MetLife Q3 2022 Earnings Call Transcript

Key Takeaways

  • Adjusted earnings per share were $1.21 in Q3 (or $1.16 excluding notable items), and net income fell to $331 million from $1.5 billion a year ago due to lower adjusted earnings, derivative losses and investment losses.
  • Rising interest rates drove new money yields to 4.71%, outpacing portfolio roll-off yields of 3.92% and boosting recurring investment income prospects.
  • U.S. Group Benefits earnings surged 259% year-over-year to $399 million, fueled by favorable underwriting, a decline in COVID-19 life claims and double-digit voluntary product growth.
  • Pension Risk Transfer (PRT) sales reached a record $12.3 billion year-to-date, including an $8 billion transaction in Q3, reflecting strong market demand and a robust pipeline.
  • MetLife returned approximately $1.1 billion to shareholders in Q3 via dividends and buybacks, while holding $5.2 billion of liquidity at its holding companies—well above its $3–4 billion target buffer.
AI Generated. May Contain Errors.
Earnings Conference Call
MetLife Q3 2022
00:00 / 00:00

There are 15 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2022 Earnings Release Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings. With that, I will now turn the call over to John Hall, Global Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Q3 2022 earnings call. To begin, I refer you to the information on non GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review. Presenting on the call this morning are Michel Hallaff, President and Chief Executive Officer and John McCallion, Chief Financial Officer.

Speaker 1

Also available to participate in the discussion are other members of senior management. Last night, we released a set of supplemental slides, which address the quarter. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to these slides features incremental disclosures, GAAP reconciliations and other information, which you should also review.

Speaker 1

After prepared remarks, we will have a Q and A session, and it will end no later than the top of the hour. In fairness to all, please limit yourself to one question and one follow-up. Now on to Michel.

Speaker 2

Thank you, John, and good morning, everyone. Many of the macroeconomic trends from the first half of the year persisted in the 3rd quarter. As equity markets fell again, interest rates rose some more and the possibility of a recession remains an execution of our next horizon strategy, which continues to prove its resilience in the face of uncertainty. Looking ahead, there are several areas that we believe differentiate MetLife and position us well going forward. We have established a track record of relentless execution focused on controlling those factors that we can control.

Speaker 2

We have a commitment to responsible growth aided by the use of powerful analytical tools such as VNB or value of new business to produce high teen IRRs and mid single digit payback periods. We have embedded an efficiency mindset in our DNA, which drives our productivity and provides us with the capacity to invest in the future. And we generate strong recurring free cash flow that supports clear and consistent capital and liquidity management. Turning to quarterly performance as a whole. Recurring investment rates rose, PFOs on a constant rate basis were strong, COVID-nineteen losses in the aggregate moderated and expense discipline held firm.

Speaker 2

The greatest headwind was variable investment income. Starting with some numbers, Last night, we reported Q3 2022 adjusted earnings of $966,000,000 or $1.21 per share. Notable items in the quarter included our annual actuarial assumption review and other insurance adjustments, which had a positive impact of $34,000,000 or $0.04 per share on adjusted earnings. Excluding notable items, Adjusted earnings in the quarter were $1.16 per share. Net income in the 3rd quarter was $331,000,000 compared to $1,500,000,000 a year ago, primarily driven by lower adjusted earnings and derivative losses from hedges we hold to protect our balance sheet as well as investment losses from standard investment activity.

Speaker 2

In the Q3, variable investment income was a loss of $53,000,000 Private Equity is the largest contributor to VII and generated a negative 1.3% return in the quarter. As you know, our PE portfolio is reported on a 1 quarter lag. 3rd quarter private equity results reflect percent as measured by the S and P 500. Our investment in private equity is driven by its properties as a long dated asset class that provides a good match for our long dated liabilities. Not only has this proven to be a good ALM strategy, but we have generated substantial gains over time for the benefit of our policyholders and our shareholders.

Speaker 2

As a partial offset to private equity in the quarter, we saw recurring investment income grow sequentially on higher new money rates. For roughly the past decade, we effectively managed through an interest rate environment where our new money rate was below our roll off rate. In the Q2, that finally reversed as our new money rate exceeded our roll off rate. This repeated in the Q3 to even greater effect. With the duration of our investment portfolio at roughly 8 years, we expect the impact of this change to build over time.

Speaker 2

Broadly speaking, rising interest rates are a good thing for MetLife. Shifting to our business segments, we saw strong growth in U. S. Group Benefits with adjusted earnings of $399,000,000 up 2 59% year over year. This represents favorable underwriting, including a substantial decline in COVID-nineteen life insurance claims and aided by strong volume growth.

Speaker 2

Group life mortality, including COVID-nineteen losses, registered a benefit ratio of 86%, which continues to be at the low end of our annual target range of 85% to 90%. And our non medical health ratio was 70.8%, also at the low end of our annual target range of 70% to 75%. Execution across our enrollment and voluntary strategy is going well and responsible for driving double digit PFO growth across our voluntary suite of products. The investments we've made to expand our product breadth, to deepen our understanding of employee needs and to connect and communicate with employees are all paying off. In Retirement and Income Solutions, or RIS, adjusted earnings were $345,000,000 which were down from a year ago, largely due to lower variable investment income.

Speaker 2

Benefiting from higher rates, Recurring investment income spreads remained strong. The highlight in the quarter for RIS was winning our largest ever pension risk transfer deal of roughly $8,000,000,000 Year to date, we have booked $12,300,000,000 of new PRT business, already an all time annual high for MetLife. And we continue to see a robust pipeline with the market opportunity extending out for years. For Asia, Adjusted earnings of $197,000,000 were below a year ago, mostly on lower variable investment income and unfavorable underwriting. COVID claims reduced adjusted earnings in the quarter by $129,000,000 driven largely by hospitalization claims in Japan.

Speaker 2

Changes to hospitalization claims eligibility rules, which took effect at the end of September, will greatly reduce such claims looking ahead. Asia sales were up 27% on a constant currency basis from a year ago, led by Japan foreign currency annuities and accident and health products. 2 weeks ago, on a visit to Asia, I had the opportunity to have strong execution. In this fast changing environment, Our efforts to meet our customers where they are and the nimbleness of that pursuit are strengthening our competitive advantage. In Latin America, the region had another strong quarter, which came from a COVID impacted $29,000,000 a year ago.

Speaker 2

Latin America sales continued to be strong, rising 22% for the quarter across the region on a constant currency basis, reflecting sustained business momentum. MacLeay's focus on responsible growth is an integral element of our strategy. On an annual basis in the Q3, We disclose our value of new business metrics for the prior year. As I mentioned earlier, VNB is a tool that underpins our efforts to generate responsible growth. The metrics show that MetLife has been able to put capital to work to support organic growth more effectively and efficiently over time.

Speaker 2

For example, in 2019, we deployed $3,800,000,000 of capital at a 15% IRR to generate $1,800,000,000 of VNB. 2 years later, we put less capital to work, $2,800,000,000 at a higher IRR to generate even more VNB, dollars 1,900,000,000 We think our principal views of VNB and the results that we've achieved are clear differentiators for MetLife. The discipline we use to evaluate and drive new business is no different than the discipline we employ to score merger and acquisition opportunities. During the Q3, MetLife Investment Management announced a definitive agreement to acquire Affirmative Investment Management. AIM is an award winning global environmental, social and corporate governance investment manager with roughly $1,000,000,000 of assets under management.

Speaker 2

Combining AIM's ESG capabilities with MEMS' fundamental investment expertise will create differentiated client solutions and offer a new and attractive opportunity for growth. Further, this transaction underscores our strategic objective to grow our Investment Management business, while highlighting M and A as a strategic capability for MetLife. Moving to cash and capital. MetLife continued to be active with capital management during the Q3. We paid $400,000,000 of common stock dividends to shareholders.

Speaker 2

We also repurchased $674,000,000 of our common shares, bringing total capital return in the quarter to roughly $1,100,000,000 In October, we repurchased an additional $176,000,000 of MetLife shares. There remains $1,600,000,000 outstanding on our current $3,000,000,000 authorization. MetLife is well capitalized and highly liquid. At the end of the quarter, We had $5,200,000,000 of cash and liquid assets at our holding companies. We remain comfortably above our target cash buffer of $3,000,000,000 to $4,000,000,000 In closing, our all weather Next Horizon strategy continues to be the right strategy to guide us through the changing times ahead.

Speaker 2

Together, the diversification of our great set of market leading businesses, our responsible growth, our efficiency mindset and our strong free cash flow generation will serve MetLife well across a range of economic cycles. We believe these are the right ingredients to create value for our shareholders and our stakeholders now and into the future. With that, I will turn things over to John.

Speaker 3

Thank you, Michelle, and good morning. I will start with the 3Q 'twenty two supplemental slides, which provide highlights of our financial performance, details of our annual global actuarial assumption review, updates on our value of new business metrics and our cash and capital positions. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the 3rd quarter. Net derivative losses were primarily the result of higher interest rates. As a reminder, MetLife uses derivatives as part of our broader asset liability management This hedging activity can generate derivative gains or losses and create fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment.

Speaker 3

Overall, the hedging program continues to perform as expected. In addition, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. In total, the actuarial assumption review and other insurance adjustments in 3Q of 2022 was favorable to net income by $54,000,000 with a positive impact to adjusted earnings of $34,000,000 and a $20,000,000 impact to non adjusted earnings. The table on Page 4 provides highlights of the actuarial assumption review and other insurance adjustments with a breakdown of the adjusted earnings and net income impact by business. Overall, the impacts were fairly modest.

Speaker 3

In MetLife Holdings, annuity earnings were negatively impacted by lower than and favorable mortality. In addition, we had a reinsurance recapture gain, which was favorable to RES adjusted earnings by $91,000,000 Our U. S. Mean reversion interest rate remained unchanged at 2.75%, and We have maintained our long term mortality assumptions. On Page 5, you can see the 3rd quarter year over year comparison of adjusted earnings by segment, which excludes notable items in both periods.

Speaker 3

Adjusted earnings excluding total notable items was $932,000,000 in 3Q of 2022, down 58% and down 57% 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 notable items was $1.16 down 55% year over year on a reported basis and down 54% on a constant currency basis. Moving to the businesses, starting with the U. S.

Speaker 3

Business. Group Benefits adjusted earnings more than tripled year over year, primarily due to significant improvement in underwriting margins aided by lower COVID-nineteen life The group life mortality ratio was 86% in the Q3 of 2022 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 deaths under age 65, which was roughly 15% in Q3 of 2022.

Speaker 3

More detail on the group life mortality results over the past 5 quarters can be found on Page 12 in the appendix. Regarding non medical health, the interest adjusted benefit ratio was 70.8% in Q3 of 2022 at the low end of its annual target range of 70% to 75% and essentially in line with the prior year quarter. Turning to the top line, Group Benefits adjusted PFOs were up 3.4% year over year. As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q3 of 2021 versus Q3 of 2022 resulted in a year over year decline in premiums from participating contracts, which dampened growth by roughly 1 percentage point.

Speaker 3

The underlying PFO increase of approximately 4.4% was primarily due to solid growth across most products, including continued strong momentum in voluntary. Retirement and Income Solutions or RIS adjusted earnings excluding the notable item this quarter were down 68% year over year. The primary driver was lower private equity return versus a very strong Q3 of 2021, as well as less favorable underwriting. Favorable volume growth was a partial offset. RIS investment spreads were 71 basis points, well below our full year 2022 guidance of 95 basis points to 120 basis points and prior year quarter of 256 basis points due to the significant decline in variable investment income.

Speaker 3

Spreads excluding VII were 101 basis points, up 8 basis points versus Q3 of 2021 and down 2 basis points sequentially. While RIS liability exposures were down 1% year over year due to certain accounting adjustments that do not impact fees or spread income, RES had strong volume growth driven by sales up 59% year to date. This was primarily driven by pension risk transfers and stable value products. With regards to PRT, this has been a record year for MetLife as we have completed 6 transactions worth $12,300,000,000 year to date and we continue to see an active market. Moving to Asia, adjusted earnings ex notable items were down 73% on both on a currency basis, primarily due to lower variable investment income and unfavorable underwriting.

Speaker 3

This was partially offset by solid volume growth as assets under management on an amortized cost basis grew 4% on a constant currency basis. In addition, Asia sales were up 27% year over year on a constant currency basis, primarily driven by a strong performance in Japan. Overall, Japan sales were up 33%, driven by FX annuities and accident and health products, which benefited from product launches and new capabilities over the past year as well as the strength of our diversified channel, dollars 64,000,000 versus $31,000,000 in the prior year quarter. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-nineteen related deaths in Mexico were down significantly year over year.

Speaker 3

LATAM's recurring interest margins in 3Q 'twenty and the Chilean encaje, which had a negative 1.9% return in 3Q 2022 versus a negative 0.3% in the prior year quarter. Lactam's top line continues to perform well as adjusted PFOs were up 21% year over year

Speaker 4

on a constant currency basis,

Speaker 3

and sales were up 22% 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 which benefited from very favorable underwriting. EMEA adjusted PFOs were down 7% on a constant currency basis, primarily due to refinements of certain unearned revenue reserves in both periods. However, sales were up 10% on a constant currency basis, reflecting growth across MetLife Holdings adjusted earnings were down 77%, excluding notable items in both periods. This decline was primarily driven by lower variable investment income.

Speaker 3

Adverse equity market impact was also a contributor as MetLife Holdings' separate account return was negative 5.5 percent in the quarter versus a negative 1% in 3Q of 2021. Favorable underwriting margins in life and long term care were a partial offset. Corporate and other adjusted loss was $265,000,000 versus an adjusted loss of $131,000,000 The year over year variance was primarily due to less favorable taxes, lower variable investment income and higher expenses due to market sensitive employee related costs. The company's effective tax rate on adjusted earnings in the quarter was 20 3%, which was at the top end of our 2022 guidance range of 21% to 23%. On Page 6, this chart reflects our pretax variable investment income for the past 5 quarters, including a $53,000,000 loss in the Q3 of 2022.

Speaker 3

The majority of VII was attributable to the private equity portfolio of roughly $14,000,000,000 which had an overall negative return of 1.3% in the quarter. As we have discussed previously, Private equity is generally accounted for on a 1 quarter lag. In addition, real estate equity funds had a positive 4.3 return in the quarter on a portfolio of roughly $2,300,000,000 While VII underperformed in 3Q 'twenty two, Our new money rate increased to 4.71 percent, which was 79 basis points above our roll off yield of 3.92%. We expect this favorable trend to continue in a rising interest rate environment. On Page 7, we provide VII post tax by segment for the prior 5 quarters, including a $42,000,000 loss in Q3 of 'twenty two.

Speaker 3

VII assets are primarily owned to match longer dated liabilities, which are mostly in these three businesses. Turning to Page 8, this chart shows a comparison of our direct expense ratio over the prior 5 quarters, including 12.3 percent in Q3 of 2022. As we have highlighted previously, we believe our full year direct expense ratio is the best Our Q3 expense ratio was in line with our full year target, but above recent trend given higher employee related costs that are sensitive to market fluctuations. Those costs contributed roughly 40 basis points to the ratio. While we'd expect our direct expense ratio to be higher in 4Q, consistent with the seasonality of our business, we remain committed to achieving our full year direct Our next question comes from the line of John Franzreb's financial results.

Speaker 3

Thank you, John. Thank you, John. Thank you, John. Thank you, John. Thank you, John.

Speaker 3

Our first question comes from the line of John Franzreb's Now let's turn to Page 9. This chart reflects new business value metrics for MetLife's major segments for the past 5 years, including an update for 2021. 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 invested $2,800,000,000 of capital in 2021 to support new business, which was deployed at an average unlevered IRR of approximately 17% with a payback period of 6 years, generating roughly $1,900,000,000 in value. New business written in 2021 reflects our disciplined approach to building I will now discuss our cash and capital position on Page 10.

Speaker 3

Cash and liquid assets at the holding companies were approximately $5,200,000,000 at September 30, which was up from $4,500,000,000 at June 30 and remains well above our target cash buffer of $3,000,000,000 to $4,000,000,000 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 approximately $700,000,000 in the 3rd quarter as well as holding company expenses and other cash flows. In addition, HoldCo cash includes the proceeds from the $1,000,000,000 senior debt issuance in July. In regard to our statutory capital, for our U. S. Companies, our preliminary Q3 year to date 2022 statutory operating earnings were approximately $1,600,000,000 while net income was approximately 2,100,000,000 Statutory operating earnings decreased by approximately $2,400,000,000 year over year, driven by unfavorable VA rider reserves, lower variable investment income and higher expenses.

Speaker 3

We estimate that our total U. S. Statutory adjusted capital was approximately $18,700,000,000 as of September 30, 2022, down 2% sequentially and year to date. Finally, the Japan solvency margin ratio was 6 17% as of June 30, which is the latest public data. The decline from March 2022 was primarily due to higher U.

Speaker 3

S. Interest rates. That being said, Rising interest rates improved the overall economic solvency of our Japan business. Let me conclude by saying the fundamentals of the business remain strong. Solid top line growth, favorable underwriting and ongoing expense discipline.

Speaker 3

While private equity returns were down this quarter, core spreads remain robust. In addition, results in our market leading franchises, Group Benefits and Latin America, continued their strong growth and recovery. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build sustainable value for our customers and our shareholders. And with that, I will turn the call back to the operator for your questions.

Operator

Thank you. One moment please. And our first question is from Jimmy Bhullar with JPMorgan. Please go ahead.

Speaker 5

Hi, good morning. So first, I had a question just on your new money yield. If you could talk about where it stands with the recent rise in rates and how it compares to the yield on your maturing investments?

Speaker 6

Good morning, Jenny. It's Steve Boulard. Thanks for the question. And I think John gave some details and color on it, but our new money yield Rose again this past quarter, 4.71 was the actual number and that shows continued improvement. I think a reflection of what we're seeing in the Obviously, with interest rates rising.

Speaker 6

And so we're very pleased with what it means for our general account investing. We're obviously going to continue to see the portfolio yield rise as a result of that given that our roll off has been now for the last couple of quarters also lower than our new money rates. I would also just remind everybody though that Things can be a little bit volatile quarter to quarter just looking at the existing book of assets that we have, what the roll off or maturity characteristics of those are. This was we look and see some big blocks that rolled off this past quarter and there'll be things like that in the future as well. But I think what's important is to think about what the trend is.

Speaker 6

The trend is positive. We continue to see and expect our new money yield to increase And continue to expect to see widening spread over the existing portfolio and that's obviously positive for net investment income.

Speaker 5

Okay. And as the new money yield is going up, how much are you having to raise crediting rates or improve terms and conditions on the Interest sensitive products that I noticed in the retirement business, the yield was up a decent amount, but crediting rates were up Even I think sequentially even a little bit more. So this spread ended up declining sequentially ex VII.

Speaker 7

Hey, Jimmy, it's Rami Tadros here. If you look at our in force for RIS, the vast majority of our in force from a crediting rate perspective is fixed. You may see quarter to quarter fluctuations in terms of the crediting rate. And clearly, the new business we're writing, While we're writing it at attractive spreads, it has a higher crediting rate given the market environment. But there is no Really increases our pressure on our in force because that's mostly fixed.

Speaker 5

Yes. And then just lastly on Group Benefits, your margins We're pretty good, I think, across all products, and other companies have reported similar results as well. Are you seeing any signs of Competition in the market picking up given the strong results that companies have had in the group benefits market over the past few quarters.

Speaker 7

Thanks, Jimmy. It's Rami again. So I'll give a specific answer to your question and maybe also helpful to give you some broader context. Both Our mortality ratio as well as our non medical health ratio were clearly favorable in the quarter. But if you look at our results historically, there's some seasonality to both of those ratios and we'd expect them To somewhat pick up in the Q4 just from a seasonality perspective.

Speaker 7

In terms of the overall market, We remain extremely bullish about this market. And if you were to kind of step back more broadly, You've all heard about the workplace dynamics and how those are changing where we're seeing employees Expecting more from their employers and we're seeing employers looking for a variety of levers to attract, retain and engage their talent. And so that's a secular trend that's here to stay and that's providing kind of tailwinds for the entire market. From a competitive perspective, I would say overall pricing is competitive, but is also rational. We've talked about this in the past.

Speaker 7

The short nature of these products, Jimmy, really act as a natural check Beyond price, such as service and digital experiences, to name a few. So some of these things, I we believe, are going to provide Kind of tailwinds to the overall market and keep the competitive landscape rational. Now All of these are germane to the entire Group Benefits Industry. They're particularly pertinent for us Because we are the market leader in this industry across both our core and voluntary products and that leadership and the strategic focus we've had It's really giving us the scale to invest in the broad range of capabilities that we have, allows us to differentiate

Operator

Next, we move on to Ryan Krueger with KBW. Please go ahead.

Speaker 8

Hey, good morning. First question was the $1,000,000,000 of debt that you issued in The quarter, is there anything that that's earmarked for or is that fully available to use?

Speaker 3

Good morning, Ryan. It's John. So as you said, we issued $1,000,000,000 of debt back in July, got some great terms On that and great execution. It's generally used it's generally raised for General purposes as well as we do have a maturity coming up in 2023. I think at the present time, we're maintaining flexibility and we'll see how things progress over the next few months, but all in all, we're pretty pleased with our Holdco cash and cash flows generally.

Speaker 8

Got it. Thanks. And then, I just had a question on Japan, just given the big moves in FX And rates there, I guess is that do you view the SMR as becoming less relevant in this environment and there's more Emerging focus on the ESR in Japan or could there be a situation where the SMR becomes a negating factored to sending cash out of Japan?

Speaker 3

Thanks. Yes, thanks. It's John again. I'll take that. So as you said, the SMR was down in the Q2 at 6.17 and certainly in the current regime, Rising interest rates do impact that.

Speaker 3

But overall, as you mentioned, and I said in my opening remarks, rising interest rates improve the overall economic value of that business. We'll have to monitor the SMR. We can't ignore it, but we want to also do things that make And we have a number of internal tools that we can utilize to help manage that temporary impact you would see in the SMR because of the asymmetrical accounting. So overall, the economics is improving. As you mentioned, In a few years' time, they're moving to a more economic solvency framework known as ESR that will better reflect the economics of the business.

Speaker 3

And right now, we have no concerns over the capital generation or dividend capacity of the business or overall free cash flow for the firm.

Speaker 8

Okay, great. Thank you.

Operator

Next, we go to the line of Tom Gallagher with Evercore ISI. Please go ahead.

Speaker 9

Good morning. Just a couple of questions on one on derivatives, second on investment losses. Just on As I think about your hedges and I just look at derivative losses from rising interest rates, I just want to understand if there's any real impact to statutory capital generation from that. I'd look at the last three quarters, they've been about $2,000,000,000 Or more than $2,000,000,000 of losses. I didn't think that impacted stat earnings.

Speaker 9

I thought that was an adjustment to TAC. Just first question is just any impact that should have on Stack Capital Generation.

Speaker 3

And just to clarify, the $2,000,000,000 you're referencing is a GAAP number, right?

Speaker 9

Yes. It's in your QFS, not and I don't see that showing up in The intact. The statute intact, right?

Speaker 3

That's right. Yes, and I think that's the correct observation. Obviously, there's different accounting that occurs in GAAP versus I think the punch line that I would just leave you with is overall, we actively manage the statutory capital of the operating entities. And as you've seen, there's been a rising rate environment and I'd say tech has been very resilient despite the market fluctuations. That's probably how we'd

Speaker 9

leave it. Okay. So John, no real impact that you see right now on dividend capacity or capital Generation that would be notable to point out? No. Okay.

Speaker 9

And then my follow-up is just on the investment losses and gains In your supplement, I just want to understand,

Speaker 3

how

Speaker 9

to think about whether those will also Could have an impact on Stack Capital Generation as well. I think most of those should be flowing through IMR. So to the extent that you have net losses, I think that will reduce your IMR amortization gains every year, It will have a very like modest annual impact. Am I thinking about that correctly? Or can you shed some light on that?

Speaker 6

Hey, Tom, it's Steve Goulart. I think John and I will tag team on this a little bit, but just in thinking about what's happening in the market and trading and losses and the like, First thing I'd say is, losses are not unexpected in this environment just given rising rates. Although I would note that they're down significantly from where Last quarter, which I think shows sort of a more moderating environment in that respect. And again, like I said last quarter, it's usually Pretty easy to decipher, understand why we're taking losses. It's a combination of rotating temporary That's in the permanent assets and things like PRTs and other longer term liabilities and also just funding out Flows and cash flow needs of the different businesses, whether it be surrenders or capital markets and the like.

Speaker 6

So that sort of sets the stage. Again, Down from last quarter as we would expect. And obviously, it is something though that we do manage and John can talk a little bit about the capital Yes.

Speaker 3

And you're correct, if you have an IMR balance that would typically get absorbed, we're in that position today. But it's one you have to

Operator

Our next question is from Erik Bass with Autonomous Research. Please go ahead.

Speaker 10

Hi, thank you. You highlighted the strong PRT sales year to date and a robust pipeline. I was just hoping you could talk about how the rise in interest rates is affecting both plan Also in the past, I think you've given a rule of thumb for the earnings contribution from each $1,000,000,000 of sales. I'm Just wondering if this is still the right level to think about.

Speaker 7

Hey, Eric, it's Rami here. To answer the second question first, yes, that's still the rule of thumb still holds and that's how you should think about the earnings run rate of these deals. With respect to the overall PRT market, clearly, I think the headline number to look at is the overall funding level, Which is going to be helped by rising interest rates and therefore improve if you feel the affordability and the funding levels of defined benefit plans to engage in any kind of pension risk transfer. Clearly, we've seen we're on track to have a record This year with respect to PRT, we're extremely pleased with winning our largest deal ever with IBM. And we still see a very robust pipeline in front of us.

Speaker 7

I mean, we are the market leader here. We have deep working with plan sponsors and their advisers on all aspects of pension risk transfers, And we have a very clear strategy in this market. We're focused on the jumbo end of the market. That plays to our competitive strengths in terms of our rating, The size of our balance sheet, our investment capabilities and you see large sponsors like IBM I'm looking for solution providers with a very long track record of being in this business. I'd also note that The jumbo end of the market is the part of the market where the competitive set of providers tends to be somewhat smaller Given all the other attributes I've talked about.

Speaker 7

And the last thing I would point on this market, while we are a market leader and actively engaged, We always have our eye on value and value of new business. Going back to the chart that Michel and John referenced, And we want to write business and we are writing business, which with ROEs that are well within our enterprise ROE targets.

Speaker 10

Thank you. And then I was hoping you could talk about the growth outlook for the Latin American business. There's been strong sales momentum and you're back to the earnings Run rate that you had talked about, so looking forward, is double digit growth in PFOs and earnings from here kind of the right target to think about?

Speaker 11

Yes. Hi. Thanks, Eric. This is Eric. So yes, overall, we had another solid quarter For the region, supported by what you know is the strength of our franchise, our strong underlying business fundamentals, all of it combined with favorable market factors and tailwinds last quarter and this quarter.

Speaker 11

Now we continue to deliver on our growth commitments as evidenced and as you mentioned by a double digit growth in PFOs that are reflective both of our strong sales and solid persistencies and good momentum that we're continuing to see across all countries. Now the sales momentum that began really last year has continued throughout this year. It is reflective of the resilience of our distribution channel, the diversification and the diversified product mix and the overall solidity and growth potential of the franchise in the region. Now the sales quarter the strong sales quarter was really across the regions and across all channels with Chile and Brazil having the record quarter. Brazil, actually, I want to point out this is a growth story.

Speaker 11

We have grown twice as fast as the market. We are growing very well across all channels and all products. And just to give you an idea, this quarter, Brazil contributed to over 20% of the region's sales. So that overall flight to quality that I referenced quarters is also evidenced by the strong persistencies that we're continuing to see and the robust Sales of year over year and quarter over quarter. So overall, We don't update our outlook and we'll do so in February, but we're very pleased with the momentum and the growth that we're seeing across the region.

Speaker 9

Great. Thank you.

Operator

And our next question is from Alex Scott with Goldman Sachs. Please go ahead.

Speaker 4

Hi. First question I had for you is on expenses. I know you guys have guided to this Direct expense ratio, but I also recognize you've been getting pretty good growth across a number of your businesses. So I just wanted to better understand the kind of operating leverage do you expect to get over time?

Speaker 2

Yes. Good morning, Alex. It's Michel. So let me just maybe remind Why we anchored on the twelvethree. And we talked about building an efficiency mindset as part of our DNA, and we're seeing excellent traction on this front.

Speaker 2

And the idea here is that we wanted to We want to continue to free up capacity to make important investments in our business. And we've been able to do so over the last A few years and I think this is playing out very nicely. If you think about I referenced voluntary benefits And some of the capabilities that we've introduced there, Japan in terms of digitizing our business And speak to market in terms of introducing new products. So we believe it's important to continue to make those types of investments to drive our competitive advantage going forward. Now when we did sort of establish the twelvethree target, obviously, it was also in a different environment if you consider The inflationary pressures that everyone is feeling at the moment.

Speaker 2

Yet, I mean and again, I think this is Credit to the sort of efficiency mindset that we've built here. We continue to be committed to achieving 123 for the year. And the last thing I would point to is that, whereas we're having a record year when it comes to PRT, Over $12,000,000,000 in new PRT deals. PRT premiums Does not factor into our direct expense ratio, does not sort of help us from that standpoint yet. There are obviously expenses associated with winning this business.

Speaker 2

So for all those reasons, we continue to believe that 12.3 is the right target for us.

Speaker 4

Got it. That's really helpful. And then maybe just to follow-up on the capital deployment and the value of new business disclosure you all give. You show in that disclosure that the margins that you're making on new business are seemingly getting Materially better. Does it make sense to deploy more capital?

Speaker 4

I mean, I noticed you deployed a little bit less Better margins, does it make sense to ramp that up as we think about 2023 and how much you'll deploy behind new business?

Speaker 3

Alex, hey, good morning. It's John. Yes, it's a great point. I mean, we are focused on achieving Solid returns and deploying capital to its highest and best use and ultimately creating value, Right. Value is the important number there.

Speaker 3

And while the IRR and the payback is also not we don't want to just get focused on one metric, The reality is that when we can deploy a great amount of capital to improve value We're comfortable with, we're going to do it. And I think that's a great call out, I think, that you've made. It's not we're not just focused on reducing the amount we deploy. We want to deploy more at Very attractive returns. And I think that will fluctuate.

Speaker 3

I mean, we've you can see, I would say, a transition that has happened over time, And that's the trend you're seeing. We're at a great point right now where I think to the extent we can deploy even more capital at attractive returns, we're going to do it.

Speaker 4

Got it. Thank

Operator

you. And our next question is from Suneet Kamath with Jefferies. Please go ahead.

Speaker 12

Yes, thanks. Good morning. Just going back to PRT for a second, Just wanted to think through the capital needs as you think about growth in that business. It didn't look like you needed to infuse any capital to support IBM, so just want to confirm that. But also as you think about the pipeline, is the opportunity set that you see in front of you going to require more capital or is that

Speaker 3

Good morning, Suneet. This is John. I'll maybe just take it at a high level And maybe touch on, I referenced in my opening remarks a slight decline in Stack Capital. If you think about that, it was about 2%. Part of that most of that I'd say was attributable to the large deal we did in the Q3 and the related capital strain Offset by some capital generation as well as we've also updated some of our latest estimates The net positive impact from the C2 updates around mortality and morbidity.

Speaker 3

So net net, I think overall, We've been able to self fund our record years to date. Now your question on the outlook, I think everything's I mean volume is a dependent factor in answering that question. But right now, we feel very comfortable with being able to fund within the operating entities What's needed to successfully grow this business.

Speaker 12

Okay, got it. And then I guess for Steve on VII, Any thoughts on kind of Q4? And then also as we think about longer term, given kind of higher rates and volatile markets, Any change to kind of the longer term thought around what the returns of this portfolio could be?

Speaker 6

Good morning. So I'd say probably several points just thinking VII and specifically the alternatives portfolio. 1st is just remember our guidance. We've been very consistent for several years 12% is our expectation every year when we go into planning, 3% a quarter. And I'd say that even now Looking forward to the last part of your question, I wouldn't anticipate that changing.

Speaker 6

That's just how we think about this portfolio. The second thing is really our experience and we've talked a lot about this too where in general, one of the things that we've always found attractive about the alternatives portfolio is that It does give us equity like returns, but it gives it to us with less volatility and less extremes as compared to some other Public market alternatives would. So that's why it's been very attractive to us. Now we did we talked a little bit Several quarters over the last couple of years where we saw that relationship be challenged, but when we look at the last couple of quarters, We do think that we're returning to sort of the historical norm in our expectations, which is, again, More muted in terms of volatility and extremes, but still giving us very attractive returns. So I don't think our outlook would change for it now, But we continue to like it for the reasons that we've mentioned.

Speaker 5

Okay, thanks.

Operator

Next, we have a question from Elyse Greenspan with Wells Fargo. Please go ahead.

Speaker 13

Hi, thanks. Good morning. My first question, I know you guys are typically asked just about potential transaction Within your blocks within holdings, anything new there or any changes that you've seen within the bid ask spread within the market in the quarter?

Speaker 3

Hi, good morning, Elyse. Nothing new to update here. It's Still an active market out there. There's still an active set of participants. We continue to focus on optimizing holdings both from an internal perspective as well as Speaking with external participants on opportunities and as we have been for quite some time and It's a potential opportunity, but it's not one where we feel like we have to do anything and we're being thoughtful about seeing that there is Opportunity one way or the other, so but nothing new at this point.

Speaker 13

And then on the RIS, the core spread ex DII, anything within that number and how should we kind of think about that trending from here?

Speaker 3

Good morning, Elyse. This is John again. As you said, total spreads were at 71, Ex VII came in at 101. So year over year up 8 basis points on an ex VII basis And then down sequentially year over year, it's obviously the higher interest rates have been beneficial. We have more of these interest rate caps that are in the money that are starting to kind of add to the spread.

Speaker 3

Sequentially, it was down 2 basis points. In the Q2, I called out that There were some excess returns in real estate that we expected to moderate, they did. So I'd say Q3 came in Pretty much as expected. And then I think the thing going forward here is, certainly based on the forward curve, which I just pulled up this morning, 3 month LIBOR, which is expected to rise to above 5% in the end of the year and beyond into next year. These caps will still be in place and will be additive to the spread.

Speaker 3

I'd say for Q4, we'd expect Spreads all else equal to grow by 5 plus bps.

Operator

Thank you.

Speaker 9

Hi, how are you?

Operator

Next, we go to the line of Wilma Burdes with Raymond James. Please go ahead.

Speaker 14

Hi, good morning. Met previously guided to $650,000,000 to $750,000,000 of corporate costs for 2022. Sounds like you're sticking to the 12.3 percent expense guidance, but should we expect a higher run rate in corporate heading into 2023 given PFO growth and inflation?

Speaker 3

Hi, good morning, Wilma. This is John. Good question. I think couple of things to point out in In terms of just Q3, first, in the first and third quarter, we typically have higher preferred stock dividends by about 30,000,000 2nd, we are running a little heavier on interest costs on debt just because of the $1,000,000,000 of debt we raised In July, I think 3rd item is PE returns have been down, the Last couple of quarters. And then lastly, I called out in my opening remarks that we do get we have seen over the last couple of quarters some higher market sensitive Employee related costs or corporate costs that we refer to and actually that probably hit us by about 40 basis points on the expense ratio this So we are running a little heavy as Michel commented before, we still expect to meet the 12.3% target despite this.

Speaker 3

And then I think we'll talk about outlook as we get into our February call. So hopefully that helps.

Speaker 14

Okay. Thank you. Second question, you previously guided to a roughly $65,000,000 quarterly earnings run rate in EMEA, but it seems like $56,000,000 this quarter was fairly normal. So I'm wondering if that's a good run rate reflecting currency pressures.

Speaker 3

Yes. I think that's a pretty simple way of thinking about it, You're on I mean, their currency has basically brought down that run rate over the last couple of quarters. So I think you're right. Probably the new number is probably closer to that.

Speaker 14

Thank you.

Operator

And that's all the time we have available for questions. And we will now pass the call back to MetLife's CEO, Michel Khalaf for closing remarks. Please go ahead.

Speaker 2

Thank you all for joining us this morning. When we rolled out our future work model in March, We did so grounded in the belief that the office plays an important role in how we live our purpose. I've now had the opportunity to visit our major In the U. S. And internationally, the vibrancy, energy and focus I encountered was palpable and speaks to the cultural evolution underpinning our Next Verizon strategy.

Speaker 2

More evidence of this emerged in our annual global employee survey, where participation rates and engagement scores reached their highest levels ever. MetLife is a team sport. These levels of energy and engagement give us further confidence in our ability to relentlessly

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.