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Metlife Inc  (NYSE:MET)
Q3 2018 Earnings Conference Call
Nov. 02, 2018, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the MetLife's Third 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 and 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 the trends in the company's operations and financial results and the business and the products of the company and its subsidiaries. MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the US Securities and Exchange Commission, including in the Risk Factors section of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

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

John Hall -- Senior Vice President & Head of Investor Relations

Thank you, operator. Good morning, everyone, and welcome to MetLife's Third 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 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 may have a significant impact on GAAP net income.

Now joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also here with us today to participate in the discussion are other members of senior management.

Last night, we released an expanded set of supplemental slides, including substantial disclosurein the appendix on our long-term care book of business. They are available on our website. John McCallion will speak to the main body of the 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 will extend no longer than the top of the hour. Please limit yourself to one question and one follow-up in fairness to all participants.

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

Steven Kandarian -- President & Chief Executive Officer

Thank you, John, and good morning, everyone. MetLife has been engaged and won the most ambitious transformations in its history. For a number of years, much of our business was characterized by capital intensive, long-tailed liabilities with low levels of free cash flow. Our strategy has been to transform MetLife into a company with a different profile, less capital intensive with shorter payback periods and higher cash flow. While some of the business we wrote in years past will take time to run off our books, we believe we are now at an inflection point where the heavy lifting of our transformation is just about complete. We are executing more consistently and the results in the quarter and for the year to date 2018 demonstrate that our strategy is working. We delivered third quarter adjusted earnings of $1.4 billion or $1.38 per share, up from $1.4 share a year ago. Once again, our business fundamentals were strong; solid underwriting, good investment results, and disciplined expense management across the company. Reflecting our strong results, adjusted return on equity in the quarter rose to 12.9% from 9.1% a year ago. After notable items, adjusted earnings were $1.53 per share. Notable items in the third quarter included a net charge of $0.07 per share associated with our annual actuarial review and other insurance adjustments, as well as $0.09 per share of costs to support our expense initiative. MetLife's annual actuarial review, which we completed during the third quarter, examine the actuarial assumptions underpinning our insurance liabilities around the world. Going into the quarter, there was considerable market interest in long-term care. Our LTC review of all assumptions, models and the margin testing process, which incorporated a third-party actual review, concluded that no long-term care reserve unlocking was necessary. Following the review our long-term care loss recognition testing margin now stands at $2.1 billion. Along with other insurance adjustments, the impact of the actual review on adjusted earnings was negative $68 million. The incremental effect of the actual review on net income was negative $230 million. None of these amounts were associated with long-term care insurance. The largest net contributors were assumption updates in Japan and the closed block. John McCallion will provide more detail on the actual review in his comment.

Net income for the quarter was $880 million, compared to a net loss of $97 million, which is driven by the separation of Brighthouse Financial a year ago. The largest items contributing to the difference between net income and adjusted earnings in the quarter included net derivative losses in the annual actuarial review. Increasing the interest rates in the US and Japan, a rising US equity market and a weakening yen combined to generate mark-to-market derivative losses of $299 million, protecting our balance sheet. As I mentioned earlier, the non-adjusted earnings impact from the annual actual review totaled $230 million. We continue to focus on delivering results where net income and adjusted earnings are more closely aligned than in the past.

Turning to business highlights, Group Benefits reported very good underwriting and solid volume growth, aided by the positive fundamentals of the US economy. Retirement and Income Solutions also reported favorable underwriting and good volume growth. New pension risk transfer deposits in the quarter totaled $1 billion and we are seeing a strong pipeline. With Property and Casualty, lower catastrophe losses and volume growth contributed to solid adjusted earnings, which were up 69% year-over-year. For our international segments, Asia benefited from volume growth offset by less favorable underwriting. Latin America was aided by business growth offset by currency headwinds. And EMEA benefited from expense management, while absorbing underwriting and currency weakness.

Moving to total company investments, recurring investment income 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 4.04% in comparison to an average roll-off rate of 4.37%. Our new money rate was up 51 basis points from a year ago, reflecting higher interest rates. Pre-tax variable investment income totaled $280 million in the quarter, driven by strong private equity returns and higher prepayment activity. Pre-tax variable investment income is above our quarterly guidance range of $200 million to $250 million and on target to meet our full-year guidance.

Notwithstanding the recent market turmoil and concerns over geopolitical issues such as trade, MetLife's business growth has been helped by the favorable economic environment in the United States. GDP growth is on track to exceed 3% for 2018 and the US unemployment rate in September dropped to the lowest level since 1969, a positive for our Group Business. In addition, higher interest rates are strengthening our recurring investment yields. It is difficult at this stage to know if the stock market is signaling an economic downturn, but as we've said before our, refreshed strategy was designed to allow MetLife to perform well across economic cycles.

Moving to capital management, we repurchased $636 million of our common shares during the third quarter. Combined with our common dividend, total capital return to shareholders in the quarter came to more than $1 billion. We have $417 million remaining on our current $1.5 billion authorization, which we expect to complete by year-end. Also, we announced last night that our Board of Directors authorized an additional $2 billion of share repurchases, bringing our current authorized buyback capacity to almost $2.5 billion. Over the three-year period from 2016 through 2018, MetLife will return close to $12 billion to our shareholders through share repurchases and common dividends. During that same time frame, our share count will be down by more than 10%. The cumulative impact of our share repurchase program is having a meaningful and growing positive impact on our financial metrics, including earnings per share and return on equity. In the current quarter alone, share repurchases contributed $0.08 to earnings per share compared to $0.04 a year ago.

I would like to spend a moment talking about our Asia business. As many of you know, we hosted in Asia, Investor Day in Tokyo at the end of September. Asia is our largest business segment outside the US. We have a strong franchise in the region with a significant opportunity to generate growth in value for our shareholders. We have pursued a multi-year effort through accelerating value initiative to improve returns and capital efficiency. Among the more normal actions was our transition from yen-denominated whole life products in Japan to dollar-denominated products. Importantly, this transition was in line with our enterprise strategy to deliver the right solutions for the right customers. Over the past three years, MetLife has more effectively deployed capital in Asia at higher internal rates of return with shorter payback periods, which we expect will generate more value for our shareholders over time. As I noted at the start of today's call, this is the approach we are pursuing across the company. We believe the attributes of the new MetLife are becoming clear, leaner, less capital intensive, more digital, more profitable with strong free cash flow. This is our plan to grow long-term shareholder value and we believe the results are clear in MetLife's improved performance. On December 14th, we will host our 2018 outlook call and share our three-year roadmap for MetLife. With that, I will turn the call over to John to discuss our quarterly financial results in detail.

John McCallion -- MetLife, Inc. -- Analyst

Thank you, Steve, and good morning. I will begin by discussing the 3Q '18 supplemental slides that we released last evening along with our earnings release and quarterly financial supplement. These slides cover our third quarter 2018 financial results including our actuarial assumption review and other insurance adjustments, as well as business highlights. In addition, we are offering a deeper dive into our long-term care block given its focus with analysts and investors.

Starting on Page 4, the schedule provides a comparison of net income and adjusted earnings in the third quarter. Net income was $880 million or roughly $500 million below adjusted earnings of $1.4 billion. The primary drivers for this variance were net derivative losses and the non-adjusted earnings impact from the actuarial assumption review. Higher interest rates, strong US equity markets and the weakening of the yen combined to drive the net derivative loss. Overall, the result in the investment portfolio and hedging program performed as expected.

Now let's turn to Page 5. We've completed our annual actuarial assumption review during the third quarter. Before I speak to the total review, I would like to first address the review as it pertains to long-term care. During the quarter, our actuarial team reviewed all LTC assumptions, models and the loss recognition testing process. Our review was supplemented by a third-party actuarial review. The short form conclusion was that no long-term care reserve unlocking was needed. We continue to have a substantial loss recognition testing margin associated with long-term care. As of September 30th, this was $2.1 billion. In addition, we increased the amount of disclosure regarding our long-term care block of business. The disclosures can be found in the appendix of the supplemental slides.

Along with the granular detail on the long-term care block, we have provided the assumptions underlying our base GAAP and statutory reserves, as well as the assumptions supporting our GAAP loss recognition testing, and our statutory asset adequacy testing. Further, we provided a set of sensitivities associated with our GAAP loss recognition testing margin. Keep in mind that MetLife is not in loss recognition. So our LTC sensitivities relate to our loss recognition testing margin rather than our base reserves. Following the review, we continue to reflect improving morbidity in our loss recognition testing assumptions at a rate of 50 basis points per year. This judgment is supported by a third-party review of our actual morbidity experience, which is tracking at an annual rate of improvement of roughly 2%, more than the assumed rate, but still building statistical significance.

It is important to note the removal of this assumption would be fully covered by a loss recognition testing margin. Our statutory long-term care reserves totaled $14.7 billion. They do not assume any improvement in morbidity in the formulation of base reserves or in the statutory asset adequacy testing process. Our statutory LTC reserves are $2.6 billion greater than our GAAP LTC reserves, which speaks to the strength of the protection provided to our long-term care policyholders. We take in roughly $750 million of long-term care premium each year, which is an important contributor to reserve growth and loss recognition testing margin over time. Importantly, premiums grew last year by 7% from rate increases and we've achieved another 3% in rate increases year-to-date, which serves to better support our LTC block of business.

I will now briefly discuss the balance of our actuarial assumption review on Page 6. During the quarter, the actuarial assumption review and other insurance adjustments reduced adjusted earnings by $68 million. There were a number of pieces that we're largely offsetting and each segment was modestly impacted. Among the larger contributors were lapse assumption updates in Asia and MetLife Holdings, as well as mortality updates, closed block refinements and other life insurance reserve adjustments in MetLife Holdings. The non-adjusted earnings portion of the assumption review was a negative $230 million and was driven by some of the same factors.

We had two notable items in the quarter as shown on Page 7 and highlighted in our earnings release and quarterly financial supplement. First, the actuarial assumption review and other insurance adjustments decreased adjusted earnings by $68 million after tax or $0.07 per share. Second, expenses related to our unit cost initiative decreased adjusted earnings by $88 million after tax or $0.09 per share. Adjusted earnings excluding notable items were $1.5 billion or $1.53 per share.

On Page 8, you can see the year-over-year adjusted earnings, excluding total notable items by segment. Excluding all notable items in both periods, adjusted earnings were up 29% year-over-year and 32% on a constant currency basis. On a per share basis, adjusted earnings were up 39% and up 40% on a 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, better expense and investment margins, as well as lower taxes, primarily due to US tax reform. With respect to investment margins, pre-tax variable investment income was $280 million, up $44 million versus the prior-year quarter, driven by higher private equity and prepayment income.

With regards to business performance, Group Benefits adjusted earnings, excluding notable items in both periods, were up 38% year-over-year, primarily driven by favorable underwriting margins, volume growth, better expense margins and the benefit from US tax reform. Underwriting results were particularly strong in non-medical health. The interest adjusted benefit ratio for non-medical health was 68.1% and 71.6% excluding a favorable insurance adjustment. This result was favorable to the prior-year quarter of 74.7% and well below the target range of 75% to 80%. Non-medical health favorable underwriting experience was primarily driven by disability, which had strong renewal results, lower incidents and favorable claim recoveries versus the prior year quarter.

The Group Life mortality ratio was 85%, which was in line with the prior-year quarter and at the low end of the target range of 85% to 90%. Group Benefits continues to see strong momentum in its top line. Adjusted PFOs were up 6% year-over-year with growth across all markets and product lines. Year-to-date, 2018 sales were down 2% relative to the first three quarters of 2017 , which had record jumbo cases. Voluntary products continued its momentum with sales up double digits year-to-date in 2018 versus the prior-year period. In addition, we also continue to grow down market, as regional and small-market sales were strong and above our year-to-date target.

Adjusted earnings in Retirement and Income Solutions, or RIS, were up 37%. The key drivers were favorable underwriting and volume growth, as well as lower taxes due to US tax reform. This was partially offset by investment margins as we had lower, variable investment income in our areas compared to the prior year.

While the flatter yield curve has put some pressure on RIS adjusted earnings, this was more than offset by higher general account balances which were up 7% versus the prior-year quarter. In addition, we have been able to maintain investment spreads, which were 125 basis points in 3Q and within our outlook call range of 110 basis points to 135 basis points. As we noted on our 2Q analyst call, earnings from interest rate caps contributed to spreads once again in the quarter. Excluding VII, RIS spreads were 104 basis points, which was up 5 basis points year-over-year, but down 9 basis points sequentially. RIS adjusted PFOs were $1.7 billion, down from $2.5 billion in the prior-year quarter due to lower pension risk transfer sales. Year-to-date PRT sales are well ahead of 2017 and we continue to win deals, highlighted by two transactions in 3Q '18 totaling $1 billion. Excluding PRT deals in both quarters, adjusted PFOs were up 2% year-over-year, primarily due to structured settlements and income annuities.

Property and Casualty, or P&C, adjusted earnings excluding notable items in the prior-year quarter were up 41%, primarily due to lower catastrophes in the current quarter. Pretax cat losses were $49 million in the quarter, which was $37 million lower than the prior year. With regards to the top line, P&C adjusted PFOs were up 2%, while sales were up 23% versus 3Q17. We continue to see strong sales momentum in 2018.

Asia adjusted earnings, excluding notable items, were up 11% and up 12% on a constant currency basis. The key driver was volume growth, which was partially offset by less favorable underwriting. Asia sales were up 29% on a constant currency basis. In Japan, sales were up 38%, primarily driven by strong foreign currency denominated annuities, as well as Accident and Health sales. FX and A&H products remain our primary focus in Japan and we continue to see strong momentum in the market. Other Asia sales were up 16%, primarily driven by China and a group case in Australia.

Latin America adjusted earnings, excluding notable items, were down 4%, but on a constant currency basis were up 4%. The impact from US tax reform has dampened Latin America earnings. For example, if we exclude notable items and the impact of tax reform, Latin America adjusted earnings were up 3% and up 13% on a constant currency basis. The key drivers were solid volume growth, higher interest margins and favorable underwriting. Latin America adjusted PFOs were down 1%, but up 7% on a constant currency basis, driven by volume growth across the region, led by Chile. Latin America sales were up 2% on a constant currency basis, due to higher direct marketing and group sales.

EMEA adjusted earnings, excluding notable items, were down 1%, but up 5% on a constant currency basis, primarily due to expense margin improvement. This was partially offset by less favorable underwriting margins. EMEA adjusted PFOs were flat versus the prior-year and up 3% on a constant currency basis, reflecting growth in Western Europe and Turkey. EMEA sales were down 22% on a constant currency basis, due to lower volumes in the Gulf and the exit of the UK Wealth Management business in mid-2017.

MetLife Holdings adjusted earnings, excluding notable items, were up 45% year-over-year, primarily driven by favorable underwriting, improved expense margins and the benefits from US tax reform. With regards to underwriting, LTC was favorable versus the prior-year quarter and remains consistent with expectations as we continue to execute on our rate action plan. MetLife Holdings adjusted earnings were aided by several items in the quarter of approximately $30 million, which are not expected to repeat.

Corporate & Other adjusted loss, excluding notable items, was $149 million compared to an adjusted loss of $152 million in 3Q '17. The primary drivers were higher variable investment income and favorable expense margins. This was mostly offset by the impact from US tax reform and lower interest margins.

Overall, the company's effective tax rate in the quarter was 17.2%. Excluding a positive one-time tax item of $12 million, the company's effective tax rate was 17.9%, a fraction below our guidance of 18% to 20%.

Turning to Page 9, this chart shows our direct expense ratio from 2015 through 2017, as well as the first three quarters of 2018. As we have stated previously, we believe this ratio best reflects the impact on profit margins, as it captures a relationship of revenues and the expenses over which we have the most control. We have also noted that we need to bring down our direct expense ratio by approximately 200 basis points from 14.3% in 2015, which was the baseline year, to realize $800 million of pre-tax profit margin improvement. For this quarter, the direct expense ratio was 13.1%, excluding notable items and pension risk transfers. This is modestly higher than the first two quarters of 2018. As we have previously mentioned, we would expect our direct expense ratio to tick-up slightly in 4Q given business seasonality, but anticipate the full-year direct expense ratio falling below the 2017 ratio of 13.3%.

I will now discuss our cash and capital position. Cash and liquid assets at the holding companies were approximately $4.5 billion at September 30th, which is down from $5.4 billion at June 30th. The $900 million decrease in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend, holding company expenses and liability management actions.

Next I'd like to provide you with an update on our capital position. For our US companies, preliminary year-to-date third quarter statutory operating earnings were approximately $3.6 billion and net earnings were approximately $3.1 billion. Statutory operating earnings increased by $1.1 billion from the prior-year period, primarily due to dividends received from an investment subsidiary, which had a corresponding offset in statutory adjusted capital, as well as the positive impact of US tax reform. We estimate that our total US statutory adjusted capital was approximately $18 billion as of September 30, 2018, down 3% compared to December 31, 2017. Net earnings were more than offset by dividends paid to the holding company and by investment losses. Finally, the Japan solvency margin ratio was 808% as of June 30th, which is the latest public data.

Overall, MetLife generated another very strong quarter in 2018, driven by solid business fundamentals. The highlights in 3Q included favorable underwriting, volume growth and improving margins. In addition, our cash and capital position, as well as our balance sheet remains strong. Yesterday's announcement of a new $2 billion buyback authorization is further evidence of MetLife's financial strength and our commitment to return excess capital to our shareholders. Finally, 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 the call back to the operator for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Ryan Krueger from KBW. Please go ahead.

Ryan Joel Krueger -- Keefe, Bruyette, & Woods, Inc., Research Division -- Analyst

Hi, thanks, good morning. I had a question on Group Benefits. The underwriting performance has been very strong this year for both MetLife and pretty much the entire industry. Can you give us some additional perspective on what you're seeing, and I guess, if we continue to stay in a good economic environment, if you think results can continue to trend more favorably than you would typically expect longer term?

Michel A. Khalaf -- President of U.S. Business & EMEA

Yeah. Hi, Ryan. This is Michel. So, as Steve mentioned in his opening, obviously, the favorable economic environment does help in terms of the underwriting performance. If you think about the disability, for example, where we've seen very good results this quarter, lower incidence, higher recovery experience, so that's one factor. We always like to be cautious and guide toward the range that we provide for our underwriting experience, but we do think that some of the benefit could be sustainable. I would also point out that if you look at our results over the last three quarters, the diversity of our business is an important factor. In the first quarter, our dental performance was strong, Q2 Life underwriting was strong, Q3 disability in particular, but also you should look at our life mortality, it's at the lower end of the range. So we think some of this is sustainable. I would also point out in non-medical health, in particular, that our shift toward voluntary benefits, Accident and Health, in particular, should over time also help lower our benefit ratio there.

Ryan Joel Krueger -- Keefe, Bruyette, & Woods, Inc., Research Division -- Analyst

Thanks. And then just one on the interest rate caps in retirement. John, could you give us some kind of perspective on just how much that's contributing right now to spread, so we can think about the impact when it runs up?

John McCallion -- MetLife, Inc. -- Analyst

Sure. So as I said, last quarter, our interest rate caps given where LIBOR is today is providing a offset and it's effectively neutralize the sensitivities we gave back in December of last year in terms of the outlook call. And I think the other aspect, we also says, there is certain management actions we took in terms of how we manage the liability side of the balance sheet as well. So the combination of those, it probably helped us in, call it the 5 to 7 basis point range.

Ryan Joel Krueger -- Keefe, Bruyette, & Woods, Inc., Research Division -- Analyst

Okay, great. Thank you.

Operator

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

Tom Gallagher -- Evercore -- Analyst

Good morning. Just a few long-term care questions, the -- can you comment on what's going on with underlying long-term care claim trends? I know, John, you had mentioned you're seeing favorable experience. That probably put you in the minority in terms of from everyone else we're hearing from on the underlying claim trends. Is it frequency, severity, claim durations, can you give a little color in terms of what you're seeing on the claims side?

John McCallion -- MetLife, Inc. -- Analyst

Yeah, sure. I'll probably just keep it pretty simple. I don't know if we're seeing favorable, I'd say they're in line with expectations, and I think just overall, the underwriting profit in the business is performing as expected. I'm not so sure, I'd say they are favorable relative to expectations.

Tom Gallagher -- Evercore -- Analyst

Okay. And then just on the disclosure that you put out for long-term care, what are our, I guess, a few things that stand out is the fact that you're not in loss recognition testing and your margin is over 10% -- loss recognition testing margin is over 10%, but is there anything other than those that you would point out that you feel like where you're block stands out is less risky or in better shape than others?

John McCallion -- MetLife, Inc. -- Analyst

Yeah. I think, I would probably reiterate things we've said in the past. We believe the profile of the block is in decent shape. Obviously, our relationship of group to individual, the amount of lifetime benefits we have, things like that and kind of things we've reiterated before. And then I'd say the second thing that we've talked about is just the work we've done on rate increases over the years has been beneficial. We have $750 million of premium in this block that we receive every year. We got a 7% increase last year. We've got another 3% through nine months this year. So I think those probably at a high level, the two factors, I would point to.

Tom Gallagher -- Evercore -- Analyst

Okay, thanks.

Operator

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

Jimmy Bhullar -- JPMorgan -- Analyst

Hi, good morning. I just had a question on your expectations for spreads, given what's happened with rates. Where do think rates need to go for spread compression to sort of fees? And then how much -- if you could quantify, how much of a benefit you're getting from interest rate protection and any color on how these expire over time?

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

Hey, Jimmy. Let me take the first one. This is Steve Goulart, and we'll just talk a little bit about spreads. Steve gave some of the statistics for what's happening in our overall portfolio. We've talked a lot in the past about the role of reinvest dilemma and we continue to see that spread narrowing as we see interest rates climbing. That's the outcome that we expected and obviously an outcome that we're very pleased to see happening. So we continue to see that happening. I think, if we see interest rates behave as, say, the forward curve or our planned projects, we continue to see that gap narrowing, and I think it's favorable -- and I think that I'd even go as far as to say that in several quarters we're likely to basically be at break-even.

John McCallion -- MetLife, Inc. -- Analyst

Jimmy. I'll take -- this is John. I'll take the second one. So probably go back to the response to Ryan's comments. So we certainly have some interest rate caps today given where LIBOR has rose to and it hasn't changed much in the last three months. Those caps we have that are giving that protection today and really neutralizing the sensitivity in our RIS business, they will roll off toward the -- into the fourth quarter and in the first quarter of '19. Now, we have other caps in '19, although they're at higher strikes. So I think what we'll do on the outlook call is work through and maybe a more robust sensitivity for you as we think about the outlook.

Jimmy Bhullar -- JPMorgan -- Analyst

And your comments on spreads maybe neutralizing or spread compression neutralizing sometime in the next several quarters, does that take into account the expiration of the gap?

John McCallion -- MetLife, Inc. -- Analyst

Right, so --

Jimmy Bhullar -- JPMorgan -- Analyst

Is that just a differential between portfolio yield and maturing or new money versus maturing loan?

John Hall -- Senior Vice President & Head of Investor Relations

Yes, so spreads, I'm focusing on RIS right now and we gave a sensitivity in the outlook call last December that indicated with the rise in LIBOR rate that we would be -- we would have a negative spread compression. And what I'm saying is that the caps, given how how fast or how high it has risen, it's -- some these out of the money caps now in the money and they are neutralizing that sensitivity. So we are not seeing that negative spread compression as a result of the caps and how high LIBOR has risen. That will roll off or else equal in the next few quarters and then we'll have to give you an updated outlook for that.

Operator

Your next question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.

Andrew Kligerman -- Credit Suisse -- Analyst

Hey, good morning. First question is on the direct expense ratio, and it looks like you have another, I don't know, 80 plus basis points, 100 basis points to go, that would be about $400 million and this quarter you spent $88 million on expense cost initiatives. If the plan is to complete the direct expense ratio reduction in two years, could you talk about the geography of where you're going to see it, the timing of when we're going to see it or we going to actually see $400 million drop to the bottom line?

John McCallion -- MetLife, Inc. -- Analyst

Right. So I'll just reference you -- reference back to the direct expense ratio slide. We've used a ratio; we believe that using the ratio of revenues to our fixed cost as a indicator of profit margin expansion. So I would argue that we have seen that already, but not all of that yet. Our target is to get to a net $800 million by 2020. So that's roughly a 200 basis point reduction using the same revenues we have today. So I think the answer is, yes. We expect to see that drop to the bottom line. And I think the ratio will be -- the reason we put the ratios out is to provide a metric that you can track to see that that has actually happened.

Andrew Kligerman -- Credit Suisse -- Analyst

So you'll see -- we'll see it within two years and any particular areas of the company where it will benefit most?

John McCallion -- MetLife, Inc. -- Analyst

Yeah, we're focusing on our fixed costs across the firm and it's everyone's contributing. This is a full team effort. We are obviously having to leverage and our goal here is not just to kind of do these things and then see expenses creep back up. This is as is a unit cost initiative. Our objective is to improve this direct expense ratio by 200 basis points and keep it there. And to do that, you need -- we're making quite a bit of investments around technology to build the platform to leverage that operational leverage.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it. Thanks. And then lastly on share repurchases, you've done $2.8 billion year-to-date, now you've upped the authorization and you have about less than $2.5 billion on it, which is terrific. Do you think you'll do this over the course of now through 2019? Will it all get deployed?

John McCallion -- MetLife, Inc. -- Analyst

Yeah. Our objective is to finish the remainder on the $1.5 billion authorization, which we will do by end -- no later than year, and then we'll reevaluate along the way. I think it's fair to say that $2 billion will be done no later than end of year next year.

Andrew Kligerman -- Credit Suisse -- Analyst

Terrific, thanks a lot.

Operator

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

Suneet Kamath -- Citi -- Analyst

Thanks. Thanks for the long-term care disclosures. That was helpful. In terms of the loss recognition testing assumptions, did you make any changes to those underlying assumptions as you went through this third quarter review?

John McCallion -- MetLife, Inc. -- Analyst

Yeah. Hi, Suneet. This is John. We did -- yeah, we did make a few changes. So we dropped our ultimate lapse assumption roughly 20 basis points in the aggregate. We're at roughly 1% before, we're down to 80 basis points now. We looked at -- probably made some changes to utilization, but it varied by block. And so there was really probably nothing material in aggregate, but we did make some changes throughout and I think other than that those are probably the most material changes.

Suneet Kamath -- Citi -- Analyst

So that $2.1 billion margin that was -- there is no big change to that in the aggregate?

John McCallion -- MetLife, Inc. -- Analyst

I would say -- yeah, not material, yeah.

Suneet Kamath -- Citi -- Analyst

Okay. And then the quick follow-up is just on the morbidity improvement. I think you said in your prepared remarks that you're seeing maybe 2% morbidity improvement, which again is -- might be different from what we're hearing from other companies. So any sense of -- like how much claims experience you've seen so far, maybe relative to inception and any sense in terms of why you're seeing it versus perhaps one of the companies that aren't seeing it yet?

Steven Kandarian -- President & Chief Executive Officer

I think I would reference, we still are building statistical significance and the data. So it's still relatively early, I don't think we could draw a conclusion that would cause us to change our current assumption, but what we're saying is early signs are indicating that it's higher than that, but we need to see the data emerge and kind of build that statistical significance as I mentioned, I'm not going to --it's hard for me, I'm not going to speculate as to why we're seeing it and others are not, but I think it's important to leverage your own data and make the appropriate conclusions off of that.

Operator

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

John Nadel -- UBS -- Analyst

Hi, thank you. Good morning. I guess a couple of questions, just thinking about favorability of underwriting results, and I guess, in particular on the group side. If you could characterize what portion of better results this quarter you think is just akin to more typical seasonal pattern -- 3Q, I think tends to be a little bit better anyway and how much of that is more difficult to think about trending? And then the second part of the question is, just to think about 1.1 (ph) renewals. I think there's been an expectation that maybe the positive impact of tax reform and maybe some of the good underwriting results we've seen would maybe put some downward pressure on premium rates for renewal business heading into 2019 and can you sort of talk to what you're seeing, if anything on -- in that respect?

Michel A. Khalaf -- President of U.S. Business & EMEA

Yeah. Hi, John. This is Michel. So if you think about our favorable underwriting results in the quarter, we mentioned this ability, we had favorable renewal results, lower incidence, and more favorable claim recovery experience. As I mentioned earlier, the healthy economy may be contributing -- a contributing factor to this, so certain aspects of that we think are sustainable. I also mentioned that as we continue to shift our business mix more toward the voluntary, we are likely to see over time improvements in our non-medical health benefits ratio, so those are some elements. I should point out here that the return of the health insurance tax, the HIT, in 2018, that was out and '17; it's back in '18; it'll be out again in'19; it will create some volatility that helps our non-medical health benefits ratio in '18. So -- and those are some of the elements that I would point out to.

On the life side, we mentioned that mortality was at the low end of our guidance range for the year. We think we'll be within that guidance range. With regards to 1.1.19, so what say first is that, we are so far pleased with our renewals and sales and the large case segments for 1.1.19 where most of the renewals and sales are already done. I think those are in line with expectation. We're winning our fair share of new sales and we were renewing and in accordance with expectation. Too early to tell as far as the mid- and lower-end of the market, but we continue to see very good momentum on the voluntary front and we think that will continue into 1.1.19.

As far as the competitive environment is concerned, we're seeing aggressiveness, particularly in dental, I would say, somewhat in disability, but we continue to be able to compete, especially that we focus on customers and intermediaries that look beyond just a lower price and where our service capabilities, our product set, our major factors and our ability to win.

John Nadel -- UBS -- Analyst

Thank you for that. I mean, if I could just sort of follow it up with, what I think is that, my take away from your commentary, Michel. It sounds like we really shouldn't expect any significant difference or shift in margin for the business based on 2019 pricing, really more just a function of overall economic condition. Is that a fair summary of your comments?

Michel A. Khalaf -- President of U.S. Business & EMEA

Yeah. I mean, I think the tax will impact the dental business in particular. But other than that, yeah, I would say you're spot on.

John Nadel -- UBS -- Analyst

Thank you.

Operator

Your next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead.

Alex Scott -- Goldman Sachs -- Analyst

Thanks. And I guess the first question I had was just on a MetLife Holdings, any color you can give around the life business, variable annuities, I guess, in particular on the life side, if any of the action from reinsurers or repricing is impacting you guys at all? And then on the variable annuity and fixed annuity side, if there is anything you learned through the actuarial process or just the experience that there you can provide color on?

John McCallion -- MetLife, Inc. -- Analyst

Hi, Alex, it's John. So on the first one, I'd say, no, nothing material that we're seeing in terms of the reinsurance pricing question you had. In terms of the actuarial review look, as we said before, and you saw on the supplemental slide, it's a variety of things and that's no exception for MetLife Holdings. Actually, the largest item in there is the closed block. It's about half of it. And we just had an update to our estimated gross margins and that has an impact on DAC that came through, so it's a little over than half of the actuarial update there.

Alex Scott -- Goldman Sachs -- Analyst

Okay. And then maybe just one quick one on LatAm. I think the growth rates on premiums have been sort of hitting your guide; this quarter is a little lower. Any kind of update around how you view that mid to high single-digit growth rate and sort of the impact of the political landscapes having across some of the geographies?

Oscar Schmidt -- President, Latin America

Yeah, Alex, this is Oscar. So, let me start with premiums and fees. So we have a 7% growth year-over-year on constant currency, but you need to consider the divestiture of our Afore in Mexico year ago. If you adjust for that, it's 1% above, which is 8% year-over-year, which we find -- which find good according to our expectations. If you go to sales, sales was also affected by the divestiture of Afore, in this case it's 4 percentage points. So if you adjust for that, our sales growth is approximately 6% year-over-year on constant currency, which we find good. Remember that our top line growth, our revenue growth for us is a combination of sales as well as higher persistency; we're putting a lot of attention on persistency.

Your second question is about the political landscape, so let me -- I guess, let me answer (inaudible) Chile and Mexico. Chile, the President announced last Sunday, the project for a pension reform. We find it very positive in terms of reaffirming the system, reaffirming the private system, the AFPs in general. Now, obviously this is going to take time, we think probably more than a year to conversion of process, maybe year and a half. So it's going to be a long process. But this is the first, obviously, signed development in the Congress; we think it's a good project.

Going to Mexico for a minute in terms of the change in government, as you probably know, the new administration has been focused on fiscal discipline, which we find very positive in general terms, and as part of that, they are planning to reduce government spending, and that includes reduction of benefits, particularly high senior officers in the government. And as you know, we provide some solutions that we inherited from the acquisition of Hidalgo more than 15 years ago. So we think that it's something we're managing. But as you know, those contracts have been subject to bidding process over the years; we've lost some, we've recovered some. At this point in time, if you want to put a value to this, we think that the fair account that may be affected by the government account for less than 5% of LatAm earnings, and of course, we are working to protect and mitigate that and we think it's going to be lower than that potentially.

Alex Scott -- Goldman Sachs -- Analyst

All right, thank you.

Operator

Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.

Humphrey Lee -- Dowling & Partners -- Analyst

Good morning, and thank you for taking my question. A question related to the unit cost initiatives. So you have $184 million spend year-to-date on an after-tax basis or maybe roughly $230 million pre-tax. I'm just trying to see if you're still on track to your $330 million pre-tax target for the full year of 2018?

John McCallion -- MetLife, Inc. -- Analyst

Yes, we are Humphrey.

Humphrey Lee -- Dowling & Partners -- Analyst

Okay. And then a question for Michel. Just to follow up on the -- group pricing. You've talked about dental to a little bit aggressive, and then so is the disability. I was just wondering if for that aggressiveness, is it still aggressive but rational or you seeing some irrational behavior in the marketplace?

Michel A. Khalaf -- President of U.S. Business & EMEA

Yeah, Hi, Humphrey. I think you always do see one or two carriers that are overly aggressive, potentially irrational. I don't think that's not unusual. And we continue to be disciplined and our approach selective and avoiding situations where pricing is overly aggressive. So that's been our approach on will continue to be our approach. So there is -- but there is a rational behavior from time to time and in particular and in dental.

Humphrey Lee -- Dowling & Partners -- Analyst

Okay, got it. Thank you.

Operator

Your next question comes from the line of Joshua Shanker from Deutsche Bank. Please go ahead.

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah. Thank you very much. I was curious what kind of deployable cash you have on hand right now, the pace of dividends that will come from the subs over the next year, and if we can look out a year or two in advance, if your financial leverage is going to change with the buyback?

Oscar Schmidt -- President, Latin America

Hey, Josh, this is John. I would just reiterate our outlook guidance around free cash flow; it's 65% to 75% over the average of two years. So I would say, there's no change to that. In terms of leverage, we've done quite a bit of delevering to-date. The guidance we've given was for 2018. We had net liability management of $1 billion to $2 billion, would take take effect this year. We've done about $1 billion and will reevaluate whether we do any any additional delevering to give ourselves some additional financial flexibility.

Joshua Shanker -- Deutsche Bank -- Analyst

And then in terms of cash on hand right now ?

John McCallion -- MetLife, Inc. -- Analyst

$4.5 billion as of September 30th.

Joshua Shanker -- Deutsche Bank -- Analyst

Thank you.

Operator

Your next question comes from the line of Randy Binner from B. Riley FBR. Please go ahead.

Randy Binner -- B. Riley FBR -- Analyst

Yeah, thanks. This is actually picking up on Suneet's line of questioning. And the question is, your view as a market leader on how this body of industry data and assumptions is coming together around long-term care disclosure. Your closures are good and we're getting a much more granularity and sensitivity from all the carriers, but I'm just curious, if you have a view on kind of the progress and quality of the disclosures we're getting, and I think it's important, what your view is, because this is becoming a gating factor for a lot of investors looking at the space. So just wanted to get your view on how you think the kind of body of industry disclosures coming together on long-term care?

Steven Kandarian -- President & Chief Executive Officer

It's difficult. This is Steve speaking. It's difficult for me to opine on other people's processes, but we certainly look at this very, very carefully. As we mentioned in our comments, this morning, we brought in an outside actuarial firm to review what we were doing. We want to make sure we had access to benchmarking from others; we looked at our models, we should make sure they were validated, and we examine all of our actuarial, morbidity, trend experience and so on. So -- and we know the sensitivity around this issue in the industry with investors, with analysts and that's why we spent the extra time and effort, both internally and bringing an external firm, to validate all these measures.

Randy Binner -- B. Riley FBR -- Analyst

I mean, with that external firm, is your sense that your conservative to what is become the industry baseline or just more in line with it?

Steven Kandarian -- President & Chief Executive Officer

I'll simply -- I'm not going to opine as to others, but I'll simply say that we looked and we benchmarked against others in terms of our own assumptions to make sure that what we were using was appropriate.

Randy Binner -- B. Riley FBR -- Analyst

Thank you.

Operator

Your next question comes from the line of John Barnidge from Sandler O'Neill. Please go ahead.

John Barnidge -- Sandler O'Neill -- Analyst

Thank you. Japan annuity sales essentially doubled in the quarter and has been a material grower recently. Can you talk about why you're comfortable with pricing and the product? Is there something like where participants have exited and you're filling a role and where is this is share coming from? Thank you.

Kishore Ponnavolu -- Executive Vice President, President, MetLife Auto and Home

Hi, this is Kishore Ponnavolu. If you look at our annuity sales, they are up 91% quarter-over-quarter, and you take the annuity sales and break them out, single premium sales account for 80% of the overall sales and then also the growth rate for single premium is much higher, at least in this quarter than level premium. And so let's spend a little bit time about -- on the single premium products per se. These are 5- and 10-year products, tightly duration matched. So if you look at the ALM risk, there's nothing there, and also these are foreign currency products. So these are predominantly US dollar denominated where we have considerable experience in terms of investment for matching liabilities. These policies also have an MVA and that's certainly ensures that there is appropriate risk sharing from market risk perspective. So overall, we're very comfortable with these products.

Operator

And at this time there are no further questions.

John Hall -- Senior Vice President & Head of Investor Relations

Great. That brings us to the top of the hour. Thank you everyone and we look forward to speaking with you on December 14th for our Annual Outlook Call.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

Duration: 61 minutes

Call participants:

John Hall -- Senior Vice President & Head of Investor Relations

Steven Kandarian -- President & Chief Executive Officer

John McCallion -- MetLife, Inc. -- Analyst

Ryan Joel Krueger -- Keefe, Bruyette, & Woods, Inc., Research Division -- Analyst

Michel A. Khalaf -- President of U.S. Business & EMEA

Tom Gallagher -- Evercore -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

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

Andrew Kligerman -- Credit Suisse -- Analyst

Suneet Kamath -- Citi -- Analyst

John Nadel -- UBS -- Analyst

Alex Scott -- Goldman Sachs -- Analyst

Oscar Schmidt -- President, Latin America

Humphrey Lee -- Dowling & Partners -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

Randy Binner -- B. Riley FBR -- Analyst

John Barnidge -- Sandler O'Neill -- Analyst

Kishore Ponnavolu -- Executive Vice President, President, MetLife Auto and Home

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