MetLife Inc

NYSE:MET

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to the MetLife First Quarter 2019 Earnings Release Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note on the forward-looking statements in yesterday's earnings release.

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

[John Hall, SVP & Head, IR]

Thank you, Operator. Good morning, everyone, and welcome to MetLife's First Quarter 2019 Earnings Call. Before starting, I refer you to the information on non-GAAP measures on the Investor Relations portions of metlife.com and our earnings release and in our quarterly financial supplements, which you should review.

Joining me this morning on the call are Michel Khalaf, 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 scheduled this morning, will extend no longer than the top of the hour. [Operator Instructions]. Finally, before we get started, I would ask that you save a date December 12 for us. We will host an Investor Day on that date here in New York City. More information on the agenda, which will include our outlook for 2020 and beyond, will follow.

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

[Michel Khalaf, CEO, President & Director]

Thank you, John. Good morning, everyone. It's an honor to join you today as the 17th President and CEO of MetLife and the company's 151 year history. Before I talk about our first quarter results, I want to thank Steve Kandarian for everything he did over the past 8 years to help us build a better company. Steve tackled big challenges and made bold decisions. His actions strengthened our balance sheet, improved our free cash flow and gave us a solid platform for profitable growth. I'm grateful for his leadership and look forward to building on that foundation as we move toward the next horizon of our strategy.

This company has a proud history of making and keeping promises. Through our work, we provide financial security for tens of millions of people and invest to support economic growth. It's a noble purpose, one that our employees carry out every day. Thanks to their efforts and dedication, MetLife is a trusted partner to individuals and institutions all around the world. Looking ahead, our task is clear: deliver great value for our customers, our shareholders and our people. That requires consistent execution across the board. Coming off a strong 2018, MetLife reported excellent first quarter results last night. Quarterly adjusted earnings totaled $1.4 billion or $1.48 per share, up from $1.36 per share a year ago.

While variable investment income was lower as expected, adjusted earnings per share benefited from solid volume growth across all ongoing businesses, strong life and Non-Medical Health underwriting margins and Group Benefits, continued expense discipline and the cumulative impact of capital management. Reflecting the strong results, our quarterly adjusted return on equity was 13.2%. As for notable items, adjusted earnings were $1.54 per share. Notable items in the quarter included $0.06 per share of costs associated with our unit cost initiative, which remains on track to achieve $800 million of annual pretax margin improvement by 2020.

Net income was $1.3 billion or $1.40 per share, up from $1.19 per share a year ago. Our efforts to manage the sensitivity of net income through the capital markets and narrow the gap between net income and adjusted earnings continue to show progress. Moving to some business highlights. Within the U.S. business segment, Group Benefits reported very strong underwriting results for both life and Non-Medical Health coverages, reversing less favorable trends in the fourth quarter of 2018. Group Benefits also posted record sales driven by voluntary products, which we continue to see as a growth opportunity.

In our Retirement and Income Solutions business, while we experienced good asset growth, adjusted earnings were adversely affected by lower variable investment income and investment spreads. Within Property & Casualty, good homeowners underwriting and modest catastrophe losses contributed to solid adjusted earnings.

For our international segments, Asia benefited from volume growth and strong foreign currency product and A&H sales in Japan. Our Latin America results included a strong contribution from there in Kihei. And our EMEA business benefited from good underwriting and volume growth. These results provide further confirmation that MetLife strategy is working and that we're hitting our stride on delivering consistent execution. The strength of our last five quarters combined tells the same story. MetLife is a long-term business, and taking the long view is the best way to evaluate our performance. We are encouraged by our first quarter results, but we are even more encouraged by the last five quarters put together.

My job as President and CEO is to continuingly ensure that we have the right strategy in place and the right people to make that strategy a success. I have made significant progress in establishing my senior leadership team following the recent appointments of, among others, Ramy Tadros as President of our U.S. business; and Marlene Debel as our Chief Risk Officer. I feel confident in the team we are assembling and excited about MetLife's future. On strategy, I believe we are on the right path while recognizing there is always room for improvement. As I mentioned on our fourth quarter earnings call, we are at an inflection point and I'm committed to MetLife's core goals of capital efficiency, strong risk-adjusted returns and profitable growth. While we have accomplished much in these areas, we still have work to do to accelerate revenue growth, further optimize our business and product portfolios and approach expense discipline as a journey of continuous improvement rather than a single destination.

These goals informed our recent decision to move MetLife Holdings, which contains the closed block businesses of our former U.S. Retail segment, to our finance organization. This new arrangement will sharpen our focus on serving our customers and creating value for our shareholders. I believe the only way to achieve sustainable success is by staying laser-focused on our customers' needs and expectations. That is the bedrock on which MetLife has built a number of great businesses. Here in the U.S., annual adjusted earnings from our market share-leading U.S. group business have grown to more than $1 billion. Our average national accounts group customer has been with us for 22 years, and several customers are approaching the century mark. Overall, the business covers more than 40 million U.S. employees and their dependents.

In Mexico, we are the #1 life insurer with a dominant business that serves millions of public sector workers and has made MetLife part of the fabric of Mexican society. In Japan, our largest business outside the U.S. and our largest retail life insurance business anywhere in the world, we pioneered foreign exchange products that have allowed us to grow in a mature market by meeting customers' needs for better returns on their savings.

In China, one of the world's largest and most rapidly growing insurance markets, MetLife has grown rapidly as well. The Chinese municipalities and provinces where we operate are home to more than 0.5 billion people and account for 55% of GDP, positioning us well to serve the needs of China's growing middle-class. Businesses like these highlight MetLife's underlying strength and potential, but again, it all starts with how we serve our customers. I've been running insurance businesses since the early 1990s, and one of my core convictions is that only by creating value for customers can we create value for shareholders.

Over the past few months, I've traveled to many of MetLife's key markets outside the U.S., including all the countries I just mentioned. Our people around the world take great pride in being there for MetLife's customers when they need us the most. I approach MetLife's challenges informed by certain guiding principles developed over a 25-year career, leading insurance businesses on 4 continents around the world. My leadership style is close to the ground and focused on winning. I believe speed, agility and innovation are critical to strengthening our competitive advantage. MetLife has reinvented itself multiple times over its 151-year history, and we will look to accelerate innovation as a driver of growth.

I recognize that capital is precious and that our shareholders have choices about where to invest. MetLife's decisions on capital deployment will continue to be driven by what produces the best risk-adjusted returns. Everything we do, organic growth, capital return and acquisitions, will be viewed through the lens of value creation. To that end, we recently announced a 4.8% increase in our quarterly dividend while returning more than $900 million of capital to shareholders in the first quarter through common dividends and share repurchases. On my second official day leading MetLife, I want you to know that I'm starting this job with a real sense of urgency. The entire leadership team has a strong commitment to accelerating the pace of value creation for all of our stakeholders.

With that, I'll turn the call over to John McCallion to go through our first quarter results in greater detail.

[John McCallion, EVP & CFO]

Thank you, Michel, and good morning. I'll begin by discussing the 1Q '19 supplemental slides that we released last evening along with our earnings release and quarterly financial supplement. Starting on Page 4. This schedule provides a comparison of net income and adjusted earnings in the first quarter of 2019. In the quarter, net income was $1.3 billion or $75 million lower than adjusted earnings of $1.4 billion. While this will change from quarter-to-quarter, the modest variance between net income and adjusted earnings reflects the progress we made to reduce the volatility of our business. Overall, the results in the investment portfolio and hedging program continue to perform as expected.

We had one notable item in the quarter, as shown on Page 5 and highlighted in our earnings release and quarterly financial supplement. Expenses related to our unit cost initiative decreased adjusted earnings by $55 million after-tax or $0.06 per share. Adjusted earnings excluding the notable item were $1.5 billion or $1.54 per share. On Page 6, 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 6% year-over-year and 8% on a constant currency basis. On a per share basis, adjusted earnings were up 15% and 18% 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 included solid volume growth, favorable underwriting, better expense margins and the impact from strong equity markets in the quarter. These were partially offset by lower recurring interest margins and less favorable variable investment income, which I will discuss in more details shortly.

With regards to business performance, Group Benefits adjusted earnings were up 57% year-over-year. The key drivers were favorable underwriting, better expense margins and solid volume growth. With respect to underwriting, the Group Life mortality ratio was 85.3%, our best Q1 performance in over 15 years and at the low end of our annual target range of 85% to 90%. Favorable results were primarily due to low incidence and the mild flu season.

The interest adjusted benefit ratio for Non-Medical Health was 72.9%, which was lower than the 75.9% in the prior year quarter and at the low end of our target range of 72% to 77%. The year-over-year improvement in the ratio was primarily driven by continued positive trends in disability while dental utilization trends were generally in line with expectations. Group Benefits continues to see strong momentum in its top line. Adjusted PFOs in the quarter were up 3,%, and 5% excluding participating customers, where PFOs can fluctuate with claim experience. Group Benefits sales in the quarter were a record up 11% versus the prior year quarter, primarily due to continued strength in voluntary products. Combination of our brand, product set, customer base and distribution reach positions us to leverage the ongoing shift of voluntary benefits in a differentiated way.

National account sales and renewals were strong, and we continue to see double-digit growth in both regional and small market sales. While results for Group Benefits will show some quarter-to-quarter volatility, this combination of strong top and bottom line results is a testament to our compelling customer value proposition and disciplined approach to pricing. Retirement and Income Solutions, or RIS, adjusted earnings were down 16% year-on-year. The key drivers were less favorable investment margins partially offset by solid volume growth. RIS investment spreads were 96 basis points in 1Q '19, down 32 basis points year-over-year. The decline in the investment spreads were primarily due to ongoing pressure from the flatter yield curve as well as lower private equity returns in the quarter.

For the full year, we expect RIS investment spreads to trend higher with full year coming in towards the bottom half of our 2019 guidance range of 100 to 125 basis points. RIS adjusted PFOs were up 64% year-over-year due to strong structured settlement sales. As for pension risk transfers, although we did not book any transactions in the quarter, we closed on a $500 million PRT deal in early April. We continue to see the PRT market as attractive with a strong pipeline.

Property & Casualty, or P&C, adjusted earnings were up 1% primarily due to favorable underwriting margins and volume growth. This was mostly offset by higher expenses primarily related to marketing costs. Pretax cat losses were $41 million in the quarter, which was $17 million lower than the prior year quarter. With regards to the top line, P&C adjusted PFOs were up 2% while sales were up 12% versus 1Q '18. Asia adjusted earnings were up 9% and 13% on a constant currency basis primarily due to strong volume growth in the region. The key drivers were higher accident and health sales and AUM growth in Japan as well as growth in Korea and China. This was partially offset by more favorable underwriting in the prior year quarter. Asia sales were up 9% on a constant currency basis.

In Japan, sales were up 13% primarily driven by Accident & Health and foreign currency products. A&H and FX products remain our primary focus in Japan, and we continue to see strong momentum in the market. Other Asia sales were up 3%, primarily driven by growth in China and India. Latin America adjusted earnings were down 4% and 1% on a constant currency basis. The primary driver was higher expenses versus 1Q '18, which benefited from a litigation reserve release. This was mostly offset by the favorable impact from equity markets in our Chilean and Kihei as well as higher investment margins and volume growth across the region. Latin America adjusted PFOs were up 4% on a constant currency basis driven by volume growth across the region led by AFP Provida in Mexico. This was partially offset by the cancellation of government contracts in Mexico. Latin America sales were up 11% on a constant currency basis due to higher Mexico sales.

EMEA adjusted earnings were up 6% and 23% on a constant currency basis primarily due to favorable underwriting and volume growth. EMEA adjusted PFOs were up 5% on a constant currency basis reflecting growth across the region. EMEA sales were up 3% on a constant currency basis due to higher volumes in employee benefits in the United Kingdom and Credit Life in Turkey. MetLife Holdings adjusted earnings excluding notable items in 1Q '18 were down 13% year-over-year. The primary drivers were lower investment margins primarily from weaker private equity returns and more favorable underwriting in the prior year quarter. This was partially offset by improved expense margins and favorable equity markets.

In regards to equity market performance within MetLife Holdings, Retail Annuities separate account returns were up 10% in the quarter, which resulted in an initial positive market impact of approximately $15 million to adjusted earnings and an ongoing positive impact of approximately $5 million to adjusted earnings. These were roughly in line with our sensitivity guidance. Corporate & Other adjusted loss excluding notable items was $138 million. Overall, the company's effective tax rate on adjusted earnings in the quarter was 18.7% and within our 2019 guidance of 18% to 20%.

Now let's turn to Page 7 to discuss variable investment income in more detail. This chart reflects our pretax variable investment income for the past 9 quarters, including $174 million earned in the first quarter.

You can see that variable investment income, as the name implies, can vary from quarter-to-quarter but tends to fall in proximity to our quarterly VII range of $200 million to $250 million. Our private equity portfolio, which is accounted for on a 1 quarter lag, was clearly impacted by equity market weakness in 4Q '18 although results were better than expected. We continue to expect full year VII to be within our 2019 guidance range of $800 million to $1 billion.

Now I will discuss recurring investment income. Our new money rate rose from 3.37% a year ago to 4.04% in 1Q '19. At the same time, our average roll-off rate has dropped from 4.38% a year ago to 4.15% in the first quarter. Although the gap between new money rates and roll-off rates has narrowed, we would not expect pairing to occur until we have a sustained U.S. 10-year Treasury yield of roughly 3% to 3.25%. In absolute dollars, recurring investment income was up 4% compared to a year ago, primarily due to higher asset balances, which offset the roll-off of higher-yielding securities.

Turning to Page 8. This chart shows our direct expense ratio from 2015 through 2018 as well as 1Q '19. As we have stated previously, our goal is to realize $800 million of pretax profit margin improvement by 2020. This would represent an approximate 200 basis point decline in our annual direct expense ratio from the 2015 baseline year. We believe the annual direct expense ratio best reflects the impact on profit margins as it captures the relationship of revenues and the expenses over which we have the most control. By successfully executing on our expense commitment, it will improve profit margins and provide additional capacity to fund future growth and innovation.

We continue to make consistent progress towards achieving our target by 2020. As the chart illustrates, we have already achieved 140 basis point improvement in the annual direct expense ratio from 2015 to 2018. For 1Q '19, the direct expense ratio was exceptionally strong at 12.1%. This was aided by favorable items including lower interest on tax reserves and lower employee benefits related to market movements in the first quarter. Overall, these favorable items totaled roughly 60 to 70 basis points. Therefore, we would expect our direct expense ratio to be higher for the remainder of the year but still show improvement versus 2018.

I will now discuss our cash and capital position on Slide 9. Cash and liquid assets at the holding companies were approximately $3.2 billion at March 31, which is up from $3 billion at December 31. A $200 million increase in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend and holding company expenses. As we noted previously, we are comfortable holding cash at the low end of our $3 billion to $4 billion holding company's buffer given our low-risk profile and the modest amount of debt that we have maturing over the next few years including none in 2019.

Next, I would like to provide you with an update on our capital position. For our U.S. companies, our 2018 combined NAIC RBC ratio was 402%, which compares to our new target ratio of 360% following U.S. tax reform. For our U.S. company's, preliminary first quarter 2019 statutory operating earnings were approximately $1.2 billion, and net earnings were approximately $1.1 billion.

Statutory operating earnings increased by approximately $600 million from the prior year quarter primarily due to improved underwriting results, lower operating expenses and lower VA writer reserves. These were partially offset by lower net investment margins. We estimate that our total U.S. statutory adjusted capital was approximately $16.6 billion as of March 31, 2019, down 9% compared to December 31, 2018. Net earnings were more than offset by dividends declared to be paid to the holding company. Finally, the Japan solvency margin ratio was 803% as of December 31, which is the latest public data.

Overall, MetLife had a very strong 2018, and execution continues in 2019 driven primarily by good fundamentals, solid underwriting, growth in our businesses and expense discipline. In addition, our cash and capital position, as well as our balance sheet, remains strong.

Finally, we are confident that the actions we are taking will continue to drive free cash flow and create long-term sustainable value.

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

[Operator]

[Operator Instructions]. Your first question comes from the line of Ryan Krueger from KBW.

[Ryan Krueger, KBW]

Michel, could you discuss your M&A philosophy and if there's any areas of particular focus that you would look to add going forward?

[Michel Khalaf, CEO, President & Director]

Sure. So we always look at M&A opportunities that fit our strategy and are accretive over time. We evaluate those opportunities on a consistent basis globally with a view on value and cash generation. These deals need to earn more than their cost of capital.

We also evaluate M&A opportunities against alternative uses of capital. Obviously, we consider capital markets, the cost of raising capital and synergies in our assessment, and we will always look to achieve a healthy balance between returning cash to our shareholders and strategic M&A activity that can help us accelerate our growth.

So hopefully, this gives you an idea about our philosophy on M&As. And again if you're looking at strategic fit, think about businesses and markets where we -- that are growth markets where we believe that potentially M&A can help us further drive our growths. Those would be the businesses and markets where we will consider such deals.

[Ryan Krueger, KBW]

And then just in regards to your comment on innovation, I guess things like that can come at, I guess, a near-term expense. So I just want to -- it sounds like you're pretty committed to the $800 million expense save target. But I just wanted to hear your thoughts and if there's any major areas of incremental investment that you think are required and if you can still achieve the $800 million in light of that.

[Michel Khalaf, CEO, President & Director]

So I'm 100% committed to the $800 million pretax profit margin improvement by 2020 target, and we're fully on track to achieve that. I think we've done a good job over the last several years actually of repurposing some savings and reinvesting in technology and innovation, and we look to continue to do that. The other thing I will say here and I mentioned it in my remarks, is that we are making sure that expense discipline is a muscle, is part of our culture here. It's embedded in everything that we do, and we see this efficiency and expense discipline as a journey of continuous improvement as opposed to a single destination. So we are committed to our target and we believe that we'll have opportunities to continue to invest in innovation and in our growth.

[Operator]

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

[Andrew Kligerman, Crédit Suisse]

Michel, you made a comment that you want to accelerate the pace of value creation. And you also mentioned that you moved MetLife Holdings to the finance unit. Are there any implications there that you might be more inclined to divest of certain blocks of business in MLH, notably long-term care, but any blocks within that?

[Michel Khalaf, CEO, President & Director]

So look, with Marty Lippert's retirement, we felt there was an opportunity to better align MetLife Holdings' reporting with our core objectives, and for me, there are 3 core objectives for the business. One is to deliver on our obligations to our policyholders. Two is to continue to reduce the risk and volatility of that business. And three is to optimize value.

So we feel that having MetLife Holdings report to finance and to John will help us sharpen our focus on these objectives. And we've said before and I'll repeat that we will consider all options to optimize the value of the business, and we don't rule anything out. Any transaction that we believe makes sense economically is something that we would consider.

[Andrew Kligerman, Crédit Suisse]

Great. And then just kind of shifting over to RIS, the investment yield came in at 4.52%, excluding variable investment income, and that sequentially was down from 4.8%, So I'm -- and I understand you had some extra cash on the balance sheet so that might have hurt it by 4 to 6 basis points. But it's a pretty big drop off, so I'm hoping that someone can give me a little guidance on where that yield is going. You also mentioned some roll-off of higher-yielding securities. So where do you see that going over the next few quarters in the RIS segment?

[John McCallion, EVP & CFO]

It's John. I would focus on the spread itself. And just for this quarter we -- there was a new accounting related to derivative hedging so there was a reclass between the yield and interest credited so that might just change the trend a little bit. But I think I would focus a bit on the spread itself. So let me talk about the spread. And obviously, we came in below the range we provided at the outlook call of 100 to 125, so a couple of things.

First, the range and the sensitivities we provided, I would take those as full year ranges, and those can certainly deviate from any one quarter. And as I mentioned in my opening remarks, while Q1 was below the range, we still believe and expect the full year to be within the range albeit maybe the lower half of that range. But there is two drivers to the Q1 underperformance. So first, we did have a slightly higher allocation to shorter-term assets during the quarter as we continue to look to shift out of certain assets that are more susceptible to a market downturn, and so we see this mostly as timing. And as rates declined that had about a 5 to 6 basis point impact.

The second thing we saw was a good portion of our sec lending business does get allocated to the segment. And to the inversion of the short end of the curve relative to LIBOR has put pressure on our sec lending margins. And so if you think about where we were at the outlook call and where the treasury curve was there and LIBOR was at that time, the drop in the treasury curve has been greater than that of the 3-month LIBOR. And so that inversion has occurred over the last 3 to 4 months, and that's put some pressure on us.

So overall, we think, certainly, the first one will we think reverse itself. We think of it as timing, and we'll have to monitor the margin pressure and sec lending and see what happens with the inversion of the curve. Right now if you follow the forward rates, it would imply that the relationship will improve throughout the year, but obviously, we know things can deviate from there.

[Andrew Kligerman, Crédit Suisse]

Okay. So just staying with the bottom end of 100 to 125 basis points for the going forward versus 97 this quarter...

[John McCallion, EVP & CFO]

I would like to say bottom half.

[Andrew Kligerman, Crédit Suisse]

Bottom half. Right. Right.

[Operator]

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

[Jamminder Bhullar, JPMorgan Chase & Co.]

I had a question just on group insurance margin. They were obviously a bigger source of the upside in earnings this quarter. To what extent do you think it's -- it was just good experience this quarter versus the trend, especially in the Non-Medical business being sustainable?

[Michel Khalaf, CEO, President & Director]

Let me give you a couple of quick comments and then Ramy can chime in as well. So if you think, obviously, we're pleased with our group performance in Q1, and I'd say this is building also on strong momentum from last year, but we should keep in mind that underwriting results do fluctuate from quarter-to-quarter. So if you think about life, for example, it's at the very low end of the range this quarter. Very much flu season was the main contributor.

But a few things I think related to what we discussed in the fourth quarter. One is that dental utilization has normalized so it's in line with expectations in Q1. As you recall, that was elevated in Q4. We said we didn't see signs of any trend. That was confirmed in Q1. And one of the things we did lower the Non-Medical Health ratio in our outlook call. That was driven by the view that disability is performing well given the healthy economy, the high levels of employment. So we continue to see positive outcomes there, but we also talked about the fact that we are seeing a business mix towards voluntary products, so with lower benefit ratios.

And we're particularly pleased, our sales results for the quarter, were very strong, and those were really driven by voluntary sales, so that's as opposed to jumbo sales, for example, which is also typical in national accounts. So I think this speaks to the fact that our strategy is delivering in terms of this product mix shift, and we think we continue to see voluntary as an important growth opportunity. I don't know, Ramy, if you want to also add to this.

[Ramy Tadros, President, U.S. Business]

Sure, thank you, Michel. Good morning, Jimmy. Again, just to emphasize, you know that these ratios can be volatile quarter-to-quarter. And for the course of the year, I would guide you to the middle of our guidance range across both the mortality and the nonmedical benefit ratio. With respect to the latter, and particularly your specific question, what we saw in this quarter on the nonmedical benefit ratio, the ratio came at the lower end of the range, as you know, and that's largely driven by a combination of lower severity of claims as well as more favorable claims recoveries. As Michel mentioned, over the medium term as our business mix shifts, we expect to also be continuing some positive trends on this ratio.

[Operator]

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

[Thomas Gallagher, Evercore ISI]

Michel, I'd just be curious on what your high-level thought is from the strategy standpoint. When I think of Steve and his legacy, I think it's risk reduction cash flow optimization. Are there any high-level issues that you would call out that you're focused on initially outside of those risk reduction or cash flow optimization?

[Michel Khalaf, CEO, President & Director]

So look, I think we're on the right path in terms of core elements of our strategy, and you mentioned those, so capital efficiency, focus on strong risk-adjusted returns on strong free cash flow generation and profitable growth. And I can tell you that in all my visits to our key markets, I see a real focus on value creation that's now well embedded in pretty much everything we do. I do feel that we're at an inflection point. And while we've accomplished much in terms of our -- in terms of derisking action, I always believe that there's room for improvement. I've already started a review process with my team, and we are going to look for opportunities: one, to see how we can further optimize our portfolio, our products, our businesses, make sure that we are making -- we continue to make the right decisions and choices in terms of capital allocation; and then how we can also accelerate revenue growth, and as I mentioned earlier, make sure that expense efficiency becomes -- is more of a journey here as opposed to a single destination. So I'm excited. I think this is an exciting time for MetLife and I think we can -- I'm confident that we can build on the strong foundations that we already have.

[Thomas Gallagher, Evercore ISI]

Okay. And then just a follow-up on Group Benefits. It seems to me from what we're seeing in the industry that there's a lot more competition in voluntary benefits, you're seeing lapses escalating for certain carriers. It sounds like you're not seeing that. And you also -- John, I think you referenced Group Benefits sales up 11%, which is a good outcome. Can you talk sort of what you're seeing there competitively? Are there parts of the market that are getting heated from pricing or -- so anyway, yes. Any color you could give on that.

[Ramy Tadros, President, U.S. Business]

It's Ramy Tadros here. So let me just give you some perspective on our voluntary strategy and the investments we've been making in that space over the last number of years, and they really fall in 3 categories. The first one is we were very early to recognize -- as you think about the voluntary space, this is not just about the traditional intermediaries and distribution channels. There's a whole benefit ecosystem that includes technology firms, benefit administrators, communication firms, and we've built an engagement model with each of those firms across the ecosystem.

We've invested in integrating our systems with them, and that creates seamless interaction and ease-of-use for both the employers and the employees. And then beyond that, once we get to the employee, we also have a lot of discipline in terms of driving employee engagement and education around voluntary benefits to build awareness and therefore increase the higher enrollment rates.

So what you're seeing here is the result of a very disciplined strategy with very focused investments that we've made over the last few years. From a competitive environment with respect to voluntary, we do see some carriers enter and they do try to compete on price to drive voluntary growth. I would say most of our growth that we've seen has actually come from expanding relationships with existing customers that value our brand and service and our ability to design flexible solutions for them. And then you're seeing a lot of growth, precisely from those investments that I'm talking about, that are driving enrollment and reenrollment rates, which enables growth outside of competitive bidding situations. And we're seeing very good bottom line results here and are very confident in the adequacy of our pricing in the voluntary space.

[Operator]

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

[Erik Bass, Autonomous Research]

For Asia, can you talk about how much runway there is to continue to grow sales of U.S. dollar-denominated products in Japan? And is this -- is the growth coming from kind of cash on the sidelines getting invested or money switching from other products? And just a little bit more color there would be helpful.

[Kishore Ponnavolu, President, Asia Region]

This is Kishore. As we discussed at the Investor Day last September, the low interest rate environment in Japan is a great fuel for the FX margin, right? That's driving a lot of customer demand across all of our distribution channels with our bank channel leading the way. In terms of our position, up until now we have been certainly expanding our share of the market. However, there are new entrants coming into that space. So if you think about this year, we had an 8% growth year-over-year, which is very, very strong.

Looking forward to the second quarter, that was a pretty strong performance last year. So year-on-year for the full year, I'm very comfortable with the guidance for the overall Asia sales of mid-single digits, but we're very, very happy with the progress we've made so far.

[Erik Bass, Autonomous Research]

And then for Latin America, can you just provide some more color on the earnings drivers this quarter and if there's any seasonality in terms of expenses or other items we can -- should consider when thinking about kind of the run rate going forward?

[Óscar Schmidt, Chairman]

Sure. This is Óscar. So let me start referring to the comparison against prior year quarter. So first, expenses were higher year-over-year primarily due to a litigation reserve release in the prior year quarter, so this quarter reflects a more normal level of expenses. And the second is we had a positive investment performance, especially the Chilean Kihei, which performed above last year and above expectations this year. These 2 effects merely offset each other.

And finally, volume business growth year-over-year was mid-single digits. It was a bit lower than usual due to the loss of some Mexico federal government group cases but in line with our outlook whole discussion. But now let me refer to this quarter in particular against expectations. The way to look at it is that we have good cat results in Chile Provida but offset by a couple of old items. First, low quarterly inflation in Chile -- actually, inflation in Chile in the first quarter was almost zero, so that had an adverse impact the investments but in our life business in Chile as investment portfolio is indexed to inflation. That was the first impact related to low inflation in Chile.

And the second one is that low inflation also has an adverse impact on taxes in Chile, that's because inflation impact on equity is deductible for tax purposes. So we expect these two items to recover during the remainder of the year because the full year consensus in Chile remains almost similar to expectations, meaning that inflation that didn't happen in the first quarter will happen during the remainder of the year.

And finally, expenses were a little higher than expected in the quarter mainly due to some accounting adjustments that impacted expenses. So for the full year, we still expect our earnings to be in the range we provided on the outlook call on a constant currency basis. I hope this answered your question, Erik.

[Operator]

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

[Suneet Kamath, Citigroup]

Just wanted to start with the RBC ratio. I think 402% is what you said, which is above your target of 360%. So would you expect -- I guess what I'm trying to get at is what is your expectations for dividends to the holding company in the balance of the year? Would you expect that excess to move to holdco or be consumed by growth in the business?

[John McCallion, EVP & CFO]

It's John. I would just -- I wouldn't comment specifically on dividend for a particular legal entity. I think we would just comment and refer back to the guidance that we've given, which is free cash flow ratio of 65 to 75 on average for the two year period. I think we're still on track to meet that target.

[Suneet Kamath, Citigroup]

Okay. And then I guess for Steve Goulart. On the balance sheet, we have seen some derisking activities from some of the other life insurers that have reported so far. So any color in terms of any changes you might be contemplating there? And should we be thinking about any of the interest rate hedges rolling off, either later this year or as we get into 2020?

[Steven Goulart, EVP & CIO]

It's Steve. Regarding portfolio repositioning, I think we've talked about this on the last couple of calls and I think indicated also, we would continue to look at opportunities that we thought made sense given our outlook in the market particularly in the credit market. And we've continued to do some repositioning into the first quarter, mostly looking at again sectors that we think would be vulnerable in a downturn. So we've continued to lighten up our bank loan portfolio as well as lower investment grade rated corporate bonds. A lot of them may be involved in M&A and higher leverage and the like. We think those are -- continue to be 2 vulnerable sectors in the market, and so that's where most of our repositioning has taken place.

And then regarding interest rates hedges and rolling off, again, I'd go back to how we think about all of our hedging policy in ALM, and it's always dynamic, and we will continue to review at that time and make the appropriate decisions then.

[Operator]

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

[Taylor Scott, Goldman Sachs Group]

First one I have is on MetLife Holdings. I'd just be interested if you had any commentary on what drove the sort of larger year-over-year decline in expenses, if there's anything specific related to the expense plan that occurred. And also on holdings, could you give us a rough way to think about statutory capital back in that segment?

[John McCallion, EVP & CFO]

It's John. On the first question with regards to expenses, yes, I think it's just been continued focus to optimize and the efficiency of that segment. We continue to focus there. And a lot of the efforts that we've been making over the years on our unit cost initiative, quite a few of that is allocated towards holdings so that's just kind of the natural progress that you would expect to see. Regarding allocation of capital, we haven't given that figure out, and we'll probably keep it that way for now.

[Operator]

And next question comes from the line of Humphrey Lee from Dowling & Partners.

[Humphrey Lee, Dowling & Partners Securities]

Just to circle back on RIS. John, you talked about the investment spread and how it's being negatively affected by the inverted yield curve for the for the sec lending book. I think in the other call, you provided guidance in terms of sensitivity to LIBOR, but I was just wondering if you can provide some sensitivity in terms of how do we think about the impacts from the yield curve, especially coming from the longer end of the curve.

[John McCallion, EVP & CFO]

Sure. We did give a sense it should be the LIBOR. LIBOR in and of itself actually performed as expected. But as I said, there was -- we didn't talk about a shift in the shape of the curve relative to LIBOR. So that inversion -- maybe I didn't give this number before, but in the quarter, it probably cost us about 3 to 4 basis points on the spread. So if you roll that forward, you can kind of come up with what the headwind would be if the curve did not kind of steepen at all from here.

[Humphrey Lee, Dowling & Partners Securities]

Remind us what is the size of your sec lending book right now sitting in RIS?

[John McCallion, EVP & CFO]

We don't give that allocation out, but it's a good percentage of our sec lending goes there.

[Humphrey Lee, Dowling & Partners Securities]

Okay. Got it. And then a follow-up question related to the expenses. You've talked about this quarter, you have a little bit lower than expected, employee benefits and deferred comp flowing through the numbers. Can you give us a sense where the geography of those lower expenses are in the segments?

[John McCallion, EVP & CFO]

They're just allocated throughout segments. You can follow up with John later, but it's not -- it's -- -- they're out there. They're allocated throughout the segments, I guess, would be the easy answer.

[Operator]

And at this time, there are no further questions. Mr. Hall, please continue.

[John Hall, SVP & Head, IR]

Great. Before we close, I'd like to turn the call over to Michel for some closing remarks.

[Michel Khalaf, CEO, President & Director]

Thanks, John. Let me close by saying we are starting 2019 on solid footing with a strong fundamental first quarter. MetLife is a company with great businesses, a noble purpose and an iconic brand. Looking ahead, I'm excited and energized by the task at hand: delivering great value for our customers, shareholders and people. I want to thank everyone for joining us today, and I look forward to getting to know you better in the weeks and months ahead. Enjoy the rest of the day.

[Operator]

Ladies and gentlemen, this conference will be available for replay after 11 a.m. Eastern time today through May 9. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 462461. International participants dial 320-365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.