Earnings Call Transcript - MET Q3 2022

Operator, Operator

Thank you for your patience. Welcome to the MetLife Third Quarter 2022 Earnings Release Conference Call. This conference is being recorded. Before we begin, I would like to remind you to refer to the cautionary notes regarding forward-looking statements in yesterday's earnings release and the risk factors outlined in MetLife's SEC filings. I will now turn the call over to John Hall, Global Head of Investor Relations. Please proceed.

John Hall, Global Head of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's third quarter 2022 earnings call. To begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements which you should review. Presenting on the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also available to participate 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 incremental disclosures, GAAP reconciliations and other information which you should also review. After prepared remarks, we will have a Q&A session, and it will end no later than the top of the hour. In fairness to all, please limit yourself to one question and one follow-up. Now on to Michel.

Michel Khalaf, President and CEO

Thank you, John, and good morning, everyone. Many of the macroeconomic trends from the first half of the year persisted in the third quarter. As equity markets fell again, interest rates rose further and the possibility of a recession remains in sight. Against this backdrop, we are pleased with the execution of our Next Horizon strategy which continues to prove its resilience in the face of uncertainty. Looking ahead, there are several areas that we believe differentiate MetLife and position us well going forward. We have established a track record of relentless execution focused on controlling those factors within our control. We have built a diversified portfolio of businesses with natural offsets through organic growth, supplemented by strategic acquisitions and tactical divestments. We are committed to responsible growth, aided by the use of powerful analytical tools such as the value of new business to produce high-teen IRRs and mid-single-digit payback periods. We have embedded an efficiency mindset in our DNA which drives our productivity and provides us with the capacity to invest in the future. Additionally, we generate strong recurring free cash flow that supports clear and consistent capital and liquidity management. Turning to our quarterly performance as a whole, recurring investment rates rose, PFOs on a constant rate basis were strong, COVID-19 losses in the aggregate moderated, and our expense discipline remained firm. The greatest headwind was variable investment income. Starting with some numbers, last night we reported third quarter 2022 adjusted earnings of $966 million or $1.21 per share. Notable items in the quarter included our annual actuarial assumption review and other insurance adjustments which had a positive impact of $34 million or $0.04 per share on adjusted earnings. Excluding notable items, adjusted earnings in the quarter were $1.16 per share. Net income in the third quarter was $331 million compared to $1.5 billion a year ago, primarily driven by lower adjusted earnings and derivative losses from hedges we hold to protect our balance sheet, as well as investment losses from standard investment activity. In the third quarter, variable investment income resulted in a loss of $53 million. Private equity is the largest contributor to VII and generated a negative 1.3% return in the quarter. As you know, our private equity portfolio is reported on a one-quarter lag. Third quarter private equity results reflect the difficult second quarter equity market which fell by 16.4% as measured by the S&P 500. Our investment in private equity is driven by its properties as a long-dated asset class that provides a good match for our long-dated liabilities. This has proven to be a good ALM strategy, and we have generated substantial gains over time for the benefit of our policyholders and shareholders. As a partial offset to private equity in the quarter, we saw recurring investment income grow sequentially on higher new money rates. For roughly the past decade, we managed through an interest rate environment where our new money rate was below our roll-off rate. In the second quarter, that finally reversed as our new money rate exceeded our roll-off rate. This was repeated in the third quarter to an even greater effect. With the duration of our investment portfolio at roughly eight years, we expect the impact of this change to build over time. Broadly speaking, rising interest rates are a good thing for MetLife. Shifting to our business segments, we saw strong growth in U.S. Group Benefits with adjusted earnings of $399 million, up 259% year-over-year. This represents favorable underwriting, including a substantial decline in COVID-19 life insurance claims, and was aided by strong volume growth. Group Life mortality, including COVID-19 losses, registered a benefit ratio of 86%, which continues to be at the low end of our annual target range of 85% to 90%. Our nonmedical health ratio was 70.8%, also at the low end of our annual target range of 70% to 75%. Execution across our enrollment and voluntary strategy is progressing well and is responsible for driving double-digit PFO growth across our voluntary suite of products. The investments we've made to expand our product breadth, deepen our understanding of employee needs, and connect and communicate with employees are all paying off. In Retirement and Income Solutions, or RIS, adjusted earnings were $345 million, which were down from a year ago, largely due to lower variable investment income. However, benefiting from higher rates, recurring investment income spreads remained strong. The highlight in the quarter for RIS was winning our largest-ever pension risk transfer deal of roughly $8 billion. Year-to-date, we have booked $12.3 billion of new PRT business, already an all-time annual high for MetLife, and we continue to see a robust pipeline with market opportunities extending out for years. For Asia, adjusted earnings of $197 million were below a year ago, mostly on lower variable investment income and unfavorable underwriting. COVID claims reduced adjusted earnings in the quarter by $129 million, driven largely by hospitalization claims in Japan. Changes to hospitalization claims eligibility rules which took effect at the end of September will greatly reduce such claims looking ahead. Asia sales were up 27% on a constant currency basis from a year ago, led by Japan foreign currency annuities and Accident & Health products. Two weeks ago, on a visit to Asia, I had the opportunity to engage with our team and our distribution partners and bear witness to our strong execution. In this fast-changing environment, our efforts to meet our customers where they are, and the nimbleness of that pursuit, are strengthening our competitive advantage. In Latin America, the region had another strong quarter with adjusted earnings totaling $171 million, up significantly from a COVID-impacted $29 million a year ago. Latin America sales continue to be strong, rising 22% for the quarter across the region on a constant currency basis, reflecting sustained business momentum. MetLife's focus on responsible growth is an integral element of our strategy. On an annual basis, in the third quarter, we disclosed our value of new business metrics for the prior year. As I mentioned earlier, value of new business is a tool that underpins our efforts to generate responsible growth. The metrics show that MetLife has been able to put capital to work to support organic growth more effectively and efficiently over time. For example, in 2019, we deployed $3.8 billion of capital at a 15% IRR to generate $1.8 billion of value of new business. Two years later, we put less capital to work, $2.8 billion at a higher IRR to generate even more value of new business, $1.9 billion. We believe our principal use of value of new business and the results that we've achieved are clear differentiators for MetLife. The discipline we use to evaluate and drive new business is no different than the discipline we employ to score merger and acquisition opportunities. During the third quarter, MetLife Investment Management announced a definitive agreement to acquire Affirmative Investment Management. AIM is an award-winning global environmental, social, and corporate governance investment manager with roughly $1 billion of assets under management. Combining AIM's ESG capabilities with our fundamental investment expertise will create differentiated client solutions and offer a new and attractive opportunity for growth. Further, this transaction underscores our strategic objective to grow our investment management business while highlighting M&A as a strategic capability for MetLife. Moving to cash and capital, MetLife continued to be active with capital management during the third quarter. We paid $400 million of common stock dividends to shareholders and repurchased $674 million of our common shares, bringing total capital return in the quarter to roughly $1.1 billion. In October, we repurchased an additional $176 million of MetLife shares. There remains $1.6 billion outstanding on our current $3 billion authorization. MetLife is well capitalized and highly liquid. At the end of the quarter, we had $5.2 billion of cash and liquid assets at our holdings companies. We remain comfortably above our target cash buffer of $3 billion to $4 billion. In closing, our all-weather Next Horizon strategy continues to be the right strategy to guide us through the changing times ahead. Together, the diversification of our market-leading businesses, our responsible growth, our efficiency mindset, and our strong free cash flow generation will serve MetLife well across a range of economic cycles. We believe these are the right ingredients to create value for our shareholders and stakeholders now and into the future. 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 Q3 '22 supplemental slides which provide highlights of our financial performance, details of our annual global actuarial assumption review, updates on our value of new business metrics, and our cash and capital positions. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the third quarter. Net derivative losses were primarily the result of higher interest rates. As a reminder, MetLife uses derivatives as part of our broader asset liability management strategy to hedge certain risks. This hedging activity can generate durative gains or losses and create fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment. Overall, the hedging program continues to perform as expected. In addition, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. In total, the actuarial assumption review and other insurance adjustments in Q3 '22 had a favorable impact of $54 million on net income, with a positive impact to adjusted earnings of $34 million and a $20 million impact to non-adjusted earnings. The table on Page 4 provides highlights of the actuarial assumption review and other insurance adjustments, with a breakdown of the adjusted earnings and net income impact by business. Overall, the impacts were fairly modest. In MetLife Holdings, annuity earnings were negatively impacted by lower-than-expected lapses and annuitizations, as well as model refinements. This was partially offset by favorable life results due to higher earned rates and favorable mortality. Additionally, we had a reinsurance recapture gain which was favorable to RIS adjusted earnings by $91 million in the quarter. Our U.S. mean reversion interest rate remained unchanged at 2.75%, and we have maintained our long-term mortality assumptions. On Page 5, you can see the third quarter year-over-year comparison of adjusted earnings by segment which excludes notable items in both periods. Adjusted earnings, excluding total notable items, was $932 million in Q3 '22, down 58% and down 57% on a constant currency basis. Lower variable investment income drove the year-over-year decline, while favorable underwriting and solid volume growth were partial offsets. Adjusted earnings per share, excluding notable items, was $1.16, down 55% year-over-year on a reported basis and down 54% on a constant currency basis. Moving to the businesses, starting with the U.S. business, Group Benefits adjusted earnings more than tripled year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19 life claims, as well as higher volume growth. This was partially offset by less favorable expense and investment margins year-over-year. The Group Life mortality ratio was 86% in the third quarter of '22, towards the bottom end of our annual target range of 85% to 90%. The business benefited from lower U.S. COVID deaths in the quarter and a continued favorable shift in the percentage of deaths under age 65, which was roughly 15% in Q3 of '22. More detail on the Group Life mortality results over the past five quarters can be found on Page 12 in the appendix. Regarding non-medical health, the interest adjusted benefit ratio was 70.8% in Q3 of '22 at the low end of its annual target range of 70% to 75% and essentially in line with the prior year quarter. Turning to the top line, Group Benefits adjusted PFOs were up 3.4% year-over-year. As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q3 of '21 versus Q3 of '22 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly 1 percentage point. The underlying PFO increase of approximately 4.4% was primarily due to solid growth across most products, including continued strong momentum in voluntary. Retirement and Income Solutions, or RIS, adjusted earnings, excluding the notable in this quarter, were down 68% year-over-year. The primary driver was lower private equity return versus a very strong Q3 of '21, as well as less favorable underwriting. Favorable volume growth was a partial offset. RIS investment spreads were 71 basis points, well below our full year 2022 guidance of 95 to 120 basis points and the prior year quarter of 256 basis points due to the significant decline in variable investment income. Spreads, excluding VII, were 101 basis points, up 8 basis points versus Q3 of '21 and down 2 basis points sequentially. While RIS liability exposures were down 1% year-over-year due to certain accounting adjustments that do not impact fees or spread income, RIS had strong volume growth driven by sales up 59% year-to-date. This was primarily driven by pension risk transfers and stable value products. With regards to PRT, this has been a record year for MetLife as we have completed six transactions worth $12.3 billion year-to-date, and we continue to see an active market. Moving to Asia, adjusted earnings excluding notables were down 73% on both a reported and constant currency basis, primarily due to lower variable investment income and unfavorable underwriting. This was partially offset by solid volume growth as assets under management on an amortized cost basis grew 4% on a constant currency basis. In addition, Asia sales were up 27% year-over-year on a constant currency basis, primarily driven by a strong performance in Japan. Overall, Japan sales were up 33%, driven by FX annuities and accident and health products which benefited from product launches and new capabilities over the past year, as well as the strength of our diversified channels. Latin America adjusted earnings excluding notables were $164 million versus $31 million in the prior year quarter. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19-related deaths in Mexico were down significantly year-over-year. LATAM's recurring interest margins in Q3 '22 continued to benefit from higher inflation rates in Chile. However, this favorable impact was more than offset by lower variable investment income and the Chilean and encaje, which had a negative 1.9% return in Q3 '22 versus a negative 0.3% in the prior year quarter. LATAM's top line continues to perform well as adjusted PFOs were up 21% year-over-year on a constant currency basis, and sales were up 22% on a constant currency basis, driven by growth across the region, primarily from higher single premium immediate annuity sales in Chile and group cases in Mexico. EMEA adjusted earnings, excluding notable items, were down 44% and 31% on a constant currency basis compared to a strong Q3 of '21 which benefited from very favorable underwriting. EMEA adjusted PFOs were down 7% on a constant currency basis, primarily due to refinements to certain unearned revenue reserves in both periods. However, sales were up 10% on a constant currency basis, reflecting growth across the region. MetLife Holdings adjusted earnings were down 77%, excluding notable items in both periods. This decline was primarily driven by lower variable investment income. Adverse equity market impact was also a contributor, as MetLife Holdings separate account return was negative 5.5% in the quarter versus a negative 1% in Q3 of '21. Favorable underwriting margins in Life and long-term care were a partial offset. Corporate and other adjusted loss was $265 million versus an adjusted loss of $131 million. The year-over-year variance was primarily due to less favorable taxes, lower variable investment income, and higher expenses due to market-sensitive employee-related costs. The company's effective tax rate on adjusted earnings in the quarter was 23%, which was at the top end of our 2022 guidance range of 21% to 23%. On Page 6, this chart reflects our pretax variable investment income for the past five quarters, including a $53 million loss in the third quarter of '22. The majority of VII was attributable to the private equity portfolio of roughly $14 billion, which had an overall negative return of 1.3% in the quarter. As we have discussed previously, private equity is generally accounted for on a one-quarter lag. In addition, real estate equity funds had a positive 4.3% return in the quarter on a portfolio of roughly $2.3 billion. While VII underperformed in Q3 '22, our new money rate increased to 4.71%, which was 79 basis points above our roll-off yield of 3.92%. We expect this favorable trend to continue in a rising interest rate environment. On Page 7, we provide VII post-tax by segment for the prior five quarters, including a $42 million loss in Q3 of '22. RIS, MetLife Holdings, and Asia continue to earn the vast majority of variable investment income consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-dated liabilities which are mostly in these three businesses. Turning to Page 8, this chart shows a comparison of our direct expense ratio over the prior five quarters, including 12.3% in Q3 of '22. As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. Our third quarter expense ratio was in line with our full year target but above recent trend given higher employee-related costs that are sensitive to market fluctuations. Those costs contributed roughly 40 basis points to the ratio. While we'd expect our direct expense ratio to be higher in Q4, consistent with the seasonality of our business, we remain committed to achieving our full year direct expense ratio target of 12.3% in 2022 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset. Now, let's turn to Page 9. This chart reflects new business value metrics for MetLife's major segments for the past five years, including an update for 2021. Consistent with our Next Horizon strategy, we continue to have a relentless focus on deploying capital and resources to the highest value opportunities. As evidence of that commitment, MetLife invested $2.8 billion of capital in 2021 to support new business which was deployed at an average unlevered IRR of approximately 17%, with a payback period of 6 years, generating roughly $1.9 billion in value. New business written in 2021 reflects our disciplined approach to building responsible growth while creating value, generating cash, and mitigating risk. I will now discuss our cash and capital position on Page 10. Cash and liquid assets at the Holdings companies were approximately $5.2 billion at September 30, which was up from $4.5 billion at June 30 and remains well above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the Holdings companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $700 million in the third quarter, as well as Holdings company expenses and other cash flows. In addition, Holdco cash includes the proceeds from the $1 billion senior debt issuance in July. Regarding our statutory capital, for our U.S. companies, our preliminary third quarter year-to-date 2022 statutory operating earnings were approximately $1.6 billion, while net income was approximately $2.1 billion. Statutory operating earnings decreased by approximately $2.4 billion year-over-year, driven by unfavorable VA rider reserves, lower variable investment income, and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $18.7 billion as of September 30, 2022, down 2% sequentially and year-to-date. Finally, the Japan solvency margin ratio was 617% as of June 30, which is the latest public data. The decline from March 2022 was primarily due to higher U.S. interest rates. That being said, rising interest rates improve the overall economic solvency of our Japan business. Let me conclude by saying the fundamentals of the business remain strong, solid top-line growth, favorable underwriting, and ongoing expense discipline. While private equity returns were down this quarter, core spreads remain robust. In addition, results in our market-leading franchises, Group Benefits and Latin America, continue their strong growth and recovery. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build sustainable value for our customers and shareholders. And with that, I will turn the call back to the operator for your questions.

Operator, Operator

Our first question is from Jimmy Bhullar with JPMorgan.

Jimmy Bhullar, Analyst

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

Steven Goulart, Chief Investment Officer

Jimmy, it's Steve Goulart. Thanks for the question. I think John gave some details and color on it, but our new money yield rose again this past quarter to 4.71%. This shows continued improvement, a reflection of what we're seeing in the market, obviously, with interest rates rising. We're very pleased with what it means for our general account investing. We will continue to see the portfolio yield rise as a result of that since our roll-off has been lower than our new money rates for the last couple of quarters. I would remind everybody, though, that things can be volatile quarter-to-quarter, just looking at the existing book of assets that we have, with the roll-off maturity characteristics. This past quarter, we saw some significant blocks roll off, and there will be similar events in the future as well. What's important is to focus on the trend, which is positive. We expect our new money yield to increase further and foresee a widening spread over the existing portfolio, which is positive for net investment income.

Jimmy Bhullar, Analyst

Okay. And as the new money yield is going up, how much are you having to raise crediting rates or improved terms and conditions on the interest-sensitive products? I noticed that in the retirement business, the yield was up a decent amount, but crediting rates were up even, I think, sequentially even a little bit more. So this spread ended up declining sequentially excluding variable investment income.

Ramy Tadros, Chief Actuary

Jimmy, it's Ramy Tadros here. If you look at our in-force for Retirement and Income Solutions, the vast majority of our in-force from a crediting rate perspective is fixed. You may see fluctuations in the crediting grid from quarter to quarter, but clearly, the new business we're writing, while we're running at attractive spreads, has a higher crediting rate given the market environment. However, there is no real pressure on our in-force contracts since they are mostly fixed.

Jimmy Bhullar, Analyst

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

Ramy Tadros, Chief Actuary

Thanks, Jimmy. It's Ramy again. I will provide a specific answer to your question, but it may also be helpful to give some broader context. Both our mortality ratio and our nonmedical health ratio were clearly favorable in the quarter. Historically, there is some seasonality to both those ratios, and we would expect them to somewhat increase in the fourth quarter just from a seasonal perspective. Overall, we remain extremely bullish about this market. If you step back more broadly, employees are expecting more from their employers, and employers are looking for various levers to attract, retain, and engage their talent. This secular trend is here to stay and is providing tailwinds for the entire market. From a competitive perspective, overall pricing is competitive but also rational. The short nature of these products acts as a natural check on any sustained irrational pricing. Additionally, we can differentiate on factors beyond price, such as service and digital experiences. This strategic focus gives us the scale to invest in a range of capabilities that allows us to differentiate our offerings. We're really pleased with our performance and persistency, continuing to see a competitive but rational market.

Operator, Operator

Next, we move on to Ryan Krueger with KBW.

Ryan Krueger, Analyst

First question was the $1 billion of debt that you issued in the quarter. Is there anything that that's earmarked for? Or is that fully available to use?

John McCallion, Chief Financial Officer

Ryan, it's John. As you said, we issued $1 billion of debt back in July. We got some great terms on that and great execution. It's generally raised for general purposes, as well as we do have a maturity coming up in 2023. At present, we're maintaining flexibility and will see how things progress over the next few months. But all in all, we're pleased with our HoldCo cash and cash flows generally.

Ryan Krueger, Analyst

Got it. And then I just had a question on Japan, just given the big moves in FX and rates there. I guess do you view the solvency margin ratio becoming less relevant in this environment, and there's more emerging focus on the economic solvency ratio in Japan? Or could there be a situation where the solvency margin ratio becomes a negating factor to sending cash out of Japan?

John McCallion, Chief Financial Officer

Yes, thanks. It's John again. As you mentioned, the solvency margin ratio was down in the second quarter to 617, and certainly rising interest rates impact that. Overall, rising interest rates improve the economic value of that business. We'll have to monitor the solvency margin ratio and can’t ignore it. We want to do things that make sense, and we have a number of internal tools that we can utilize to help manage that temporary impact from the solvency margin ratio due to asymmetrical accounting. Overall, the economics is improving, and in a few years' time, they are moving to a more economic solvency framework known as the economic solvency ratio that will better reflect the economics of the business. Currently, we have no concerns over the capital generation or dividend capacity of the business, nor overall free cash flow for the firm.

Operator, Operator

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

Tom Gallagher, Analyst

Just a couple of questions; one on derivatives and the second on investment losses. I want to understand if there’s any impact to statutory capital generation from the derivative losses from rising interest rates. I look at the last three quarters, and they’ve been about $2 billion or more than $2 billion of losses. I didn’t think that impacted statutory earnings. I thought that was an adjustment to the Total Adjusted Capital. But is there any impact on statutory capital generation?

John McCallion, Chief Financial Officer

Just to clarify, the $2 billion you're referencing is a GAAP number, right?

Tom Gallagher, Analyst

Yes. It's in your QFS, and I don't see that showing up in the Total Adjusted Capital.

John McCallion, Chief Financial Officer

That's right. Yes, that's the correct observation. Obviously, there's different accounting that occurs in GAAP versus statutory. The punchline is that we actively manage the statutory capital of the operating entities. As you've seen, CAC has been very resilient despite the market fluctuations. That’s the main takeaway.

Tom Gallagher, Analyst

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

John McCallion, Chief Financial Officer

No.

Tom Gallagher, Analyst

Just on the investment losses and gains in your supplement, I want to understand how to think about whether those losses could have an impact on statutory capital generation as well? I think most of those should be flowing through the Investment Margin Reserve. To the extent that you have net losses, I think that will reduce amortization gains every year, but it will have a very modest annual impact. Am I thinking about that correctly? Could you shed some light on that?

Steven Goulart, Chief Investment Officer

Tom, it's Steve Goulart. I'll tag team on this a little bit. Losses are not unexpected in this environment given rising rates. I would note they are down significantly from where they were last quarter, showing a more moderating environment. It’s usually easy to understand why we're taking losses, which is a combination of rotating temporary assets into permanent ones and doing things like pension risk transfers along with other funding outflows and cash flow needs of the different businesses. That sets the stage; down from last quarter as we would expect. This is something we actively manage, and John can speak a little about the capital impacts.

John McCallion, Chief Financial Officer

You're correct. If you have an Investment Margin Reserve balance, that typically gets absorbed, and we're in that position today. But it's one you have to actively monitor and manage, and we plan to do so.

Operator, Operator

Our next question is from Erik Bass with Autonomous Research.

Erik Bass, Analyst

You highlighted the strong Pension Risk Transfer sales year-to-date in a robust pipeline. I was just hoping you could talk about how the rise in interest rates is affecting both plan sponsor demand for risk transfer, as well as pricing for transactions? And also in the past, I think you've given a rule of thumb for the earnings contribution from each $1 billion of sales. I'm just wondering if this is still the right level to think about?

Ramy Tadros, Chief Actuary

Eric, it's Ramy here. I'll answer the second question first: Yes, that rule of thumb still holds; you should think about the earnings run rate of these deals in that way. Regarding the overall Pension Risk Transfer market, the headline number to look at is the overall funding level, which is being helped by rising interest rates. This improves the affordability and funding levels of defined benefit plans, driving engagement in pension risk transfer. We're on track for a record year this year, and we are extremely pleased with winning our largest deal ever with IBM. We still see a very robust pipeline ahead of us. We are the market leader here with extensive experience working with plan sponsors and their advisers on all aspects of pension risk transfers. We have a clear strategy focusing on the jumbo end of the market, where our competitive strengths lie in terms of our rating, the size of our balance sheet, and our investment capabilities. Large sponsors like IBM seek solution providers with a long track record in this business. While actively engaged in this market, we always keep an eye on value and the value of new business. We're writing business with ROEs well within our enterprise targets.

Erik Bass, Analyst

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

Eric Clurfain, Latin America Executive

Yes. Overall, we had another solid quarter for the region, supported by the strength of our franchise and solid underlying business fundamentals. This, combined with market factors and tailwinds, reflects the growth commitments we've delivered, as evidenced by double-digit growth in PFOs, which is as strong as ever. The sales momentum that began last year has continued throughout this year, reflecting the resilience of our distribution channel, our diversified product mix, and the overall solidity and potential for growth of the franchise in the region. The strong sales result was consistent across the region and across all channels, with Chile and Brazil having record quarters. To point out Brazil, we have grown twice as fast as the market, with Brazil contributing over 20% of the region's sales. The flight to quality I referenced last quarter is also evidenced by the strong persistencies we continue to see, along with robust sales year-over-year and quarter-over-quarter. Overall, we won’t update our outlook until February, but we're very pleased with the momentum and growth we're seeing across the region.

Operator, Operator

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

Alex Scott, Analyst

First question; I had a few on expenses. I know you guys have guided to this direct expense ratio. But I recognize you've been getting pretty good growth across a number of your businesses. So I wanted to better understand the kind of operating leverage that you expect to get over time?

Michel Khalaf, President and CEO

Alex, it's Michel. To remind you, we anchored on the 12.3% expense ratio target due to our commitment to building an efficiency mindset as part of our DNA, which has been yielding excellent traction. The idea is to continue to free up capacity to make important investments in our business, and we've successfully achieved this over the last few years. For example, I referenced voluntary benefits and our digitization initiatives in Japan, which allow for quicker product launches. We believe it’s important to continue making these investments to drive competitive advantage over time. While we mentioned the 12.3% target, it was set earlier in a different environment, considering inflationary pressures everyone is feeling. Despite these challenges, we remain committed to achieving the 12.3% target for the year. The record year we expect in Pension Risk Transfer, with over $12 billion in new deals is not factored into our direct expense ratio as it does not contribute positively from that standpoint, and there are expenses associated with winning this business. For all these reasons, we believe 12.3% is still achievable.

Alex Scott, Analyst

Got it. That's really helpful. And then maybe just a follow-up on capital deployment and the value of new business disclosure you all provided. You show in that disclosure that the margins you’re making on new business are seemingly getting materially better. Does it make sense to deploy more capital? I noticed you deployed a little bit less at better margins. Does it make sense to ramp that up as we think about 2023 and how much you'll deploy behind new business?

John McCallion, Chief Financial Officer

Alex, it's John. Yes, it's a great point. We are focused on achieving solid returns and deploying capital to its highest and best use to create value. While the IRR and payback are significant metrics, we want to deploy capital effectively where we can improve value and are comfortable with the returns. Trends have shown we are at a great point now, and to the extent we can deploy more capital at attractive returns, we will do it.

Operator, Operator

And our next question is from Suneet Kamath with Jefferies.

Suneet Kamath, Analyst

Just going back to Pension Risk Transfer for a second. I wanted to think through the capital needs as you consider growth in that business. It didn't look like you needed to infuse any capital to support IBM. So I want to confirm that. Also, as you look at the pipeline, do you see needing more capital for the opportunities in front of you, or is that business sort of self-funding at this point?

John McCallion, Chief Financial Officer

Suneet, this is John. I referenced in my opening remarks a slight decline in statutory capital, about 2%. Most of that was attributable to the large deal we did this third quarter and its related capital strain. That said, we've generated some capital and updated estimates on the positive impact from the recent changes due to mortality and morbidity. Net-net, we’ve self-funded our record year to date. Your outlook is volume-dependent, but for now, we’re comfortable funding growth within the operating entities.

Suneet Kamath, Analyst

Okay, got it. And then I guess for Steve, on variable investment income, any thoughts on fourth quarter? Also, as we think about the long term, given higher rates in volatile markets, any change to the outlook on what the returns of this portfolio could be?

Steven Goulart, Chief Investment Officer

I'd mention several points on variable investment income, particularly with the alternatives portfolio. First, remember our guidance of 12%; we’ve consistently planned for this. Even now looking forward, I don’t anticipate that changing. Our experience indicates that alternatives give us equity-like returns, but with less volatility and fewer extremes relative to other public market alternatives, making it attractive. We talked about a few quarters back where this relationship was challenged, but we think we’re returning to historical norms now, showing more muted volatility and still providing attractive returns. So I don’t believe there will be any changes to our outlook.

Operator, Operator

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

Elyse Greenspan, Analyst

My first question; I know you guys are typically asked about potential transactions within your blocks within Holdings. Anything new there or any changes you've seen within the bid-ask spread within the market in the quarter?

John McCallion, Chief Financial Officer

Elyse, nothing new to update here. It's still an active market. There is still an active set of participants. We continue to focus on optimizing Holdings, both from an internal perspective and by speaking with external participants about opportunities. It's a potential opportunity, but we're being thoughtful about seeing if an opportunity arises. Nothing new at this point.

Elyse Greenspan, Analyst

And then on the Retirement and Income Solutions core spread excluding variable investment income, anything within that number? How should we think about that trending from here?

John McCallion, Chief Financial Officer

Elyse, it's John again. Total spreads were at 71, and ex-VII came in at 101. Year-over-year, that's up 8 basis points on an ex-VII basis and then down sequentially. It's clear that higher interest rates have been beneficial. We also have more interest rate caps in the money that are beginning to contribute to the spread. Sequentially, it was down 2 basis points as I had mentioned previously about some excess returns we anticipated moderating did happen. Third quarter came in as expected. Going forward, based on the forward curve I pulled up this morning for 3-month LIBOR, which is expected to rise above 5% by the end of the year and beyond into next year, these caps will still be in place and should enhance the spread. For Q4, we expect spreads to grow by 5-plus basis points, all else equal.

Operator, Operator

Next, we go to the line of Wilma Burtis with Raymond James.

Wilma Burtis, Analyst

You previously guided to $650 million to $750 million of corporate costs for 2022. It sounds like you're sticking to the 12.3% expense guidance, but should we expect a higher run rate in corporate heading into 2023, given PFO growth and inflation?

John McCallion, Chief Financial Officer

Wilma, this is John. Good question. A couple of points regarding the third quarter: In the first and third quarters, we typically have higher preferred stock dividends by about $30 million. We are also experiencing higher interest costs on debt, primarily due to the $1 billion of debt raised in July. Additionally, private equity returns have been down the last couple of quarters, contributing factors to our results. Lastly, we've noted an increase in market-sensitive employee-related costs or corporate costs that we discussed. We think higher costs attributed roughly 40 basis points to the expense ratio this quarter. We anticipate the 12.3% target remains achievable despite these factors, and we'll provide more outlook details during our February call.

Wilma Burtis, Analyst

Okay. Second question; you've previously guided to a roughly $65 million quarterly earnings run rate in EMEA. It seems like $56 million this quarter is fairly normal. Is that a good run rate reflecting currency pressures?

John McCallion, Chief Financial Officer

Yes. That’s a good way to think about it. Currency pressures have brought down that run rate over the last couple of quarters, so I think you're correct in identifying that as the new figure.

Operator, Operator

And that concludes your conference for today. Thank you for your participation. You may now disconnect.

Michel Khalaf, President and CEO

Thank you all for joining us this morning. When we rolled out our future work model in March, we did so grounded in the belief that the office plays an important role in how we live our purpose. I've now had the opportunity to visit our major offices in the U.S. and internationally. The vibrancy, energy, and focus I encountered were palpable and speaks to the cultural evolution underpinning our Next Horizon strategy. More evidence of this emerged in our annual global employee survey, where participation rates and engagement scores reached their highest levels ever. MetLife is a team sport. These levels of energy and engagement give us further confidence in our ability to relentlessly execute on our strategy and deliver long-term value to our stakeholders. Thanks again and have a great day.