MetLife Inc

NYSE:MET

Earnings Call Transcript 2019-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth 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 Fourth Quarter 2019 Earnings Call. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in 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 to participate in the discussions are other members of senior management. Last night, we released a 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. An appendix to these slides features a number of disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. [Operator Instructions]

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

[Michel Khalaf, CEO & President]

Thank you, John, and good morning, everyone. The headline from our financial results is that MetLife had a solid underlying fourth quarter and a very strong year. Our track record of consistent execution continues, and this leadership team is committed to being a top-performing company. In the fourth quarter of 2019, we delivered adjusted earnings of $1.8 billion compared to $1.3 billion in the fourth quarter of 2018. On a per share basis, adjusted earnings rose to $1.98 from $1.35 a year earlier. Net income in the quarter was $536 million, driven by mark-to-market losses on interest rate-related derivatives that we hold to protect our balance sheet.

Backing out the impact of notable items, adjusted earnings per share came in at $1.53, up 21% year-over-year. The positive drivers included market factors, volume growth and capital management, offset in part by higher seasonal expenses as we indicated would be the case.

Adjusted return on equity in the quarter, excluding AOCI, other than FCTA and notables, was 12.6% compared with 11.7% in the prior year quarter. For the full year 2019, MetLife delivered very strong results. Net income was $5.7 billion, while adjusted earnings were $5.8 billion. We've spoken before about our efforts to bring net income and adjusted earnings into closer alignment, efforts that succeeded in 2019.

On a per share basis, adjusted earnings rose 13% to $6.11, up from $5.39. Excluding notable items, adjusted earnings per share were $6.06, 10% higher than the prior year. The drivers were capital management and volume growth that more than offset the impact of lower recurring interest margins. Across our businesses, 2019 was a year of significant achievements. Our flagship U.S. group benefits business generated adjusted earnings of $1.3 billion, nearly double the earnings from this business just 3 years earlier. In retirement and income solutions, we booked nearly $4.3 billion of pension risk transfer sales, our second best year ever. Just as important, we delivered on our commitment that investment spreads would fall within a range of 100 to 125 basis points. Despite declining interest rates, we came in at 106 basis points.

In both our Asia and Lat Am businesses, we delivered double-digit adjusted earnings growth year-over-year, excluding total notable items on a constant currency basis. And within investments, we generated variable investment income of nearly $1.2 billion, largely on the strength of our private equity portfolio. Our competitive advantage and sourcing private assets provided significant protection for our investment portfolio. In a year when the 10-year treasury fell by 77 basis points, our net investment yield only declined by 2 basis points. Our strong business performance drove adjusted return on equity for the year, excluding AOCI other than FCTA and notables, to 13%, up 20 basis points from the prior year and right at the midpoint of our target range.

Book value per share, excluding AOCI other than FCTA, grew nearly 10% to $48.97. And our direct expense ratio came in at 12.6%, an improvement of 30 basis points over the prior year. As we have noted, our unit cost initiative is on track to deliver $900 million of margin expansion, which is $100 million above our initial commitment.

MetLife's consistent execution in 2019 created significant shareholder value. Our robust free cash flow generation enabled us to return roughly $4 billion to shareholders in the form of common dividends and share repurchases. We deployed another $3.6 billion of capital to support new business at internal rates of return comfortably above our hurdle rate. And growing appreciation of our company's strength led to a total shareholder return of 29%. The strategic themes of focus, simplify and differentiate that we outlined at our December Investor Day were clearly on display in 2019 and will drive our decisions in the years ahead. On focus, we have reduced our footprint post the ALICO acquisition from 66 markets to 44, and in 2019, announced the sale of our Hong Kong business. We continue to look at our portfolio through the lens of strategic fit and deploy capital to businesses that can meet or exceed our risk-adjusted hurdle rate. We will be just as disciplined when it comes to optimizing our portfolio. Any transaction must be in the long-term interest of MetLife, offering either compelling economics or a significant reduction in our risk profile.

On simplify, we will overdeliver on our UCI cost-saving target, and going forward, we'll adopt an efficiency mindset that will create an additional $1 billion of capacity to fund innovation and growth over the next five years. On differentiate, we will continue to capitalize on those competitive advantages that are difficult for others to replicate. We believe our group benefits business in the U.S. creates unmatched value for customers. And as we expand the platform with attractive benefits, such as pet insurance, digital wells and health savings accounts, we are very well positioned to extend our lead.

In early January, we gathered 200 of MetLife's senior leaders at an off-site meeting to ensure we have full alignment on our strategy. Notably, 10 of our 12 Independent Directors were in attendance as well. There was tremendous energy and enthusiasm for the task before us, to be a purpose-driven company that creates superior value for its people, its customers and its shareholders. We have set bold aspirations for all our stakeholders, for our customers who are committed to building remarkable and enduring relationships. We are taking concrete steps to strengthen both our metrics and our leadership commitment to customer focus.

For our people, we promised a culture that energizes them to make a difference. We are already making progress with our latest employee engagement survey, providing further evidence of the cultural evolution taking place at MetLife. When I look at MetLife's recent history, I see remarkable progress. A few years ago, we were in a de-risking phase where the emphasis was on the need to improve our cash flow. Then we reached the inflection point I spoke about last year, where we could pivot to a focus on responsible growth. Now we are in the next horizon, where we have fully transitioned to leveraging our competitive advantages to win in the marketplace, which brings me to our aspirations for our shareholders. I covered these in detail at Investor Day and will highlight the key points today.

First, we will achieve an adjusted return on equity of 12% to 14%. Second, we will dispense with serial expense programs in favor of an efficiency mindset that will generate $1 billion of additional capacity over 5 years. And third, we will maintain a 2-year average free cash flow ratio of 65% to 75%, which will generate $20 billion of deployable cash over the next 5 years. In closing, we are pleased to deliver another solid quarter and very strong year that add to our record of consistent execution. We believe that MetLife's narrative and results are converging nicely. Our thesis is clear. We are a simpler and more focused company with a great set of businesses and strong free cash flow. Our track record in support of this thesis is equally clear. $900 million in projected expense savings, healthy growth in our most attractive businesses and consistent delivery of free cash flow in our 65% to 75% range.

With that, I will turn the call over to John McCallion to cover our fourth quarter and full year performance in more detail.

[John McCallion, EVP & CFO]

Thank you, Michel, and good morning. I will begin by discussing the 4Q '19 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. Starting on Page 3. The schedule provides a comparison of net income and adjusted earnings in the fourth quarter and full year of 2019. Net income in the fourth quarter was $536 million or $1.3 billion lower than adjusted earnings of $1.8 billion. This variance is primarily due to net derivative losses resulting from the increase in interest rates during the quarter. For the full year, net income of $5.7 billion largely mirrored adjusted earnings of $5.8 billion. The results in the investment portfolio and hedging program continued to perform as expected.

Notable items are shown on Page 4, and highlighted in our earnings release and quarterly financial supplement. First, favorable tax items in the fourth quarter increased adjusted earnings by $475 million after tax or $0.51 per share. I'll provide more details on these tax items shortly. Second, as a result of the favorable tax items, there was a related release of interest on tax reserves of $64 million after tax or $0.07 per share, which is a reduction in and recorded through direct expenses as opposed to income taxes. Finally, expenses related to our unit cost initiative decreased adjusted earnings in the quarter by $119 million after tax or $0.13 per share. For the full year, these costs were $332 million or $0.35 per share. As a reminder, fourth quarter of 2019 is the last quarter for this incremental spend, and therefore, there will be no UCI-related costs in 2020. Excluding notable items in the quarter, adjusted earnings were $1.4 billion or $1.53 per share.

Page 5 provides further detail on the notable tax items in the quarter. First, we had a tax benefit of $317 million related to a settlement with the IRS regarding the U.S. tax reform repatriation transition tax. This settlement resolves uncertainty regarding the taxation of dividends from foreign subsidiaries paid prior to U.S. tax reform. Second, we had a tax benefit of $158 million from an IRS audit settlement relating to the tax treatment of a wholly owned U.K. investment subsidiary of Metropolitan Life Insurance Company. As some of you may recall, MetLife took a charge in the third quarter of 2015 related to this matter. We have now settled this issue for all audit years and the matter is closed.

On Page 6, you can see the fourth quarter year-over-year adjusted earnings, excluding notable items by segment. Excluding all notable items in both periods, adjusted earnings were up 13% and 14% on a constant currency basis. On a per share basis, adjusted earnings, excluding notable items, were up 21% on both a reported and constant currency basis. The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers include strong equity market performance, continued strength in variable investment income, solid volume growth and favorable tax benefits. This was partially offset by less favorable expense margins in the quarter.

Turning to the performance of our businesses in the quarter. Group benefits adjusted earnings were up 43% year-over-year, driven by favorable underwriting, solid volume growth and higher investment margins. This was partially offset by less favorable expense margins in the quarter. The group life mortality ratio was 85.4%, which is at the low end of our annual target range of 85% to 90% and favorable to the prior year quarter of 89.4% due to lower claims severity.

The interest adjusted benefit ratio for Non-Medical Health was 71.4%, which is below our annual target range of 72% to 77% and also favorable to the prior year quarter of 73.2%. The primary driver was strong disability results, which benefited from renewal rate actions and higher claim recoveries. In addition to the strong bottom line, the business continues to grow its top line with adjusted PFOs in the quarter up 6% and full year sales up 11%, led by growth in voluntary products.

Retirement and Income Solutions, or RIS, adjusted earnings were down 10% year-over-year, driven by lower investment margins. RIS investment spreads were 106 basis points in 4Q '19, and while down 24 basis points year-over-year, spreads were up 4 basis points sequentially. For the full year 2019, investment spreads were also 106 basis points, which was within the 2019 guidance range.

Looking ahead, we continue to expect spreads to remain within our 2020 guidance range of 90 to 115 basis points. RIS adjusted PFOs were up $2.6 billion year-over-year, driven by strong pension risk transfer deals of $2.5 billion in 4Q '19. As announced last week, this includes a $1.9 billion transaction with Lockheed Martin, which covers approximately 20,000 retirees and beneficiaries. The pipeline for PRTs remain strong, and we expect this to continue into 2020.

Property and Casualty, or P&C, adjusted earnings were down 75% versus 4Q '18, primarily due to unfavorable underwriting in the quarter. The overall combined ratio was 101.6%, driven by higher severity within auto bodily injury, including approximately 6 points from adverse prior year development. We are reassessing operational practices and have accelerated rate actions. Based on current trend and planned rate actions, we expect to be within our 2020 target combined ratios. With regards to the top line, P&C adjusted PFOs were up 1%, while sales were down 6% versus 4Q '18.

Moving to Asia. Adjusted earnings were up 21% and 23% on a constant currency basis. The positive year-over-year drivers were favorable volume growth as general account assets under management, excluding fair value adjustments, grew 9% as well as better investment margins and favorable equity markets. This was partially offset by less favorable underwriting.

Asia sales were down 16% on a constant currency basis. In Japan, sales were down 23%, primarily driven by foreign currency denominated annuity products. FX annuity products, which are primarily sold through bank channels had another challenging quarter, given the contraction of the bank market. In addition, our A&H sales in Japan were down 10% year-over-year, which is a function of changes in the tax laws associated with certain products. We expect Japan sales to remain soft through the first half of 2020 before recovering. Other Asia sales were down 3%, but up 5%, excluding the impact from our divested Hong Kong operations, driven by growth in Korea.

Latin America adjusted earnings were up 18% and 21% on a constant currency basis. The primary year-over-year drivers were higher investment margins, solid volume growth, better expense margins and the favorable impact from capital markets on our Chile Encaje. These were partially offset by the less favorable underwriting compared to 4Q '18.

Latin America adjusted PFOs were down 7% and 4% on a constant currency basis, primarily due to lower SPIA sales in Chile. Latin America sales were up 11% on a constant currency basis, driven by higher sales in Brazil and Mexico.

EMEA adjusted earnings were up 20% and 22% on a constant currency basis. The main drivers were lower taxes and volume growth. These were partially offset by less favorable underwriting margins. EMEA adjusted PFOs were up 5% on a constant currency basis, and sales were up 12% on a constant currency basis from growth across the region.

MetLife Holdings adjusted earnings were up 21% year-over-year, driven by the strength of the equity markets as well as favorable underwriting and investment margins. These were partially offset by less favorable expense margins, although primarily due to items that we do not expect to recur.

With regard to underwriting, the life interest adjusted benefit ratio was 55.5%, in line with seasonal expectations and favorable to 58% in the prior year quarter. For the full year 2019, the life interest adjusted benefit ratio, excluding notable items, was 52.9%, comfortably within the target range.

Corporate & Other adjusted loss, excluding notable items, was $98 million. This result compared favorably to the prior year quarter, which had an adjusted loss of $132 million due to lower taxes and favorable investment margins. This was partially offset by less favorable expense margins.

For the full year 2019, Corporate & Other adjusted loss, excluding notable items, was $608 million, which was within our 2019 guidance range of an adjusted loss of $550 million to $750 million. Excluding the notable and other favorable tax items, the company's effective tax rate on adjusted earnings in the quarter was 18.5% and within our 2019 guidance of 18% to 20%. As a reminder, our 2020 effective tax rate guidance is expected to be within 20% to 22%.

Now let's turn to Page 7 to discuss variable investment income in more detail. This chart reflects our pretax variable investment income in 2019, including $327 million earned in the fourth quarter. This was another solid performance for variable investment income. Our private equity portfolio, which is accounted for on a 1 quarter lag, had another solid quarter; and the quarter also contained higher mortgage prepayments. For full year 2019, VII was $1.2 billion pretax and above our 2019 guidance range of $800 million to $1 billion. As a reminder, our 2020 VII target range remains $900 million to $1.1 billion.

With regards to recurring investment income, our new money rate was 3.45% versus a roll-off rate of 4.17% in the quarter. This compares to a new money rate of 4.24% and a roll-off rate of 4.4% in 4Q '18. Lower interest rates have pressured this relationship. As we have noted previously, we would not expect parity to occur until we have a sustained U.S. 10-year treasury yield of roughly 3% to 3.25%.

Turning to Page 8. This chart shows our direct expense ratio from 2015 through 2019. We have made consistent progress towards achieving our UCI target by 2020. 2019 marks another 30 basis point improvement versus 2018, and 170 basis point improvement overall from the baseline of 14.3% in 2015.

The 4Q '19 direct expense ratio, excluding notable items and PRTs, came in above trend at 13.7%. As we've indicated, our expenses tend to be seasonally higher in the fourth quarter due to higher enrollment and other costs incurred prior to receiving premiums in our group benefits business. In addition, the higher direct expense ratio reflects roughly 50 to 60 basis points of unfavorable items, primarily driven by higher employee benefit costs and higher corporate initiatives in the quarter.

Despite the higher 4Q expenses, we are quite pleased with the overall progress that we have made in driving down the company's direct expense ratio, as demonstrated by the improvement of our full year results. We are on track to deliver a direct expense ratio of approximately 12.3% for full year 2020, which equates to an incremental $100 million of profit margin improvement over our original commitment.

I will now discuss our cash and capital position on Page 9. Cash and liquid assets at the holding companies were approximately $4.2 billion at December 31, which is up from $3.5 billion at September 30. $700 million increase in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend as well as holding company expenses.

In 2019, we returned approximately $4 billion of capital to shareholders, and our average 2018 and 2019 free cash flow ratio was 72% and within our 65% to 75% guidance. We remain committed to maintaining a 65% to 75% 2-year average free cash flow ratio over the near term. This target still holds with a 10-year treasury between 1.5% and 4.5%.

Next, I'd like to provide you with an update on our capital position. For our U.S. companies, we estimate that our combined NAIC RBC ratio will be above our 360% target. For our U.S. companies, preliminary 2019 statutory operating earnings were approximately $4.5 billion and net earnings were approximately $4.1 billion. Statutory operating earnings increased by $164 million from the prior year, primarily due to lower VA rider reserves and improved underwriting results. These were mostly offset by the impact of a prior year dividend from an investment subsidiary. We estimate that our total U.S. statutory adjusted capital was approximately $18.6 billion as of December 31, 2019, up 1% compared to December 31, 2018. The increase in operating earnings was partially offset by dividends paid to the holding company and derivative losses.

Finally, the Japan solvency margin ratio was 904% as of September 30, which is the latest public data. Overall, MetLife delivered another solid quarter to close out a very strong 2019. Our ability to leverage our diverse market-leading businesses to drive capital-efficient growth, while maintaining expense discipline across the firm, has led to a strong, consistent level of results in 2019.

We grew book value per share by 10% year-over-year, while generating an adjusted ROE of 13%, excluding notable items. In addition, our cash and capital position as well as our balance sheet remain strong and resilient.

Finally, we are confident the actions we are taking to become a simpler and more focused company will continue to create long-term sustainable value for our customers and our shareholders.

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

[Operator]

[Operator Instructions]. Your first question comes from the line of Andrew Kligerman from Crédit Suisse.

[Andrew Kligerman, Crédit Suisse]

My first question is around the group benefits. So you mentioned that PFO, up 6%; sales, up 11%; the life benefits ratio was 85.4% against guidance of 85% to 90% and the Non-Med was 71.4% under the 72% to 77%, so it's clearly phenomenal. And it seems like quarter in, quarter out, you're doing this. So I want to get a sense of what's the pricing environment like right now? And when is it going to get a little uglier or get ugly at some point because it always does in insurance?

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

Andrew, it's Ramy here. Phenomenal, I think we would say, it's a very strong quarter for us, and we're extremely pleased with those results. To give you some context around your question, if you think about this into 2020 and beyond, I would say a few things. One is that we are very confident in our fundamentals here. This is an attractive market. It has structural characteristics that make it attractive that we talked about. And we are a market leader here, and we do have sustainable competitive advantages that we continue to press.

If you think about the specific results on the underwriting ratio, like you said, remember, this is an insurance business. So you do expect these ratios to fluctuate quarter-to-quarter, they do have some seasonality to them, with first quarter typically being a bit elevated. The other thing you should think of as an insurance business is that the results that we're seeing are entirely within our expected range of outcomes in the context of our business. So if you look at 2020, our view of those ranges have not changed from the ones we've given you in December and our expectations for the full year remain the same and are in the mid -- towards the middle of that range.

From a competitive environment, it is competitive. It's not irrational. We seek to differentiate on a lot of factors beyond price. And the other thing I would say, there's a lot of white space in this business, and we talked about the voluntary opportunity in particular, where we see white space for further growth.

[Andrew Kligerman, Crédit Suisse]

Great. And then just on RIS. I guess, spreads were within the guided range of 90 to 115 at 106, as you said earlier, John. And I guess, could you share with us what the annual portfolio turnover is on that business? And what kind of new money yields you're getting as you move forward against the portfolio yield?

[John McCallion, EVP & CFO]

Good morning, Andrew. It's John. Yes, I would just -- maybe I'll start with the beginning part there and just say, this is consistent with what we expected, and we mentioned previously on the third quarter call, we started to see a bottoming of spreads, partly due to the anticipation of the benefit of 2 fed rate cuts and that's kind of starting to get fully absorbed in the market. And so that was one. And also, we saw the dislocation and the repo markets subside. So we've seen some bottoming of the kind of spread decline happen over the last couple of quarters. And as we said, we think that's a pretty good run rate for the near term.

In terms of -- in terms of turnover in this particular RIS book, I don't think we have that handy here. But again, you can talk to IR off-line. It's -- we talk about overall this -- the roll-off reinvest with regards to rate for the firm. A lot of that, obviously, mix matters there, and it's hard to read into that specifically. But I think just -- I would go back to what we've said, which is that the spreads here have started to bottom. You see the benefit of 2 full rate cuts. You can see that in our crediting rate. It's kind of dropped faster than our investment yield in this business, and that's because we have a lot of floating rate liabilities in that business. And it does take some time for that to fully get recognized because 3-month LIBOR does -- it has to take a little -- a few months before it's fully recognized there. So I'll let Steve add some color.

[Steven Goulart, EVP & CIO]

I'll just add a little bit of color, Steve Goulart, Andrew. But just reminding you of our capital markets business, which I think is where you're going with that question. In general, it is a shorter duration business, and there isn't a lot of mismatch. So even when there's rollover on the asset side, we're also managing rollover on the liability side. So it's a reasonably matched business, and that protects us.

[Operator]

Your next question comes from the line of Elyse Greenspan from Wells Fargo.

[Elyse Greenspan, Wells Fargo Securities]

My first question, it seems like there were some good PRT momentum to end the year. If you could just give us a little bit of an update on the sales pipeline? And what you're seeing with that business? And I guess, interest rates went up in the fourth quarter, and then they've been down this year. Is that -- have you seen any impact from interest rates on the pipeline there?

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

Good morning, Elyse. It's Ramy here. We're clearly very pleased with our PRT results, both for the quarter and for the year. The quarter was a $2.5 billion quarter, and as Michel mentioned, it's a $4.3 billion a year for us. Remember, we're focusing -- from a pipeline perspective, we are focusing on the larger end of the market. So these are big pension plans, mid-single digits, but sometimes even higher with respect to the size of these plans. That's the part of the market where we have a competitive advantage with respect to our rating, our investment capability and our scale of the balance sheet. And when you think about those plans, they are on a derisking journey, right? So this is not something that's a trade that they make overnight. And that -- this derisking journey ends up taking a number of years. And therefore, for any one of them, the current rate position is only an input because it depends on their overall ALM position and it depends on their equity allocation. So having said all of that and given the market we're focused on, we're still seeing a very robust 2020 in that segment that we're looking at.

[Elyse Greenspan, Wells Fargo Securities]

Okay. And then my next question, within your P&C business, you guys called out higher BI severity trends in the quarter, impacting both current accident year as well as prior accident years. If you could just give a little bit more color on what you're seeing? And as you think of 2020, does getting within your guide assume that the severity trends might remain elevated at least for part of this year?

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

Sure. So clearly, it's been a challenging quarter for the P&C business. And the headline here, as you've mentioned, is a bodily injury severity. And as you know, it's a trend that we're seeing in the marketplace. We saw some initial indication of deterioration in the third quarter, and we took some reserve strengthening then. And those indications worsened in the fourth quarter, which warranted additional strengthening. And that's a combination of PYDs as well as out-of-period strengthening for '19.

As we look forward, I can tell you, we're looking at these trends very closely. We're pulling a range of levers, which are at our disposal, beginning with rate actions where we've accelerated some of the rate actions into early 2020, but we're also looking at underwriting and claims practices. So we're on top of this. I could say with respect to the auto line, in particular, where we stand today, our expectations are that we would remain within our overall guidance range for auto, albeit towards the upper end of that range. So if you recall, that's a 93% to 98% for the auto business.

[Elyse Greenspan, Wells Fargo Securities]

Okay. And John, one just quick numbers question. The derivative loss in the quarter, you said that, that was driven off of the move in interest rates. Given that interest rates have been down to start 2020, should we think about that reversing in the first quarter this year?

[John McCallion, EVP & CFO]

Yes, directionally correct. Yes.

[Operator]

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

[Thomas Gallagher, Evercore ISI]

Just one follow-up on property casualty. The current accident year auto loss ratio was 82%. And I guess, the question is, is that a just 4Q pick? Or is that a current accident year catch-up for the prior quarters as well? Like what would a better trend loss ratio be? Because I assume it's not a 107 combined as the way we should think about normalized heading into 2020?

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

Yes. I mean, if you look at the fourth quarter, if you exclude the PYDs in the quarter, I would say, remember, that the fourth quarter is typically seasonally higher for auto for us. So if you think about that fourth quarter results, excluding PYD, it's 98.9%. And again, there's some elevation because of seasonality here.

[Thomas Gallagher, Evercore ISI]

Got you. And then just a question on capital management. So buybacks were lighter this quarter and your buildup of cash at the holding company is now $4.2 billion. So that's slightly above your target for the first time in a while. Any reason why you dialed it back this quarter despite having the excess cash to use?

[Michel Khalaf, CEO & President]

Yes, Tom, it's Michel. As we mentioned, we are comfortable with the $3 billion to $4 billion buffer at the HoldCo, slightly above this -- for the fourth quarter. Mostly, I would say, timing related in terms of dividends to the HoldCo. I would look at our sort of cash buyback activity in the fourth quarter in tandem with the third quarter. We had mentioned then that we had pulled forward some of the share repurchases. We tend to be opportunistic in that respect. So nothing more to read into that, I would say.

[Thomas Gallagher, Evercore ISI]

And Michel, just as a follow-up, are you -- how are you thinking right now in terms of the balance or trade-off between M&A and buybacks?

[Michel Khalaf, CEO & President]

No change also in terms of our capital management philosophy. I think we talked before about M&A opportunities, how we view those strategic fit accretive. And we sort of also consider alternative uses of capital. So I would say no change in terms of our capital management philosophy. Excess capital belongs to the shareholders, and absent M&A activity, we'll return it in the form of dividends and share repurchases.

[Operator]

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

[Jamminder Bhullar, JPMorgan Chase & Co.]

I just had a question first on what you're seeing in terms of the operating environment in the Latin America business, and specifically, in Chile, where your sales were weak this quarter. There's also a lot of talk about political uncertainty and potential changes in the pension business.

[Oscar Schmidt, President, Latin America]

Yes, Jimmy, this is Oscar. So let me start with the social situation. As I said in December, the magnitude of the profits was a surprise to everybody. But I have to say it's getting better. And remember that, in summer, in Chile, the flow activity, January and February, we'll need to see what happens in March when the year really starts there. But so far, the social environment has been much better. In terms of the business, to-date, we have not seen a significant impact on our business through January from the situation there. But facts and circumstances may change, of course, as the situation evolves.

So let me talk about the reform, which, I think, is your other question. The government finally managed to present a project in the Congress for pension reform, and they were able to make it to be approved in the house, in the lower chamber. Now it has to go to the Senate. February is -- there's no Congress activity. So we need to wait until March to see what happens in the Senate. I have to say, it's too early to say in the legislative process to -- what's going to happen. It's possible that there will be more changes, right, to be introduced before the project ends up enacted as a law. But we cannot say what is the final impact. But based on the facts, not today, which is the version of the project that is being discussed, we don't anticipate material financial impact to the region. It's -- I would say, it's a good step forward for the people of Chile in terms of the kind of pension improvements that introduces, and hopefully, will help to ease the social situation there if the project is approved. So we really support the government pension reform efforts. I hope that answers your question?

[Jamminder Bhullar, JPMorgan Chase & Co.]

And the potential impact on your business as of the proposal as you see it currently?

[Oscar Schmidt, President, Latin America]

As it stands today, it's not big, right? Now I have to say we've got to be prudent because we don't know how it's going to end. It still has to go through senate and the executive power has to approve it, but the version that is being discussed today, we think it's good for people, and the impact on our business is not that big.

[Jamminder Bhullar, JPMorgan Chase & Co.]

Okay. And then if I could ask one more of John McCallion. Just on the changes in accounting that are coming through in 2022 on long duration contracts, you haven't disclosed any sort of potential impact on your business either as anybody else. Are you expecting to start quantifying more of the impact in the next few quarters? Or would you wait until your even closer to the rules being implemented, so maybe next year?

[John McCallion, EVP & CFO]

Yes, hard to tell in terms of time line at this point. We're still working through it. So we don't really have a projected or estimated time line in terms of when we would share that information.

[Operator]

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

[Ryan Krueger, KBW]

[Technical Difficulty]. Just from reinsurers on pieces of MetLife Holdings at the December Investor Day. Can you give an update on that? And are you still seeing the same amount of interest following the decline in interest rates this year?

[John McCallion, EVP & CFO]

Ryan, at the beginning of your question, you cut off, but I think it had to do with just any updates on just activity from reinsurers with regards to holdings, is that right?

[Ryan Krueger, KBW]

That's right. And have you seen any impact from lower interest rates as well?

[John McCallion, EVP & CFO]

Yes. I would actually maybe refer to the way that Ramy described PRTs. It's not something that they can turn on, turn off. This is like -- given the size and the complexity, sometimes it just requires people to spend time on these things for some time. So I don't think they react to movements in interest rates as much. So I would say it's no change at this point. It's -- there's still kind of a good supply of capital out there, but I'd say the bid-ask spread is still fairly wide, but there's a number of folks that have entered the space over the last few years, and we're seeing that.

[Ryan Krueger, KBW]

And then on the expenses, there was a lot of seasonality, I guess, in 2019. Can you give us any sense of, I guess, how to think about normal seasonality with the direct expense ratio?

[John McCallion, EVP & CFO]

Yes, I will try. And I make that point only because we have talked about that there is seasonality from quarter-to-quarter, which is why we focus on the annual direct expense ratio. Having said that, let me just kind of recall a few things. So we did say that -- and we've called out previously that the third and fourth quarter tend to be -- tend to be elevated due to the cost, as I mentioned, in my opening remarks for the enrollment of group customers, and we don't get those premiums in until the following year, so this tends to be an elevated. And even this year, if you recall, we didn't see that come through in the third quarter. So there was even some slippage into 4Q.

On top of that seasonality, there were some additional onetime costs in the quarter that we would not expect to recur. We had some elevated employee benefit costs. Remember in the earlier 3 quarters, we had employee benefit costs going the other way. So they've kind of washed or kind of neutralized each other out. And then we also had some additional corporate initiatives spend in the quarter, in 4Q, that was elevated. So we estimate 50 to 60 basis points above what normal trend would be for kind of the fourth quarter. And so you can kind of think of that as what we had expected in the quarter and the additional onetime costs that came through.

[Operator]

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

[Humphrey Lee, Dowling & Partners Securities]

Just want to follow up on that expense. So -- but looking back specifically in group benefits, just looking back, I don't really see there's a seasonality that you talked about in 3Q and 4Q. And then, obviously, this year, we see the bonds of it in the fourth quarter. So I was just wondering, is there anything constructionally different this year compared to years past?

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

Well, remember also, I mean, we've been growing a lot, right, in the last few years. So you're seeing there is kind of a pickup as a result of just sheer growth, but I would say that's the case. We can -- we'll look again, but it's there. And there's other things that go into this, right? I mean, there's other investments being made. So sometimes, it's hard. But as we've said -- and I think, last year, there might have been employee benefit costs that offset that. So the volatility and some of the market impacts from unemployed benefit costs can impact the segments as well. So you might see a little offset, but you can be assured, it's in there.

[Humphrey Lee, Dowling & Partners Securities]

Okay. Got it. And then just a follow-up question on the tax rate. So I think in your prepared remarks, you talked about the effective tax rate was 18.5%. I'm a little bit struggling to get to that number based on the tax items that you called out. I think you may have some additional tax items, too, but maybe if you can help me to think about like the tax rate, what contributed to the reported number and then versus your effective tax rate?

[John McCallion, EVP & CFO]

Yes. I think if you -- so if you adjust the notable items, you come to something closer in the 13s in terms of effective tax rate. So we did have some additional positive items that were not called out as notable just because of the size and, call it, our kind of approach to notables of anything over a $50 million impact. So it's a series of a few items. One is there were some revision to the rules on the GILTI tax in the fourth quarter, and I think it was early December, maybe late November, which ultimately provided a company's ability to use some additional foreign tax credits. So that came through in the fourth quarter. And then the remaining amount is effectively just some return to provision true-ups and some other year-end tax estimate refinements. So if you exclude those items, it's, call it, $65 million impact, you get to 18.5%. And so that's how you reconcile the quarter ETR.

[Operator]

Your next question comes from the line of John Barnidge from Piper Sandler.

[John Barnidge, Piper Sandler & Co.]

Sorry. I was muted. Have you seen any change in the operating environment in EMEA following the favorable U.K. election and subsequent Brexit certainty?

[Michel Khalaf, CEO & President]

Yes, John, I would say not much. I mean, our business in the U.K. as mostly employee benefits and individual protection. So I wouldn't say that we've seen a major -- there's an improvement in the overall sentiment, I would say, post-elections and now with Brexit sort of not necessarily behind the U.K. but at least decided. But no impact to our business that I would call out, no.

[John Barnidge, Piper Sandler & Co.]

Okay. And then kind of back to the auto adverse development, were there specific states this came from? And what levels of rate are you going to push to correct this, specifically within auto?

[John McCallion, EVP & CFO]

Yes. I mean, we -- there are clearly some skew there, and there are some states where we see -- where we saw higher severity than others. So there is that skew there, and we're clearly focusing on the states where we're writing the most amount of business. In terms of rate taking, so if you look at over 2019, we took 2% in rate across the book on average. Over the last 90 days, we've accelerated the rate actions for 2020. So we've taken under 2% in rate, just for Q1 of 2020, and we're clearly going to be watching this carefully. We expect to take additional rate as warranted.

[Operator]

And I'd now like to turn the call back to Michel Khalaf for any closing comments.

[Michel Khalaf, CEO & President]

So let me close this meeting by thanking everyone for joining us. We're pleased with our strong 2019 results and our growing track record of consistent performance. Having said that, rest assured that this leadership team is motivated by a strong sense of urgency to create greater shareholder value. Thank you again, and talk to you soon.

[Operator]

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