Earnings Call Transcript
METLIFE INC (MET)
Earnings Call Transcript - MET Q1 2022
Operator, Operator
Ladies and gentlemen, thank you for standing by. Welcome to the MetLife First Quarter Earnings 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. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about the forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings. With that, I will turn the call over to John Hall, Global Head of Investor Relations.
John Hall, Global Head of Investor Relations
Thank you, Operator. Good morning, everyone. We appreciate you joining us for MetLife's first quarter 2022 earnings call. Before we begin, I would point 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. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides, which addressed 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 disclosures, GAAP reconciliations and other information, which you should also review. After prepared remarks, we will have a Q&A session. In light of the busy morning, Q&A will last no later than the top of the hour. In fairness to all, please limit yourself to one question and one follow-up. With that, over to Michel.
Michel Khalaf, President and CEO
Thank you, John, and good morning, everyone. MetLife delivered strong financial results in the first quarter of 2022, with the rise in geopolitical uncertainty and the pandemic that has not fully loosened its grip. These results demonstrate the strength and resiliency of our underlying businesses. MetLife's purpose of always with you building a more confident future is ringing true with our customers now more than ever. Starting with our financial results, we reported first quarter 2022 adjusted earnings of $1.7 billion or $2.08 per share, which was well above consensus expectations. The primary driver was strong variable investment income, partly offset by continued elevated COVID-19 claims, mostly in the U.S. Trends in our business point to continued momentum despite the many global dislocations. Net income for the quarter was $606 million, up from $290 million a year ago and below adjusted earnings in the quarter. Losses on derivatives helped to protect our balance sheet from interest rate movement and payments on bonds account for most of the difference between net income and adjusted earnings. Interest rates rose rapidly during the quarter with the yield on the 10-year treasury advancing 83 basis points, triggering market value adjustments to our derivative hedges. The tragic events in Ukraine led to an impairment of Russian and Ukrainian bonds in the quarter. Let’s shift to our continued strong performance and variable investment income, which totaled $1.2 billion pre-tax in the quarter. Private equity was again the engine producing an approximately 7% quarterly return, with the higher PD balances also a factor. Our private equity returns are reported on a one-quarter lag and the weaker first-quarter equity market may impact or VII results in the second quarter. For MetLife, private equity has long been an important source of value creation, generating strong returns and supporting our long-dated liabilities. It is an asset class we manage prudently. Last quarter, we indicated that we would divest roughly $1 billion of general account PE assets. Just after the first quarter close, we launched a PE fund of funds to be managed by MetLife Investment Management and the transaction that creatively and thoughtfully addressed investment allocation, while establishing a new fee-generating business venture. Turning to some first-quarter business segment highlights, I will start with our U.S. Group Benefits results. Adjusted earnings of $112 million were up 20% year-over-year. We saw strong growth within our current customer base, reflecting a combination of higher enrollment, higher employment level and higher salaries. Although, COVID-19 life claims remained elevated, the Group life mortality ratio fell sequentially 250 basis points to 103.8%. Our flagship U.S. Group Benefits franchise has generated a profit for shareholders in every quarter since the pandemic began, a testament to the breadth, strength and resilience of this business. With our scalar leadership, the biggest threat in this business is becoming complacent, something we will simply not allow to happen. We have taken concrete actions to grow and establish products like Group Life, Dental and Disability, voluntary products like legal and newer products like vision and Pat. The results are showing up in solid recurring PFOs, which have grown by more than $3 billion over the last three years looking past per claims. In Retirement and Income Solutions or RIS, adjusted earnings were down 16%, primarily due to a tough comparison as the strong contribution from VII in the current quarter fell below the extraordinary contribution of a year ago. Beyond VII, a number of key metrics in this business were strong, including volume growth and spreads. Continuing the momentum from the fourth quarter, we booked a $1.3 billion pension risk transfer deal in the first quarter. With funding levels strong and interest rates on the rise, we see a robust PRT pipeline going forward. For Asia, adjusted earnings similarly benefited from strong VII, partly offset by a negative impact from foreign exchange. At the same time, business momentum was solid. General account AUM was up 7% on a constant currency basis from a year ago. Sales in Asia grew 2% on a constant currency basis year-over-year driven by a good fiscal year-end in Japan. In Latin America, adjusted earnings were up by more than $100 million from the prior period. As COVID-19 claims moderated in Mexico, the exceptional sales success posted in 2021 has carried into 2022 with sales on a constant currency basis jumping 40% in the first quarter. The pandemic has ushered in a renewed focus on the importance of insurance across Latin America. This has fueled a flight to quality, which in turn has helped drive our sales and boost our persistency. Shifting to capital and cash, we returned more than $1.3 billion to shareholders through common dividends and share repurchases in the first quarter. Based on the strength of our balance sheet and free cash flow generation, we announced a 4.2% increase in our common dividend per share, which has grown at a compound annual rate of 9.5% since 2011. With $475 million left on our current repurchase authorization, our Board of Directors has authorized an incremental $3 billion authorization, which brings our total buyback capacity to roughly $3.5 billion. At the end of the quarter, we had $4.2 billion of cash and liquid assets at our holding companies. Despite the seasonally low quarter for subsidiary dividends, we remain comfortably above our target cash buffer of $3 billion to $4 billion. The proceeds from the sale of our Poland business, which closed in April, will contribute to our cash balances in the second quarter. Turning to governance, MetLife has a highly experienced and diverse Board of Directors and we were pleased to announce the addition of Carla Harris at the end of April. Carla is a well-recognized leader across the financial services industry. She brings deep expertise and fresh perspectives and her experience and knowledge will serve MetLife well. Our talent is also a competitive advantage that sets us apart from our peers. As a global company, MetLife can grow talent from around the world and match it to our greatest opportunities. Our recent leadership changes demonstrate this deep strength. I want to start by thanking Kishore Ponnavolu for his distinguished service to MetLife over the past 11 years. During his time with MetLife, Kishore served as Chief Enterprise Strategy Officer and Head of MetLife Auto and Home, and finally as Regional President, Asia, where his leadership delivered outstanding results. When Kishore steps away from this position at the end of June, we will rotate several executives into new roles. Lyndon Oliver will move from Treasurer and Head of Strategy to Regional President, Asia. John Hall will add Treasurer to his current responsibilities and Dimitri Lorenzon will move from Head of Strategy Product and Marketing from MetLife Japan to Head of Strategy for MetLife. These moves demonstrate our commitment to talent development and highlight our deep bench of leaders who are ready to step up and deliver value to our customers and shareholders. We are broadening and deepening our leadership commitment to and accountability for diversity, equity and inclusion. At the end of the quarter, MetLife announced a broad set of VII commitments designed to address the needs of the underserved and underrepresented by 2030. These commitments encompass a mix of investments, partnerships and solutions, and other efforts, and are firmly aligned with MetLife's purpose. In setting these commitments, we are establishing clear roadmaps and strengthening accountability for progress. Before I close, I would like to say a few words about MetLife's return-to-office in the U.S., which started on March 28th. Our new model, Future Work, combines the best of office and virtual environments and is an essential element in attracting and retaining top talent. Our Future Work model has been well received in the U.S. and we are seeing tremendous collaboration and partnership across the organization. We are also well underway to adopting our Future Work model outside the U.S. as conditions allow. From my own perspective, it is great to walk the floors again, host in-person meetings and feel the energy in the building. Over the past few weeks, I have visited several of our offices across the U.S. and the team's enthusiasm and energy levels have been outstanding. I look forward to more such visits as the world increasingly opens and I also welcome the opportunity to sit down face to face with many of you in the months ahead. The past two years have been an unprecedented period, but with all of the challenges, MetLife remains laser-focused on consistent execution and we look forward to building on our momentum. With that, I will turn things over to John.
John McCallion, Chief Financial Officer
Thank you, Michel, and good morning. I will start with the 1Q 2022 supplemental slides, which provide highlights of our financial performance and an update on our cash and capital positions. Starting on page three, we provide a comparison of net income to adjusted earnings in the first quarter. Net income was $606 million or $1.1 billion lower than adjusted earnings. The majority of this variance was due to net derivative losses as a result of the significant rise in long-term interest rates in the quarter. In addition, we had net investment losses, primarily due to impairments on our Russian premium bonds, as well as normal trading activity in the portfolio that resulted in losses given the rising interest rate environment. Following the impairments and a sale of Russian bonds in April, our current combined exposure in Russia and Ukraine is roughly $125 million. On page four, you can see the first quarter year-over-year comparison of adjusted earnings by segment, which did not have any notable items on either period. Adjusted earnings were $1.7 billion, down 12% and down 10% on a constant currency basis. Lower variable investment income accounted for the majority of the year-over-year decline. While private equity returns were again strong, they compared to an even stronger Q1 of 2021, adjusted earnings per share was $2.08, down 5% year-over-year on a reported basis and down 4% on a constant currency basis. Moving to the businesses, starting with the U.S., Group Benefits adjusted earnings were up 20% year-over-year due to higher volume growth and an improvement in underwriting margins. I will discuss Group Life underwriting in more detail shortly. Regarding non-medical health, the interest adjusted benefit ratio was 72.5% in Q1 of 2022 at the midpoint of its annual target range of 70% to 75%. That said, the ratio higher than the prior year quarter of 71.1%, due to higher incidences in disability relative to favorable incidence levels in the prior year quarter. Turning to topline, Group Benefits adjusted PFOs were up 7% year-over-year. This growth included 2 percentage points related to higher premiums from participating contracts, which can fluctuate with claim experience. The balance of the PFO growth of 5% was due to solid growth across most products, including continued strong momentum in voluntary. Group Benefits sales were down 31% compared to record sales in Q1 of 2021, which were driven by exceptionally strong jumbo cases. While jumbo case activity was significantly lower in 1Q 2022, we continue to see good growth in the business and our persistency remained strong. Retirement Income Solutions or RIS adjusted earnings were down 16% year-over-year. The primary driver was less favorable private equity returns versus a very strong Q1 of 2021. Favorable volume growth was a partial offset. RIS investment spreads were 181 basis points, driven by another strong quarter of variable investment income, spreads excluding VII were 89 basis points, up 1 basis point versus 1Q 2021, but down 2 basis points sequentially due to higher LIBOR rates. RIS liability exposures were essentially flat year-over-year, as growth across most products primarily U.K. longevity reinsurance and pension risk transfers were offset by lower separate account balances. With regards to pension risk transfers, we completed one transaction worth $1.3 billion in the first quarter and continue to see an active market. Moving to Asia, the adjusted earnings were down 7% and 4% on a constant currency basis, primarily due to lower recurring interest margins and a decline in first-quarter equity markets in Japan and Korea. This is partially offset by solid volume growth as assets under management on an amortized cost basis grew 7% on a constant currency basis. In addition, sales were up 2% year-over-year on a constant currency basis driven by strong sales in Japan. Latin America adjusted earnings were $142 million versus $40 million in the prior year quarter, while COVID-19 related claims remained elevated in 1Q 2002 at roughly $30 million after-tax. They were down significantly versus the prior year quarter. In addition, volume growth was a positive contributor, while lower equity markets were a partial offset. The Chilean Encaje had negative 4% return in 1Q 2022 versus the prior year quarter, which was a modest positive. While LatAm's bottom line has been trending towards pre-pandemic levels, its topline continues to demonstrate strength as adjusted PFOs were up 22% year-over-year on a constant currency basis and sales were up 40% on a constant currency basis, driven by solid growth across the region. EMEA adjusted earnings were down 27% and 15% on a constant currency basis, primarily driven by the exclusion of divested businesses, Poland and Greece, which were included in the first quarter of 2021 adjusted earnings. In addition, higher expenses were partially offset by favorable underwriting margins and volume growth. While the region reported excess COVID claims in Q1, they were lower than the prior year quarter. MetLife Holdings adjusted earnings were down 39%. This decline was primarily driven by lower variable investment income and less favorable underwriting. Corporate and other adjusted loss was $117 million versus an adjusted loss of $171 million in the prior year quarter. Higher variable investment income was the result of a $1.1 billion transfer of PE assets to corporate and other from IRS and MetLife Holdings in Q1 of 2022. To better align asset liability management for these two segments, higher expenses were partial offset. The company's effective tax rate on adjusted earnings in the quarter was 21.3% and within our 2022 guidance range of 21% to 23%. Now, I will provide more detail on Group Benefits mortality results on page five. This chart reflects our Group Life mortality ratio for the last five quarters, including the COVID-19 impact on the ratio and on Group Benefits adjusted earnings. The Group Life mortality ratio was 103.8 in the first quarter of 2022, which is well above our annual target range of 85% to 90%. COVID-reported claims were roughly 14 percentage points, which reduced Group Benefits adjusted earnings by approximately $230 million. While U.S. COVID deaths were higher sequentially, there was a favorable shift in the percentage of deaths under age 65, declining from approximately 33% in the fourth quarter to roughly 23% in the first quarter. As a result of these two competing factors, we saw a modest improvement in mortality results this quarter. In addition we experienced 1 percentage point to 2 percentage points from non-COVID excess mortality. This included a large number of high-dollar claims, which can fluctuate from period to period. On page six, this chart reflects our pre-tax variable investment income for the past five quarters, including $1.2 billion in the first of 2022. This strong result was mostly attributable to the private equity portfolio of roughly $14 billion, which had an overall return of 7% in the quarter. Unlike previous quarters where we have seen a dispersion in returns by fund type, this quarter our major PE returns were tightly coupled around 7% overall. As we have previously discussed, private equities generally accounted for on a quarter lag. In addition, real estate equity funds were also a strong contributor to VII with a 10% return in the quarter, while hedge funds, which are reported on a one-month lag, had a loss. On page seven, we provide VII post-tax by segment for the prior five quarters, including $936 million in Q1 of 2022. You will note that our general rule of thumb that RIS, MetLife Holdings in Asia account for 90% or more of the total VII did not hold in 1Q 2022, coming in at 83%. This lower percentage was primarily due to the transfer of PES to corporate and other from RIS and MetLife Holdings that I discussed earlier. In addition, Asia's higher VII year-over-year was primarily due to strong real estate equity fund performance, as well as higher PE asset balances. Turning to page eight, this chart shows a comparison of our direct expense ratio over the prior five quarters, including 11.7% in Q1 of 2022. 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 first-quarter direct expense ratio benefited from solid topline growth and ongoing expense discipline. This included approximately 40 basis points from premiums that relate to participating cases in Group Benefits due to excess mortality. We remain committed to achieving a full-year direct expense ratio below 12.3% in 2022, demonstrating our consistent execution and focus on an efficiency mindset. I will now discuss our cash and capital position on page nine. Cash and liquid assets at the holding companies were approximately $4.2 billion at March 31st, which was down from $5.4 billion at December 31st, but remains above our target cash buffer of $3 billion to $4 billion. The sequential decline in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of $915 million in the first quarter, as well as holding company expenses and other cash flows. Our first quarter tends to be lower in subsidiary dividends and higher in holding company expenses. Therefore, we would expect HoldCo cash balances to increase in the second quarter due to higher subsidiary dividends, as well as proceeds from the sale of our Poland business, which closed in April, as Michel noted. In regard to our statutory capital, for our U.S. companies, our 2021 combined NAIC RBC ratio was 386%, which was above our target ratio of 360%. For our U.S. companies, preliminary first-quarter year-to-date 2022 statutory operating earnings were approximately $400 million, while net income was approximately $800 million. Statutory operating earnings decreased by approximately $1.1 billion year-over-year, primarily due to less favorable VA rider reserves, underwriting results and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $18.7 billion as of March 31, 2022, down 2% compared to December 31, 2021. Finally, the Japan solvency margin ratio was 947% as of December 31st, which is the latest public data. Looking ahead, we expect the Japan SMR to decline in 2022, as a result of higher U.S. interest rates, but remain well above its capital target level. Let me conclude by saying MetLife delivered another strong quarter, highlighted by outstanding private equity returns, solid topline 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. In addition, our capital, liquidity and investment portfolio remain 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 will turn the call back to the Operator for your questions.
Operator, Operator
Thank you. And we go to the line of Ryan Krueger with KBW. Please go ahead.
Ryan Krueger, Analyst
Hi. Thanks. Good morning. Could you discuss your outlook for the retirement spread over the next few quarters in light of the higher interest rate environment but also the flatter yield curve?
Michel Khalaf, President and CEO
Good morning, Ryan. Let me begin with Q1, which was 181, primarily driven by VII, while our result excluding VII was 89 basis points of spread. We observed a sequential decline in the spread by a few basis points, mainly due to the rising LIBOR, which we had previously identified as a factor that could pressure the spread. On a positive note, we saw better-than-expected performance in our real estate property income investments during Q1, which helped mitigate some of the anticipated downward pressure. Given the upward trend in LIBOR we are experiencing in Q2, we expect to see that mid-single-digit decline that we anticipated for Q1 actually occur in Q2. However, if the forward curves materialize as expected, we could observe a potential shift in the spread moving slightly upwards. There are two main reasons for this. First, while we have provided our sensitivities in the outlook, they often adjust, and typically the day following our projections, conditions are not as favorable. We’ve discussed that an increase in LIBOR initially acts as a headwind but could turn positive, particularly around the 200-basis-point mark, and we are currently a bit above 130 basis points. Therefore, while we expect rising LIBOR to continue to exert pressure in Q2, if it keeps climbing, it could actually begin to generate income. The second reason, as you noted, relates to the overall increase in rates—it typically takes longer for the benefits of the 10-year to manifest, but this will start to become evident over time. I hope this clarifies things.
Ryan Krueger, Analyst
Thanks. Very helpful. And then, I guess, the follow-up is just I think we all know rising interest rates are generally good for life insurance. I just want to make sure that there are any unusual impact from things like interest rate derivative mark on a stat basis that would have any kind of negative impact on dividend capacity going forward?
Michel Khalaf, President and CEO
We do not anticipate any unusual impacts occurring. The broad interest rate sensitivities we provided as part of our outlook still apply, even though the curve's shape has changed slightly. The numbers may not be precise, but the general direction suggests a slight negative impact in the first year, which I might describe as neutral now given recent developments. We expect to see positive momentum start to emerge in 2023 and 2024, assuming rates follow the projected path. Regarding statutory capital, we do not expect any unusual volatility or results due to a rising rate environment.
Ryan Krueger, Analyst
Great. Thanks a lot.
Operator, Operator
And our next question is from Jimmy Bhullar with JPMorgan. Please go ahead.
Jimmy Bhullar, Analyst
Hi. Good morning. First, I just had a question on what you are seeing in terms of activity in the pension closeout market. I think you mentioned that the pipeline is healthy, but how do you see, I guess, interest rates are obviously benefiting, but the weak equity market and its impact on funding levels, are you seeing a little bit of a slowdown or just the uncertainty causing plan sponsors to put off any transactions?
Ramy Tadros, Analyst
Good morning, Jimmy. This is Ramy. I want to reiterate our approach to the PRT market and address your question about the pipeline. Our philosophy has two main aspects. First, we maintain pricing discipline, and overall, our capital deployment aligns with our enterprise ROE targets while being beneficial to our in-force annuity spreads. Second, we focus on the large and jumbo segments of the market, where there are fewer competitors, and the deals align with our strengths in terms of size, rating, balance sheet, and investment capabilities. Regarding our outlook, we had a strong quarter in 2021. In the fourth quarter, we completed five transactions totaling $3.6 billion, and this quarter we executed one transaction for $1.3 billion. We continue to see a robust pipeline as we move through the year. In the jumbo segment, many plans are on a multiyear derisking journey, making immediate decisions less frequent. Many of these asset allocations have already been set, which means the jumbo segment is less affected by equity market volatility. However, the current overall market is at high funding levels, which is positive for the pipeline.
Jimmy Bhullar, Analyst
Okay. Thanks. And then on your Latin American sales, they were pretty strong across every single major market. To what extent is that a function of the pandemic receding versus just anything that you have done on the product or distribution side?
Eric Clurfain, Analyst
Yes, hi Jimmy. This is Eric. The sales momentum really highlights the strength of our distribution channels and the diversity of our product mix. We're witnessing the benefits of our diversification strategy, combined with the increased awareness that Michel mentioned and the growing demand for insurance. The rapid implementation of digital capabilities, both during and now after the pandemic, enables us to better sell and serve our customers, and the marketplace is responding positively with a genuine flight to quality. This focus on quality is also reflected in our strong persistency, alongside robust sales, leading to over 20% year-over-year growth in PFOs on a constant currency basis. Approximately half of these sales are from the SPA business in Chile, as we’ve observed the annuity market expand during the first quarter. Overall, I would say it’s a combination of factors, and the strength of our franchise in Latin America is becoming evident as the pandemic subsides.
Jimmy Bhullar, Analyst
Thank you.
Operator, Operator
And our next question is from Elyse Greenspan with Wells Fargo. Please go ahead.
Elyse Greenspan, Analyst
Hi. Thanks. Good morning. My first question, we have seen move up in interest rates this year. I was just wondering if that has an impact on the potential fee-by-secure transaction with one of your blocks within holdings.
John McCallion, Chief Financial Officer
Hey, Elyse. It’s John. Good morning. I think as we have said before, rising interest rates are, I think, beneficial to the block, the risk transfer, block transfer market and I think there is, so that gives, but I don’t think that’s the only thing that people are focused on. I don’t think it changes materially. I think it’s a modest positive as we have talked about improving interest rates, solid equity markets, I think they all kinds of support a healthy risk transfer market. So, but again, I don’t think that’s the only driver and I think as we have seen over the years, the last few years, there has been plenty of transactions even at lower rates. So, but again, I think, it’s a modest positive.
Elyse Greenspan, Analyst
Okay. And then within Group, you guys called out the non-COVID mortality this quarter. I just was hoping to get a little bit more color there and if you guys expect this to continue as we move through this year and even potentially get on the other side of the pandemic.
Michel Khalaf, President and CEO
Hi, Elyse. I would say what we saw this quarter is very much in line with kind of normal quarterly fluctuations we see. Just to give you some color in terms of one of the drivers here, if you look at our kind of large claims here define, let's say, you take a $2 million mark. We have got a higher number of those claims. But when I say higher, you think high-single digits and we have got quarters when that came below our expectation. So this is kind of normal quarterly fluctuation. We clearly look at the numbers, we are the largest writer of Group Life Benefits in the industry, and as of this point, we are not seeing any real evidence outside of COVID of any long-term adverse trends here.
Operator, Operator
Next we go to the line of Erik Bass with Autonomous. Please go ahead.
Erik Bass, Analyst
Hi. Thank you. In the Group business, can you talk about enrollment and persistency trends in the level of benefit you are seeing from rising employment and rates growth?
Michel Khalaf, President and CEO
Erik, could you just repeat the question? You were just coming off a bit.
Erik Bass, Analyst
Sorry, I was just asking in the Group business, if you could talk about enrollment and persistency trends and then the level of benefit that you are seeing from rising employment and wage growth?
Michel Khalaf, President and CEO
Sure. In terms of persistency, we continue to see very, very strong persistency on our book. That’s up and down market and very much kind of in line with our expectations. And as I have highlighted before, we are seeing that persistency even in an environment where we have been taking price increases in particular on the life book given the uncertainty around COVID, so the persistency has been really excellent. We are also seeing continued momentum on our voluntary portfolio and that’s going to continue to drive double-digit PFO growth in our business. And just to give you a flavor of that, we ended the year well above $1 billion of PFOs in voluntary and we continue to see good growth on that. In terms of employment, that’s a tailwind. We are starting to see that in the business. Clearly higher employment levels provide just more eligibles and therefore more premiums. Wage inflation is another tailwind, although that does play out gradually over time. So we don’t expect that to see kind of having an immediate uptick and it does depend on the population that’s getting those wage increases, et cetera, but both of these I would think of as general tailwinds to the business and we are seeing evidence of that in our book today.
Erik Bass, Analyst
Great. Thank you. And then can you discuss your earnings and capital exposures to a weaker yen and what hedges you have in place?
Kishore Ponnavolu, Analyst
Hi, Erik. This is Kishore. So if you think about the yen impact, you can think about this in two aspects. One is the translation impact on earnings and the second one is the impact on sales. On earnings, we have a multi-currency balance sheet in Japan because of our FX products. And if you think about it holistically for MetLife Asia, roughly 15% of our earnings are yen-denominated and so, therefore, any depreciation on the yen has a moderate impact, I can say that on Asia adjusted earnings. On the sales, however, the FX volatility more than the rate itself is the volatility that is very important to rates consideration as well. It impacts volumes so far FX products in the near term. In periods of high FX volatility, our customers tend to wait and see before they commit their yen to be converted to U.S. dollars, say, if it’s the U.S. dollar product. At the same time, the yen, the increase in U.S. dollar rates, which is certainly true now enhances the customer value making them more attractive. So there is a balance both ways. And currently, we are seeing the impact of both the yen weakening and the higher U.S. dollar interest rates on both sides. So if you think about, that’s the way I would look at it. I will leave it at that.
Erik Bass, Analyst
Great. Thank you.
Operator, Operator
And our next question is from Tom Gallagher with Evercore. Please go ahead.
Tom Gallagher, Analyst
Good morning. First question is just can you provide a little bit of color behind the around $400 million of investment losses. I presume most of that was Russia-Ukraine, but can you just give some specificity for the accounting for the $400 million?
Steve Goulart, Analyst
Sure. Hey, Tom. It’s Steve Goulart. And you are right on that, but I think, John mentioned it too in his script that there really were two issues that led to virtually all of the realized losses in the first quarter. One, as you point out was Russia and that was roughly half of the credit losses and provisions. And again, I’d start out by reminding everyone that our total exposure to Russia is less than one-tenth of 1% of the general account. So, in sum some not really a material number. And then the second piece on the losses, John also mentioned was normal trading activity, but that really just reflected what was happening with interest rates in the quarter. And if you think about, again, our asset liability management, we are heavily investing in private assets right now, and it takes time to originate those private assets. So we are putting in assets that are more liquid and as we replace those in the permanent structure with private assets, given the interest rate movements in the quarter we saw losses in that. But again we pick it up on the back end, of course, because the private assets are higher yielding.
Tom Gallagher, Analyst
Got it. That makes sense, Steve. So I would assume some of that, there could be a little bit of a tail to the trading aspect of that as you roll into 2Q and rates have continued to go up. Is that fair?
Steve Goulart, Analyst
I think as long as rates are moving, we will probably see similar action and similar results, yeah.
Tom Gallagher, Analyst
Okay. I understand. For Kishore, I wanted to follow up on Japan. Sales there appeared strong, especially since your competitors were struggling due to the state of emergency orders in Japan. I'm curious how you managed to achieve sales growth. Was there something distinctive about your product launches or distribution that enabled you to increase sales across all products in Japan?
Kishore Ponnavolu, Analyst
I appreciate your question, Erik, and I will share your compliment with our team in Japan. It's a thoughtful inquiry. Our sales in Japan have increased by 18%, which is a robust performance. I attribute this growth to three main factors. First, our execution in the market has been very effective. Second, we have a well-diversified channel mix, which continues to perform well, even with some relative softness in the banking sector, but that has been offset by strong performance in California. Third, we have made significant investments in our products and capabilities over the last two years, especially in the past year with several successful product launches, including our re-entry into the quarterly market, which has been positively received. We also launched a new banker platform last year, which has received strong feedback, and we have ventured into variable product markets, which is also gaining traction. We are pleased with this progress. However, it's important to provide some context regarding overall performance in Asia this quarter, which has been quite good, but we must also acknowledge the ongoing impact of COVID-19 across all markets, particularly in Korea and Japan, where we experienced a surge in cases in the first quarter, and we are still managing that situation in China. Additionally, in the second quarter, we are facing various market-specific regulatory and exchange-related challenges. Moreover, there is a seasonal aspect to consider in the first quarter, with March being the fiscal year-end, which has provided a boost that won't extend into the second quarter. Given these factors, sales volume in the upcoming quarter will likely face pressure. Nonetheless, I anticipate that Asia, excluding Japan, will perform better in the second quarter compared to the previous year, helping to balance out this situation. So we had a strong first quarter, will face some challenges in the second quarter, but I would like to emphasize that our execution remains robust and our market diversity is having a positive effect. Therefore, from a guidance standpoint, we are still on track for mid-to-high single-digit sales growth as we indicated in February. I expect a much stronger year-over-year performance in the second half for Asia overall. I hope this information is helpful.
Tom Gallagher, Analyst
That was. Thank you.
Kishore Ponnavolu, Analyst
Great.
Operator, Operator
And, Mr. Gallagher, did you have anything further?
Tom Gallagher, Analyst
No. That’s all. Thank you.
Operator, Operator
Very good. We will move on to Suneet Kamath with Jefferies. Please go ahead.
Suneet Kamath, Analyst
Thanks. Good morning. I wanted to revisit Group Life for a moment. We are observing a significant decline in COVID-related deaths in the second quarter, but I'm curious if we should consider any delays regarding the receipt of death notices in Group when evaluating earnings for that business in the second quarter.
Ramy Tadros, Analyst
Hey. It’s Ramy here. Generally speaking, we are pretty quick in terms of recognizing and getting the death claims and recognizing those and we clearly hold the reserves essentially account for the IBNR. So I would say, on average, we have been getting up pretty well over the last kind of year and a half. So I would just continue to anchor any of your kind of estimates based on the headline mortality numbers for the entire population. So I would say, you looked at those and those have trended favorably in April. And the other statistic I would also look at is the percentage of deaths, which are under 65, which looking at April, that has continued to be at the same level as we saw in the first quarter, which, as John mentioned, would be favorable for us from a severity perspective.
Suneet Kamath, Analyst
Okay. Got it. And then, I guess, for John on capital. I think you had said that, statutory operating earnings was lower than stat net income. So I just want to make sure I got that right and maybe some color on what happened there? And then, also, I think you said, Pat, decline relative to the end of the year. So can you just talk a little bit about what happened there?
John McCallion, Chief Financial Officer
Sure. Good morning, Suneet. Yes, that's correct. I think the differences can be attributed to the geography of our VA reserves compared to our hedges, especially considering the performance of equity markets. As for capital generation, it was down 2%, which amounts to just over $300 million. I would attribute this to the normal volatility seen in any given quarter. We paid out approximately 25% of our target annual dividend in this quarter, which added some variability. Therefore, I wouldn't interpret this as significant and would view it as normal fluctuations rather than part of a trend.
Suneet Kamath, Analyst
Okay. Thank you.
Operator, Operator
And next we go to the line of Alex Scott with Goldman Sachs. Please go ahead.
Alex Scott, Analyst
Hi. Thank you for taking my question. My first inquiry is regarding expenses. They have consistently been below the targets you set during Investor Day with the Horizon strategy, and you are achieving solid organic growth in several of your businesses. I am curious about any insights on where expenses could head from here. In the past, you have mentioned one-time expenses that could bring you back to your targeted levels, but it seems like you might be benefitting more from operating leverage. Is it possible for expenses to be lowered even further?
John McCallion, Chief Financial Officer
Good morning, Alex. We are certainly pleased with our execution, even in the face of challenges such as inflation and wage increases. This reflects the strength of our team and the culture we have established around efficiency. It's a critical aspect of our strategy, as you noted. Regarding the ratio itself, it was 11.7. I mentioned earlier that the headline number likely benefits by about 40 basis points from elevated COVID claims, which affect our participating cases and temporarily inflate revenue. In net terms, we are slightly above 12 but still below 12.3. This also accounts for our ongoing commitment to invest in the firm for growth and enhance our technology use, allowing us flexibility to leverage capacity in various ways to protect our margins. Overall, I believe we are successfully executing our targets and initiatives in expense management.
Alex Scott, Analyst
Thanks. And then my follow-up is just if you could provide a brief update on the asset management business and just what you are thinking in terms of inorganic opportunities that are out there and if the current environment makes that more challenging or maybe it presents more opportunities, just interested in if anything changing there?
Steve Goulart, Analyst
Hey, Alex. It’s Steve Goulart. So the updated continues to be very positive. We continue to grow MetLife Investment Management. I think we have been really achieving an aggressive organic growth plan that is in line with what we laid out at our 2019 Investor Day on our objectives and targets for where we are going to see the business grow. At the same time, you are right, it’s a very active market right now and we continue to be active in it as well and looking at opportunities for acquisitions and it does cut both ways and there is a lot of activity, but there are a lot of people looking in the markets too. We know what we are looking for strategically. We are very disciplined financially and we want to make sure that anything we do fits culturally and strategically. So we will continue to be active and hopefully when we find something that meets those criteria we will be successful in acquiring it.
Operator, Operator
And we have a question from Tracy Benguigui with Barclays. Please go ahead.
Tracy Benguigui, Analyst
Good morning. I realized later in the year you review your reserving assumption, but still were the 10-year treasury you read it today at 3% and where it maybe heading and how should we be thinking about your 2.75% reversion mean assumption and how does inflation come into play with respect to your reserve position?
Michel Khalaf, President and CEO
Good morning, Tracy. That's a good question. We have a long-term assumption, but circumstances have changed significantly. It's too early for us to make any predictions right now. As we move toward the end of the second quarter and into the third quarter, particularly more in the third quarter, we will begin to think about it more seriously. We all know that situations can shift rapidly. While this is a long-term assumption, you've pointed out that current rates are higher than what we had projected for our long-term target in about 12 years. However, I don't foresee any sudden changes either way, as we made our last adjustment a few years ago, and we need to see trends before making any further changes. We'll need to evaluate all the available data as we get closer. Regarding inflation, it's closely related to your first question about how it impacts rates. This is likely the most significant factor for us when it comes to reserving. Generally, any inflation effects are balanced out by other factors, so that's how I would respond to your question about inflation.
Tracy Benguigui, Analyst
Great. Thank you. I noticed in prior years, you didn’t fully utilize your U.S. statutory dividend capacity, but in 2021 it appears in the U.S. Co. and I realize you have various sources. But just looking at Metropolitan Life Insurance Company you have $3.5 billion ordinary capacity in 2022, are you expecting again to fully utilize that this year?
John McCallion, Chief Financial Officer
Yeah. I think, as you point out, we have a lot of sources of cash to the holding company. I think what we have committed to, we don’t commit to kind of a dividend in any one legal entity. And I think the benefit of having a diverse set of cash generation that can be sent to the holding company is that, it gives us the benefit of being able to commit to the 65% to 75% free cash flow ratio on average over a two-year period. And so it’s not something we target at any one entity. We look at all aspects of how we are trying to manage our cash and capital at the operating entities, where we are looking to grow, where we need extra capital, things like that. And I think the benefit is, like I said, it’s a diverse set of sources is very helpful. So we don’t set a target at any legal entity externally, I should say, and then we kind of, just like you manage your own wallet, we manage our collective wallets the same way.
Tracy Benguigui, Analyst
Thank you.
Operator, Operator
And we have no more questions at this time. I will turn the call back to Michel Khalaf.
Michel Khalaf, President and CEO
Great. Well, thank you again for joining us on this busy morning. Our strong performance in the first quarter of 2022 building on last year's outstanding results should provide further evidence of the significant progress we are making in delivering on our all-weather Next Horizon strategy. This management team is laser-focused on continuing to execute with urgency and we are confident in our ability to create long-term sustainable value for all stakeholders. Thanks again and talk soon.
Operator, Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference service. You may now disconnect.