John McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel and good morning. I will start with the 1Q '23 supplemental slides, which provide highlights of our financial performance and an update on our liquidity and capital positions. In addition, we provided some supplemental detail of our investment portfolio given the heightened focus recently. The appendix also includes slides, which provide our full-year 2021 and 2022 adjusted earnings recasted for the new LSTI accounting basis. Starting on page 3, we provide a comparison of net income to adjusted earnings in the first quarter. Net investment losses were above trend, primarily driven by sales of fixed maturity securities in Japan. Management took the opportunity to reposition some of the U.S. dollar portfolio to help mitigate some cash tax relating to our recent A&H reinsurance transaction, enhance that investment income and improve asset-liability management within the Japan business. These sales were neutral to a net positive to Japan's solvency margin ratio, which is expected to be approximately 725% at the end of March.
In addition, net investment losses in the quarter included an increase in the current expected credit loss or CECL allowance, primarily in our commercial mortgage loan portfolio given the current environment. That said, the portfolio remains well-positioned, and I will provide more detail shortly. We have itemized a new reconciling item between net income and adjusted earnings as a result of LDTI called market risk benefit or MRB gains and losses. For certain products, such as variable annuities with market-related guarantees, the change in fair value excluding changes attributable to nonperformance risk is recognized in net income each quarter. Similar to certain variable annuity guarantees previously classified outside of adjusted earnings, we'll also now identify MRB gains and losses as a reconciling item between net income and adjusted earnings.
Lower interest rates in the quarter drove an MRB loss. This loss was partially offset by derivative gains relating to lower interest rates. However, we had net derivative losses in the quarter as these gains from lower interest rates were more than offset by derivative losses relating to the strong equity markets in Q1 of '23. On page 4, you can see the first quarter year-over-year comparison of adjusted earnings by segment, which did not have any notable items in either period. Adjusted earnings were $1.2 billion, down 30% and down 29% on a constant-currency basis. Lower variable investment income drove the year-over-year decline while favorable underwriting and higher recurring interest margins were partial offsets. Adjusted earnings per share were $1.52, down 25% year-over-year on a reported and constant-currency basis.
Moving to the businesses, starting with the U.S. Group Benefits' adjusted earnings were $307 million versus $117 million in the prior year period, primarily due to lower COVID-19 claims. The Group Life mortality ratio was 90.5%, slightly above the top end of our annual targeted range of 85% to 90%. As we have noted before, Group Life's mortality ratio tends to be seasonally highest in the first quarter. The drivers were excess mortality due to claims resulting from the year-end flu spike and higher severity. Regarding non-medical health, the interest-adjusted benefit ratio was 72.9% in the quarter, slightly above the midpoint of its annual target range of 70% to 75%, but generally in line with higher seasonal dental utilization in the first quarter. Turning to the top line. Group Benefits' adjusted PFOs were up 1% year-over-year. As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q1 of '22 versus Q1 of '23 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly four percentage points.
Taking participating contracts into account, the underlying PFO increase of approximately 5% was primarily due to solid growth across most products, including continued strong momentum in voluntary and was within our 2023 target growth range of 4% to 6%. In addition, Group Benefits sales were up 15%, driven by strong growth across all markets. Retirement and Income Solutions or RIS adjusted earnings were down 27% year-over-year. The primary driver was lower variable investment income. This was partially offset by favorable recurring interest margins year-over-year. RIS investment spreads are 117 basis points and 137 basis points excluding VII, up 37 basis points versus Q1 of '22, and up 13 basis points sequentially primarily due to higher interest rates and income from in-the-money interest rate caps. RIS liability exposures were up 1% year-over-year. But solid volume growth was masked due to certain accounting adjustments that do not impact fees or spread income.
That said, general account liabilities, which comprise future policy benefits and policyholder account balances collectively grew 5% year-over-year and RIS adjusted PFOs excluding pension risk transfers were up 43%, primarily driven by strong sales of structured settlement products and growth in UK longevity reinsurance. Once again reflecting the power of our diversified set of market-leading products in RIS.
Moving to Asia. Adjusted earnings were down 53% and 50% on a constant-currency basis, primarily due to lower variable investment income. Asia's key growth metrics remained solid as general account assets under management on an amortized cost basis grew 3% on a constant-currency basis, and sales were up 18% year-over-year on a constant-currency basis, primarily driven by strong growth across the region, in Japan, FX annuity sales continued its strong momentum with growth in our face-to-face and bank channels. Latin-America adjusted earnings were $215 million, up 59% 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. The favorable Q1 underwriting benefited from seasonality as well as additional claims favorability in the quarter. In addition, higher recurring interest margins were mostly offset by lower variable investment income year-over-year. Latin-America's top line continues to perform well as adjusted PFOs were up 26% year-over-year on a constant-currency basis. And sales were up 36% on a constant-currency basis, driven by growth across the region. EMEA adjusted earnings were $60 million, up 9% and up 30% on a constant-currency basis, primarily driven by higher recurring interest margins and solid volume growth. EMEA adjusted PFOs were up 5% on a constant-currency basis, and sales were up 27% on a constant-currency basis, reflecting strong growth across the region. MetLife Holdings' adjusted earnings were $158 million, down 55%. This decline was primarily driven by lower variable investment income. Corporate and other adjusted loss was $236 million versus an adjusted loss of $105 million in the prior year. Lower variable investment income was the primary driver. The company's effective tax rate on adjusted earnings in the quarter was approximately 22%, at the low end of our 2023 guidance range of 22% to 24%.
On page 5, this chart reflects our pretax variable investment income for the prior five quarters, including a $44 million loss in Q1 of '23. Private equity portfolio, which makes up the majority of the VII asset balance and is reported on a one quarter lag had a positive 0.1% return in the quarter. Venture capital, which now comprises roughly 20% of the $14.2 billion PE portfolio had a negative 6.6% return. The remainder of the PE portfolio had a positive 1.9% return. In addition, real estate equity funds, which comprise roughly $2.3 billion of VII assets and are also reported on a one quarter lag had a negative 5.9% return in Q1 of '23. While VII underperformed this quarter and is approximately 4% of the portfolio, the three, five and 10-year cumulative private equity annual returns through Q1 of '23 were 19.8%, 17 2%, and 16% respectively, demonstrating the long-term value up incorporating this asset class into our asset liability management.
On Page 6, we provide VII post tax by segment for the four quarters of 2022 and Q1 of '23. As we have noted previously, each of the businesses hold its own discrete investment portfolios, which have been built to match its liabilities. Although not readily apparent in the chart, RIS, MetLife Holdings and Asia continue to hold the largest proportion of VII assets given the long dated liability profile. Also, Corporate & Other currently holds an outsized amount of VII assets. We expect to reduce this balance over time as part of our normal ALN process. Now turning to page 7. The chart on the left of the page shows the split of our net investment income between recurring and VII for the past three years and in Q1 of '22 versus Q1 of '23.
While VII has shown lower than trend returns over the last few quarters, recurrent investment income was up roughly $850 million year-over-year, reflecting higher interest rates and growth in asset balances. Shifting your attention to the chart on the right of the page, which shows our new money yield versus roll-off yield over the past three years, with new money yields continuing to outpace roll-off yields in recent quarters. In this quarter, our global new money yield reached its highest level in more than a decade at 5.8%, 123 basis points higher than the roll-off yield. We expect this favorable trend to continue assuming interest rates remain near current levels.
Now let's look at our global investment portfolio on page 8. As you can see in the chart, MetLife general account AUM shown at fair value as of March 31, 2023 is $424 billion. The portfolio is high quality and well diversified by asset class and geography. In construction of the portfolio, we use a disciplined approach to asset-liability management, in depth underwriting and risk management. MetLife's global footprint combined with the local market expertise of MetLife Investment Management or MIM allows us to source high quality attractive assets that fit the needs of our businesses. Overall, the portfolio is well-positioned and built for resilience through uncertain markets and we have a strong track record of mitigating losses across all asset classes in the portfolio. From 2008 through Q1 of '23, our average annual impairment rate was 13 basis points for fixed maturity securities and only 5 basis points for commercial mortgage loans.
Now, let's discuss our commercial mortgage loan portfolio in more detail on page 9. As of March the 31, the CML portfolio carrying value of approximately $54 billion is well-diversified by geography and property type. The CML portfolio is concentrated in high quality properties and in larger primary markets. These loans are typically to the larger and stronger institutional sponsors, who are better-positioned to effectively manage assets through periods of stress. In addition, almost all of our CMO loans are in first lien positions with have less than 0.5% in subordinated loans. The portfolio has a low average loan-to-value of 58% with a high average debt service coverage ratio of 2.4 times. As shown on the table, only 0.4% of the CML portfolio has a higher than 80% average loan-to-value ratio and a below one times average debt service coverage ratio. The commercial mortgage loan allowance for credit loss stands at $319 million, including the roughly $100 million increase in Q1 of '23 and considers the current environment as well as the risk around the economic outlook. We estimate that our allowance for credit loss is sufficient to cover current expected credit losses in the CML portfolio. The delinquency rate on the portfolio is only 5 basis points and is related to one loan as of March 31, 2023. With regards to loan maturities, only 14% of the CML portfolio was scheduled to mature in 2023, with 36% of these loans already favorably resolved through extensions or payoffs. Of our remaining 2023 maturities, we expect most will be similarly resolved with only 0 to 3% of our 2023 maturities potentially resulting in defaults. If the full 3% or approximately $200 million of loans were to default, this could result in an impairment of up to approximately $15 million.
Continuing on page 10, let's drill down further on our office commercial mortgage portfolio. As of March 31, the office loan portfolio was approximately $21 billion or 4.9% of our total general account AUM. The portfolio is high quality with 89% collateralized by Class A properties, which have seen less market pressure. The portfolio also has an attractive average loan-to-value ratio of 57% and an average debt service coverage ratio of 2.4 times. As shown on the table, less than 1% of the office CML portfolio has a higher than 80% average loan-to-value and below one time average debt service coverage ratio. The office CML portfolio is geographically diverse across Class A markets in the U.S. and internationally. While we remain confident in the office portfolio given this high quality, we have been very selective on new office loan production in the current environment. In 2022, office loans represented only 8% of our total U.S. commercial mortgage loan production. And since 2016, we have reduced our overall office exposure from approximately 50% of the CML portfolio down to 39% today.
Now let's switch gears to discuss expenses on page 11. This chart shows a comparison of our direct expense ratio over the prior five quarters, including 12% in Q1 of '23. As you have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. Our Q1 direct expense ratio benefited from solid top line growth and ongoing expense discipline. We remain committed to achieving a full year direct expense ratio of 12.6% or below in 2023, demonstrating our consistent execution and focus on an efficiency mindset.
I will now discuss our cash and capital positions on page 12. Cash and liquid assets at the holding companies were approximately $4.2 billion at March 31st, which is above our target cash buffer of $3 billion to $4 billion and down from $5.4 billion at December 31st. The sequential decline in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend and share repurchases of roughly $800 million in the first quarter as well as holding company expenses and other cash flows. Our first quarter tends to be lower in subsidiary dividends and higher in holding company expenses. As illustrated in the chart, you can see that this same seasonal pattern occurred from 4Q of '21 into Q1 of '22.
Regarding our statutory capital. For our U.S. companies, our 2022 combined NAIC RBC ratio was 367%, which is above our target ratio of 360%. For our U.S. companies, preliminary first quarter year-to-date 2023 statutory operating earnings were approximately $1 billion, while net income was approximately $700 million. Statutory operating earnings increased roughly $500 million year-over-year, primarily driven by favorable underwriting, partially offset by lower variable investment income and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $17.7 billion as of March 31, 2023, down 3% compared to December 31, 2022, due to derivative losses from certain equity options and dividends paid, partially offset by higher operating earnings.
Finally, as I referenced earlier, we expect the Japan solvency margin ratio to be approximately 725% as of March 31st, which will be based on statutory statements that will be filed in the next few weeks. Let me conclude by saying that MetLife results reflect the strength of our business fundamentals, solid top-line growth, favorable underwriting and ongoing expense discipline. While private equity and real estate funds underperformed this quarter, core spreads remain robust. In addition, results in our market-leading franchises, Group Benefits and Latin-America continue their strong top and bottom line growth. While market fluctuations are expected to continue, MetLife remains in a position of strength, given our balance sheet, investment portfolio, free cash flow generation and the diversification of our market-leading businesses. 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.
