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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the MetLife’s Fourth Quarter 2018 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded.
Before we get started, I refer you to the cautionary note on the forward-looking statement in yesterday's earnings release.
With that, I will turn the call over to John Hall, Head of Investor Relations.
Thank you, Operator. Good morning, everyone, and welcome to MetLife’s fourth quarter 2018 earnings call. Before starting, 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.
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 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 contents of the slides begins following the romanette pages that feature a number of GAAP reconciliations.
After prepared remarks, we will have a Q&A session. But given the busy earnings call schedule this morning, we'll extend no longer than the top of the hour. So in fairness to all participants, please limit yourself to one question and one follow-up.
With that, I will turn the call over to Steve.
Thank you, John, and good morning, everyone. Last night, we reported fourth quarter earnings to close on a very strong 2018. Quarterly adjusted earnings totaled $1.3 billion or $1.35 per share, up from $0.64 per share a year ago. Adjusted earnings benefited from a tax settlement that more than offset weaker capital markets, weaker underwriting and refinement to the estimated impact of U.S. tax reform. Net income was $2 billion or $2.04 per share, down from $2.14 per share a year ago. Falling interest rates, falling equity markets and the strengthening dollar drove substantial gains in the derivatives we hold to protect our balance sheet. These gains reversed much of the non-economic derivative losses incurred earlier in the year.
For the full year 2018, MetLife generated adjusted earnings of $5.5 billion or $5.39 per share, an increase of 37%. Net income for the year was $5 billion or $4.91 per share. Overall, 2018 was an excellent year, driven by solid underwriting, good volume growth, disciplined expense management and tax reform. These positive fundamentals were enhanced by the impact of significant and consistent capital management. Reflecting the strong full year results, adjusted return on equity in 2018 was 12. 6%.
Turning to total company investments. Our investment portfolio continues to benefit from higher investment rates. Our new money rate rose from 3.23% a year ago to 4.24% in the fourth quarter. Our average roll-off rate in the quarter was 4.4%. In absolute terms, recurring investment income was up 6.5% compared to a year ago as higher asset balances and rates combined to offset the roll-off of higher-yielding securities. Variable investment income of $237 million came in above the midpoint of our quarterly guidance range and was aided by another strong quarter of private equity returns. For the full year, VII totaled $962 million at the upper end of our annual range of $800 million to $1 billion.
Looking ahead, we anticipate weaker first quarter private equity returns in our alternative investment portfolio given fourth quarter marketing conditions and the one quarter reporting a lag. Our full year 2019 guidance for variable investment income remains unchanged. Before I address capital management, I want to provide an update regarding the group annuity issue we disclosed in December 2017. We continue to make good progress on the remediation of this issue and expect to report in our 2018 Form 10-K later this month, the lifting of the related material weakness. At the same time, we also expect to report the lifting of the previously reported material weakness associated with over-reserving in our Japan variable annuity book.
Moving to capital management. When we held our outlook call in mid-December, I indicated that we have repurchased $700 million of MetLife shares since reporting earnings on November 1st, which extinguished our prior authorization and began utilization of our current $2 billion authorization. During the balance of December, we took advantage of market conditions and repurchased an additional $500 million at an average price of $39.46 per share bringing fourth quarter share repurchases to $1.2 billion. There remains $1.3 billion outstanding on our current authorization.
All totaled we repurchased $4 billion of MetLife common stock and paid $1.7 billion of common dividends during 2018 to bring total capital return to common shareholders to $5.7 billion well ahead of our $5 billion target and more than 100% of full year adjusted earnings. By now it should be clear to all that we have a strong commitment to returning excess capital to shareholders. As this is my last earnings call before Michel Khalaf takes over as CEO, I have been thinking about what defines my time with MetLife. The one word that sums it up best is de-risking, whether on the asset side of our balance sheet, the liability side or in the regulatory arena.
My goal is for MetLife to perform well in any economic environment. 18 months after joining MetLife as Chief Investment Officer in 2005, we sold Peter Cooper Village, Stuyvesant Town in Manhattan for $5.4 billion. While this was regarded as a historic top-of-the-market asset sale, it was actually de-risking move. That one property has risen so much in value that it represented nearly 50% of our entire real estate portfolio. The same approach to risk guided us as the storm clouds and the financial crisis began to gather. I am proud that we saw the housing bubble earlier than most and took action to significantly reduce our holdings to subprime mortgage-backed securities.
We also saw the recession coming in October of 2007, two months ahead of the official call and made a decision to sell down approximately $8 billion of assets we thought would be most vulnerable in a downturn. Our efforts to de-risk MetLife's asset portfolio helped us come to the financial crisis in such strong financial shape that we were able to buy Alico from AIG for $16.4 billion, money that AIG used to repay U.S. taxpayers.
When I became CEO in May of 2011, I knew our major task would be to de-risk our liabilities just as we had de-risked our assets. After going public, the company had been growing the topline with complicated guarantees that produced impressive GAAP earnings, but with poor underlying economics. We had exited the long-term care business the prior year, largely because some of our leadership view the liabilities ask unhedgeable. But we were still in danger putting a lot of value at risk in a lower-for-longer interest rate environment.
Initially, I thought that exiting universal life with secondary guarantees and ratcheting down verbal annuity sales will get the job done. Eventually, we realized the best course will be to spin-off our U.S. retail business altogether and create two distinct value propositions. In light of these actions, I believe we have made tremendous progress in de-risking MetLife. At the same time, we were improving MetLife's economics by boosting free cash flow and the value of new business written. We expanded capital life businesses with high internal rates of return and shorter payback periods in fixed or exited businesses that fail to meet those criteria.
As a result, our free cash flow ratio rose from 26% in 2012 to an average of 66% over 2017 and 2018. This stronger free cash flow enabled MetLife to repurchase more than $10 billion of common shares over the last five years even as we increased our common dividend at a 12% compound average growth rate since 2011. Operationally, we made significant investments to upgrade MetLife's technology, expand our digital capabilities, and deliver a better customer experience, all without negatively impacting expenses.
To the contrary, our unit cost initiative has already improved MetLife's direct expense ratio by 140 basis points and is on track to deliver $800 million of pretax margin improvement by 2020. In the midst of all these efforts, we were confronted with a regulatory risk larger than any MetLife has faced in its history. Because we won our lawsuit against the government to shut our designation as a systemically important financial institution or SIFI, it may be hard to remember how ominous the threat appeared in 2013.
The actions of the Financial Stability Oversight Council and the Federal Reserve at that time, made two things clear, first, only three out of more than 800 U.S. life insurers will be labeled SIFIs; and second, the capital requirements for SIFIs will be significantly higher than for other firms. We view this as an existential threat that would make it impossible for MetLife to price many of its products competitively, harming customers and shareholders alike.
The Dodd-Frank Act included a provision allowing companies to seek judicial review of their SIFI designations. No company wants to take the Federal government to Court, but this was a path I felt we must pursue for the sake of our customers, employees, and shareholders. We were given many warnings: you will lose, your brand will suffer, you will face retribution. But if anything, because we took the principal stand and fought for what we knew was right, MetLife emerged with its repetition enhanced. I believe I was the right person to lead the de-risking of MetLife, which has stabilized our balance sheet, strengthened our free cash flow and positioned us for a profitable growth.
I also believe that MetLife is now at an inflection point, where a different kind of leadership is needed, someone with a strong track record of execution, who sets ambitious targets and knows how to meet or beat them. That person is Michel Khalaf and I'm very excited that he's taking over as CEO on May 1. The Board of Directors conducted a thorough internal and external search to find the right executive to lead MetLife. We knew it was critical to find someone who combine deep knowledge of the industry and entrepreneurial spirit, a commitment to innovation and strong leadership skills. The Board and I have every confidence that Michel is the right executive to lead our global company into the future.
In closing, I want to thank everyone who has helped transform MetLife into a more efficient, innovative and financially successful company. This starts with MetLife's 48,000 employees, who bring a deep sense of purpose to our mission of making people's lives more financially secure. I also want to thank MetLife's senior leaders for their willingness to make hard decisions to move us forward. We have built one of the strongest leadership teams anywhere in the industry. I am confident they will lead MetLife to new levels of success.
To my fellow Board members, I want to say thank you for your support, especially during our long SIFI struggle. Few Boards would have had the courage to stick with us through this challenge. I am very pleased that your trust was rewarded. And finally to our shareholders, thank you for your patience. Large life insurance companies are difficult ships to turn, but it was critical that we set MetLife on a better course for the future. As the owners of the company, you deserve a fair return on the capital you've entrusted to us. I believe our efforts are now delivering on their promise and will continue to do so in the years to come.
With that, I will turn the call over to John McCallion.
Thank you Steve and good morning. I will begin by discussing the 4Q 2018 supplemental slides that we released last evening along with our earnings release and quarterly financial supplement. These slides cover our fourth quarter and full year 2018 financial results.
Starting on page four. The schedule provides a comparison of net income and adjusted earnings in the fourth quarter and full year 2018. In the quarter, net income was $2 billion, or roughly $700 million higher than the adjusted earnings of $1.3 billion. The primary driver for the variance was net derivative gains due to significant market movements during the fourth quarter. Lower interest rates, equity market weakness and the strength of the U.S. dollar combined to drive the net derivative gains. For the full year 2018, net income was $5 billion, which was roughly $500 million less than adjusted earnings of $5.5 billion. Overall, the results in the investment portfolio and hedging program continue to perform as expected.
We had three notable items in the quarter as shown on page five and highlighted in our earnings release and quarterly financial supplement. First, favorable tax items increased adjusted earnings by $247 million after tax or $0.25 per share. The largest component of this benefit was the result of an IRS audit settlement related to the tax treatment of a wholly-owned U.K. investment subsidiary of Metropolitan Life Insurance Company. As some of you may recall, MetLife established a reserve in the third quarter of 2015 related to this matter.
Second, expenses related to our unit cost initiative decreased adjusted earnings by $100 million after tax or $0.10 per share, which is the highest UCI expenses of the year.
Third, litigation reserves and settlement costs were $60 million after tax or $0.06 per share. This includes separate fines, totaling approximately $20 million paid to the insurance Department of New York and the Securities Division of Massachusetts related to our group annuity business. Adjusted earnings excluding notable items were $1.2 billion or $1.26 per share.
On page six, 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 14% and up 16% 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 better expense margins and solid volume growth as well as lower taxes primarily due to the U.S. tax reform. These were partially offset by the impact from weaker equity markets, lower recurring interest margins and less favorable underwriting. Pre-tax variable investment income was $237 million, up $21 million versus the prior year quarter, driven by higher private equity returns.
With regards to our business performance. Group Benefits adjusted earnings were flat year-over-year. The key drivers were solid volume growth and lower taxes, which were offset by less favorable underwriting, higher expenses and lower investment margins. With respect to underwriting, the Group Life mortality ratio was 89.4%, which was higher than the prior year quarter of 87.2%, primarily due to elevated severity. Notwithstanding, this quarter's results the Group Life mortality ratio was 87.5% for the full year 2018 and exactly in the middle of our target range of 85% to 90%.
The interest adjusted benefit ratio for non-medical health was 73.2%, which was lower than the 73.7% in the prior year quarter and below the 2018 target range of 75% to 80%. The year-over-year improvement in the ratio was primarily driven by continued positive trends in disability. This was partially offset by higher utilization in dental in the quarter. Group Benefits continues to see strong momentum in its top line.
Adjusted PFOs in the quarter and full year were up 4% with growth across most markets and product lines. Full year sales were down 1% versus 2017, which had record jumbo cases. Voluntary products saw continued momentum with sales up double digits in 2018. In addition, we also continue to grow our market as regional and small-market sales were strong and well-above full year expectations. Retirement and Income Solutions or RIS, adjusted earnings excluding notable items were up 51%. The key drivers were favorable underwriting and investment margins, solid volume growth, as well as lower taxes due to U.S. the tax reform.
While the flatter yield curve has continued to pressure RIS adjusted earnings, this was more than offset by higher total liabilities which were up 5% versus the prior year quarter. Excluding the FedEx transaction announced in May of 2018, total liabilities were up 2%. As a result of higher variable investment income in this quarter, we have been able to maintain spreads which were 130 basis points in 4Q 2018 and within our prior year outlook call range of 110 to 135. Excluding VII, RIS spreads were 103 basis points, down two basis points year-over-year and one basis point sequentially. RIS adjusted PFOs were $523 million, down from $1 billion in the prior year quarter due to lower pension risk transfer sales. While we did not complete any transactions in the fourth quarter, PRT PFOs were $6.9 billion in 2018, a record year for us.
As we look to 2019, we remain optimistic on winning our share of PRT deals given the strong pipeline that we continue to see. Excluding PRT deals, adjusted PFOs were up 40% versus the prior year quarter and up 13% for the full year, primarily due to structured settlements and income annuities. Property & Casualty or P&C adjusted earnings excluding notable items in the prior quarter were up 13%, primarily due to lower taxes. Pretax cat losses were $25 million in the quarter which was $2 million lower than the prior year quarter.
With regards to the topline, P&C adjusted PFOs were up 1%, while sales were up 13% versus 4Q 2017. Asia adjusted earnings were down 9% and 8% on a constant currency basis. The key drivers were less favorable underwriting and the impact of weaker capital markets in Japan and Korea in the quarter. This was partially offset by solid growth in assets under management as well as lower taxes. Asia sales were up 5% on a constant currency basis. In Japan, sales were up 19% primarily driven by strong foreign currency-denominated annuities as well as Accident & 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 down 13%, primarily driven by regulatory changes in Korea.
Latin America adjusted earnings were up 10% and 19% on a constant currency basis. The key drivers were better expense margins, favorable underwriting, and volume growth. This was partially offset by the impact from a lower equity market on our Chilean encaje and higher taxes. Latin America adjusted PFOs were down 3%, but up 5% on a constant currency basis, driven by volume growth across the region. Latin America sales were up 6% on a constant-currency basis. The divestiture of MetLife Afore, our former pension management business in Mexico dampened sales growth by four points compared to the prior year quarter.
EMEA adjusted earnings were down 30% and 24% on a constant currency basis, primarily due to less favorable underwriting and higher taxes. This was partially offset by better expense margins. In addition, EMEA's adjusted earnings were negatively impacted by a few one-time items totaling roughly $9 million that we don't expect to repeat. EMEA adjusted PFOs were up 3% on a constant-currency basis, reflecting growth in Western Europe and Turkey. EMEA sales were down 7% on a constant currency basis, primarily due to lower volumes in the Gulf.
MetLife Holdings adjusted earnings, excluding notable items in 4Q 2017, were down 8% year-over-year. The primary drivers were unfavorable equity market impacts and life mortality. This was partially offset by improved expense margins and the benefits from U.S. tax reform. With regards to equity market performance, MetLife Holdings separate account returns were down 10% in the quarter and resulted in an initial market impact of approximately $25 million to adjusted earnings, which is roughly in line with our sensitivity guidance.
Underwriting results included unfavorable mortality due to a higher large face claims in the quarter, which drove the life interest adjusted benefit ratio to 58%. Despite the higher life claims in 4Q, the full year interest adjusted benefit ratio was 52.4% excluding notable items and in the middle of our target range of 50% to 55%. Corporate & Other adjusted loss, excluding notable items, was $132 million. Overall, the company's effective tax rate on adjusted earnings in the quarter was 12.2%. Excluding the favorable notable tax items discussed earlier, the company's effective tax rate in the quarter was 18%.
Turning to page seven. This chart shows our direct expense ratio from 2015 through 2018, as well as the quarterly details for 2018. As we have previously stated, 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. We have also noted previously that our goal is to realize $800 million of pre-tax profit margin improvement by 2020, which represents an approximate 200 basis point decline from the 2015 baseline year. 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. While we are pleased with these results, we had certain expense items in the fourth quarter that lowered the full year ratio by approximately 20 basis points. We don't anticipate these items recurring in future periods.
I will now discuss our cash and capital position on slide eight. Cash and liquid assets at our holding companies were approximately $3 billion at December 31, which is down from $4.5 billion at September 30. The $1.5 billion 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. Our average 2017 and 2018 free cash flow ratio was 66% of adjusted earnings excluding notable and Brighthouse separation related items. This was within our two-year average target of 65% to 75%.
Next, I would like to provide you with an update on our capital position. For our U.S. companies, our new combined NAIC RBC target ratio post U.S. tax reform is 360%. And we will be in excess of that amount for the full year 2018. For our U.S. companies, preliminary 2018 statutory operating earnings were approximately $4.4 billion. And net earnings were approximately $4.2 billion. Statutory operating earnings increased by $1 billion from the prior year. The increase was primarily due to dividends received from the investment subsidiary, which had a corresponding offset in statutory adjusted capital as well as lower taxes. These items were partially offset by less favorable capital markets in 2018 and reinsurance recaptures in 2017.
We estimate that our total U.S. statutory adjusted capital was approximately $18.5billion as of December 31, 2018, which remains relatively flat versus 2017. Net earnings and investment gains were offset by dividends paid to the holding companies. Finally, the Japan solvency margin ratio was 794% as of September 30th, which is the latest public data.
Overall, MetLife generated a solid quarter despite challenging market conditions to close out a very strong year. Our full year financial accomplishments in 2018 include; 22% growth in adjusted EPS excluding notable items; record PRT PFOs of $6.9 billion; returned a record $5.7 billion of capital to shareholders; improved the direct expense ratio; and remained on track to achieve our target by 2020. In addition, our cash and capital position as well as our balance sheet remains strong. Finally, we remain confident that the actions we have taken to implement our strategy will continue to drive free cash flow and create long-term sustainable value to our shareholders.
And with that, I will turn back to the operator for your questions.
Thank you. [Operator Instructions] Your first question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.
Hey, good morning. Question around mortality. It looks like it was -- and you called that out in the press release as well. It looks like Group, Asia, EMEA, MetLife Holdings all had somewhat elevated mortality. So, I just wanted to get a sense. Is this kind of a blip? Could it reverse the next quarter? How do you see the outlook?
Good morning, Andrew. It's John. Let me take it from the top. I might ask Michel to jump in a little bit too on the group side. But I think in general what you said is true. I would consider this just normal volatility. I think the important thing to point out if you go back to our full year benefit ratios we're generally in line with our targets. So I would tend to agree with your -- I guess, your statement that this is just a normal volatility. It's generally severity in a lot of places. We did have a reserve refinement in Asia. I think the one place; we did see some higher utilization in dental. And maybe I'll just have Michel comment on that. So we'll monitor that. But I think otherwise the other mortality or unfavorable mortality is generally just considered a blip.
Yes, hi Andrew. It's Michel. So, on the dental front, we did see higher utilization in Q4. As a reminder, we had a very strong first quarter. Typically, the fourth quarter, we see lower utilization. A lot of insureds reached their limit so that drives the overall utilization. As I said, we had low utilization in the first quarter. We've analyzed this; we see no particular trends in any block area or service. And some of the Q4 results are also due to prior quarter development as well. So, trailing from Q3. So, we're keeping a close eye, but nothing to suggest that this is the beginning of a trend.
Got it. And then just on the pension risk trends. You mentioned earlier John that the pipeline still looks very good. But it was quiet in the fourth quarter. Is it getting too competitive? Is pricing under any pressure here? Or do you feel good about the returns going forward?
Yes, Andrew, Michel again. So, it is a competitive marketplace, but we see a good pipeline based on discussions that we're having with intermediaries and plan sponsors. We feel confident in our ability to continue to win our fair share of deals while sticking to our discipline in terms of how we evaluate and assess those opportunities going forward. So, we're still bullish and confident in terms of the PRT opportunity going forward.
Double-digit returns are still viable?
Well, certainly we're sticking to our discipline in terms of the returns that we look for on those deals. And again, as a reminder, we had a record year in 2017 and we more than doubled 2017 and 2018. So, another record year there as well. So, yes, we're still sort of optimistic about the market opportunity there.
Excellent. Thanks.
Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Good morning. Steve just a follow-up on your point on de-risking. As you think about how you leave Met position here, I think the perception is the only real remaining tail risk might be long-term care. And when you think about this risk going forward, while Met's block has performed pretty much better than everyone else in the industry so far, is there a risk that every block is underwater and eventually Met will -- it will catch-up to Met? Or do you have reason to believe that Met's long-term care block is going to be fine over the next several years?
Hi Tom. We feel good about our long-term care block. And we talked about this; I think it was the last earnings call, gave you a fair amount of detail on it. We are getting rate relief in many states. We continued those efforts. As you know as most of this business is written on MOIC, that's under New York regulations which we had very strong capital rules and reserving requirements. So, we feel our book is in a good position. And we stopped writing this business back in 2010, as I mentioned. But obviously we still have a block of business on our books. And we still get premiums in for those policies that have been out there for quite some time. But we have looked at it very, very carefully. We've done a lot of work on it and we feel that it's in a good place.
Got you. And then my follow-up is just on the Holdco liquidity and capital management. So looks like you're toward the low end of your Holdco liquidity target of $3 billion to $4 billion now. My question is, how much above the 360% RBC target are you in terms of stat surplus? And when you think about what your excess capital position is now, or maybe you don't have much of that excess capital, is there a thought for 2019 that you might want to build a bigger buffer? Or do you think you'll be able to use all of your free cash flow for 2019 for shareholder return purposes?
Good morning, Tom. This is John. Let me take it from the Holdco and I'll touch on the RBC at the end. So first, let me just start to just help reconcile and maybe roll through – roll forward our cash from over the course of the quarter. I think it's important to recognize that we had 1.2 billion of share repurchase in the quarter. And I think you may realize that we had an additional 500 million post the outlook call. And I take that as a decision to accelerate some of what otherwise would've been repurchased in 2019. And we did so at an average price of $39.46. So, yes, we view that as good use of excess cash at that time given the work market weakness. And so we'll be mindful of that as we see how markets trend.
I think the second thing to keep in mind in the quarter; we did complete our net liability management actions in the quarter. And just remind you, we said during 2018 that we would compete $1 billion to $2 billion of net liability management during 2018. We ended up at about $1.5 billion, which we completed in the fourth quarter. Roughly $400 million or $500 million of debt repurchases. And then I attribute the remaining portion to just lumpiness and any one quarter of intercompany cash flows and tax sharing payments. So then turning to the buffer. So we're at the low end of the range today. This process of setting the buffer, we use some severe and very severe liquidity stress tests. We look at the related calls on holding company cash and capital and then we set the buffer accordingly. And so we did so a number of years -- I guess, it was two years ago or so. We set the $3 billion to $4 billion range. And it's a range for a reason.
So we take into account our outlook. And one of the things these liability management actions did is it helped reduce some of the complexity or the calls on cash at the holding company. We've historically run at about $1 billion of maturities every year in debt, debt maturities. And a lot of that liability management actions has helped push out some of those maturities. So just to give you a sense of that, we have no debt maturities in 2019. We have like $400 million to $500 million each year from 2020 to 2022. So our debt maturity towers are much different today. And as a result the holding company, under a stress, can be – can think about that.
Right.
So it's just, we've kind of continued to reduce their risk, I'd say, at the Holdco. And therefore, I would expect us to manage to the lower end of that range in the near term. Moving to RBC. We did lower our RBC target as a result of the tax reform by 40 points. Remember it did not have any impact on our adjusted -- total adjusted capital. This was just merely impact to the formula for required capital. It doesn't change anything in terms of our available resources or anything like that. So we adjusted it down by the 40 points from 400 to 360. Today our best estimate that would be that we're above 380 at the end of the year.
Got you. That’s helpful. Thanks. John.
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hi, thanks. Good morning. In Asia, the earnings this quarter were about $50 million lower than the full year quarterly average ex-notable items. I think John you mentioned reserve item. But I'm just curious if there's anything in the quarter you view as ongoing? Or if it was just a weaker quarter in terms of underwriting? And some of the other things you mentioned on capital markets and reserve true ups?
Ryan this is Kishore. For the full year 2018, if you exclude notables, the Asia segments reported adjusted earnings is up 8%. That certainly exceeds the outlook we provided for the year. In terms of this quarter there were four factors that put pressure on our earnings. One was unfavorable underwriting. And John spoke to the reserve refinement. That's about $20 million. There were two one-timers; one in the Japan segment, the other one was in the Other Asia segment. So that's first one.
Then the second one is VII. Although VII was up for MetLife as a whole it was lower for the Asia segment by about $13 million. The third factor is the U.S. dollar strengthened in the fourth quarter against the Korean Won and the Aussie Dollar that -- about one point there. Finally, we had significant pressure on the equity markets in both Japan and Korea. Topics was down 18%, cost fee was down 13%. So this led to some reserve increases in some of various products. Just to give you a little bit of context around this, right? These reserves represent 2% of our total reserves. So that's point number one.
And then point number two is in Korea, which represents a bulk of this impact, we are hedged on a statutory basis. So given all this and looking at 2019, I'm quite comfortable reaffirming our earnings outlook guidance. Thank you.
Great. Thanks a lot. That was helpful. And then on the weaker VII in 1Q 2019 from lack of private equity returns, can you give us any quantification of that?
Ryan its Steve Goulart. Well, as Steve Kandarian said in his prepared remarks, we do expect the weaker first quarter; remember that's a lag in private equity. We've gone back and relooked at it. We looked at our outlook. What we've done, we have lowered our expected yield but it's still low-double digits as we said at the outlook call. And most important I think is we're still confident that our VII will come within the range that we gave at the outlook call off $800 million to $1 billion. Undoubtedly we'll be weaker. Private equity will be weaker in the first quarter reflecting the fourth quarter markets, but we're confident overall still.
Okay. Thank you.
Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead. Jimmy Bhullar, your line is open. Check your mute button.
Yes, hi. So I had a couple of questions. First on just as you mentioned new money yields going up throughout last year. And if you can talk about where your new money yield sit right now versus the rates that rates on the bonds that are holding off just to get an idea on if you're close to a point where you think spread compression will begin to abate in the business?
Well, if you look at the trend, the trend continues to be positive. And I think we've had four quarters in a row of rising new money yield. But remember what happened in -- sort of, late in the fourth quarter to rates have fallen again. Where we would stand though is we're still confident that as rates continue to rise, we're going to be approaching that breakeven threshold. But for now, we're still looking at kind of 25 to 100 basis point for each quarter just given the volatility in some of the runoff assets. But we're getting closer, we're not there yet.
Okay. And then on the international business, you've had sort of few dispositions recently with the Mexico Afore and the U.K. Wealth Management business. As you're looking at your international franchise overall, are there other pieces that you're looking to sort off deemphasize or are you comfortable with -- or is most of the restructuring effort already done?
Jimmy, we can't say we can look at our overall portfolio businesses in terms of where were going to put more capital and where we're going to put less capital. And even in some cases as you've mentioned selloff or disinvest in those areas. So, that's an ongoing process. But if there's anything there that we come to conclude on, we'll certainly let you know.
Okay. And then just lastly if I could ask on the MetLife Holding segment, the fact that a lot of the business is in New York, I think makes it difficult to sort of transact either insurer or sell it. Has anything changed the way you think that there's an opportunity for you to offload that exposure?
We are careful with that business, and its cash flow characteristics, but we always look at opportunities to create value for the shareholders. So, it's an area that we have spent a great deal of time looking at in the past and we continue to do so and we'll continue to do so going forward. If we find a way to transact in that area that's beneficial to our shareholders, we certainly will get give that full consideration.
Thanks.
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Hi, thank you. I know you've touched on this part of the couple of the outlook pieces already. But I guess broader question. Is there anything on the 4Q results that changes your view on the 2019 outlook for any of the businesses? Or do you view all of the fluctuations this quarter as things that we would fall within your range of normal expectations?
Erik its John. Yes, that's correct. We would view this as this quarter -- this quarter does not impact our outlook for 2019. I think the only place I would just refer back to what Steve Goulart said is maybe there are some pressure on returns, but we think return for the year is still within our outlook range.
Got it. Thank you. And then can you comment on the competitive dynamics in the group business and how they're affecting sales in persistency trends? Maybe how was your experience around the year on renewals?
Sure. Erik, its Michel. So, it's a competitive marketplace I would say, in particular, in the dental space. But we are -- I would say, we are winning our fair share of business. I think 1/1/19 sales and renewals are in line with expectations. And we continue to see excellent momentum in our voluntary business as well. And that's really making up for some of the weakness that we see on the dental front, where we are really continuing to hold our ground in terms of discipline on pricing. But overall, I would say, sales and persistency are in line with expectations.
Thank you.
Your next question comes from the line of John Nadel from UBS. Please go ahead.
Good morning. Thanks for taking my questions. Maybe just a broader question, John. Capital markets impacts sort of broadly speaking in the fourth quarter. Do you have any estimate on what markets -- I mean, I know it was mentioned that Japan, Korea, obviously the U.S., etcetera. Can you just give us a sense for what kind of impact that had on your earnings in the fourth quarter? And how should we think about the 1Q balances that sort of go into your point of recovery?
Good morning, John. Yeah. As you said, there's been quite a bit of recovery already in the first quarter. I think we’re close to 9% year-to-date, something like that. And only 1 point off of where the S&P was at outlook call, I believe is correct. In terms of the – in the fourth quarter I would estimate the impact to be around $0.06. About half in the U.S. and half outside. So I don't know if that helps frame the fourth quarter.
And then as you said, I think – but I don't see that impact continuing as our view right now, particularly given the recovery that we've seen so far. The only place that we would -- as Steve Goulart highlighted, there'll be some pressure in the first quarter that we think will – that we will recover and get to a return that keeps us within the range for the full year for PAI.
Okay. And then, maybe a little bit premature, but I guess a question for, Michel. As you're taking over the reigns, what are your priorities? And how should investors be thinking about those priorities? I know, Steve has characterized and thanked investors for some patience, given the transformation and some de-risking. How are you going to reward that patience as you think about priorities over the next one to two years?
Yeah. Thanks, John. So, first of all, let me say that I'm excited for the opportunity to lead MetLife. And continue degrade value for our customers and shareholders alike. Let me tell you what will not change under my watch and that's my commitment to MetLife's core goals of capital efficiency, strong risk adjusted returns and profitable growth. Like Steve, I believe that excess capital above and beyond what is required to fund organic growth belongs to our shareholders and should be used for share repurchase, common dividends, or if and when it makes sense, strategic acquisitions that clear our risk-adjusted hurdle rate.
I believe that, as Steve said, MetLife is at an inflection point. And while much has been accomplished in de-risking our business, we still have work to do to accelerate revenue growth further optimize our business and product portfolios and strengthen expense discipline. Obviously, I'm now in a transition phase, so I look forward to share more post May 1st.
Appreciate that. Thanks so much.
Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead. Elyse Greenspan, your line is open. Check your mute button. Okay, we'll move on. Your next question comes from the line of Alex Scott from Goldman Sachs. Please go ahead.
Hi, good morning. First question I had was just on, when I think about the sales growth in Asia and the FX annuities you saw, could you talk a little bit about like what makes that product different from your decision to exit the retail annuities business in the U.S? I mean, clearly it's a different type of product, different regulatory regime, different geography. But I guess any color you can provide that would kind of give us more comfort that that product will ultimately have much better economics than the outcome when you are ramping up on sales of annuities in the U.S.?
Alex I know you were at the Asia Investor Day, and we went into this in fair amount of depth. And certainly these products from a risk-adjusted return perspective are very attractive. And then we talked about the compelling value proposition, not just from a customer perspective from a MetLife perspective as well, because much of these products go through the bank channel and a lot of them are single premium, a vast majority of our sales are actually single premium.
And we take advantage of our strength, which is our investment in the U.S. dollar portfolio. We leverage that combined with our distribution power. That's driven been pretty much our success. And if you look at the category as a whole that's been growing and our share has been growing because we have a very strong value proposition. I talked about the market value adjustment feature, also talked about the constant repricing that we look at it pretty much on a biweekly basis. So this is a very actively managed portfolio. And we're very happy with that.
Okay. That's helpful. And then my follow-up just on the U.S. group business. Can you give us an update on year-end renewals? Any insight on competition pricing et cetera?
As I mentioned earlier, very much in line with expectations. We're getting the renewal action that we are seeking in the market and persistency is in line with expectations. So it is a competitive market. And our pricing reflects that. But again nothing to point out in terms of deviation from what we expected or what we discussed on the outlook call.
Thanks.
Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning and thank you for taking my question. Just a follow-up on Asia sales on different directions. In Other Asia you talked about the regulatory changes in Korea hurting your sales in that segment. But I assume you have -- your sales in China is probably better. So I was wondering if you can provide some color in terms of how much the challenges in Korea hurt your Other Asia sales and then also the other components of the other countries in the region in terms of your sales prospects?
Sure. Again if you take Asia segment as a whole, we've really done well, 11% year-on-year growth for Asia segment. Now, if you take the fourth quarter, Japan obviously, delivered a stellar performance, 19% year-on-year for the fourth quarter, 13% down on the Other Asia segment leading to a 5% overall growth that John mentioned where pretty much from all of it comes from the Korea shortfall. Certainly, we've got some smaller markets, but they are certainly growing healthy. No issues on China, China has, I think, posted strong growth as well.
And the challenge with Korea is that one of our products which is our lead product has been impacted by the regulatory change on commissions where we're working very hard on repricing it and reintroducing it to the marketplace with additional marketing efforts. So, for looking forward to next year -- for this year, I think we'll be fine. I just wanted to reaffirm the outlook guidance of mid-single-digit growth for 2019.
Thank you. And then shifting gear to Group Benefits, in the prepared remarks I think you talked about dental was a little bit unfavorable in the quarter. I guess that's a little bit surprising given the seasonality pan of that particular product line. I was just wondering if you can elaborate a little more in terms of what you saw in the fourth quarter.
Yes. Sure Humphrey. So, as you said typically the fourth quarter, we see favorable utilization in dental because a lot of the insurers reached their maximum limits, which lowers utilization. However, this year, we had a very low first quarter, which typically tends to be high -- I mean 2018. So, that might have impacted the fourth quarter results. As I said, we've analyzed this; we see no issues with any particular block, service, or area here. So, this would indicate that this is not a beginning of trend, but we're obviously keeping a close eye on the situation.
Thank you.
And your final question today comes from the line of John Barnidge from Sandler O'Neill. Please go ahead.
Your Property & Casualty business has meaningfully improved the underwriting. How much rate are you currently pushing on auto and also on home?
Yes, hi John. We think that the industry as a whole has taken about 2% to 3% on auto over the last 12 months. We've taken slightly higher rate action than that. Going forward, we think that we're going to be more in line with industry. And I would say the same on homeowners. We think we're going to be in line with industry going forward.
If you've been pushing more rate than industry previously and now you're going back to industry levels. Does that apply possibly greater share you're going to take or planning you're going to take?
Well, we've -- in our outlook call, we provided -- we increased our outlook for PFO growth in 2019 to 2% to 4% and we think that's going to grow further to -- between 5% and -- over 5% in 2020 and beyond. We're also making important investments in our P&C business. We are re-platforming that business which -- and we are rolling that out in 2019 and 2020. So we think that that's going to give us also some competitive advantages in the market which will help our top line growth going forward.
Great. Thank you for the answers.
Thank you very much. That's our last question. We look forward to speaking with everyone throughout the quarter. Bye-bye.
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