MetLife, Inc. (NYSE:MET) Q2 2022 Earnings Conference Call August 4, 2022 9:00 AM ET

Company Participants

John McCallion - EVP & CFO

Michel Khalaf - CEO, President & Director

Steven Goulart - EVP & CIO

Ramy Tadros - President, U.S. Business

John Hall - SVP & Head, IR

Eric Clurfain - Regional President, Latin America

Conference Call Participants

Ryan Krueger - KBW

Thomas Gallagher - Evercore ISI

Jamminder Bhullar - JPMorgan Chase & Co.

Elyse Greenspan - Wells Fargo Securities

Suneet Kamath - Jefferies

Alexander Scott - Goldman Sachs Group

Andrew Kligerman - Crédit Suisse

John Barnidge - Piper Sandler & Co.

Erik Bass - Autonomous Research

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2022 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to the risk factors discussed in MetLife's SEC filings.

With that, I will now turn the call over to John Hall, Global Head of Investor Relations.

John Hall

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Second Quarter 2022 Earnings Call. Before we begin, I'd 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 address the quarter. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along.

An appendix to these slides feature incremental disclosures, GAAP reconciliations and other information which you should also review. After prepared remarks, we will have a Q&A session, which 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 over to Michel.

Michel Khalaf

Thank you, John, and good morning, everyone. Over time, I have referred to our Next Horizon strategy as being all weather designed to guide MetLife through a variety of economic environments. And the environment has shifted with equity markets falling from historic highs, interest rates trending up from historic lows, further strengthening of the dollar and the odds of a U.S. recession on the rise.

The resilience of Next Horizon, combined with our clarity of purpose, positioned MetLife to meet these challenges in the second quarter of 2022. While certain things may be outside our control, we continue to execute with urgency across those things we do control. Let's turn to some numbers. MetLife reported strong financial results for the second quarter. Adjusted earnings were $1.6 billion or $2 per share compared to $2.37 per share a year ago. Excluding one notable item, adjusted earnings were $1.90 per share.

The combination of strong underwriting margins and good volume growth drove solid adjusted earnings results while variable investment income fell below our quarterly outlook expectations. Net income in the second quarter was $103 million compared to $3.4 billion a year ago. Current period net income was driven by adjusted earnings, offset by interest rate and foreign currency derivative losses from securities held to protect our balance sheet.

Also, standard investment activity resulted in realized losses as interest rates rose during the quarter. Year ago net income includes the gain we booked on the successful sale of our Auto & Home business. Now moving to variable investment income, which returned to a more typical level following 7 consecutive quarters of truly outstanding results. During the 7-quarter period, MetLife generated more than $8 billion of cumulative pretax variable investment income. This type of investment performance serves to validate MetLife's long-term prudent exposure to this value-added asset class.

In the second quarter, variable investment income of $389 million was aided by private equity investments and real estate funds, which generated returns of 1.5% and 7.9%, respectively. Our private equity returns are reported on a 1-quarter lag and the weak second quarter equity market should negatively impact our variable investment income in the third quarter.

Throughout the pandemic, the broad diversity of MetLife's businesses across product lines and geographies has clearly been a great strength. Initially, underwriting gains in one business offset underwriting losses elsewhere. When COVID claims seem to reach their peak, our private equity gains then filled the gap. And the current quarter continues to illustrate this point as variable investment income has returned to more normal levels in the second quarter, so too have our underwriting margins.

Turning to MetLife's business performance. I'll start with our U.S. Group Benefits results. Adjusted earnings of $400 million were up 61% year-over-year. This represents the highest quarterly result ever posted by this flagship business, primarily driven by favorable underwriting. Historically, the second quarter tends to be a low mortality quarter, something that was also evident this year.

Group Life mortality, including COVID-19 losses, registered a benefit ratio of 85.8%, which is at the low end of our target range of 85% to 90%. A significant contraction in U.S. COVID-related deaths and a further shift upward in the age of death contributed to the improvement in the second quarter benefit ratio. Having witnessed prior [indiscernible] during this 2.5-year long pandemic, we are cautiously optimistic and note the absence of much, if any, excess mortality in our current period group benefits results.

At the current pace, MetLife is on track to generate close to $25 billion of adjusted group benefit revenue in 2022, a true testament to our product breadth, scale and momentum in this attractive market-leading business. For Retirement and Income Solutions, or RIS, adjusted earnings totaled $388 million, which were down from a year ago due to less variable investment income, but helped by favorable volume growth. Looking past the decline in variable investment income, recurring investment income spreads were strong at 103 basis points as we continue to manage against a shifting yield curve.

During the quarter, we booked $2.6 billion of new pension risk transfer business, which brings our year-to-date total to roughly $4 billion. We continue to see a strong pipeline for the balance of the year based on good funding levels and higher long-term interest rates. In Asia, adjusted earnings of $386 million were below a year ago on lower variable investment income and less favorable underwriting.

COVID claims in Japan impacted adjusted earnings in the quarter, driven largely by deemed hospitalization, which allows for payment of COVID claims incurred for care outside of the hospital. Other Asia business metrics remained favorable, with sales growing 2% year-over-year on a constant currency basis, while general account AUMs in the region were up 5% on the same basis.

In Japan, sales grew 5% on a constant currency basis. MetLife has a history of product innovation in Japan. Most recently, we've built on that legacy with product launches in September, February and April, illustrating both our speed to market for new products and our leading digital distribution capabilities. We continue to have good sales momentum in Japan, supported by a resilient business model and we remain on track to achieve our Asia region sales outlook for the year.

Looking to Latin America, adjusted earnings totaled $267 million, well above $97 million a year ago. Lower COVID claims, a favorable impact from inflation, a strong encaje and continued volume growth, all combined to generate substantial outperformance in the second quarter. Fundamental drivers in Latin America also remains strong with sales and PFOs up from a year ago on a constant currency basis by 19% and 26%, respectively.

Moving to capital and cash. MetLife was active with capital management during the second quarter, and we returned more than $1.5 billion to shareholders through $408 million of common dividends and $1.1 billion of share repurchase. In the first half of 2022, MetLife repurchased approximately $2 billion of common stock. Given the accelerated pace of buyback activity in the first half of the year, we anticipate a modestly slower pace in the back half.

There remains $2.5 billion outstanding on our current $3 billion authorization. MetLife continues to be well capitalized and highly liquid. At the end of the quarter, we had $4.5 billion of cash and liquid assets at our holding companies, which includes the proceeds from the sale of our Poland business, and we remain comfortably above our target cash buffer of $3 billion to $4 billion.

Financial flexibility was further enhanced after the second quarter's end when we tapped the debt market raising $1 billion of 30-year paper and a well oversubscribed offering, another example of the value the market attributes to MetLife's financial strength. Turning to sustainability. At the end of last quarter, MetLife announced a broad set of DEI commitments designed to address the needs of the underserved and underrepresented by 2030.

The MetLife Foundation recently announced an updated strategy aimed at driving inclusive economic mobility by addressing the needs of underserved and underrepresented communities around the globe. The foundation's grant-making and impact investments will be aligned across 3 core portfolios: Economic inclusion, financial health and resilient communities and will advance the broad set of diversity, equity and inclusion commitment MetLife announced at the end of last quarter.

In closing, when we introduced our Next horizon strategy, little did we know that it would be put to the test so quickly and so severely. Our results this quarter clearly demonstrate its resilience. We saw solid underlying business performance, supported by a strong capital base, which reinforces our confidence that Next Horizon is the right strategy for MetLife. With our purpose as our North Star and with our strategic pillars to guide us along the way, MetLife is well positioned to rise to the challenges ahead and deliver significant long-term value to our shareholders and other stakeholders.

With that, I will turn things over to John.

John McCallion

Thank you, Michel, and good morning. I will start with the 2Q '22 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions as well as commentary on the new U.S. GAAP accounting known as Long Duration Targeted Improvements or LDTI, effective 1/1/23.

Starting on Page 3, we provide a comparison of net income to adjusted earnings in the second quarter. Higher interest rates and the strengthening of the U.S. dollar in the quarter drove net derivative losses. As a reminder, MetLife uses derivatives as part of our broader asset liability management strategy to hedge certain risks. This hedging activity often generates derivative gains or losses and creates fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment.

In addition, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. We had one favorable notable item this quarter of $77 million or $0.09 per share related to a reinsurance settlement, which was accounted for in MetLife Holdings.

On Page 4, you can see the second quarter year-over-year comparison of adjusted earnings by segment, which excludes notable items in both periods. Adjusted earnings in the second quarter of 2022, excluding the notable item were $1.5 billion, down 23% and down 21% 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 the notable item, was $1.90, down 17% year-over-year on a reported basis and down 15% on a constant currency basis. Moving to the businesses, starting with the U.S. business. Group Benefits adjusted earnings were up 61% year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19 Life claims as well as higher volume growth.

The Group Life mortality ratio was 85.8% in the second quarter of '22 towards the bottom end of our annual target range of 85% to 90%. The business benefited from lower U.S. COVID deaths in the quarter and a continued favorable shift in the percentage of death under age 65, declining from approximately 23% in the first quarter to roughly 17% in the second quarter.

The adjusted earnings impact of Group Life COVID-19 reported claims was approximately $35 million offset in part by an IBNR release related to 1Q '22 COVID-19 claims of approximately $25 million. Therefore, the net COVID impact was roughly $10 million or one percentage point on the Group Life mortality ratio. More detail on the Group Life mortality results over the past 5 quarters can be found on Page 11 in the appendix.

Regarding non-medical health, the interest-adjusted benefit ratio was 73.1% in Q2 of '22 within its annual target range of 70% to 75% and favorable to the prior year quarter of 73.8%. Turning to the top line, Group Benefits adjusted PFOs were up 3% year-over-year. As we discussed in the prior quarters, excess mortality can result in higher premiums from participating contracts in the period.

The higher excess mortality in Q2 of '21 versus Q2 of '22 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly 1.5 percentage points. The underlying PFO increase of approximately 4.5% was due to solid growth across most products, including continued strong momentum in voluntary. Retirement and Income Solutions, or RIS, adjusted earnings were down 41% year-over-year. The primary driver was less favorable private equity returns versus a very strong Q2 of '21.

Favorable volume growth was a partial offset. RIS investment spreads were 116 basis points within our full year 2022 guidance of 95 to 120 basis points, but well below the prior year quarter of 224 basis points due to the significant decline in variable investment income. Spreads, excluding VII, were 103 basis points, up 5 basis points versus Q2 of '21 and up 14 basis points sequentially due to higher interest rates, wider credit spreads and favorable real estate performance.

RIS liability exposures were down 3% year-over-year despite strong top line growth. The key drivers of this decrease came from reductions in accounting adjustments that impact our liabilities, but do not impact fees or spread income and thus have no impact on adjusted earnings. RIS sales were up 30% year-to-date, primarily driven by pension risk transfers and stable value products.

With regards to PRT, we completed 3 transactions worth $2.6 billion in the quarter, a strong first half of 2022, and we continue to see an active market. Moving to Asia. adjusted earnings were down 26% and 22% on a 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 5% on a constant currency basis.

In addition, Asia sales were up 2% year-over-year on a constant currency basis, primarily driven by another solid performance in Japan. Overall, Japan sales were up 5% driven by FX annuities and accident and health products sold through face-to-face channels. Latin America adjusted earnings were $267 million versus $97 million in the prior year quarter. This strong performance were driven by several positive factors, primarily favorable underwriting and investment margins as well as solid volume growth.

Overall, COVID-19 related deaths in Mexico were down significantly in Q2. This positive trend, coupled with the emergence of even more favorable mortality experience in our own block, resulted in a reduction to the IBNR reserve that was established in prior periods. This benefited LatAm's adjusted earnings by roughly $40 million after tax in 2Q '22. The LatAm's adjusted earnings in the quarter also benefited from strong investment margins, primarily due to the net impact from inflation-linked assets and liabilities in Chile that increased with higher inflation rates as well as the Chilean encaje, which had a 4.8% return in 2Q '22 versus a negative 1.5% in the prior year quarter.

LATAM's top line continues to perform well as adjusted PFOs were up 26% year-over-year on a constant currency basis, and sales were up 19% 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 were down 32% and 16% on a constant currency basis compared to a strong Q2 of '21, which benefited from a favorable refinement of an unearned premium reserve in the prior year period, totaling approximately $15 million after tax.

In addition, adverse equity market impacts in the current year period were partially offset by favorable underwriting margins. MetLife Holdings adjusted earnings were down 46%, excluding the favorable notable item of $77 million after tax as discussed earlier. This decline was primarily driven by lower variable investment income, adverse equity market impacts and less favorable underwriting also were contributors to the year-over-year decline.

MetLife Holdings separate account return was negative 14% in the quarter versus a positive 6% in Q2 of '21. Corporate and other adjusted loss was $243 million versus an adjusted loss of $126 million, excluding notables in the prior year quarter. The year-over-year variance was primarily due to higher expenses from corporate-related costs associated with less favorable equity markets and higher interest rates. Higher taxes and lower variable investment income were also contributors.

The company's effective tax rate on adjusted earnings in the quarter was 22.3% and within our 2022 guidance range of 21% to 23%. On Page 5, this chart reflects our pretax variable investment income for the past 5 quarters, including $389 million in the second quarter of '22. The majority of VII was attributable to the private equity portfolio of roughly $14 billion, which had an overall return of 1.5% in the quarter.

As we have previously discussed, private equity is generally accounted for on a 1-quarter lag. In addition, real estate equity funds were also a strong contributor to VII with nearly an 8% return in the quarter while hedge funds, which are reported on a 1-month lag, had a loss.

While VII in 2Q '22 was below expectation and recent trends, our new money rate was 3.92% and above our roll-off yield of 3.71%. This marks the first time in over a decade in which we did not experience quarterly spread compression in the investment portfolio. On Page 6, we provide VII post-tax by segment for the prior 5 quarters, including $307 million in Q2 of '22.

Asia, MetLife Holdings and RIS 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-date liabilities, which are mostly in these 3 businesses.

Turning to Page 7. This chart shows a comparison of our direct expense ratio over the prior 5 quarters, including 11.9% in Q2 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 second quarter direct expense ratio benefited from solid top line growth and ongoing expense discipline.

While we would expect our direct expense ratio to be higher in the second half of the year, consistent with the seasonality of our business, we remain committed to achieving a full year direct expense ratio below 12.3% in 2022 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset.

I will now discuss our cash and capital position on Page 8. Cash and liquid assets at the holding companies were approximately $4.5 billion at June 30, which is up from $4.2 billion at March 31 and remains above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of $1.1 billion in the second quarter as well as holding company expenses and other cash flows.

In addition, holdco cash includes the proceeds from the sale of our Poland business, which closed in April. In regard to our statutory capital for our U.S. companies, our preliminary second quarter year-to-date 2022 statutory operating earnings were approximately $700 million, while net income was approximately $1.3 billion. Statutory operating earnings decreased by approximately $2 billion year-over-year, driven by unfavorable VA rider reserves, underwriting results and lower variable investment income.

We estimate that our total U.S. statutory adjusted capital was approximately $19.1 billion as of June 30, 2022, up 2% sequentially. Finally, the Japan solvency margin ratio was 764% as of March 31, which is the latest public data. The decline from December 2021 was primarily due to higher U.S. interest rates.

Now shifting to LDTI on Page 9. While there is quite a bit of work still to be done prior to implementation on January 1, let me take a moment to recognize the great work of our MetLife associates and our partners in getting us to this point. This slide provides an update on our expected transition balances as of January 1, 2021, under LDTI. The column on the left was our actual balances at 12/31/'20, and the middle column contains the estimated range of our restated balances under LDTI.

The changes under LDTI that account for the bulk of the book value adjustment at transition include the market risk benefit adjustment associated with variable annuities, not presently accounted for at market, the impact of disaggregation and the revaluation of in-scope long-duration insurance contracts using a [indiscernible] equivalent discount rate and the elimination of relevant shadow account balances.

As you can see from MetLife at the end of 2020, there is a greater convergence between book value and book value excluding AOCI under LDTI. However, this may not always be the case as certain assets are not mark-to-market and not all liabilities are in scope under LDTI. While LDTI will provide additional information and transparency and improve consistency around accounting for certain aspects of the life insurance industry, it does not impact cumulative product profitability, cash flow generation, our strategy or how we manage the business.

Let me conclude by saying MetLife delivered another strong quarter, highlighted by solid top line 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. While private equity returns were lower this quarter, it was offset by favorable underwriting, most notably in our market-leading franchises in Group Benefits and Mexico, which saw a return to more normal mortality as COVID-19 deaths significantly declined.

Finally, our capital, liquidity and investment portfolio remains strong and position us for further success. And 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.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question is from Ryan Krueger with KBW.

Ryan Krueger

First question was, thanks for the LDTI disclosure on the balance sheet. I guess, at this point, are you able to give any sense, I guess, directionally on the potential impact to ongoing earnings?

John McCallion

Ryan, it's John. We're still working through that. And I think our plan would be to discuss more details at a later date. But I think the general point, I would probably leave you with is that we don't expect major differences in the core underlying earnings, but there are sources of differences when actuals emerge, right?

So how actual experience may deviate from expectation, gets treated one way in current GAAP versus under LDTI, and then there's a number of different aspects. But I think all in all, we would expect kind of core earnings. Maybe I'll just give you a little color, too. I think this is probably a good perspective as to why that would be the case.

So it does not affect all of our segments, right? If you think about group minimal impact, vast majority, not subject to it given it's a short duration product. We go through RIS and it's mainly a spread business. We would expect spread calcs to look similar.

As you move into MLH, not all products are impacted, right? We have a number of [indiscernible] FAS 97 products, universal life fixed annuities. Also the participating business is not subject to LDTI. And if we took kind of an early look at that and kind of assume that we would implement this the beginning of this year, we probably would have given you the same range of guidance that we would have otherwise given back in February. And then Asia is probably the other one that's somewhat sizable. Again, there's a lot of FAS 97 products there. Japan, if you think about our flagship products in FX, they're all under FAS 97 versus FAS 60. And then EMEA and LatAm are much more modest. So hopefully, that kind of just gives you color as to why kind of give you that general statement.

Ryan Krueger

Yes. No, that's very helpful. And then on VII, obviously, acknowledging how strong it's been over the last couple of years. But can you give any sense of what it could look like in the third quarter?

Steven Goulart

Ryan, it's Steve Goulart. I think -- I guess I'd start with just reminding everybody sort of the slide that John used, which is what's our guidance. Our guidance is really just a generic assumption of 12% a year, 3% a quarter. We all know, of course, there's a one quarter lag in it too. And when we look at broad market returns in the second quarter, we know that they were basically negative in the teens.

But I think what we've proven over time through the diversification in our portfolio across strategies and geographies is we would expect that directionally but likely not to the same degree as a market overall. So I think that's probably all we'd really say at this point.

Operator

And our next question is from Jimmy Bhullar with JPMorgan.

Jamminder Bhullar

So first, I had a question on the retirement business in terms of spreads. I think they expanded about 14 basis points sequentially. And I think you had been cautioning that they might actually decline or certainly weren't expecting much of an improvement. So wondering how much of the improvement has to do with interest rate caps or other types of sort of hedging activities? And do you expect this to be a good base for spread going forward? Or should we think about the 1Q level and adjust off of that looking forward?

John McCallion

Jimmy, it's John. As you point out, we had a pretty resilient level of spreads this quarter, up 14 basis points sequentially. And as you point out, we did not quite expect that back in the Q1 call. But that was -- we were basing our commentary based on forward rate curve, right? And if you think about what has happened since the 10-year treasury ends up about 65 basis points above that. And the other thing that happened is spreads widened. So our reinvestments were strong. And then the third thing is 3-month LIBOR jumped to a much greater level than we had expected and actually the forward curve expected ended the quarter at roughly 2.3%.

If I think about just during the course of the quarter, it was kind of hovering around 150 and then all of a sudden, there was a huge spike kind of at the end of May into June. And bypassing that [indiscernible], I referenced this 2% marker. As LIBOR started to grow, get towards that 2% and then beyond, it could create a little bit of a tailwind. We have a number of caps that start to become in the money. That we have in place today.

And so that was really the main driver moving us from a headwind of LIBOR rising to a, if you call it, I guess, a benefit of having the caps be in the money. So that was the real driver. The other thing I'd point out is real estate equity outperformed. So within our core investment income, real estate equity was stronger than expected. We'd expect that to moderate.

But if we look forward, and I guess, assuming today's current forward rates, which we know can be different, we'd expect ex-VII spreads to remain pretty close to where we are today, I mean, give or take, plus or minus, and even assuming some moderation of the real estate returns.

Jamminder Bhullar

And then sales...

John McCallion

Sorry, Jimmy just let me just add. I would just tell you that, that's probably for the next couple of quarters, right? I mean we'll give guidance for next year when we get towards the latter part of the year.

Jamminder Bhullar

And then obviously, the changes in new money yields and those affect that as well, obviously, modestly, but they do have a an effect.

John McCallion

Yes, you're right. Yes.

Jamminder Bhullar

And on sales in the Asia business outside of Japan were down. And I think you had mentioned previously that in Korea, it was because of a lot of your salespeople getting COVID and COVID cases still being high. And then I think in China, with the mobility restrictions, that's hurting sales, is it more -- are the sales down more because of those types of factors in 2Q as well? Or is there anything else going on in the underlying market that could sustain even beyond COVID.

Unidentified Company Representative

Jimmy, it's Lindon here. So let me give you the color on total Asia sales, and then I'll get into the other markets as well. we have good diversification across all the markets, products and channels, and that really drives very consistent execution through this market conditions.

So overall, we've had positive growth in the second quarter, led by strong performance in Japan. If we look a little bit at Japan sales, we're up 5%. And that's actually driven by 3 factors. First, the execution on the ground of the team has been very strong. We have a very diversified distribution channels, and the products and capabilities we've launched in the past year has really helped us drive the growth over there.

But as you pointed out in Other Asia, we've faced a couple of headwinds. We've got COVID restrictions going on in China right now, and the stronger U.S. dollar has really impacted sales for the FX products in Korea. But despite these channels, we actually have other markets that are compensating for these and help offset some of these headwinds.

Looking forward, we expect strong momentum going into the third quarter. We're introducing new products in Korea. And also, we expect some relief in the lockdown conditions in China. So full year basis, we are comfortable with the guidance of mid-single year digit growth that we gave at the outlook call.

Operator

And next, we go to Tom Gallagher with Evercore ISI.

Thomas Gallagher

I had two capital questions. The first is the new C2 factor change that's coming year-end for mortality, morbidity. My understanding is it positively impacts Group Life, negatively affects Individual Life. If so, is that a positive for Met? And if so, could you quantify it?

Ramy Tadros

Tom, it's Ramy here. I would say it's overall neutral. I mean we have been looking at our business and pricing it in anticipation of changes to the C2 factors, and there's a fair bit of diversification calculation in that number. So I would say very small and neutral in terms of its impact.

Thomas Gallagher

Okay. And the SMR change in Japan dropped a lot in March, I assume that's going to go down a lot more in June just based on where rates went. How are you thinking about managing through that? Or are you contemplating hedging this at all? And also, is there a risk that, that can impact the dividend remittances out of Japan.

John McCallion

Tom, it's John. As you point out, the higher U.S. rates really for us is what's driving that decline. And as you point out, they've continued to rise throughout 2Q. Just a couple of reminders. One, rising rates is a improvement proving economic value situation for that business. But the reality is, right now, we have a solvency regime that has some asymmetrical accounting, so it creates some unintuitive results, if you will.

So so that's kind of one. Two, I'd say, remember in a few years, it's likely this moves to this new economic solvency regime, which would kind of better align the solvency accounting with the economic reality. And so we really -- we don't have concerns over dividends or dividend capacity at this time. The reality is that this is a good economic situation, and we have plenty of tools to be able to manage the overall situation. So at this time, we're fine.

Operator

And next, we move to Elyse Greenspan with Wells Fargo.

Elyse Greenspan

You guys had strong results in LatAm in the quarter, and I know you called out around $40 million from favorable mortality. Can you just expand on the other underlying drivers of the results this quarter and just with the sustainability of results there?

Eric Clurfain

Elyse, this is Eric. So yes, as you pointed out. So overall, this was a strong quarter for the region, supported by solid business fundamentals and several positive items that we really put into 2 buckets, right, the market factors and underwriting. So starting with market factors, we had very strong net investment margins this quarter, which include the net positive impact of inflation in Chile as well as the above-average encaje results. And the quarter also benefited from strong variable investment income.

So these items combined contributed to roughly $60 million in adjusted earnings. Then the second bucket, underwriting, and John mentioned that earlier, this quarter was really recorded a 40 million after-tax benefit from a favorable prior year developments related mainly to COVID mortality experience. So these are the 2 main items. Now putting these items aside, we're also very pleased to see our business continues to deliver. As you may recall, last quarter, I mentioned that our earnings growth continued to be supported by strong and resilient business fundamentals, which are driving solid top line growth.

And that sales momentum that began last year has continued this quarter as well. And this reflects really the strengths, the resiliency and the diversity of our distribution franchise across the region, combined with a noticeable flight to quality. And then this emphasis on quality is also evidenced by a very solid persistency across the region, which, combined with the strong sales momentum that I mentioned has resulted in a 26% growth year-over-year in PFOs on a constant rate basis. Now about half of that growth came from the SPIA business in Chile, where our market share has increased, but the market as well has grown over the past over the past quarter. So that's in a nutshell, the story for LatAm this quarter. I hope this helps.

Elyse Greenspan

Yes. And then my second question, you guys bought back $1.1 billion in the quarter, a pretty strong number. Was there any acceleration in buybacks, just given the market weakness and an opportunity to buy your shares at a more attractive price? And can you just give us a sense of the outlook for future levels of share repurchase for the balance of the year?

Michel Khalaf

This is Michel. So yes, as I noted in my opening comments, we had our foot on the gas pedal a little bit in the second quarter, in particular. So expect a modestly slower pace, I would say, in the second half. Our overall view has not changed. Our philosophy, our approach have not changed. We're still comfortable with the $3 billion to $4 billion cash buffer over time. We'll get back to that. So no change in approach here. It's just that we had an acceleration in the first half. So it will be modestly slower in the second.

Operator

And our next question is from Erik Bass with Autonomous Research.

Erik Bass

Can you provide some more color on the expected adjustment to retained earnings from adopting LDTI. And is this all being driven by the impact of bringing market risk benefits to fair value? Or are there any meaningful reserve adjustments? And I guess given the rise in interest rates since year-end '20, should we expect the adjustment to be smaller today than what you're showing on the slide?

John McCallion

Eric, it's John. So the impact to retained earnings, it affects both market risk benefits and a function of disaggregation. Disaggregation's about, I'd say, 20% to 25% of the number. So it's mainly a function of the fact that our -- under our -- for VAs and primarily the GMIBs, also, by the way, GMDBs get now mark to market, which is a different debate. But GMIBs, they're all kind of accrual accounting, if you will, and now they're moving to mark-to-market. So that's the biggest driver.

As we think about relative to initial impact that we disclosed, it's a little better as you get into kind of year-end '21 in terms of less of a change. I think interest rates moved maybe 60 basis points on the 10-year. And then it will continue to decline, if you will, as you move into 2022, just given the -- a function of the rising rate environment. So that's the -- those are the main drivers.

Erik Bass

Perfect. And then maybe if you could touch on your U.S. mortality experience this quarter across both Group and Holdings. And it looks like even ex COVID margins were favorable versus your targets. So have you seen some of the elevated non-COVID mortality that have been a factor in recent quarters? Has that started to come down as well?

Ramy Tadros

Eric. It's Ramy here. I'll start off with group and Michel and John will comment on Holdings. So for the quarter, if you look at our ratio sequentially, I would say the decline can be broken down into 4 pieces. So the first one is just the lower frequency in terms of overall population death. The second piece is the material decrease in the percentage of deaths under 65, which clearly reduced the impact on the working age population. The third piece is the Q1 reserves, which competed favorably, which John spoke about, and that was less than a point or so.

And then the final piece is we did see little by way of non-COVID excess mortality in the quarter. And as Michel pointed out, the second quarter tends to be a bit lighter in general in terms of mortality. As we look at the rest of the year, on the Group business side, we're cautiously optimistic given the results here. But clearly, you know the trajectory of the pandemic is uncertain. At this point, I would say, if you exclude COVID, we anticipate that our mortality ratio to be comfortably inside our range for the second half of the year for the group business.

John McCallion

Yes. And just on -- just touching on Holdings. I mean we certainly saw kind of a reduction in claims in the quarter. We didn't really see a big impact at all for COVID. And then on the -- if you just look at the life interest adjusted benefit ratio, you have to adjust for the reinsurance settlement. But excluding that, it comes in at 43.8. And that's -- we just saw a favorable non-COVID claim experience in the quarter.

Operator

And our next question is from Suneet Kamath with Jefferies.

Suneet Kamath

Maybe just for Steve to start out with. Can you just maybe talk a little bit about your outlook for credit and the potential for credit losses if we move into a recession? Is there any asset classes or sectors that you're paying particular attention to these days?

Steven Goulart

Sure. Thanks, Suneet. I think obviously, there's still a lot of uncertainty and clearly, volatility in the markets about where we're headed from a macro perspective. What I do is really sort of rewind the clock a little bit. And remember, in a way, we sound like a broken record, but we go back to really even pre-COVID where we were actually starting to get concerned about a recession occurring sometime in 2020 and started preparing the portfolio then.

Our derisking efforts started in a pretty big way. And I think then, of course, was accelerated during COVID, and we went through over $8 billion of derisking in that time period. And that really sort of set the portfolio in a position that we're very comfortable with.

Obviously, we continue to watch as we go through this period now, expectations of recessions, again, of course, depend how one defines a recession, I guess, these days are clearly picking up. But we're very comfortable with the derisking we've done over the last couple of years and think the portfolio is in very good shape.

Obviously, we continue to have a cautious attitude, but opportunistic at the same time because we do see some attractive investments and we have the opportunity to do that. one metric that might be of interest to is just in looking at the portfolio, during the course of this year, we've actually had twice as many upgrades as downgrades. And I think that says a lot about how we've been positioning the portfolio and our overall outlook. So we're very comfortable with where we are today.

Suneet Kamath

Okay. And then I guess for Ramy, on the Group Benefit side, I know Q2 is a low quarter for sales. But just curious on any color from the conversations you're having with your clients around pricing just given -- I'm assuming most of them are facing pressures across the board on cost from inflation. So just any color on how those conversations are going as we think about 1/1 next year?

Ramy Tadros

Sure. Just with respect to your comment on sales, as we've kind of discussed earlier, the year-to-date drop in sales is very much a function of the record year we had last year where we had a record number of jumbos. And as you know, these jumbos can be pretty lumpy. So this is something we expected in terms of the sales coming down. And I would just also point you to the fact that really the better measure to think about the overall growth of this business is the PFO number and we're certainly very pleased with the PFO growth number that we're seeing this quarter.

In terms of the pricing environment, I would say, the market is competitive, but remains rational. In aggregate, we have put in place price increases, both on the life and the disability side to reflect our expectation of the coming environment to reflect also a load with respect to the COVID deaths. And in aggregate, we are getting our target price increases, and we're also continuing to see very strong persistency in the book.

Operator

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

Alexander Scott

First one I had for you was just to get your latest thoughts on MetLife Holdings and the potential for risk transfer. And also any commentary you have around if doing something -- taking action on something in holdings could influence the way that these impacts look from LDTI?

John McCallion

Alex, it's John. I think overall, on risk transfer, I'd say nothing new really to update. I mean we've probably given a consistent message every quarter for quite some time now. And I think it's the same, and I think we're being very transparent. Our goal here is continuously optimize. And we're trying to do that both in the form of internal actions but also looking at opportunities to leverage the growing risk transfer market. And as a result, we continue to converse with third parties.

Our philosophy is there's no burning platform. We're happy to maintain our approach and continue to optimize internally, but we want the optionality to see if we can accelerate the appropriate release of capital and reserves. I think the one thing that we continue to just look at here, this is a reinsurance transaction for us if we were to do something.

So as we think about our philosophy, when we look at this is, we view this as a long-term relationship. So it's -- this is one of those things that would take time. It takes time to make sure that we feel grounded with a strong counterparty and structure and kind of the approach.

But I think we're continuing to evaluate that and that's been the case now for some time. In terms of the impact to LDTI, I don't know how to exactly answer that. I think one thing we have to be careful about is under LDTI, one of the things that probably did not come out as perfect was just the -- there is some asymmetrical counting when you do enter into reinsurance. So you have to be mindful of that under GAAP. So it doesn't perfectly line up. So I don't know how to perfectly answer your question that way because it would -- I guess the answer is it depends. So I'm sure that...

Alexander Scott

It's helpful color. And then the follow-up I had was maybe just a question on sort of the broader economy. I mean, you guys get such an interesting look at the labor market, given your presence in the Group Benefits. I mean anything that you can give us color on, even maybe thinking through like beyond the end of the quarter that you're seeing in labor markets and potential implications just more broadly for your business?

Ramy Tadros

Alex, I would say, the numbers we're continuing to track clearly is just overall eligibility in our book, and we have a highly diversified book of business. And with the low unemployment levels, clearly, those numbers continue to kind of increase and remain very solid.

And we're seeing some kind of form of wage inflation come through as well, and both of these have been kind of tailwinds to the business. So we're kind of seeing in the book, what you're seeing probably in the broader economy. And maybe that's kind of as much color as I can give you in terms of what we're seeing.

Operator

And our next question is from John Barnidge with Piper Sandler.

John Barnidge

So you had an IBNR reserve release in both group and Latin America. Is there any tail that we should be thinking about for subsequent quarters from that?

John McCallion

John, it's John. Just when you say tail, you're referencing just more releases. Is that what you mean?

John Barnidge

Yes, correct.

John McCallion

Yes. Look, I think our -- this is a reserve. It's -- the reserve was put up at the point in time based on best estimates. I think in both cases, the facts are that actuals have emerged different than expected. And so that's just kind of the simple answer to why there was a release. I wouldn't assume there is a tail because if we had a -- if we assume there was more, we would have taken it.

So right now, our best estimates are what we have up on our balance sheet. But I think just like we do every quarter, we'll continue to evaluate and review the emergence of actuals. And if there are refinements needed, we'll make them.

John Barnidge

Okay. And then my follow-up to that, if we're talking about emergence versus expected, the LDTI disclosure, can you maybe talk about is there any unrealized insurance margin that's something we've seen from other companies that have large operations in Japan?

John McCallion

Yes. Sure, John. It's John again. Look, I think the reality on that one is it's really a function of mix of business. And I think that's -- if you listened to my earlier response to earnings and how some things are in scope and others are not, that's a major driver to kind of that outcome.

Many of our segments are not materially impacted by LDTI and many of the products we sell are not as well. And that includes like Asia, where some of those products are out there that show that unrealized in Asia. You think about in Japan, our flagship products are not subject to this. If you think about some of the, I wouldn't say all products, but some of the FX products that we sell, they're all under FAS 97. So it's a little bit of a different probably situation for us. And so I -- like I said, it really depends on mix of business to answer that question.

Operator

Next, we go to Andrew Kligerman with Credit Suisse.

Andrew Kligerman

A lot of most of the questions have been asked. But I'm wondering, as we look at another excellent quarter at MetLife, if there's anything transformative that you need to do from an M&A perspective, anything that you think in your business lines that could change kind of or improve MetLife?

Michel Khalaf

Andrew. So I don't think -- if we look at our portfolio, I think we don't see any major gaps when it comes to that portfolio. We're really well pleased. As you know, we've gone through a major transformation that got us to this point. We believe we have the right strategy. Having said that, M&A is a strategic capability and if we see opportunities to accelerate revenue growth in certain businesses that we -- where we believe, potentially doing something organically might make sense or bring in a capability that can help drive our competitive advantage, we'd certainly be open to doing so.

And look at a lot of deals and the -- maybe the sort of lack of deal should not suggest to you that there's a lack of activity here. We increased our shareholding in our India JV in the first quarter to 47%. So we continue to be active, but we're also very disciplined and whatever we do has to make strategic sense for us as well.

Andrew Kligerman

And then with regard to pension risk transfer, I think you said you did 3 deals of $2-plus billion. Maybe a little color around the pipeline. It seems like there are a lot of new players in pension risk transfer that we didn't see 3 years ago. So do you think that pipeline will continue to be robust and that we'll have quarters like this one.

Ramy Tadros

Andrew, it's Ramy here. I mean, as you know, the activity in the first half of the year was pretty substantial in the PRT space. Year-to-date, we've written $3.8 billion worth of deals, and that comes after a successful fourth quarter where we roll $3.6 billion worth of deals. So that's cumulatively about $7.5 billion year-over-year. The pipeline continues to be pretty active and pretty robust, as Michel mentioned.

And we are focused on a specific part of that pipeline where we enjoy our own kind of set of competitive advantages, namely the jumbo end of the plans, and there are fewer competitors there. When you go down size, clearly, there are more competition and more providers, but where we play, it's another set of competitors because of the size of the transactions that we bid for.

Operator

And ladies and gentlemen, we will now turn the conference back to the CEO, Michel Khalaf.

Michel Khalaf

Thank you all for joining us this morning. I know it's a busy morning. Our second quarter results add to MetLife's track record of consistent, strong performance and provide further evidence of the strength and momentum of our well-diversified, market-leading businesses.

With our clarity of purpose, a compelling all-weather strategy and a relentless focus on execution, we are well positioned to deliver superior value to all our stakeholders. Thank you, and have a great day.

Operator

Ladies and gentlemen, this conference is available for digitized replay after 11:00 a.m. Eastern Time today through August 12 at midnight. You may access the replay service at any time by dialing 866-207-1041 and enter the access code of 2495088. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.