MetLife, Inc. (MET) Q3 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2014 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results and the businesses and products of the company and its subsidiaries. MetLife's actual results may differ materially from results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the 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 Ed Spehar, Head of Investor Relations.

Thank you, Greg. Good morning, everyone, and welcome to MetLife's Third Quarter 2014 Earnings Call. We will be discussing certain financial measures not based on generally accepted accounting principles, so called non-GAAP measures. Reconciliations of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the Investor Relations portion of metlife.com, in our press release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John Hele, Chief Financial Officer. After their prepared remarks, we will take your questions. Also here with us today to participate in the discussions are other members of management, including Bill Wheeler, President of Americas; Steve Goulart, Chief Investment Officer; Michel Khalaf, President of EMEA; and Chris Townsend, President of Asia. [Operator Instructions] With that, I'd like to turn the call over to Steve.

Thank you, Ed. And good morning, everyone. We are pleased to report strong third quarter results. Operating earnings were $1.8 billion, up 22% from the third quarter of 2013. And operating return on equity was 13.2%, an increase from 11.7% in the prior-year period. Notable items in the quarter were variable investment income above the top end of the normal quarterly range, favorable catastrophe experience and prior year loss reserve development in property and casualty, a positive impact from our annual review of actuarial assumptions and a modest net negative impact from tax adjustments. These notable items increased operating earnings by $107 million. Excluding notable items, operating earnings increased 14% from the third quarter of 2013. Favorable investment margins have been a consistent earnings theme in recent years despite low interest rates. In the quarter, the average investment spread for U.S. product lines was 236 basis points or within the approximately 220 to 240 basis point range of the past few years. Strong variable investment income more than offset the negative impact on investment margins from low interest rates. While the 2014 interest rate environment has been close to the low-rate scenario we provided in our 2013 10-K, the earnings impact has been more benign than we predicted, largely due to management actions. Investment margins in both Retail life and Latin America returned to normal levels in the third quarter. Underwriting margins in Group, Voluntary & Worksite Benefits were the low end of the normal range but better than the prior year quarter. Within group, disability results improved year-over-year and sequentially. We anticipate further improvement in disability results from the operational changes and targeted price increases that we shared with you on the Second Quarter Earnings Call. Turning to expenses. We continue to deliver on the cost savings outlined as part of MetLife's strategy. The operating expense ratio of 23.0% in the quarter versus 24.3% in third quarter of last year. Operating expenses also remained well controlled on an absolute basis, up 2% from the prior year period compared to a 5% increase in adjusted premiums, fees and other revenues. Another key element of our strategy, growing in emerging markets, also showed progress in the quarter. Compared to the prior year period, sales in emerging markets were up 10% in Latin America, 31% in EMEA and 20% in Asia. On a per share basis, operating earnings in the quarter were $1.60, a 19% increase from the prior year period. Growth on a per share basis was dampened by the conversion of $1 billion of equity units into common shares in September 2013. The dilutive impact of these conversions was partially offset by our repurchase of $438 million of stock in the third quarter at an average price of $54.19 per share. Since we resumed our share repurchase program in late June of this year, we have repurchased a total of $756 million of stock at an average price of $52.53 per share. Our strong third quarter stands in contrast to our second quarter. We are pleased to see underwriting results improve after the second quarter's adverse experience. In addition, the Corporate & Other loss was modest, largely as a result of tax benefits and well below the elevated level of the second quarter. At the same time, it's important to remember that this is a long-term business and quarterly results will fluctuate. And as you have heard me say before, paying too much attention to quarterly performance could lead us to take actions contrary to the future health of the business. Running a business for the long term takes patience and a recognition that what managers choose not to do is often just as important as what they choose to do. Consider MetLife's strategy in the pension risk transfer market. As you know, MetLife did not win either of the 2 large pension closeout deals announced recently. We find the market opportunity in closeouts attractive, and MetLife has been winning profitable business from small and mid-sized pension plans. We will continue to bid on transactions of all sizes but will remain disciplined. We believe our bids on recent large closeouts would have created value for MetLife's shareholders, but the spread over our cost of capital was modest. The competitive landscape for large closeouts leaves little margin for error. Pension closeouts are long-dated liabilities that cannot be repriced, so a negative surprise relative to assumptions could impact returns for decades. We know that large closeouts can have a material positive impact on GAAP earnings. However, our philosophy is that near-term GAAP earnings accretion is not necessarily indicative of long-term value creation for shareholders. I would now like to provide a brief update on regulatory developments. As you know, the Financial Stability Oversight Council voted on September 4 to make a proposed determination that MetLife is a systemically important financial institution or SIFI. On October 3, MetLife requested an evidentiary hearing, which is scheduled for November 3, to contest the proposed determination. After the hearing, FSOC has 60 days to make a final determination as to whether MetLife is a SIFI. Under the Dodd-Frank Act, if MetLife is designated, the company has 30 days to decide whether to seek a judicial review of the designation in federal district court. With regard to the capital rules for nonbank SIFIs, the Federal Reserve announced on September 30 that it will conduct a quantitative impact study or QIS to "better understand how to design a capital framework for insurance holding companies and supervisors that has compliance with the Collins Amendment." Although MetLife is not under its supervision, the Federal Reserve accepted our request to participate in the QIS. It is important to note that the QIS assumes that the new rules will be compliant with the Collins Amendment, which the Federal Reserve interprets as requiring it to impose bank capital standards on all nonbanks under its supervision. We believe this underscores the critical importance of enacting the Insurance Capital Standards Clarification Act as quickly as possible. We are encouraged that the House and Senate have already passed identical language, providing the Federal Reserve with flexibility to tailor the capital rules for insurance companies. And we urge Congress to finish the job during the lame duck legislative session later this fall. To sum up, I am pleased that, in the face of economic and regulatory headwinds, MetLife continues to perform well in those areas under its control, including expense management, pricing discipline and investment performance. Performing well on the fundamentals is the clearest path to creating shareholder value over time. With that, I will turn the call over to John Hele.

Thank you, Steve. And good morning. Today, I'll cover our third quarter results, including a discussion of insurance margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash and capital. Operating earnings in the third quarter were $1.8 billion, up 22% from the prior year period. And operating earnings per share were $1.60, up 19%. This quarter includes 4 notable items, which are highlighted in our press release and disclosed by business segment in the appendix of our quarterly financial supplement or QFS. First, variable investment income was $273 million after taxes and DAC, which is $62 million or $0.05 per share above the top end of our quarterly guidance range. Second, we had lower-than-budgeted catastrophe losses and favorable prior year reserve development, which increased operating earnings by $38 million or $0.03 per share. Third, we had 2 tax items that mostly offset. The onetime impact from Chilean tax reform reduced operating earnings by $41 million or $0.04 per share, and this was largely offset by a favorable tax adjustment of $32 million or $0.03 per share related to the filing of our 2013 U.S. federal tax return. Finally, as a result of our annual actuarial assumption review, there was a $16 million or $0.01 per share positive impact to operating earnings. There were a number of small items that drove this result, and most of the benefit was in Retail. The total positive impact to GAAP net income from the actuarial assumption review was $105 million. In total, notable items included an operating earnings of $107 million or $0.09 per share. Turning to our bottom line results. Third quarter net income was $2.1 billion or $1.81 per share. Net income exceeded operating earnings by $239 million. The 3 most significant items that explain the majority of this difference are: one, derivative net gains of $187 million after tax and other adjustments, primarily from the strengthening of the U.S. dollar; two, an impact of $89 million after-tax from the portion of the actuarial assumption review that was not included in operating earnings; and three, net investment gains of $71 million after tax. Non-economic and asymmetrical accounting adjustments were $146 million of the $239 million difference between net income and operating earnings in the quarter. Before I discuss margins and business segments, I want to highlight new metrics for book value and ROE included in the QFS. We are now disclosing book value excluding AOCI other than foreign currency translation adjustments or FCTA, and tangible book value. Operating ROE will now be calculated using these 2 measures of book value. We believe operating ROE, based on book value excluding AOCI other than FCTA, is a better measure of performance than an operating ROE calculation based on book value excluding AOCI, as the former includes the impact of foreign currency in both the numerator and denominator. We are making this change because FCTA has become more significant and now distorts the ROE calculation. Book value per share, excluding AOCI other than FCTA, was $49.69 as of September 30, up 7% year-over-year but below book value per share, excluding AOCI, of $51.62. Operating ROE in the third quarter was 13.2% on book value excluding AOCI other than FCTA or 40 basis points higher than the 12.8% using book value excluding AOCI. Tangible book value and tangible operating ROE are also new disclosures this quarter. Tangible book value is calculated by excluding goodwill and other non-insurance intangible assets from book value excluding AOCI other than FCTA. These intangible assets were $10.9 billion as of September 30, and the vast majority was goodwill. Tangible book value per share was $39.95 as of September 30, up 7% year-over-year, and tangible operating ROE was 16.7% in the third quarter. We believe tangible operating ROE provides a better measure of the underlying business returns for MetLife. Turning to third quarter margins. Underwriting was favorable to the prior year quarter. Highlights included a recovery in Retail and Latin America from a weak second quarter, modest improvement in Group, Voluntary & Worksite Benefits on a sequential and year-over-year basis and strong results in property and casualty. Retail life's interest-adjusted benefit ratio was 51.0% in the third quarter, excluding the impact of the actuarial assumption review. This ratio was in line with the prior year quarter and significantly better than the adjusted second quarter of 55.2%. Large claims returned to a normal level in the third quarter from an elevated level in the second quarter. In Latin America, underwriting results were similar to the prior year quarter but better than the second quarter. The sequential improvement was driven by Mexico worksite marketing claims returning to a normal level and the absence of negative onetime items. The mortality ratio in group life was 89.9% versus 90.3% in the prior year period. Results this quarter were at the top end of our 85% to 90% targeted range but only slightly above the 89.1% third quarter average during the prior 3 years, when adjusting for the -- a onetime item in the third quarter of 2011. The non-medical health interest-adjusted loss ratio was 79.0%, favorable to the prior year quarter of 80.6% and down sequentially from 82.6%. Disability underwriting results were favorable to the prior year quarter and improved sequentially, largely due to lower claim severity. Dental margins were unfavorable to the prior year, driven by higher utilization. On a year-to-date basis, dental utilization is unchanged compared to the first 9 months of 2013. In our P&C business, the combined ratio, including catastrophes, was 83.6% in Retail and 91.0% in group. The combined ratios, excluding catastrophes, were 79.3% in Retail and 86.2% in group. Overall, P&C underwriting results were favorable versus the prior year due to the -- due to lower catastrophe and non-cat losses as well as favorable prior year reserve development. Moving to third quarter investment margins. As Steve noted, the average of the 4 U.S. product spreads in our QFS was 236 basis points, up 15 basis points both year-over-year and sequentially. Product spreads, excluding variable investment income, were 191 basis points, down 16 basis points versus the prior year and 4 basis points sequentially. While we have experienced modest compression in our recurring investment margins, this has been more than offset by strong variable investment income. Overall, we are pleased with our investment margins, particularly in this persistent low rate environment. With regard to expenses, the operating expense ratio was 23.0% in the third quarter, as compared to 24.3% in the year-ago quarter. As Steve mentioned, expenses were up only 2% year-over-year. Adjusting for Provida as well as onetime regulatory and project costs, expenses were below the prior year level. Gross expense saves were $239 million in the third quarter, and net saves were $162 million after adjusting for reinvestment of $29 million and onetime costs of $48 million. While we caution against extrapolating any 1 quarter's results, the annualized effect of the net saves has reached our targeted bottom line benefit of $600 million, which was announced at the May 2012 Investor Day. In addition to our expectation for a modest increase in gross expense saves, we anticipate that, over time, the reinvestment spend will increase while onetime costs decrease. I will now discuss the business highlights in the quarter. Retail operating earnings were $699 million, up 6% versus the prior year quarter and up 2% after adjusting for notable items in both periods. Growth in Retail was driven by Life & Other, while -- which reported operating earnings of $350 million, up 48% versus the prior year quarter and up 15% after adjusting for notable items in both periods. The primary drivers were favorable expense margins and underwriting. Annuities reported operating earnings of $349 million, down 17% versus the prior quarter -- year quarter and down 6% after adjusting for notable items in both periods. The primary drivers were negative net flows and lower core spreads, partially offset by favorable markets and lower expenses. Group, Voluntary & Worksite Benefits or GVWB reported operating earnings of $237 million, up 5% versus the prior year quarter and essentially flat after adjusting for notable items in both periods. Underwriting results improved in group life and disability, partially offset by less-favorable dental results. GVWB PFOs was $4.3 billion, up 6% year-over-year. GVWB sales increased 10% from the prior year quarter due to growth in group life and disability businesses. Corporate Benefit Funding reported operating earnings of $408 million, up 37% versus the prior year quarter and up 26% after adjusting for notable items. Growth was driven by improved interest margins and favorable underwriting results. CBF PFOs were $582 million, up 2% year-over-year due to growth in structured settlements and income annuities, partially offset by lower pension closeouts. We remain active but disciplined in the pension closeout market and continue to see a good pipeline of small to mid-sized cases. Latin America reported operating earnings of $152 million, up 14% from the prior year quarter and 22% on a constant currency basis, driven by the Provida acquisition and business growth across the region. Chilean tax reform, which resulted in a onetime charge of $41 million, was a partial offset. Latin America PFOs were $1.1 billion, up 24% from the prior year quarter and 31% on a constant currency basis, driven by growth across the region. Turning to Asia. Operating earnings were $306 million, up 19% from the prior year quarter on both a reported and constant currency basis and down 3% after adjusting for notable items in both quarters. Business growth and solid investment margins were muted because of positive onetime tax impacts in the prior year. Asia PFOs were $2.5 billion, up 3% from the prior year quarter and 5% on a constant currency basis, primarily due to growth in Australia. Asia sales were up 10% from the prior year period, driven by strong growth in Australia and China. Repricing of products in Japan explains an 18% decline in sales from the prior year quarter. We continue to focus on value over volume in Japan as new business sales are generating attractive returns relative to the prior year. In EMEA, operating earnings were $96 million, up 13% year-over-year and 20% on a constant currency basis. The key drivers in the quarter were business growth in the Middle East, a $10 million after-tax benefit from the annual actuarial assumption review and other insurance adjustments, as well as an incremental $5 million benefit from the conversion of certain operations at calendar-year reporting. EMEA PFOs were up 3% from the prior year period and 4% on a constant currency basis. Total sales increased 12%, with 31% growth in emerging markets, including strong employee benefits sales in the Middle East. Finally, the operating loss in Corporate & Other was $73 million, as compared to $163 million in the prior year quarter. The improvement in Corporate & Other was mainly due to certain tax items. These items include the previously noted $32 million benefit related to the filing of the company's 2013 U.S. federal tax return, a $31 million year-to-date adjustment to reflect lower estimated tax rate in 2014 and a tax benefit from the timing of certain dividend payments from non-U.S. subsidiaries. The Corporate & Other line is difficult to predict on a quarterly basis, and we think that the third quarter loss was well below a normal level. We would expect Corporate & Other loss to be between $175 million and $225 million in the fourth quarter and within our guidance range of $550 million to $750 million for the full year. I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $6 billion at September 30, which is up from $5.5 billion at June 30. The increase from the second quarter was driven by approximately $1.5 billion of subsidiary dividends, less common stock dividends and share buybacks. For our U.S. insurance companies, preliminary third quarter statutory operating earnings were approximately $1 billion, up 43% from the prior year quarter, and statutory net income was approximately $1.1 billion, up 140%. The increase in statutory operating earnings was primarily due to lower taxes and unfavorable mortality, partially offset by lower separate account returns. The increase in statutory net income was due to these factors and lower derivative losses. Next I would like to provide you with an update on our capital position. As you know, we report U.S. RBC ratios annually, so we do not have an update for the third quarter. Our total U.S. statutory adjusted capital is expected to be approximately $28 billion as of September 30, up 6% compared to December 31. For Japan, our solvency margin ratio is 1,018% as of the second quarter of 2014, which is the latest public data. In conclusion, MetLife had a strong third quarter. Investment margins remain healthy. Expenses are well controlled, and underwriting improved. In addition, our cash and capital position remain strong, providing us with the flexibility to be opportunistic in managing capital as we seek to maximize shareholder value. 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. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: First, I had a question on just your spreads overall. They've been pretty strong throughout the year and even if you exclude variable investment income. So if I think about your guidance, I think you had talked about a 10-year Treasury yield of around 3.36% or so by the end of the year, so we're considerably below that. Just wondering how you think about that as you look into 2015 and look at your spreads and margins given the current interest rate environment.

Jimmy, it's Steve Goulart on. I'll start and in just thinking about rates. I mean you're right that rates are a lot lower than the consensus. And I think, even when we look at the outlook, I think the forecast within the year is 2 88 for the 10 year and 3 35 next year. We're probably still more conservative about that, but remember there are 2 legs to this too. So we've had strong VII. We continue to have good recurring income, but we are continuing to reinvest or roll off at rates, call it, 100 to 150 below the assets that are rolling off. So we're able to maintain the yield portion of this through strong VII and continued good ALM discipline, but remember the other piece of it is also pricing and crediting rates on products too. So a margin takes both pieces to work together, and I think the other pieces work together. And I don't know if Bill wants to add anything to that.

Well, if you look at our businesses, I mean it's in the disclosure: Our crediting rates have been flat for a long time because we've reached product rate minimums in many of our products. And even though new sales generally have lower interest rate credit minimums, they're -- it's only changing the mix slightly. Therefore, I think you're going to see investment spread compression continue, barring some significant macroeconomic change in interest rates. So I think that's it's been a very gradual decline in terms of spread compression. And I think that will continue with maybe the same -- some offset from VII. Jamminder S. Bhullar - JP Morgan Chase & Co, Research Division: And on VII, can you talk about what asset classes did better than normal? Obviously, VII was a little bit higher than your -- the high end of your range. And which asset classes outperformed those that underperformed?

Sure. The trend continues, basically. We've had strong private equity performance for most of the year, and that happened again in the third quarter. Prepayments continue to be a little bit ahead of our projections too, both bond and mortgages. And hedge funds have sort of underperformed to plan. And I think, in looking at the fourth quarter, we generally expect that trend. I don't think you'll see the same strong VII results in the fourth quarter, but I would still expect this to be within our planned range of 2 25 to 2 75, maybe more toward the lower end, just looking at what's happened in PE and hedge funds in the last couple of months.

Your next question comes from the line of Tom Gallagher from Crédit Suisse. Thomas G. Gallagher - Crédit Suisse AG, Research Division: First question, for John, just following up on your comment on corporate loss expectations going forward. So if I start with the dollar -- adjusted $1.51 number, stripping out the unusual items, I would then, I guess, adjust corporate other by another $0.07 or so at least. Any other adjustments that you would make when you think about run rate heading into 4Q?

Yes, so I gave the range for the loss in the fourth quarter between $175 million and $225 million, and that's really getting out these tax -- mainly tax adjustments that we had in corporate in this quarter, with some of it was from last year which is notable that was taken out. And then the -- but there's still some catch-up in the tax rate that we made in this quarter to get at the effective tax rate for the year. So I think it's within the guidance that I've given. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Okay, but no -- and I heard Steve Goulart's comment about his expectation for VII, so we can make that adjustment as well, but any other -- anything else that you don't believe as necessarily trendable, whether it's encaje returns within Lat Am or anything else, certain FX adjustments that you would make that you feel like are notable enough to not extrapolate this quarter into next or to make any adjustments?

Well, Tom, I think we have a policy that we don't give guidance other than for some specific items like Corporate & Other and a few things and VII for the year. So we've given those pieces, but that's as far as we do. Thanks. Thomas G. Gallagher - Crédit Suisse AG, Research Division: Okay. And then just one follow-up, I guess, for Steve. I saw the IAIS capital standard came out, I guess it was earlier this week, and was just curious -- or maybe it was late last week. Just curious if this is something that you all have been analyzing. And if so, what are your thoughts on it? And do you think there's any -- should we be thinking about that impacting what the Fed might do in terms of nonbank SIFI framework?

Okay, Tom, thanks. I'm going to answer your question in 1 minute, but it was brought to my attention that I misread one of the words in my remarks. I had meant to say that underwriting margins in both Retail life and Latin America returned to normal levels in the third quarter, and I guess I said investment margins. I suppose that's a hazard of being a former Chief Investment Officer. But so Tom, in terms of the standards that just came out by the IAIS, they talked about basic capital requirements, which is where the starting point on which they will kind of develop higher loss absorbency requirements for global systemically important insurers. They will be named GSIIs. So that would include us. Now I will say it's still early days, but the key focus by us is on this HLL -- HLA standard, higher loss absorbency, and that has yet to be determined. They've talked about some principles, but it's still being worked on. So we are working very closely with regulators across the globe and with groups like the IAIS; through the IIF, the International Institute of Finance; and The Geneva Association; and others, and we're quite engaged in this. It's still early days, I'd say. And I think it's important to remember that these international bodies have no regulatory authority other than to make suggestions to the national or local regulators, who either adopt or do not adopt the standards they ultimately come up with. So it's a long way of saying we're still far from knowing what these standards will mean in terms of actual impact upon our company or the industry.

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

I just have one question. As you think about your cost of equity capital and your discussion around pension risk transfer transactions, and you indicated that participating in some of these larger transactions would have created value for you but modest value for your shareholders, do you perceive -- as best as you can tell, do you perceive your cost of equity capital to be materially different from that of other large insurers?

It's Steve. I don't really want to try to opine upon other people's cost of equity capital, but I think we have a pretty good understanding of our cost of equity capital, what impacts it. And we've taken steps from our strategy work to try and reduce that as well as increase our returns. And we look closely at all businesses, including the pension closeout business, to determine where we think we're creating shareholder value and where we're not. And we'll bid on that kind of business but we'll be very disciplined, as I mentioned in my remarks. And we can't really speak to what others' thought process is or what they think their cost of equity capital is, to simply make sure that whatever we do on our side is a value to our shareholders over the long run.

One quick follow-up. Is it that the smaller end of the market, the smaller -- well, let's say, the mid-sized employer market for pension risk transfers is just less competitive and that has allowed you to achieve your targeted rates of returns, where you weren't able to do so in the larger market? What's different about the markets where you have achieved success in terms of winning business?

Eric, it's Bill. So we ask that -- we've asked that question a lot internally ourselves about, geez, there's something going on with expenses or implementation costs for smaller deals that -- versus large deals. And the answer is it -- I think every transaction is a little different in terms of what we think the mortality experience is likely to be, the assets that are getting transferred over and or not. And so they're all a little different. My -- I would've assumed at one time that -- larger-case deals, because there are just less bidders, because there are less bidders avail -- able to take the larger transactions on their balance sheet, that those would have been somewhat less competitive. That has clearly turned out not to be true, at least in the last couple of years. And we have experienced a lot more success in the small end of the market than the large. And we were -- last year, for instance, in 2013, we were the market share leader in this category. There were not any large deals last year. And even after these 2 big deals were announced, we won shortly right after that 3 smaller deals. So it's hard to understand the competitive dynamics in terms of large versus big. I would just say there's -- I don't think, really, there's much difference.

Your next question comes from the line of Seth Weiss from Bank of America.

Two quick ones. First, just in terms of the ultimate goal for ROE, if we look at the new book value standard. It looks like it gives you about 30 to 40 basis points, at least this quarter, because of lower book value. When you think about your ultimate ROE objective, has that changed because of the rebasing of the book value?

No. This is John. I mean the goal of our ROE was set out as a strategy, which was a basic return goal of return over equity, and you want to have that on the same basis. Currency has moved quite a bit since 2012. As I said, this just was not really a major impact in prior years. '13, it started to become more as continuing, so we thought it was important to make this adjustment. Most of our major competitors adjust for this already in how they quote and think about this. So it truly is the economic return that's happening to get apples and apples on the numerator and the denominator. So we think it's a better measure, but we are returning, with these measures we're publishing, to the goals that we set out of the 12% to the 14% ROE.

And if I could ask just one question on PRT. And Steve, I appreciate your commentary on the conservatism of your pricing. When you think about the sensitivity of your ultimate profitability of this business, is interest rates the primary and the overall variable that's really driving the sensitivity? Or is it mortality and other assumptions that also causes a lot of the sensitivity of your profitability analysis?

Well, again, we look at -- this is Bill Wheeler again. We look at the -- anytime we -- a case of any size, we have to look at the underlying mortality experience and extrapolate from that in terms of -- because remember, the closeouts we're doing, they're almost all retired lives. They're not generally active lives. And retired lives, what's the age of the group? What -- there are lots of demographic issues which can change the mortality assumptions. You have to make a good assumption there. And then we have a target set of investments that we want to put up against these liabilities. We have a standard set, and that'll inform our investment spreads. Those are the 2 big drivers. It's really not administrative costs, though we have a very efficient administrative platform. Or it's not setup costs. It's -- that's the 2 big factors are mortality experience and then the investment spreads you're going to earn.

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

You used to discuss the sales trends you're seeing in group benefits and the level of activity in the market. I mean it's also -- are you starting to see any benefit from employment growth on plan enrollments?

Yes, Erik, it's Bill again. The -- so we're having a good sales year. And I think John alluded to that, that sales activity is up year-over-year. We're -- we had a -- we've talked, I think, in previous quarters about exchanges. The exchange numbers that sales numbers came in, essentially where we think they're going to for the full year, but the adoption there is pretty slow, so I would say that's not a very big factor yet in the group marketplace. The -- we're also -- I would argue, I would contend we're having quite a good renewal season in terms of cases we already had that have come up for renewal pricing. We are generally achieving our targets there, and that's good. So that means the market is -- it's competitive but not overly competitive. And in terms of adding -- seeing increases due to payroll, I would say, right now, that's modest. And there is a little bit of growth there, but it's not very material.

And then on just the underwriting results in group, can you give a little bit more detail on where you saw improvement this quarter and where you see additional opportunities?

Sure. So there are 3 big drivers here. It's group life, disability and dental. Group life, a little better year-over-year, right at the -- just under the top end of our guidance range, so I would call it a so-so underwriting quarter. I think there's improvement left there, and I think you'll probably see that in the coming quarters the next year. Disability, pretty good improvement sequentially. And I think -- and I -- we are working through our -- I think, on the last quarterly call, we talked about some operational issues in one of our claims management sites. And we've seen some improvement in the metrics there, and I think that will continue. So I think there's opportunity for continued upside there. As John alluded to in the call, dental was soft this quarter. We're still seeing a catch-up in utilization. Remember, in the first quarter, we had a really poor weather. Nobody went to the dentist, and -- but they did eventually go see their dentists in the second quarter and also the third quarter. So utilization now is just where it was at the 9-month period last year, so I think we've had our catch-up. And so my guess is dental will -- should improve from here as well. So I see -- even though I think it was an okay improvement overall in group underwriting, I think there's more to come.

Your next question comes from the line of Yaron Kinar from Deutsche Bank.

I had a couple of follow-up questions on interest rates. So first, if we think of the better performance than expected on the interest rate front, given that interest rates have come down and spreads have not weakened nearly to the degree that you expected back when you provided the 10-K assumptions, what else do you have? Are there any other things that you can do as you think of 2015 and a possibly lower rate environment there that could still mitigate the impacts from the declining rates?

This is John. And our strategy, I think, will continue, that we have mitigated much of the decrease in the core spreads by variable investment income. And of course, we've been helped by good equity markets and other factors, but also the diversification of our asset structure helps mitigate this, as well as the derivatives that have been purchased some time ago. Unfortunately, as time wears on, that impact from those derivatives will slowly start to wear off and we will be faced with declining spreads if rates stay at these low levels. So it's there will be continued pressure on this, and we are doing our best to mitigate it.

Okay, and that leads me to my second question, which really goes to -- back to the assumption review. So clearly, there was no real impact from a lower interest rate environment in the assumption review. And I know that the company had lowered it's expected total returns a couple of years ago. If rates remain kind of lower for longer, at what point do you have to revisit your current assumptions? Or are you comfortable with where they are today regardless of kind of the rate environment that we currently see?

Right. So that's -- it's a very important question and something that we consider all the time. Rates are low. We even saw some quite low 10-year Treasury rates just a few weeks ago. And so the question always is does that make you change your long-term assumption. Our actuaries make assumptions that impact our business for the next 50-plus years, sometimes even longer, so you have to think about this over a very long time. And we look at recent trends, but we also look way back, over 100 years or 50 years or 40 years. And you think about your different economic cycles. So you have to take all those into account. We do target basically a 4.5% 10-year Treasury, which is a basis of the Fed inflation target of 2% and then a long-term growth return for the U.S. economy. We still think that is appropriate for the long, long term. We do great into that from where we are today. And we also have to remember that even though we have low rates, we just saw the announcement that the Federal Reserve is stopping bond buying, so an unprecedented buying within the market, so that's never been seen before by both the Federal Reserve and the ECB, which has a big impact on global markets. And I think the Fed said that they will be buying more, but they will keep their current balance the same, so they will buy. They will keep it up, so they won't even see that going down. And this has a large impact on what's happening to interest rates. We've also seen some global economic concerns, which there's always a flight to U.S. Treasuries whenever that happens. So I think you always have to take the current day's news, quarter's news, year's news into a total perspective and think about 40 and 50 years, which is a hard thing to think about, but that's what our actuaries have to do. And we would have to see some continued time and really get a fundamental differing view, long-term view, on the U.S. economy and inflation targets to fundamentally make -- to make some changes.

Your next question comes from the line of Nigel Dally from Morgan Stanley.

Question on Retail. While the earnings were on track, sales came pretty soft on the life insurance and annuity side. So to hit your longer-term targets, I think we'll probably going to need to see that turn around. So can you discuss what's driving the current weakness and where you stand on product introductions? Or are there distribution initiatives to help drive stronger growth?

Nigel, it's Bill. So there are sort of 2 stories here. Both life sales and annuity sales are down -- or variable annuity sales are down significantly year-over-year. And I would say almost all of that is product driven. We -- well, if I take variable annuity sales, we forecast all year. Or when we gave sort of our outlook call last -- late last year, we said that we expected variable annuity sales to be down and that '14 would sort of represent the dip year and then we'd see -- we'd start to see growth in '15. And that's even probably more true than we estimated at the time. I do expect to see growing VA sales, but I think they're going to be timed very closely to the new product rollout that we expect over the next couple of quarters. And we're not in a position to make product rollout announcements today, but there will be new product rollouts coming. And I think that'll strengthen our competitive position in that marketplace. And so I would say it's product driven, not distribution related. With regard to life, a couple things going on there. Again, the third quarter was a little soft, and seasonally, it's always going to be the softest quarter. It -- we changed pricing in term life in the third quarter. And I think -- when that got announced, I think people waited for the new repriced term to come out, and I think that probably made the sales look a little worse than we otherwise would have thought. So I think there will be a recovery in the fourth quarter in term. There is a new product in the competitive scene, indexed universal life, which is garnering a lot of sales. We don't sell that product. And of course, what makes the year-over-year comparison a little more difficult is the sale of no longer selling universal life with lifetime guarantees. There too, we have had some new product introductions, which I think have gotten a lot of interest. And I expect to see sales momentum starting to build in Retail life as well over the next, I would say, 4, 5 quarters. So a bit of a dip this year given all the changes we've made in the Retail business. And I don't think that's really surprising, but we -- but I think we're on the upswing.

That's helpful. Just a quick follow-up on the IAIS basic capital requirements. We're hearing that bid rules are likely to be similar. Interested to say whether -- or to hear whether you think that's right, or it's just too early to tell.

Nigel, could you repeat that a little bit -- a little slowly?

Let me just -- yes. Nigel, did you say that -- the IAIS capital rules, that it's expected the Fed will use these? Is that what you...

Yes, it'd be along the same lines, right.

It is unclear what the Federal Reserve will do. Technically, right now, they're bound by the Collins Amendment, which the Federal Reserve is interpreting to apply basically Basel III to anything that is similar in an insurance company that a bank has. If the current bills in the House and Senate get reconciled and signed by the President, then the Federal Reserve has the freedom, they believe, to adopt different set of rules, but up to now, the Fed has not given any guidance as to how much tailwind that they expect to do. They have said that they will, of course, look at what the IAIS comes up with, in a very similar way that the Federal Reserve looks at what Basel does for banks. The Basel Committee passes basic global rules, Basel III. The Federal Reserve then looks to those rules, interprets them and comes up with standards that they believe are at least as strong as what the Basel III rules are. So I believe they'll be following a similar process when it comes to in rules that apply to nonbank SIFIs, but exactly how that turns out and where it ends up is unknown at this time.

Your next question comes from the line of Ryan Krueger from KBW. Ryan Krueger - Keefe, Bruyette, & Woods, Inc., Research Division: I had a question on expenses. So you've already achieved the $600 million net expense save target. So trying to get a sense of, as we look forward from here, how do you think about additional opportunities to improve the consolidated expense ratio going forward.

Ryan, it's John. Yes, as I mentioned, we have realized our goal. I did say and we do expect to be continually focusing on our expense ratios. I think, when we gave our long-term guidance last fall -- last December and we spoke about the various business lines, in general, the goal from here on in is to grow revenues faster than expenses to get that growing margin growth. But the cost saves, the major program that we started in 2012, we are basically there at a run-rate basis. Ryan Krueger - Keefe, Bruyette, & Woods, Inc., Research Division: Is it -- I guess, as a follow-up to that, I think I definitely remember in the international businesses that the goal is, in kind of each case, to grow. Do you expect expense growth to be lower than revenue growth? And it seemed like that might be less the case in the U.S. Should we expect it mostly to be driven by international, with U.S. kind of seeing less opportunity for improvement from here?

Yes, well, we had -- in the fast-growth markets, we expect that to be better. And we do expect a slight improvement in certain of the U.S. businesses, but in some of the larger ones, really far less from this point forward.

Your next question comes from the line of Colin Devine from Jefferies.

With respect to where you stand in the regulatory front, it's been a pretty busy year, I guess, with New York, notwithstanding what's going on with the Fed. Are there any updates you can give us on where things stand with respect to your use of captive reinsurance? Or how are you looking at reinsurance usage overall now given the changes from New York, ditto on the XXX situation? And then also, perhaps for Steve Goulart, the NAIC is looking at a bunch of different changes to RBC capital requirements on the C1 charges both with the much broader range of bond categories, commercial real estate. How is that impacting your thinking about where you're going to be reinvesting next year even perhaps repositioning the portfolio but to keep the yield up?

Colin, this is John. So when it comes to captives, of course, our variable annuity captive, which is now based in Delaware, will be merged into a set of statutory entities in November this year. This is what we announced last year, and we're on track for that. We have all regulatory approvals to proceed. So that means that sales of variable annuities will no longer be using any seeding to a captive. They'll be in the statutory entities, either the New York company for New York sales or the large non-New York company for non-New York sales. Life captives, we have existing ones in place, but for New York, we don't seed to captives at all. And we don't sell universal life for secondary guarantees anymore, which is what these captives are used for. We don't sell those any place in the U.S., so we have no real net use for the -- for the major use of these captives. There's a small amount of term insurance non-New York that might be used for that. And then I'll turn it over to Steve for the RBC question.

One question, John, before you do that. Going forward, when you refer to MetLife's RBC, is it going to be just for the New York entity? Or will you start referring to it on a consolidated U.S. basis? Not -- but the[ph] international operations, obviously, but [indiscernible].

Colin, we don't really give it for -- on a consolidated U.S. basis for our primary U.S. statutory entities, and that's the number that I quote on an ongoing basis. And that will be reflecting -- post the merger of all these companies, we'll then reflect the VA captive, which used to be offshore, in that number. So our RBC at the end of this year will reflect all the VA business within the statutory entities.

Okay. And is there any update on the -- what -- how that will impact your RBC? Is it still the sort of 60 bps there?

We have -- gave some time ago guidance that we expected it to be of above 400% RBC, and we still expect that to be the case.

Okay. And Steve?

Colin, Steve. A couple of comments, I guess, on that. And obviously, we're following what's going on in RBC and potential ratings. It's always an important factor in our investment plan. My understanding, though, is on the -- at least on the bond side, I think there's still a lot of uncertainty on where the NAIC is going to come out on that. The one positive is actually on the mortgage side, where I think it looks like some of the re-ratings there are going to be positive. And of course, given the importance of real estate and mortgages to us, that would be a benefit.

So you're specifically fine to to meet there [ph]. Is there -- what about also for owned real estate? I mean you've been very successful in it. Does that give you -- if they're going to drop the capital requirement that meaningfully, open up an opportunity to get back into that perhaps a bit more actively and also thinking that you don't face the same sort of mark-to-market fluctuations?

Well, I guess, at this point, I couldn't say it'll change our strategy. Remember, real estate equity has always been important to us, and it continues to be a good component of our overall investing strategies, probably more so than some of our peers. So I wouldn't say it would necessarily increase that because you still have to think about overall risk-return and capital requirements.

Okay. Thank you, everyone. We're at a little bit past 9:00. Thanks for dialing in.

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