大都會人壽保險 (MET) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MetLife First Quarter 2018 Earnings Release Conference Call.

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

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

Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to 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 statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission, including in the Risk 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, operator.

Good morning, everyone, and welcome to MetLife's First Quarter 2018 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 supplement.

A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.

Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John McCallion, Chief Financial Officer.

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

Last night, we released an expanded set of supplemental slides.

They are available on our website.

John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along.

After prepared remarks, we will have a Q&A session that, given the busy earnings call schedule this morning, will extended no longer than the top of the hour.

So in fairness to all participants, please limit yourself to one question and one follow-up.

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

Thank you, John, and good morning, everyone.

As you know, we announced on Tuesday that John Hele is retiring from MetLife and has been succeeded as CFO by John McCallion.

I want to thank John Hele for his service and for being a strategic partner on MetLife's refreshed enterprise strategy, which has made us a simpler company and strengthened our free cash flow generation.

I also want to welcome John McCallion to the CFO role.

I have worked closely with John for over 10 years, and I have every confidence that he will bring the skill, energy and leadership needed to help MetLife create significant value for our shareholders.

Moving to financial results.

Last night, we reported first quarter adjusted earnings per share of $1.36, up from $1.20 per share a year ago.

Tax reform added roughly $0.10 per share to adjusted earnings year-over-year.

Overall, it was a very strong quarter with particularly good underwriting.

Variable investment income came in above expectations, and foreign currency also provided some lift.

Despite rising in the quarter, current interest rate levels continue to pressure recurring investment yields.

Equity markets had limited impact on consolidated adjusted results.

Adjusted return on equity in the quarter was 12.8%, the highest adjusted ROE for MetLife since the third quarter of 2014.

After notable items, adjusted earnings were $1.34 per share.

The net difference of $0.02 per share included a positive $0.06 per share from the final portion of a Japanese variable annuity reserve release that we elected to recognize in the first quarter.

This was partially offset by costs to achieve our target of $800 million in pretax annual run rate savings by 2020.

Net income for the quarter was $1.2 billion compared to $867 million a year ago.

We've been working to reduce the sensitivity of net income to capital markets and narrow the gap between net income and adjusted earnings.

In a volatile first quarter for the capital markets, we reported adjusted earnings of $1.4 billion, only moderately above net income.

This points to progress we are making to lower our sensitivity to the capital markets following the spin of Brighthouse and the repositioning of some of our hedge programs.

Moving to business highlights.

Within the U.S. business segment, Group Benefits reported another quarter of strong underwriting results, notwithstanding seasonally high flu claims.

Volume growth and underwriting contributed to strong adjusted earnings within Retirement and Income Solutions.

We are working hard and making meaningful progress on our group annuity remediation plan.

John McCallion will provide more details in his prepared remarks.

Driven by good auto insurance results, Property & Casualty adjusted earnings were strong despite industry-wide catastrophe activity in the quarter.

For Asia, our largest international segment, adjusted earnings benefited from volume growth due to higher premiums, fees and other revenues and higher assets.

In Latin America, a onetime tax adjustment in Chile and lower Encaje contribution held adjusted earnings below our expectations.

EMEA adjusted earnings reflected sustained expense management efforts in volume growth in Europe and Turkey.

Finally, MetLife Holdings adjusted earnings benefited from tax reform and good underwriting, offset in part by lower recurring interest margins.

Turning to investments.

Recurring investment income was up 1.3% from a year ago, aided by asset growth, which outweighed the drag from low interest rates.

In the quarter, our global new money yield stood at 3.37% compared to an average roll-off rate of 4.38%.

Pretax variable investment income totaled $268 million in the quarter, which is above our quarterly guidance range of $200 million to $250 million.

Private equity returns continued to be the largest contributor to performance, particularly leveraged buyout and venture capital funds.

Moving on to capital management.

We repurchased $1 billion of our common stock during the first quarter.

Combined with our common dividend, this brought our total capital return in the quarter to $1.5 billion.

We continued buying back shares in the second quarter, repurchasing another $350 million of common stock.

We have $370 million remaining on our current $2 billion authorization.

As a reminder, last week, we also announced a 5% increase on our annual common dividend to $1.68 per share.

We expect to divest our remaining stake in Brighthouse Financial before the end of 2018.

Since we announced our intention to execute an equity exchange offer late last year, capital market conditions have changed and volatility is up.

In addition to an equity exchange offer, we are now exploring other transactions that may provide better economics, including a direct sale of our Brighthouse Financial shares or an exchange offer for MetLife debt securities.

The time frame and the primary objective, divest our Brighthouse shares and buy back MetLife shares, remain the same regardless of the form of the transaction.

Turning to the external environment.

Our business continues to benefit from a number of tailwinds.

Tax reform remains broadly favorable for MetLife, both in terms of its direct earnings impact and the boost it provides to jobs and growth.

As is always the case, the benefits of lower taxes will be shared among our key constituencies.

As we announced in February, MetLife will invest a portion of the proceeds to strengthen the financial security of its employees.

We also expect that, over time, a portion of the tax savings will be competed away, resulting in more affordable financial protection for consumers.

Finally, we expect a meaningful portion of the tax savings will be returned to shareholders.

Those shareholders, in turn, will reallocate capital to other productive investments or will drive economic growth to increase consumer spending.

Another tailwind for MetLife is the overall strength of the economy.

The U.S. unemployment rate has held constant at 4.1% for 6 months, and a record 148 million Americans are now employed.

There's additional upside if robust economic growth results in a higher labor force participation rate.

A strong U.S. labor market is always positive for our market-leading U.S. Group Benefits business.

We are also seeing positive trends with regard to interest rates.

From the 2017 low of 2.06%, the 10-year Treasury rate has risen approximately 90 basis points and is now at its highest level in over 3 years.

While geopolitical uncertainty and the prospect of a trade war could cause a [flight to quality] that drives down interest rates, we believe the economic fundamentals point toward rising rates, although not to pre-financial crisis levels.

With U.S. budget deficits rising and the Federal Reserve unwinding its balance sheet, we see the supply of treasuries outstripping demand, which, all else being equal, should push prices down and yields up.

I would like to close this morning with some comments on MetLife's commitment to building a culture of operational excellence, which is 1 of the 4 cornerstones of our refreshed enterprise strategy.

After some negative surprises, we are pleased that MetLife delivered a clean quarter that exceeded consensus.

However, we also recognize that this is merely a down payment on the improved performance investors expect at MetLife.

While issues can always arise in a company the size of MetLife, we have significantly strengthened our focus on execution.

We are escalating issues sooner and insisting on a greater degree of management rigor.

A case in point is our unit cost improvement program, or UCI.

As you know, our target is $1.05 billion in pretax run rate savings by 2020.

Net of $250 million in stranded overhead from the separation of Brighthouse Financial, that translates into $800 million to the bottom line.

This quarter, for the first time, we are publishing our expense ratio in a way that will allow you to track our progress on UCI.

We have already achieved more than $400 million of gross savings toward our target.

And while our progress will not always be linear, we are fully committed to delivering on this commitment.

As I noted in my annual letter to shareholders, we have overcome our most significant regulatory challenge with a victory on our SIFI litigation.

We have overcome our major macroeconomic challenge with a refreshed strategy that makes us a less market-sensitive company.

And we will also overcome our operational challenges by resolving our material weaknesses, achieving the cost savings we have promised and delivering more predictable earnings and strong free cash flow.

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

Thank you, Steve, and good morning.

Let me start by acknowledging what a great honor it is to be named MetLife's Chief Financial Officer.

I look forward to working with all of you in the future.

Now let's get to the highlights in the quarter.

I will begin by discussing the 1Q '18 supplemental slides that we released last evening, along with our earnings release and quarterly financial supplement.

These slides address several key areas of focus for investors: first quarter 2018 financial results and business highlights; the impacts from U.S. tax reform; our unit cost initiative, or UCI; and an update on our remediation plans.

Starting on Page 4. This schedule provides a reconciliation of net income and adjusted earnings in the first quarter.

Net income was $1.2 billion and roughly $200 million lower than adjusted earnings of $1.4 billion due to the results in our investment portfolio and hedging program.

Net investment losses were $263 million, which included a loss of $168 million related to mark-to-market impact on our holdings in Brighthouse Financial.

Net derivative gains were $276 million after tax, primarily driven by changes in foreign currencies.

Overall, the relatively modest net income volatility in the quarter reflects MetLife's postseparation product mix and refined hedging program.

Book value per share, excluding AOCI other than FCTA, was $43.36 as of March 31, up 1% versus the sequential quarter and up 3% after adjusting for the adoption of certain new accounting rules in the quarter related to tax reform.

Year-over-year book value per share is down 15% but up 8% after adjusting for the spin-off of Brighthouse Financial and related financial impacts.

This growth was driven by strong earnings over the prior 4 quarters.

Our 2 notable items in the quarter are shown on Page 5 and highlighted in our news release and quarterly financial supplement.

First, we had a release of reinsurance reserves related to variable annuity guarantees assumed from a former operating joint venture in Japan.

Our assumed Japan JV reserves are accounted for under 2 methods.

The error leading to the material weakness that was discovered and corrected in the 2017 10-K was on a larger portion of the reserve, which utilizes the derivative accounting model.

There is a smaller part of the assumed reserve accounted for under the insurance model, which also required an adjustment.

Given the size of this adjustment, we elected to process a cumulative catch-up for this part of the assumed reserve in the first quarter.

This reserve refinement benefited adjusted earnings in MetLife Holdings by $62 million after tax or $0.06 per share.

Second, expenses related to our unit cost initiative decreased adjusted earnings by $34 million after tax or $0.03 per share.

In total, notable items in the quarter increased adjusted earnings by $28 million.

Adjusted earnings, excluding notable items, were $1.4 billion or $1.34 per share.

On Page 6, you can see the year-over-year adjusted earnings excluding total notable items by segment.

Excluding all notable items in both periods, adjusted earnings were up 6% year-over-year and up 3% on a constant currency basis.

On a per-share basis, adjusted earnings were up 12% and up 9% on a constant currency basis.

The better results on an EPS basis reflect the cumulative impact from share repurchases.

Positive year-over-year drivers in the quarter included favorable underwriting, solid volume growth and lower taxes due to tax reform, which I will discuss in more detail shortly.

These were partially offset by weaker investment margins and a flatter yield curve.

However, we are encouraged by the recent rise in interest rates and would expect our average new money rate and roll-off rate to converge when we have a sustained 10-year U.S. Treasury in the range of 3% to 3.25%.

Pretax variable investment income was $268 million, essentially flat to the prior year quarter.

VII continues to benefit from strong private equity returns.

In regards to business performance, Group Benefits adjusted earnings, excluding notable items, were up 14% quarter-over-quarter, primarily driven by the impact of U.S. tax reform.

Excluding the impact of tax reform and notable items, adjusted earnings were down 6%.

Group Benefits had solid volume growth and favorable underwriting, most notably in Non-Medical Health.

The interest-adjusted benefit ratio for Non-Medical Health was 75.9%., favorable to the prior year quarter of 79.9% and at the low end of its targeted range of 75% to 80%.

Non-Medical Health underwriting experience was strong across all product lines.

It should be noted that some of the improvement in Non-Medical Health loss ratio was driven by the reinstatement of the health insurer tax in the Affordable Care Act.

Although neutral to earnings, this increases our expense ratio and reduces our loss ratio.

The Group Life mortality ratio was 88%, which was within its targeted range of 85% to 90%, but higher than the prior year quarter of 86.9%, primarily due to elevated flu-related deaths.

In addition, Group Benefits adjusted earnings were dampened by lower investment margin and higher expenses, primarily due to technology investments supporting our growth initiatives.

Group Benefits had another strong sales quarter.

Year-over-year sales were down 1% versus first quarter 2017, which included record jumbo case sales.

Group Benefits saw continued momentum in its strategy to grow downmarket and involuntary products.

Regional and small-market sales were above our expectations year-over-year, and voluntary sales were up double digits versus the prior year quarter.

Adjusted earnings, excluding notable items, in Retirement and Income Solutions, or RIS, were up 32% and up 8% when also adjusting for the impact from tax reform.

The key drivers were favorable underwriting and volume growth.

This was partially offset by weaker interest margins from lower VII for the segment and the impact of continued spread compression.

RIS adjusted PFOs were $371 million, down 23% from the prior year period, driven by lower pension risk transfer and structured settlement sales.

On PRT, as we have noted in prior calls, sales can be lumpy, and the first quarter tends to be the slowest for transactions.

We continue to see a good PRT pipeline of all sizes and structures.

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

Property & Casualty, or P&C, had a strong quarter as adjusted earnings, excluding notable items, were up 33% year-over-year, driven by favorable auto underwriting and lower catastrophes.

The auto combined ratio was 91.3%, down 6.5 points versus 1Q '17 due to increased average premiums and lower costs.

Auto results have benefited from targeted rate increases and management actions to create value.

Pretax catastrophe losses were $58 million in the quarter but $54 million lower than the prior year quarter.

In regards to the top line, P&C PFOs were up 1%, while sales were up 16% versus 1Q '17.

Asia adjusted earnings, excluding notable items, were up 10% and up 6% on a constant currency basis.

The key drivers were volume growth and lower taxes, partially offset by higher onetime expenses.

Asia sales were down 10% on a constant currency basis.

In Japan, sales were up 9%, driven by strong FX annuity sales.

This was partially offset by lower life and A&H sales relative to strong sales in 1Q '17.

Other Asia sales were down 31% compared to very strong sales in the prior year quarter, which included a large group case in Australia.

Latin America adjusted earnings, excluding notable items, were down 3% and down 11% on a constant currency basis.

The key drivers were higher taxes due to U.S. tax reform and a onetime tax item in Chile as well as a lower Encaje return versus a year ago.

Higher taxes in the quarter masked good underlying business fundamentals for Latin America, highlighted by volume growth and lower claims.

Latin America adjusted PFOs were up 8% and up 2% on a constant currency basis.

Latin America sales were down 4% on a constant currency basis as growth across the region was more than offset by lower Mexico group sales.

EMEA adjusted earnings were up 8% and down 5% on a constant currency basis, primarily due to impacts from U.S. tax reform.

Excluding tax reform, adjusted earnings were up 19% and up 4% on a constant currency basis, driven by volume growth and lower expenses.

This was partially offset by less favorable underwriting.

EMEA adjusted PFOs were up 11% and up 2% on a constant currency basis, reflecting growth in Europe and Turkey.

MetLife Holdings adjusted earnings, excluding notable items, were up 17% year-over-year, primarily driven by the impact of U.S. tax reform and favorable underwriting results in life, annuities and long-term care.

If tax reform would have passed prior to our December outlook call, we would have it guided to adjusted earnings of up 7% in 2018 rather than down 10%.

And given favorable underwriting results in the first quarter, we now expect adjusted earnings to be up approximately 10% in 2018.

Corporate & Other adjusted loss excluding notable items was $169 million compared to an adjusted loss of $30 million in 1Q '17.

The primary driver of the year-over-year variance was the impact of U.S. tax reform.

With regards to U.S. tax reform, Page 7 provides a table showing the 1Q '18 adjusted earnings impact from U.S. tax reform by segment.

The column on the far right reflects the 1Q '18 tax rate for each of the segments.

While these tax rates can be simply calculated from the business segment income statements in the QFS, we felt it would be a helpful aid as you think about modeling after-tax earnings in 2018.

As shown, the 1Q '18 benefit to adjusted earnings from U.S. tax reform was $101 million in total.

The vast majority of the benefit, as you would expect, is in the U.S. and MetLife Holdings segments.

Property & Casualty did not receive much benefit as the business was already at a very low tax rate, which did not change.

For our international regions, the results vary.

Asia, Latin America and EMEA all receive a smaller tax benefit related to the allocation of corporate overhead expenses.

Previously, this benefit was calculated on a 35% tax rate and now 21% due to tax reform.

This is the reason that Latin America and EMEA show a negative U.S. tax reform-related impact to 1Q '18 adjusted earnings of $10 million and $7 million, respectively.

For Asia, there is an offsetting benefit from tax reform as Japan's earnings are no longer taxed or topped off at a higher U.S. tax rate, previously 35%.

In Corporate & Other, the negative $67 million impact is primarily due to the results now being taxed at 21% and therefore, receiving a lesser benefit.

In regards to modeling for 2018.

The 1Q '18 tax rates, as shown in the table, are a good run rate for each of the segments, with the exception of Latin America.

As previously noted, Latin America had a onetime tax item in Chile, which resulted in an unusually high tax rate of 35% in 1Q '18.

Adjusting for that item, we would expect Latin America's tax rate to be in the mid- to high-20s for the remainder of 2018.

Finally, we are reaffirming our prior guidance for the company's effective tax rate of 18% to 20% in 2018.

Let me turn to Page 8. As Steve mentioned, our unit cost initiative is a critical element of the transformation underway at MetLife.

Our goal is to reduce expenses by $800 million pretax, net of stranded overhead, by 2020.

This slide shows the adjusted expense ratio and our direct expense ratio from 2015 through 2017 as well as 1Q '18.

Adjusted expenses include direct expenses as well as pension, premium taxes and commissions net of capitalized DAC, among other costs.

Direct expenses include the cost of labor and other general and administrative costs.

You can see from the slide that we have made progress on an annual basis through 2017 in reducing our adjusted expense ratio, which has fallen 250 basis points since the baseline year of 2015, while the direct expense ratio has fallen 100 basis points over the same time frame.

We are measuring expense improvement on an annual basis since the expense ratio can fluctuate from quarter-to-quarter.

We believe that direct expense ratio on an annual basis is the best measure of our UCI progress since it reflects expenses over which we have the most control and best reflects the impact on profit margins.

Turning to Page 9. This is a summary of the new expense disclosure now included on Page 7 in our quarterly financial supplement.

In calculating our expense ratios, we seek consistency by adjusting for 2 items.

First, we back out revenue associated with pension risk transfer deposits.

Since PRT revenues can be lumpy and have few associated direct costs, we believe they can distort the expense ratio and make it look better than it actually is.

Second, we adjust for notable items related to other expenses.

In addition to the expense ratios, you will be able to see how the ratios are calculated as well as the split among the various cost components, including employee-related costs.

While the adjusted expense ratio and direct expense ratio increased in comparison to the first quarter of '17, which has unusually low general and administrative expenses, they both showed sequential improvement from the fourth quarter.

To the point I made earlier, while the expense ratios for each quarter during 2017 varied, we see improvement on an annual basis.

Going forward, we aim to be transparent and accountable as we execute towards achieving our expense target.

Now I will provide an update on our progress for remediation of the 4Q '17 material weaknesses, as shown on Page 10.

We are executing on our plan to remediate the material weaknesses and have developed steering committees, project teams and working groups to lead the remediation efforts.

First, as it relates to the RIS group annuity issue, we have taken the following 3 actions: one, implemented immediate changes to improve administrative and accounting procedures and search practices to identify, contact and record responses from unresponsive and missing plan annuitants and to otherwise locate missing annuitants; two, instituted additional procedures to help address the timely communication and escalation of issues throughout the company; and three, engaged third-party advisers who have commenced procedures associated with the comprehensive examination and analysis of the facts and circumstances giving rise to the material weakness under the supervision of MetLife's Chief Risk Officer, Ramy Tadros.

Next, as it relates to the MetLife Holdings assumed variable annuity guarantee reserves, we have taken the following 2 actions: one, implemented immediate changes to the data flows and input controls into the valuation process.

These changes included enhanced reconciliation and analytics; two, we engaged third-party advisers who have commenced procedures associated with the comprehensive examination and analysis of the facts and circumstances giving rise to the material weakness under the supervision of the General Auditor.

We believe these remediation steps will further strengthen our internal control over financial reporting.

We will test the ongoing operating effectiveness of all new controls subsequent to implementation and will consider the material weaknesses remediated after the applicable controls operate effectively for a sufficient period of time.

The company will continue to evaluate, update and improve its internal control over financial reporting as we execute on our remediation plans.

I will now discuss our cash and capital position.

Cash and liquid assets at the holding company were approximately $5.1 billion at March 31, which is down from $5.7 billion at December 31.

The $600 million decrease in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend and holding company expenses.

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 423% on an NAIC basis at year-end 2017.

For our U.S. companies, preliminary first quarter 2018 statutory operating earnings were approximately $600 million.

We estimate that our total U.S. statutory adjusted capital was $17.8 billion as of March 31, down 4% from December 31.

Net earnings were more than offset by subsidiary dividends paid to the holding company of $1 billion.

Finally, the Japan solvency margin ratio was 892% as of December 31, which is the latest public data.

Overall, MetLife had a strong first quarter in 2018, highlighted by favorable underwriting and solid volume growth.

In addition, our cash and capital positions remain strong, and we remain confident that the actions we are taking to implement our strategy will drive free cash flow and create long-term sustainable value to our shareholders.

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

(Operator Instructions) Your first question comes from the line of Jimmy Bhullar from JPMorgan.

I had a couple of questions.

First, on the Brighthouse disposition.

Obviously, you were exploring an exchange offer.

Initially, you mentioned a couple of other options.

Where are you in the process of evaluating those?

And based on where you stand, is it possible that you could do something in the first half?

Or is it more likely going to be the second half of the year?

Jimmy, it's Steve.

Yes, we're looking at different options.

As we said in the prepared remarks, we're just trying to find the best transaction form to drive the greatest benefit for the company overall.

Increased volatility in the marketplace impacts, in an exchange offer, equity-for-equity, the discount you have to give to get enough people to come forward to transact with you to make it a successful exchange offer.

So that's a factor now because of the change in volatility from the time we first thought about the former transaction.

But nothing has changed regarding our intent, which is to transact this year.

And I think we've said before, kind of the May-June time frame is as early as we can start because of filing requirements that have to come into place driven out of Brighthouse.

So the time frame hasn't changed in the intent in terms of retiring MetLife shares and disposing of Brighthouse shares has not changed.

And then any color on your long-term care block?

Just if you could frame the size, annual premiums, your GAAP and stat reserves.

And specifically on your assumptions, what are your interest rate assumptions relative to -- over the next few years relative to where your rates are right now?

Jimmy, it's John.

Yes, I would just refer you back.

I think the statistics we gave back in the fourth quarter hold today.

We have roughly $2.5 billion more stat reserves than we do GAAP.

So it's like $14.3 billion in GAAP and $11.7 billion in stat.

I think we've talked about the rate actions that we've taken.

I'm sorry, $14.3 billion in GAAP -- and $14.3 billion in stat and $11.7 billion in GAAP, so $2.5 billion more in stat.

And then, I'd just reference back to the rate actions.

We had -- we've been fairly successful getting approval over the course of the years.

We referenced 7% over the course of the -- over the $750 million of premium we get annually.

So all those things were a factor into the good results.

I don't know if, Marty, you want to add any color.

I guess I would just add that from both the underwriting results as well as expense control that we're seeing there, as well as the rate actions, all of those are moving in a very positive direction.

As John mentioned in his opening comments, that's resulting in us feeling much more comfortable about 2018.

And relative to the guidance that we gave at the outlook call last year, is what's contributed to us moving that guidance up.

So all in all, I think across MetLife Holdings and specifically with respect to long-term care, we're seeing very positive results.

Do you have -- just to following up.

Do you have an assumption of a steep increase in rates over the next several years in your reserving?

Yes.

For stat, we only include what's been approved.

No, no.

I meant interest rates.

Do we have -- so we have -- we assume a forward rate increase and ultimately getting to our long-term rate of 4.5% in testing.

In the reserve, there's no forward -- there's no increase.

So for loss recognition testing, cash flow testing, we would assume that, but for reserving, there's no increase.

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

First question on share repurchase.

You're clearly on a pace to finish the $2 billion pretty quickly this year.

Is that more of a timing issue?

Or should we consider a potential increase to your share repurchase plans relative to the initial guidance?

Yes.

I think that's -- it's John, Ryan.

I think that's more timing.

There's no change to our capital management plans for the -- for '18.

Got it.

And then I just wanted to clarify one thing on the unit cost initiative plan.

The $800 million net cost save guidance, just to be sure, that is already net of all the TSA payments from Brighthouse that would be running off?

That's a net -- that's netted out of that number already?

Yes, that's all-in, right?

We said it's $1.50 billion on a gross basis.

And then net of strand gets us down to the $800 million.

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

If I could just go back to Steve's comments about the alternatives to the exchange offer.

I think you mentioned a debt exchange.

So would that be going to MET bondholders and offering to give them Brighthouse common stock in exchange for their debt holdings?

Yes.

Sean, it's John.

I would just -- look, I think what Steve talked about is there are alternatives, right, and a debt for equity would be one.

I think our -- right now, we wouldn't want to get into too much details.

We want to maintain flexibility here.

And there's a number of other reasons why we can't get into a lot of these of how we might do it.

But as Steve said, there's a few options for us to pursue, and we'll pursue the most economically beneficial one of those.

Okay.

And then, I guess, John, a question for you.

I don't want to beat a dead horse, but you're new in the role, and I think investors were concerned that maybe MET would be backing off the net $800 million expense save target from UCI.

So just to be clear, that policy is still in place and that's still the goal and you still think that's attainable?

I would reiterate what Steve said.

We are fully committed to our commitment.

Your next question comes from the line of Tom Gallagher from Evercore.

John, just can you make a few comments about the remediation and the accounting controls issue?

I heard your prepared remarks.

But just like, I guess, cutting to the chase, can you provide a little more clarity around when -- timing and process that's left here and when you believe you'll kind of be at the end of this?

Yes.

Tom, it's John.

Look, I think we are -- as we've said before, there's a lot of work to do.

The first thing is to identify the root cause, then we need to implement kind of the full set of procedures.

We've done some things, as I articulated in my prepared remarks, but we need to kind of implement the full set of controls, and then we need to observe those for a sufficient period of time.

And usually, that's at least 2 quarters.

So -- but our target still -- for clearing the material weaknesses, is still 2018.

Got you.

And then just back on long-term care.

So you have a lot of margin between GAAP and stat.

You had favorable results this year.

I think from looking at the long-term care exhibits that came out for '17, your results seem to be fairly well behaved, certainly on a relative basis.

Taking all that together, should we feel pretty confident heading into balance sheet review season that long-term care, from your starting point now, looks like it's fine?

Or any color you can give there as it relates to as we think about balance sheet review season and that, if that's an area to watch.

Yes.

So it's Marty Lippert.

We still are very comfortable with our reserve adequacy, and our experience continues to emerge consistent with our reserving assumptions.

We test our GAAP and stat reserves annually and are comfortable with the reserve margins that are indicated in those tests.

So yes, we continue to feel good about it.

Your next question comes from the line of Andrew Kligerman from Crédit Suisse.

First question, could you give a little more color about the kind of sudden departure of John Hele and what the thinking was behind it?

Because it just kind of seemed very sudden.

Andrew, it's Steve.

Look, we're -- in any company the size of MetLife, there's always some change in management from time to time.

Once -- and one of the questions that came up to us after this announcement was why the timing and so on and so forth.

But once the decision on John Hele's retirement was made, we decided it was important for the incoming CFO, John McCallion, to oversee the filing of our financial statements for this quarter and to present on this earnings call to all of you.

So this -- you may or may not know, but under SEC rules, once a decision is made at this level of an executive, you have to file with the SEC a disclosure within 4 days.

So it's not like there's a great deal of flexibility about timing of announcements.

So that's just -- that drives a lot of it.

So in the quarter, like there were a lot of positive strides.

I shouldn't be concerned then, because of this event, something might be an issue with the financials?

No.

So there were 2 separate tracks.

Think of it that way.

One was John's retirement, and the other was we had a quarter coming up to announce.

And look, in any big company, there's never a great or perfect time for announcement of a major change at senior executive levels.

I can cite a whole bunch of other things besides just the quarter that come up over the course of the year in terms of important points in time in terms of when our Chief Financial Officer will be presenting.

So there's never a perfect time, and these 2 separate tracks were going on.

And once the retirement decision was made, then we had to announce.

And then just a detailed question on the Group Benefits business.

The underwriting ratios were quite strong, right in line with your guidance.

But you had in other expense line, I think John talked about spending on technology and so forth.

The other expense line was up, I think, north of 10% in the quarter.

Could you give a sense of whether that line item is sort of a run rate from the first quarter or maybe that comes down a bit?

Andrew, this is Michel.

So 3 factors influencing the increase in the expense item.

One is the reinstatement of the health insurance tax.

So that drives the expense ratio up.

It benefits our loss ratio in Non-Medical Health.

And the other 2 factors were -- one was the timing of some technology investments that we're making.

We had announced in the second half of last year a major initiative in partnership with IBM, additional platform that would help drive our growth in the small market segment, which is an -- we see it as an attractive segment for us.

So we're seeing some of that investment flow through.

And then as we continue to emphasize voluntary business and we continue to grow that component in terms of our overall sales, that's also having an impact on our acquisition costs.

But as a reminder, again, voluntary is a very attractive segment, and it's very consistent with our strategy to grow in that area.

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

I was hoping you could provide some more color on the underwriting results in RIS and MetLife Holdings this quarter and how they would compare to your normal expectations.

Let me start with RIS, Erik.

So we had favorable underwriting, in particular, in our U.S. pensions business.

I would also point out that in the first quarter of 2017, we had also some -- reserve adjustments, which impacted our underwriting in that quarter.

So that's what you're seeing here.

Obviously, underwriting can vary quarter-to-quarter.

And it's Marty Lippert.

In MetLife Holdings business, we actually had a very good quarter with respect to underwriting across the board.

We would expect that to move back into kind of our normal range that we've communicated to you in the past of between 50% and 55%.

For the quarter, it was in the 47.5% range.

And then on kind of the pension risk transfer outlook.

You commented that the pipeline for the business is looking good given move-in rates and, I guess, other favorable macro dynamics.

Just wondering if you're seeing any implications on your competitive position in that market as a result of the recent issues.

No.

Just to reemphasize what John mentioned is that we think the opportunity in the market will be attractive in terms of flows this year.

We've had constructive engagements with the key intermediaries and brokers for this business, and we have no indication that our competitive position would be negatively impacted by the RIS issue.

Your next question comes from the line of John Nadel from UBS.

So just a question on the cost initiative.

The $800 million of expense saves through 2020, do we know yet -- have you told us whether all of that would be expected to drop to the bottom line?

Or would some of that be expected to be reinvested into the business?

And how much of that $800 million is in the numbers today?

John, it's John.

I would go back to that slide that we put in the supplemental deck, right, where we showed the ratios.

Let's start there.

So remember, we think -- as I emphasized, we think the annual expense ratio is the best metric.

If you look over '15 to '17, we've -- we're down about 100 basis points.

And if you think that we have roughly $45 billion of revenue, we'd have about $400 million of savings.

And that effectively goes to the bottom line.

That's pretax, but that's the improvement in our profit margin, as I said.

So yes, the answer is -- the short answer to your question on the $800 million is, yes, we would expect that to be an improvement in profit margin post all the actions being taken 2020 on.

Got it.

And then I have a question on allocated equity for 2 of the segments.

For Holdings, allocated equity is down pretty significantly in the first quarter versus the level you guys were allocating last year.

And I think that makes some sense, right?

We should -- that should track reasonably similar, I assume, to revenues declining.

You can affirm that or not.

But then what was surprising to me was Asia, where allocated equity was up pretty significantly, and it doesn't -- and I think you've got 2 things going on in Asia.

One, you've been moving more towards fee-based businesses, I believe.

And two, the risk-oriented business there, the higher capital required business there, I thought, was shrinking.

John, I'm going to take my 48-hour pass go card on this one if that's all right.

But yes, we'll get back to you on that in more detail.

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

Just a question on the TSA fees, and thanks for breaking that out.

So that $79 million that you booked this quarter, I was just curious why we didn't see any of that in the fourth quarter.

And then how would you expect that $79 million to kind of trend over the next year or so?

Sorry, Suneet.

Could you just say that one more time?

Yes.

You had $79 million of TSA fees in your supplement, right, and so I assume that's related to the Brighthouse TSA arrangement that you have.

Since the thing was spun out in August, I would have expected some in the fourth quarter, but there weren't any.

So curious about that.

But then also, how do you expect those TSA fees to kind of trend over the course of 2018?

I know Brighthouse has talked about really trying to clamp down on those as quickly as possible.

Yes.

I think through '19, I'd say, a year from now, there's probably a decline in $30 million to $40 million of TSA fees is expected.

But I think it depends on how fast we -- the exits occur.

And that's not a real precise number, but give or take.

And is that what's captured in that original Investor Day slide when you went from -- you shared the cost savings and you went from like 2018 to 2019 and there was actually a $100 million pickup in stranded overhead.

Is that essentially capturing the loss of these TSA fees?

Yes.

If you -- that was -- there was a separate line on stranded, and you saw that uptick.

And that is effectively the roll-off of the TSA fees.

Got it.

And then the last one is just on the expense initiative costs.

I thought that maybe last quarter you had told us $275 million would be expected to hit the operating results in 2018.

It seems like first quarter, you're running a little bit less than that, the annualized rate.

Should we expect that $275 million is still kind of a good number for '18, and so we'll see a pickup in that over the subsequent quarters?

Yes.

So we're still aligned to what we provided at Investor Day in 2016.

So like you said, we said we'd get gross saves of $417 million.

I think you could see the math is there.

And then we're expecting to get another $300 million during -- $275 million or whatever, roughly, during the course of '18.

And then I would just say, on the quarter, as I said in my prepared remarks, I think -- we think it's very important to focus on the annual expense ratio.

Now we gave you Q1 '18 as a reference.

But even 2017, you saw varying quarter-to-quarter expense ratios.

And that's -- so we really think the trend -- looking at the trend of the annual rate is probably the best way to think about it.

Your next question comes from the line of Josh Shanker from Deutsche Bank.

Thank you.

All my questions have been answered.

Next, we'll go to the line of Alex Scott from Goldman Sachs.

The first question I had was just on RIS.

Could you discuss the headwind you'd expect from 3-month LIBOR increasing?

Like would the cost of crediting be expected to go up?

And it looked like the NII yield there was a bit higher this quarter.

Is there any floating rate I should be thinking about?

Or should that continue to trend down as it has the last few quarters?

Yes.

Alex, it's John.

I think the simple answer at this time is probably just to put you back to the outlook call.

We gave you those sensitivities.

We think they're holding well.

And if you were to use those relative to what happened in the quarter, I think you'll see that this is -- they still hold so...

And that brings us to the top of the hour.

We're going to have to shut the call down to move on -- let everybody move on to the next one.

Thanks, everybody, for your participation, and we'll talk to you throughout the quarter.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive TeleConference.

You may now disconnect.