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MetLife, Inc. (NYSE:MET)
Q2 2018 Earnings Conference Call
Aug. 2, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2018 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. 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 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, included 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. Please go ahead.

John A. Hall -- Senior Vice President and Head of Investor Relations

Thank you, Operator. Good morning, everyone, and welcome to MetLife's Second 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 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 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 discussions 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. The content for the slides begins following the romanette pages that feature a number of GAAP reconciliations.

After prepared remarks, we will have a Q&A session that, given the busy earnings call schedule this morning, will extend 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.

Steven A. Kandarian -- Chairman, President, and Chief Executive Officer

Thank you, John, and good morning, everyone. Last night, we reported second quarter adjusted earnings of $1.3 billion, or $1.30 per share, up from $1.04 per share a year ago. Overall, it was another strong quarter in 2018, driven by solid underwriting and expense management across the company. Reflecting the strong results, adjusted return on equity in the quarter was 12.2%. After notable items, adjusted earnings were $1.36 per share. The only notable item in the second quarter was costs incurred to support our unit cost initiative, which totaled $0.06 per share.

Net income for the quarter was $845 million, compared to $865 million a year ago. During the second quarter, MetLife successfully divested its remaining equity stake in Brighthouse. Included in second quarter net income is a realized loss on our disposed Brighthouse shares, as well as other transaction costs, which together totaled $212 million. These items represent the largest portion of the difference between net income and adjusted earnings in the quarter. We are focused on delivering results where net income and adjusted earnings track more closely than in the past.

Turning to business highlights, both Group Benefits and Retirement and Income Solutions reported good volume growth and solid underwriting. With Property and Casualty, lower catastrophe losses and improved auto underwriting contributed to solid adjusted earnings, which more than doubled year-over-year. For our international segments, Asia benefited from volume growth, higher investment income, and lower taxes. Latin America faced only minor currency headwinds and EMEA continued to benefit from expense management.

Moving to total company investments, recurring investment incomes was up 6.7% from a year ago. ASA growth and higher interest rates account for the increase. In the quarter, our global new money yield was 3.98% in comparison to an average roll-off rate of 4.52%. Our new money rate was 68 basis points higher than a year ago due to higher interest rates and the significant amount of new money invested in the U.S. after winning the FedEx pension risk transfer deal.

Pre-tax variable investment income totaled $176 million in the quarter, as private equity and hedge fund returns were down from prior periods. While pre-tax variable investment income is below our quarterly guidance range of $200 million to $250 million, on a year-to-date basis, VII is at the midpoint of guidance.

I would like to take a moment to frame our view of the U.S. economy and the current credit environment. U.S. macroeconomic performance has been strong, aided by tax reform, repatriation of corporate profits, and regulatory relief. The momentum in corporate earnings, which began in late 2016, has continued into the second quarter. Although U.S. credit valuations have been in the tight end of the historical range, spreads have widened more recently on geopolitical and trade concerns. The timing and drivers of a potential economic downturn are currently an area of focus in the credit markets, where corporate debt has continued to grow, primarily driven by M&A.

We have seen substantial growth in BBB rated corporate debt, as well as aggressive issuance in the syndicated bank loan market. While we do not believe a downturn is imminent, we are keeping a close eye on the evolving credit market. With regard to specific fixed income classes, we remain largely neutral on U.S. investment grade bonds and municipals with dedicated revenue streams. We are more cautious on general obligation bonds of states and municipalities with large unfunded pension obligations, as well as certain parts of the high yield market.

We continue to favor private placement credit, given our ability to structure deals, negotiate financial covenants, and receive yields above comparable publicly traded bonds. Beyond credit, we favor privately originated assets, such as residential whole loans, agricultural loans, and commercial mortgages.

Over the last decade, the credit markets have become less liquid for a variety of reasons, including post-financial crisis regulation. We are mindful of this, understanding more time may be required to make portfolio changes. As a result, identifying market shifts and executing strategies early, traditional strengths of MetLife, have become even more important in our current environment.

Turning to expenses, I want to provide an update on the progress we are making toward our commitment to realize $800 million in pre-tax savings by 2020. In the first quarter, we began publishing our expense ratio in a way that will allow you to track our progress against our expense target. We indicated that, to meet our goal, MetLife would need to reduce its direct expense ratio, excluding PRTs and notable items, by approximately 200 basis points versus our 2015 baseline of 14.3%. In dollar terms, this means $1.05 billion of gross savings to get to $800 million net. The $250 million difference is extraneous overhead from the Brighthouse Financial separation.

As you can see in our quarterly financial supplement, our direct expense ratio in the second quarter was 13%. For the full year 2018, we think the ratio will be slightly higher, as expenses tend to be concentrated in the second half of the year. This was true in 2017 as well. Importantly, we remain highly confident that we will achieve a 200 basis point reduction by 2020.

As part of the ongoing process, MetLife has been engaged in an intensive effort to sharpen our focus on efficiency. Our goal is to build a margin of safety above our $1.05 billion gross savings target to ensure that we succeed even if certain initiatives fall short. To become more efficient, we are aggressively managing our spending on vendors and consultants, building out our digital distribution and service channels, and automating processes. We have gone through every expense initiative line by line and provided detailed support for the saves. This rigorous exercise is what gives us confidence that we will reach our goal.

Just as important as reducing expenses is growing revenues. While the spinoff of Brighthouse Financial was a tremendous achievement, it should not create an impression that MetLife is more focused on exiting businesses than entering them. I am a strong supporter of growth that exceeds our cost of capital and provides a fair return to our shareholders, such as our Logan Circle Partners acquisition, our $2 billion purchase of ProVida in Chile, and our $6 billion FedEx pension risk transfer deal. Our purpose at MetLife is to provide financial protection to people and their families. When we grow responsibly, our customers receive the help they need, our employees enjoy better career opportunities, and our shareholders earn better returns.

Moving to capital management, we repurchased $1.1 billion of our common shares during the second quarter, completing our $2 billion buyback authorization. Also in the quarter, our Board of Directors authorized an additional $1.5 billion share repurchase program. Combined with our common dividend, total capital return to shareholders in the quarter came to more than $1.5 billion. We continue buying back shares in the third quarter, repurchasing another $236 million in common stock, leaving $870 million remaining on our current $1.5 billion authorization, which we anticipate completing by year end. MetLife's business is predicated on keeping the promises we make to policyholders. We view our commitments to our shareholders no differently.

On our last call, I spoke about how our clean first quarter represented a down payment on the improved performance expected of MetLife. We were pleased to make a subsequent payment in the second quarter. In addition to being a less complex company, we have made several significant financial commitments to our shareholders. These include: boosting our return on equity to 800 to 900 basis points above the 10-year treasury yield, and eventually to 1,000 basis points on a sustainable basis; generating a free cash flow ratio of 65% to 75%, on average, over a two-year period; achieving pre-tax net savings of $800 million by 2020; and returning roughly $5 billion of capital to shareholders in 2018.

We are highly focused on meeting or exceeding these commitments. At the year's midpoint, we are well on our way to doing so, which we believe will lead to greater shareholder value over time. With that, I will turn the call over to John McCallion to discuss our quarterly financial results in detail.

John McCallion -- Chief Financial Officer

Thank you, Steve, and good morning. I will begin by discussing the 2Q '18 supplemental slides that we released last evening along with our earnings release and quarterly financial supplement. These slides cover our second quarter 2018 financial results and business highlights.

Starting on Page 4, the schedule provides a comparison of net income and adjusted earnings in the second quarter. Net income was $845 million, which included a $159 million mark-to-market loss related to the disposition of our remaining investment in Brighthouse Financial. In addition, costs associated with the debt exchange were $53 million after tax. Excluding these items, net income was $1.1 billion in the quarter, or $269 million lower than adjusted earnings of $1.3 billion, primarily due to the results in our investment portfolio and hedging program. Overall, the relatively modest net investment and net derivative losses in the quarter reflect MetLife post-separation product mix and refined hedging program, as well as the continued benign credit environment.

Now let's turn to Page 5. Book value per share, excluding AOCI other than FCTA, was $42.76 as of June 30, down 1% versus $43.36 as of March 31. The decline was primarily due to a change in FCTA in the second quarter, as the U.S. dollar strengthened significantly against all major currencies. As of June 30, FCTA was a negative $4.7 billion, which reflects a decline of nearly $1 billion, or $0.96 per share, from March 31. While the change this quarter was significant, it largely reverses the FCTA gain that we had in the first quarter of 2018 when the dollar had weakened. As we have seen in our results, the FCTA is sensitive to movements in currencies and can fluctuate from quarter to quarter.

We only had one notable item in the quarter, as shown on Page 6, and highlighted in our earnings release and quarterly financial supplement. Expenses related to our unit cost initiative decreased adjusted earnings by $62 million after tax, or $0.06 per share. Adjusted earnings excluding notable items were $1.4 billion, or $1.36 per share.

On Page 7, you can see the year-over-year adjusted earnings, excluding notable items, by segment. Excluding all notable items in both periods, adjusted earnings were up 18% year-over-year and 17% on a constant currency basis. On a per share basis, adjusted earnings were up 25% on both a reported and constant currency basis. The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers in the quarter included favorable underwriting, solid volume growth, and lower taxes primarily due to U.S. tax reform. These were partially offset by weaker investment margins due to lower variable investment income.

Pre-tax variable investment income was $176 million, down $46 million versus the prior year quarter of $222 million, due to lower private equity and hedge fund returns. Despite the weakness this quarter, year-to-date VII results are in line with our expectations and we are maintaining our outlook call range of $200 million to $250 million per quarter for the remainder of the year.

With regards to business performance, Group Benefits adjusted earnings were up 29% year-over-year, primarily driven by favorable underwriting margins, volume growth, and the impact of U.S. tax reform. Underwriting results were particularly strong in non-medical health. The interest-adjusted benefit ratio for non-medical health was 73.1%, favorable to the prior year quarter of 76.9% and below the low end of its target range of 75% to 80%. Non-medical health's favorable underwriting experience was primarily driven by disability, which had a higher net closure rate and lower incidence than the prior year quarter. The Group Life mortality ratio was 87.9%, which was within one standard deviation of the prior year quarter of 87.3% and within its target range of 85% to 90%.

Group Benefits continues to see strong momentum in its top line. Adjusted PFOs were up 4% year-over-year, with growth across all markets and most product lines. Year-to-date, 2018 sales were down 4% relative to the first half of '17, which had record jumbo case sales. Group Benefits continued its strategy to grow voluntary products, which were up double digits for the first half of 2018 versus the prior year period. In addition, we also continue to grow down market, as regional and small market sales were above our target year-to-date.

Adjusted earnings in Retirement and Income Solutions, or RIS, were up 32%. The key drivers were favorable interest and underwriting margins, volume growth, and lower taxes due to U.S. tax reform. This was partially offset by lower VII.

While the flatter yield curve has put some pressure on RIS adjusted earnings, this was more than offset by higher general account balances from continued growth in nearly all businesses. Most notably, in pension risk transfers, growth is highlighted by the $6 billion FedEx deal that we closed in May. In addition, we have been able to maintain investment spreads, which were 129 basis points in 2Q, and within our outlook call range of 110 to 135 basis points.

Earnings from certain near-expiring interest rate caps were a key contributor to spreads in the quarter, offsetting weakness in variable investment income. Excluding VII, RIS spreads were 113 basis points, which is up both year-over-year and sequentially.

RIS adjusted PFOs were $6.5 billion, up from $1.2 billion in the prior year quarter, due to the FedEx deal. Excluding FedEx and all other PRT deals in both quarters, adjusted PFOs were up 26% year-over-year, primarily due to strong sales of structured settlements and income annuities.

On PRT, we continue to see a good pipeline of all sizes and structures. Our approach will continue to balance growth with an efficient use of capital.

Property and Casualty, or P&C, adjusted earnings more than doubled year-over-year, driven by favorable underwriting margins in both auto and home, as well as lower catastrophes. The auto combined ratio was 91.2%, down by 5.3 points versus the second quarter of 2017, due to increased adverse premiums and expense management. Pre-tax catastrophe losses were $108 million in the quarter, but $19 million lower than the prior year quarter. This improvement was due to lower cat activity, as well as management actions that we have taken over the last 12 months.

In regards to the top line, PNT adjusted PFOs were at 1% while sales were up 23% versus 2Q '17. We continue to see strong sales momentum in 2018, particularly through our group channel.

Asia adjusted earnings, excluding notable items, were up 22% and up 20% on a constant currency basis. The key drivers were volume growth, investment margin, and lower taxes. This was partially offset by higher expenses. Asia adjusted earnings were aided by several one-time items in the quarter of approximately $20 million. Asia sales were up 26% on a constant currency basis. In Japan, sales were up 42%, driven by strong foreign currency denominated annuities, as well as action in health sales. FX and A&H products remain our primary focus in Japan, as the shift away from the end-life products over the past three years is now complete. We believe that we have a competitive advantage selling these products and continue to see solid momentum for the remainder of the year. Other Asia sales were up 3%, primarily driven by China.

Latin America adjusted earnings were down 6% and down 3% on a constant currency basis. Higher taxes in the region and the impact from U.S. tax reform offset solid volume growth. On a pre-tax basis, Latin America adjusted earnings were up 6% on a reported basis and up 9% on a constant currency basis. Latin America adjusted PFOs were up 5%, and up 7% on a constant currency basis, due to volume growth across the region. Latin America sales were up 6% on a constant currency basis, driven by higher direct marketing sales throughout the region.

EMEA adjusted earnings were up 19%, and up 15% on a constant currency basis, due to expense margin improvement, as well as volume growth in Turkey and Western Europe. This was partially offset by the impact of U.S. tax reform. EMEA adjusted PFOs were up 8%, and up 5% on a constant currency basis, reflecting growth in Western Europe and Turkey.

MetLife Holdings adjusted earnings, excluding notable items, were up 1% year-over-year, primarily driven by the benefit from U.S. tax reform and favorable expense margins. This was mostly offset by less favorable life underwriting and investment margins. In regards to underwriting, life claims were up relative to a very strong 2Q '17, but the interest-adjusted benefit ratio this quarter was at the midpoint of our target range of 50% to 55%. Our LTC results remain consistent with expectations, generating positive earnings, and we continue to execute on our rate action plan.

Corporate and other adjusted loss, excluding notable items, was $157 million compared to an adjusted loss of $114 million in 2Q '17. The primary driver of the year-over-year variance was the impact from U.S. tax reform. Overall, the company's effective tax rate in the quarter was 15.4% due to a one-time reduction in the tax accrual of $36 million following a transfer of assets from a foreign subsidiary to its U.S. parent. Excluding this item and other one-time tax items in the quarter, the company's effective tax rate was 18.2%, which is within our prior guidance of 18% to 20%.

Turning to Page 8, this slide shows our direct expense ratio from 2015 through 2017, as well as the first two quarters of 2018. As Steve noted, we need to bring down our direct expense ratio by approximately 200 basis points from the 14.3% in 2015, which was the baseline year, to realize $800 million of pre-tax profit margin improvement. As we noted last quarter, we believe the direct expense ratio on an annual basis is the best measure of our unit cost initiative progress, as the ratio can fluctuate from quarter to quarter. This ratio captures the relationships of revenues and the expenses over which we have the most control. We believe this best reflects the impact on profit margins.

For this quarter, the direct expense ratio was 13%, excluding notable items and pension risk transfers. This is essentially in line with the first quarter of 2018 and below the full-year 2017 ratio of 13.3%. We continue to make good progress despite absorbing over 40 basis points of one-time expenses related to the remediation of our material weaknesses, as well as the growth in our investment management business, which has a higher expense ratio. Looking ahead to the back half of the year, we would expect our direct expense ratio to be modestly higher than the first half. This is a function of the strong growth we have enjoyed in our national account business, where we will incur enrollment and other costs prior to receiving associated premiums. For the full-year 2018, it is our objective to show improvement in the direct expense ratio compared to 2017.

Now I will provide an update on our progress for remediation of the 4Q '17 material weaknesses. First, let me discuss the RIS group annuity reserves. We have now completed the root cause analysis. The findings from that analysis are being addressed by the ongoing remediation activities. This analysis further supports that the current remediation plan continues to be appropriate. Regarding the MetLife Holdings assumed variable annuity guaranteed reserves, we have also completed the root cause analysis and incorporated its findings in the remediation plan. This also confirmed that the current plan continues to be appropriate.

We believe the steps we are taking will further strengthen our internal control over financial reporting. While an observation period is required, we continue to work toward clearing the material weaknesses during 2018.

I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $5.4 billion at June 30, which is up from $5.1 billion at March 31. The $300 million increase in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend, holding company expenses, preferred stock issuance, and liability management.

During the quarter, we issued approximately $800 million of preferred stock, bringing our total preferred stock issuance for the year to approximately $1.3 billion. To divest our remaining Brighthouse Financial equity stake, we exchanged BHF stock for MetLife debt, which was a non-cash liability management exercise. The objective of these actions is to continue to optimize the capital structure in line with the rating agency expectations, as well as provide further financial flexibility.

Next, I would like to provide you with an update on our capital position. For our U.S. companies, preliminary year-to-date second quarter statutory earnings were approximately $2.7 billion and net earnings were approximately $2.2 billion. Statutory operating earnings increased by $792 million from the prior year period, primarily due to dividends received from a foreign investment subsidiary, which had a corresponding offset in statutory adjusted capital. We estimate that our total U.S. statutory adjusted capital was approximately $18.2 billion as of June 30, 2018, down 1% compared to December 31, 2017. Net earnings were more than offset by dividends paid to the holding company. Finally, the Japan solvency margin ratio was 884% as of March 31, which is the latest public data.

Overall, MetLife had a very strong second quarter in 2018, highlighted by favorable underwriting and solid volume growth. In addition, our cash and capital position remains strong and we remain confident that the actions we are taking to implement our strategy will drive 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.

Questions and Answers:

Operator

Ladies and gentlemen, if you would like to ask a question, please press "*1" on your telephone keypad. You will hear a tone indicating you have been placed in queue. You may remove yourself from this queue by depressing "#". Once again, for any questions, please press "*1". And our first question is from the line of Ryan Krueger with KBW. Please go ahead.

Ryan Krueger -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hi. Thanks. Good morning. John, you mentioned that in Retirement there was some benefit from interest rate caps that were near expiration. Can you help us quantify that amount as well as think about when those will actually run off?

John McCallion -- Chief Financial Officer

Yeah, sure. Hey, Ryan. So let me just back up. On the outlook call, we indicated that a 10 basis point move would have a $5 million to $10 million impact on earnings. So since that time, two things have happened. So, first, the three-month LIBOR has risen probably 60 or 70 basis points above our expectations. It's actually up like 90 basis points year-to-date. And so we did have some out-of-the-money caps that are now in the money. So that's one. The second thing I would also emphasize is there were certain management actions that we took on the liability side to reduce the exposure to kind of the floating rate liabilities. So that also had a modest improvement relative to the guidance.

So, as a result, I would say it's temporarily neutralized at this level of rates. I say temporarily because, as you point out, these caps will gradually roll off through the latter half of this year and into '19. So, ex these actions in the caps, we think the sensitivity holds but LIBOR has obviously increased outside of our expectations. So, right now through the rest of this year, I would say, at these levels, we are less sensitive than previously disclosed. And I think what we'll do is we'll try to give you a more holistic update on the next outlook call.

Ryan Krueger -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. That's helpful. And then just one on long-term care. I know that you've said your statutory reserves do not assume any benefit from future premium rate increases. Can you disclose if you assume morbidity improvement currently?

John McCallion -- Chief Financial Officer

Sure. So let me start with just a few high-level comments. So, first, we will be -- we're starting our annual assumption review now. That takes place in the third quarter so, as we speak, it's under way. And we'll obviously share the results when we get there. I think until then, let me give you some additional color and maybe some guardrails.

So reminders. We have roughly $14.5 billion of statutory reserves. In there, we do not assume any rate increases and we do not assume morbidity improvement. So that's on the statutory side. For GAAP, we do assume some planned rate increases but it's really over a short period of time and it's based on our experience to date. As a reminder, we had roughly 7% rate increase off of '17. On the premium that we got the rate increase, it was roughly 20% increases. It was about $250 million of the $750 million of premium we had. So I think from a GAAP perspective, we would track a similar way. We're tracking that way in '18 to similar levels.

Regarding morbidity for GAAP, we do include some assumptions for morbidity improvement. It's on roughly 20% of our long-term care block. So, if we were to eliminate that assumption, we would not incur an LTC charge. It would get absorbed by our loss recognition testing margin. And we'd probably still have some left pretty significantly after that. So hopefully that gives you a little color.

Ryan Krueger -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks, John. That's really helpful.

Operator

Next we go to the line of Erik Bass of Autonomous Research. Please go ahead.

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. I was just hoping you could comment a bit more on the pension risk transfer pipeline and the competitive environment, particularly for larger deals.

Michel A. Khalaf -- President, U.S. and EMEA

Yeah. Hi, Erik, this is Michel. So we continue to find the market opportunity attractive with a good pipeline. Last year was a record year for us from a PRT standpoint. This year, obviously with the FedEx deal, we'll exceed that. So I think we continue to be active. We continue to see opportunity in the market. Our approach is consistent in terms of balancing growth with the efficient use of capital, also considering alternative uses of capital. So we remain disciplined and consider the risks and pricing parameters for each deal. But we do think that the market opportunity continues to be attractive.

Erik Bass -- Autonomous Research -- Analyst

Got it. And maybe as a follow-up, just given Steve's somewhat cautious comments on credit, do you have any concerns about taking on the asset leverage or just the investment funding needs associated with large PRT blocks?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Hi, it's Steve Goulart. The basic answer is no. I mean, I think I'd just go back to Steve's comments. I don't think we're sounding any alarm bells but we're basically saying our job is getting tougher in this environment. But, remember, we're investing billions of dollars a quarter and we're still finding sound, attractive investment alternatives. It's just that market conditions remain tight. Market structure is different than it was years ago. So we're spending more time just thinking about what happens in the next downturn and how do we position ourselves when we think it's coming. But we're still finding plenty of attractive investments. We are cautious, as Steve mentioned, on certain sectors. But I think our motto, I quote one of my favorite investors, who says, "We're still in an environment of move forward with caution."

Erik Bass -- Autonomous Research -- Analyst

Great. Thank you.

Operator

Next we go to the line of Tom Gallagher with Evercore. Please go ahead.

Thomas Gallagher -- Evercore -- Analyst

Good morning. Just a few on long-term care. Just given all the peer charges occurring around you, any reason to do a deeper dive for your 3Q review this year, including third-party involvement?

John McCallion -- Chief Financial Officer

Tom, it's John. I would say we are normal course. We annually test our assumption rigorously. So we have in the past, we continue to do so, and we will in the third quarter. I don't see anything changing in how we do things, so.

Thomas Gallagher -- Evercore -- Analyst

And my follow-up is, if you look at Met's development over the last few years and you compare it to others, Met's have looked a lot better. You really have not seen the same level of adverse development that I would say the vast majority of peers are showing right now. Can you comment at all? I'm sure you guys have looked into this as well. So can you comment at all about what you think is actually happening that is preventing Met from seeing the same deterioration that has now become pretty broad-based?

John McCallion -- Chief Financial Officer

Yeah. I think I would just go back to maybe the risk profile that we articulated over the last few quarters. Right? So I think part of it is when we exited. We exited in 2010. I think we have, if you think about our block, it's pretty high percentage. Almost 40% of that block is in the Group space, which is generally the lower ages, smaller policies, less generous provisions than the individual. We've been doing a lot on getting premiums in. We've taken rate actions. We started early. I think that's a big component of that. We have $750 million of premium coming in and we've been rate increases and we're halfway through the actuarial justified rate increases. So I think it's a combination of risk profile coupled with, I'd say, management actions that have occurred.

Thomas Gallagher -- Evercore -- Analyst

Okay. Thanks.

Operator

Next we go to the line of Andrew Kligerman with Credit Suisse. Please go ahead.

Andrew Kligerman -- Credit Suisse Securities -- Analyst

Hey, thanks a lot. So just kind of looking at Slide 8, the direct expense ratio, and you want to get it from 14.3% in 2015 down by 200 basis points into 2020. The last two years, it was 13.3% and now it's kind of 13% and you're saying it's gonna kind of come up a bit as we go to the second half of the year. And it was good that you pointed out the 40 bps of material weakness. So does that come off next year once you kind of resolve the material weakness? And maybe you could give us a little color on the trajectory of this direct expense ratio over the next two years, as it seems to have kind of leveled out over the last three.

John McCallion -- Chief Financial Officer

Yeah, sure, Andrew. So a couple of things I would just note to help with the trajectory comment. Don't forget, if you went backwards, we had the strand came in. So that kind of offset some of the saves that we would have otherwise seen. So I think the trend would look better if we normalized for the strand. That's one. Two, just to edit one thing you said, the 40 basis points is a combination of two things. It's extra costs we have for remediating the material weaknesses coupled with our growth in the investment management business, which is a high-returning business but has a higher expense ratio.

But that doesn't change our commitment. We're still committed to getting 200 basis points. I think I would go back to Steve's comments to assure you that we feel very comfortable about achieving that by 2020. This is a bigger exercise than just a cost exercise. This is a transformational exercise. We are investing not for this just to be completed by 2020, but investing so this is an ongoing platform that we can leverage for growth. And so I think some of it will kind of start to trend in into '19 and '20 at a better clip, but a lot of this right now, we're a lot of the investment now that will translate into the saves in the future.

Andrew Kligerman -- Credit Suisse Securities -- Analyst

Got it. And then just to follow up on Asia. PFO are kind of -- they were up about 1% year-over-year. Do you see that materially going up over time or are things a bit slower in Japan, where it might be a bit mature?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Well, I think if we go back to our outlook call, Andrew, I think we're still in line with our expectations there and very comfortable with that. Japan actually continued to be very strong. We talked about that. And we're also seeing strong growth in other remarks. Remember, it's a portfolio of ten different countries. They're not all going to perform the exact same at any point in time. But basically we've got strong sales growth in certain of the markets, slower growth given some of the environment, including some regulatory changes, in different markets. But, all in all, I think we're still expecting what we've seen as building momentum in the second quarter and we're very comfortable with what we've said for our outlook call expectations.

John McCallion -- Chief Financial Officer

I would just add, Andrew, also, if you think through the mix of business there a little bit, so we're shifting quite a bit to the foreign currency denominated. It's a FAS 97 type product. So it's fee oriented as opposed to premium. So we're seeing great growth there I think, as Steve talked about, but you may not see it just in the premium line but we're seeing it through margin.

Andrew Kligerman -- Credit Suisse Securities -- Analyst

Okay. So, per guidance, low single digit PFO growth makes sense. Thanks a lot.

Operator

And next we will go to the line of Jammi Bhullar with JP Morgan. Please go ahead.

Jamminder Singh Bhullar -- JP Morgan -- Analyst

Hi. Good morning. First, just I thought overall your international results were pretty good, but there were a few areas of weakness, specifically sales in ex-Japan/Asia, Mexico sales, and then EMEA sales overall seemed weak as well. So could you just give us some color on what drove that and what your outlook is?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Hey, Jammi, it's Steve Goulart again. Just sort of picking up on what I had just commented on really, again, there were markets outside Japan where we did see slower sales growth but when I think about why that happened, I mention we saw regulatory changes in certain markets. We've been really sort of rebounding from those changes and I do see building momentum. So I think we're comfortable with the full-year outlook in really all of Asia and ex-Japan as well.

Michel A. Khalaf -- President, U.S. and EMEA

And for EMEA, this is Michel, Jammi. A couple of comments is. One is keep in mind that our sales figure is influenced by the exit from the UK wealth management business last year. If you adjust for that, our sales are up 1%. That's still below the level that we'd expect for EMEA. The main driver for that is the increasingly competitive pricing environment in the gulf on the group medical business in particular. The margins are thin on this business and we're holding firm on pricing and that's having an impact on our sales.

Jamminder Singh Bhullar -- JP Morgan -- Analyst

Okay. And then Mexico, I guess, the sales there as well?

Oscar Schmidt -- President, Latin America

Hey, Jammi, this is Oscar. Good morning. So let me talk about sales first. So sales year-over-year grew 6% but if you adjust for the divestiture of our business in Mexico, that's 3 percentage points. It goes to 9%. So it will align with our high single digits expectation from our outlook call. If you go to premiums and fees, which is up 7% year-over-year, if you do the same, if you adjust for the divestiture, it goes to 8%. Which is, again, in line with our high single digits expectations.

Jamminder Singh Bhullar -- JP Morgan -- Analyst

Okay. And then if I could ask another question on long-term care. You were pretty active in buybacks this quarter. Your review is coming up. How concerned are you or what's the likelihood of it being a stat charge, if you take a charge? And do you think, under reasonable scenarios, it could have an impact on your free cash flow or capital deployment strategy for this year and next?

John McCallion -- Chief Financial Officer

Yeah, Jammi, in terms of stat reserves, we are comfortable at the present time. We're going through the assumption review, as I said, in the third quarter. But right now there's no reason to believe or there's any concerns for changing our capital management plans.

Steven A. Kandarian -- Chairman, President, and Chief Executive Officer

As I said in my remarks, we anticipate extinguishing the $1.5 billion authorization for share repurchases by the end of the year. So that's on track.

Jamminder Singh Bhullar -- JP Morgan -- Analyst

Okay. Thank you.

Operator

Next we have a question from John Nadel with UBS. Please go ahead.

John Nadel -- UBS -- Analyst

Hey, good morning. So this may be a little bit complicated to do on a consolidated basis, but it looks like investment income was up pretty significantly versus the level we've seen maybe the average of the last five quarters, maybe a little over 4% higher. And there really doesn't look like there was much of a corresponding offset anywhere in the interest credit line or otherwise. And I guess it's really evident in RIS, maybe a little bit in international, especially Asia. I'm just trying to understand the sustainability of this higher level of investment income. Are we already seeing the benefits of higher new money rates and is this a new level we ought to think about from here?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

John, it's Steve again. I'll start with just sort of investment performance and then let John talk more about it from a margin perspective. But put it in the context of what's happening in the environment. Rates have, I guess you could say steadily, if you use a point in time, but rates continue to rise in general over time. We continue to see our new money yield rising along with it. I don't get hung up on quarter to quarter. We're really looking at trends. But we do see the overall performance and yield in the portfolio rising. Is it sustainable? I think it depends a lot on the overall market, what happens with underlying rate levels, and, of course, what happens with spreads. And then I think I'll let John comment more about overall investment margin.

John Nadel -- UBS -- Analyst

Steve, if I can just follow up real quick. Was the new money rate -- I know it's a global sort of approach, but was the global new money rate in the last couple of quarters above the portfolio yield?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

No. No, we haven't had our new money rate above the portfolio yield in years. But we're getting closer.

John Nadel -- UBS -- Analyst

Okay.

John McCallion -- Chief Financial Officer

And I would just add, John, that I think it's probably always relative to expectations here. Right? So we are seeing a benefit from the rate environment and we've seen some benefits for some of the things I talked about earlier in RIS. We saw some initiatives in Asia that have helped us. So I think it depends a little bit where you're referencing. But those are probably the two largest businesses seeing the benefit of some investment margin.

John Nadel -- UBS -- Analyst

Okay. That's helpful. And then just real quick, I think you had mentioned a one-time impact on the tax rate and I forget what the other one was. I think there was something in Asia. Could you just remind us of those real quick?

John McCallion -- Chief Financial Officer

Yeah. For taxes, you're referencing?

John Nadel -- UBS -- Analyst

Yeah. I think you mentioned something on the tax rate. The underlying tax rate was a little over 18%.

John McCallion -- Chief Financial Officer

Yes. So it's 15.4% but there's a one-time benefit coming through in corporate and other. It relates to this one-time transfer that we had of some assets from a foreign subsidiary to a U.S. parent. Really our effort to simplify some structure and it's just a release of an accrual that we had up in GAAP.

John Nadel -- UBS -- Analyst

Okay. And in Asia, I think you mentioned a little over $20 million?

John McCallion -- Chief Financial Officer

What we said there was really just some one-time items. It wasn't tax-related. Half of it is actually that region got allocated a higher level of VII this quarter. The other half, I would kind of put in the camp of some reserve refinements.

John Nadel -- UBS -- Analyst

Got you. Okay. Thanks.

Operator

Next we go to the line of Alex Scott with Goldman Sachs. Please go ahead.

Alex Scott -- Goldman Sachs -- Analyst

Hi. Thanks for taking the questions. Just the first one on long-term care. Could you provide any clarity just on the mortality improvement that's assumed on statutory and GAAP?

John McCallion -- Chief Financial Officer

Yeah, I don't think we're gonna go through that right now. Just obviously we're going through our annual assumption review and it's not something we would disclose at this time.

Alex Scott -- Goldman Sachs -- Analyst

Okay. And then maybe just a follow-up. Just thinking about holdings more broadly, it seems like the supply of reinsurance capital is pretty robust. Any updated thoughts on the potential for doing a risk reduction transaction or risk transfer transaction, whether it be long-term care or annuity blocks, etc.?

Martin J. Lippert -- Executive Vice President and Head of Global Technology & Operations

Alex, this is Marty Lippert. We continue to look for economic deals that can help drive positive returns. And when we come across one that looks strong enough to us, we'll pursue it.

Alex Scott -- Goldman Sachs -- Analyst

And would you guys expect a cash flow coming out of MetLife Holdings to remain the same, I guess, as you've kind of stated previously? Can you just remind us about what that cash flow would be relative to earnings and what you expect there?

John McCallion -- Chief Financial Officer

Yeah, I would just say it's consistent with the guidance we've given. We see this -- there's a little bit of a unique situation going on in '18 because of the change in taxes. But going forward, it's about a 5% runoff.

Alex Scott -- Goldman Sachs -- Analyst

Okay. And would cash flow be greater than 100% potentially?

John McCallion -- Chief Financial Officer

I don't know about greater. I would say around 100%.

Alex Scott -- Goldman Sachs -- Analyst

Okay. Very helpful. Thank you.

Operator

Next we go to the line of Larry Greenberg with Janney Montgomery Scott. Please go ahead.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Good morning and thank you. Two questions on the property casualty segment. If you could just discuss pricing trends in personal auto. And then I think you referenced some management actions you've taken to lower catastrophes this year. If you could just give us a little bit of color on that, and, if possible, how much it might have reduced your catastrophe load, 2018 versus 2017.

Michel A. Khalaf -- President, U.S. and EMEA

Hi, Larry, this is Michel. So on auto, I think we've seen loss trends that are more favorable, generally speaking, in recent quarters, especially compared to '15 and '16. We think this is due to a number of factors, mainly the miles driven, which seem to have flattened after several years of increase. I think this is reflected in the industry. If you look at rate taking, I think it's slowed down. We had taken aggressive action from late '16 onwards above industry-level action. I think that's reflected in some of the improvement that you see in our auto loss ratios. We think that, going forward, our rate action would be more in line with the industry.

And on the cat front, again, we had taken a number of management actions, mostly focused on reducing and lessening our exposure to areas where historically we had seen significant cat activity. And I think we see the benefit of that, if we compare our second quarter cats for this year compared to last year on a pre-tax basis. They were better by $19 million. So I think that's reflective of some of the action that we've taken.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Is there a specific geography, in terms of the actions on the cat side?

Michel A. Khalaf -- President, U.S. and EMEA

There are certain geographies where we were experiencing a high level of cat losses. Dallas/Ft. Worth, for example. Colorado. So we've taken action, but not limited to those states, but we've certainly taken action to lessen exposure in those areas.

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Great. Thank you.

Operator

Next we go to the line of Jay Cohen with Bank of America. Please go ahead.

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

My question was answered. Thank you.

Operator

Thank you. Next we go to the line of John Barnidge with Sandler O'Neill. Please go ahead.

John Barnidge -- Sandler O'Neill -- Analyst

Thank you. I know you guys have been focused on growing your investment management, asset management business. Could you talk about what percent, if any, of your assets under management are exposed to index funds?

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Yeah. We do have a fairly large block of index funds but they're all related to MetLife separate accounts. It is less than a quarter of our overall third-party assets, if you want to include it in that, and is really not material from a revenue generation perspective.

John Barnidge -- Sandler O'Neill -- Analyst

Thank you. And then you talked about wanting to grow, not divest. What areas are you looking to grow through M&A, other than asset management obviously? Thank you.

Steven A. Kandarian -- Chairman, President, and Chief Executive Officer

Hey, it's Steve Kandarian. We look at opportunities in the marketplace that fit our strategy. And obviously the areas we are in now in the United States are largely the Group area and the Retirement area. And, of course, outside the United States, we have a significant position in Latin America and Asia and the Middle East. So those have been the logical places for us to be looking for opportunities. But, as we've always said, we compare any acquisition opportunity against a share repurchase. And it doesn't mean we wouldn't do an acquisition or that it has to be accretive Day 1 but it has to be accretive quickly for us to pursue something.

John Barnidge -- Sandler O'Neill -- Analyst

Thanks for the answers.

Operator

There are no other questions. You may continue.

John A. Hall -- Senior Vice President and Head of Investor Relations

Okay. Great. If there's no other questions, thanks, everybody, for your attention and we'll speak with your next quarter.

Operator

Ladies and gentlemen, this conference is available for replay after 11:00 a.m. Eastern Time today through August 9 at midnight. You may access the replay service at any time by dialing 1-800-475-6701 and enter the access code of 433150. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844 with the access code of 433150. That does conclude your conference for today. Thank you for your participation and for using AT&T teleconference service. You may now disconnect.

Duration: 56 minutes

Call participants:

John A. Hall -- Senior Vice President and Head of Investor Relations

Steven A. Kandarian -- Chairman, President, and Chief Executive Officer

John McCallion -- Chief Financial Officer

Michel A. Khalaf -- President, U.S. and EMEA

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Oscar Schmidt -- President, Latin America

Martin J. Lippert -- Executive Vice President and Head of Global Technology & Operations

Ryan Krueger -- Keefe, Bruyette & Woods, Inc. -- Analyst

Erik Bass -- Autonomous Research -- Analyst

Thomas Gallagher -- Evercore -- Analyst

Andrew Kligerman -- Credit Suisse Securities -- Analyst

Jamminder Singh Bhullar -- JP Morgan -- Analyst

John Nadel -- UBS -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Larry Greenberg -- Janney Montgomery Scott -- Analyst

Jay Cohen -- Bank of America Merrill Lynch -- Analyst

John Barnidge -- Sandler O'Neill -- Analyst

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