John D. McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel and good morning. I'll start with the 3Q '21 supplemental slides, which provide highlights of our financial performance, details of our annual global actuarial assumption review and updates on our valued new business metrics and our cash and capital positions. Starting on page 3, we provide a comparison of net income to adjusted earnings. Net income in the third quarter was $1.5 billion or $541 million lower than adjusted earnings. Net derivative losses of $172 million were primarily driven by the strengthening of the U.S. dollar in the quarter. In addition, our actuarial assumption review accounted for $76 million of the variance between net income and adjusted earnings.
In total, the assumption review reduced net income by $216 million, including a notable item to adjusted earnings of $140 million. The table on page 4 provides highlights of the actuarial assumption review with the breakdown of the adjusted earnings and net income impact by business segment. We have kept our U.S. mean reversion interest rate unchanged at 2.75% and maintain our long-term mortality assumptions despite the near-term impacts from COVID-19. Most of the net income impact was in MetLife Holdings and Asia. For MetLife Holdings, the primary driver was a refinement to the variable annuity lapse rate function to better reflect policyholder behavior based on withdrawal status.
In Asia, the largest impact was due to the lowering of the earned rate assumption in Japan where we assume current earned rates for a long-term rate assumption. On page 5, you can see the year-over-year comparison of adjusted earnings by segment excluding notable items in both periods. Adjusted earnings, excluding notable items were $2.2 billion, up 24% and up 23% on a constant currency basis, primarily driven by strong returns in our private equity portfolio. Adjusted earnings per share excluding notable items was $2.56, up 31% year-over-year on both a reported and constant currency basis aided by Capital Management.
Moving to the businesses starting with the U.S.; Group Benefits adjusted earnings were down 72% year-over-year driven by unfavorable underwriting margins in Group Life, which I'll discuss in more detail shortly. Regarding non-medical health, the interest adjusted benefit ratio was 70.7% in 3Q of '21 at the low end of its annual target range of 70% to 75% but higher than the prior year quarter of 67.4%, which benefited from extremely low dental utilization and favorable disability incidence. Volume growth, the addition of Versant Health and favorable expense margins were partial offsets to the decline in year-over-year results.
Group Benefits continues to have strong topline growth. Year-to-date sales were up 40% primarily due to higher jumbo case activity. Adjusted PFOs in the quarter were up 13% year-over-year driven by solid volume growth across most products, including voluntary and the addition of Versant Health. Retirement Income Solutions or RIS adjusted earnings were up 60% year-over-year. The primary driver was higher variable investment income, largely due to strong private equity returns. Favorable underwriting margins and volume growth also contributed to year-over-year performance. RIS investment spreads were 256 basis points, up 100 basis points year-over-year due to higher variable investment income.
Spreads excluding VII were 93 basis points, down 5 basis points year-over-year and sequentially primarily due to lower paydowns in our portfolios of residential mortgage-backed securities and residential mortgage loans. RIS liability exposures including UK longevity reinsurance increased 4% year-over-year due to solid volume growth across the product portfolio. With regards to pension risk transfers as Michel noted, we have already completed $3.5 billion of transactions in the fourth quarter and continue to see an active market. Moving to Asia, adjusted earnings were up 31% on both a reported and constant currency basis, primarily due to higher variable investment income.
Asia's solid volume growth also contributed to the strong performance driven by higher general account assets under management on an amortized cost basis, which were up 7% on a constant currency basis. Lower accident and health utilization in the prior period was a partial offset. Asia sales were down 12% year-over-year on a constant currency basis, reflecting pressure from COVID-related lockdowns in the regions. Asia year-to-date sales were up 10% on a constant currency basis and remain on target to achieve double-digit growth in 2021.
Latin America adjusted earnings were down 35% and down 38% on a constant currency basis, primarily driven by unfavorable underwriting margins due to elevated COVID-19 related claims mainly in Mexico. The impact to Latin America's third quarter adjusted earnings was approximately $137 million. While the situation remains fluid, we have seen COVID-related hospitalizations and deaths in Latin America significantly decline in October. Favorable investment and expense margins as well as lower taxes versus the prior year quarter were partial offsets. While Latin America's adjusted earnings have been pressured by elevated COVID-19 related claims, sales and persistency throughout the region remains strong.
Latin America adjusted PFOs were up 22% year-over-year on a constant currency basis and sales were up 45% on a constant currency basis, driven by solid growth across most markets. EMEA adjusted earnings were up 20% on both a reported and constant currency basis, primarily driven by volume growth across the region and favorable underwriting margins, primarily in the Gulf. We expect EMEA adjusted earnings to decline in the fourth quarter due to the timing of certain technology investments across the region. EMEA adjusted PFOs were down 2% on a constant currency basis and sales were down 5% on a constant currency basis, reflecting divested businesses, partially offset by growth in Turkey and Europe.
MetLife Holdings adjusted earnings, excluding notable items in both periods were up $271 million year-over-year. The increase was primarily driven by strong private equity returns. Underwriting margins did reflect higher life claims severity than expected during the third quarter of 2021. However, the life interest adjusted benefit ratio of 53.3% was within our annual target range of 50% to 55%. In addition, LTC new claims returned to more normal levels in the quarter versus very low new claims submissions in the prior year quarter. Corporate and other adjusted loss was $131 million in both periods. Lower tax benefits were mostly offset by higher net investment income year-over-year.
The company's effective tax rate on adjusted earnings in the quarter was 20.6% and within our 2021 guidance range of 20% to 22%. Now, I'll provide more detail on Group Benefits mortality results on page 6. This chart reflects our Group Life mortality ratio for the first three quarters of 2021, including the COVID-19 impact on the ratio and on Group Benefits adjusted earnings. Group Life mortality ratio 106% in the third quarter of 2021, which is well above our annual target range of 85% to 90%. COVID reported claims in 3Q of '21 were roughly 18 percentage points, which reduced Group Benefits' adjusted earnings by approximately $290 million.
The primary drivers were higher claim frequency and severity. Approximately 40% of U.S. COVID deaths in the quarter were under age 65, about double the rate of the first quarter of this year and the highest percentage in any quarter since the pandemic began and therefore having a greater proportional impact on the working-age population. In addition, we estimate that the quarter included roughly 1 to 2 incremental percentage points impact on the mortality ratio from claims that appear to be COVID-related, but were not specifically identified as COVID on the death certificate.
Despite the impact from COVID, Group Benefits remains a profitable and growing business for MetLife. Group Benefits reported adjusted earnings of roughly $450 million year-to-date and adjusted PFO growth of 13%. Now let's turn to page 7. This chart reflects our pretax variable investment income over the last five quarters, including approximately $1.8 billion in the third quarter. This very strong result was mostly attributable to the private equity portfolio, which had a 12.6% return in the quarter. As we have previously discussed, the private equities are generally accounted for on a one quarter lag.
While all private equity asset classes performed well in the quarter, our venture capital funds, which account for roughly 23% of our PE account balance of $12.8 billion were the strongest performer across subsectors with a roughly 18% quarterly return. Page 8 highlights VII by segment for the first three quarters of 2021 including $1.4 billion post tax in the third quarter. The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio. As we have previously noted, RIS MetLife Holdings, and Asia generally account for 90% or more of the total VII and are split roughly one-third each although it can vary from quarter-to-quarter.
The VII results in the quarter were more heavily weighted towards RIS and MetLife Holdings as Asia's private equity portfolio is less mature and has a smaller proportion of venture capital funds I referenced earlier. Turning to page 9, this chart shows our direct expense ratio over the prior five quarters and full year 2020 including 11.1% in the third quarter of '21. 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 third quarter direct expense ratio benefited from solid top line growth and ongoing expense discipline.
This did include approximately 20 basis points from premiums that relate to participating cases and 20 basis points from a single premium Group Life sale in RIS. In addition, the impact from seasonal enrollment costs and timing of certain technology investments are expected to be more heavily weighted to the fourth quarter. Therefore, we do expect the direct expense ratio to be elevated in 4Q. Now let's turn to page 10; this chart reflects new business value metrics from MetLife major segments for the past five years, including an update for 2020. Consistent with our Next Horizon Strategy, we continue to have a relentless focus on deploying capital and resources to the highest value opportunities.
As evidence of that commitment, MetLife's invested $3.2 billion of capital in 2020 to support new business, which was deployed at an average unlevered IRR of approximately 17% with a payback period of six years. New business written in 2020 reflects our disciplined approach to building profitable growth while creating value, generating cash and mitigating risk. Despite the sales challenges in 2020 associated with lockdowns related to the pandemic, we were able to increase our value of new business and IRR while lowering our cash payback period versus 2019.
Now, I will discuss our cash and capital position on page 11. Cash and liquid assets at the Holding companies were $5.1 billion as of September 30, which is down from $6.5 billion at June 30, but still well above our target cash buffer of $3 billion to $4 billion. The sequential decrease in cash at the Holding companies include the net effects of share repurchases of $1 billion, payment of our common stock dividend of roughly $400 million, subsidiary dividends as well as holding company expenses and other cash flows. In addition, we had a long-term debt repayment of $500 million in the third quarter.
Our next long-term debt maturity is not until September 2023. Next, I would like to provide you with an update on our capital position. For our U.S. companies, preliminary third quarter year-to-date 2021 statutory operating earnings were approximately $4 billion, while net income was approximately $3 billion. Statutory operating earnings increased by approximately $1 billion year-over-year primarily driven by higher variable investment income and lower variable annuity rider reserves. Year-to-date 2021 net income increased by roughly $400 million as compared to the first nine months of 2020. The primary drivers were higher operating earnings and net investment gains, which was partially offset by derivative losses.
We estimate that our total U.S. statutory adjusted capital was approximately $19.7 billion as of September 30, 2021, up 16% compared to December 31, 2020. Favorable operating earnings and net investment gains were partially offset by derivative losses and dividends paid to the holding company. Finally, the Japan solvency margin ratio was 960% as of June 30, which is the latest public data. In summary, MetLife delivered another very strong quarter, driven by exceptional private equity returns, solid top line growth, ongoing expense discipline and the benefits of our diverse set of market-leading businesses and capabilities.
While earnings power of our Group Benefits and Latin America businesses has been dampened by COVID-19 excess mortality, we are pleased with the momentum behind these market-leading franchises. In addition, our capital, liquidity and investment portfolio remains strong and position us for further success. Finally, we are confident that the actions we are taking to be 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.