MetLife, Inc. (NYSE:MET) Q3 2022 Earnings Conference Call November 3, 2022 9:00 AM ET

Company Participants

John Hall - Head of Investor Relations

Michel Khalaf - President & Chief Executive Officer

John McCallion - Executive Vice President & Chief Financial Officer

Steven Goulart - Executive Vice President & Chief Investment Officer

Ramy Tadros - President, U.S. Business

Eric Clurfain - Regional President, Latin America

Conference Call Participants

Jimmy Bhullar - JPMorgan

Ryan Krueger - KBW

Tom Gallagher - Evercore ISI

Erik Bass - Autonomous Research

Alex Scott - Goldman Sachs

Suneet Kamath - Jefferies

Elyse Greenspan - Wells Fargo

Wilma Burtis - Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third 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 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. Please go ahead.

John Hall

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

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 some more 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 that we can control. We have built a diversified portfolio of businesses with natural offsets through organic growth, supplemented by strategic acquisitions and tactical divestments. We have a commitment to responsible growth, aided by the use of powerful analytical tools such as VNB or 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. And we generate strong recurring free cash flow that supports clear and consistent capital and liquidity management.

Turning to 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 expense discipline held 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 was 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 PE portfolio is reported on a 1 quarter lag. Third quarter private equity results reflect the difficult second quarter equity market which fell 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. Not only has this proven to be a good ALM strategy but we have generated substantial gains over time for the benefit of our policyholders and our 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 effectively 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 repeated in the third quarter to even greater effect. With the duration of our investment portfolio at roughly 8 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 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%. And 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 going well and responsible for driving double-digit PFO growth across our voluntary suite of products. The investments we've made to expand our product breadth to deepen our understanding of employee needs and to 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. 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 a market opportunity 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 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, VNB 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 VNB. 2 years later, we put less capital to work, $2.8 billion at a higher IRR to generate even more VNB, $1.9 billion. We think our principal use of VNB 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 AIMs ESG capabilities with MEMS 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. We also 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 great set of 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 our stakeholders now and into the future.

With that, I will turn things over to John.

John McCallion

Thank you, Michel and good morning. I will start with the 3Q '22 supplemental slides which provide highlights of our financial performance, details of our annual global actuarial assumption review, updates on our value of new business metrics and our cash and capital positions.

Starting on Page 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 3Q of '22, was favorable to net income by $54 million, with a positive impact to adjusted earnings of $34 million and a $20 million impact to non-adjusted earnings.

The table on Page 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 impact in life as a result of higher earned rates and favorable mortality. In addition, we had a reinsurance recapture gain which was favorable to RIS adjusted earnings by $91 million in the quarter. Our U.S. mean reversion interest rate remained unchanged at 2.75%. And we have maintained our long-term mortality assumptions.

On Page 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 3Q of '22, down 58% and down 57% on a constant currency basis. Lower variable investment income drove the year-over-year decline while favorable underwriting and solid volume growth were partial offsets. Adjusted earnings per share, excluding notable items, was $1.16, down 55% year-over-year on a reported basis and down 54% on a constant currency basis.

Moving to the businesses, starting with the U.S. business. Group Benefits adjusted earnings more than tripled year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19 life claims as well as higher volume growth. This was partially offset by less favorable expense and investment margins year-over-year. The Group Life mortality ratio was 86% in the third quarter of '22 towards the bottom end of our annual target range of 85% to 90%. The business benefited from lower U.S. COVID deaths in the quarter and a continued favorable shift in the percentage of death under age 65 which was roughly 15% in Q3 of '22. More detail on the Group Life mortality results over the past 5 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 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 6 transactions worth $12.3 billion year-to-date and we continue to see an active market.

Moving to Asia. Adjusted earnings ex 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 ex notables were $164 million versus $31 million in the prior year quarter. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19-related deaths in Mexico were down significantly year-over-year. LATAM's recurring interest margins in 3Q '22 continued to benefit from higher inflation rates in Chile. However, this favorable impact was more than offset by lower variable investment income and the Chilean and encaje [ph] which had a negative 1.9% return in 3Q '22 versus a negative 0.3% in the prior year quarter. LATAM's top line continues to perform well as adjusted PFOs were up 21% year-over-year on a constant currency basis and sales were up 22% on a constant currency basis, driven by growth across the region, primarily from higher single premium immediate annuity sales in Chile and group cases in Mexico.

EMEA adjusted earnings, excluding notable items, were down 44% and 31% on a constant currency basis compared to a strong Q3 of '21 which benefited from very favorable underwriting. EMEA adjusted PFOs were down 7% on a constant currency basis, primarily due to refinements to certain unearned revenue reserves in both periods. However, sales were up 10% on a constant currency basis, reflecting growth across the region.

MetLife Holdings adjusted earnings were down 77%, excluding notable items in both periods. This decline was primarily driven by lower variable investment income. Adverse equity market impact was also a contributor as MetLife Holdings separate account return was negative 5.5% in the quarter versus a negative 1% in 3Q of '21. Favorable underwriting margins in Life and long-term care were a partial offset. Corporate and other adjusted loss was $265 million versus an adjusted loss of $131 million. The year-over-year variance was primarily due to less favorable taxes, lower variable investment income and higher expenses due to market-sensitive employee-related costs. The company's effective tax rate on adjusted earnings in the quarter was 23% which was at the top end of our 2022 guidance range of 21% to 23%.

On Page 6, this chart reflects our pretax variable investment income for the past 5 quarters, including a $53 million loss in the third quarter of '22. The majority of VII was attributable to the private equity portfolio of roughly $14 billion which had an overall negative return of 1.3% in the quarter. As we have discussed previously, private equity is generally accounted for on a 1-quarter lag. In addition, real estate equity funds had a positive 4.3% return in the quarter on a portfolio of roughly $2.3 billion. While VII underperformed in 3Q '22, our new money rate increased to 4.71% which was 79 basis points above our roll-off yield of 3.92%. We expect this favorable trend to continue in a rising interest rate environment.

On Page 7, we provide VII post-tax by segment for the prior 5 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 3 businesses.

Turning to Page 8. This chart shows the comparison of our direct expense ratio over the prior 5 quarters, including 12.3% in Q3 of '22. As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. Our third quarter expense ratio was in line with our full year target but above recent trend given higher employee-related costs that are sensitive to market fluctuations. Those costs contributed roughly 40 basis points to the ratio. While we'd expect our direct expense ratio to be higher in 4Q, consistent with the seasonality of our business, we remain committed to achieving our full year direct expense ratio target of 12.3% in 2022 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset.

Now, let's turn to Page 9. This chart reflects new business value metrics for MetLife's major segments for the past 5 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.

In regard to our statutory capital, for our U.S. companies, our preliminary third quarter year-to-date 2022 statutory operating earnings were approximately $1.6 billion, while net income was approximately $2.1 billion. Statutory operating earnings decreased by approximately $2.4 billion year-over-year, driven by unfavorable VA rider reserves, lower variable investment income and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $18.7 billion as of September 30, 2022, down 2% sequentially and year-to-date.

Finally, the Japan solvency margin ratio was 617% as of June 30 which is the latest public data. The decline from March 2022 was primarily due to higher U.S. interest rates. That being said, rising interest rates improve the overall economic solvency of our Japan business.

Let me conclude by saying the fundamentals of the business remain strong, solid top line growth, favorable underwriting and ongoing expense discipline. While private equity returns were down this quarter, core spreads remain robust. In addition, results in our market-leading franchises, Group Benefits and Latin America 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 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 Jimmy Bhullar with JPMorgan.

Jimmy Bhullar

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

Jimmy, it's Steve Goulart. Thanks for the question. And I think John gave some details and color on it but our new money yield rose again this past quarter. 471 was the actual number and that shows continued improvement. I think a reflection of what we're seeing in the market, obviously, with interest rates rising. And so we're very pleased with what it means for our general account investing. We're obviously going to continue to see the portfolio yield rise as a result of that given that our roll-off has been now for the last couple of quarters also lower than our new money rates. I would also just remind everybody, though, that things can be a little bit volatile quarter-to-quarter, just looking at the existing book of assets that we have, with the roll-off of maturity characteristics of those are. This was -- we look and see some big blocks that rolled off this past quarter and there'll be things like that in the future as well. But I think what's important is to think about what the trend is. The trend is positive. We continue to see and expect our new money yield to increase and continue to expect to see widening spread over the existing portfolio and that's obviously positive for net investment income.

Jimmy Bhullar

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 that I noticed 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 ex-VII.

Ramy Tadros

Jimmy, it's Ramy Tadros here. If you look at our in-force for RIS, the vast majority of our in-force from a crediting grade perspective is fixed. You may see quarter-to-quarter fluctuations in terms of the crediting grid. And clearly, the new business we're writing, while we're running at attractive spreads, it has a higher crediting rate given the market environment. But there is no really increases or pressure on our in-force because that's mostly fixed.

Jimmy Bhullar

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

Thanks, Jimmy. It's Ramy again. So I'll give a specific answer to your question. It may be also helpful to give you some broader context. Both our mortality ratio as well as our nonmedical health ratio were clearly favorable in the quarter. But if you look at our results, historically, there's some seasonality to both of those ratios and we'd expect them to somewhat pick up in the fourth quarter just from a seasonality perspective. In terms of the overall market, we remain extremely bullish about this market. And if you were to kind of step back more broadly, you've all heard about the workplace dynamics and how those are changing where we're seeing employees expecting more from their employers and we're seeing employers looking for a variety of levers to attract, retain and engage their talent. And so that's a secular trend that's here to stay and that's providing kind of tailwinds for the entire market.

From a competitive perspective, I would say overall pricing is competitive but is also rational. We've talked about this in the past, the short nature of these products, Jimmy, really act as a natural check on any sustained irrational pricing. And the other piece of this market that we kind of like is that you can also differentiate on many factors beyond price such as service and digital experiences to name a few. So some of these things, we believe, are going to provide kind of tailwinds to the overall market and keep the competitive landscape rationale. Now all of these are germane to the entire Group Benefits industry. They're particularly pertinent for us because we are the market leader in this industry across both our core and voluntary products. And that leadership and the strategic focus we've had is really giving us the scale to invest in a broad range of capabilities that we have that allows us to differentiate our offerings.

So overall, really pleased with the performance, really pleased with the persistency and continue to see a competitive but rational market here.

Operator

Next, we move on to Ryan Krueger with KBW.

Ryan Krueger

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

Ryan, it's John. So 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 used -- it's generally raised for general purposes as well as we do have a maturity coming up in 2023. I think at the present time, we're maintaining flexibility and we'll see how things progress over the next few months. But all in all, we're pretty pleased with our holdco cash and cash flows generally.

Ryan Krueger

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

John McCallion

Yes, thanks. It's John, again. I'll take that. So as you said, the SMR was down in the second quarter at 6 17 and certainly in the current regime, rising interest rates do impact that. But overall, as you mentioned and I said in my opening remarks, rising interest rates improve the overall economic value of that business. We'll have to monitor the SMR. We can't ignore it but we want to also do things that make sense. And we have a number of internal tools that we can utilize to help manage that temporary impact you would see in the SMR because of the asymmetrical accounting. So overall, the economics is improving, as you mentioned, in a few years' time. They're moving to a more economic solvency framework known as ESR that will better reflect the economics of the business. And right now, we have no concerns over the capital generation or dividend capacity of the business or overall free cash flow for the firm.

Operator

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

Tom Gallagher

Just a couple of questions on one on derivatives, second on investment losses. Just on -- as I think about your hedges and I just look at derivative losses from rising interest rates, I just want to understand if there's any real impact to statutory capital generation from that. I look at the last 3 quarters, they've been about $2 billion or more than $2 billion of losses. I didn't think that impacted stat earnings, I thought that was an adjustment to TAC. But just first question is just any impact that should have on stack capital generation?

John McCallion

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

Tom Gallagher

Yes. It's in your QFS, not -- and I don't see that showing up in the -- the intact, right?

John McCallion

That's right. Yes. And I think that's the correct observation. Obviously, there's different accounting that occurs in GAAP versus stat. I think the punch line that I would just leave you with is overall, we actively manage the statutory capital of the operating entities. And as you've seen, there's been a rising rate environment. And I'd say CAC has been very resilient despite the market fluctuations. That's probably how I'd leave it.

Tom Gallagher

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

No.

Tom Gallagher

Okay. And then my follow-up is, just on the investment losses and gains in your supplement, I just want to understand how to think about whether those loss could have an impact on stack capital generation as well? I think most of those should be flowing through IMR. So to the extent that you have net losses, I think that will reduce amortization gains every year but it will have a very like modest annual impact. Am I thinking about that correctly? Or can you shed some light on that?

Steven Goulart

Tom, it's Steve Goulart. I think John and I will tag team on this a little bit. But just in thinking about what's happening in the market and trading and losses and the like. First thing I'd say is losses are not unexpected in this environment, just given rising rates. Although I would note that they're down significantly from where they were last quarter which I think shows sort of a more moderating environment in that respect. And again, like I said last quarter, it's usually pretty easy to decipher understand why we're taking losses. It's a combination of rotating temporary assets into permanent assets and things like PRTs and other longer-term liabilities. And also just funding outflows and cash flow needs of the different businesses, whether it be surrenders or capital markets and the like. So that sort of sets the stage. Again, down from last quarter as we would expect. And obviously, this is something though that we do manage and John can talk a little bit about the capital impacts.

John McCallion

Yes. And you're correct, Tom, if you have an IMR balance, would typically get absorbed, we're in that position today. But it's one you have to actively monitor and manage and we plan to do so.

Operator

Our next question is from Erik Bass with Autonomous Research.

Erik Bass

You highlighted the strong PRT 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

Eric, it's Ramy here. I'll answer the second question first. Yes, that's still the rule of thumb still holds and that's how you should think about the earnings run rate of these deals. With respect to the overall PRT market, clearly, I think the headline number to look at is the overall funding level which is going to be helped by rising interest rates and therefore, improve if you fill the affordability and the funding levels of defined benefit plans to engage in any kind of pension risk transfer. Clearly, we've seen -- we're on track to have a record year this year. With respect to PRT, we're extremely pleased with winning our largest deal ever with IBM. And we still see a very robust pipeline in front of us. I mean, we are the market leader here. We have deep experience working with plan sponsors and their advisers on all aspects of pension risk transfers. And we have a very clear strategy in this market.

We're focused on the jumbo end of the market. That placed our competitive strengths in terms of our rating, the size of our balance sheet, our investment capabilities and you see large sponsors like IBM are looking for solution providers with a very long track record of being in this business. I'd also note that the jumbo end of the market is the part of the market where the competitive set of providers tends to be somewhat smaller given all the other attributes I've talked about. And the last thing I would point on this market, while we are a market leader and actively engaged, we always have our eye on value and value of new business. Going back to the chart that Michel and John referenced and we want the write business and we are writing business which with ROEs that are well within our enterprise ROE targets.

Erik Bass

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, kind of the right target to think about?

Eric Clurfain

Yes. Thanks, Erik. This is Eric. So Yes. Overall, we had another solid quarter for the region, supported by what you know is the strength of our franchise, our strong underlying business fundamentals. All of it combined with a market factors and tailwinds last quarter and this quarter. Now we continue to deliver on our growth commitments as evidenced and as you mentioned, by a double-digit growth in PFOs that are reflective both of our strong sales and solid persistencies and good momentum that we're continuing to see across all countries. Now the sales momentum that began really last year has continued throughout this year. It is reflective of the resilience of our distribution channel, the diversification and the diversified product mix and the overall solidity and growth potential of the franchise in the region.

Now the sales quarter -- the strong sales quarter was really across the region and across all channels with Chile and Brazil having the record quarter. Brazil actually I want to point out this is a growth story. We have grown twice as fast as the market. We are growing very well across all channels and all products. And just to give you an idea, this quarter, Brazil contributed to over 20% of the region's sales. So that overall flight to quality that I referenced last quarter is also evidenced by the strong persistencies that we're continuing to see and the robust sales of year-over-year and quarter-over-quarter. So overall, we don't update our outlook and we'll do so in February but we're very pleased with the momentum and the growth that we're seeing across the region.

Operator

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

Alex Scott

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

Michel Khalaf

Alex, it's Michel. So let me just maybe remind why we anchored on the 12 3 and we talked about building an efficiency mindset as part of our DNA and we're seeing excellent traction on this front. And the idea here is that we wanted to -- we want to continue to free up capacity to make important investments in our business. And we've been able to do so over the last few years and I think this is playing out very nicely. If you think about, I referenced voluntary benefits and some of the capabilities that we've introduced there, Japan in terms of digitizing our business and speed to market in terms of introducing new products. So we believe it's important to continue to make those types of investments to drive our competitive advantage going forward. Now when we did sort of establish the 12 3 target, obviously, it was also in a different environment if you consider the inflationary pressures that everyone is feeling at the moment. Yet, I mean -- and again, I think this is credit to the sort of efficiency mindset that we've built here.

We continue to be committed to achieving 12 3 for the year. And the last thing I would point to is that whereas we're having a record year when it comes to PRT, over $12 billion in new PRT deals, PRT premiums does not factor into our direct expense ratio, does not sort of help us from that standpoint yet. There are obviously expenses associated with winning this business. So for all those reasons, we continue to believe that 12 3 is the right target for us.

Alex Scott

Got it. That's really helpful. And then maybe just a follow-up on the capital deployment and the value of new business disclosure you all gave. You show in that disclosure that the margins that you're making on new business are seemingly getting materially better. Does it make sense to deploy more capital? I mean 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

Alex, it's John. Yes, it's a great point. I mean we are focused on achieving solid returns and deploying capital to its highest and best use and ultimately creating value, right? Value is the important number there. And while the IRR and the payback is also -- we don't want to just get focused on 1 metric, the reality is that when we can deploy a great amount of capital to improve value that we're comfortable with, we're going to do it. And I think that it's a great call out I think that you've made. It's not -- we're not just focused on reducing the amount we deploy. We want to deploy more at very attractive returns. And I think that will fluctuate. I mean you can see, I would say, a transition that has happened over time and that's the trend you're seeing. We're at a great point right now where I think to the extent we can deploy even more capital at attractive returns, we're going to do it.

Operator

And our next question is from Suneet Kamath with Jefferies.

Suneet Kamath

Just going back to PRT for a second. I just wanted to think through the capital needs as you think about growth in that business. It didn't look like you needed to infuse any capital to support IBM. So I just want to confirm that. But also, as you think about the pipeline, is the opportunity set that you see in front of you going to require more capital? Or is that business sort of self-funding at this point?

John McCallion

Suneet, this is John. I'll maybe just take it at a high level and maybe touch on -- I referenced in my opening remarks a slight decline in STACK capital. If you think about that, it was about 2%. Part of that -- most of that I'd say was attributable to the large deal we did in the third quarter and the related capital strain, offset by some capital generation as well as we also updated some of our latest estimates on the net positive impact from the C2 updates around mortality and morbidity. So net-net, I think overall, we've been able to self-fund our record years to date. Now your question on the outlook. I think everything is dependent. I mean, volume is a dependent factor in answering that question. But right now, we feel very comfortable with being able to fund within the operating entities, what's needed to successfully grow this business.

Suneet Kamath

Okay, got it. And then I guess for Steve, on VII, any thoughts on kind of fourth quarter? And then also as we think about longer term, given kind of higher rates in volatile markets, any change to kind of the longer-term thought around what the returns of this portfolio could be?

Steven Goulart

I'd say probably several points just thinking about VII and specifically, the alternatives portfolio. First is just remember our guidance. We've been very consistent for several years in that. 12% is our expectation every year when we're going to planning, 3% a quarter. And I'd say that even now looking forward to the last part of your question, I wouldn't anticipate that changing. That's just how we think about this portfolio. The second thing is really our experience. And we've talked a lot about this, too, where in general, one of the things that we've always found attractive about the alternatives portfolio is that it does give us equity-like returns but it gives it to us with less volatility and less extremes as compared to some other public market alternatives would. So that's why it's been very attractive to us.

Now, we did -- we talked a little bit several quarters over the last couple of years where we saw that relationship be challenged. But when we look at the last couple of quarters, we do think that we're turning to sort of the historical norm in our expectations which is, again, more muted in terms of volatility and extremes but still giving us very attractive returns. So I don't think our outlook would change for it now but we continue to like it for the reasons that we've mentioned.

Operator

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

Elyse Greenspan

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

John McCallion

Elyse, nothing new to update here. It's still an active market out there. There is still an active set of participants. We continue to focus on optimizing holdings, both from an internal perspective as well as speaking with external participants on opportunities. And as we have been for quite some time. And it's a potential opportunity but it's not one where we feel like we have to do anything and we're being thoughtful about seeing if there is a opportunity one way or the other. So -- but nothing new at this point.

Elyse Greenspan

And then on the RIS on the core spread ex-VII, anything within that number? And how should we kind of think about that trending from here?

John McCallion

Elyse, it's John again. As you said, total spreads were at 71, ex-VII came in at 101. So year-over-year, up 8 basis points on an ex-VII basis and then down sequentially. Year-over-year, it's -- obviously, the higher interest rates have been beneficial. We have more of these interest rate caps that are in the money that are starting to kind of add to the spread. Sequentially, it was down 2 basis points. In the second quarter, I called out that there were some excess returns in real estate that we expected to moderate they did. So, I'd say third quarter came in pretty much as expected. And then I think the thing going forward here is certainly based on the forward curve which I just pulled up this morning of 3-month LIBOR which is expected to rise to above 5% in the end of the year and beyond into next year. These caps will still be in place and will be additive to the spread. I'd say for fourth quarter, we'd expect spreads all else equal to grow by 5-plus bps.

Operator

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

Wilma Burdis

[Indiscernible] previously guided to $650 million, $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

Wilma, this is John. Good question. I think a couple of things to point out in terms of just third quarter. First, in the first and third quarter, we typically have higher preferred stock dividends by about $30 million. Second, we are running a little heavier on interest costs on debt just because of the $1 billion of debt we raised in July. I think third item is PE returns have been down the last couple of quarters. And then lastly, I called out in my opening remarks that we do get -- we have seen over the last couple of quarters some higher market-sensitive employee-related costs or corporate costs that we referred to. And actually, that probably hit us by about 40 basis points on the expense ratio this quarter. So we are running a little heavy, as Michel commented before, we still expect to meet the 12.3% target despite this. And then I think we'll talk about outlook as we get into our February call. So hopefully, that helps.

Wilma Burdis

Okay. Second question, you've previously guided to a roughly $65 million quarterly earnings run rate in EMEA. But it seems like $56 million this quarter was fairly normal. So I'm wondering if that's a good run rate reflecting currency pressures.?

John McCallion

Yes. I think that's a pretty simple way of thinking about it, one, you're on. I mean, the currency has basically brought down that run rate over the last couple of quarters. So I think you're right that probably the new number is probably closer to that.

Operator

And that's all the time we have available for questions. And we will now pass the call back to MetLife's CEO, Michel Khalaf for closing remarks. Please go ahead.

Michel Khalaf

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 was 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.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.