大都會人壽保險 (MET) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife First Quarter 2017 Earnings Release Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

Before we get started, I would like to read the following statement on behalf of MetLife.

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal security laws, including statements relating to the 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 statement 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 Factors section of those filings.

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

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

Thank you, Greg, and good morning, everyone.

Welcome to MetLife's First 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 on 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.

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.

(Operator Instructions)

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

Thank you, John, and good morning, everyone.

Last night, we reported first quarter operating earnings per share of $1.41, up from $1.20 per share a year ago.

Overall, it was a strong quarter across most business segments, with favorable results from the variable investment income, expense management and underwriting.

Equity markets, which were rose by 5.5% in the quarter as measured by the S&P 500, created a tailwind for earnings, while low interest rates and a strong U.S. dollar remain as headwinds.

Adjusting for notable items, operating earnings were $1.46 per share, which compares to $1.31 per share on the same basis in the prior year period.

Net notable items of $0.05 per share in the quarter included higher catastrophe losses, expenses to support our unit cost initiative, a legal settlement and a Penn Treaty guarantee fund assessment.

These were offset in part by a Retail Life Insurance reserve release.

As noted in my annual letter to shareholders, MetLife has a leading position in Group Benefits with a market share of 25% among large employers.

We're also experiencing strong growth in the mid-market and have over 40,000 small employer relationships.

While we pioneered this business a century ago, we consider Group Benefits an avenue for future growth and highlighted the segment as one of our growth engines at our November Investor Day.

During the quarter, sales of Group Benefits were up by 29% with strength across all market segments and product lines.

Our national account sales were particularly strong, especially among clients with more than 25,000 employees.

We continue to invest in this business to create differentiated customer experiences, supported by strong enabling technology and leading data protection capabilities.

Over the years, our group customers have put their confidence in us because of our financial strength and strong service capabilities.

Today, they're also trusting us to protect client privacy in an uncertain world.

The macroeconomic environment, the last 8 years has affected our business units in different ways.

Our group business, for example, is correlated to the health of the U.S. employment market.

We have been able to grow premiums and fees in the group business at a compound annual rate of 4.5% over the past 5 years, despite modest U.S. labor force and wage growth among large employers.

All else being equal, a stronger U.S. job market would drive faster growth in our Group Benefits business.

I've also made note of our shift away from capital-intensive Yen Whole Life insurance in Japan.

This decision was driven by our requirement for appropriate internal rates of return and payback periods for the products we sell.

The shift in our product mix resulted in lower Japanese sales for most of 2016, but we have started to turn the corner.

In the first quarter of 2017, Japan sales grew by 8% with strength in foreign currency denominated Whole Life as well as Accident & Health products.

Although there's too early to declare a trend from a single quarter, we are pleased with the overall direction of our sales transition in Japan.

MetLife's net derivative losses in the quarter totaled $602 million.

With interest rates ending the first quarter roughly where they started, much of the derivative loss was driven by strength in the U.S. equity markets and costs associated with executing the separation of Brighthouse Financial.

As part of our supplemental disclosure, we've again included an exhibit that details the fair value movements of our derivative portfolio.

As promised at meetings with investors throughout the first quarter, we are providing on this call an update on the RemainCo MetLife hedging strategy.

We refreshed our hedging strategy to protect free cash flow from both falling and rising interest rates.

This was accomplished through a process that sought to optimize free cash flow while balancing several key statutory, economic and GAAP metrics.

While the restructuring of RemainCo hedge program is largely complete, the program is dynamic.

We'll actively monitor and rebalance when market conditions warrant.

John Hele will offer more detail on this topic.

Moving to investments.

Variable investment income totaled $343 million in the quarter.

Of this amount, $272 million is attributable to RemainCo MetLife, which is above the high end of the quarterly guidance range of $250 million provided on our outlook call in December.

Private equity investments were the largest contributor to the outperformance.

In addition, hedge fund returns improved significantly from a year ago.

In the quarter, our global new money yield stood at 3.34%.

This compares to an average roll-off rate of 4.45% over the past 4 quarters.

In the fourth quarter, our new money rate was 3.15%.

Low yields continued to pressure the life insurance industry.

I would now like to provide an update on our plan to separate a substantial portion of our U.S. Retail business.

Many of you have asked whether the separation of Brighthouse Financial will still occur in the first half of 2017.

Given the complexity of the transaction, we do not believe we will have the necessary approvals to complete the separation in that time frame.

The MetLife and Brighthouse Financial teams continue to work diligently with our regulators on all aspects of the disaffiliation.

While we do not have an exact estimate of when that work will be complete, we are hopeful it will be in the coming months.

Operationally, the separation is proceeding on schedule, and we have reached several important milestones.

In January, Brighthouse Financial began to operate as an independent entity under MetLife.

In March, most significantly, Brighthouse Financial began doing business under its own name.

In April, Brighthouse Financial launched its first broadcast advertising campaign called Predictability.

You may have seen some of the ads during March Madness, The Masters or on Squad Box.

And most recently, we finalized the former financing for Brighthouse captive to hold ULSG liabilities.

This captive will aid in Brighthouse's capital efficiency and reduce statutory capital volatility.

Looking ahead, the next regulatory milestone would be the declaration of a hearing date by the Delaware Department of Insurance.

We remain confident that the separation will position both companies for success in their respective marketplaces.

For MetLife, the separation remains a cornerstone of our transformation to a company with lower market sensitivity and a higher and more sustainable free cash flow ratio.

Turning to regulatory matters.

I would like to provide a brief update on the government's appeal of the court ruling that rescinded our status as a systemically important financial institution, or SIFI.

On April 21, the Trump administration issued a memorandum directing the Secretary of the Treasury to report within 180 days on the SIFI designation process used by the Financial Stability Oversight Council, or FSOC.

On April 24, MetLife filed a motion in the U.S. Court of Appeals for the District of Columbia Circuit, asking the court to hold appeal in advance until that report is complete.

As we've said in our filing, we believe an advance will enable the new administration to determine whether any of FSOC's positions in this case should be reconsidered and whether it is appropriate for the government to continue pressing the appeal.

The timing for a ruling on our motion is at the discretion of the Court of Appeals.

Before I close, I want to update you on our share repurchase program.

During the first quarter, we repurchased $858 million of our common shares.

To date, we have bought back approximately $1.5 billion of our common shares or roughly half of our $3 billion authorization that we announced in November 2016.

We are on track to fully execute this authorization by year-end 2017.

With that, I will turn the call over to John to discuss our Q1 financial results in greater detail.

Thank you, Steve, and good morning.

Today, I'll cover our first 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 a disclosure labeled 1Q '17 Supplemental Slides that addresses the net derivative loss in the quarter.

I will speak to these slides later in my presentation.

We will continue to release additional supplemental slides when we have complex elements in a quarter.

Operating earnings in the first quarter were $1.5 billion or $1.41 per share.

This quarter included 5 notable items totaling a negative $61 million that we highlighted in our news release and quarterly financial supplement: first, unfavorable catastrophe experience net of prior year development in Property & Casualty decreased operating earnings by $45 million or $0.04 per share after tax; second, Corporate & Other was negatively impacted by a guarantee fund assessment for Penn Treaty insolvency and an increase in litigation reserves, which decreased operating earnings by $44 million or $0.04 per share after tax; third, expenses related to our unit cost initiative, also in Corporate & Other, decreased operating earnings by $21 million or $0.02 per share after tax; fourth, reserve adjustments, primarily resulting from modeling improvements of individual life products, increased operating earnings in MetLife Holdings by $34 million or $0.03 per share after tax.

In addition, activity related to separation resulted in an increase to operating earnings of $42 million in MetLife Holdings and offsetting a $42 million decrease to operating earnings in Brighthouse Financial; finally, variable investment income was above the company's 2017 quarterly business plan range, excluding Brighthouse Financial, increasing operating earnings by $15 million or $0.01 per share after tax and the impact of deferred acquisition costs, or DAC.

Adjusted for all notable items in both periods, operating earnings were up 11% year-over-year and 12% on a constant currency basis.

On a per share basis, operating earnings adjusted for all notable items were $1.46, up 11% year-over-year and 12% on a constant currency basis.

Turning to our bottom line results.

We had first quarter net income of $820 million or $0.75 per share.

Net income was $726 million lower than operating earnings, primarily because of net derivative losses of $602 million after tax.

For more details about the difference between net income and operating earnings, please reference Page 3 in our supplemental slide disclosure this quarter.

Page 4 in the supplemental slides shows the attribution of the after tax derivative loss.

As Steve noted, the derivative loss is driven by strength in the U.S. equity market and the repositioning of our hedging strategies.

For the total company, the $602 million GAAP derivative net loss included: number one, $402 million or 2/3 of the total for asymmetrical and noneconomic accounting, which included costs to reposition the RemainCo hedges to protect from changes in interest rates on the statutory basis; number two, $139 million of VA hedge ineffectiveness, primarily in Brighthouse Financial, including the impact of the transition to their new hedging strategy with; number three, the balance of $61 million, largely driven by other risks in VA embedded derivatives.

The asymmetrical and noneconomic accounting is a recurring feature under U.S. GAAP as the derivative assets are mark-to-market, but a significant portion of MetLife's VA and life liabilities are not.

As Steve mentioned, we have made significant progress at RemainCo with protecting the statutory capital and thus, free cash flow from future changes in interest rates.

We have obtained further hedge accounting treatment on a statutory basis and restructured the hedges, such that our free cash flow percentage is expected to stay within a 65% to 75% band on average over 2 years with a range of the 10-year treasury rate from 1.5% to 4%.

I stated in the recently filed Form 10 amendment, Brighthouse Financial has made significant progress in repositioning to its new strategy.

This strategy targets hedging to the statutory measure of a CTE95, while also holding the targeted buffer of $2 billion to $3 billion.

The new hedges protect on the downside using a portion of buffer but offer upside potential to Brighthouse Financial.

Brighthouse Financial believes this new strategy will reduce hedging costs over time and improve statutory results.

Brighthouse Financial and MetLife share a common philosophy of preserving a free cash flow through their hedging strategies and protecting statutory capital, but the circumstances of the companies are a bit different.

Brighthouse Financial's hedging to CTE95.

Brighthouse Financial has a greater concentration of variable annuity business than RemainCo, and this capital measure better reflects Brighthouse Financial's business.

Since Brighthouse Financial maintains a large capital buffering, it can retain some risk like a deductible reducing hedge costs.

In contrast, RemainCo has a more diverse business with a lower concentration in variable annuities and no longer writes new variable annuity business in the U.S.

Book value per share, excluding AOCI other than FCTA, was $50.52 as of March 31, down 5% year-over-year, primarily due to the impact of derivative losses as well as the actual assumption review in the second quarter of 2016.

Tangible book value per share was $41.64 as of March 31, down 6% year-over-year.

With respect to first quarter underwriting margins, total company earnings were lower by approximately $0.13 per share versus the prior year quarter after adjusting for notable items in both periods.

Underwriting in Brighthouse Financial accounted for approximately $0.10 of the total decrease.

This was primarily due to the previously disclosed impact from the loss of the aggregation benefit in variable and universal life and the second quarter 2016 modeling changes.

Excluding Brighthouse Financial, underwriting earnings were lower by approximately $0.03 per share year-over-year.

This was primarily due to higher claim volumes in Mexico and the impact of a DAC assumption change in the company's Chile pension business as well as a onetime reserve adjustment in Japan.

In the U.S., underwriting results were essentially in line with the prior year quarter.

The Group Life mortality ratio was 86.9%, unfavorable to the prior year quarter of 85.7%, but below the midpoint of the annual target range of 85% to 90%.

This is the second lowest first quarter mortality ratio for Group Life in 13 years.

Only the first quarter of 2016 was lower.

MetLife Holdings interest adjusted benefit ratio for life products was 48.6% and 53.8% after adjusting for notable items discussed earlier.

This result was favorable to the prior year quarter of 56.6% and at the low end of the targeted range of 53% to 58%.

Finally, the group nonmedical health interest adjusted benefit ratio was 79.9%, favorable to the prior year quarter of 81.2% and within the 2017 annual target range of 76% to 81%.

Favorable underwriting results were primarily due to renewal actions in dental and lower new claim severity in disability.

Turning to investment margins.

The weighted average of the 3 product spreads presented in our QFS was 165 basis points in the quarter, up 25 basis points year-over-year.

Pretax variable investment income, or VII, was $343 million, up $178 million versus the prior year quarter, driven by stronger private equity and hedge fund performance.

Product spreads, excluding VII, were 129 basis points this quarter, down 2% year-over-year.

Lower core yields accounted for most of this decline.

Overall, higher investment margins in the quarter accounted for approximately $0.01 of EPS improvement year-over-year.

In regards to expenses, the operating expense ratio was 22.5% and 21.6% after adjusting for the notable items this quarter related to Penn Treaty, litigation reserves and the company's unit cost initiative.

The ratio is favorable to the prior year quarter of 23.8%, primarily due to the sale of MetLife Premier Client Group and expense efficiencies.

Overall, better expense margins contributed approximately $0.08 of EPS improvement versus the prior year quarter.

I will now discuss the business highlights in the quarter.

Group benefits reported operating earnings of $194 million, up 37% and 34% adjusting for notable items in both quarters.

The primary drivers were favorable expense margins and strong Non-Medical Health underwriting results.

Group Benefits operating PFOs were $4.3 billion, up 5% year-over-year, driven by growth across all markets.

This is at the high end of our guidance of 3% to 5%, which excluded the loss of one large dental contract, which will occur in the second quarter.

Group Benefits sales were up 29% with growth across all markets.

We saw particular strength in the jumbo case market due to more quote activity and higher closing ratios, while persistency continued to be favorable.

Retirement and Income Solutions, or RIS, reported operating earnings of $280 million, up 16%, but down 1% after adjusting for notable items in both quarters due to less favorable underwriting.

RIS operating PFOs were $479 million, essentially unchanged year-over-year.

While 1Q tends to be the seasonally weakest for PRT transactions, we continue to see a good PRT pipeline, and we expect 2017 to be an active year for transactions of all sizes.

Our approach will continue to balance growth with an efficient use of capital.

Property & Casualty, or P&C, operating earnings were $29 million, up 32%, but down 3% after adjusting for notable items in both quarters.

Elevated catastrophes, net of prior year development, reduced operating earnings by $45 million in both quarters.

Nearly half of these cats were due to hailstorm activity in Northern Texas.

We have taken steps to address this, and as a result, our homeowner policy count in this area has declined 18% year-over-year.

We expect the pace of decline will accelerate through additional rate increases and management actions.

Our P&C combined ratio, excluding cats and prior year development, was 89.8%, modestly better than the prior year quarter of 90.0%.

We continue to see improvement in our non-cat auto results, which posted a combined ratio, excluding cats and prior year development, of 97.2%, well below the 100.7% in the prior year quarter.

Lower auto claim frequency was partially offset by higher severity as repair costs continued to increase on technology laden vehicles.

We have been taking targeted rate increases in auto over the last 12 months of 7% to 8% and expect to take similar related actions in the immediate future.

P&C operating PFOs were $875 million, down 1% year-over-year.

Overall P&C sales were down 5% due to price increases and management actions to drive value.

Turning to Asia.

Operating earnings were $295 million, down 3% from the prior year quarter and 4% on a constant currency basis after adjusting for notable items in both quarters.

Volume growth and lower expenses were offset by higher reserves and taxes due to the change in the Japan effective tax rate.

Asia operating PFOs were $2.1 billion, up 3% and up 1% on a constant currency basis.

PFOs, including the joint ventures and ownership, was up 3% on a constant currency basis.

Asia sales were up 35% on a constant currency basis.

In Japan, sales were up 8%, driven by foreign currency life and accident health growth.

Other Asia sales were up 89%, representing good growth in all markets, driven particularly by China with the growth of our protection business through our professional agency channel as well as a large group case in Australia.

Latin America reported operating earnings of $143 million, down 5%, and down 8% on a constant currency basis after adjusting for notable items in both quarters.

The key drivers were less favorable underwriting due to higher claims in Mexico and the impact of an assumption change in the company's Chile pension business.

Favorable market impact due to better yields in Mexico and [Encaje] as well as volume growth were partial offsets.

Latin America operating PFOs were $916 million, up 5% and 6% on a constant currency basis.

Total sales for the region were up 3% on a constant currency basis, driven by strong employee benefit sales, particularly offset by lower pension sales in Mexico.

EMEA operating earnings were $75 million, up 19%, and 34% on a constant currency basis.

The key drivers were favorable expense margins and volume growth.

While unit cost improvement is ahead of planned, a meaningful portion of the year-over-year decline in expenses is related to timing and favorable items that are not expected to repeat in subsequent quarters.

EMEA operating PFOs were $614 million, essentially unchanged from the prior year period, but up 5% on a constant currency basis, driven by growth in Turkey as well as employee benefits in the U.K. and Egypt.

Total EMEA sales increased 4% on a constant currency basis.

We continue to see a favorable shift toward higher-margin products in the region.

MetLife Holdings, which primarily consists of our legacy Retail and long-term care runoff businesses, reported operating earnings of $385 million, up 44%, and up 12% adjusting for notable items in both periods.

The key drivers were improved underwriting and market results.

MetLife Holdings operating PFOs were $1.5 billion, down 8% mostly due to the sale of MetLife Premier Client Group, which included the company's affiliated broker-dealer unit.

As previously guided, we expect operating PFOs to decline by approximately 12% in 2017 versus 2016.

Corporate & Other had an operating loss of $99 million compared to an operating loss of $190 million in the first quarter 2016.

Adjusting for notable items in the current period, the operating loss was $30 million.

This unusually low quarterly loss for Corporate & Other is primarily due to the incremental tax benefit of $151 million reflected in the Earnings by Source table at the bottom of Page 28 in the QFS.

The incremental tax benefit is required by GAAP accounting rules to adjust the company's overall consolidated quarterly tax rate to equal the company's annual projected effective tax rate.

As a result, it enables the consolidated tax rate to be consistent period-over-period, yet causes Corporate & Other to fluctuate on a quarterly basis.

As for the company's effective tax rate, we expect it to be between 21% to 22% for 2017, down from 23%, as previously guided.

The primary reason is the benefit of non-U.

S. operation at rates lower than the U.S. tax rate of 35%.

Brighthouse Financial operating earnings were $244 million, down 25%, and 17% after adjusting for notable items in both quarters.

The key drivers of the earnings decline primarily related to the previously mentioned unfavorable underwriting, including $39 million from the loss of the aggregation benefit and $10 million from the previously discussed 2Q '16 modeling changes.

As a reminder, Brighthouse Financial statement results within MetLife's financial statements duly match the financial statements of Brighthouse Financial, Inc.

and related companies shown in the most recent Brighthouse Financial Form 10, due to accounting timing differences.

Brighthouse Financial PFOs were $1.1 billion compared to $1.3 billion in the first quarter 2016.

Overall, annuity sales were down 35% and life sales were down 54%, mostly resulting from the suspension of sales through one distributor and lower sales in the MetLife Premier Client Group.

Sales of the company's index-linked annuity product Shield Life Selector (sic)[Shield Level Selector] remained strong in the first quarter 2017 at $455 million, up 25% year-over-year.

I will now discuss the cash and capital position.

Cash and liquid assets at the holding companies were approximately $3.8 billion at March 31, which is down from $5.8 billion at December 31.

This decrease reflects the net effects of share repurchases, payment of our quarterly common dividend and other holding company expenses.

Please note that first quarter cash at the holding companies include minimal dividends from our operating subsidiaries, and we expect operating subsidiary dividends to increase in the second quarter.

Consistent with our prior guidance, we expect MetLife to receive between $3.3 billion to $3.8 billion in dividends from Brighthouse Financial prior to separation, subject to regulatory approvals.

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

Our combined risk-based capital ratio for our principal U.S. insurance companies, excluding ALICO, was 465% on an NAIC basis at year-end 2016.

For our U.S. companies, preliminary first quarter statutory results were operating earnings of approximately $870 million and a net loss of $107 million.

Statutory operating earnings were up 18% for the prior year quarter, primarily due to favorable underwriting and lower operating expenses.

The net loss was primarily the result of losses on derivatives.

We estimate that our total U.S. statutory adjusted capital was partially $24.1 billion as of March 31, down 2% from $24.6 billion at December 31.

The decrease in statutory capital was driven by Brighthouse Financial with total adjusted capital, or TAC, reduced by $1.2 billion.

This drop was a function of certain restructuring transactions for the separation, which caused VA reserves to be less responsive to equity markets in the quarter.

Several restructuring and capitalization actions are expected to occur prior to the separation was positively impacting TAC.

Many of these have been completed in the month of April.

As a result, Brighthouse Financial combined TAC has increased by approximately $1.5 billion since quarter-end.

On a pro forma basis as of March 31, 2017, and to give an effect to all restructuring and separation-related transactions, including those in April, we continue to estimate a buffer of approximately $2.1 billion above CTE95.

This will result in a combined pro forma RBC ratio for Brighthouse Financial of approximately 650% as of March 31, 2017.

Further details will be included in the next amendment to the Form 10, which we expect to file in May.

For Japan, our solvency margin ratio was 909% as of December 31, which is the latest public data.

Overall, MetLife had a strong first quarter in 2017, highlighted by favorable impacts in equity markets, lower expenses and solid underwriting in the U.S. Top line growth was particularly strong with sales up 15% year-over-year for MetLife as a whole, and 21% for MetLife on a post-separation basis.

GAAP net income was negatively impacted by net derivative losses, 2/3 of which were asymmetrical and noneconomic.

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 improvement in free cash flow and generate long-term -- and create long-term sustainable value to our shareholders.

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

(Operator Instructions) Your first question comes from the line of Tom Gallagher from Evercore.

Steve, just a question on the separation.

You mentioned the complexity that may delay the timing.

Just a question on that.

Do you still feel confident in the structure of the transaction in terms of the dividends, the capital for each business?

Or do you see the delay being more administrative complexity?

Tom, nothing changes in terms of our expectations other than the timing.

In the timing, I used the word months, I didn't use the word quarters.

It is the complex transaction.

We're working closely with our regulator.

There's a lot of information to impart.

We're working very diligently and provide the information as fast as humanly possible, but it is a large volume of information and analysis that is going on.

So that's what's resulted in the expected delay from what our initial thought was, which was made many months ago, many quarters ago in terms of an expectation around timing.

Once you get into these transactions and you see the complexity associated with them, you see what occurs in terms of amount of work that has to get done to make sure that everything is detailed appropriately and analyzed appropriately.

Okay.

That's helpful.

And then just a question on expenses to make sure I have my head wrapped around these.

So John, the -- if I'm understanding the flow of the strategic expenses for RemainCo, that would imply you still have another $260 million to $270 million left for the balance of the year that would come through operating in Corporate.

That was my first question on expenses.

And then also on Brighthouse, I just want to get a sense for how much of the kind of annualized $200 million increase in expenses this year is embedded in the 1Q result.

The answer to your first question is yes.

That's what you would expect for the year.

And could you share the second question again?

I didn't quite get that.

Yes.

In the Form 10, it indicates Brighthouse expenses are expected to go up $200 million in '17 versus 2016 levels.

And I just want to understand how much of that planned increase is embedded in the 1Q number?

Is any of that -- or is it a small amount?

Just some indication of how much is in the 1Q number?

Probably about $30 million of that is in Q1.

$30 million on an annualized basis?

No, $30 million in the quarter.

It's $200 million annually.

In the quarter, building to like $50 million quarterly run rate?

Yes.

Yes.

Yes.

Okay.

So a little more than half.

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

My first question was in regards to the changes you made to the derivatives program, should we expect any impact to your ongoing benefits from some of the low interest rate hedges that would come through -- that would have been coming through operating earnings?

Not -- there's not a material change to the benefit that we get from those hedges.

Of course, rates are higher now so we get less benefit, but those are still essentially there.

Okay.

So no material change, I was interested in interest rates moving.

Then just secondly, coming to the year, you had guided to $450 million to $650 million of corporate losses excluding the expense initiative cost.

Does that outlook change now that you've lowered your consolidated tax rate outlook?

Yes.

So we expect still to be within that range, and -- but we do expect the lower tax rate for the year now.

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

First, just had a question on the derivative losses.

Obviously, the derivative loss declined significantly from 4Q but were still relatively large.

So I was a little surprised with the loss in interest rates in that.

Rates were generally flat or lower depending on which part of the curve you look at.

So just wondering what caused that?

Was that related to sales of some of the hedging positions or something else?

And then how the GAAP loss in hedge -- on the hedging program affected yours -- or whether it had any effect on stat capital.

So there's a few things going on, Jimmy.

First is although the 10-year treasury dropped a little or was almost flat quarter-to-quarter, swap rates were up a little bit.

So there was some noise from that.

That's asymmetrical and noneconomic, but you get the GAAP noise from that.

And you will also had some strong equity markets in the quarter and you get some GAAP noise from that as well.

We also, as we pointed out, had some hedge ineffectiveness in the quarter and that impacted the total GAAP net income.

And then just in terms of the changes you implemented, I'm assuming you changed from swaps to swaptions as you had discussed before, but did you -- is that correct?

And how -- if you can discuss some of the other changes that you've made.

And whether you've changed the size of the hedge program, whether you made it bigger or smaller.

We actually did a variety of things.

We were able to get some more statutory hedge accounting for some types of derivatives by changing their technique and structure.

We did move from a few different instruments like that, and we have accomplished our primary goal of making stat capital for RemainCo less sensitive to changes in interest rates.

And as you can see from the numbers and the breakouts, RemainCo has the sensitivity across the board.

And in terms of equities, it is relatively insensitive.

I mean, there's always movements.

And every time you look at these results every quarter, there's a lot going on in a quarter when you have derivatives as well as variable annuities.

There's the time decay of the derivatives.

There's the age in the portfolio.

You have basis risk, or what is known as VA hedge ineffectiveness.

So all these get grouped together.

So there are sensitivities going up and down.

We've minimized that but there's always -- there'll always be some movement here due to all of these factors.

Okay.

And then lastly, just you mentioned the strong sales in Asia -- in Japan, I think, up 8%.

To what extent do you view this as sort of a turn in your sales since results have been pretty weak the last few quarters versus maybe some front-selling related to the discount rate changes that are going into effect in the second quarter?

So let me try that.

It's Chris Townsend here.

So Japan sales were up 8% year-on-year and this is driven primarily by foreign currency life sales growth that are up 51%.

As you know, we made that shift in the end market probably in July at the end of '15, beginning of '16.

We also had very strong growth in Asia, which is up 6%.

So as the foreign currency business now makes up about 70% of our total life sales, and we think that's fairly consistent as a mix going forward, then as a number of our competitors have pooled their life products and changed pricing following that reserve discount rate change, we're seeing customers and agency push much towards the foreign currency life products, and we're very well positioned to provide those, given the breadth of distribution we've got.

So we see that as a fairly consistent theme.

We probably did benefit from around (inaudible) sales pre-repricing because all the products were -- we repriced in April.

And as you know, following that reserve discount rate in the sort of financial year, and you'll expect sales in this sector to fall off in the second quarter.

But overall, we're very comfortable in terms of Japan sales.

But it’s too early to sort of list our guidance of that sector at the moment.

Your next question comes from the line of Erik Bass from Autonomous.

In Group Benefits, can you just talk about the competitive environment?

And where are you seeing the best opportunities?

And given relatively strong industry results in recent quarters, you're seeing any uptick in price competition?

This is Maria Morris.

First of all, I just want to say we were very pleased with our group sales results in 2017.

It's a competitive market.

As you know, it's always competitive.

But having said that, I'd say that life and disability has been rational.

We've seen a little bit more of an intense competition in dental, especially downmarket, but overall, we feel very comfortable with the market that we are in.

You probably saw that we had strong growth and strong persistency.

We've been able to get our renewal actions, and overall, it's been a rational market.

Got it.

And then one thing to clarify just on the pace of buybacks, should we expect it to slow at all until you receive the dividend payment from Brighthouse?

And I'm assuming that $3.3 billion to $3.8 billion is contingent on the transaction being approved?

And it's also -- are there any restrictions to you being in the market around the time of the transaction?

No, we don't anticipate any change in the program that we put in place.

Between our existing cash reserves and earnings, we believe we're on track for the program being completed by 2017.

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

And just to follow up on Erik's question around the share repurchase.

As I understand it, there was kind of a bright line test that RBC couldn't fall below 400%, and it sounds like whatever happened with hedge losses in the first quarter didn't bring you close to that.

But is that 400% applied to the statutory entities related to RemainCo?

Or all of the current MetLife?

Well, RBC's only measured once a year.

And so we're confident about our long-term projections.

We always knew that there's a lot of pluses and minuses as you do this restructuring, unwinding reinsurance transactions, you see the pieces moving back and forth.

And the Brighthouse tentative RBC, we haven't done the debt infusion yet from that.

So there's been a lot of moving pieces here, and you have to look in -- if you take that into account, we're strongly capitalized across the board for all of our businesses.

Okay.

That would be great.

And then just on MetLife Holdings, the results were stronger on a normalized basis than I would have thought.

I mean, broadly speaking, should we think that in quarters in which you have -- you see favorable equity market performance that MetLife Holdings will not runoff as quickly as you guided to?

Well, there is a block of VAs in MetLife Holdings.

And so in favorable equity markets, you have better fees on an ongoing basis and that will continue to be one of the factors.

Your next question comes from the line of John Nadel from Crédit Suisse.

My question's about the group insurance business.

Steve, it's been a long time since I can remember you sort of starting off the conference call talking about or highlighting that business.

Given your size and scale there, particularly at the large case market, is there anything beyond further economies of scale that you think you could gain from a large acquisition within that business line?

And relatedly, why do you think you're seeing more success particularly in the jumbo case market?

Has competition declined there?

Or have you just gotten a bit more aggressive?

John, as for the first part of your question, we always look at any opportunities out there in the marketplace.

And the group business is one in which we have a very favorable view going forward, and it has been a strong part of our company for many decades.

So if there's opportunities in the marketplace to make an accretive acquisition, we certainly are going to be quite interested in looking at that.

Maria, do you want to take the second part of the question?

Sure.

In terms of where we've been investing in group insurance, I think we're seeing the benefits of our investment in our growth.

So as an example, we've been investing in our voluntary benefit platform.

And so we are seeing large groups as well as medium-size groups really gravitate toward carriers both for the core benefit program and to offer voluntary benefits to their employees toward carrier like MetLife, where we're in a position to do that.

We've talked historically about benefiting as an example from the exchanges.

We're, in some cases, the only nonmedical carrier on the health exchanges.

And I think going forward, the other place we really put investments is in our ability to ensure that employee records are secure.

So a lot of work in our security platforms.

That's been very helpful up market as we've looked to bring on new Group Life and disability business as well.

So Maria, is it fair to say that when you talk about really strong growth in sales at the jumbo case market that a good chunk of that is actually voluntary and not employer paid?

It's actually both.

I would say that we've had a very strong sales quarter up and down in the market, so double-digit growth in the jumbo market.

But we've had high single-digit growth in the regional market, and as you know, small market is actually not seasonally first quarter focused.

But even there, we've had strong growth.

We've had growth in both our core business and our voluntary business.

Our voluntary business is up double digits from a sales perspective.

So overall, a very strong sales quarter for group.

And then a question for John on the change in the hedging strategy implemented at both Brighthouse and RemainCo.

Can you give us some sense as to the duration of the program that you've put in place now?

And how often some of these hedges need to roll?

I'm just trying to understand how the new instruments compare with some of the older hedges.

I'm not sure if you even still have them that had extended into the 2020s.

So on RemainCo, the duration is about the same, and it's basically some longer-term hedges mainly in that.

Brighthouse is like a 1- to 3-year type restructuring of hedges that they're doing.

And they've made significant progress to get their hedging done now.

So if you think about future sensitivities, we point out, look at the Form 10, those recently published, there's sensitivity for VA as well as ULSG in there, and you can see both on a stat and a GAAP basis what the special sensitivity should be going forward.

No, I understand that, that disclosure is there.

I was just trying to understand duration and maybe the risk of having to roll.

It's -- so for Brighthouse, it's about 1 to 3 years.

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

Just want to start with the stat capital.

I guess, it was down about $1 billion from year-end, despite not taking any dividends out.

So John, can you just walk through the mechanics in terms of why the capital was down?

So it's only down $500 million from $24.6 billion to $24.1 billion.

And as I said, most of that is Brighthouse Financial.

And they had -- some of their restructuring caused less sensitivity to the reserves.

The total CTE95, which is what they're really hedging to in their strategy, is still at the buffer when we take into account all the transactions that will happen.

So on a pro forma basis -- but as of March 31, you've seen partway through the restructuring and all the steps that have to happen.

So you're seeing this as sort of the low point, and as I said in my script, it's up significantly from March 31.

And that there would be a whole series of further transactions that have to happen to get there.

So we gave you sort of the pro forma view of it and they expect to be like a [6 50] RBC pro forma for all that as if -- if all that has happened as of March 31.

Okay.

And then just another question on the updated Form 10.

Two of the changes were that the debt-to-capital of Brighthouse is now going to be 25% and then the CTE95 buffer has gone from, I guess, around $3 billion to $2 billion to $3 billion.

So can you just discuss why those 2 -- what drove those 2 changes?

So the first, Form 10, all the calculations, the values as well as all the core assumptions and projections were all done as of June 30 last year.

And the updated Form 10 is as of December 31, and things change a lot between June 30 and December 31.

So there's a series of changes, and I think Brighthouse will be a dynamic company in how they manage their business, and that's reason for that.

Still strongly capitalized and will provide good value over time to shareholders.

Okay.

And just one last clarification question, if I could, on the 9% ROE target for Brighthouse, is that the guidance for sort of out of the gate?

Or is that more of the longer-term expectation?

I think what happens in Brighthouse is for the next little while, it is about that type of range because of just how kind of GAAP works, and -- but their key focus is to build up over time to reduce the hedging cost to start getting cash out of the company.

And that's -- the key focus is to run it mainly on statutory basis.

And your final question today comes from the line of Humphrey Lee from Dowling & Partners.

Just to follow up on John Nadel's question regarding kind of your appetite for group market acquisition.

Given your capital position, like what size of the transaction will you be more comfortable in doing it without kind of seeking external capital?

Humphrey, well, first of all, we certainly will have some capital in reserve for acquisitions.

But please remember that we do acquisitions that are of larger size like the Travelers deal back in 2005, the ALICO deal in 2010.

We would access the capital markets for any funds necessary above and beyond we hold at the holding company and just important to reiterate our philosophy on acquisitions.

They have to make sense strategically in terms of what we are planning for the company going forward in the direction and businesses we want to be in.

And second of all, they have to be accretive for our shareholders and create shareholder value.

They have to earn more than their cost of capital, and at any point in time when there's an acquisition opportunity, we'll look at the capital markets and what it would cost us to raise capital and what kind of returns we'd expect from acquisition, including synergies, and we make a determination in terms of what we're willing to pay for that business.

Got it.

And then just a housekeeping question, do you have any updates regarding the dividend stopper in some of your debt costs right now?

Well, we do not believe that this will be a factor going forward.

We have steps that we can take, if we need to adjust for this.

So that's something that we have a plan for if we need to execute it.

And at this time, there are no further questions.

So I'll now turn the call back over to Mr. Hall.

Thank you, everybody, and we'll talk to you throughout the quarter.

Goodbye.

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