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 4Q '23 supplemental slides, which provide highlights of our financial performance, an update of our liquidity and capital positions as well as our commercial mortgage loan portfolio. In addition, I will discuss our near-term outlook in more detail. Starting on page three, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year of 2023. Market risk benefit or MRB remeasurement losses in the fourth quarter was due to the decline in long-term interest rates. Net derivative gains were only a partial offset as the favorable impact from lower long-term interest rates were mitigated by changes in short-term interest rates and higher equity markets in the quarter. For the full year, the variance between net income and adjusted earnings was mostly attributable to net derivative losses, primarily due to stronger equity markets, changes in foreign currencies and higher interest rates in 2023. In addition, net investment losses were largely the result of normal trading activity on the portfolio in a rising interest rate environment as well as the mark-to-market impact on securities that were transferred as part of the reinsurance transaction with Global Atlantic. Overall, the portfolio remains well positioned with modest levels of credit losses and the hedging program continues to perform as expected. On page four, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $76 million after tax, of an unfavorable notable item relating to asbestos litigation reserves in 4Q of '23 that was accounted for in Corporate & Other.
There were no notable items in the prior year quarter. Regarding the asbestos reserve increase of $76 million, based on our latest review, while we continue to observe a declining claim count, the frequency of severe claims related to asbestos has not declined as expected. The total reserve is $364 million at the end of 2023. Adjusted earnings, excluding total notable items were $1.4 billion, up 14% and 12% on a constant currency basis. The primary drivers were strong recurring interest margins, higher variable investment income, or VII, volume growth and favorable underwriting margins. Adjusted earnings per share, excluding total notable items were $1.93, up 21% and 19% on a constant currency basis. Moving to the businesses. Group Benefits adjusted earnings were $466 million, up 19% versus the prior year period. The key drivers were favorable life underwriting margins and solid volume growth. The Group Life mortality ratio was 83.5%, favorable to the prior year quarter of 87.3% and below the bottom end of our 2023 target range of 85% to 90%. Consistent with CDC U.S. mortality data, we saw a much lower number of life claims than typical in the fourth quarter. Regarding Non-Medical Health, the interest-adjusted benefit ratio was 70.7% in the quarter, and at the low end of its annual target range of 70% to 75%. We expect both the life mortality ratio and the Non-Medical Health ratio to be higher in Q1 given the seasonality of the business.
Turning to the top line, Group Benefits adjusted PFOs on a full year basis were up 3% year-over-year. Taking participating contracts into account, which dampened growth by roughly 200 basis points, the underlying PFOs were up approximately 5% year-over-year within our 2023 target growth range of 4% to 6%. In addition, Group Benefits 2023 sales were up 9% year-over-year. The continued strong growth is primarily due to solid growth across most products, including continued strong momentum in voluntary. RIS adjusted earnings were $421 million, up 10% year-over-year. The primary drivers were favorable investment margins due to higher recurring interest and variable investment income, as well as favorable underwriting margins. RIS investment spreads were 121 basis points. Spreads, excluding VII were 134 basis points, up 10 points versus Q4 of '22, 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% year-over-year, primarily driven by strong sales of structured settlement products and post-retirement benefits, as well as growth in U.K. longevity reinsurance. With regards to PRT, we added transactions worth approximately $1.9 billion in the fourth quarter, bringing our full year total to roughly $5.3 billion. This marks the third highest PRT sales year for MetLife, and we continue to see an active market.
Moving to Asia. Adjusted earnings were $296 million, up 12% and 11% on a constant currency basis, primarily due to higher investment margins and lower taxes. For Asia's key growth metrics, general account assets under management on an amortized cost basis were up 6% year-over-year on a constant currency basis, and sales were essentially flat versus the prior year quarter. For the full year, Asia sales were up 13%, driven by strong growth across the region, exceeding its 2023 guidance range of mid- to high-single digits. Latin America adjusted earnings were $207 million, up 13% and 4% on a constant currency basis, primarily due to solid volume growth, partially offset by less favorable underwriting margins versus a strong Q4 '22. In addition, LATAM had favorable Chilean encaje returns of 7.9% in 4Q of '23 versus 6.1% in the prior year quarter. Latin America's top line continues to perform well as adjusted PFOs were up 29% and 19% on a constant currency basis, driven by strong sales and solid persistency across the region. For the full year, adjusted PFOs were also up 29% on a reported basis and 19% on a constant currency basis exceeding LatAm's 2023 guidance of low double-digit growth. EMEA adjusted earnings were $47 million, down 27% on both a reported and constant currency basis, primarily driven by an unfavorable tax charge following a favorable tax benefit in the prior year period, as well as less favorable expense and underwriting margins.
This was partially offset by higher recurring interest margins year-over-year. EMEA full year 2023 adjusted earnings of $265 million exceeded our outlook expectations of roughly $55 million per quarter. EMEA adjusted PFOs were up 5% on both a reported and constant currency basis, and sales were up 18% on a constant currency basis, reflecting strong growth across the region. MetLife Holdings adjusted earnings were $156 million, down 15%, largely driven by foregone earnings as a result of the reinsurance transaction that closed in November. Corporate and other adjusted loss was $156 million, excluding the unfavorable notable item of $76 million after tax that I referenced earlier. This compares to an adjusted loss of $210 million in the prior year. Higher net investment income and favorable taxes were the primary drivers. The company's effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits, primarily related to the true-up of the federal tax return to provision. On page five, this chart reflects our pretax variable investment income for the four quarters and full year of 2023. VII was $63 million in the fourth quarter, primarily driven by positive returns in our corporate and mortgage loan funds. The private equity portfolio and real estate equity funds had a combined return of essentially 0 in the quarter. For the full year, VII was $419 million, well below our 2023 target of approximately $2 billion. That said, while mark-to-market returns were below expectation in 2023, the PE portfolio generated approximately $2 billion in cash distributions during the year.
On page six, we provide VII post-tax by segment for the prior four quarters and full year 2023. As reflected in the chart, RIS, Asia and MetLife Holdings continue to hold the largest proportion of VII assets given their long-dated liability profile. Now turning to page seven. 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 as well as Q4 of '22 versus Q4 of '23. While VII has had lower than trend returns over the last couple of years, recurring income, which accounted for most of the net investment income in 2023 was up approximately $2.6 billion year-over-year, reflecting higher interest rates and growth in asset balances. The expansion of recurring income in 2023 more than offset the lower VII year-over-year. Shifting your attention to the right of the page, which shows our new money yield versus roll-off yield since 4Q of '20. New money yields continue to outpace roll-off yields over the past couple of years, consistent with rising rates. In this quarter, our global new money yield continued its upward trajectory coming in at 6.67%, 142 basis points higher than the roll-off yield. Turning to page eight. I'll provide a few updates on our commercial mortgage loans. Overall, the CML portfolio continues to perform consistent with expectations where we expect higher quality assets to outperform the asset sector broadly. The average LTV on our CML portfolio now stands at 64% as of December 31, up slightly from 63% in the third quarter of '23 and the average debt service coverage ratio remains steady at 2.3 times.
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 2.6% of loans having LTVs more than 80% and DSCRs less than one times. With regard to CML loan maturities, we resolved 100% of the loans that were scheduled to mature in 2023. Our expectation going forward remains for modest credit losses on the portfolio. Turning to page nine. This chart shows the comparison of our direct expense ratio over the prior eight quarters and full year 2022 and 2023. Our direct expense ratio in 4Q of '23 was up modestly at 12.4%, reflecting the impact from seasonal enrollment costs in Group Benefits, as well as higher employee-related costs. 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 2023, our direct expense ratio was 12.2%, below our 2023 target of 12.6%. 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 10. Cash and liquid assets at the holding companies were approximately $5.2 billion at December 31, which is above our target cash buffer of $3 billion to $4 billion.
The cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of roughly $900 million in the fourth quarter as well as holding company expenses and other cash flows. In addition, we repurchased shares totaling approximately $500 million in January. For the two-year period 2022 and 2023, our average free cash flow ratio excluding notable items totaled 74% and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, our combined 2023 NAIC RBC ratio is still preliminary, but expected to be approximately 400% and above our 360% target. For our U.S. companies, preliminary 2023 statutory operating earnings were approximately $4.5 billion, while net income was approximately $3.9 billion. Statutory operating earnings increased by approximately $1.9 billion year-over-year, primarily driven by favorable underwriting and impacts from the reinsurance transaction. This was partially offset by higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $19.5 billion as of December 31, 2023, up 10% from September 30, 2023, primarily due to operating earnings and the impact of the reinsurance transaction. This was partially offset by dividends paid. Finally, we expect that Japan solvency margin ratio to be approximately 720% as of December 31, and which will be based on statutory statements that we filed in the next few weeks. Before I shift to our near-term outlook, starting on page 12, a few points on what we included in the appendix.
The chart on page 17 reflects new business value metrics for MetLife's major segments from 2018 through 2022. This is the same chart that we showed as part of our 3Q '23 supplemental slides, but we feel it's worth including, again, for the sake of completeness. Also, page s 18 through 21 provide interest rate assumptions and key outlook sensitivities by line of business. Now let's turn to page 12 for further details on our near-term outlook. Starting with the overview. We expect continued uncertainty to persist around inflation and unemployment in 2024. We expect the U.S. dollar to stabilize around current levels. Based on the 12/31/23 forward curve, we assume long-term interest rates to be largely unchanged in 2024, and the yield curve will move from inverted to modestly upward sloping as short-term interest rates decline, and we assume a 5% annual return for the S&P 500. For our near-term targets, we are maintaining our adjusted ROE range of 13% to 15%. We expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings. Also, given continued focus on expense discipline, building capacity to reinvest in growth initiatives and our overall efficiency mindset, we are lowering our direct expense ratio guidance for 2024 from 12.6% to 12.3%. Specifically for 2024, VII expected to be approximately $1.5 billion. Our Corporate &; Other adjusted loss target is expected to be $750 million to $850 million after tax in 2024. This represents an approximate $100 million increase from our prior adjusted loss guidance of $650 million to $750 million in 2023.
The higher range reflects C&O's current run rate, given the impact of a higher rate environment on interest expense and pension costs as well as the impact of lower expected benefits from VII. We are increasing our expected effective tax rate range by two points to 24% to 26% to reflect our expectation for higher earnings in foreign markets with higher tax rates 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 13, the chart reflects our VII average asset balances from $18 billion in 2022 to $19.7 billion expected in 2024. Private equity investments will continue to represent the vast majority of our VII asset balances. We are reducing our near-term expected annual return for private equity to be between 7% to 10%. And we are also lowering our expected returns for real estate and other funds to be in the range of 5% to 7% over the near term. We expect PE and real estate returns will remain pressured in the first quarter of '24 before trending higher. 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 14. For Group Benefits, excluding the excess premium from participating Group Life contracts of approximately $300 million in 2023, adjusted PFOs are expected to grow at 4% to 6% annually over the near term. And for 2024, we expect growth to be in the top half of that range. This reflects the strong momentum in the business, particularly in voluntary products as well as exceptionally strong persistency in our national accounts. Regarding underwriting, we expect 2024 underwriting margins to be generally consistent with 2023. As such, we are reducing our near-term Group Life mortality ratio and Non-Medical Health interest-adjusted benefit ratio ranges by one percentage point to 84% to 89% and 69% to 74%, respectively. Finally, keep in mind, these are annual ratios and both typically skew to the higher end of the ranges in the first quarter 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 account spread and fee-based businesses. Regarding investment spread, full year 2023 was 125 basis points and is expected to be relatively flat for the full year of 2024. This incorporates both the impact of the roll-off of our interest rate caps with maturities throughout 2024 and the offsetting benefit of VII reemerging over the year as a more meaningful contributor. As such, we expect the investment spread range for 2024 is 115 to 140 basis points.
We have also provided updated RIS sensitivities for interest rate movements in the appendix. Sensitivities reflect the anticipated impact from interest rate cap maturities throughout 2024. As such, our sensitivity to [Indecipherable] declines throughout the year. For MetLife Holdings, we are expecting adjusted PFOs to decline by approximately 13% to 15% in 2024 and then declining 4% to 6% annually thereafter. And we are lowering the adjusted earnings guidance range to $700 million to $900 million in 2024 to reflect the foregone earnings from the reinsurance transaction as well as lower expected PE returns and natural runoff of the business. Now let's look at the near-term guidance of our businesses outside the U.S. on page 15. For Asia, we expect the recent sales momentum to continue and generate mid single-digit growth over the near term. In addition, we expect general account AUM to maintain mid single-digit growth. We are expecting adjusted earnings to grow roughly 20% in 2024 as we assume VII to have a greater impact throughout the year. We are maintaining mid single-digit adjusted earnings growth expectation over the remainder of the near term. For Latin America, we expect both adjusted PFOs and adjusted earnings to grow by high single digits over the near term. Finally, for EMEA, we are expecting sales to grow mid- to high-single digits and adjusted PFOs to grow mid-single digits over the near term.
The forward curve assumes a strengthening of the U.S. dollar relative to most currencies in EMEA. As such, we project EMEA's adjusted earnings run rate to be roughly $60 million to $65 million per quarter in 2024. And and then grow by mid-single digits in 2025 and 2026 based on the forward curve for these currencies. Let me conclude by saying that MetLife delivered a solid quarter to close out another strong year. The underlying strength of our business fundamentals remains on display with strong top line growth, coupled with disciplined underwriting and expense management. While VII remains below historical returns, core spreads remain robust, and continue to benefit from the higher yield environment. While the current environment remains uncertain, we are excited about the outlook and growth prospects for our businesses over the near term and beyond. MetLife continues to move forward from a position of strength with a strong balance sheet, recurring free cash flow generation and a diversified set of our market-leading businesses. And we are committed to deploying capital to achieve responsible growth and build sustainable value for our customers and our shareholders.
And with that, I will turn the call back to the operator for your questions.