Earnings Call Transcript
METLIFE INC (MET)
Earnings Call Transcript - MET Q1 2020
Operator, Operator
Ladies and gentlemen, thank you for your patience. Welcome to the MetLife First Quarter 2020 Earnings Release Conference Call. Currently, all participants are in listen-only mode. We will have a question-and-answer session later. Please note that this conference is being recorded. Before we begin, I would like to remind you about the cautionary note regarding forward-looking statements mentioned in yesterday's earnings release, as well as the risk factors outlined in MetLife's 8-K filed last night and other SEC filings. Now, I will hand the call over to John Hall, Head of Investor Relations.
John Hall, Head of Investor Relations
Thank you, operator. Good morning, everyone. Now more than ever, we appreciate you joining us for MetLife's first quarter 2020 earnings call. Before we 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. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management. Last night, we released a set of supplemental slides. 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 and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. And in fairness to all participants, please limit yourself to one question and one follow-up. Before I turn the call over to Michel, I have a quick scheduling update. As you might have concluded, given the environment, we will not be hosting an Investor Day in Tokyo this September. Now, over to Michel.
Michel Khalaf, CEO
Thank you, John, and good morning, everyone. I'd like to begin by acknowledging the difficulties and challenges that so many people have faced as a result of the pandemic. What the world has been living through is tragic, yet it is also demonstrating the best of humanity. We see this every day as thousands of first responders, healthcare workers, and other frontline employees risk their lives to care for others and provide essential services. At MetLife, as our employees go above and beyond to deliver on our promises to customers, we feel the effects of the crisis deeply, both the personal loss and the economic disruption. These are the moments that MetLife is built for. At our Investor Day last December, I emphasized the importance we place on being a purpose-driven company. Our purpose statement, 'Always with you, building a more confident future,' has taken on greater meaning in the current environment. People are counting on us like never before to provide the value, support, and financial security they need. Our Next Horizon strategy is a roadmap for how the company will create value for all of its stakeholders: our people, our customers, our shareholders, and our communities. It starts with our people, which means making their health and well-being our top priority. We've done that in various ways. We rapidly moved employees to a work-from-home environment, expanded benefits to help cover COVID-19 testing and treatment, enhanced mental health support to help employees cope with stress, and deployed tools and resources to keep people connected. I am proud of the level of engagement and motivation our people are showing; they know they are making a difference. Since we conduct business in many markets, MetLife got an early look at how the pandemic could affect societies and our own operations. Our experience in Asia gave us a running start on the activation of our business continuity plan globally. Across our enterprise, 92% of our 38,000 non-agent employees are now working from home, including 98% in the United States. Of course, the true test of our business continuity plan was not merely whether employees could log on from home, but whether they had full functionality to be able to deliver for our customers. We are pleased that we've been able to maintain service levels, with 95% of all customer calls, claims, and other transactions successfully handled by employees working remotely. This includes our group insurance business, where even in this highly disrupted environment, MetLife still expects to meet or exceed its performance guarantees. For our customers, this moment is crucial. The way we show up now will resonate with them for years to come. Across the enterprise, we are acting to provide them with comprehensive and compassionate care. We are extending premium grace periods, fast-tracking claims, crediting or adjusting auto and dental premiums, and providing our digital financial wellness portal to small businesses and their employees at no cost. The shutdown of face-to-face distribution has also spurred us to innovate and accelerate the digital transformation of our business. In China, for example, sales of our medical reimbursement product rose sharply after we created a WeChat store for agents. In times of crisis, we must do more for the communities where we work and live. MetLife Foundation has committed $25 million, and MetLife has donated millions of dollars, along with thousands of masks, disinfectant wipes, and hand sanitizers to combat COVID-19. We were also pleased to work with the State of New York to offer Intercontinental Times Square as free housing for medical workers. Most impactful is the social and economic benefit MetLife creates as a life insurance company. The heart of our business is a promise to pay when people need us most. For the power of risk pooling, the premiums of the many become payments to those who need them. MetLife paid more than $24 billion in policyholder claims, benefits, and dividends in the U.S. alone last year, an average of more than $65 million a day. At a time when people's jobs and income are at risk, life insurers form a vital part of the social safety net that sustains people financially. MetLife entered this current period of uncertainty from a position of strength. We have made substantial changes to our strategy and product portfolio. The biggest change is to the profile of our liabilities. We are now a less market-sensitive and capital-intensive company. At our Investor Day, we showed that approximately two-thirds of our adjusted earnings came from protection and fee-based products and only one-third from spread-related businesses. Within our investment portfolio, we took early action in anticipation of a recession. Beginning in 2018, we became concerned about certain lower-rated areas of the credit markets. We reduced our holdings in sectors and names that we thought would carry heightened risk in a downturn. Overall, our investment portfolio is marked by broad diversification, high quality, and ample liquidity. Notably, at our operating insurance companies, we have nearly $100 billion in U.S. government and agency securities, Japan government bonds, and other cash and short-term investments. MetLife has also further strengthened its already strong capital and liquidity position. As part of our planned capital actions, in late March, we accessed the bond market when few others could to raise $1 billion. For the quarter, this helped bring the company's total cash and liquid assets at our holding companies to $5.3 billion. Our combined U.S. NAIC risk-based capital ratio as of year-end 2019 was 395%, and we enjoy higher ratings from all major credit-rating agencies. Another proactive step we've taken is to increase our focus on expenses. MetLife remains committed to meeting the expense target we set as part of our unit cost initiative program. In the current environment, perhaps no area gives us greater opportunity to demonstrate our commitment to consistent execution than expense discipline. As we announced last week, our financial strength enabled us to increase our quarterly common stock dividend, which provides a steady and growing source of income to millions of people during this economically challenging time. We raised our second-quarter 2020 common stock dividend by 4.5%, which illustrates our confidence in MetLife's future. Given our strong starting position, we expect the impact of the pandemic to be an earnings event, not a balance sheet event. MetLife has a great set of globally diversified businesses, some of which may be pressured by today's unprecedented events, while others act as offsets. For instance, in our Retirement and Income Solutions (RIS) business, while we are seeing a slowdown in new pension risk transfer deals, we are also seeing a surge in demand for our stable value offerings as 401(k) sponsors and participants seek the safety of these book value products backed by MetLife. Although rollover reinvestment rates continue to be pressured for our long-tailed businesses in RIS, the current configuration of the yield curve, very low at the short end and positively sloped, is favorable for our capital markets, investment products, and securities lending activities. Similar balance exists across our global protection businesses, where mortality, morbidity, longevity, and Property & Casualty risks serve as natural offsets. At the core, our scale, strong balance sheet, and broad diversification are key strengths of our franchise. These trends enabled us to generate first-quarter adjusted earnings of $1.4 billion or $1.58 per share, up 7% from a year ago. The direct impacts on our adjusted earnings from the pandemic and economic slowdown were limited. Adjusted earnings reflected strong underwriting margins and group benefits and favorable underwriting margins in Property & Casualty. Variable investment income was very strong, mostly due to private equity, which is reported on a one-quarter lag. These positives were offset in part by unfavorable market factors across interest rates, equities, and foreign currency. Net income was $4.4 billion or $4.75 per share, up from $1.40 per year prior. Falling interest rates drove substantial gains in the derivatives we hold to protect our balance sheet. Book value per share, excluding AOCI, other than FCTA, was $52.36, up 7% sequentially from year-end, while adjusted return on equity on the same basis totaled 12.6%. Looking ahead to the second quarter, we anticipate that the greatest earnings impact will be felt within variable investment income, where we expect less favorable private equity returns for some time. The strong historical returns associated with our private equity portfolio and its role as a good match for our long-dated liabilities justify this asset class as an important ongoing component of the general account. In fact, the current economic turmoil is precisely the environment where the seeds of tomorrow's private equity returns are being planted. We believe our Next Horizon strategy was the right approach before the pandemic struck, and we are even more confident that the pillars of focus, simplify, and differentiate are the right approach today. By focusing even more intently on where we deploy capital and by further simplifying the company, we will enable MetLife to emerge from the current environment in the best shape possible. If anything, we must accelerate our Next Horizon work. This is how we will truly differentiate MetLife and capture the opportunities that periods of disruption always bring. MetLife has seen many such periods during its history: the 1918 flu pandemic, The Great Depression, World War II, 9/11, and the financial crisis. Through all of them, we never faltered. We maintained our financial strength, kept our promises, and provided people with the security and confidence they need. That's what we mean when we say, 'Always with you,' and it will be true throughout this pandemic and beyond. I will now turn the call over to John McCallion.
John McCallion, CFO
Thank you, Michel, and good morning, everyone. I'll start with the first quarter 2020 supplemental slides that we released last evening, which highlight information on our earnings release and quarterly financial supplement. In addition, the slides provide more detail on our investments, outlook for the second quarter, as well as an update on our cash and capital positions. Starting on Page 3, this schedule provides a comparison of net income and adjusted earnings in the first quarter. Net income in the first quarter was $4.4 billion, or approximately $3 billion higher than adjusted earnings of $1.4 billion. This variance is primarily due to net derivative gains resulting from the significant decline in interest rates during the quarter. The results of the investment portfolio and hedging program continue to perform as expected. Turning to Page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding notable items. This quarter's results did not include any notable items, while the prior year quarter had $55 million associated with our unit cost initiative, which was accounted for in Corporate & Other. Excluding the unit cost in the first quarter of 2019, adjusted earnings were down 2% and essentially flat on a constant currency basis. On a per share basis, adjusted earnings were up 3% and up 5% on a constant currency basis. The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers include strong variable investment income, solid volume growth, favorable expense margins, and lower taxes. This was offset by equity market weakness, lower recurring interest margins, and less favorable underwriting compared to the first quarter of 2019. Turning to the performance of our businesses, group benefits adjusted earnings were down 9% year-over-year. The group life mortality ratio was 87.9%, which is slightly above the midpoint of our annual target range of 85% to 90%, but less favorable to the exceptionally strong prior year quarter of 85.3%, which was the best first quarter mortality ratio in over 15 years. The interest-adjusted benefit ratio for Non-Medical Health was 71.7%, which is below our annual target range of 72% to 77% and also favorable to the prior year quarter of 72.9%. The primary driver was strong disability results, which benefited from higher claim recoveries, lower incidents, and lower severity. With regards to the top line, group benefits adjusted PFOs were up 7% due to solid growth across all markets. Retirement and Income Solutions, or RIS, adjusted earnings were up 26% year-over-year. RIS investment spreads for the quarter were 114 basis points, up 18 basis points year-over-year and up 8 basis points sequentially. Spreads in the quarter benefited from higher private equity returns and a decline in LIBOR rates. RIS liability exposures grew 9% driven by very strong growth in the second half of 2019 and exceptionally strong stable value sales in the quarter, which benefited from a flight to safety amid the turbulent equity markets as well as opportunistic issuances in our capital markets investment products. While liability exposures grew, RIS PFOs were down 32% due to the mix of sales in the quarter, driven by lower structured settlement and income annuity sales. Property & Casualty, or P&C, adjusted earnings were up 12% versus the prior year. The overall combined ratio is 91%, which was below our annual target range of 92% to 97% and the prior year quarter of 92.2%. P&C results benefited from favorable non-catastrophe weather in homeowners and auto. P&C auto also benefited from lower auto frequency over the last two weeks of the quarter due to the COVID-19 shelter-in-place orders. Moving to Asia, adjusted earnings were down 2% and flat on a constant currency basis. Solid volume growth was driven by higher general account assets under management on an amortized cost basis, which were up 7% and 9% on a constant currency basis. This was offset by less favorable underwriting margins, unfavorable equity markets in Japan and Korea, and lower investment margins. Latin America adjusted earnings were down 29% and down 19% on a constant currency basis. The primary year-over-year driver was lower equity markets impacting our Chilean encaje returns, which was a negative 11% in the quarter versus a plus 5% return in Q1 of 2019. Excluding the impact from encaje, Latin America adjusted earnings were up 23% on a constant currency basis due to higher investment margins, solid volume growth, and favorable underwriting. EMEA adjusted earnings were down 9% and down 6% on a constant currency basis as lower equity markets and less favorable underwriting margins were partially offset by better expense margins and solid volume growth across the region. MetLife Holdings adjusted earnings were down 13% year-over-year, primarily driven by adverse equity markets. The separate account return in the quarter was a negative 14.4%, which was better than the 20% decline in the S&P as roughly 30% of funds are allocated to fixed accounts. This resulted in a negative $20 million initial impact, which compares to an approximately $15 million positive initial impact in the first quarter of 2019. With regards to underwriting, the life interest-adjusted benefit ratio was 51%, which is near the bottom end of our annual target range of 50% to 55%. Corporate & Other adjusted loss was $131 million. This result compared favorably to the prior year quarter, which had an adjusted loss of $138 million, excluding $55 million of UCI costs. The company’s effective tax rate on adjusted earnings in the quarter was 17.5% and 20.2% on a run rate basis when adjusting for a favorable $45 million tax benefit in the quarter. Now let’s turn to Page 5 to discuss variable investment income in more detail. This chart reflects our pretax variable investment income in 2019, including $351 million earned in the first quarter of 2020. Our private equity portfolio, which is generally accounted for on a one quarter lag, had another solid quarter. With regards to recurring investment income, our new money rate was 3.56% versus a roll-off rate of 3.92% in the quarter. This compares to a new money rate of 4.04% and a roll-off rate of 4.15% in the first quarter of 2019. Lower interest rates have pressured this relationship, but wider credit spreads in the quarter provided an offset. Now on Page 6, the chart on Page 6 highlights our strong historical private equity returns. Steve Goulart presented a version of this slide at Investor Day, showing private equity returns going back to 2016. Given our focus on private equity in the current environment, we’ve decided to expand this view, showing returns going back to the financial crisis in 2008. Our private equity portfolio was $7.6 billion as of March 31, which represents less than 2% of the general account assets under management. It is well-diversified across strategy, geography, and portfolio managers and provides a good fit against long-term liabilities. As you can see from the chart, our private equity investments have generated an average return of 12% since 2008, and only in 2009, the trough of the financial crisis, did this portfolio fail to generate a positive return. These next two slides were shown at our Investor Day, but they’re helpful reminders. On Page 7, you can see our portfolio loss history since 2008. The chart highlights a strong track record of performance as our cumulative impairment rate of 1.2% is roughly half that of the industry peer group. It also speaks to MetLife Investment Management’s culture of disciplined underwriting, deep fundamental analysis, and strong risk management with a particular focus on private asset origination. Turning to Page 8, as we’ve discussed previously, we have been proactive in improving the quality of our portfolio with a focus on significantly reducing our exposure to below-investment-grade credit and syndicated bank loans. We are also highly focused on our low BBB exposure given fallen angel risk. Our BBB-minus credit exposure is roughly 4% of the general account AUM, with 46% of this being private placements, which benefit from better financial covenants in place. I would also call to your attention Page 14 in the appendix, which displays that we have relatively modest fixed maturity exposures to stress sectors. You can see our largest exposure on the chart is our energy portfolio of approximately $8.7 billion, of which 85% is investment grade. The energy portfolio is well diversified across subsectors and issuers, and we believe it is defensively positioned given the changes that we have made since the last downturn for the energy sector back in 2016. Turning to Page 9, this chart shows our direct expense ratio from 2015 through 2019 and the first quarter of 2020. Through year-end 2019, we have achieved a 170-basis point improvement in our direct expense ratio. While we expect top line pressure in 2020, we remain committed to achieving our 12.3% full year target as we continue to deploy an efficiency mindset to increase capacity for reinvestment and to protect the margins of the firm. Now I’d like to spend some time reviewing several key considerations for the second quarter, given the uncertainty of the current environment. These considerations are summarized on Page 10, with further detail offered by segment on Page 13 in the appendix. Starting with investments, as Michel indicated, we anticipate the largest impact of the current environment to manifest in variable investment income with the return on our private equity portfolio. While we received a limited number of PE reports to date, our best estimate for the second quarter is a negative high-single to low-double-digit return. In thinking about our recurring investment income, we continue to experience downward pressure, but reinvestment rates held reasonably steady during the first quarter as credit spreads widened to offset falling treasury rates and also provided good reinvestment opportunities. During the last week of March, we were able to invest roughly $2 billion in high-quality investments that yielded, on average, 5.4%. Additionally, while interest rates remained low, the curve has steepened, which improves margins in our capital market products and RIS in our securities lending program. Moving on to underwriting margins, broadly speaking, we anticipate modest underwriting impacts on a combined basis in the second quarter from COVID-19, but there are many moving parts. To date, while we’ve seen limited impact from COVID-19 on life claims in the U.S., we do expect this to increase during the second quarter. However, claims activity in dental has declined and auto claims frequency is down with fewer miles driven. Additionally, we would expect some level of offsets from businesses with longevity risks. So currently, we expect a limited overall impact to underwriting margins on a combined basis in Q2. Turning to top line metrics, we would expect Q2 sales to be challenged in most of our markets with a risk of further pressure in future quarters. Additionally, as Michel mentioned, for April and May, we’ve provided a 15% premium credit for MetLife personal auto customers and a 20% premium adjustment for our fully insured dental business within group benefits for the two months. As far as variable product sensitivities to equity markets, our Investor Day guidance offered back in December still holds. While we expect to encounter volume and top line growth pressures, the efficiency mindset continues to be a core tenet of our strategy in managing margin pressures across our business. And as I noted earlier, our plans include meeting our direct expense ratio full-year target of 12.3% despite the challenges of the current environment. I will now discuss our cash and capital position on Page 11. Cash and liquid assets at the holding companies were approximately $5.3 billion at March 31, which is up from $4.2 billion at December 31 and well above our target cash buffer of $3 billion to $4 billion. The $1.1 billion increase in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend, preferred stock, and debt issuances, as well as holding company expenses. During the quarter, we repurchased $500 million of net common shares with $485 million remaining on our current authorization. We have not been in the market since early March, which we believe to be prudent at this time. Our cash balances are high; our next debt maturity is December 2022, and we like the optionality and financial flexibility those balances provide us at this time. Next, I would like to provide you with an update on our capital position. Using market inputs at the end of the first quarter, interest rates following the observable forward yield curves as of March 31, and equity markets down 20% in 2020, we estimate that our average free cash flow ratio for the two-year period, 2019 and 2020, will hold within our target range of 65% to 75%. Looking forward to the two-year period of 2020 to 2021 and assuming the same March 31, 2020, forward yield curves and a return to normal 5% equity market growth in 2021, we estimate our free cash flow would be within a range of 40% to 60%. This range occurs as we estimate some level of credit losses due to the pandemic over the next 12 to 24 months and some level of additional reserves would be established under current New York cash flow testing requirements, which would impact dividend capacity at our New York domicile statutory company, Metropolitan Life Insurance Company, or MLIC. We would not expect such reserves to be required under NAIC standards, and therefore, would not impact our combined NAIC RBC levels. For our U.S. companies, our combined NAIC RBC ratio was 395% at year-end 2019 and comfortably above our 360% target. For our U.S. companies, preliminary first quarter 2020 statutory operating losses were approximately $650 million, and net income was approximately $260 million. Statutory operating earnings decreased by $1.9 billion from the prior year, primarily due to higher VA reserves. Net income was mostly driven by derivative gains in the quarter. We estimate that our total U.S. statutory adjusted capital was approximately $21.4 billion as of March 31, 2020, up $2.8 billion from $18.6 billion at December 31, 2019. Derivative gains more than offset operating losses in the first quarter of 2020. Finally, the Japan solvency margin ratio was 931% as of December 31, which is the latest public data. Overall, MetLife delivered another solid quarter despite the significant volatility in the capital markets due to COVID-19. Looking ahead, we expect our second quarter adjusted earnings to be dampened by negative private equity returns, but our underlying business fundamentals from our diverse, market-leading businesses remain intact. Additionally, we believe our capital, liquidity, and investment portfolio are resilient and well positioned to manage through this challenging environment. 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
Okay. Your first question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Tom Gallagher, Analyst
Good morning. John, just to follow up on the updated free cash flow guidance. Can you provide a little more color on how this works? How much of the impact would be related to interest rates and credit, because I know you mentioned both? Is it as simple as just thinking there would be AAT reserves of around $1 billion a year for 2020 and 2021? Is this the right way to think about this? And then just my follow-up would be, you had a competitor announce a big long-term care reserve charge recently after a regulatory review. Just want to see whether there’s anything similar going on with New York regulators in MetLife. Thanks.
John McCallion, CFO
Good morning, Tom. So on the first question, let me start by saying, I wouldn’t call it guidance, right? This is – let’s just be clear what our objective here is to provide a scenario. We anchored it on some market data as of March 31. So it was really to provide a scenario of free cash flow. And one, we’re considering a level of credit losses and downgrades based on our bottom-up analysis that our investment team has been working through and monitoring and thinking it will play out over a 12- to 24-month period. And two, looking at the potential impact of New York cash flow testing requirements using last year’s requirements. And remember, we get a special consideration letter every year and then considering any new requirements that we’re aware of. And there, we applied those factors to estimate some level of cash flow testing reserves, again, based on March 31 macro factors. As I said, Steve and the team put forth a bottoms-up review to a value to range of credit losses. And for cash flow testing, we picked a point more stressful than where we are today, that being March 31, where interest rates – while interest rates are similar, credit spreads were wider back then, equity markets were lower. I would also point you to just, directionally, the shape of the curve is more favorable. In fact, it’s more favorable than I’d say a year-end base case we used at the outlook call, just given the shape of the curve, given the significant drop in the short end. Additionally, let me clarify about long-term care reserves. I’m not going to comment on someone else’s situation. For us, we work with New York every year. I wouldn’t say there’s anything in particular for us. However, we’re always looking at our reserves, and there’s nothing to point out different than what we encounter every year.
Tom Gallagher, Analyst
All right. Thanks, John. Just one quick follow-up, if I could. Is the plan to stay paused with buybacks? Or any color you can give on what you’re thinking about the buyback?
Michel Khalaf, CEO
Hi, Tom, it’s Michel. As John mentioned, we completed $500 million in Q1 buybacks in Q1. We have $45 million left on our current authorization. Since early March, just given the stressed environment, we’ve been prudent to preserve and maintain capital and maintain optionality. There’s no change in our philosophy, I would say, in terms of excess capital belongs to shareholders. We expect to distribute all free cash flow in the form of dividends and share buybacks while maintaining sufficient liquidity for stress events. Also, if you think about our liquidity buffer of $3 billion to $4 billion, we’re maintaining cash in excess of that, given the uncertain economic environment. We believe that’s the prudent thing to do. We’ll continue to evaluate the situation, assess our liquidity position based on business and macro conditions. As it stands, we’ve hit the pause button for the time being, but we’ll continue to monitor things and decide when would be an appropriate time to resume buybacks.
Operator, Operator
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Ryan Krueger, Analyst
Hi, good morning. Back to the free cash flow generation, I just want to clarify one thing. If rates remain low as in the scenario that you expressed, would that basically create one year of additional asset adequacy testing reserves to account for that? After you made that reserve addition, you’d go back more towards normal cash flow afterwards?
John McCallion, CFO
Hey, Ryan, it’s John. Yes, I think that’s fair. As I said, those were off of March 31 rates. Rates are different today. It’s an estimate that we haven’t finalized. Therefore, there’s a wide range of possible outcomes. But directionally, that’s a good way to think of the potential impact on one year’s free cash flow.
Ryan Krueger, Analyst
Got it. Thanks. And then on your commercial mortgage loan portfolio, can you give us any statistics on forbearance requests and how much has been granted so far?
Steve Goulart, CIO
Hey, Ryan, it’s Steve Goulart. Sure. I mean, obviously, we’ve been expecting to see elevated activity in this. I’ll start by reminding you and everyone else about the portfolio itself, $50 billion of commercial mortgages with a loan-to-value ratio of 55% for the entire portfolio, and 2.4 times debt service coverage. So again, a very secure, low-risk portfolio in our mind. We are seeing elevated requests, as you’d expect, particularly in retail and hotels for forbearance requests. We have been getting requests. We have a committee that deals with each and every one. We believe that some of these make sense to grant, and we’ve been doing so. Ninety percent of the requests have come from hotel and retail, and they’re typically for a deferral of interest and/or principal, and typically, what we’ve been granting is in the range of three to four months of forbearance. Remember, it’s forbearance, not forgiveness. So we do expect that these payments will be made. By the way, we saw virtually no impact on April payments for the portfolio overall. So at this point, we’ve granted forbearance on just less than 2% of the total premium balance outstanding at this time.
Ryan Krueger, Analyst
Got it. And then in April, you had almost all of the loans pay?
Steve Goulart, CIO
Correct.
Operator, Operator
Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
Nigel Dally, Analyst
Great. Thanks and good morning. A question on group insurance. Should we be taking some deterioration in the margins given this back-end unemployment? I know it’s typically related to disability claims. And just wanted to get your perspective on whether that’s a headwind we should be watching out for?
Ramy Tadros, Head of Group Benefits
Hey, Nigel, it’s Ramy here. Well, maybe just on underwriting, stepping back and giving you an overall context across the U.S. business. We do have significant diversification across the U.S. business, so think about mortality and longevity across the group and the RIS businesses. We’ve also diversified within each of those businesses. Currently, the environment is leading to various offsets and give-and-takes across the product lines. We are seeing favorable impacts in dental, given the lower utilization. We’re also seeing unfavorable impacts on the life block. I’d say that, to date, on the short-term disability block, it’s been a push. We’ve seen an increased number of COVID-related incidents, but that’s been more than offset by a decrease in other short-term disability claims, like elective surgeries and the like. Currently, while there’s still some uncertainty regarding the overall number of deaths in the U.S. and the impact on the insured population versus the general population, it’s reasonable to expect at this stage that the overall impact would more or less offset each other on a full-year basis.
John McCallion, CFO
Maybe I’ll just add to a couple of points to what Ramy mentioned. You referenced unemployment, Nigel. A couple of things to point out here. One is that the segment hardest hit is the small business sector. Our total premiums there are at $1 billion, so it’s not a major component of our current portfolio. Two, keep in mind that our disability business represents 11% of our total earnings. We’ve been taking steps from a pricing perspective in terms of the guarantees that we provide on from a rate perspective to ensure we are also well-positioned for a downturn scenario.
Nigel Dally, Analyst
That’s great. Thanks a lot.
Operator, Operator
Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.
Jimmy Bhullar, Analyst
Hi, good morning, everyone. I had a couple of questions. First, your investment portfolio, can you discuss if you’ve run any stress test on what would happen to your capital and/or your RBC ratio in sort of a mild recession, deep recession? I appreciate your comments in terms of qualitatively, but anything that you’re able to share in terms of numbers on that?
Steve Goulart, CIO
Hi, Jimmy, it’s Steve Goulart again. Let me start by just reminding everybody; I know you probably think I sound like a broken record when I do this, but we’ve been prepositioning this portfolio for a downturn since 2018. That’s been our outlook. Remember what we talked about at Investor Day, and John updated some of those slides. We’ve reduced sectors we were very concerned about below investment grade. We reduced by another $600 million since Investor Day and an additional $600 million of bank loans since then. I’d have to say, and I think anybody who converses with investment professionals would agree, we’ve entered this crisis period in better shape than we probably ever have in the past, so we’re very comfortable moving into it. John showed a slide about sensitive sectors, and we’ve been analyzing the portfolio in several ways. We run it through a number of different tests and lenses. Frankly, many of you out there have conducted your own reviews. We go through every one of those in detail and compare to our own. We’ve done longer-term analysis using external models from the rating agencies and other outside experts. Our core strength is in credit and structured underwriting and we’ve been utilizing our credit and real estate research teams to help us assess this. The result is a granular assessment of our exposures we believe are vulnerable to downgrades and losses. In this analysis, we considered two scenarios: a nearer-term recovery, does the economy start opening up, say, sometime in the summer, or a year-end scenario. The bottom line assessment is based on what we foresee today, the impact of downgrades and possible losses on our capital in these scenarios is very manageable. That analysis put possible losses of up to $1.4 billion over time, which will likely occur over a 12- to 24-month period, and the impact on RBC from downgrades, in that, we would estimate also up to about 25 basis points. Again, we’ve been preparing for this. In this environment, we expect losses and downgrades above normal, but based on prepositioning we’ve done, we feel very comfortable and think our position is sound.
Jimmy Bhullar, Analyst
Okay. And just one on the retirement business. Normally, you'd assume in a low rate environment that spreads would actually decrease, but they've held in pretty well. Assuming rates stay around here and the yield curve remains steep, would you expect your spread to hold up or potentially improve from these levels?
John McCallion, CFO
Yes, hi, Jimmy, it's John. Good morning. Yes, spreads were in line with what we've kind of been forecasting for the last few quarters as we said before and came in at 114 basis points but ex-VII, 83 basis points. We expect, given VII returns in Q2, this will take our overall spread down. In Q2, 85% to 90% of our VII comes through three segments: RIS, MLH, and Asia, with a roughly third each. Let me focus on how the shape of the curve is improving spreads ex-VII. We think for the remainder of this year, we would expect of kind of 5 to 10 basis point improvement due to the change in the shape of the curve, particularly since March. If you just look at LIBOR, I think it's down 100 basis points since the end of the first quarter. Our sensitivity would be that for every 10-basis point move, it would be a $10 million plus or minus depending on whether it goes up or down. So, I thought I'd just provide that color as well.
Operator, Operator
Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Elyse Greenspan, Analyst
Hi, thanks. Good morning. My first question is about potential transactions within MetLife Holdings. You've also mentioned speculations surrounding some sales of certain overseas businesses. How does the current environment, including lower rates, impact the potential for transactions? Are you looking to see if this could potentially free up capital through either of those routes?
John McCallion, CFO
Good morning, Elyse. This is John. Yes, look we have said this before – we’re in a lower rate environment, but we’ve been in low-rate environments for some time now, and they have gotten lower during the last 12-plus months. This does put some pressure on the bid-ask spread as we talked about in holdings. However, these are complex blocks of business. We always urge the team to keep an external perspective and remain prepared for when things – if things were to change. We want to be ready and opportunistic if something makes sense for us. But all else being equal, lower rates do put pressure on executing something in holdings at this juncture.
Ramy Tadros, Head of Group Benefits
More broadly, Elyse, I would add that a more challenging macro environment cannot be ignored. It does not change our approach to M&A. We will continually assess our businesses and timing, and certainly, the current environment makes M&A more challenging, but it doesn’t stop our evaluation work. There may be opportunities emerging from this crisis that we’ll consider.
Elyse Greenspan, Analyst
Okay. And then in terms of PRT, can you provide on the outlook for that business? I think deal flows have been affected, given the low-interest rate environment as well?
Ramy Tadros, Head of Group Benefits
Sure, and regarding the overall pipeline, it has slowed due to the environment. A number of drivers within that include funding levels, volatility in capital markets, and the priorities of treasury and HR teams in the context of the pandemic. We’ve seen a few deals either pulled out or put on hold in the first quarter, and we’re seeing a lighter pipeline. If activity rebounds in the second half of the year, we expect to get our fair share. Remember, we were a top three player in that market last year. However, keep in mind that RIS has more than PRT in it, and while PRT is one product line in a diversified context, we've seen substantial increases in our stable value business in the last quarter. We expect year-over-year increases in liability balances, hence we still expect to be within the guidance range we talked about.
Operator, Operator
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Erik Bass, Analyst
Hi, thank you. In the group business, can you help us think of the potential impact on premiums from the current environment? And how quickly would you start to see an impact? Does this materially differ by plan size?
Ramy Tadros, Head of Group Benefits
Sure, let me just start by profiling the overall PFO mix and then talk about some of the dynamics. Remember, 75% of our PFOs come from national accounts, so think large employers. When you think about the headline unemployment numbers, they have impacted smaller employers, part-time workers, and the like disproportionately. The other dynamic in our national accounts book is that the ultimate impact we’d see is influenced by the benefits practices of certain large employers; there have been examples where employers continue to provide benefits for furloughed workers. We have a diversified book by industry and geography, and similarly to our credit portfolio, we’ve assessed our exposure to various industries. That percentage is just shy of 10% of our entire book. As an example, hotels and leisure is less than 2%. Putting this all together, we’re witnessing some headwinds to PFOs related to overall unemployment, but we expect to see some PFO growth for the full year, albeit modest and likely below the 4% to 6% range we’d discussed. Additionally, in our dental business, we implemented a premium credit for April and May, given the significant decline in utilization of dental services, and will adjust dental premiums for the balance of 2020 to align with expected utilization. As for our Q2 number, we will be shifting some revenue recognition from Q2 to the second half of the year. Roughly, we expect to see double-digit CAGR in PFOs for voluntary business in 2020, although unemployment levels remain a headwind, we have tailwinds as well from increased awareness of the product needs. We’re starting from a place of relatively low penetration for these products with the employee population.
Erik Bass, Analyst
Thank you. That’s very helpful. And then one for John, as we think about your GAAP interest rate assumption. Is the sensitivity to changes still in line with what you've discussed in the past of roughly $50 million per 25 basis point change? And is there a level where that linearity changes, and I guess loss recognition could become an issue for any of the blocks?
John McCallion, CFO
Good morning, Erik. So, I’d say, the first few 25 basis point reductions would be fairly consistent and then it would begin to grow. The first two are roughly $50 million. If you move to another 100 basis points down, it would start to grow a little more each time. We’ve done some sizing, rough sizing, and we estimate if you see a 150 basis point move down, that would roughly be between $400 million and $450 million impact, with no loss recognition testing impact still. We’ve conducted stress and sensitivities, but that's our best estimate at this time.
Operator, Operator
And at this time, I'd like to turn it back to Michel Khalaf for any closing comments.
Michel Khalaf, CEO
Thank you, operator. When I took the job of CEO just over a year ago, I envisioned a lot of things happening during my first year on the job, but the coronavirus was not one of them. At a time when we all need silver linings, mine is how MetLife's employees have stepped up for our customers. It is fashionable for companies to say they are purpose-driven. The team at MetLife really walks the talk. I'm so privileged to lead this company at a time when we're making such a critical difference in people’s lives. Thank you for listening. Please stay safe, and have a good day.
Operator, Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.