Welcome to the MetLife Fourth Quarter 2016 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 in 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 risks factors section of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. With that, I would like to turn the call over to John Hall, Head of Investor Relations.

Thank you, Greg. Good morning, everyone and welcome to MetLife's fourth quarter 2016 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 of MetLife believes it is not possible to provide a reliable forecast of net investment and that derivative gains and losses which can fluctuate from period to period and may have a significant impact on GAAP net income. Joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer and John Hele, Chief Financial Officer. Also here with us today to participate in the discussions are other members of Senior Management. After prepared remarks, we will have a Q&A session. In fairness to all participants, please limit yourself to one question and one follow-up. With that, I'll turn the call over to Steve.

Thank you, John and good morning, everyone. Last night, we reported fourth quarter operating earnings per share of $1.28 and a net loss of $1.94. Capital market movements during the quarter, primarily the strong rise in interest rates, produced net losses in our derivative portfolio. We own derivatives almost exclusively to protect against market fluctuations in interest rates, equities and currencies. An outsized post-election move in interest rates, characterized by the 85-basis point quarterly increase in the 10-year U.S. Treasury yield, affected the carrying value of our derivative portfolio to a greater degree than typical. Much of this is due to asymmetrical insurance accounting which marks assets, including derivatives, to fair value, while related insurance liabilities follow an accrual-based accounting model. Despite almost all of our derivatives being used for hedging purposes, fewer than 15% qualify for hedge accounting. As a result, the change in the quarterly value of most of our derivatives flows through our income statement, while changes in the economically hedged risk do not. As in past quarters, the vast majority of our after-tax net income impact, approximately 94% in the fourth quarter, represents asymmetrical and a non-economic movement that would reverse with a decline in interest rates. Despite these accounting-related volatility, rising interest rates remains favorable for MetLife over the longer term. Included in our disclosure for the quarter is a slide that offers more detail on the fair value movements of our derivative portfolio which a John Hele will discuss later in our presentation. Adjusting for notable items in the quarter, operating earnings were $1.35 per share which compares to $1.33 per share on the same basis in the prior-year period. The only notable items in the quarter were $58 million of net insurance adjustments spread across the MetLife Holdings and Brighthouse segments and $28…

Thank you, Steve and good morning. Today, I'll cover our fourth quarter results, including a discussion of our insurance underwriting margins, investment spreads, expenses and business highlights. I will then conclude with some comments on cash on capital. Based on your feedback, we released additional disclosure last night labeled 4Q 2016 supplemental slides that addresses the large, more complex elements in the quarter, the large derivative loss and the fourth quarter tax rate. I will speak to these slides later in my presentation. In the future, we will release additional supplemental slides when we have complex elements in a quarter. Operating earnings in the fourth quarter were $1.4 billion, $1.28 per share. This quarter included a two notable items which were highlighted in our news release and disclosed by business segment in the appendix of our quarterly financial supplements or QFS. First, changes in DAC associated with the annual fourth quarter approval of an increase in the dividend scale for traditional life insurance policies, primarily in MetLife Holdings, along with other insurance adjustments, decreased operating earnings by $58 million or $0.05 per share, after tax. Second, severance expenses related to our unit cost initiative decreased operating earnings by $28 million or $0.03 per share, after tax. Adjusted for all notable items in both periods, operating earnings were up 1% year over year. On a per-share basis, operating earnings adjusted for all notable items were $1.35, up 2% year over year. Turning to our bottom-line results, we had a fourth quarter net loss of $2.1 billion or $1.94 per share. Net income was $3.5 billion lower than the operating earnings, primarily because of derivative losses of $3.2 billion after tax. For more details about the difference between operating earnings and net income, please reference page 3 in our supplemental slide disclosure…

[Operator Instructions]. Your first question comes from the line of Sumit Kumar from Citi. Please go ahead.

I wanted to start with MetLife Holdings if I could I don't know if you give guidance on this but do you have a sense of what the free cash flow conversion is out of that segment?

We haven't given details of it -- by segment yet and MetLife Holdings -- the goal of that is to optimize value for the shareholder and MetLife Holdings including cash flow so work underway with that over time will give you some more guidance on that but right now we give you the overall guidance for Remain-Co is 65% to 75% on average in 2017 and 2018.

Okay. And then I guess on the interest rate hedges, obviously some of those hedges are going to stay with some of them are going to go to Brighthouse so can you maybe give us a sense of how much you are benefiting from the interest rate hedges now and then what the trajectory is of that benefit over the next couple of years?

I'm just looking it up. So we have about a couple hundred million of benefit right now from that -- and about just under half of that is Brighthouse today and these hedges stay for a long time so they run well into 2020, 2022. That's a couple hundred million in the quarter? But yes. The quarter, I'm sorry -- that's also pre-tax.

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

Can you comment on the net income sensitivity to interest rates. We had the pretty big loss here and I realize your view is uneconomical but just curious with the next 82 100 basis point increase in rates have a similar GAAP net income loss or does the sensitivity change? Is it not symmetrical?

It depends both on the shape of the curve and how much it moves in the quarter, how these marks on derivatives moves we also have currency hedging and some other aspects to it so it's a little complex. We have instituted a plan, though, we're we looking at our hedging in total so we don't want to give any guidance on it now and we haven't decided how we're going to think about it. I mean, it's kind of an interesting balance, economically, we're better off even with these hedges from an economic balance sheet point of view but you have these noise through to the GAAP so how much do you want to spend money or change your hedging to protect GAAP? So we're examining various options because we're at these rates and if the rates go up further, we will be moving away from some of the more costly guarantees in our businesses that we maybe modify our hedging strategy but that is still work underway.

Okay. And then, I guess the way I would think about is for these types of Mark to market losses on derivatives, to truly be uneconomical, I would have to think that it's not affecting your view of enterprise wide capital adequacy despite what sounds like some negative adjustments to statutory surplus? So can you kind of a reconcile those two things? And indicate whether there is at least an immediate negative impact on capital and how you and the rating agencies with you that?

So from a pure mark to market economic balance sheet MetLife is better off end of the year than in the third quarter and second quarter. But the accounting does have timing issues sometimes. So there is, as you can see, there are some statutory capital but we're still -- have our guidance and reconfirming our 65 to 75 free cash flow for 2017 and 2018 for Remain-Co on average for 17 and 18 so it hasn't change that amount long term it's very good for the business what we think about that net present value of cash flows.

And just one final one relates to that is I get the rate hedges related to the variable annuity business but can you comment a little more broadly since most of the loss was outside of the year, at least the accounting loss, is it mainly universal life insurance related hedges? Is that related to your pension business? Can you provide a little more granularity for what exactly there's in terms of the liabilities that you're hedging there?

These were general interest rate hedges purchased over years to protect against low rates across the Board and particularly we do have some long liabilities, long term care, for example that need a protected gains of some other longer liabilities so that's what it's protecting the gains and we've had them for a long time and they reduce to the income for us in a very positive way as the rates go up they produce less income now and they do have this Mark to market to the balance sheet to this asymmetrical accounting but that's why it's a big piece of it and less in the VA book.

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

Understand the balance sheet income of the accounting a cement surely debatable but just wanted to see if you can reiterate your view on the near term earnings impact from higher interest rates and just wanted to double check necessarily a positive with rates moving up and maybe more specifically could you categorize what the impact to earning as from what you're losing of what's being kicked off in the derivative book for higher rates and how that is immediately offset by the earnings impact of the and force business and how to think about any timing lag that may exist between those two forces?

Right. Well, there is an impact. It depends on how rates go up, the short the end goes up because the short and can affect the derivative income. If we have 100 basis points increase in rates affecting operating up, right up from where we're now, you have the positive from rising rates and the reinvestment of the portfolio and you'd also have a lesser derivative income. It would be -- if it's spiked up today, the subsidy would be kind of a wash in 17 at about 100 million in 2018 and $150 million in 2019.

And then if we think about so the book value basis, is there a way to separate out the value of the derivative portfolio? From book value? Just to get maybe a cleaner cents, a more consistent sense of what book value is or similar to what you do we with the 2015 adjustment or the FCTA adjustment?

That is complex. Because you have to go way back and where do you start? And how do the calculations? So I think unfortunately the answer is you are going to have to wait until the accounting is modified at some point in the future. It's been about 10 years we've been working on it but the hope is to have a better balance sheet for insurers and this work by FASB underway to move towards that.

So you can give just and EPI per share amount of what those derivatives and opposition is what today --

Well, the total values are disclosed in our balance sheet if you divide the number of shares outstanding but to try to equate to get to the true book value, the true economic value is assets liabilities that's what I mean it's not a useful number because you don't know the true economic value of the liabilities to really figure out what is the true economic book value.

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

First said of the question just on your Latin America business, and specifically on Mexico your sales in the business were pretty weak I think mostly related to the weak volume that if you could just discuss how economically sensitive the businesses and I think portion of is it -- is group sales and how susceptible are you to potential weakening in the economy in Mexico?

So as we disclosed, the quarter in general terms revenues are 5% are fine. We have weaker sales in Mexico which you know is -- impacting the lower sales not necessarily directly correlated with the top line because it's previously put in terms of the impact in the economy, obviously monitoring how the situation evolves including discussions about NAFTA. I have to say that our business partner in Mexico is fairly unrelated to any trade agreements so it's just tied to the general economy. Of the market we normally grow each rate to the market growth rate.

And then, just on the Brighthouse business if you look at your sales of the two major products, annuities and life insurance, individual life insurance, there opposed weak a lot in part of the distribution which is really -- so how do you think about the growth outlook for that business down the road, given that it seems that annuity flows are going to be negative for a while even with growth in the shield product and just a life -- Individual Life book seems to be shrinking.

I really can't talk about Outlook right now but I can give you a little sense. Will, where we're in the fourth quarter is right around where we thought we would be put on the what I would call the normal variable annuity business obviously there has been an FX from DOL. You’ve seen that on other competitors as well. The life this is we kind of expected as we sold off the MPC gene field force and they shifted it to their new company. But the shield sales are fantastic, up 45%, quarter over quarter, so we're seeing some momentum in I would say what I call a normal VA business we continue to see momentum in the shield business light of the life business was clearly weak in the fourth quarter and will have to work on that in coming quarters going forward.

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

I want to follow up on something John mentioned around the FASB proposals for long term insurance contracts so if I understand correctly, insurance liabilities will be fair value to every quarter. Is that something that MetLife supports?

We're very active with the FASB on this. The concept makes a lot of sense. That was in the details. The big question is what interest rate do you bring the liabilities back at a lot of discussion with the FASB on that and that work is still underway. A lot of the changes, though, would flow-through -- I think the proposals flow-through AOCI and not give noise to operating earnings so you still see the operating earnings peace and the noise would flow-through the AOCI.

And then I have a question about proposed tax reform. If U.S. corporate taxes get lowered, how do you think the industry and regulators respond? Do you -- would you target and after-tax return and cut pricing or do think the industry would as a whole? Or do you think regulators would require pricing cuts?

I think it's pretty hard to answer a question right now about tax reform because it's so early stage. Chairman Brady of the House Ways and Means Committee has a blueprint out will have to see where that goes. There's been some support for it and other reporters of the economy are concerned about the border adjustability component still a lot of knowledge has to be gained in terms of how that will actually work and with the details will be so it's really premature for me right now to say how it will affect those factors.

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

Can you comment on the expected earnings run light for MetLife Holdings and if there's any residual impact from the highlight -- the items you highlighted this quarter?

No. The guidance we gave that our Outlook still applies for next year there's noise this quarter and some worse mortality than we had thought we had a couple large claims that fell through but we would stick with the guidance we gave you on the call.

Okay. And then on interest rates, you'd mentioned that the rise in new money rates, how much more would rates need to rise to sort of get you towards where your portfolio yield as and eliminate the drag from spread compression?

Well, you highlight one of the sensitivities there and this is Steve -- at the way we look at it is if you were to hold all spreads constant across asset sectors, what has to happen to the 10 year treasury? Which is a primary indicator for where we're investing and it's approximately about a 3% U.S. Treasury rate of 10 years and again it's assuming all spreads stay the same but that would be about where we would hit our breakeven on reinvesting.

And I guess when you hit that point, would you expect to get some spread benefit initially before having to share that with policyholders?

I think we'll have to wait and see. It will be nice to not have spread compression that we've been fighting for years and we look forward to dealing with that issue going forward.

Your next question comes from the line of John Nadel from Credit Suisse. Please go ahead.

Just a question I'm thinking about the 2017 Outlook and taking into account all the moving parts in the fourth quarter results at the same levels are there any segments where you would say the baseline that you identified six or seven weeks ago that you talked about back in December that where the baseline has changed materially on sort of the core basis where we need to adjust our expectations for 2017?

No. We would not adjust our Outlook and we would try to tell that to you if we had a change to our Outlook but thanks for the question.

Okay. And then, second one is just can you give us an update on any asset adequacy reserve additions of any note for 2016 year end?

Well, actually with interest rates going up at we've asset adequacy reserves. We have better buffers now than with the rising rates and look forward to a future of not having to add to those for a while so we -- this has been a very -- as I said, economically very favorable to MetLife with the rise in rates.

And then last one real quick you didn't give an update and I suppose that means nothing's changed but can you still confirm that the spinoff is expected to take place in the first half?

Yes, our target is still the first half of 2017 for the Brighthouse separation.

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

John, you mentioned $625 million benefit to the holding company's cash position. Is that something that you would view as a permanent benefit or should we think about that as potentially--

Some of that was tax which we have so we have the cash and then another piece was collateral for derivatives so depending upon what happens to currencies interest rates, the collateral postings can change. And we'll just have to wait and see. That's on that piece.

Okay. And then, on Brighthouse, could you just quantified I guess for the quarter, how much weaker worthy underwriting results relative to what you would have expected?

I would say about $19 million but I would say this. This comparison, fourth quarter of 2015, was a very good underwriting quarter for us. Whether you look at what we expected or maybe an average run rate over eight or nine, quarters, it was a very good underwriting quarter. This quarter, our fourth quarter, 2016 while it is weaker maybe than we expected, slightly weaker than we expected over the last eight, quarters, it's right on the average so similar to what MetLife experienced a little bit of severity and a little less seated but despite the fact that it cost us some earnings, not that far off of what we expect.

Your next question comes from the line of Yaron Kinar from Deutsche Bank Securities. Please go ahead.

John, I think you reiterated your day cash flow target of 65% to 75% for the next couple of years. Would it be fair to expect a cash flow conversion to be a bit on the lower end for 2017 and then maybe more they catch up in 2018? Just given where the statutory capital and earnings are today? And then the separation costs?

So I think I understand your question but free cash flow is a lot of moving parts to it and it is a bit volatile from year-to-year so we give you an average over two years and we're confident in our rage at 65 to 75 but I can't give you an individual year target.

Okay. But directionally, would it be fair to expect maybe the cash flows moving up as the year moves on?

Directionally, we -- I'm reiterating our range. At this time, it is a bit volatile from time to time.

Okay. And then, in RIS, if one excludes the pension transfers I think PFOs were actually came under some considerable pressure this quarter. Can you maybe talk about that a little bit and maybe also have any color or any extrapolations that you may see for that into 2017?

This is Maria Morris. Obviously RIS has a number of different products as part of it was our institutional income annuities block that was down this quarter, quarter over quarter, we're in a process as you know a balancing kind of value and growth in this marketplace and so we're comfortable with where we ended up and going into next year we have focused plans on each of these markets. In the income annuities business we're seeing some increase in different sponsors, interested in this product line, so we do believe that will go back to traditional growth in the future.

Your next question comes from the line of Randy Binner from FBR Capital Markets. Please go ahead.

I wanted to talk about just expenses and confirm that the overall expense savings initiative of the $800 million is still on track. I think it is but more specifically I think that you talked about the December costs associated with the expense initiative $300 million pre-tax initiative and '17 is that still on course now that we're in 2017 and is there any update or color you could give us on how the timing of that $300 million of cost associated with the expense initiative is going to come in in 2017?

Yes, we're on track to the outlook we gave you for the cost savings. As you remember, we spent a lot in in 2017 to get these savings later on, a lot of technology investments. It is spread out throughout the year perhaps a little more in the second half than the first half, but we will isolate these for you each and every time and so you can see these pieces of what the investments are to create the savings.

And then just a quick when I wanted to cover the long term care, there's a little bit of an adjustment in holdings. Can you just give a quick update on what the behavior versus interest rate assumptions were that change it wasn't mostly interest rate that change?

In long term care, we adjusted the claims we had in 2016. We updated at the end of the year for those claims what we were seeing -- we were seeing a little less termination of those claims so we had to adjusted reserves on that. Is a small amount relative to the total size of our long term care, remember that we have about $10 billion of GAAP reserves on this business, about $13 billion and so this is a small change within the total and only affecting the 2016 claims.

At this time there are no further questions.

Okay that brings us close to the top of the hour, it's a busy morning. Thank you to everyone for joining us and we look forward to speaking with you during the quarter.