John D. McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel, and good morning. I will start with the 4Q '21 supplemental slides, which provide highlights of our financial performance and update on our cash and capital positions and more detail on our near-term outlook.
Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in the quarter was $1.2 billion or $662 million lower than adjusted earnings. Net derivative losses were primarily due to the stronger equity markets and the strengthening of the U.S. dollar in the quarter. For the full year, net derivative losses of $1.8 billion, primarily due to higher interest rates in 2021 accounted for most of the variance between net income and adjusted earnings.
On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $140 million of notable tax items that were favorable in the fourth quarter of '21 and accounted for in Corporate & Other. Adjusted earnings, excluding notable items, were $1.7 billion, down 8% and down 7% on a constant currency basis. Adjusted earnings per share, excluding notable items, was $2.01, down 1% year-over-year on a reported basis and essentially flat on a constant currency basis, aided by capital management.
Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were down 95% year-over-year due to unfavorable underwriting margins. I will discuss group life underwriting in more detail shortly. Regarding non-medical health, the interest adjusted benefit ratio was 74.2% in 4Q of '21, at the upper end of its annual target range of 70% to 75%, but generally in line given fourth quarter seasonality for dental utilization. That said, the ratio was higher than the prior year quarter ratio of 61.7%, which benefited from low dental utilization and favorable disability incidences.
Turning to the top line. Group Benefits adjusted PFOs were up 15% versus 4Q of '20 and up 18% for the full year. The strong full year PFO growth of 18% included 6 percentage points, mostly related to higher premiums from participating contracts, which can fluctuate with claim experience. The balance of PFO growth of 12% was at the top end of our low double-digit annual guidance in 2021. This was equally attributable to the addition of Versant Health and solid growth across most products, including continued strong momentum in voluntary.
Retirement and Income Solutions, or RIS, adjusted earnings were up 18% year-over-year. The primary driver was higher variable investment income, largely due to strong private equity returns. Favorable volume growth also contributed to year-over-year performance. RIS investment spreads were 202 basis points, driven by another strong quarter of variable investment income. Spreads, excluding VII, were 91 basis points, down 13 basis points versus 4Q '20, primarily due to lower paydowns in our portfolios of residential mortgage-backed securities and residential mortgage loans. RIS liability exposures increased 3% year-over-year, driven by strong growth in U.K. longevity reinsurance. With regards to pension risk transfers, we completed five transactions worth $3.6 billion in the fourth quarter and continue to see an active market.
Moving to Asia. Adjusted earnings were up 19% and 21% on a constant currency basis, primarily due to higher variable investment income as well as favorable expense margins and volume growth. This was partially offset by lower recurring interest margins and unfavorable underwriting margin due to higher COVID-19-related claims. Asia's solid volume growth was driven by higher general account assets under management, on an amortized cost basis, which were up 7% on a constant currency basis. In addition, sales were up 13% year-over-year on a constant currency basis, primarily driven by growth across most markets.
Latin America adjusted earnings were $125 million versus $14 million in the prior year quarter. While COVID-19-related claims remain elevated in 4Q '21 at roughly $37 million after tax, they were down significantly versus the prior year quarter and sequentially. In addition, higher recurring interest margins, favorable tax items and volume growth also contributed. Lower Chilean and encaje returns were a partial offset. Top line continues to demonstrate strength as adjusted PFOs were up 13% year-over-year on a constant currency basis, and sales were up 35% on a constant currency basis, driven by solid growth across the region.
EMEA adjusted earnings were down 48% and 45% on a constant currency basis, primarily driven by unfavorable underwriting from COVID-19-related claims as well as higher expenses and the exclusion of divested businesses in the current year period. MetLife Holdings adjusted earnings were up 13%. This increase was primarily driven by higher variable investment income as well as a reduction in policyholder dividend levels. This was partially offset by lower recurring interest margins and less favorable underwriting.
Corporate & Other adjusted loss was $177 million, excluding favorable notable items in the quarter versus an adjusted loss of $198 million in the prior year quarter. Higher net investment income and lower taxes were partially offset by higher expenses in the quarter.
The company's effective tax rate on adjusted earnings in the quarter was 12% due to several favorable tax items. These include an IRS audit settlement, a release of a deferred tax liability and a true-up associated with the filing of our 2020 corporate tax return. Adjusting for these items, the effective tax rate was within our 2021 guidance range of 20% to 22%.
Now I'll provide more detail on Group Benefits mortality results on Page 5. This chart reflects our Group Life mortality ratio for the four quarters of 2021, including the COVID-19 impact on the ratio and on Group Benefits adjusted earnings. The Group Life mortality ratio was 106.3% in the fourth quarter of 2021, which is well above our annual target range of 85% to 90%. COVID reported claims in 4Q of '21 were roughly 18 percentage points, which reduced Group Benefits adjusted earnings by approximately $300 million. While U.S. COVID deaths were higher in 4Q versus 3Q, we did see a favorable shift in the percentage of deaths under age 65, declining from approximately 40% in 3Q to roughly 33% in 4Q. As a result, these two competing factors essentially offset. In regard to non-COVID deaths, they were within our normal expected quarterly fluctuations.
On Page 6, this chart reflects our pretax variable investment income for the four quarters and full year of 2021. VII was $1.3 billion in the fourth quarter. This strong result was mostly attributable to the private equity portfolio, which had a 7.9% return in the quarter. As we have previously discussed, private equity is generally accounted for on a one-quarter lag. While all private equity classes performed well in the quarter, our venture capital funds, which accounted for roughly 25% of our PE account balance of $14 billion we're the strongest performer across subsectors with a roughly 13% quarterly return. For the full year, VII was $5.7 billion, more than 4 times above the top end of our 2021 target range of $1.2 billion to $1.4 billion.
On Page 7, we provide VII post-tax by segment for the four quarters and full year 2021. As we had previously noted, RIS, MetLife Holdings and Asia generally account for 90% or more of the total VII and are split roughly one-third each. For the full year, these three businesses accounted for 92% of the total VII with RIS and MetLife Holdings benefiting from the outperformance from venture capital funds relative to Asia.
Turning to Page 8. This chart shows a comparison of our direct expense ratio over the prior 8 quarters and full year 2020 and 2021. As expected, our direct expense ratio in 4Q of '21 was elevated at 12.9%, reflecting the impact from seasonal enrollment costs and group benefits, timing of certain technology investments and employee 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 2021, our direct expense ratio was 11.6%, well below our annual target of less than 12.3%, clearly demonstrating our consistent execution and focus on an efficiency mindset.
I will now discuss our cash and capital position on Page 9. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.1 billion at September 30 and remains above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of $1.2 billion in the fourth quarter as well as holding company expenses and other cash flows. In 2021, we returned approximately $6 billion to shareholders, the most in any year through share repurchases and common stock dividends.
For the two-year period 2020 and 2021, our average free cash flow ratio excluding notable items, totaled 59%, while the ratio was below our 65% to 75% target range due to the strength of our adjusted earnings in 2021, our statutory free cash flow in absolute dollar terms remains strong. In terms of statutory capital for our U.S. companies, we expect our combined 2021 NAIC RBC ratio will be above our 360% target. Preliminary 2021 statutory operating earnings for our U.S. companies were approximately $5 billion, while net income was approximately $3.8 billion. We estimate that our total U.S. statutory adjusted capital was $19.1 billion as of December 31, 2021, an increase of 12% year-over-year. 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 911% as of September 30, which is the latest public data.
Before I shift to our near-term outlook on Page 11, a few points on what we included in the appendix. The chart on Page 16 reflects new business value metrics for MetLife's major segments from 2016 through 2020. This is the same chart that we showed as part of our 3Q '21 supplemental slides, but we felt it was worth including again for the sake of completeness. Consistent with our Next Horizon strategy, this chart demonstrates that we continue to have a relentless focus on deploying capital and resources to the highest value opportunities. Also Pages 17 through 20 provide interest rate assumptions and key outlook sensitivities by line of business.
Turning back to Page 11. We expect COVID-19 to remain with us in 2022. But given the uncertainty of the environment, we are not going to speculate on the magnitude or timing. Therefore, our near-term targets do not reflect COVID impacts. Based on 12/31 forward curve, interest rates are expected to rise. However, we would expect favorable impacts to be offset in part by higher LIBOR rates, resulting in a flatter yield curve.
FX rates based on the forward curve indicate the U.S. dollar is expected to remain strong, which will be a headwind for our businesses outside the U.S. As a result, we would expect adjusted earnings in 2022 versus 2021, will be reduced by roughly $50 million in Asia, roughly $25 million for both Latin America and EMEA. Finally, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our historical returns for PE.
Moving to near-term targets. We are maintaining our adjusted ROE range of 12% to 14%. We also expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings. Given the strong adjusted earnings in 2021, we would expect to be closer to the bottom end of the range in 2021 and 2022 before moving higher in 2022 through 2024. This is just a function of math, given the outsized earnings in 2021 as well as the lagging nature of statutory dividend payments to the holding company. In addition, we remain committed to maintaining a full year direct expense ratio below 12.3%.
We are raising our VII guidance in 2022 to $1.8 billion to $2 billion. After applying our historical average returns on higher asset balances, I'll provide more detail on VII in a moment.
Our Corporate & Other adjusted loss is expected to remain at $650 million to $750 million after tax, but we are increasing our expected effective tax rate by 1 point to 21% to 23% to reflect our expectation for higher earnings in foreign markets and lower tax credits in the U.S.
At the bottom of the page, you'll see expected key interest rate sensitivities relative to our base case, which incorporates the forward curve as of December 31. The takeaway is that changes in interest rates are expected to have a relatively modest impact on adjusted earnings over the near term.
Now I'd like to provide you with more detail on what informed our 2022 VII guidance range of $1.8 billion to $2 billion, as highlighted on Page 12. The chart reflects the growth in our VII average asset balances from $8.4 billion in 2020 to nearly double at $16.5 billion expected in 2022. This growth is due to both the strong private equity returns in 2021 as well as the inclusion of over $2.6 billion of real estate and other funds in 2021. These were previously part of the recurring investment income portfolio and were reclassed to VII beginning in 2021 as we've begun to partially shift the form of our investment in certain asset classes, such as real estate equity investments through participation in funds. In addition, our 2022 average VIII asset balance also factors in, our expected sale of $1 billion of private equity in the secondary market in 2022.
Finally, in addition to the asset balances, we are applying our historical annual returns for each asset class within VII. In addition to the PE return of 12%, which I previously discussed, we expect 6.5% return for hedge funds and a 7% return for real estate and other funds.
So now I will discuss our near-term outlook for our business segments. Our comments will be anchored off full year 2021 reported results in our QFS, unless otherwise noted. Let's start with the U.S. on Page 13.
For Group Benefits, excluding the excess premium from participating Group Life contracts of $1.1 billion in 2021, adjusted PFOs are expected to resume their historical target range of 4% to 6% annually, albeit from a higher base.
Regarding underwriting, we expect the annual Group Life mortality ratio to be between 85% to 90%, excluding COVID impacts. We are also maintaining the expected group nonmedical health interest adjusted benefit ratio at 70% to 75%.
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. However, we are increasing our expected annual RIS investment spread by 5 basis points to 95 to 120 basis points in 2022, consistent with our higher VII range. Overall, we would expect a significant decline in RIS adjusted earnings in 2022, given the exceptional private equity returns in 2021 as well as 2021 benefiting from higher mortgage paydowns and excess mortality gains, we believe were likely due to COVID.
For MetLife Holdings, we are expecting adjusted PFOs to decline between 6% to 8% annually, higher than our prior guidance of 5% to 7%. We are lowering the life interest adjusted benefit ratio to 45% to 50% in 2022 from the prior 50% to 55% in 2021 to reflect the impact of lowering the policyholder dividend levels. Finally, we are maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2022.
Now let's look at the near-term guidance for our businesses outside the U.S. on Page 14. For Asia, we expect the recent sales momentum to continue and generate mid- to high single-digit growth over the near term. In addition, we expect journal account AUM to maintain mid-single-digit growth. We are expecting mid-single-digit adjusted earnings growth when excluding the excess VII over plan of approximately $800 million post tax in 2021. In Latin America, we expect adjusted PFOs to grow by high single digits over the near term. Relative to its 2021 reported adjusted earnings, we expect Latin America adjusted earnings to double in 2022, excluding COVID impacts, and then grow by high single to low double digits in 2023 and 2024.
Finally, for EMEA, we expect sales to grow mid- to high single digits over the near term. We expect adjusted earnings and PFOs to decline in 2022 due to the impact from the stronger U.S. dollar and divestitures in the region. For 2023 and 2024, we expect to me adjusted earnings and PFOs to grow to mid- to high single digits on a constant currency basis.
Let me conclude by saying MetLife delivered another strong quarter to close out a very strong year, highlighted by outstanding private equity returns, solid top line growth, ongoing expense discipline and the benefits of our diverse set of market-leading businesses and capabilities. 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'll turn the call back to the operator for your questions.