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Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2020 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 turn the call over to John Hall, Head of Investor Relations.
Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Second Quarter 2020 Earnings Call. We hope you and your families are both safe and healthy. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management. Last night, we released a set a supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to these slides features disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up. Now over to Michel.
Thank you, John, and welcome, everyone. My focus this morning will be on how MetLife is successfully managing through the current crisis, financially, operationally and culturally. I'll begin with our financial performance in the second quarter, which demonstrates 3 key fundamentals about our business. First, we have become a simpler and more predictable company. On our last earnings call, we set the major pandemic related impact in the second quarter would be the loss in our private equity portfolio. The negative 8.2% return we reported fell squarely within the range provided. Second, our businesses are well diversified by both geography and product, providing meaningful offsets to increased claims from COVID-19. In aggregate, the second quarter was not an underwriting event.
And third, we remain a company that is committed to and generate strong free cash flow, providing us with significant liquidity and flexibility. In the quarter, we reported adjusted earnings of $758 million or $0.83 per share compared to $1.38 per share a year ago. Net income of $68 million fell below adjusted earnings primarily due to losses on derivatives helped to protect our balance sheet against declining equity markets. On a 2020 year-to-date basis, MetLife has generated $4.4 billion of net income. As you know, our private equity portfolio is reported on a one quarter lag, so the results reflect the extremely difficult first quarter equity market. The percentage decline in our private equity portfolio was much smaller than the 20% drop in the S&P 500, but still generated an after-tax quarterly loss of $0.48 per share, consistent with the expectations we shared with you. Given the substantial rebound in the equity market, we expect a significant recovery in our private equity portfolio when we next report our quarterly results. Our roughly $500 billion investment portfolio remains a key strength for MetLife.
We believe the diversity, quality and liquidity of our portfolio as well as our early actions to reduce risk position us well for a variety of market outcomes. Year-to-date, we have seen only modest realized investment losses. Our underwriting results in the quarter reflect the broad diversity of our businesses. For example, higher claims frequencies in the U.S. were largely balanced by fewer auto insurance claims of selling longevity impact and lower claims and utilization of other protection products globally. Our group benefits business is instructive. Higher mortality drove our group life benefit ratio beyond our annual target range, but this was offset in part by a decrease in dental utilization. Looking ahead, we expect group life mortality to improve but remain elevated in the third quarter. And while dental utilization should increase as we move through the year, with deferred recognition of dental premium given the significant decrease in the availability of dental services. This has the effect of limiting outsized results in any one quarter. Overall, we continue to expect that the diversity of our business mix will mitigate the global underwriting impact of COVID-19.
Turning to free cash flow. We have long spoken of a life insurers capacity to generate cash as one of the most critical measures of the strength and sustainability of its business model. In the second quarter, we were able to grow total cash and liquid assets at our holding companies to $6.6 billion. This is up from $5.3 billion sequentially and well above our cash buffer target of $3 billion to $4 billion. Our strong cash reserves provide us with significant financial flexibility to navigate an uncertain and changing economic landscape, including taking advantage of opportunities as well as managing potential impacts to our investment portfolio. Beyond our financial results, I would like to spend a few minutes on other ways we are managing the challenges presented by the pandemic. Operationally, our people continue to show grit and determination and not only stepping up to respond effectively to a challenging environment, but in accelerating some of the trends that will be critical to our long-term success. Enterprise-wide, 75% of our employees continue to work remotely. Throughout the crisis, we have been able to deliver for our customers without interruption. In our U.S. group business, for example, we continue to meet or exceed our service level agreements. The crisis is also causing us to fast forward the digitization of our company, which will produce lasting benefits.
Turning to the U.S. Group business again. We have expedited and now completed the rollout of an enhanced digital platform that makes it easier for customers to get benefit information, make payments and for a claim. Since the start of the year, the number of people eligible to access the platform has grown by more than 30 million. In addition to continuing to invest to improve the customer experience, we also provided our customers with significant premium relief in the second quarter. While this created some top line pressure, we remain committed to strong expense discipline. We moved quickly to find savings as part of our efficiency mindset and are still on track to achieve our full year direct expense ratio target of 12.3%. For the first 6 months of the year, the ratio is 12.2%. An essential part of being a high-performing company is having a strong culture and here, too, we are seeing improvements. One of the biggest concerns about the shift to working from home was that employee engagement would suffer.
We have been experiencing the opposite effect. In all 3 of our priority areas, collaboration across the enterprise, a strong focus on the customer and a spirit of experimentation, employee engagement has actually strengthened. Part of this is the deep sense of purpose that our employees feel at a time when what we do matters more than ever. Another factor is our commitment as a leadership team to communicating at unprecedented levels. For example, we have been holding interactive global town halls for all of our employees every other week. Our commitment to building momentum for our next Horizon strategy has a new urgency as well. More than 25,000 employees have participated in immersive virtual sessions to build a strong sense of ownership. The pillars of our strategy remain more relevant than ever, focus on deploying scarce capital to its highest use, simplify MetLife by driving operational efficiency and improving the customer experience and differentiate to drive competitive advantage in the marketplace.
Far from slowing us down, the current crisis is accelerating our efforts to find attractive opportunities. In June, we closed our first ever deal in the U.K. longevity reinsurance market. Longevity risk is a business that allows us to tap several competitive advantages, including our world-class actuarial talent. In addition, the underwriting and capital dynamics of this business fit well with our internal rate of return and payback period requirements. Another growth opportunity is the need of products we are adding to our market-leading employee benefits platform. In January, we closed on the acquisition of PetFirst to give us access to the fast-growing pet insurance market. Even though we will not launch the product on our platform until later this year, 25 large employers with approximately 250,000 eligible employees have already signed up to offer pet insurance as a voluntary benefit. Before I close, I would like to say a word about MetLife's commitment to diversity and inclusion, a topic that has taken on greater importance in light of recent protests across the United States. MetLife has taken a number of steps to contribute to a more just and equitable society. We have spoken out in the face of injustice.
We have committed to improving diversity within our own workforce, and we have contributed financially to organizations that advance rational equity. While we know there is more work to do, both as a company and as a society, our purpose is motivating us to help make forward progress. What I hope you will take away from today's call is that MetLife feels a tremendous sense of urgency about the future. Everyone has heard the expression, don't let a crisis go to waste. At MetLife, we are taking that to heart and doing the work now to position ourselves for long-term success. We're becoming more efficient. We're gaining new customer insights. We're strengthening our culture and we're remaining laser-focused on consistent execution. With that, I will turn the call over to John McCallion to discuss our second quarter results in greater detail.
Thank you, Michel, and good morning. I'll start with the 2Q '20 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. In addition, the slide provides more detail on our outlook for the third quarter as well as an update on our cash and capital positions.
Starting on Page 3. The schedule provides a comparison of net income and adjusted earnings in the second quarter. Net income in the second quarter was $68 million, were $690 million lower than adjusted earnings of $758 million. This variance is primarily due to net derivative losses resulting from the stronger equity markets as well as higher long-term interest rates in the quarter. On a year-to-date basis, net income was $4.4 billion compared to net income of $3 billion in the first half of 2019. The investment portfolio and hedging program continue to perform as expected. Also, as highlighted on Page 3, adjusted earnings included a $438 million after-tax loss in Variable Investment Income, or VII. I will provide more details on this shortly. On Page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding total notable items. This quarter's results did not include any notable items, while the prior year quarter had $70 million associated with our recently completed unit cost initiative, which was accounted for in corporate and other. Excluding the UCI cost in the second quarter of '19, adjusted earnings were down 45% and down 44% on a constant currency basis. On a per share basis, adjusted earnings were down 43% and down 41% on a constant currency basis. Overall, Variable Investment Income was lower than second quarter of '19 by $702 million after tax. This decline in VII was more than the decline in total adjusted earnings year-over-year. Positive year-over-year drivers included solid volume growth, favorable expense margins and equity market strength in the quarter. This was partially offset by the lower recurring interest margins and less favorable taxes compared to 2Q of '19.
Turning to the performance of our businesses. Group benefits adjusted earnings were down 20% year-over-year. The Group Life mortality ratio was 95.9% due to elevated claims related to COVID-19. This is above our annual target range of 85% to 90% and less favorable to the prior year quarter of 85.3%. The interest adjusted benefit ratio for group nonmedical health was 58.5%, which is well below our annual target range of 72% to 77% and also favorable to the prior year quarter ratio of 75.4%. The primary driver was extremely low dental utilization, which I will discuss in more details shortly. In regards to the top line, Group benefits adjusted PFOs were down 5% year-over-year, primarily due to lower dental premiums from the deferral of revenues given a significant decrease in the availability of dental services and to account for a 25% premium credit to all fully insured customers, excluding these dental premium adjustments, which totaled approximately $500 million in the quarter. Group benefits PFOs would have been within its annual target range due to solid growth across all markets.
Retirement and Income Solutions, or RIS, adjusted earnings were down 45% year-over-year due to unfavorable investment margins related to the decline in variable investment income, which was partially offset by favorable underwriting margins. RIS investment spreads for the quarter were 25 basis points, down 94 basis points year-over-year. Spreads, excluding VII, were 85 basis points in the quarter, up 1 basis point year-over-year due to a decline in LIBOR rates. RIS liability exposures grew 11% year-over-year, driven by strong volume across all products and separate account investment performance in the quarter. While liability exposures grew RIS adjusted PFOS, excluding pension risk transfers, were down 22% year-over-year due to lower structured settlement and institutional income booty sales. Property and Casualty, or P&C, adjusted earnings were up 19% versus the prior year period, driven by favorable underwriting margins, partially offset by unfavorable investment margins related to variable investment income. The overall combined ratio was 91.1%, which was more favorable than our annual target range of 92% to 97% and the prior year quarter ratio of 96.1%. P&C results benefited from lower auto claim frequencies due to a decline in miles driven in the quarter. This was partially offset by higher catastrophe losses of $89 million after-tax compared to $62 million after tax in 2Q of '19.
Moving to Asia. Adjusted earnings were down 29% and 27% on a constant currency basis due to lower investment margins resulting primarily from the decline in variable investment income in the quarter. This was partially offset by solid volume growth, which was driven by a 5% increase in general account assets under management on an amortized cost basis as well as favorable expense margins. Latin America adjusted earnings were down 17% as foreign exchange rates across the region dampened year-over-year results. If today's FX rates hold, we would expect the year-over-year impact to Latin America's third quarter earnings to be similar to the second quarter. On a constant currency basis, adjusted earnings were up 3%, driven by higher equity markets, favorably impacting our Chilean and Kahe returns, which were up 14% in the quarter as well as favorable underwriting margins. This was partially offset by unfavorable investment margins. EMEA adjusted earnings were up 51% and 59% on a constant currency basis. This was a record adjusted earnings quarter for EMEA, primarily due to favorable underwriting margins as a result of lower claims in group Medical and accident and health policies in the region as well as better expense margins. We would expect EMEA's underwriting results to be closer to historical levels in the third quarter. MetLife Holdings adjusted earnings were down $279 million year-over-year. This decline was primarily driven by lower variable investment income of $250 million after-tax, compared to the prior year. As well as lower recurring interest margins and unfavorable underwriting due to COVID-19 related claims. The Life Interest adjusted benefit ratio was 59.1% and which was above the prior year quarter of 53.9% and above our annual target range of 50% to 55%. Higher equity markets in the quarter were a partial offset to the year-over-year decline in adjusted earnings. The separate account return in the quarter was 14.8%, which resulted in a positive $13 million initial impact, which compares to a positive $5 million initial impact in 2Q '19. Corporate and other adjusted loss was $289 million. This result was less favorable to the prior year quarter, which had an adjusted loss of $237 million, excluding $70 million of UCI costs. The decline in variable investment income was the quarter. Looking ahead, we would expect corporate and other losses to be between $325 in the second half of the year. The company's effective tax rate on adjusted earnings in the quarter was 19.2%, modestly below our 2020 guidance range of 20% to 22%.
Now let's turn to Page 5. This chart reflects our pretax variable investment income over the prior 5 quarters, including a loss of $555 million in the second quarter of 2020. The loss was entirely attributable to the private equity portfolio which had a negative 8.2% return in the quarter. As we have previously discussed, private equities are generally accounted for on a one quarter lag, and the negative marks included in our 2Q '20 financial results are in line with our disclosures from the last earnings call.
With regards to recurring investment income, our new money rate was 3.41% versus a roll-off rate of 3.72% in the quarter. This compares to a new money rate of 4.01% and a roll-off rate of 4.34% in 2Q '19. We have added a table on Page 6 that breaks out the second quarter negative VII of $438 million after-tax by segment. The largest VII impacts to adjusted earnings in the quarter were MetLife Holdings and Retirement and Income Solutions, followed by Asia and corporate and other.
In the quarter, certain timing adjustments have shifted the relative VII impact between Asia and corporate and other. Going forward, these timing adjustments will be eliminated and as such, we would expect Asia's adjusted earnings to have a larger contribution from VII and corporate and other to have less as compared to the second quarter.
Now let's turn to Page 7. This chart provides one approach to illustrate the impact of below trend VII on our reported earnings. The box in red reflects the adjusted EPS impact of $0.48 related to the negative VII experienced in the quarter. This was the first quarterly loss for VII since 2009. The $0.22 highlighted in the green box illustrates the adjusted EPS impact assuming VII at the quarterly midpoint of our 2020 annual target range of $900 million to $1.1 billion. To be clear, this chart should not be viewed as quarterly guidance, but rather as one approach to illustrate the below trend results.
Moving to Page 8. This walk provides more detail on the group non-medical health interest adjusted benefit ratio. As I noted earlier, the reported ratio of 58.5% was very favorable, driven by low dental utilization. However, 2 adjustments are needed for comparability to our annual target guidance of 72% to 77% and the sensitivities we provided on our outlook call last December. First, the ratio should be adjusted by 3.9 points for the 20th earlier. Second, the ratio should also be adjusted by 7.1 points related to the establishment of an unearned premium reserve. We established an unearned premium reserve recognition with the availability of dental service sources. As dental offices have begun to open across the U.S., we have seen utilization pick up in July for more involved treatments and procedures, which represent less than 20% of our typical overall dental claims. However, incidence remains low for more routine visits. We expect dental utilization to pick up in the second half of the year, pushing the ratio closer to the low end of our 72% to 77% target range.
Turning to Page 9. This chart shows our direct expense ratio from 2015 through 2019 and the first two quarters of 2020. In 2020, our year-to-date direct expense ratio was 12.2%, while the ratio was elevated in 2Q at 12.4% due to top line pressure from premium credits in our dental and auto businesses, as well as the establishment of a dental premium reserve. We remain on track and committed to achieving our full year target of approximately 12.3% as we continue to deploy an efficiency mindset to increase capacity for needs of the firm. Now I'd like to spend some time reviewing several key considerations for the third quarter, given the continued uncertainty of the current environment. These considerations are summarized on Page 10.
Starting with investments. We expect a strong recovery in variable investment income in the third quarter with our best estimate for private equity returns to be a positive mid-single digit, which is based on a $7.2 billion PE balance at June 30. Regarding recurring investment income, we continue to experience downward pressure from lower rates. However, reinvestment rates have held up reasonably well during the first half of the year, given our diverse market-leading asset origination capabilities. Finally, we expect the short end of the yield curve to remain favorable, supporting investment spreads. Moving on to underwriting margins. We continue to anticipate modest underwriting impacts from COVID-19 on a combined basis. Assuming deaths rise in the U.S. to approximately 200,000 through the third quarter. We expect life insurance claims frequency in the U.S. to moderate. With life insurance benefit ratios and group benefits and MetLife Holdings moving closer to their respective annual target ranges. However, we do expect claims activity to significantly increase in Latin America in the third quarter, as the region is behind other parts of the world in COVID-19 emergence. Additionally, we would expect some level of offsets from businesses with longevity risks, most notably in Retirement and Income Solutions. So currently, we expect a limited overall impact to underwriting margins on a combined basis for 3Q.
Turning to top line metrics, we would expect global face-to-face sales to remain challenged, negatively impacting most of our segments. However, we do anticipate modest sequential sales improvement in Japan. We expect lower adjusted PFOs in most segments with the exception of group benefits, which we expect to have mid- single-digit growth year-over-year. While we expect to encounter volume and top line growth pressures, our efficiency mindset is a core tenet of our strategy to manage margin pressures across our business. As I noted earlier, we remain on track to meet our direct expense ratio full year target of approximately 12.3% despite the challenges of the current environment.
Now let's turn to Page 11. Given the persistent low interest rate environment, we decided to add this page on estimated impacts to our income statement and balance sheet. If we were to lower our long-term actuarial U.S. interest rate assumption of 3.75% by 25, 50, 100 or 150 basis points. For each hypothetical scenario, GAAP loss recognition is not triggered, and there would be a relatively modest impact to net income, specifically, with respect to the 150 basis point down scenario, which would bring our long-term mean reversion rate assumption to 2.25%. I would highlight 2 points. First, the approximate $425 million net income impact is consistent with the guidance range disclosed on our 1Q '20 earnings call. And second, we will continue to have a significant margin for purposes of GAAP loss recognition. Overall, I believe these sensitivities of test a MetLife significantly reduced risk profile. I will now discuss our cash and capital position on Page 12. Cash and liquid assets at the holding companies were approximately $6.6 billion at June 30, which is up from $5.3 billion at March 31 and well above our target cash buffer of $3 billion to $4 billion. The $1.3 billion increase in cash in the quarter reflects the net effects of subsidiary dividends payment of our common stock dividend as well as holding company expenses and other cash flows.
Next, I would like to provide you an update on our capital position. As a reminder, for our U.S. companies, our combined NAIC RBC ratio was 395% at year-end 2019 and comfortably above our 360% target. For our U.S. companies, preliminary second quarter year-to-date 2020 statutory operating earnings were approximately $1.8 billion, while net income was approximately $2.1 billion. Statutory operating earnings decreased by approximately $600 million from the first half of 2019, primarily due to higher VA rider reserves and the impact of a prior year dividend from an investment subsidiary. This was partially offset by lower operating expenses. Year-to-date net income was driven by derivative gains, partially offset by lower operating earnings. Our expected total U.S. statutory adjusted capital was approximately $21.1 billion as of June 30, up 13% compared to December 31, 2019. Derivative gains and operating income more than offset dividends paid and other investment losses.
Finally, the Japan solvency margin ratio was 799% as of March 31, which is the latest public data. In summary, this quarter's adjusted earnings were dampened by the negative private equity returns which are based on a one quarter accounting lag. However, the underlying business fundamentals from our diverse market-leading businesses were evident in our results despite the challenging environment. Looking ahead, we expect our third quarter adjusted earnings to benefit from a strong recovery in private equity returns, while continuing to absorb modest underwriting impacts from COVID-19. In addition, we believe our capital, liquidity and investment portfolio are strong, resilient and well positioned to manage through this unprecedented environment. Finally, we are confident that the actions we are taking to be a simpler and more focused company will continue to create long-term sustainable value for our customers and our shareholders. And with that, I will turn the call back to the operator for your questions.
[Operator Instructions]. Your first question comes from the line of Erik Bass from Autonomous.
First question, with $6.6 billion of holding company liquidity and credit impact, [Technical Difficulty] this is -- and is that something that's potentially on the table for the third quarter? Or do you want to wait longer to see how the environment evolves?
Erek, we lost you there in the middle do you mind repeating the question?
Certainly. It was -- in May on the outlook for capital return. And with the $6.6 billion of HoldCo liquidity and credit impacts trending a bit below fear so far? Just how are you thinking about the timing of resuming share repurchases? And is that something that's potentially on the table for 3Q?
Sure. So as you know, last quarter, we put our share repurchase program on pause. And we felt that was prudent to build our cash and capital and to maintain -- in order to maintain financial flexibility. Our view is that there remains substantial uncertainty in the economy as well as with the pandemic, which is going to take more time to clear. Yet having said that, over the past 3 months, we've seen a resilient equity market and tighter credit spreads, as you reference, government and Fed reserve policy. And our cash position has grown to $6.6 million, which gives us greater financial flexibility and optionality. So if you take all of these factors together, we would not roll out capital management in the latter part of 20 but we remain on plus for the time being. So I hope that answers your question.
Yes. That's helpful. And then just a follow-up for John on Group. I just wanted to clarify kind of is the idea of the unearned premium reserve to essentially better align the timing of revenues and expenses. So should we think of this as essentially taking some excess earnings from the second quarter and allocating them to future periods when you expect claims and incidents to be higher?
Erik, yes, it's very much about the availability of service. And so in the second quarter, dental offices were closed for quite a bit of time. Remind, part of that, we gave back a 25% premium credit to fully insured customers. And then as you said, we also then said we needed to defer some revenue so that it would be recognized when those services are available. And so those are -- that is a timing item.
Got it. So it's essentially the earnings -- if you hadn't booked that, would have been higher in the second quarter, but you'll recoup that at some point in the future?
That's correct.
Our next question comes from the line of Tom Gallagher from Evercore.
The reduction that you gave on free cash flow guide for 2021 last quarter, I think a piece of that was driven by elevated credit loss assumptions. My question is, if interest rates stay low, but credit remains fairly benign, where do you think that would land you in terms of the free cash flow conversion heading into 2021?
Tom, I would just remind you, that was a scenario, not a guide. It was -- there's a lot of different factors. We had a 1- to 2-year assumption of how this may play out. It was based on macro factors as of March 31 when spreads were wide, our equity markets were worse, we'll say interest rates are modestly down. If you look at the 10 years since then. So things, as Michel said, there has been a somewhat resilient equity and credit market for the last 3 months. I'd still say we're in the mode of caution at this point in terms of what the outlook it will be and how this will play out. I also talked about last time that, that factors in some level of cash flow testing. It's a range of outcomes. And that some -- the estimates we provided were based on New York special consideration letter that we receive every year. The last one we got was a year ago, it was based on a certain macroeconomic environment. We'll work through hopefully constructively with them this time. But we wanted to just give a I'll say, a stress set of scenarios for what's a possible outcome. But it's -- I wouldn't call it a guide. I'd just say that's -- those are kind of possible outcomes-based on where but it depends on where macro factors are at the end of the year.
Got you. And then my follow-up is, any update on MetLife Holdings and the potential for risk transfer or interest rates than the current level of interest rates too low, making the bid as spread too wide? Or do you think something could still happen there even if rates remain kind of where they are?
Yes, I think we're in the same mode that we've been in for the last few quarters. We are preparing for the opportunity for something to occur, although macro factors are creating a wider bid-ask spread, having said that, there's still kind of a biased push to supply being greater. And so that could narrow the bid-ask over time. So I'd say we continue to maintain readiness, but interest rates, I would say, do present a headwind.
Your next question comes from the line of Ryan Krueger from KBW.
On the holding company cash, were there any meaningful timing considerations that influenced the increase in the quarter? Or would you expect a further build in the cash position in the second half of the year, depending on your uses of free cash flow?
Ryan, yes, we did have some lower outflows in the second quarter. And we did receive some proceeds from the sale of Hong Kong. So it was another item, which we did not disclose, as you know. And so on the -- looking at the remainder of the year, I would say, I would not expect the same rate of increase that you're seeing here.
Got it. And then could you provide some updates on what you're seeing in the commercial mortgage loan portfolio in terms of things like forbearance requests and grants and any other statistics that you could provide on what's going on there?
Sure, Ryan, it's Steve Goulart. I'll take that. Let's step back and start with an overview of the portfolio again. It's nearly $51 billion now in commercial mortgages. And again, we continue to believe it's very conservatively positioned. The average loan-to-value is 57%. And the average debt service coverage ratio on the portfolio is 2.4x. It's very well diversified geographically and by property type. And we also feel it's concentrated in high-quality assets that are typically located in larger primary markets. So again, backdrop of a very strong fundamentally built diversified portfolio. That said, there clearly are signs of stress in sectors like hotel and retail. For us, that's less than 25% of the total. And not surprisingly, as I talked about on the previous earnings call, we have received requests for temporary debt service payment deferrals on the portfolio. We've reached a point where we're really not seeing much in the way of new requests, but we've granted about 9% on a principal balance outstanding of those. And again, they're heavily concentrated in hotel and retail. But again, these are payment deferrals. We don't expect losses, and we're not projecting losses from any of those today. It's just they're going to be delayed in receiving the principal and interest. And in addition to just those that we've granted deferrals on, we actually have received 100% of all other expected payments. In June. So this is something we'll deal with in this crisis. But again, given our long-term history of performance in commercial mortgages, and I'll remind you, from 2009 to '19, we have less than $120 million in cumulative losses, the portfolio, we believe, is well positioned, and we'll manage through this time period.
Your next question comes from the line of Elyse Greenspan with Wells Fargo.
My first question is on the expense side of things. You guys obviously seen a 12.3% for the full year. And Michel, I know since you took over your role, you've kind of put out the message that expense management is a core part of what's going on at met even beyond this year. So as we've been in this COVID environment, and we've heard companies talk about becoming more efficient. Have you guys learned anything or see anything within your expense base that perhaps could lead to more sustainable savings beyond 2020 into 2021 and beyond?
Yes, Elyse. So as you mentioned, we do believe that driving an efficiency mindset. And then just keep in mind, coming off our UCI initiative, where we've exceeded our target is very important, and the management team here is highly committed to this. And if anything, we're seeing an acceleration of this during the pandemic. If you consider that we do have some incremental costs related to the pandemic that we are managing to offset. If you take into account the fact that this quarter, we have about $500 million. Our top line is suppressed by about $500 million due to the dental credits and the UPR that we discussed earlier. We're seeing also some top line pressure just from the pandemic in general, yet we continue to be committed to our 12.3% expense ratio. I think that gives you a sense of just the urgency and the momentum that we're seeing in terms of the adoption of this efficiency mindset. And clearly, as we see further adoption of some of our digital tools, we think those trends are going to persist even coming out of this crisis as we continue to find ways of further simplifying the company. We feel good about sort of what we discussed during Investor Day about our ability to create additional capacity. That's also going to help us continue to invest in growth and innovation. So again, I cannot stress enough. In times of crisis, it's about the things that you control. And that's one area that we feel we do control. And as I said, we're very committed to maintain the 12.3% despite all the other things that I mentioned earlier.
Okay. And then my second question on the investment spreads within RIS were compressed in the quarter, but that was really due to VII because away from that, they actually held up pretty well. Given your outlook, can you give us a sense of where spreads within RIS for the rest of the year, I guess, could come in relative to your 2020 guide.
Elise, yes. So Q2 spreads were certainly on an overall basis, depressed, driven by the negative returns on our private equity portfolio. And as just as a reminder, we have said that res typically takes about call it, 1/3 of the results from VII. And then excluding spreads, were 85 basis points, up slightly from Q1. And most of that is driven by the drop in LIBOR. This has helped us a little -- be resilient when it comes to our spreads, the shape of the curve against some headwinds. Lower rates do hurt ultimately, but the shape of the curve matters a lot, as we've said before. We also have seen some head, in particular around hotels. So -- but nonetheless, I think the spreads have been resilient. We expect them to VII, where the shape of the curve would help offset some of those other headwinds.
Your next question comes from the line of Jimmy Bhullar from JPMorgan.
First, I had a question for Steve Goulart. On -- if you think about the credit environment, obviously, things haven't ended up being as bad as was feared, but there's still uncertainty. So where do you see good value? And what are some of the areas that you might be avoiding? And then relatedly, can you talk about what your new money yields are that you're earning right now versus -- and the gap between that and the portfolio yields, so we get a better idea for where your core spreads are headed?
Jimmy, let's step back and just talk about the current environment, though. And John made some comments on this, too, and then I'll pick up. But we're still dealing crisis in the markets. And in our mind, that's presented a fair amount of uncertainty around what the shape of the recovery would look like. And what long-term impacts could be. Now we all know, Fed came to the rescue and through really unprecedented intervention has calmed the markets. And in general, the market tone have certainly improved where we were a quarter ago. And when you look at things like a lot of the downgrade projections that were in the market, just about all those participants have reduced their projections however, we are still seeing defaults and bankruptcies, and that trend is going to continue. If you think back to our first quarter call, we talked about how we are looking at that, different scenarios and analyses we've made and what the potential impact would be on our portfolio and on our risk-based capital, and what we said was through all the analysis we've done, we think that all the risks are manageable. So put that in the context of today, things have improved. The risk that we saw a quarter ago have also modestly improved.
And therefore, I guess, I'd describe it as continuing to be very manageable. But all that said, we are still very cautious about the market because there is a disconnect, we think, between kind of technicals and fundamentals. So we continue to be cautious. We've continued to reposition the portfolio. When we see price and spread action like we've seen in some sectors and names that we are still cautious about, we're going to continue and have continued to reduce our exposure. At the same time, though, there are attractive opportunities, and we're going to take advantage of them when we can. Particularly we've seen over the last quarter, continued opportunities in private assets, and so we'll continue to invest there. So again, it's really one of balance about continuing to take advantage of what the market will give us to lighten up the portfolio in those sectors and names that we are so cautious about. But taking advantage of opportunities that we see, which, again, right now seem to be more heavily concentrated, again, no surprise in private assets, which, again, given our strong origination networks, our reputation of commitment to those sectors and our conservative underwriting really serve us well. And I think that's when you just look at our commitment to sound underwriting to asset liability management, and most importantly, to diversification across the portfolio that allows us to really continue to put up a long term positive, successful investing track record even in markets like this.
And are you able to quantify this your new money yields? And where they stand relative to the gap between that and the portfolio?
Yes. So our new money yield for the quarter was 3.41%. Our roll off was 3.72. And that reflects -- I think that's down a little bit from the last quarter, but it does reflect still being able to take advantage of opportunities that we do see. In the market. And again, we're obviously in a prolonged low interest rate and for now anyway, tighter spread environment. So that trend is likely to continue in the near term. But again, the diversification that we have available for us from an investing perspective will continue to serve us well.
Okay. And then if I could just ask one more for John McCallion. On your annual actuarial review, in the past, you've brought your rate assumption down, but the adjustments have been fairly modest. Are you following a similar process as you're looking at your rate assumption? Or could we -- adjustments would be closer to what actual rates are?
Jimmy. Yes. We have a process. We will follow our processes we typically have. And we'll go through that during the course of the third quarter and provide an update on next quarter's earnings call. I don't think there's reasons to change. I don't think it I would call the environment would require a change in process, process should dictate and drive the results. So I think we have a very healthy process, objective process. And we'll kind of manage through that over the course of the next several weeks.
Your next question comes from the line of Humphrey Lee from Dowling & Partners.
I just have a follow-up question on group benefits to trend for the balance of the year. Clearly, this quarter, you mentioned you had the $500 million impact related to dental. Do you anticipate any of the unearned premium reserves are all kind of behind you? And since you go back to normal? Or do you anticipate there could still be a little bit of a headwind because not the entire country is still fully open?
Humphrey, it's Ramy Tadros here. So as John mentioned, we are expecting the utilization of some of the services for dental to be elevated or more than -- above our normal expectations for the rest of the year. So think of that, our customers are making up services that were not provided in the second quarter. So there's that catch up effect. This additional catch-up effect will be offset by the release of the unearned premium reserve in the subsequent quarters. So we will get -- we will see that UPR, if you will, release into premiums as we see that catch-up effect happen with respect to utilization. More broadly, with respect to PFO growth in the third quarter, we did talk about employment levels being one of the key drivers that drives PFO here for the group benefits business. If you recall, we talked about a number of attributes on the last call, which somewhat mitigate that employment level impact in terms of the diversification of our book, the focus towards more larger accounts, national accounts, so in aggregate, if you think about the third quarter, we are still looking at PFO growth in the solid mid digits for group benefits.
Got it. And then in John's prepared remarks, you talked about the expecting some longevity benefits in the third quarter to offset some of the continued corporate-related underwriting impact. Is there any way to help us to think about the potential benefits from RIS and long-term care in the coming quarters?
Humphrey. Yes. Look, I would probably put this in the context of just overall view. Of underwriting. So just as a reminder as to what Michelle mentioned, overall, for 2Q, we saw a modest impact in underwriting on a combined basis. We had higher claims in the U.S., and they were largely offset by auto claims, auto frequency claims. Also, we had some longevity impacts in the quarter. And then we had other claims and utilization benefits outside the U.S., particularly EMEA. As we look into the Q3 end of kind of a neutral impact on underwriting on a combined basis to still be the case even with death rising to 200,000 in the U.S. So a couple of things to highlight. We expect the mortality, as I said before, on my opening remarks for Group Life and MetLife Holdings to still be elevated, albeit migrating closer to the top end of our range. So not as severe as 2Q. And just particularly in Mexico, we expect COVID impact to rise in Q3. So we're forecasting about 40,000 deaths in Q3 for Mexico. And at this point, we'd estimate that would have roughly maybe a segment benefit ratio. And then going to your point around offsetting impacts. So offsetting these elevated losses, we do expect longevity offsets to increase in both R and long-term care as these typically are delayed by a quarter or are slower to emerge from a reporting perspective. And then as I said in my remarks, we also expect EMEA would migrate back to normal trends. So in summary, we think the net underwriting result would generally offset, and therefore, COVID impacts would remain modest in Q3.
Your next question comes from the line of Andrew Kligerman from Crédit Suisse.
Maybe just kind of following up on the capital management question, taking more of the M&A stack. Do you think that if any opportunities were to arise in this environment that you'd be able to act pretty quickly? And do you have a desire to do so? And then finally, you mentioned the pet insurance acquisition. I've been hearing that, that's just a very tough line to underwrite as pets age, it becomes quite problematic in terms of the loss ratio. So I was wondering what the thinking was when you made that acquisition. So questions there.
Andrew, I'll take the first part on capital management, and then Ramy will question. So as I've said before, we view M&A as a strategic and that's an important tool, but 1 of the tools in our toolbar. We're very disciplined in our approach to M&A. I would just remind that we always look at strategic fit as a potential transaction going to help us grow revenues? Are there synergies involved? It would have to be accretive. Does it clear a minimum risk-adjusted return, hurdle rate or return? And we always also compare it to other potential uses of capital. So I would say that nothing changes here in terms of our approach. We are open for business. And -- but the discipline that I just described, we -- with these types of opportunities.
Michel, any areas that I though that you kind of would like to add to the net life portfolio in terms of M&AS?
Yes. I mean, just taking you back, Andrew, to what we discussed during Investor Day, I think we talked about sort of certain lines of business markets where given the right opportunity, we'd certainly be open to doing something. And I think if just sort of to add to that, if you consider sort of the pet insurance acquisition, a smaller acquisition that we made in digital wells, which complement our legal plans offering again, adding or enhancing our group benefits offering, for example, group obviously is a business that we like here in the U.S. So those are the types of things that I would point you to in terms of going back to what we discussed during Investor Day and the businesses and the markets that we -- that we like and where we see opportunities to further grow revenues.
Andrew, it's Ramy here. Just building on Michel's comment, the first acquisition was small, but important. It very much is aligned to our Investor Day strategy. And we're entering into a capital-light business, where we've identified a clear opportunity where we can bring value to customers, employers and employees. The pet insurance market, if you look at it more broadly, 2/3 of Americans have a path. They spend collectively $18 billion every year on vet care. But the penetration in the market is -- in the insurance market is just 2%. And it's seeing 20% CAGR year-on-year. And clearly, look, the -- we have -- we've purchased a company with immense data and history. We have our best actuaries working on this, and we're very much confident in our underwriting in this line of business going forward.
And at this time, I'd like to turn the call back to Michel Khalaf for final comments.
Let me thank you all for participating in today's call. And I want to close today by reiterating how committed this leadership team has to controlling was in our power to control. We know that capital and liquidity, consistent execution and expense management are vital during times of uncertainty. Please stay safe, and have a great day.
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