Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Metlife fourth quarter 29.
<unk> earnings release conference call.
This time, all participants are in 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 statements 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 Metlifes 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 Dot Com and our earnings.
Release, and in our quarterly financial supplements, but you should review.
Joining me this morning on the call or Michel Khalaf, President and Chief Executive Officer, and John Mccallion, Chief Financial Officer.
Also year 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 slide 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 QNX session that will extend to the top of the hour in fairness to all participants please limit yourself to one question and one follow up.
That.
We'll turn the call over to Michelle.
Thank you John and good morning, everyone.
Headline from our financial results that Metlife how does.
Solid underlying fourth quarter, and a very strong year.
Our track record off consistent execution continues and this leadership team is committed to being a top performing company.
And the fourth quarter off 2019, we delivered adjusted earnings of $1.8 billion compared to $1.3 billion and.
The fourth quarter off 2018.
On a per share basis.
Adjusted earnings Rose to $1.98 cents from $1.35 cents a year earlier.
Net income in the quarter was $536 million driven by mark to market losses on interest rates related derivatives that we hold.
To protect our balance sheet.
Backing out the impact of notable items adjusted earnings per share came in at one dollar on 53 cents up 21% year over year.
The positive drivers included market factors volume growth and capital management offset in part by higher seasonal.
<unk> expenses as we indicated would be the case.
Adjusted return on equity in the quarter, excluding <unk> other than F.C.T.A., and notables was 12.6% compared with 11.7% under prior year quarter.
For the full year 2019, Metlife delivered very strong.
Long results.
Net income was $5.7 billion, while adjusted earnings were $5.8 billion.
We spoken before about our efforts to bring net income and adjusted earnings into closer alignment.
Fixed that succeeded and 20 910 on a per share basis adjusted earnings Rose 13%.
I want to $6, an 11 cents 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's more than offset the impact of lower recurring interest.
Engines.
Across our businesses 29 gene was a year of significant achievements.
Our flagship U.S. group benefits business generated adjusted earnings of $1.3 billion nearly doubled the earnings from this business just three years earlier.
Retirement 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.
With our Asia, and Latin businesses, we delivered double digit adjusted earnings growth year over year. Excluding total notable items on a constant currency basis.
And with an investments we generated variable investment income of nearly a $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 the year when the 10 year Treasury Fella by 77 basis points are not investment yield only declined by two basis points.
Oh strong business performance drove adjusted return on equity for the year.
Excluding AOCI <unk> other than 58 and notables to 13%.
20 basis points from the prior year and right at the midpoint of our target range.
Book value per share, excluding AOCI <unk> other than FCTA grew nearly 10% to $48 a 97 cents.
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.
Consistent execution and 2019 created significant shareholder value.
Ill robust free cash flow generation enabled us to returned roughly $4 billion to shareholders and the form of common dividends and share repurchases.
We deployed another $3.6 billion off capital to support new business.
Internal rates of return comes to be above our hurdle rate.
And growing appreciation of our company's trends that to a total shareholder return of 29%.
The strategic seems a focus simplify and differentiate that we outlined at our December Investor day, where clearly on display and 2019.
And will drive our decisions in the years ahead.
On focus we have reduced our footprint post the article acquisition from six to six markets to 44 and in 2019 announced the sale of our Hong Kong business. We continue to look at our portfolio through the landfill strategic fit Undeployed capital to.
So that can meet or exceed our risk adjusted hurdle rate, we wouldn't be justice disciplined when it comes to optimizing our portfolio any transaction must be in the long term interest on metlife offering either compounding the economics or a significant reduction in our risk profile.
On simplify we will over deliver.
On order, you see I cost saving target and going forward.
Often inefficiency mindset that would create an additional $1 billion of capacity to fund innovation and growth over the next five years.
On the French eight we would continue to capitalize on those competitive advantages that are difficult for others to replicate.
We'd be D var group benefits business in the U.S. creates unmatched value for customers and as we expand the platform with attractive benefits such as but insurance digital wells and health savings accounts, we are very well positioned to extend our lead.
In early January we gather.
100000, Metlife senior leaders at an Offsite meeting to ensure we have full alignment on our strategy.
Notably then all 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 create superior value for its people.
So its customers and its shareholders.
We have set bold aspirations for all our stakeholders.
For our customers, who are committed to building a 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 promise that 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 up Metlife.
When I look at Metlife recent history, I see a 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 an inflection point I spoke about last year, where we could pivot to focus on responsible growth.
No. We are in the next horizon, well, we have fully transitioned to leveraging our competitive advantage.
On to just to win in the marketplace.
Which brings me to our aspirations for our shareholders I covered these in detail at Investor Day, and we'll highlight the key points today.
First we will achieve and adjusted return on equity of 12% to 14%.
And we will dispensed with serial.
<unk> expense programs in favor of inefficiency mindset that will generate $1 billion off additional capacity over five years and third we will maintain a two year average free cash flow ratio of 65% to 75%, which will generate $20 billion off deployable cash over the next five years.
In closing we are pleased to deliver another solid quarter and very strong here that at all record off consistent execution.
We believe that Metlifes 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.
Hello.
Our track record and supported this thesis is equally clear.
$900 million and projected expense savings.
Healthy growth in our most attractive businesses.
And consistent delivery of free cash flow and our 65% to 75% range.
With that I will turn the call over to John.
On mccallion to cover our fourth quarter on full year performance in more detail.
Thank you Michelle and good morning, I'll begin by discussing the Fourq you 19 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement.
Starting on page three.
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 and adjusted earnings of $1.8 billion.
This variance is primarily due to net.
Relative losses, resulting from the increase in interest rates during the quarter.
For the full year net income of $5.7 billion, largely myriad adjusted earnings of $5.8 billion.
The results in the investment portfolio and hedging program continued to perform as expected.
Notable.
Those are shown on page four and highlighted in our earnings release in quarterly financial supplement.
First favorable tax items in the fourth quarter increased adjusted earnings by $475 million after tax or 51 cents per share.
I will provide more details on these tax item shortly.
Second.
As a result of the favorable tax items. There was it related release of interest on tax reserves of $64 million after tax or seven cents per share.
Which is a reduction in and recorded through direct expenses as opposed to income taxes.
Finally expenses related to our unit.
Initiative decreased adjusted earnings in the quarter by $119 million after tax or 13 cents per share.
For the full year these costs were $332 million or 35 cents per share.
As a reminder, fourth quarter of 2019 is the last quarter for this incremental spend.
And therefore, there will be no you see I related costs in 2020.
Excluding notable items in the quarter adjusted earnings were $1.4 billion or $1.53 cents per share.
Page five provides further detail on the notable tax items in the quarter.
First we had tax benefit of $317 million related to a settlement with the IRS regarding the U.S. tax reform repatriation transition tax.
This settlement resolve uncertainty regarding the taxation of dividends from foreign subsidiaries paid prior to us 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 UK investments 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 six 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.
<unk> percent on a constant currency basis.
On a per share basis adjusted earnings excluding notable items were up 21% on both reported and constant currency basis.
The better results on EPS basis reflect the cumulative impact from share repurchases.
Overall positive year over.
Your 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 claim severity.
The interest adjusted benefit ratio for Nonmedical health was 71.4%, which is below our annual target range of 70% 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 topline with adjusted PFS in the quarter up 6% and full year sales up 11% led by growth.
In voluntary products.
Retirement income solutions or our as adjusted earnings were down 10% year over year.
Driven by lower investment margins.
Our asset investment spreads were 106 basis points in Fourq, you 19, and while down 24 basis points year over year spreads are up four.
As points sequentially.
For the full year 2019 investment spreads were also a 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.
Our as adjusted Pia Pfos were up $2.6 billion year over year, driven by strong pension risk transfer deals of $2.5 billion in Fourq you 19.
As announced last week. This includes a $1.9 billion transaction with Lockheed Martin, which covers approximately 20000 retirees and beneficiaries.
The pipeline for Prts remains strong and we expect this to continue into 2020.
Property and casualty or PNC adjusted earnings were down 75% versus Fourq you 18.
Primarily due to unfavorable underwriting in the quarter. The overall combined ratio was 100 at 1.6.
Again, driven by higher severity within auto bodily injury.
Including approximately six 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 regard to the topline PNC adjusted Pfos were up 1%.
While sales were down 6% versus Fourq you 18.
Moving to Asia, adjusted earnings were up 21% and 23% on a constant currency basis.
Positive year over year drivers were favorable volume growth as.
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.
Fixed annuity products, which are primarily sold through bank channels had another challenging quarter, given the contraction of the bank market.
In addition, our age sales in Japan were down 10% year over year.
Which is a function of changes in the tax laws.
She there with certain products, we expect Japan sales to remains soft through the first half of 2020 before recovering.
Other Asia sales were down 3%, but a 5% excluding the impact from our divested Hong Kong operations driven by growth in Korea.
Latin America adjusted earnings were up 18% and 21.
Present 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 children and tie.
These were partially offset by the less favorable underwriting compared to Fourq you 18.
Latin America adjusted.
Those 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% in 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 PFS 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.
A life interest adjusted benefit ratio was 55.
5.5% inline with seasonal expectations and favorable to 58% in the prior year quarter.
For the full year 2019, the life interested just did benefit ratio. Excluding notable items was 52.9% comfortably within the target range.
Corporate and 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 and others adjusted loss, excluding notable items was $608 million, which was within our 2019 guidance range of an adjusted loss of 552 $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 seven to discuss variable investment income in more detail.
This chart reflects our pre tax.
Variable investment income in 2019, including $327 million earned in the fourth quarter.
This was another solid performance for variable investment income.
Private equity portfolio, which is accounted for on a one quarter led had another solid quarter.
In the quarter also contain 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 VI target range remains 900 million to $1.1 billion with regards to recurring investment income our new.
Mining 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% and for Q 18.
Lower interest rates have pressured this relationship.
As we've noted previously.
We would not expect parity to occur until we have a sustained U.S. tenure treasury yield of roughly 3% to 3.25%.
Turning to page eight this chart shows our direct expense ratio from 2015 through 2019.
We have made consistent progress towards achieving.
Are you see I 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.
For Q 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.
Bench 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 for Q expenses, we're quite pleased with the overall progress that we have made in driving down the company's direct expense ratio as.
Mr aided 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 I'll discuss our cash and capital position on page nine.
Cash and liquid assets at the holding companies were approximately $4.2 billion at December 30, Onest, which is up from $3.5 billion at September Thirtyth.
$700 million, increasing 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 in 2019 free cash flow ratio was 72% and within our 65% to 75% guidance.
We remain committed to maintaining a 60, 575% two year average free cash flow ratio over the near term.
This target still holds with a 10 year treasury between one and a half 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.
At our combined any IC RBC ratio.
We will be above our 360% target.
For our US 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.
$1 from the prior year, primarily due to lower V.A. rider reserves and improved underwriting results.
These were mostly offset by the impact for prior year dividend from an investment subsidiary.
We estimate that our total U.S. statutory adjusted capital was approximately $18.6 billion as.
December 30, Onest 2019 up 1% compared to December 30, Onest 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 Thirtyth.
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.
Distant level of results in 2019.
We grew book value per share by 10% year over year, while generating an adjusted our we have 13% excluding notable items.
In addition, our cash and capital position as well as our balance sheet.
Remains strong and resilient.
Finally, we are.
Confidence the actions we are taken 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.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press one than zero on.
Your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using the speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question you may plus one then zero at this time and one moment. Please for your first question.
Your first.
Question comes from the line of Andrew Klingerman from Credit Suisse. Please go ahead.
Hey, good morning.
My first question is around the group benefits. So you mentioned that.
FFO up 6% sales up 11, the life benefits ratio was 85 four against.
Guidance of 85 to 90 in the non Med was 71 for under this 72 to 77, so it's clearly not.
Phenomenal and it and it seems like quarter in quarter out Youre 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.
Good morning onto its Rami here, Hey, Rami Hey.
Phenomenal I think we would say, it's a very strong quarter for us and would extremely pleased with those results.
To give you some.
Fixed around your question if you think about this into Twentytwenty and beyond.
I would say few things one is that we're 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.
Vantages that we continue to press.
If you think about the specific results from the underwriting ratio.
I'd 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.
First quarter typically.
Being bid elevated.
The other thing you would you think of as an insurance business is the results that were 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.
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.
On the other thing I would.
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 us for further growth.
Great. Thank you Rami and then just on Ri, yes.
No I guess.
Spreads were within the.
Hi, good range of 90 to 115 that when those six as you said.
Earlier, John and.
I guess could you share with us what the annual portfolio turnover is on on that business and what kind of new money yields you getting as you move forward against.
Portfolio yield.
Good morning, Andrew It's John.
Yes, I would just maybe I'll start with the beginning part there and just say of this this is consistent with what we expected and we mentioned previously on the third quarter call. You know, we started to see a bottoming of spreads.
Lately due to.
To the anticipation of the benefit of too.
Fed rate cuts and.
Thats kind of starting to get fully absorbed in in the market and so that was one and also we saw the dislocation in the repo market subside. So.
Yes, so we've seen some bottoming of the kind of spread.
Line happen over the last couple of quarters in.
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 RMBS book I don't think we have that handy here.
But again.
Yeah.
You can talk to you know to IR offline it's.
We talk about overall this the role of reinvest.
With regards to rage 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 our.
What we said which is that.
The spreads here has started to bottom.
You see the benefit of two full rate cut 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 and it and it does take some time for that to fully wrecked get recognized because you know three month LIBOR or does it has to take a little a few months before it's fully recognize there. So let's see that's good color I'll just add a little color Steve grew our good morning, Andrew but just reminding you of our capital markets business, which I.
I think is where you're going without question.
In general it is a shorter duration business and there isn't a lot of mismatch. So even when there is rollover on the asset side. We're also managing rollover on the liability side. So it's a reasonably match business and that protects us.
Okay. Thank you.
Your next question comes from the line of lease Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks. Good morning, My first question on it seems like there were some good PR team all men.
Here, if you could just give us a little bit of an update on the sales pipeline and what you're seeing on what that.
Nathan I guess interest rates went up.
Fourth quarter, and then they've been down this year is that have you seen any impact on interest rates on the pipeline there.
Good morning lease its rami here.
Well clearly very pleased with our PRT results, both for the quarter and for the year.
The quarter was a two and half a billion dollar.
Turn as Michelle mentioned, it's 4.3 billion dollar you a year for us.
Remember, we're focusing for 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.
Back to the size of these plans that's the part of the market, where we have the competitive advantage with respect to lower rating or investment capability in our our scale of the balance sheet.
And when you think about those plans they are on a d. risking journey right. So this is not something that's a trade that they make overnight.
<unk> the risking 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 over all L.M. position and it depends on their equity on location. 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.
Okay. Thank you and then my next question within on your P.N.C., That's nasty class called out on higher Sir higher.
Trends in the corridor, you know impacting both you know current accident here as well as prior accident here is if you couldn't chest on you know give a little bit more color on what you're seeing and you know as you think at 2020 dies on you know getting dust getting within your guide assume that the severity trends on my main elevated.
At least for part of this year.
Sure. So clearly it's been a challenging quarter for the P.N.C. business and the headline here as you've mentioned is is a bodily injury. So very t. and as you know it's a trend that we're seeing in the marketplace.
We so some initial indication of deterioration in third quarter, and we took some reserves strengthening then and those indications worsened in the fourth quarter, which were into the additional strengthening and that's a combination of P.U.I.D.'s as well as out of periods strengthening for 19 as we look for.
Forward I can tell you were looking at these trends very closely we're pulling arrange of leavers, which are with our disposal a 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 O. two 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 the arrange so if you recall doesn't 93 298 for the or to business.
Okay. Thank you and John want just click numbers question on that derivatives loss and a quarter. You said that that was driven off at the moment interest rates given that interest rates have been down to star 2020 shall we think about that rehearsing and at first quarter. This year.
Directional incorrect yes.
Thank you.
Your next question comes from the line of Tom Gallagher from I.S.I. Please go ahead.
Morning, just one follow up on property casualty the current accident your auto a loss ratio was 82%.
And.
Guess the question is is that.
Is that a just four to pick or is that a current accident your catch up for the prior quarters as well like what would it better trend loss ratio Bay, because I assume it's not one o. seven combined.
The way, we should think about normalize heading into 2020.
Yeah, I mean, if you look at the fourth quarter. If you exclude the P.Y.I.D.'s in the courts or I would say you remember that the fourth quarter is typically seasonally higher for auto for us. So if you think about that the fourth quarter.
Excluding P.U.I.D. is it's 98.9 and again does some elevation because of seasonality here.
Gotcha and then just a question on on capital management, So by buybacks were lighter this quarter.
And your buildup of cash at the holding company is now 4.2 billion. The so that slightly above your targets for the first time. It awhile any any reason why dolled up back this quarter, despite having the excess cash to use.
Yeah hit on its Michelle.
You know as we mentioned we are comfortable with the three to 4 billion a buffer the holdco slightly above this for the fourth quarter, you know, mostly I would say timing related in terms of dividends to the hold cool.
You know I would I would look at our sort of gosh bye bye bye activity into fourth quarter in tandem with the third quarter.
You know we had mentioned done that we had pulled forward some of the sheer repurchases we tend to be unfortunate <unk> in that respect. So you know nothing more to read into it out I would say.
And Michelle just as a follow up or you. How are you thinking right now in terms of the balance or tradeoffs between every day and buybacks.
You know change also in terms of our capital management philosophy, I think we talked before about.
<unk>.
Many opportunities how we view those you know strategic <unk> creative.
And you know we sort of also consider alternative uses of Capitol. So I would say no change in terms of our capital management philosophy.
Access capital belongs to the shareholders and ups and I'm, an activity would return it into form of dividends and share repurchase.
Thank you.
Your next question comes from the line of Jimmy Bueller from J.P. Morgan. Please go ahead.
Hi, good morning.
First on the of what you're seeing in terms of the operating environment, and Latin America business and specifically in Chile, very good feeling sales or weak. This quarter. There's also a lot of talked about.
Political uncertainty and.
Yeah and.
Yeah.
So let let me start.
<unk> December the the marching through the brother.
Everybody.
But but I have to say, it's getting better remember that summer <unk>. This lower D.V.D., John or if everybody will need to see what happens in March.
When do you are really starts there, but so far this also environment has to be.
Much better.
In terms of the business.
We have nothing is significant <unk> I don't know where business through January.
From from the situation there.
But <unk> circumstances may change of course.
<unk>.
So let me talk about the the reform, which I think it's your question.
The government finally managed to present a project for pension reform.
They were able to make it to be approved.
House in the lower number.
No no you have to go to the Finaid.
<unk> is there's no there's no <unk> marched to see what happens in the Senate.
<unk> <unk> <unk>.
<unk>, what's gonna happen, if <unk> that that will be more changes right to be introduced before.
<unk> <unk> ends up you know enacted after law, but.
We can say what is different but based on the Fox no today, which is <unk> being discussed.
It's pretty much real fun us I mean, but do the region is if I would say it's a good.
You said <unk>.
Stepped forward for the people <unk> in terms of the kind of <unk> very intrusive and hopefully will help going to help to ease the the photo he plays on there either.
Pool, So we're really support the government binge on.
<unk>.
Potential impact on your business of the proposal as you see it differently.
I was it stands today is not another big right now I have to say, we got to be brilliant because we don't know how it's going to end still has to go through <unk>.
<unk>, but diversion Daddy didn't discuss today.
We think is a is good for the people on the impact on our business is not that big.
Okay.
And then if I could have one more John.
On the changes in accounting that are coming through and 2022 on long duration contract.
<unk> any sort of potential impact on your business either has anybody else are you expecting to start quantifying more of them back to the next few borders or would you wait till you're even closer to the rules being implemented so maybe that's here.
Yeah hard to tell in terms of timeline at this point, we're still working through it. So you know we don't really have a projected or estimated timeline in terms of when we would.
You share that information.
Thank you.
Your next question comes from the line of Ryan Kruger from K.B.W. Please go ahead.
Just from reinsurers on my life holding at the December Investor Day can you give an update on that and I still seeing the same amount of interest following the decline in in interest rates this year.
Yeah.
<unk>.
Beginning even question cut off but I think it had to do and just any updates on just activity from Reinsures with regards to holdings is that right.
That's right yeah.
Have there has have you seen any impact from lower interest rates as well.
Yeah, I'd actually were maybe refer to the way that Rami describe <unk>, it's not something that they can turn on turn off this is like a given the <unk> the size and Ah complexity, sometimes it just requires for people to spend time on these things for some time, so I I don't think they react to movement and interest rates as much.
So I would say it's no change at this point.
It's you know, there's still kind of a good supply of capital out there, but I'd say the bit s. bread is still fairly wide, but there's a number of folks that have entered the space over the last few years and and we're seeing that so.
Thanks, and then unexpected there there's a lot of seasonality I guess.
In 2019 can you give us any sense of I guess, how to think about normal seasonality with with the direct expense ratio.
Yeah, I will try.
And and I and make that point only because we we have talked about that they're 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 costs as I mentioned in my opening remarks for the enrollment of group customers and and you know we don't get those premiums in until the following year. So there's 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 four q. on top of that seasonality. There was some additional one time costs in the quarter that we would not expect to recur we had some elevated employee benefit costs remember in the in the earlier three quarters, we had.
Employee benefit costs going the other way, so they've kinda washed or or kind of neutralized. Each other out and then we also had some additional corporate initiatives stand in the quarter in four Q. that was elevated. So you know we estimate 50 to 60 basis points above what normal to.
Friend would be for the fourth quarter.
And and so you can you can kind of think of that as what what we had expected in the corridor and the additional one time cost that came through.
At it.
Your next question comes from the line of Humphrey Lee from Bellingham Partners, whose go ahead.
Thank you the money and think of what they hear my question just want to follow up on that expands so like looking back, especially.
<unk> benefits just looking back I don't really see the the seasonality that you talked about three to four Q. and then obviously this year, we see that the the buttons of it in the fourth quarter. So it's just wondering is there anything 'cause structurally different this year compared two years past.
Well remember also I mean, we've we've been growing a lot right in the last few years. She you're seeing there is a kind of a pick up as a result of just sheer growth.
But I I I would say that's the case you know we can we'll look again, but it's 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 employed benefit costs at offset that so that the the volatility and some of the the market impacts from unemployed benefit costs can can impact the segments as well. So you might see a little upset but usher you can be assured it's in there okay.
Got it and then just a follow up question on a tax rate. So I think you're prepared remarks, you talked about the effective tax rates was 18.5% I'm a little bit struggling to get to that and number of based on data texts items that you call out I think you may have some additional tests items to buy the maybe if you can help me to think about like the the tax rate how what country.
To to to the recorded number and then we're <unk> effective tax rate.
Yeah, I think if you. So if you adjusted notable items you come to something closer in in the Thirteens in terms of effective tax rate. So we did have some additional positive items that that we're not called out as notables just because the size and color kind of approach to notables anything over a 50 million impact. So it's it's a sin.
You have a few items. One is there were some revision to the rules on the guilty tax in the fourth quarter and I think it was early December maybe late November.
Which ultimately provided companies the ability to use some additional foreign tax credits Oh, so that came through in the fourth quarter and then the remaining amount is effectively just some returned to provision true ups in some other your end tax estimate refinements. So have you exclude those item. It's it's call at 65 million.
Impact you get to 18.5% and so.
So that's that's how you reconcile the the quarter E.T.R.
Thank you.
Your next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
John Barnidge. Your line is open. Please go ahead.
Yeah. Thanks, sorry, I was muted have you seen any change in the operating environment in a me a following the favorable U.K. election, and subsequent Brexit certainty.
Hi, John.
I would say not much I mean, our our business in the U.K. is mostly employee benefits on the individual protection.
So I wouldn't I wouldn't say that we soon and major I, there's a there's an improvement than the overall sent them until I would say posted auctions and now with Brucks that sort of you know not necessarily behind the U.K., but at least decided but.
No no impact to our business that I that I would call no.
Okay, and then come back to the auto adverse development, where they're specifics dates this came from and what levels of rate are you going to push to correct. The specifically within a lotto.
Yeah, I mean, we we there are there clearly some skew there and there are some states, where we see where we so higher severity than than others. So there is that it's q. there and we're clearly focusing on the states, where we writing the most of them out of business in terms of rate taking so if you look at over 2019, we took.
<unk> present in rate the cross the book on average over the last 90 days, we've accelerated the rate action for 2020, So we've taken under 2% in rate just for Q1 off 2020.
And we're clearly going to be watching this careful you know we expect to take additional rate as a as warranted.
And I'd now like to turn the call back to Michelle whole lot for any closing comments.
So let me close this meeting by thanking everyone for joining US we're pleased with our strong 2019 results and are growing track record off consistent performance, having sat dot 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.
Soon.
Ladies gentleman that does conclude your conference for today. Thank you for your participation in for using A.T. and T. Teleconferencing may now disconnect.
Yeah.
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