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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. 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, Global Head of Investor Relations.
Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife’s third quarter 2020 earnings call.
Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release, and in our quarterly financial supplements, which you should review.
On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management.
Last night, we released a set of supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks, if you wish to follow along. An appendix to these slides features disclosures and GAAP reconciliations, which you should also review.
After prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up.
Before I turn the call over to Michele, I have a quick scheduling note. When we report MetLife full year results in February. We will consolidate our annual outlook call with our fourth quarter 2020 earnings call, making for an impactful 60 minute call. Stay tuned.
With that, over to Michel.
Thank you, John, and welcome everyone. As you saw in our earnings release last night MetLife delivered strong financial results in the third quarter of 2020. These results are a testament to the kind of company that MetLife has become. We are simpler and more predictable.
For example, the impact of our Annual Actuarial Assumption review was modest and consistent with the sensitivities we provided last quarter. We had a well-diversified mix of market leading businesses that diversity was on display and the largely offsetting impacts of COVID-19.
And we have an ongoing commitment to consistent execution. A good quarter at MetLife is just another installment in what investors have come to expect of us. And what we expect of ourselves.
Turning the numbers, we reported third quarter 2020 adjusted earnings of $1.6 billion, or $1.73 per share, compared to $1.27 per share a year ago. Net income of $633 million, was below adjusted earnings, mostly due to losses on derivatives held to protect our balance sheet against movements and equity markets and interest rates.
For year-to-date 2020, MetLife has generated $5.1 billion of net income. Excluding all notable items, we reported quarterly adjusted earnings of $1.8 billion, or $1.95 per share, compared to $1.4 billion or $1.64 per share a year ago.
The only notable item in the quarter was our annual actuarial assumption review, which had a negative $203 million impact on adjusted earnings and an incremental negative $98 million impact on net income. This is largely a function of lowering our long-term interest rate assumption from 3.75% to 2.75%.
As expected, we experienced a significant recovery in our private equity portfolio, which we'll report on a one quarter lag, the rebound that occurred, a 6.7% return tracked with the mid-single digit forecast we provided in Q2. Other contributors, including hedge funds and prepayments, added meaningfully to our $652 million of pre-tax variable investment income.
Turning to some third quarter business highlights, our US business segment produced very strong adjusted earnings, driven by group benefits and retirement and income solutions. In group benefits, group life mortality experience improved from the second quarter and dental utilization and disability remains favorable.
RIS benefited from the rebound and VII, as well as temporarily wider recurring investment spreads. Offsetting this property and casualty so heavier than normal catastrophe losses that overwhelmed favorable auto claims frequency.
Outside the US, Asians adjusted earnings action levels are up 34% from a year ago on higher VII, favorable underwriting, lower expenses and volume growth. Adjusted earnings next notables in Latin America were down 67% year-over-year, as COVID claims rose sharply as expected.
In EMEA, adjusted earnings ex notables increased 26% due to lower expenses, favorable underwriting and volume growth. And finally for MetLife Holdings, adjusted earnings ex notables rose 35% on higher VII and better Long Term Care underwriting results.
Our cash position strengthened during the quarter, and being at $7.8 billion well above our target cash buffer of $3 billion to $4 billion. The increase in cash is mostly due to our issuance of $1 billion of six preferred stock during the quarter, which was used in October to retire $1 billion of floating preferred stock.
As we committed in September, we have resumed the purchases of our common stock, roughly, $80 million in the third quarter and about another $240 million since then. Despite the extreme disruption 2020 has presented, we are on track this year to deploy $4.3 billion of capital towards strategic M&A, common stock dividends and share repurchases. We believe this underscores the durability of our all-weather Next Horizon strategy and MetLife's consistent execution across a range of economic scenarios.
We rolled our Next Horizon strategy almost one year ago with three main pillars, focus on deploying scarce capital and resources to their highest use, simplify MetLife by driving operational efficiency and improving the customer experience, and differentiate to drive competitive advantage in the marketplace. We believe we have made clear progress on all three fronts.
At Investor Day last December, I noted that our capital management philosophy at MetLife has not changed. Capital is precious, and we are disciplined in deploying it to the highest value opportunities.
Our purchase of Versant Health, which we expect to close before year-end, demonstrates our commitment to this approach. Vision Care is a capital-light business with strong risk adjusted returns and high free cash flow generation, like our US group benefits franchise more broadly, it is precisely the kind of business we want to grow.
Knowing where not to play is just as important as knowing where to place our strategic bets. During the quarter, we booked the sale of our annuity business in Argentina, which was no longer the right fit for MetLife. While not material to MetLife, this divestment helps illustrate our ongoing process of planting and pruning in an effort to achieve the optimal business mix.
When we talk about simplifying MetLife, we have two goals in mind, continuously improving our operational efficiency and becoming an easier company for our customers to do business with.
On efficiency, given the headwinds we have faced this year, we knew it was going to be a challenge to meet our target of a 12.3% direct expense ratio, but this is a firm commitment, and we will keep it. Despite higher anticipated seasonal expenses in Q4, we are increasingly confident that we will beat this target for the full year.
By embracing an efficiency mindset, we are also freeing up resources that can be reinvested in critical areas to improve the customer experience. A case in point is the investment we are making in group disability in the US.
The shared goal of all stakeholders in the disability system, whether employees, employers or insurance carriers is to achieve the best possible health outcomes and get people back to their lives and livelihoods as quickly as possible.
We are implementing an end-to-end disability and Absence Management solution to meet changing customer expectations and extend our leadership in this space. By investing in the customer experience here and across our businesses, we deepen MetLife's competitive advantage into the future.
The third pillar of our strategy is differentiation, those competitive advantages that set us apart from our peers. One of the most important is our talent. A major strength of being a truly global company is that we can redeploy talent to match it against our most promising opportunities.
This is precisely what we have done and the latest round of leadership changes that MetLife announced last month. And I want to begin by thanking Oscar Schmidt for his exemplary service to MetLife over the past 26 years. Under his leadership, MetLife has grown to become the largest life insurer in Latin America, with a well-diversified set of leading businesses across the region.
When Oscar steps away from his executive position at the end of the year, we will rotate a number of executives into new roles. Eric Clurfain will move from CEO of Japan to Head of Latin America, Dirk Ostijn will move from Head of EMEA to CEO of Japan, and Nuria Garcia will move from Deputy Head of EMEA to running the region.
Taken together, these appointments demonstrate not only our commitment to talent development, but are deep bunch of leaders who are ready to step up immediately and deliver value to our customers and shareholders.
Another area of differentiation I want to highlight is sustainability, which is core to our purpose at MetLife. The best talent want to work for sustainable companies. Corporate customers want sustainability embedded in their supply chain. And investors are increasingly interested in owning companies that incorporate environmental, social and governance principles into how they operate.
To highlight one example at MetLife, in September, we set ambitious new targets for our environmental performance. We committed to reduce our location-based greenhouse gas emissions by 30%, originate $20 billion in new green investments and direct $5 million to develop products and partnerships that will drive climate solutions all by the year 2030. We believe sustainability can be a competitive differentiator for us.
At a day long session with our Board of Directors in late September, we pressure tested every aspect of our next horizon strategy. We came away more confident than ever that our strategy will not only continue to guide us through the current environment but position us to emerge from the crisis in even stronger shape.
From capital deployment and digital acceleration to expense rigor and a culture of experimentation, we are accelerating the pace of change to win with customers and create shareholder value.
Before I close, I would like to say a few words about one of the towering figures in the history of MetLife. John Creedon, MetLife's President and CEO from 1983 to 1989, passed away on October 11 at the age of 96. John's path at MetLife literally took him from the mail room to the board room.
Among his many notable achievements was hiring Snoopy and the Peanuts gang, and furthering the company's expansion into global markets. But perhaps what best captures John's career was his passion for the customer. The overarching goal he had in every job was to exceed customer expectations.
John's passing reminds us that we are stewards of a great institution. MetLife was around long before we got here, and it will be around long after we are gone. Our task is to create long-term value for MetLife's many stakeholders, including our shareholders, to ensure in the words of our purpose statement that we will be always with you build in a more confident future.
With that, I will turn the call over to John McCallion.
Thank you, Michele. And good morning. I will start with the 3Q 2020 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 annual global actuarial assumption review as well as an update on our cash and capital positions.
Starting on page three, the schedule provides a comparison of net income and adjusted earnings in the third quarter. Net income in the third quarter were $633 million, or $945 million lower than adjusted earnings. This variance is primarily due to net derivative losses resulting from higher long-term interest rates, as well as the stronger equity markets in the quarter.
The investment portfolio and hedging program continue to perform as expected. In addition, the actuarial assumption review accounted for $98 million of the variance between net income and adjusted earnings, which I will now discuss in more detail on page four.
During the quarter, the actuarial assumption review reduced net income by $301 million, of which $203 million impacted adjusted earnings. The most significant driver was the reduction of our long-term US 10 year treasury interest rate assumption from 3.75% to 2.75%.
In addition to this 100 basis point reduction, we have extended our mean reversion rate to 12 years. These changes reflect expectations of lower interest rates for a longer period of time. The overall impact to earnings is consistent with the sensitivities provided on our second quarter 2020 earnings call.
Page five provides a breakdown of the actuarial assumption viewed by business segment. The vast majority of the earnings impact was in MetLife Holdings, primarily due to the change in our long-term US interest rate assumption. We also had a few adjustments in Asia, Latin America and EMEA, primarily due to lower interest rates and various changes in policyholder behavior.
On page six, you can see the year-over-year comparison of adjusted earnings by segment, excluding notable items in both periods. Both quarters exclude the impact of their respective actuarial assumption reviews. In addition, the prior year quarter had $88 million associated with our completed unit cost initiative, which was accounted for in Corporate and Other.
Excluding these notable items, adjusted earnings were up 24% and 25% on a constant currency basis. On a per share basis, adjusted earnings were up 27% and 28% on a constant currency basis.
Overall, variable investment income was higher than third quarter of 2019 by $257 million after tax. This year-over-year increase in VII accounted for nearly 75% of the total adjusted earnings growth, favorable expense margins and solid volume growth or other key year-over-year drivers.
Turning to the performance of our businesses. Group benefits adjusted earnings were up 7% year-over-year. The group life mortality ratio was 89.6%, and which improved sequentially and included roughly three percentage points related to COVID-19 claims.
This is at the top end of our annual target range of 85% to 90%. We expect the group life mortality ratio in the fourth quarter to be modestly above the annual target range as fourth quarter tends to have higher seasonal life claims, and we expect COVID-19 related claims will remain elevated.
The interest adjusted benefit ratio for group non-medical health was 67.4%, which is below our annual target range of 72% to 77%, driven by favorable dental and disability results.
As the quarter progressed, dental utilization came in above expectations, which was offset by the partial release of the unearned premium reserve we established in the second quarter. We expect this dental utilization trend to continue and would expect the group non-medical health ratio in the fourth quarter to be at the low end of its annual target range of 72% to 77%.
In regards to the topline, group benefits adjusted PFOs were up 7% year-over-year due to growth across most products and markets as well as the partial release of the unearned dental premium reserve. Excluding the unearned dental premium reserve release, which totaled approximately $110 million, group benefits PFO growth would have been within the annual target range of 4% to 6%.
Retirement and Income Solutions, or RIS, adjusted earnings were up 73% year-over-year. The drivers were strong investment margins, primarily higher variable investment income, favorable underwriting margins of roughly $50 million in the quarter, of which we estimate approximately half is related to elevated COVID-19 mortality and volume growth.
RIS investment spreads for the quarter were 156 basis points, up 54 basis points year-over-year. Spreads, excluding VII, were 98 basis points in the quarter, up 19 basis points year-over-year, primarily due to the decline in LIBOR rates and an increase in prepayments of RMBS held on our books at a discount.
Looking ahead, we expect RIS investment spreads in 4Q to decline sequentially, primarily due to lower VII, but still come in at the top end of the annual guidance range of 90 to 115 basis points.
RIS liability exposures grew 12.5% year-over-year driven by strong volume across the product portfolio, as well as separate account investment performance. While liability exposures grew, RIS adjusted PFOs, excluding pension risk transfers, were down 8% year-over-year due to lower structured settlement in institutional income annuity sales. Regarding pension risk transfers, we had approximately $500 million of PRT sales in the quarter and are seeing a good pipeline building once again.
Property & Casualty or P&C adjusted earnings were down 68% versus the prior year period, driven by unfavorable underwriting margins due to higher catastrophe losses. The overall combined ratio was 104.2%, which was above our annual target range of 92% to 97% and the prior year quarter of 98.4%.
Catastrophe losses were $115 million after-tax in the quarter, $60 million higher than 3Q of 2019. This quarter's cats primarily related to a tropical storm that impacted the Northeast and severe windstorms in the Midwest. It was the highest quarterly cat loss for our P&C business in nearly a decade.
Moving to Asia. Adjusted earnings were up 34% and 32% on a constant currency basis, primarily due to higher variable investment income, as well as favorable underwriting and expense margins.
In addition, Asia continues to benefit from solid volume growth, driven by higher general account assets under management, which were up 6% on an amortized cost basis. Looking ahead, we expect Asia's strong VII and favorable underwriting in 3Q to return to more normal levels in the fourth quarter.
Latin America adjusted earnings were down 67% and 62% on a constant currency basis, primarily driven by unfavorable underwriting and lower Chilean and Kahe returns, which were essentially flat in the quarter.
Elevated COVID-19 related life claims, primarily in Mexico, impacted Latin America's adjusted earnings by approximately $70 million after-tax in the quarter. We expect COVID-19 related claims in the fourth quarter to remain elevated.
EMEA adjusted earnings were up 26% and 30% on a constant currency basis, primarily driven by favorable underwriting margins as a result of lower claims and group policies in the region, as well as better expense margins and volume growth.
MetLife Holdings adjusted earnings were up 35% year-over-year. This increase was primarily driven by higher private equity returns, as well as favorable underwriting margins, as lower claim incidents and long-term care more than offset marginally higher life claims due to COVID-19.
The life interest adjusted benefit ratio was 60.2%, which included 7.3 percentage points related to the actuarial assumption review. Adjusting for this impact, the life interest adjusted benefit ratio was 52.9%, within our annual target range of 50% to 55%.
Looking ahead to 4Q, we expect MetLife Holdings adjusted earnings to return to more normal levels due to lower VII and more normal underwriting results in long-term care.
Corporate and Other adjusted loss was $131 million. This result was modestly more favorable than the prior year quarter, which had an adjusted loss of $135 million, excluding notable items. This quarter's results reflect lower expenses, partially offset by less favorable investment margins, as well as higher preferred stock dividends.
As we outlined in our 2Q earnings call, we expect an adjusted loss range of $325 million to $375 million in the second half of 2020, which implies corporate and other adjusted losses to be between to $250 million in 4Q. The Company's effective tax rate on adjusted earnings in the quarter was 20% at the bottom of our 2020 guidance range of 20% to 22%.
Now let's turn to VII in the quarter on page seven. This chart reflects our pre-tax variable investment income over the prior five quarters, including $652 million in the third quarter of 2020. This strong result was mostly attributable to the private equity portfolio, which had a 6.7% return in the quarter.
As we have previously discussed, private equities are generally accounted for on a one quarter lag, and the positive marks included in our third quarter results are in line with the outlook offered in our last earnings call.
There was also a positive contribution to VII from hedge funds, which had a 13% return in the quarter, as well as higher prepayment fees. In the fourth quarter, we expect VII to remain strong, but closer to the pre 2Q 2020 trend levels.
Now let's take a look at VII by segment on page eight. This table breaks out the third quarter VII of $515 million after-tax by segment. The three largest recipients of VII in the quarter were MetLife Holdings, RIS and Asia. The allocation of VII by business segment is based on the quarterly returns of their individual portfolios. That said, as a general rule, MetLife Holdings, RIS and Asia will account for approximately 90% of the total VII and roughly split one-third each.
Our new money rate was 2.76% versus a roll-off rate of 3.81% in the quarter. This compares to a new money rate of 3.41% and a roll-off rate of 3.72% in 2Q of 2020. The 65 basis point sequential decline in the new money rate was primarily due to tighter credit spreads in the quarter, purchases of short term investments to match short-term issuances in our capital markets business, as well as higher liquidity at the holding company.
We also purchased close to $1 billion in low yielding foreign government bonds, primarily JGBs, to invest cash flows associated with recurring premium income from our Japanese yen in-force block. Looking ahead, we expect new money yields in 4Q to remain at comparable 3Q levels as we maintain our disciplined approach to investing in high-quality assets despite persistently tight credit spreads.
Turning to page nine. This chart shows our direct expense ratio from 2015 through 2019 and the first three quarters of 2020. In 3Q, our direct expense ratio was 11.4%. This low ratio was driven by a reduction in direct expenses, increased availability of our dental services driving higher premium and a reserve release in corporate and other.
Year-to-date, our direct expense ratio was 11.9%. We expect the direct expense ratio to be higher than trend in 4Q, primarily due to seasonality. In our Group Benefits business, we incur higher enrollment and other costs prior to receiving premiums. Also, certain corporate initiative costs are expected to be higher in 4Q.
Overall, as Mitchell noted, we are increasingly confident that we will beat our full year target of approximately 12.3%. As we continue to deploy an efficiency mindset to increase capacity for reinvestment and to protect the margins of the firm.
I will now discuss our cash and capital on page 10. Cash and liquid assets at the holding companies were approximately $7.8 billion at September 30, which is up from $6.6 billion at June 30 and well above our target cash buffer of $3 billion to $4 billion.
The $1.2 billion increase in cash at the holding companies was primarily the result of a $1 billion preferred stock issuance in the quarter. The proceeds from this issuance were used in October to redeem $1 billion of preferred stock outstanding.
In addition, cash at the holding companies reflect the net effects of subsidiary dividends payments of our common stock dividend, share repurchases of $80 million in the quarter, as well as holding company expenses and other cash flows.
Next, I would like to provide you with an update on our capital position. For our US company's preliminary third quarter year-to-date 2020 statutory operating earnings were approximately $3.2 billion, while net income was approximately $2.8 billion.
Statutory operating earnings decreased by $200 million from the prior year period, primarily due to higher VA rider reserves and the impact of a prior year dividend from an investment subsidiary. This was partially offset by the favorable underwriting, higher separate account returns and lower operating expenses.
Year-to-date, net income was lower due to the decrease in operating earnings and other realized losses. These were partially offset by derivative gains in the current year. We estimate that our total US statutory adjusted capital was approximately $21 billion at September 30, up 12% compared to December 31, 2019.
Operating Income and derivative gains more than offset dividends paid. Finally, the Japan solvency margin ratio was 892% as of June 30, which is the latest public data.
Overall, MetLife delivered a strong quarter, bolstered by an increase in variable investment income and supported by the solid fundamentals from a diverse set of market leading businesses. In addition, we believe our capital, liquidity, and investment portfolio are strong, resilient, and well-positioned to manage through and come out stronger in this challenging environment.
Finally, we are confident 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'll turn the call back to the operator for your questions.
Thank you [Operator Instructions] Your first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Hi, thanks. Good morning. My first question is on the capital discussion. You guys mentioned you have a good amount of excess capital above the buffer you'd like to hold at the holding company, even if we adjust for the preferred stock that you paid back subsequent to the end of the quarter.
So just trying to get a sense of how you're thinking about kind of working your way back down to kind of the target buffer. And as we think about the environment normalizing combined with potentially holding on to some excess capital for potential M&A as we hear about some kind of new properties that could potentially see out there in the life space?
Hey. Good morning, Elyse. It's Michel. So let me begin by saying that at a high level, we have a well-diversified mix of market leading businesses and I think that diversity was on display and the largely offsetting impact from COVID-19.
In addition, we believe that our capital liquidity and investment portfolio are strong, resilient and well-positioned to manage through and come out stronger in this challenging environment.
And ultimately, I think this, we believe, underscores the durability of our all-weather next Horizon strategy and our consistent execution across a range of economic scenarios.
What I would say around sort of our capital management philosophy is that it has not changed. So we believe excess capital above and beyond what's required to fund organic growth belongs to our shareholders and should be used for share repurchases, common dividends or strategic acquisitions that clear a minimum risk-adjusted hurdle rate.
As you mentioned, as you referenced, after we complete our buyback authorization by year-end and the Versant acquisition, we expect to have a cash buffer well in excess of our $3 billion to $4 billion target, but no change in terms of our philosophy and how we would deploy excess capital.
Okay. That's helpful. And then my second question, I wanted to get a little bit more color on the group side. The non-medical results have been pretty strong this year. Can you kind of alluded to favorable dental results, and it sounds like that you continue into the fourth quarter at the low-end of your range.
How should we think about that business performing into 2021? Do you just have some initial thoughts, obviously, given that the business has been a little kind of volatile this year to see the impact of COVID?
Good morning, Elyse. It's Ramy here. So with respect to the non-medical health ratio, first, you've got the disability part of that business. Historically, you've seen a linkage, although be delayed linkage between recessions and increases in frequency and lower recoveries on the LTD book. We have not seen that yet. The results continue to track pretty favorably on the LTD side. But there is a lag, and we're continuing to monitor this pretty carefully.
On the STD side, the COVID impact has been a push for us, as we look forward. So higher coverage related claims have been offset by lower claims due to delays of elective surgeries, et cetera. So we continue to monitor the LTD book into next year.
But I would remind you, we can re-price just shy of 50% of that business every year. So our block is about 13% of our PFOs and about half of that can be re-priced every year. So this is a short term business, and we have a track record of being able to appropriately react to changes in the environment and get the rate changes that we need.
On the dental side, this year has been an exceptional year in the sense that we've had all the shutdowns and that are COVID related in the second quarter, and hence, the rationale and the reason why you've set up the unearned premium reserves.
As we look forward, in terms of the dental business, as John mentioned, as the quarter progressed, dental offices are more fully opened. And we started seeing utilization levels primarily in September that came in above our typical levels, as the patients made up for those services. And this was offset by the partial release of the dental premium that was set up in the second quarter.
Sitting here today, we expect to continue to see above typical utilization levels in the fourth quarter for dental. And you will also see us release the balance of the unearned premium reserve in the fourth quarter for the dental business.
Okay. That's helpful. I appreciate all the color. Thank you.
Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Thanks. First question is on MetLife Holdings. Just following the equitable risk transfer deal, a New York company with pretty attractive pricing on that deal. Would you say it makes you more likely to consider risk transfer for that business?
Good morning, Tom. It's John. So let me just start with - I don't think our commentary would change here. So one, as I said before, our focus is on optimizing MetLife Holdings. It's a large and stable well-seasoned in force. It's diversified. It's got a number of natural offsets. It's a good source of sustainable free cash flow.
That said, we've continued to take an external perspective in a third-party view of the business. And one, I think it makes us better at managing the business. Two, we need to do this work because it has got some complex - complexity to it. So you need to do the work upfront. And I think it can give us an opportunity to accelerate albeit appropriately, the release of capital and reserves.
So I think it was an interesting data point. I think data spreads are still wide. But certainly, as I said before, I think some increases in supply here can narrow that. And I don't think it's changed the sense of urgency we have on how we optimize the business.
Okay. Thanks. And just my follow-up is top line in group benefits, it's holding up pretty well and better than most peers. You see that trend continuing as you think about 2021?
Hey, it's Ramy here. We're clearly pleased with the performance this quarter, and we're exceptionally pleased with the performance, especially in the context of a difficult environment. I mean, think about the rise in unemployment rates, think about we're in the middle of a pandemic as the largest group life insurer in the country and where they're paying claims and fulfilling promises to our customers and beneficiaries.
So just to give you a sense on top line, for the full year, we would expect to be - from a year-over-year perspective, close to the bottom end of our PFO guidance range of 4% to 6% and that's even if you factor in the premium discounts that we've given in Dental. And I would remind you that you should expect to also see top line PFO growth be in double-digits next year with the addition of Versant. So if you're thinking about the top line growth, we still have a pretty robust view of next year.
Okay. Thanks.
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Thanks. Good morning. First, I had one follow-up to Tom's question. One piece of MetLife Holdings is participating in Life, which I assume would be a pretty attractive liability to re-insurers. But my question is, because it's participating in from pre-demutualization, is there any impediment to you looking for risk transfer for that specific block?
Hey, Ryan. It's John. I would just say to start that - I would say nothing is necessarily off the table, but there is a closed block, and then there's an open block that have participating policies associated with it. And I think, certainly, the closed block has different complexity associated with it.
Both are very well-performing blocks of business. And as I said before, we have a number of businesses that are actually complementary, have a number of natural offsets, which - some of which you actually saw come through this quarter. But yes, I think just to answer your question directly, certain blocks would have different complexities than others.
Got it. Thanks. And then on retirement spread, they did pick up quite a bit on an underlying basis ex VII in the quarter. And I heard your comment on the full year, but as we look a little bit longer into 2021, can you give us any sense of kind of the rough range to think about here?
So you may have heard John's opening remarks. We'll give - we're going to have an outlook call in February, and we'll give more color there. But look, I would just give maybe some qualitative commentary to start.
One is, we've seen this - we've seen some resiliency here in our spreads. And it goes back to just a diverse set of businesses we have, not just in terms of source of earnings, but even across spread businesses. We have diverse set of spread businesses, some of which do well in a lower rate, steeper curve environment. And then we have longer tail legacy blocks that obviously would have some spread pressure over a long period of time.
And so all things considered, I think we've seen a pretty resilient spread levels this year. Nonetheless, I think over time, there would be longer-term pressure on some of those other long-term blocks, but that ignores new business.
Got it. Thanks.
Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
Great. Thanks and good morning. So we're optimizing your businesses. Can you discuss the importance of the property Casualty business the article back in September highlighting potentially the division could be put up to sale. Now you probably don't want to speak to that specific article, but hoping you can discuss just where it fits strategically into our overall mix?
Yes. Hi, Nigel, sure. So first of all, I would say this is a well-run, good business, our P&C business. It's been consistently profitable. It generates mid-teen ROEs. And it does have an important strategic connection to our Group business. It also produces a steady source of non-correlated free cash flow.
So I think those are the comments that I would make about the business. And as you said, we're not going to speculate or we're not going to respond to any potential rumors here.
Okay. That's helpful. Thank you.
Your next question comes from the line of Eric Bass from Autonomous Research. Please go ahead.
Hi. Thank you. Just going back to RIS, volumes have also been pretty strong year-to-date despite a lower level PRT activities, so just can you talk about what's been driving this and how you see the outlook for liability growth?
Hey, Eric. It's Ramy here. So as we've talked about, there are a number of different parts or businesses within RIS, we have seen a significant pickup in sales and stable value deposits this year. A lot of that was driven by individuals seeking the safety, that stable value offers them inside their DC plans.
Offsetting that, if you think about the other parts of RIS, we've seen more pressure in the structured settlements business, the institutional annuity business. And a lot of those businesses are rate sensitive. So the value proposition to the customer, if you will, is diminished and lower rate environment. And so think about the volumes there, as being - continuing to be driven by the rate environment.
PRT, we're seeing it starting to pick up. As John mentioned, we're looking at a pretty healthy pipeline in Q4. But as we've talked about before, we're not chasing top line here. We continue to be highly disciplined, in terms of our pricing of every single deal that we look at, in the PRT space.
And then finally, as you probably have seen, we are now well into our entry into the UK longevity market. So far this year, we're close to $1 billion in sales, in terms of longevity swaps. And we continue to see a robust pipeline there, into Q4 into next year.
I would just come back and reiterate for RIS. We've seen a very healthy top line. We've seen very healthy growth in liability balances. But discipline is the name of the game here, in terms of looking for the returns, as opposed to chasing growth.
Thank you. And then maybe, if I could ask one for Steve Goulart, just hoping you could discuss your outlook for the commercial real estate sector? And how you see the current stresses affecting both, your commercial mortgage loan portfolio as well as CMBS more broadly?
Sure. Thanks, Erik. I think we've talked about this on a couple of prior calls. Obviously, it's an important topic. It's an important investment for us, in commercial mortgage loans.
We continue to be optimistic, about the sector. We like it. We continue to invest in the sector. I think back actually to some of the comments I made, I think it was actually in perhaps a response to one of your questions.
But we did see deferral requests, as we entered into the COVID pandemic. I think I mentioned on our last earnings call that those got to about 9%, of our principal balance outstanding, but that appears to be sort of where we topped out.
And what's most important now is, as those are rolling off the deferral cost, we've seen 60% of them roll off. And they've all gone back to resuming payment. So I think that supports our underlying view of strength in this sector, Eric. And it continues to be important for us.
Thank you.
Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.
Thanks. I wanted to ask about Asia sales. They're down year-over-year, but up pretty sharply, on a sequential quarter basis. Just curious, what's going on there? We had heard from another company, that there was a pull forward of sales because of some rate changes that helped their sales growth. Just wondering, if there was any kind of similar dynamic at met? Or more specifically what you're seeing, in terms of driving that growth?
Suneet, this is Kishore. Let me say that the premise of your question is correct in the first part, so let me - based on your question, let me start by putting a little bit of context to our sales performance in Q2. In the second quarter, lockdowns and social distancing restrictions had a significant impact on our sales. And Q2 sales for Asia overall dropped 44%, 55% in Japan compared to prior year.
To overcome this challenge, we took several distribution and product actions. As you're well aware of all the past investments, we've been making in sales platforms. And on top of that, we implemented several digital solutions to augment our face-to-face interactions. And we also stepped up our sales management activities as well.
And because of these actions, we've seen a very strong recovery in Q3 sales, as you rightly pointed out. Q3 sales increased sequentially, 63% for overall Asia, 85% in Japan. And our year-over-year drop is now reduced to 16%. So you asked about the re-pricing that was we did re-price our level premium FX product. It was contributing, but not a major factor in driving our sequential growth.
So another way to look at this is to how we're seeing, how this is going to play out for the rest of the year. We expect the impact of our actions that we've taken so far to sustain our Q3 momentum. While the environment is still challenging for face-to-face sales environment, we're seeing a pickup in our sales pipeline, and you should expect a positive year-on-year growth for Asia as a whole.
Got it. Thanks for that. And then I guess - yes. No, it does. Another quick one for John on the VA block. Just curious, as you've mentioned something about reserves on a statutory basis, but is this block sort of past the peak reserve funding period? Or are you still sort of building reserves as the block matures? And at what point do you think you'd be at sort of peak reserves? Thanks.
Good morning, Suneet. Just as a reminder, we have roughly $50 billion of VA account balances. Half of it is a living benefit guarantee. As we showed you back at Investor Day, and that has been rolling off consistently over time.
Having said that, there are certain components of that block that are building reserves and others that are, I'd say, kind of have - kind of settled down in terms of the reserve build. So it depends on which vintage you're talking about.
Is there any way to give us a percentage of the block at that peak reserves versus the block that's still building?
I probably have to get back to you on that. I don't have it handy.
Okay. Thanks.
Yes.
Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.
Hi. Good morning. I had a couple of questions. First, on your Latin America business, sales were down a decent amount year-over-year. I'm assuming that's mostly because of COVID. And to the extent it is, can you give us any color on whether things got better as the quarter went on? And how do you see things working out through the next quarter or two? And then I have another one.
Yes. Hi, Jimmy. This is Oscar. So let me talk about the quality of our top line overall. So as you said, sales are down because of social distancing because of COVID that affects the entire region. But if you think about it, the sales that we're performing are all done remotely is really good performance considering the potential after social distancing goes away.
But if you think about our premiums and fees, and you exclude PF. And let me say that PF in Chile, sales are really down because most of Chileans are deferring their decision to retire. So PF sales are really down. If you exclude PF impacts in our premiums and fees, year-over-year, we are growing above mid-single digits, which is pretty healthy considering the COVID environment. And that speaks about the quality of our persistency, not just the resilient sale [ph].
So we are very confident about our topline health, particularly if you strip out the PES, which, as I said are, obviously, related to a few number of silencing to retire. So we're very confident as well that as our agents are for core channels, they learn to remotely as they can start dealing face-to-face with these customers, sales are going to go back to normal and it's happening. So we're very happy about the potential.
And then maybe a bigger picture question. You've done a few sort of niche acquisitions in Group benefits. But - and obviously, you're deploying capital towards buybacks as well. Given your - where your stock price is, can you comment on your interest in sort of larger acquisitions and how you think about those because there are - there is a decent amount of activity in the business lines that you're in. Are you interested in large acquisitions as well? Or not as much given sort of the potential accretion from buybacks at this price?
Hi, Jimmy. Look, I mean, I go back to our strategy and what we shared with you at Investor Day last December. If I look at our portfolio, especially factoring in some of the recent acquisitions, Versant Health, that in [Indiscernible] PetFirst and Digital Willing [ph] I don't - we don't see gaps in terms of the portfolio that - of businesses that we have. We see plenty of organic growth opportunities.
And we're focused on getting the synergies and whether cost or revenue synergies from those acquisitions that I referenced. So hopefully, that gives you a bit of sort of insight into our thinking here.
Thanks.
Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.
Good morning and thank you for taking my questions. My first question is, when looking at the annual assumption review, should we think about where there's going to be some ongoing run rate earnings impact into some of your segments?
Good morning, Humphrey. Its John. No, we don't expect any material changes in ongoing run rate earnings as a result of the assumption review.
Got it. My second question is, I think, in Michel's prepared remarks, you talked about entering into absence management business. How should we think about the corresponding expense impact from the investment into the business? Especially since some of your peers have incurred quite a meaningful labor expenses for this business as they ramp up?
Hi, Humphrey. Its Ramy here. So in terms of our actual expenses relating to our disability business this quarter, we're running right on line with expectations. So, we're not really seeing any impact here whatsoever. What Michel was talking about is some of our broader investments in technology and platform around disability and absence management. All of those numbers on all of those investments have been baked into our run rate that you've seen over the past many quarters.
And our investments here are in areas like pricing sophistication, contract competitiveness, clinical model in terms of the return to health initiatives, which are critical for the LTD business. And we've already seen positive business outcomes and end-to-end disability and absence management solution, which Michel is talking about is already resonating in the market with the larger employers.
It includes things like the digital interface for claimants, AI-driven automated claim processing, sophisticated data analytics for employers so that they can understand their workforce. And we're expecting to see growth here, although growth with discipline in this area going forward.
And Humphrey, it's John. I would just add just to Ramy's point there. In a little bit the way you asked the question, this is all part of the - as we refer to as the efficiency mindset concept, where we continue to drive efficiencies every quarter in the firm and look for opportunities then to redeploy that into strategic reinvestments to support our market leading businesses and doing all of that within our run rate costs. So I would just go back to that point. We made that point at Investor Day, and I think it's a key component for us as we move forward.
Got it. Appreciate the color.
Your next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
Thank you. Another licensure that reported last night talked about elevated non-COVID mortality from delaying care, heart attacks and deaths of despair in their book. As it relates to the Group Life business and benefits, are you seeing signs of this?
No, we're not.
Okay. And then, are you seeing any signs of permanent change of behavior coming out of COVID that may impact claims utilization trends on a more secular basis? Thank you for the answers.
Not yet.
And at this time, there are no further questions. I'd now like to turn the call back to Michel Khalaf.
Thank you. In closing, I believe our performance in Q3 and so far in 2020, underscores the sense of urgency and laser focus and how this leadership team is executing on our Next Horizon strategy to create long-term shareholder value.
I am thankful and proud of the effort and commitment of our employees around the world, who are going above and beyond to deliver for our customers. Please be safe and talk soon.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.