John D McCallion
Executive Vice President and Chief Financial Officer at MetLife
Thank you, Michel, and good morning. I will start with the 3Q '22 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 three, we provide a comparison of net income to adjusted earnings in the third 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 strategy to hedge certain risks. This hedging activity can generate durative gains or losses and create fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment. 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 '22, was favorable to net income by $54 million, with a positive impact to adjusted earnings of $34 million and a $20 million impact to non-adjusted earnings.
The table on page four 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. In MetLife Holdings, annuity earnings were negatively impacted by lower-than-expected lapses and annuitizations as well as model refinements. This was partially offset by favorable impact in Life as a result of higher-earned rates and favorable mortality. In addition, we had a reinsurance recapture gain, which was favorable to RIS adjusted earnings by $91 million in the quarter. Our U.S. mean-reversion interest rate remained unchanged at 2.75%. And we have maintained our long-term mortality assumptions. On page five, you can see the third quarter year-over-year comparison of adjusted earnings by segment, which excludes notable items in both periods. Adjusted earnings, excluding total notable items was $932 million in 3Q of '22, 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. business. Group Benefits adjusted earnings more than tripled year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19 life claims as well as higher volume growth. This was partially offset by less favorable expense and investment margins year-over-year. The Group Life mortality ratio was 86% in the third 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, which was roughly 15% in Q3 of '22. More detail on the Group Life mortality results over the past five 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 '22 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 '21 versus Q3 of '22 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly one percentage point. 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 items this quarter, were down 68% year-over-year. The primary driver was lower private equity return versus a very strong Q3 of '21 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 to 120 basis points and prior year quarter of 256 basis points due to the significant decline in variable investment income. Spreads, excluding VII, were 101 basis points, up eight basis points versus Q3 of '21 and down two 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, RIS 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 six transactions worth $12.3 billion year-to-date, and we continue to see an active market. Moving to Asia.
Adjusted earnings ex notable items were down 73% on both a reported and 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 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 channels. Latin America adjusted earnings ex notables were $164 million versus $31 million in the prior year quarter. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19-related deaths in Mexico were down significantly year-over-year. LATAM's recurring interest margins in 3Q '22 continued to benefit from higher inflation rates in Chile.
However, this favorable impact was more than offset by lower-variable investment income and the Chilean encaje, which had a negative 1.9% return in 3Q '22 versus a negative 0.3% in the prior year quarter. LATAM's top line continues to perform well as adjusted PFOs were up 21% year-over-year on a constant-currency basis, 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, excluding notable items, were down 44% and 31% on a constant-currency basis compared to a strong Q3 of '21, which benefited from very favorable underwriting. EMEA adjusted PFOs were down 7% on a constant-currency basis, primarily due to refinements to certain unearned revenue reserves in both periods. However, sales were up 10% on a constant-currency basis, reflecting growth across the region. MetLife Holdings adjusted earnings were down 77%, excluding notable items in both periods. This decline was primarily driven by lower-variable investment income.
Adverse equity market impact was also a contributor as MetLife Holdings separate account return was negative 5.5% in the quarter versus a negative 1% in 3Q of '21. Favorable underwriting margins in Life and long-term care were a partial offset. Corporate and other adjusted loss was $265 million versus an adjusted loss of $131 million. 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 23%, which was at the top end of our 2022 guidance range of 21% to 23%. On page six, this chart reflects our pretax variable investment income for the past five quarters, including a $53 million loss in the third quarter of '22. The majority of VII was attributable to the private equity portfolio of roughly $14 billion, 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 $2.3 billion.
While VII underperformed in 3Q '22, our new money rate increased to 4.71%, 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 seven, we provide VII post-tax by segment for the prior five quarters, including a $42 million loss in Q3 of '22. RIS, MetLife Holdings and Asia 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-dated liabilities, which are mostly in these three businesses. Turning to page eight. This chart shows the comparison of our direct expense ratio over the prior five quarters, including 12.3% in Q3 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 third quarter 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 expense ratio target of 12.3% in 2022 despite the challenging inflationary environment.
We believe this demonstrates our consistent execution and focus on an efficiency mindset. Now let's turn to page nine. This chart reflects new business value metrics for MetLife's major segments for the past five 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 $2.8 billion of capital in 2021 to support new business, which was deployed at an average unlevered IRR of approximately 17% with a payback period of six years, generating roughly $1.9 billion in value. New business written in 2021 reflects our disciplined approach to building responsible growth while creating value, generating cash and mitigating risk. I will now discuss our cash and capital position on page 10. Cash and liquid assets at the Holdings companies were approximately $5.2 billion at September 30, which was up from $4.5 billion at June 30 and remains well above our target cash buffer of $3 billion to $4 billion.
The sequential increase in cash at the Holdings companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $700 million in the third quarter as well as Holdings company expenses and other cash flows. In addition, Holdco cash includes the proceeds from the $1 billion senior debt issuance in July. In regard to our statutory capital, for our U.S. companies, our preliminary third quarter year-to-date 2022 statutory operating earnings were approximately $1.6 billion, while net income was approximately $2.1 billion. Statutory operating earnings decreased by approximately $2.4 billion year-over-year, driven by unfavorable VA rider reserves, lower-variable investment income and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $18.7 billion as of September 30, 2022, down 2% sequentially and year-to-date. Finally, the Japan solvency margin ratio was 617% as of June 30, which is the latest public data. The decline from March 2022 was primarily due to higher U.S. interest rates.
That being said, rising interest rates improve 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. 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.
