potential impact of capital requirements on the variable annuity business, if it remained part of a systemically important financial institution, or SIFI.

On the first point, as I have said on prior calls, we have learned a great deal about the cash and capital characteristics of our major business lines, as a result of our accelerating value strategic initiative.

One of the key early learnings from this effort was that the capital requirements and potential volatility of cash flows from the VA businesses do not fit well with our overall goal to deliver predictable, recurring free cash flow.

Following the separation, we anticipate that MetLife will generate a free cash flow to operating earnings ratio above our current target of 55% to 65%, and with less volatility.

In our view, the market does not give us appropriate credit for our higher multiple businesses, because of concern about the potential risk profile of VAs.

By separating out of a substantial portion of our US retail operation, we are addressing this valuation overhang on MetLife.

On the second point, we believe that regulatory risk is significantly diminished as a result of this plan.

The Federal Reserve has made encouraging comments on capital rules for so-called traditional insurance lines, but we are concerned that the Fed could view variable annuities as non-traditional, which is how this product is currently categorized by international regulators.

Since we believe the standalone US retail business would not be a SIFI, separation mitigates the risk of onerous capital rules for the VA business.

MetLife continues to challenge its SIFI designation in court, and does not believe any part of our business poses systemic risk.

However, we also recognize that the judicial process could take a considerable period of time, especially if either party appeals the district court's decision.

In the meantime, adverse capital rules for VAs could put MetLife at a competitive disadvantage.

Finally, as we said in the press release announcing the separation plan, we believe the standalone US retail business will be more nimble and competitive, benefiting from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden.

We know you want more information on what the new Company will look, like including specifics on strategy and capital.

However, we are able to provide only limited information prior to finalizing the form of the separation.

Turning to regulatory matters, I would like to report on two developments in New York that will improve MetLife's ability to return excess capital to shareholders.

First, in late December of 2015, New York changed the law for calculating ordinary dividend capacity for life insurers, creating a more level playing field with other states.

Previously, an ordinary shareholder dividend could be distributed annually if it did not exceed the lesser of either 10% of statutory surplus, or the statutory net gain from operations in the prior year.

The legislation adds a greater of test, which is consistent with existing standards in the majority of states.

We had assumed that our New York subsidiary, Metropolitan Life Insurance Company, would distribute meaningful capital to the holding company under the old law.

However, that assumption was heavily dependent upon extraordinary dividends, which are subject to regulatory approval.

While the new law means predictable, less volatile dividends, it does not change MetLife's commitment to keeping our businesses very well capitalized.

Second, the New York Department of Financial Services is unique among state regulators in mandating certain actuarial assumptions and reserve requirements through an annual special consideration letter.

For year-end 2015 financial statements, Metropolitan Life Insurance Company is permitted to aggregate all three lines of business, life, annuity, and health, to meet the requirements.

Previously, health insurance was excluded.

Largely because of this change, we anticipate a reserve release of approximately $1 billion, based on current capital market conditions.

While New York standards remain very conservative relative to other regulatory regimes, the change will make us more competitive with insurers domiciled in other states.

In conclusion, we are committed to making the right decisions to produce substantial and sustainable shareholder value, and we are willing to execute bold moves to achieve this goal.

Our separation plan will allow MetLife to focus on businesses that have lower capital requirements and greater cash flow generation potential, while creating a more nimble and competitive US retail franchise.

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

John?

Thank you Steve, and good morning.

Today, I will cover our fourth-quarter results, including a discussion of insurance margins, investment spreads, expenses, and business highlights.

I will then conclude with some comments on cash and capital.

Operating earnings in the fourth quarter were $1.4 billion, or $1.23 per share.

This quarter included three notable items which were highlighted in our news release and disclosed by business segment in the appendix of our quarterly financial supplement, or QFS.

First, variable investment income was $71 million after DAC and taxes, which was $137 million or $0.12 per share below the bottom end of our 2015 quarterly plan range.

Second, we had higher than budgeted catastrophe losses, partially offset by favorable prior-year reserve development, which in total decreased operating earnings by $9 million or $0.01 per share after tax.

Third, we had a one-time tax benefit in Argentina, which increased operating earnings by $31 million or $0.03 per share after tax.

This tax benefit was a result of Argentina's currency being devalued by 40% in December, which required the remeasurement of US dollar based reserves into pesos, and resulted in an increased tax deduction.

Turning to our bottom line results, fourth-quarter net income was $785 million, or $0.70 per share.

Net income was $591 million, lower than operating earnings, primarily because of derivative net losses, and losses related to certain variable annuity guarantees, where the hedge assets are more sensitive to market fluctuations than the GAAP treatment for guaranteed liabilities.

The derivative net losses were primarily driven by higher interest rates.

The difference between net income and operating earnings in the quarter included an unfavorable impact of $305 million after tax related to asymmetrical and non-economic accounting.

Book value per share, excluding AOCI other than FCTA was $51.15 as of December 31, up 3% year over year.

Tangible book value per share was $42.22 as of December 31, up 5% year-over-year.

With respect to fourth-quarter margins, underwriting, primarily in the US was less favorable than the prior-year quarter by $0.06 per share after adjusting for notable items in both periods.

Property and casualty, corporate benefit funding and retail life were the primary drivers of the year-over-year result.

In property and casualty, the combined ratio including catastrophes was 96.1% in retail, and 99.8% in group.

The combined ratio excluding catastrophes was 89.4% in retail, and 96.4% in group.

Overall, P&C underwriting was unfavorable versus the prior-year quarter.

We experienced higher non-catastrophe claim costs, primarily due to elevated frequency and severity in our auto business, as well as higher catastrophes in homeowners.

We continue to increase prices in auto, which should drive improvement in our loss ratios over the next several quarters.

In corporate benefit funding, or CBF, the less favorable underwriting result versus a strong 4Q 2014 was due to lower mortality experience in our pay-out annuity business and higher claims in our life products.

Fourth-quarter underwriting results were in the expected range, and CBF's full-year 2015 underwriting margins were in line with our expectations.

Retail life's interest-adjusted benefit ratio was 54.9%, which is less favorable than the prior-year quarter of 53.9%, and 53.0% in 4Q 2014, after adjusting for a one-time notable item.

The year-over-year variance was due to higher average net claims.

The fourth quarter benefit ratio is high relative to a full-year 2015 target of 50% to 55%, because of seasonally high premiums and the related increase in reserves.

Finally, the group life mortality ratio was 86.8%, and the non-medical health benefit ratio was 77.7%, both within their respective ranges.

Turning to investment margins, the average of the four US product spreads in our QFS was 170 basis points in the quarter, down 42 basis points year-over-year.

Of this decline, 27 basis points was the result of lower variable investment income.

Pre-tax variable investment income, or VII, was $109 million, down $216 million versus the prior-year quarter, due to weak private equity and hedge fund performance.

For the full year, pretax VII was $1.2 billion, which was below the bottom end of the 2015 targeted range of $1.3 billion to $1.7 billion.

Product spreads, excluding variable investment income were 168 basis points this quarter, down 15 basis points year over year.

Lower core yields accounted for most of this decline.

With regard to expenses, the operating expense ratio was 24.4%, unfavorable to the prior-year quarter of 23.7%, after adjusting for notable items in the prior-year quarter.

The higher operating expense ratio in the quarter was primarily due to lower pension risk transfer sales, as well as higher expenses related to one-time items and timing.

I will now discuss the business highlights in the quarter.

Retail operating earnings were $582 million, down 19% versus the prior-year quarter, and down 10% after adjusting for notable items in both periods.

Life and other reported operating earnings of $195 million, down 41% versus the prior-year quarter, and down 26% after adjusting for notable items in both periods.

The primary drivers were less favorable underwriting, primarily in P&C, and higher expenses.

Life and other PFOs were $2.1 billion, down 2% year over year as growth in the open block was more than offset by run-off of the closed block.

Retail life sales were up 9% year over year, primarily driven by term, whole life and universal life.

Annuities reported operating earnings of $387 million, up 1% versus the prior-year quarter and up 3% after adjusting for notable items in both periods.

The key drivers were improved investment margins, as well as favorable lapse experience, which were partially offset by higher expenses and negative fund flows.

Total annuity sales were $2.5 billion in the quarter, up 23% year over year.

We continue to see good momentum in our index-linked annuity, Shield Level Selector.

Shield sales were $361 million in the quarter, which are almost triple the sales in the prior-year period.

Also, our VA guaranteed minimum withdrawal benefit rider, FlexChoice, continues to gain acceptance in the market, and drove VA sales of $1.8 billion this quarter, an increase of 13% year over year.

Group voluntary worksite benefits, or GVWB, reported operating earnings of $214 million, down 10% versus the prior-year quarter, and down 5% after adjusting for notable items in both periods.

The primary drivers were less favorable underwriting in auto, and lower investment margins.

GVWB PFOs were $4.3 billion, up 3% year over year.

Sales were up 14% year over year with growth in core and voluntary products.

Corporate benefit funding, or CBF, reported operating earnings of $286 million, down 21% versus the prior-year quarter, and down 18% after adjusting for notable items in both periods.

The key drivers were lower investment and underwriting margins.

CBF PFOs were $886 million, down 39% year-over-year, due to strong pension risk transfer, or PRT, sales in the prior-year quarter.

Excluding PRT sales, PFOs were up 39% due to strong sales in structured settlements and institutional income annuities.

Latin America reported operating earnings of $150 million, down 1% from the prior-year quarter, but up 24% on a constant currency basis.

After adjusting for notable items in both periods, Latin American operating earnings were up 14% on a constant currency basis.

The key driver was business growth.

US Direct, which is included in Latin America's results, had an operating loss of $8 million versus a $22 million loss in the prior-year quarter, reflecting lower expenses.

Latin America PFOs were $1 billion, down 2% but up 17% on a constant currency basis, with growth across the region, despite the challenging environment.

Total Latin America sales increased 3% on a constant currency basis, primarily due to direct marketing in the region.

Turning to Asia, operating earnings were $290 million, down 15% from the prior-year quarter, and down 9% on a constant currency basis.

Adjusting for notable items in both periods, operating earnings were up 6% on a constant currency basis, driven by favorable business growth and lower taxes, primarily due to a change in the Japan tax rate from 31% to 29%.

Asian PFOs were $2 billion, down 11% from the prior-year quarter, and down 3% on a constant currency basis.

Adjusting for the withdrawal of single-premium A&H products in Japan, which did not meet our hurdle rates in the current interest rate environment, premium fees and other revenues increased 2% on a constant currency basis.

Discontinuing the sale of single-premium A&H products is a good example of our focus on cash, return on capital, and payback periods, more so than GAAP metrics.

We estimate the statutory IRR on single-premium A&H is 7%, with a 14-year payback period, assuming mean reversion for interest rates.

The product looks even worse if we assume current low rates persist.

While these products could contribute meaningful revenue and operating earnings on a GAAP basis, the economic returns are unattractive.

For full-year 2015, Asia PFOs were up 4% on a constant currency basis.

Asia sales were down 1% year over year on a constant currency basis, representing the net impact of management actions taken across the product portfolio to improve value creation and growth in targeted markets.

In Japan, 2015 third sector sales were up 11% versus 2014.

Our expectation is for Japan's third sector sales to be down 10% to 15% in 2016, as a result of actions to improve value, including the impact from suspension of our single-premium A&H products.

Excluding the impact of these actions, our expectation is underlying growth in Japan's third sector sales will be consistent with our prior guidance, of mid to high single digits.

EMEA operating earnings were $54 million, down 16% year-over-year, and down 2% on a constant currency basis.

Adjusting for a one-time tax benefit in the fourth quarter of 2014, operating earnings were up 32% on a constant currency basis, primarily driven by business growth, particularly in the UK and the Middle East.

EMEA PFOs were $625 million, down 7% from the prior-year period, but up 3% on a constant currency basis.

Excluding the impact from the conversion of certain operations of calendar year reporting in the prior-year quarter, PFOs were up 10%, driven by Gulf, Turkey and the UK.

Total EMEA sales declined 11% on a constant currency basis due to strong employee benefit sales in the Middle East, and a conversion of certain operations of calendar year reporting in the prior year quarter.

In corporate and other, I would like to remind you of the timing of our preferred dividend payments.

With our refinancing discussed on our second-quarter 2015 call, we now pay dividends on a $1.5 billion Series C preferred stock on a semiannual basis.

As a result, you will see preferred dividends paid on the second and fourth quarters of approximately $40 million related to this security.

On an annualized basis, the lower dividend will generate a net savings of approximately $20 million during the first five-year fixed term of the security.

I will now discuss our cash and capital position.

Cash and liquid assets at the holding companies were approximately $6.4 billion at December 31, up from $5.5 billion at September 30.

This amount includes inflows from our subsidiary dividends, and the issuance of senior debt, offset by share repurchases, the payment of our quarterly common dividend, and other holding court expenses.

In addition, our 2015 free cash flow ratio was 63% of operating earnings, after adjusting for the third-quarter non-cash charge of $792 million after-tax.

Next, I would like to provide you with an update on our capital position.

While we have not completed our risk-based capital calculations for 2015, we estimate our combined US RBC ratio will be above 450%.

For Japan, our solvency margin ratio was 936% as of the third quarter of 2015, which is the latest public data.

In conclusion, fourth-quarter operating earnings were below expectations as a result of lower investment margins, primarily due to VII, ongoing pressure from foreign currency, less favorable underwriting, and higher expenses.

While the current environment remains challenging, we are confident that our strategy will drive improvement in free cash flow, and create long-term sustainable value for our shareholders.

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

(Operator Instructions)

Seth Weiss from Bank of America.

Steve, I would like to just first ask about the comment that you cannot buy back stock until more details of the spin are provided.

I just want to clarify, is this the Registration Statement with the FCC in the next six months, or are there other events for need to wait for, before buyback can resume?

Seth, we are in possession of material, non-public information, regardless of the form of the transaction.

So we are unable at this point in time to engage any further repurchases.

Could you just give us an indication of either what events or timeframe we should be waiting for, for when you will no longer be in possession of this?

What is the trigger, I guess, is the question?

Seth, we are working hard toward determining the form of the separation.

And until we have determined that, we won't be in a position to share purchases.

I don't have a specific timeframe for you.

The form of the separation could be a public offering, it could be a spinoff, it could be sale of the business or some combination of these options, and it is still too early to determine which of those it will be.

Okay.

And then, maybe just a follow-up on the spin, and specifically on comments you made in your December outlook call about no longer needing to build that capital buffer.

Does those commentaries and understanding that you are unable to buy shares now, but independent of that, did that comment contemplate the need to potentially capitalize a spin company?

And does this alter your view of your HoldCo capital position and adequate capital buffer?

That wasn't the reason for the comment.

And we will start -- wait to see how the form turns out of the separation before we know the capital positions of both the remaining Company and the NewCo.

Okay.

This is John.

I wanted to add to that.

We are, as Steve said last December, for our total business, we are comfortable with our capital buffers that we have here.

But there's a lot to calculate out, depending upon the transaction and form of separation.

That is work that has to be done, and that is underway, and we are working on that.

But it doesn't change our view of the total capital we have for our total business.

Okay.

Just to clarify, just wanted to not run the risk of extrapolating any statements here.

The comments that you don't need to build a capital buffer related to MetLife as a combined entity does not contemplate a potential spin, and actions that might need to be taken for that?

Well, that is right, Seth.

Because we have said there are three -- there's various forms that we are looking at.

It could be a spin, it could be an IPO with a spin, it could be a sale.

So all of those have different capital implications for both the separated Company and the remaining Company.

So that is work that has to be done.

But we are comfortable with our total capitalization that we have for our total business.

Okay, great.

Thank you.

Jimmy Bhullar from JPMorgan.

Please go ahead.

Good morning.

On the US retail separation, it seems like many of the details like the nature of the separation, branding, haven't really been finalized, as you mentioned.

So I just wanted to get an idea on your timing of any announcement.

Why did you make it when you did, versus waiting until you had decided on some of these items?

Jimmy, we did a lot of work before making this announcement to pursue a separation of much of our retail business, US retail business.

But more work had to get done to answer some of the questions you just raised, and many others.

And to do that would require a much larger group of people, both within the Company and outside the Company, to make those determinations.

And as a practical matter, it would have leaked out to the public that we were engaging in this plan to pursue a separation.

So, our view was that once we made the initial determination, that a separation was desirable, and we're going to pursue that plan.

Now, we are able to bring in many more people to do the analysis that will lead to the answer to the questions you just raised.

Okay.

And then can you give us an idea on the expected timing of the separation?

It seems like an IPO or a sale would be difficult in this environment, so obviously, spin is an option, but how do you try to balance doing it in a timely fashion versus maybe being opportunistic and maximizing what you're able to get from the business?

We are not in position to give any guidance at this point in time in terms of the timing.

I can only tell you that we have been working hard on our strategy for over a year now.

We have made this announcement about the plan to pursue a separation, and we are working very rapidly answering all the questions that we need to answer, to determine the form of such a separation, and we're moving as quickly as one can.

Okay.

And then maybe if I could just ask one on the business, your alternative investment income, obviously, as you mentioned, was pretty weak in the fourth quarter.

So just give us some insight into what drove that, whether it is private equity hedge funds, and what is your view on some of those asset classes, on how they are performing as it relates to the first quarter?

I think you should have some insight, given the reporting lag on private equity, and on hedge fund.

Jimmy, it's Steve Goulart.

Just in recapping the fourth quarter, certainly, we were disappointed in the performance of the alternatives portfolio.

Both private equity and hedge funds materially underperformed our plan, and that has been somewhat unusual, but that is really what happened.

Prepayments were still very strong in the fourth quarter, and as we look forward to this year, you talked about first quarter, obviously, the market came out of the gate on the wrong foot perhaps.

A lot more volatility than expected.

We don't see any reason to change the plan yet.

We will see how it unfolds.

Obviously, there is a lag in the portfolios.

One quarter on PE, one month on hedge funds.

So you can sort of look at what has transpired.

But I would also remind you that when we look at correlation, while there is a directional correlation, the correlation isn't really that high in trying to compare it exactly.

So we're sticking with the plan for now.

I would also say that we have engaged in some repositioning in the portfolio.

During the course of the latter half of last year, we reduced the alternative portfolio by about $1 billion, split between the hedge fund and private equity portfolios, really concentrating on the managers and strategies that have been the longer-term stronger performers for us, and that we feel, our confident are going to deliver that performance going forward.

Like Steve said in his opening remarks, this is a portfolio that has provided strong returns for us and for our shareholders over some period of time.

We expect it will continue to do so.

Obviously, we are managing it and monitoring it very closely, just given what we did late last year.

And particularly in the hedge funds, they're a little bit in the spotlight given the last couple of years of underperformance there, so very close.

And specifically on private equity, is it more sensitive to the level of market because that drives the marks, or is it more sensitive to IPO activity?

Because I can understand fourth quarter being really bad because the S&P was down like 7% in the third quarter, but it bounced back and was up almost 7% in the fourth quarter.

So is it more the ending level of the market in the previous quarter, or is it actual IPO activity that influences your private equity insurance more?

Like I said, we have studied a lot of different correlations, and it is hard to really tie any of them, so directionally, it's actually a little bit of both of what you said.

Okay.

Thank you.

Tom Gallagher from Credit Suisse.

Good morning.

First question, Steve, just based on what you have proposed so far in terms of the split, and what remains with Met, which I will refer to as RemainCo, it looks like close to 20% of the earnings in RemainCo, which would be retail, would essentially be a closed block, if I am understanding it correctly.

How should we think about that conceptually?

Is that a business that you also might be open to divesting, or should that be considered a closed block with the remaining business, or is that one still up in the air?

That is my first question.

Tom, this is John.

That is something that's still under review, that we are looking at.

And as we develop future plans on this, we will let you know.

Okay.

And then the next question is a broader one.

Steve, is the ultimate goal here really to de-SIFI?

I realize you are still not done with the court case, but let's just assume for a moment that you don't win that.

Is the plan here to still get out of SIFI, how critical is that to you?

Or do you believe the split eliminates the need to de-SIFI here?

Tom, the decision to separate the US retail business, a significant portion of it, was really driven by two factors.

One, our strategy work that we talked you about, as well as the regulatory component.

When we do our strategy work, regulatory environment, business environments within markets, are very central to that analysis.

So two things in combination led o the decision for the separation and pursuing the separation of the US retail business.

In terms of overall our view on the SIFI designation, we continue to believe that we are not a SIFI under Dodd-Frank.

We are pursuing our appeal rights in the District Court of the District of Columbia.

There is a hearing next week, Wednesday, February 10, on the case, and we look forward to the judge's decision.

Okay, thanks.

John Nadel from Piper Jaffray.

John, I appreciate the commentary on the risk based capital ratio, or at least the estimate as of year-end 2015.

So it looks like a pretty significant increase on a year-over-year basis from something, and I think the adjustment was slightly under 400% for the US at year-end 2014.

Can you give us some sense for what the risk-based capital ratio looks like for the three entities that are part of the spin?

I believe those entities were somewhere just north of 400% at year-end 2014.

Should we think about a boost in year-end 2015 for those entities?

John, this is John.

I really can't until we finish our cash flow testing and the actuaries sign off on their statements, and we file our blue books to really give you any details, and you will see that all when it gets published.

Because of the impact of the change of the FCL that Steve mentioned, that has helped our total ratios, our total combined ratio while we are moving up higher but that is -- until we get all that work done, we cannot really give any details such as you are asking for.

We are announcing a week earlier this year than we did last year, so that's why the timing is a bit off here.

Okay.

I appreciate that.

My second question is a bigger picture question around Japan.

Obviously, you have taken some action around product offerings.

Given the interest rate environment, I'm wondering, given the Bank of Japan's actions last week, and a significant shift in JJB yields across the curve, whether there is something more specifically that has to be done now, in response to those actions.

I think there is negative yields all the way up to nine years on the JJB at this point.

It's Chris Townsend.

Let me respond to that.

In the short-term, there's the falling interest rates are going to have a negative, sorry, a positive impact on the SMR as the values will appreciate, but have potential negative impacts on our US GAAP earnings due to lower investment income, and that is very manageable.

It is immaterial in the bigger picture of things.

Over the long-term, if continued the lower rate situation, you can credit the drag on earnings impacted by reductions to NII's earnings and distributable cash but as the Japanese yen yields reduce, foreign currency products may become more popular, supporting our existing strategy to move away from the yen products, the foreign currency products.

On the yen products themselves, we have taken significant action on our portfolio, well in advance of the recent BOJ announcements.

So what we have done is to de-risk or to reduce the focus on our yen life portfolio by reducing commissions in that area, doubling the ticket size, continuing to focus on packaging of A&H products to enhance the returns, and also to incentivize some of the FX life products.

We took that action at the back end of the third quarter, and if you see from the sales results in terms of the life business in Japan for the fourth quarter, it was up 2% year-on-year for the fourth quarter, and the mix of that underneath that is quite interesting, because the foreign currency live is up, and the yen life is down, which is exactly what we wanted to happen.

And I think you will see that play out as we go into the rest of 2016.

Ryan Krueger from KBW.

I want to follow up on Seth's question on the capital buffer.

Steve, is it fair to say that when you talk about holding a capital buffer for non-bank SIFI risk, that a fair amount of the buffer was related specifically to the variable business?

Well, we don't know what the capital rules will be.

The Federal Reserve has not released anything yet.

There are some international draft rules out there, but they have already said they will be changing those.

So it is really just a level of comfort I think, that we have to have.

We do a lot of stress testing ourselves.

We have an economic view of our risks, and feel that this-sized buffer was where we should be, knowing what we know at the time we made that call.

And we reassess this on an ongoing basis.

As capital rules get announced, we will know what it is.

We do know that variable annuities have been discussed by many regulators, as being a product that may attract higher capital requirements.

That clearly is one of the larger capital risk products out there, which makes the separation quite compelling.

Understood.

On the RBC ratio, obviously, you talked about the $1 billion reserve release that certainly contributed to the increase in the year-over-year RBC ratio.

Were there any other big key factors that you can help us understand at this point?

That is probably the most major one.

Okay.

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

Ryan, it's Steve Goulart.

Just to update on the energy portfolio, we did take the opportunity, most of last year, to start reducing that portfolio.

We have sold almost $2 billion out of it.

It ended the year just under $12 billion, and again, 86% of that is investment-grade.

It is tilted more toward the defensive sectors in the portfolio, midstream refiners and that sort of thing.

So I think we are comfortable, we are obviously -- we run it through constant stress tests just given the energy environment, and I think at year-end, there was an unrealized net loss of about $220 million on the portfolio.

Okay, great.

Thank you.

Eric Berg from RBC Capital Markets.

You said that on a Company-wide basis, you are comfortable with the level of cushion you have, but you have also said that -- I don't know whether it was unexpected but regardless, you had a $1 billion increase in your statutory surplus as a result of the change in New York State accounting rules.

Should we infer from these two statements, when we think of them together, that some of this $1 billion is going to be above and beyond what you consider to be your adequate capital cushion, and that therefore, some of this $1 billion could become available for redeployment?

Eric, we view capital on a total holistic basis.

Whether it be at the holding companies within the regulated companies, we had always viewed this amount that was in these reserves as really capital but they were in a reserve that would be paid out over time, of course.

So I think the best way to think of this is, this is capacity that we have, as we think about our total capital position.

And we will have to see in terms of redeployment, as Steve said, we can't make any decisions on that until we get further along with the separation.

I have one question related to operations.

Because of the decision to pull back in Japan, it seems like even on a -- let's call it just apples-to-apples basis, adjusting for notable items, adjusting for currency, adjusting for the withdrawal of the single premium product, that -- well, that growth is quite slow right now in terms of premiums fees and other revenues.

My question is, once you get through this -- let's call it a transition period, product transition period -- how do you think of the sustainable growth rate for the whole Asia region, given that you have cross currency.

You have a very mature market in Japan, but you were rapidly growing markets in Southeast Asia.

So on somewhat of an overall basis, how should we think about the sustainable growth rate once we get through this transition period for Asia?

Thank you.

It is Chris Townsend.

Let me respond to that.

First of all, there is no change to the guidance we provided in December across all of the key metrics for Asia.

And we gave you some, I think, fairly clear guidance in terms of earnings and revenue in the medium term.

And we are sticking by that guidance, overall.

In terms of Japan, we are doing the right thing in terms of creating value for our shareholders, in terms of the product portfolio, and those items I responded to one of the prior questions on, in terms of the yen life will definitely increase in the value of our business.

If you look at A&H and the third sector where we made some very solid margins, we gave earlier guidance of mid-to high single digits.

We updated that guidance to a range of 10% to 12%, and we came in at 11%.

So I think we have delivered well in terms of that business for this year, and John gave some fairly clear guidance in terms of his prepared remarks as to what is happening with that portfolio overall.

So I do think we had a fairly solid year in the Asia region overall, with our normalized, constant rate earnings of 15% or 16%, which is again ahead of guidance.

So in conclusion, we are sticking with product guidance we have given.

Humphrey Lee from Dowling & Partners.

I have a question regarding your auto business.

Can you provide some color in terms of claims experience in the quarter, excluding cats and prior-year development versus 3Q?

And also with 4Q in the books, does it change your view for the outlook for 2016 in terms of the loss ratio expectations?

Humphrey, are you talking about the auto business?

Yes.

Humphrey, it is Eric.

We took about, I would say in 2015, roughly 2% rate throughout the year of 2015.

Going into 2016, we'll only slightly more than double that.

Auto is clearly up in Q4 2015 versus Q4 2014.

We actually, if you want to talk about total combined ratio, homeowners in Q4 2014 was fabulous, frankly, so that was up in Q4 2015.

Still a very good result.

On the auto side, like many of our peers, or at least one peer that has reported so far, we are still seeing elevated severity and frequency.

As I said in the third quarter -- and obviously, I am talking about just retail here.

In a minute, I'll let Maria comment on group.

In the third quarter, I mentioned, and I think so did some of our peers that miles driven is up.

I'll also add, and I may have mentioned it in the third quarter as well, that claim costs are up as well, which shouldn't be surprising.

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

Maria?

This is Maria Morris.

With regard to the group business, we see the exact same trends as we saw in our retail business.

So obviously, both frequency and severity up.

Eric talked about a lot of the trends underlying that.

I would mention one thing on severity.

We do notice that with a lot of new cars on the road, that the cost is actually repairing those is up, with the computerization and other things in new cars.

In addition to obviously more miles driven, we've got also the issue with regard to severity, and we have been taking rate as well.

So in the mid single digits, and I would note that in group, even as we are taking rate, we still have double-digit sales increases year over year.

So we are focused just as we are on retail, on continuing to take rate throughout 2016, and we are bullish on the prospects for growth.

Got it.

And then, shifting gears to Latin America, the US Direct business continued to be an earnings drag for the segment.

How long do you expect the unit to turn profitable?

Is it a matter of scale, or are there some levers that you can pull to drive improvements in that particular business?

So you are referring to currency or the growth of the business?

No, just from the earnings perspective.

Right.

So, as you know, we have been facing currency issues in Latin America.

The impact is around 20% during the last year.

But if you think about growth, excluding that, and excluding the US Direct business, adjusted for none of the items in the current quarter, operating earnings were flat year-over-year.

But strong growth of approximately 11% happened, adjusting for all of that.

We gave you guidance of upper single digits, and we will continue to support that.

Beside from currency.

We see further deterioration of local currencies against dollar, but not as big as we saw before.

So we, in the core business, we look at currency to sustain our high single digits.

All right.

Thank you.

Yaron Kinar from Deutsche Bank.

I want to go back to the separation plan.

And the announcement regarding the buyback cessation for the time being.

So first, Steve, I think in your comments to Tom's question, you said that really the separation plan is not just regulatory driven, it's also part of the strategic work you have done.

With that in mind, why go through the court challenge at this point, if ultimately, even if the challenge let's say was accepted, you'd still go through the separation plan?

Yaron, as you have said many times, we don't believe we are a SIFI under Dodd-Frank.

80% of the Company remains after the separation, if it were to occur.

And that remaining 80% will be impacted by whatever capital rules the Federal Reserve comes up with, as well as a number of other matters related to compliance, that will relate to being designated a SIFI.

So there is still a significant potential burden that will be placed upon the remaining Company that would put us potentially on an un-level playing field with our competitors who are not SIFIs.

Why not file the challenge after the separation plan, if you're still designated, then?

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

Okay.

And the credit rating agencies came out with the few negative outlooks after the plan was announced.

Could you comment on those, and maybe what you could do in order to alleviate their concerns?

Sure.

Often, I think you will see that whenever a firm announces a significant transaction, whether they are buying something or selling or separating something, the rating agencies put you on watch for outlook just until they get more details so they can sort out exactly what is going to happen.

We announced a plan to pursue a separation.

We have to sort out a lot of details, including how this will work, and we will present that to the rating agencies when we have that work completed, and they will be able to have an appropriate view.

So this is -- we are in a transition period, a holding period with the rating until such time as we can get them more information.

And then finally, I guess this is more a comment that a question on my part.

In the December outlook call, you basically said that you would be increasing the capital deployment, given a change in strategic view and given the buffer that you had built.

I would have thought that at the time you knew that you were going to go through the plan, or announcing the plan of separation, and just creates a lot of back and forth here, I think, in terms of how investors think of the buyback program and the timing thereof.

So I just -- I would have thought that this could have been handled differently, and I guess that is my comment, and I wanted to see if you have any reaction to that.

What we are doing through our work on strategy is to find ways to maximize values for our shareholders.

We have talked about a focus on cash and growing businesses that throw off more free cash flow, and returning any excess capital to our shareholders.

We also look at all of our businesses in terms of their viability longer-term, and how best they may be viable in the marketplace.

And it was our determination after a great deal of work that the US retail business would be more viable long-term as a separate entity.

Once we made that determination, we made that announcement that we'd be pursuing a plan to separate.

And as I said earlier in the call, a great deal of work has to still be done to effect that plan, and to determine which avenue we take to separate that business.

But all of this is done through the lens of creating shareholder value.

Okay, thank you.

Erik Bass from Citigroup.

In retail, you mentioned higher direct expenses.

Can you discuss the drivers in the quarter, and also, should we expect to see any increase in spending in either retail or the corporate level in anticipation of the separation?

It's Eric, I will start out.

It was across the board.

Corporate overhead was higher, including some advertising costs.

We had some legal reserves set up in there.

Generally fourth quarter was higher, so this isn't really out of line with what we would expect.

Going forward, I would expect in the first quarter, you will see something that looks more like a normal first quarter, but maybe I will let John or Steve comment if they want to add anything.

I just want to add about -- do we expect to have some expenses to do the work on the plan to pursue the separation?

Clearly, there will be some costs, but the costs will vary depending on what ultimate form we take.

So it's still too early to give you any guidance on that piece of it.

Okay.

And then, Eric, just a question with the prospect of a final DoL rule seemingly pretty close, can you talk about what steps you are taking to prepare, and maybe if you have had any discussions with third-party distributors about their comfort selling products under the best interest contract exception?

I am sure you have heard this from others, as well.

We are thinking of every angle, based on what was previously put out by the DoL.

But as you know, we don't have anything.

The regulation is with OMB now.

We would expect to see it in let's call it 40 to 70 days, something like that.

So we're thinking about the various forms that it could take.

Again, based on what we saw previously.

We have talked to a number of distributors.

I don't think it would be appropriate for me to share some of those conversations.

But suffice to say, we are considering all potentialities from both a product perspective and how you'd distribute and anything else that would result from the actual regulation coming out.

More to come, and obviously, all of us will be ever to add to this dialogue when we see it, sometime in the March/April time frame.

Okay, thank you.

I just want to say at the end of the call here, the key message I want to leave with all of you today is that management is doing everything possible to unlock value for our shareholders, and the things you have heard about recently from us in terms of US retail separation and the strategy work we are doing with accelerating value is driven by that desire.

And that brings us to the top of the hour.

So we're going to end the call.

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