John D. McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel, and good morning. I will start with the 4Q '22 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions, and more detail on our near-term outlook. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in 4Q of '22 was $1.3 billion, or $88 million higher than adjusted earnings. Net investment gains in the fourth quarter were primarily driven by real estate sales, which were partially offset by losses on the fixed maturity portfolio due to normal trading activity in a rising rate environment. Credit losses in the portfolio remained modest. In addition, we had net derivative gains, primarily due to the weakening of the U.S. dollar in the quarter. For the full year, net derivative losses accounted for most of the variance between net income and adjusted earnings, primarily due to higher interest rates in 2022. Overall, our hedging program continues to perform as expected.
On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment. Excluding $140 million of notable tax items that were favorable in the fourth quarter of '21 and accounted for in corporate and other. Adjusted earnings in 4Q of '22 or $1.2 billion, down 28%, and down 26% on a constant-currency basis. Lower variable investment income drove the year-over-year decline, while higher recurring interest margins and favorable underwriting were partial offsets. Adjusted earnings per share were $1.55, down 23% year-over-year, and down 21% on a constant-currency basis.
Moving to the businesses, starting with the U.S. Group benefits adjusted earnings were $400 million versus $20 million in 4Q of '21, primarily due to significant improvement in underwriting margins, aided by lower COVID-19 life claims, as well as higher volume growth. This was partially offset by less favorable expense margins year-over-year. Group life mortality ratio was 87.6% in the fourth quarter of '22. in the middle of our annual target range of 85% to 90%. Regarding non-medical health, the interest-adjusted benefit ratio was 69.4% in Q4 of '22, slightly below its annual target range of 70% to 75%, and below the prior year quarter of 74.2%. The non-medical health ratio benefited from favorable disability severity while dental was in line with expectations.
Turning to the top-line. Group benefits adjusted PFOs were essentially flat year-over-year. As we've discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q4 '21 versus Q4 of '22 resulted in year-over-year decline in premiums from participating contracts, which dampened growth by roughly six percentage points. The underlying PFO increase of approximately 6% was primarily due to solid growth across most products, including continued strong momentum in voluntary. For the full year, group benefits adjusted PFO growth was 3% while underlying growth, excluding excess premiums from participating contracts in 2021 versus 2022, was up 5% and within the 2022 target range of 4% to 6%. Retirement and income solutions, or RIS, adjusted earnings were down 40% year-over-year. The primary driver was lower variable investment income, mostly due to weaker private equity returns. This was partially offset by favorable recurring interest margins year-over-year. RIS investment spreads were 96 basis points and 112 basis points excluding VII, up 21 basis points versus Q4 of '21 and up 11 basis points sequentially, primarily due to income from in-the-money interest rate caps. RIS liability exposures were down 1% year-over-year due to certain accounting adjustments that do not impact fees or spread income. That said, RIS had strong volume growth, driven by sales of 23% in 2022. This was primarily driven by pension risk transfers and stable value products. In addition, we had a record sales quarter for structured settlements, demonstrating the strength of product diversification within RIS. With regards to PRT, we completed six transactions worth $12.2 billion in 2022, a record year for MetLife. And we continue to see an active market.
Moving to Asia. Adjusted earnings were down 63% and down 62% on a constant-currency basis, primarily due to lower variable investment income. In addition, we had a write-down of a deferred tax asset in China as it was determined that the accumulated tax losses were unlikely to be utilized within the required five-year statutory period. The write-down of the DTA reduced Asia's adjusted earnings in Q4 of 2022 by $34 million after tax, and was accounted for in net investment income due to the equity method of accounting treatment for our China joint venture. While Asia's underwriting was modestly unfavorable versus Q4 of '21, we saw a significant sequential improvement due to lower COVID claims in Japan. Asia's key growth metrics remained solid as general account assets under management on an amortized cost basis grew 4% on a constant-currency basis, and sales were up 12% year-over-year on a constant-currency basis, primarily driven by FX annuities sold through face-to-face channels in Japan.
For the full year, Asia sales were up 11%, exceeding its 2022 guidance of mid-to-high single digits. Latin America adjusted earnings were $181 million, up 45%, and up 51% on a constant-currency basis. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19 related deaths in Mexico were down significantly year-over-year. In addition, the Chilean encaje, which had a positive 6% return in 4Q '22, versus 4% in the prior year, and higher recurring interest margins, were positive contributors. These two favorable items were partially offset by lower variable investment income year-over-year. LATAM's top-line continues to perform well as adjusted PFOs were up 20% year-over-year on a constant-currency basis and sales were up 22% on a constant-currency basis, driven by growth across the region. EMEA adjusted earnings were $70 million, up 67%, and up 112% on a constant-currency basis, primarily driven by favorable underwriting versus Q4 of '21, which had elevated COVID-19 related claims, particularly in the U.K. This was partially offset by less favorable expenses year-over-year. EMEA adjusted PFOs were up 2% on a constant-currency basis and sales were up 13% on a constant-currency basis, reflecting solid growth across the region.
MetLife Holdings' adjusted earnings were $208 million, down 57%. This decline was primarily driven by lower variable investment income. In addition, less favorable expense margins and adverse equity market performance also reduced adjusted earnings year-over-year. Corporate and other adjusted loss was $219 million versus an adjusted loss of $177 million in the prior year, which excludes favorable notable tax items of $140 million. Higher taxes and lower net investment income were partially offset by lower expenses year-over-year. The company's effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits, primarily related to the settlement of an IRS audit. Excluding these favorable items, the company's effective tax rate was approximately 22% within our 2022 guidance range of 21% to 23%.
On Page 5, this chart reflects our pretax variable investment income for the four quarters and full year of 2022. VII was $24 million in the fourth quarter. The private equity portfolio, which makes up the bulk of the VII asset balances, had a negative 0.3% return in the quarter. As we have previously discussed, private equity is generally accounted for on a one quarter lag. For the full year, VII was $1.5 billion, below our 2022 target range of $1.8 billion to $2 billion. Our private-equity portfolio had a positive 7% return in 2022, a solid performance in comparison to the public equity markets with the S&P 500 down 19%. While VII underperformed in 4Q '22, our new money rate increased to 5.66%, which was 150 basis points above our roll-off yield of 4.16%.
On Page 6, we provide VII post-tax by segment for the four quarters and full year 2022. On a full-year basis, you will note RIS, MetLife Holdings, and Asia continued to earn the vast majority of variable investment income, consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-dated liabilities, which are mostly in these three businesses.
Turning to Page 7. This chart shows a comparison of our direct expense ratio over the prior eight quarters and full-year 2021 and 2022. Our direct expense ratio in 4Q of '22 was elevated at 13.1%, reflecting the impact from seasonal enrollment costs in group benefits, as well as higher employer-related costs and timing of certain projects. That said, as we have highlighted previously, we believe our full-year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. For the full year of 2022, our direct expense ratio was 12.2%, below our annual target of 12.3%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment, while continuing to make investments in our businesses.
I will now discuss our cash and capital positions on Page 8. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.2 billion at September 30 and remained above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $600 million in the fourth quarter, as well as holding company expenses and other cash flows. For the two-year period 2021 to 2022, our average free cash flow ratio, excluding notable items, totaled 68%, and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, we expect our combined 2022 NAIC RBC ratio will be above our 360% target. Preliminary 2022 statutory operating earnings for our U.S. companies were approximately $2.6 billion, while net income was approximately $3 billion. We estimate that our total U.S. statutory adjusted capital was $18.3 billion as of December 31, 2022, a decrease of 3% sequentially, primarily due to derivative losses and dividends paid, partially offset by operating earnings and investment gains.
Finally, while our Japan solvency margin ratio dipped below 500% as of September 30, we expect the Japan SMR to be approximately 700% as of December 31, which was based on statutory statements that will be filed in the next few weeks. As we have discussed on prior calls, our Japan business as well as MetLife overall does better economically in a higher interest rate environment. However, given the asymmetrical nature of how the SMR is calculated, the ratio declines in a rising rate environment as assets are mark-to-market, but not to corresponding liabilities. As a result, we executed an internal reinsurance transaction in December with our Bermuda entity, which has an economic-based solvency regime. This transaction improves the Japan SMR ratio by approximately 250 percentage points.
Before I shift to our near-term outlook starting on Page 9, a few points on what we included in the appendix. The chart on Page 15 reflects new business value metrics for MetLife's major segments from 2017 through 2021. This is the same chart that we showed as part of our 3Q '22 supplemental slides, but we felt it was worth including again for the sake of completeness. Also, Pages 16 through 19 provide interest rate assumptions and key outlook sensitivities by line of business.
Turning back to Page 9, our 2023 to 2025 outlook reflects the impacts of the new accounting requirements of long duration targeted improvements, or LDTI. While 2022 actually used for growth rate calculation to remain as previously reported on a pre-LDTI basis, in mid-April, or roughly two to three weeks prior to the reporting of our 1Q '23 earnings, we planned to provide you with a re-casted QFS based on LDTI for each of the quarters in 2022. While there would be certain positive and negative effects depending on product and segment, we do not expect the underlying run rate of adjusted earnings for the firm overall to change materially.
Now let's turn to Page 10 for further details on our near-term outlook. We assume COVID-19 to be endemic, consistent with the recent trends that we have been experiencing. We expect continued uncertainty to persist around inflation and a potential recession in 2023. Based on the 12/31/22 forward curve, we expect interest rates to rise in 2023. Finally, for purposes of the near-term outlook, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our long-term historical returns for PE.
Moving to near-term at targets. We are increasing our adjusted ROE range to 13% to 15%. This increase of 100 basis points from our prior 12% to 14% ROE range is a function of the growing impact of our mix of business and higher new business returns over the last several years, as well as the impact of LDTI. We expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings, excluding total notable items. Our direct expense ratio guidance for 2023 is being recalibrated to reflect LDTI by approximately 30 basis points to 12.6%. This captures an approximate $1 billion reduction in adjusted PFOs excluding PRTs due to the change in accounting. This is primarily related to certain annuity contracts within RIS as well as shifting certain variable annuity fees to market risk benefits, which are reported outside adjusted earnings. Since this change in accounting to LDTI will be retroactively applied back to the beginning of 2021, our previously reported direct expense ratios will likewise be recalibrated to put 2021 and 2022 on the same basis as 2023 and beyond.
Our VII for 2023 is expected to be approximately $2 billion after applying our historical average returns on asset balances. I'll provide more detail on VII in a moment. Our corporate and other adjusted loss target is expected to remain at $650 million to $750 million after tax in 2023. We are increasing our expected -- effective tax rate range by one point to 22% to 24% to reflect our expectation for higher earnings in foreign markets and lower tax credits in the U.S. At the bottom of the page, you will see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near-term.
On Page 11, the chart reflects our VII average asset balances from $14.7 billion in 2021 to $19 billion expected in 2023. Private equities will continue to hold the vast majority of our VII asset balances. We are applying our historical annual returns for each asset class within VII. In addition to the PE annual return of 12%, we expect an annual 7% return for real estate and other funds. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII.
So, now, I will discuss our near-term outlook for our business segments. Let's start with the U.S. on Page 12. For group benefits excluding the excess premium from participating group life contracts of approximately $750 million in 2022, adjusted PFOs are expected to grow at 4% to 6% annually. Regarding underwriting, we expect the group life mortality ratio to be between 85% to 90%. We're also maintaining the expected group non-medical health interest-adjusted benefit ratio at 70% to 75%. Keep in mind, these are annual ratios and are typically higher in the first quarter for both group life and non-medical health, given the seasonality of the business. For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general count spread and fee-based businesses. We are increasing the range of our expected annual RIS investment spread by 40 basis points to 135 to 160 basis points in 2023. The majority of this increase is driven by continued expectations of rising interest rates on the short end of the curve and the resulting benefit of interest rate cap income, which we expect to peak in the first half of 2023. In addition, LDTI will contribute approximately 10 basis points to the investment spread calculation while not increasing adjusted earnings. Upon transition to LDTI, the unlocking of future cash flow assumptions to current best estimate increased our deferred profit liability, which is amortized into earnings, and will now be included in the spread calculation, reducing other sources of earnings. Overall, the conversion to LDTI will not significantly change RIS run rate adjusted earnings.
For MetLife Holdings, we're expecting adjusted PFOs to decline 12% to 14% in 2023, driven by the normal runoff of the business, market declines, and the transition to LDTI. Beyond 2023, we expect annual PFOs to decline 6% to 8%. We're lowering the life interest-adjusted benefit ratio target to 40% to 45% in 2023 from the prior 45% to 50% target, to reflect the impact of lowering policyholder dividend levels. Finally, we're maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2023.
Now, let's look at the near-term guidance of our businesses outside the U.S. on Page 13. For Asia, we expect the recent sales momentum to continue and generate mid-to-high single-digit growth on a constant-currency basis over the near term. In addition, we expect general account AUM to maintain mid-single-digit growth on a constant-currency basis. We expect Asia's adjusted earnings, excluding $270 million of COVID-19 claims in 2022, to grow at mid-single-digits over the near term. For Latin America, we expect adjusted PFOs to grow by low-double-digits over the near term. We expect our adjusted earnings to grow high-single-digits over the near term excluding roughly $80 million due to favorable market-related factors in 2022. Finally, for EMEA, we're expecting sales and adjusted PFOs to grow mid-to-high single-digits on a constant-currency basis over the near term. We expect EMEA run rate-adjusted earnings to be roughly $55 million per quarter in 2023, reflecting the impact of currency headwinds, and then grow by high-single-digits in 2024 and 2025.
Let me conclude by saying that MetLife delivered a good quarter to close out another strong year, reflecting the strength of our business fundamentals: solid top-line growth, favorable underwriting, and ongoing expense discipline. While private equity returns were down this quarter, core spreads remain robust. In addition, results in our market-leading franchises, group benefits, and Latin America continued their strong growth and recovery. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build sustainable value for our customers and our shareholders.
And with that, I will turn the call back to the operator for your questions.
