John D. McCallion
Executive Vice President and Chief Financial Officer, MetLife, Inc., and Head of MetLife Investment at MetLife
Thank you, Michel, and good morning. I will start with the 3Q '23 supplemental slides which provide highlights of our financial performance including details of our Annual Global Actuarial assumption review. In addition, I'll provide updates on our value of new business metrics, our liquidity and capital positions, as well as our commercial mortgage loan portfolio. Starting on page three, we provide a comparison of net income to adjusted earnings in the third quarter. Net investment losses include the mark-to-market impact on securities that are expected to be transferred with the pending reinsurance transaction with Global Atlantic that we announced at the end of May. For GAAP purposes any increase in gross unrealized losses on these securities are required to be realized through net income until we close the transaction. Also, we had net investment losses from our normal trading activity in the portfolio, given the rising interest rate environment. In addition, we had net derivative losses due to higher interest rates and strengthening of the US dollar versus multiple currencies, primarily the Chilean peso and yen. That said, net derivative losses were partially offset this quarter by market risk benefit or MRB remeasurement gains due to higher interest rates. Overall, the portfolio remains well positioned. Credit losses continued to be modest and the hedging program performed as expected. The table on page four provides highlights of our Annual Actuarial Assumption Review and other insurance adjustments with a breakdown of the adjusted earnings and net income impact by business.
Overall, the impact to adjusted earnings and net income was negligible. In Group Benefits, we had a favorable impact from assumption changes in individual disability, primarily due to lower incident rates and favorable recoveries. In Retirement and Income Solutions or RIS, we lowered our near-term assumption for mortality improvement which resulted in an economic benefit, given the longevity products in this business. In Asia, the net unfavorable impact was due to lapse rate changes across life and accident & health products in Japan, as well as lowering lapse rates and expected fund returns for variable life products in Korea. On page five, you can see the third quarter year-over-year comparison of adjusted earnings by segment, excluding notable items associated with the Annual Assumption Review and other insurance adjustments in both periods. Adjusted earnings were $1.5 billion up 35% and 33% on a constant currency basis. The primary drivers were higher variable investment income or VII, strong recurring interest margins and favorable underwriting margins. Adjusted earnings per share were $1.95, up 43% and 40% on a constant currency basis. Moving to the businesses, starting with the US. Group Benefits adjusted earnings were $483 million, up 16% versus the prior year period. The key drivers were favorable underwriting margins and solid volume growth. The Group Life mortality ratio was 83.6% favorable to the prior year quarter of 85.7% and below the bottom end of our annual target range of 85% to 90%.As a reminder, mortality results tend to be more favorable in the third quarter, so we would expect our Group Life ratio to be back within the 85% to 90% range in the fourth quarter and full year of 2023.
Regarding non-medical health, the interest adjusted benefit ratio was 69% in the quarter or 70.4% excluding the favorable impact related to the annual assumption review that I mentioned earlier and at the low end of its annual target range of 70% to 75%.Turning to the top line, Group Benefits adjusted PFOs were up 3% year-over-year. Taking participating contracts into account which dampened growth by roughly 1%, the underlying PFO were up approximately 4% 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 11% year-to-date driven by strong growth across most products and markets. RIS adjusted earnings were $409 million, up 60% year-over-year. The primary driver was favorable investment margins due to higher recurring interest and variable investment income. Solid volume growth year-over-year also contributed to the strong performance. RIS investment spreads were 130 basis points. Spreads excluding VII were 138 basis points, up 26 points versus Q3 of 2022 primarily due to higher interest rates as well as income from in-the-money interest rate caps. RIS adjusted PFOs excluding pension risk transfers were up 75% primarily driven by strong sales of structured settlement products, growth in UK longevity reinsurance, and postretirement benefits. With regards to PRT we added transactions worth approximately $1.5 billion in Q3 of 2023, bringing our year-to-date total to roughly $3.5 billion. Moving to Asia. Adjusted earnings were $369 million, up 23% and 25% on a constant currency basis, primarily due to higher investment margins. Asia's key growth metrics were solid as journal on assets under management on an amortized cost basis as well as sales both grew 5% year-over-year on a constant currency basis, driven by growth across most of the region.
In Japan, sales on a constant currency basis were up 3% year-over-year, driven by strong life sales due to the ongoing momentum of a single premium FX Life product that was relaunched April 1st of this year. In other Asia sales on a constant currency basis were up 8% year-over-year, primarily driven by strong life sales in Korea in advance of a prospective regulatory change that took place on September 1st, that impacts low cash value whole life products. Looking ahead, while we anticipate Asia year-over-year sales will decline in the fourth quarter, we expect full year 2023 sales growth to be at the top end or exceed our annual guidance range of mid- to high single-digits. Latin America adjusted earnings were $199 million up 26% and 8% on a constant currency basis primarily due to solid volume growth and favorable underwriting margins. Latin America's topline continues to perform well as adjusted PFOs were up 32% and 16% on a constant currency basis. And sales were also up 16% on a constant currency basis driven by strong growth in Mexico and Chile and solid persistency across the region. EMEA adjusted earnings were $70 million, up 43% and 40% on a constant currency basis primarily due to higher volume growth recurring interest margins as well as underwriting margins running favorable to expectations. This was partially offset by less favorable expense margins year-over-year. EMEA adjusted PFOs were up 9% on both a reported and constant currency basis and sales were up 20% on a constant currency basis, reflecting strong growth across the region. MetLife Holdings adjusted earnings were $206 million, up 23%, primarily driven by higher variable investment income. Corporate and other adjusted loss was $262 million compared to an adjusted loss of $258 million in the prior year quarter. Higher expenses, including interest on incremental debt, were partially offset by higher net investment income.
The company's effective tax rate on adjusted earnings in the quarter was approximately 23% and within our 2023 guidance of 22% to 24%.On page six, this chart reflects our pre-tax variable investment income for the prior five quarters including $179 million in Q3 of 2023. The private equity portfolio of $14.9 billion had a plus 1.4% return in the quarter. Real estate equity funds of $2.2 billion had a minus 3% return. As of now, we anticipate PE returns to remain consistent with the second and third quarter with a modest improvement in real estate funds in the fourth quarter. Therefore, VII would more closely resemble second quarter results. On page seven we provide VII post-tax by segment for the prior five quarters. As we 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 proportion of VII assets given their long-dated liability profile while Corporate and Other continues to hold higher VII assets than historical levels. Now turning to page eight. 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 Q3 of 2022 versus Q3 of 2023. While VII has had lower than trend returns over the last few quarters, recurring income, which accounts for approximately 96% of net investment income, was up approximately $700 million year-over-year, reflecting higher interest rates and growth in asset balances. Shifting your attention to 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 continued its upward trajectory coming in at 6.26%, 156 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 nine. I'll provide a few updates on our commercial mortgage loans. First, let me say that we are pleased with the commercial mortgage loan or CML portfolio, which continues to perform as expected. As we have noted last quarter our real estate team updated all US office valuations through June 30, assuming a 25% peak to trough valuation decline. In this quarter, the team shifted its effort to revaluing other CML asset classes, which have not been under the pressure seen in the office sector. Not surprisingly, the average LTV increased only slightly as a result with our CML portfolio now at an average LTV of 63%, up from 62% in the second quarter of 2023 and an average debt service coverage ratio of 2.3 times, which represents no change versus 2Q 2023. The modest increase in LTVs and stable debt service coverage ratio are further indicators of the disciplined approach we take to investing in this asset class. The quality of our CML portfolio remains strong with only 1.6% of loans having LTVs more than 80% and DSCRs less than one times. With regards to CML loan maturities, we now have successfully resolved almost 90% of the portfolio scheduled to mature in 2023 and our expectation remains for minimal losses on the portfolio. Our CML portfolio scheduled maturities over the next three years are very manageable, 10% in 2024 13% in 2025 and 16% in 2026. Now, let's switch gears to discuss expenses on page 10. This chart shows a comparison of our direct expense ratio for the full year of 2022 as well as the first three quarters of 2023. In Q3 of 2023, the ratio was 12.3%. 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 Q3 direct expense ratio benefited from solid top line growth and ongoing expense discipline. While we would expect our direct expense ratio to be higher in Q4 consistent with the seasonality of our business, we are confident we will beat our full year direct expense ratio target of 12.6% in 2023 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset. Now let's turn to page 11. This chart reflects new business value metrics for MetLife's major segments for the past five years including an update for 2022. As mentioned by Michel, MetLife invested $3.7 billion of capital in 2022 to support new business. This was deployed at an average unlevered IRR of approximately 17% with a payback period of six years, generating roughly $2.3 billion in value. I will now discuss our cash and capital position on page 12. Cash and liquid assets at the holding companies were approximately $4.9 billion at September 30th, which is above our target cash buffer of $3 billion to $4 billion and higher than our $4.2 billion at June 30th. The cash of the holding companies reflects the net effects of subsidiary dividends, a $1 billion senior debt issuance in July, payment of our common stock dividend, share repurchase of roughly $800 million in the third quarter, as well as holding company expenses and other cash flows. In addition, we have repurchased shares holding approximately $250 million in October. For our US companies preliminary third quarter year-to-date 2023 statutory operating earnings were approximately $3.1 billion, while net income was approximately $2.1 billion. Statutory operating earnings increased by approximately $1.6 billion year-over-year, primarily driven by favorable underwriting partially offset by higher expenses. We estimate that our total US statutory adjusted capital was approximately $17.7 billion as of September 30, 2023, up 2% from June 30, 2023.
This increase was primarily due to operating earnings partially offset by dividends paid and net investment losses. Total US statutory adjusted capital has absorbed a negative impact of roughly $300 million associated with the investments expected to be transferred to Global Atlantic, which will be recovered upon closing. Finally we expect the Japan solvency margin ratio to be approximately 600% as of September 30th, which we based on statutory statements that will be filed over the next few weeks. Let me conclude with a few points. First, while VII remains below historical returns, core spreads remain robust and continue to benefit from higher yield 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. Finally, our strong value of new business metrics provide further evidence of our disciplined approach to deploying capital to its highest and best use consistent with our all-weather strategy. To close, MetLife remains in a position of strength given our balance sheet, free cash flow generation and 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.
