John Dennis McCallion
Executive Vice President & Chief Financial Officer at MetLife
I will start with the 2Q 23 supplemental slides, which provide highlights of our financial performance and an update on our liquidity and capital positions. In addition, I'll provide an update on our commercial mortgage loan portfolio. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the second quarter.
Net investment losses were primarily the result of securities that were associated with the pending reinsurance transaction with Global Atlantic that we announced at the end of May. For GAAP purposes, gross unrealized losses as of June 30 on securities expected to be transferred to Global Atlantic at closing, are required to be realized through net income this quarter. In addition, we had net derivative losses due to the favorable equity markets, strengthening of the U.S. dollar versus the yen and higher interest rates. That said, derivative losses were mostly offset this quarter by market risk benefit or MRB remeasurement gains due to higher equity markets and interest rates.
Overall, the portfolio remains well positioned. Credit losses continued to be modest and the hedging program performed as expected. On Page 4, you can see the second quarter year-over-year comparison of adjusted earnings by segment excluding a favorable notable item of $77 million in 2Q of '22, primarily related to a reinsurance settlement, which was accounted for in MetLife Holdings. There were no notable items in the current quarter. Adjusted earnings were $1.5 billion, down 10% and down 11% on a constant currency basis. The primary driver was lower variable investment income. Underwriting margins were also less favorable than the prior year, but within our targeted ranges. Higher recurring interest margins and solid volume growth were partial offsets.
Adjusted earnings per share were $1.94, down 5% year-over-year on a reported and constant currency basis. Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were $372 million, down 8% versus the prior year period. Results were below run rate expectations for the quarter due to certain unfavorable expense, reinsurance and reserve-related items, which reduced Group Benefits adjusted earnings by approximately $40 million and were specific to this quarter.
The Group Life mortality ratio was 85.3%, essentially in line with the prior year quarter and at the bottom end of our annual target range of 85% to 90%. Regarding non-medical health, the interest adjusted benefit ratio was 73.3% in the quarter above the midpoint of its annual target range of 70% to 75%. We had a disability reserve refinement of approximately $15 million after tax, which increased the ratio up by 0.8 percentage points and was included in the items totaling $40 million that I just referenced.
Turning to the top line, Group Benefits adjusted PFOs were up 4% year-over-year taking participating contracts into account, which dampened growth by roughly 1%. The underlying PFOs were up approximately 5% year-over-year, 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 benefit sales were up 13% year-to-date, driven by strong growth across most products and markets.
Retirement and Income Solutions, or RIS, adjusted earnings were $417 million, up 11% year-over-year. The primary drivers were higher recurring interest margins and solid volume growth. This was partially offset by lower variable investment income year-over-year. RIS investment spreads were 132 basis points. Spreads, excluding VII, were 142 basis points, up 29 basis points versus Q2 of '22 and primarily due to higher interest rates as well as income from in-the-money interest rate caps.
RIS liability exposures were up 5% year-over-year driven by general account liabilities, which grew 7% due to strong net flows. RIS adjusted PFOs, excluding pension risk transfers were up 73% primarily driven by strong sales of structured settlement products and growth in U.K. longevity reinsurance. With regards to PRT, we completed two transactions worth approximately $2 billion in the quarter, and continue to see an active market.
Moving to Asia. Adjusted earnings were $431 million, down 11% and 9% on a constant currency basis primarily due to lower variable investment income. Adjusted earnings ran approximately $25 million above expectation due to certain reserve refinements and tax-related true-ups. Asia's key growth metrics were strong as general account assets under management on an amortized cost basis grew 5% on a constant currency basis, and sales were up 34% year-over-year on a constant currency basis, driven by strong growth across the region.
In Japan, sales were up 42% year-over-year, driven by continued strong momentum in FX annuities through our face-to-face channels as well as life sales due to a relaunch of a single premium FX Life product on April 1. We continue to see Japanese consumer interest for our FX products given the attractive higher U.S. interest rates. Latin America adjusted earnings were $219 million, down 13% and 21% on a constant currency basis due to less favorable underwriting margins versus 2Q of '22.
The prior year quarter had a roughly $40 million benefit to adjusted earnings from a release of a COVID-related IBNR reserve. In addition, investment margins were down year-over-year, partially offset by solid volume growth. Latin America's top line continues to perform well as adjusted PFOs were up 23% and 14% on a constant currency basis and sales were up 13% on a constant currency basis, driven by growth across the region.
EMEA adjusted earnings were $70 million, up 6% and up 15% on a constant currency basis, primarily driven by higher recurring interest margins. EMEA adjusted PFOs were up 4% on a constant currency basis, and sales were up 13% on a constant currency basis, reflecting strong growth across the region. MetLife Holdings adjusted earnings were $211 million, down 31%. This decline was primarily driven by lower variable investment income. Corporate and other adjusted loss was $228 million, essentially flat versus an adjusted loss of $227 million in the prior year. The company's effective tax rate on adjusted earnings in the quarter was approximately 22% and at the low end of our 2023 guidance of 22% to 24%.
On Page 5, this chart reflects our pretax variable investment income for the prior five quarters, including $221 million in Q2 of '23. Private equity portfolio of $14.6 billion had a plus 1.5% return in the quarter. Real estate equity funds of $2.2 billion had a minus 1.9% return. While both PE and real estate equity funds are reported on a 1-quarter lag, as of now, we anticipate that VII in the third quarter will generally be in line with the second quarter results. On Page 6, we provide VII post-tax by segment for the prior five quarters. As you have noted previously, each of the businesses hold its own discrete investment portfolios, which have been built to match its liabilities. As reflected in the chart, Asia, RIS and MetLife Holdings continue to hold the largest portion of VII assets given their long-dated liability profile.
For 2Q of '23, Asia's VII portfolio generated the highest returns at 2.2%, outperforming MetLife Holdings at 1.5% and RIS at 0.9%. 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 in Q2 of '22 versus Q2 of '23. While VII has had the lower-than-trend returns over the last few quarters, recurring income, which accounts for approximately 96% of net investment income was up $700 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, new money yields continue to outpace roll-off yields in the recent quarters. In this quarter, our global new money yield reached its highest level in more than a decade of 6.06%, 157 basis points higher than the roll-off yield. We expect this favorable trend to continue, assuming interest rates remain near current levels.
Turning to Page 8. I'll provide a few updates on our commercial mortgage loans, which you can find further details in our quarterly financial supplement. As of June 30, our commercial mortgage loan or CML portfolio, carrying value of approximately $53 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.
Given the focus on the office sector, our real estate team updated all U.S. office valuation through June 30, assuming a 25% peak-to-trough valuation decline. We believe it was prudent to focus our efforts here in the quarter given the heightened attention this has received. As expected, LTVs increased slightly as a result with our CML portfolio now in an average LTV of 62%, up from 58% in the first quarter of '23 and an average debt service coverage ratio of 2.3 times, down slightly from 2.4 times in 1Q '23. The modest increase in LTVs coupled with the resiliency and robustness of the debt service coverage ratio is another indicator of the disciplined approach we take to investing in this asset class. The quality of our CML portfolio remains strong with only 2% of the loans having LTVs more than 80% and DSCRs less than 1 times.
With regards to CML loan maturities, we now have successfully resolved 69% of the portfolio scheduled to mature in 2023, and our expectation is for minimal losses on the portfolio. Now let's switch gears to discuss expenses on Page 9. This chart shows the comparison of our direct expense ratio for full year 2022 as well as Q1 of '23 and Q2 of '23, which had a ratio of 12.2%. 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.
Our Q2 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 position on Page 10. Cash and liquid assets at the holding companies were approximately $4.2 billion at June 30, which is above our target cash buffer of $3 billion to $4 billion and consistent with March 31. The cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend and share repurchases of roughly $700 million in the second quarter as well as holding company expenses and other cash flows.
The buybacks in 2Q of '23 were lower than our recent trend as we were in a blackout period for most of May in advance of our pending reinsurance transaction with Global Atlantic. That said, we have repurchased shares totaling approximately $300 million in July. For our U.S. company's preliminary second quarter year-to-date 2023 statutory operating earnings were approximately $2 billion while net income was approximately $1.3 billion. Statutory operating earnings increased by approximately $1.3 billion year-over-year, primarily driven by favorable underwriting, partially offset by higher expenses.
We estimate that our total U.S. statutory adjusted capital was approximately $17.4 billion as of June 30, 2023, down 2% from March 31, 2023, primarily due to the temporary impact of roughly $300 million associated with the investments expected to be transferred to Global Atlantic. We expect these impacts to reverse at close, which remains on target by year-end. In addition, as previously disclosed, we expect the transaction to add approximately 60 combined RBC points.
Finally, we expect the Japan solvency margin ratio to be approximately 700% as of June 30, which will be based on statutory statements that will be filed in the next few weeks. Let me conclude with a few points. First, while VII remains below historical returns, we believe we reached a trough. In addition, core spreads remain robust and continue to benefit from a higher-yielding environment.
Second, the underlying strength of our business fundamentals continues to be displayed with strong top line growth, coupled with disciplined underwriting and expense management. Lastly, 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 and we are committed to deploying capital to achieve responsible growth and building sustainable value for our customers and our shareholders. And with that, I will turn the call back to the operator for your questions.
