John D. McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel, and good morning. I will start with the 2Q '22 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions as well as commentary on the new U.S. GAAP accounting, known as Long Duration Targeted Improvements or LDTI, effective 1/1/23. Starting on Page three, we provide a comparison of net income to adjusted earnings in the second quarter. Higher interest rates and the strengthening of the U.S. dollar in the quarter drove net derivative losses. As a reminder, MetLife uses derivatives as part of our broader asset liability management strategy to hedge certain risks.
This hedging activity often generates derivative gains or losses and creates fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment. In addition, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. We had one favorable notable item this quarter of $77 million or $0.09 per share related to a reinsurance settlement, which was accounted for in MetLife Holdings. On Page four, you can see the second quarter year-over-year comparison of adjusted earnings by segment, which excludes notable items in both periods. Adjusted earnings in the second quarter of 2022, excluding the notable item were $1.5 billion, down 23% and down 21% on a constant currency basis.
Lower variable investment income drove the year-over-year decline, while favorable underwriting and solid volume growth were partial offsets. Adjusted earnings per share, excluding the notable item, was $1.90, down 17% year-over-year on a reported basis and down 15% on a constant currency basis. Moving to the businesses, starting with the U.S. business. Group Benefits adjusted earnings were up 61% year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19 Life claims as well as higher volume growth. The Group Life mortality ratio was 85.8% in the second quarter of '22 towards the bottom end of our annual target range of 85% to 90%.
The business benefited from lower U.S. COVID deaths in the quarter and a continued favorable shift in the percentage of death under age 65, declining from approximately 23% in the first quarter to roughly 17% in the second quarter. The adjusted earnings impact of Group Life COVID-19 reported claims was approximately $35 million offset in part by an IBNR release related to 1Q '22 COVID-19 claims of approximately $25 million. Therefore, the net COVID impact was roughly $10 million or one percentage point on the Group Life mortality ratio.
More detail on the Group Life mortality results over the past five quarters can be found on Page 11 in the appendix. Regarding non-medical health, the interest-adjusted benefit ratio was 73.1% in Q2 of '22 within its annual target range of 70% to 75% and favorable to the prior year quarter of 73.8%. Turning to the top line, Group Benefits adjusted PFOs were up 3% year-over-year. As we discussed in the prior quarters, excess mortality can result in higher premiums from participating contracts in the period.
The higher excess mortality in Q2 of '21 versus Q2 of '22 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly 1.5 percentage points. The underlying PFO increase of approximately 4.5% was due to solid growth across most products, including continued strong momentum in voluntary. Retirement and Income Solutions, or RIS, adjusted earnings were down 41% year-over-year. The primary driver was less favorable private equity returns versus a very strong Q2 of '21. Favorable volume growth was a partial offset.
RIS investment spreads were 116 basis points within our full year 2022 guidance of 95 to 120 basis points, but well below the prior year quarter of 224 basis points due to the significant decline in variable investment income. Spreads, excluding VII, were 103 basis points, up five basis points versus Q2 of '21 and up 14 basis points sequentially due to higher interest rates, wider credit spreads and favorable real estate performance. RIS liability exposures were down 3% year-over-year despite strong top line growth. The key drivers of this decrease came from reductions in accounting adjustments that impact our liabilities, but do not impact fees or spread income and thus have no impact on adjusted earnings. RIS sales were up 30% year-to-date, primarily driven by pension risk transfers and stable value products.
With regards to PRT, we completed three transactions worth $2.6 billion in the quarter, a strong first half of 2022, and we continue to see an active market. Moving to Asia, adjusted earnings were down 26% and 22% on a constant currency basis, primarily due to lower variable investment income and unfavorable underwriting. This was partially offset by solid volume growth as assets under management on an amortized cost basis grew 5% on a constant currency basis. In addition, Asia sales were up 2% year-over-year on a constant currency basis, primarily driven by another solid performance in Japan.
Overall, Japan sales were up 5% driven by FX annuities and accident and health products sold through face-to-face channels. Latin America adjusted earnings were $267 million versus $97 million in the prior year quarter. This strong performance were driven by several positive factors, primarily favorable underwriting and investment margins as well as solid volume growth. Overall, COVID-19 related deaths in Mexico were down significantly in Q2. This positive trend, coupled with the emergence of even more favorable mortality experience in our own block, resulted in a reduction to the IBNR reserve that was established in prior periods. This benefited LATAM's adjusted earnings by roughly $40 million after tax in 2Q '22. LATAM's adjusted earnings in the quarter also benefited from strong investment margins, primarily due to the net impact from inflation-linked assets and liabilities in Chile that increased with higher inflation rates as well as the Chilean encaje, which had a 4.8% return in 2Q '22 versus a negative 1.5% in the prior year quarter.
LATAM's top line continues to perform well as adjusted PFOs were up 26% year-over-year on a constant currency basis, and sales were up 19% on a constant currency basis, driven by growth across the region, primarily from higher single premium immediate annuity sales in Chile and group cases in Mexico. EMEA adjusted earnings were down 32% and 16% on a constant currency basis compared to a strong Q2 of '21, which benefited from a favorable refinement of an unearned premium reserve in the prior year period, totaling approximately $15 million after tax.
In addition, adverse equity market impacts in the current year period were partially offset by favorable underwriting margins. MetLife Holdings adjusted earnings were down 46%, excluding the favorable notable item of $77 million after tax as discussed earlier. This decline was primarily driven by lower variable investment income, adverse equity market impacts and less favorable underwriting also were contributors to the year-over-year decline. MetLife Holdings separate account return was negative 14% in the quarter versus a positive 6% in Q2 of '21. Corporate and other adjusted loss was $243 million versus an adjusted loss of $126 million, excluding notables in the prior year quarter.
The year-over-year variance was primarily due to higher expenses from corporate-related costs associated with less favorable equity markets and higher interest rates. Higher taxes and lower variable investment income were also contributors. The company's effective tax rate on adjusted earnings in the quarter was 22.3% and within our 2022 guidance range of 21% to 23%. On Page five, this chart reflects our pretax variable investment income for the past five quarters, including $389 million in the second quarter of '22. The majority of VII was attributable to the private equity portfolio of roughly $14 billion, which had an overall return of 1.5% in the quarter.
As we have previously discussed, private equity is generally accounted for on a one-quarter lag. In addition, real estate equity funds were also a strong contributor to VII with nearly an 8% return in the quarter while hedge funds, which are reported on a one-month lag, had a loss. While VII in 2Q '22 was below expectation and recent trends, our new money rate was 3.92% and above our roll-off yield of 3.71%.
This marks the first time in over a decade in which we did not experience quarterly spread compression in the investment portfolio. On Page six, we provide VII post-tax by segment for the prior five quarters, including $307 million in Q2 of '22. Asia, MetLife Holdings and RIS continue to earn the vast majority of variable investment income consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-date liabilities, which are mostly in these three businesses. Turning to Page seven.
This chart shows a comparison of our direct expense ratio over the prior five quarters, including 11.9% in Q2 of '22. 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 second quarter 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 the second half of the year, consistent with the seasonality of our business, we remain committed to achieving a full year direct expense ratio below 12.3% in 2022 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset. I will now discuss our cash and capital position on Page eight.
Cash and liquid assets at the holding companies were approximately $4.5 billion at June 30, which is up from $4.2 billion at March 31 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 $1.1 billion in the second quarter as well as holding company expenses and other cash flows. In addition, HoldCo cash includes the proceeds from the sale of our Poland business, which closed in April. In regard to our statutory capital for our U.S. companies, our preliminary second quarter year-to-date 2022 statutory operating earnings were approximately $700 million, while net income was approximately $1.3 billion.
Statutory operating earnings decreased by approximately $2 billion year-over-year, driven by unfavorable VA rider reserves, underwriting results and lower variable investment income. We estimate that our total U.S. statutory adjusted capital was approximately $19.1 billion as of June 30, 2022, up 2% sequentially. Finally, the Japan solvency margin ratio was 764% as of March 31, which is the latest public data. The decline from December 2021 was primarily due to higher U.S. interest rates. Now shifting to LDTI on Page nine. While there is quite a bit of work still to be done prior to implementation on January one, let me take a moment to recognize the great work of our MetLife associates and our partners in getting us to this point.
This slide provides an update on our expected transition balances as of January one, 2021, under LDTI. The column on the left was our actual balances at 12/31/20, and the middle column contains the estimated range of our restated balances under LDTI. The changes under LDTI that account for the bulk of the book value adjustment at transition include the market risk benefit adjustment associated with variable annuities, not presently accounted for at market, the impact of disaggregation, the revaluation of in-scope long-duration insurance contracts using a single rate equivalent discount rate and the elimination of relevant shadow account balances. As you can see from MetLife at the end of 2020, there is a greater convergence between book value and book value excluding AOCI under LDTI.
However, this may not always be the case as certain assets are not mark-to-market and not all liabilities are in scope under LDTI. While LDTI will provide additional information and transparency and improve consistency around accounting for certain aspects of the life insurance industry, it does not impact cumulative product profitability, cash flow generation, our strategy or how we manage the business. Let me conclude by saying MetLife delivered another strong quarter, highlighted by solid top line growth, ongoing expense discipline and the benefits of our diverse set of market-leading businesses and capabilities that allow us to navigate successfully through uncertain environments.
While private equity returns were lower this quarter, it was offset by favorable underwriting, most notably in our market-leading franchises in Group Benefits and Mexico, which saw a return to more normal mortality as COVID-19 deaths significantly declined. Finally, our capital, liquidity and investment portfolio remains strong and position us for further success. And 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.
