MetLife Inc
NYSE:MET
Earnings Call Analysis
Q3-2023 Analysis
MetLife Inc
In their third-quarter earnings call, the management highlighted improved financial performance with adjusted earnings of $1.5 billion, marking a 35% increase year-over-year. This rise is attributed to higher variable investment income, strong interest margins, and favorable underwriting, signifying a robust growth trajectory even in a tumultuous market. The company remains well-positioned with credit losses being modest and the overall investment portfolio performance aligning with expectations despite rising interest rates and currency fluctuations.
The U.S. Group Benefits sector reported a 16% rise in adjusted earnings to $483 million, with the Group Life mortality ratio better than forecast, indicating effective risk management. Retirement and Income Solutions (RIS) witnessed a 60% leap in adjusted earnings at $409 million, propelled by favorable investment margins and sales of structured settlement products. In Asia, the financial upturn was evident with a 23% increase in adjusted earnings at $369 million, and despite a projected sales dip in the fourth quarter, year-end expectations align with the high-end guidance range. These sectoral performances collectively solidify the company's outlook for achieving or surpassing their annual financial targets.
The effective tax rate on adjusted earnings stood at 23%, which is within the predicted corridor of 22% to 24% for the year. Variable investment income, although lower than historical averages, is anticipated to stabilize, suggesting judicious fiscal management and strategic adaptations to the economic developments during the year.
The company's commercial mortgage loan (CML) portfolio demonstrates robust health, with minimal losses projected, showcasing strong risk controls and strategic asset management. Liquidity and capital position are also healthy, with cash and liquid assets at the holding companies reaching about $4.9 billion, surpassing the target buffer. Share repurchases underscore the company's commitment to returning value to shareholders, and the U.S. statutory adjusted capital increase by 2% to approximately $17.7 billion reflects financial solidity. In Japan, the solvency margin ratio hovers around 600%, and the management has indicated no concerns over capital perspective or dividend capacity.
The company has continued its share repurchase program with approximately $250 million bought in October. Moreover, a $1 billion debt issuance in July is to pre-fund a maturity, signaling a conservative approach to managing financial obligations and strategic leverage.
Core spreads are expected to continue at a strong pace into the fourth quarter, with estimates in the range of 135 to 140 basis points, maintaining the momentum from the previous quarter.
In the Group Benefits sector, current indicators point to high persistency in national accounts and a favorable dynamic with rate actions, suggesting a stable and potentially growing revenue stream from this business line as the company moves into the new year.
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Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2023 Earnings Release Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. Before we have started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings.
With that, I will now turn the call over to John Hall, Global Head of Investor Relations.
Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Third Quarter 2023 Earnings Call. Before we begin, I'd point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review.
On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Also, last night, we released a set of supplemental slides, which address the quarter. The slides are available on our website. John McCallion will speak to them in his prepared remarks if you wish to follow along. An appendix to the slides features GAAP reconciliations and other information, which you should similarly review. As usual, after prepared remarks, we will host a Q&A session. We will end Q&A just prior to the top of the hour. [Operator Instructions].
With that, over to Michel.
Thank you, John, and good morning, everyone. As you can see from the report we posted last night, MetLife delivered another quarter of strong underlying results with sustained business momentum. MetLife's capacity to perform across a wide range of economic scenarios, there's a testament to the resilience of our all-weather strategy and is characterized by our unyielding focus on execution. And concentrating on those elements within our control, such as balance sheet security, investment performance, reserve adequacy, responsible growth, expense efficiency and capital deployment, to name just a few we have positioned MetLife to generate significant value for our shareholders and other stakeholders for many years to come.
Turning to the quarter. We reported adjusted earnings of $1.5 billion or $1.97 per share. Notable items in the quarter included our annual actuarial assumption review and other insurance adjustments, which had a positive impact of only $14 million or $0.02 per share on adjusted earnings. Excluding notable items, adjusted earnings per share were $1.95, up 43% from a year ago. As we previously indicated, Variable investment income of $179 million fell below our quarterly outlook expectation. Private equity returns totaled 1.4%, while real estate equity risk trailed at minus 3%.
In the aggregate, net income for the third quarter was $422 million compared to $1.1 billion in the prior year period. The third quarter result reflects the negative impact of certain required accounting adjustments associated with our previously announced reinsurance transaction. Net derivative losses related to interest rate and foreign exchange hedges helped to protect our balance sheet, further reduce net income. Our investment portfolio has stayed up in quality and continues to perform well. Underscoring that quality the credit metrics associated with our real estate portfolio remain largely unchanged sequentially, and we did not incur material credit losses during the third quarter.
Moving to MetLife's business performance in the quarter. I will start with our U.S. Group Benefits results. Adjusted earnings, excluding notable items, totaled $483 million, an all-time high and up 16% from a year ago. Underwriting results in the quarter for both Group Life and Non-Medical Health were outstanding. Year-to-date sales are up 11%, while adjusted PFOs are up more than 4% in the quarter reflecting the impact of our contracts and within our 4% to 6% outlook range, which we expect to achieve for the full year.
In Group Benefits, we have invested significantly to integrate with the employer benefits ecosystem and enhance our enrollment capabilities and perhaps more important, our reenrollment capabilities. With a significant portion of our overall sales and group benefits coming from employee paid products, our efforts to enhance enrollment and take-up rates are critical. Speaking of enrollment, we are about to enter open enrollment season. This is an important opportunity to review our employee benefit needs and refresh selections for the upcoming year, something I encourage all of you to do. Several of the investments that I referenced aim to make this process easier for participants.
Further, we are activating emerging technologies that will help accelerate some of our group benefits initiatives, particularly around underwriting, claims and the customer experience. We believe the impact of these investments will enable us, over time, to further leverage our size to drive greater scale advantage.
Looking to Retirement and Income Solutions, or RIS, adjusted earnings, excluding notable items, totaled $409 million, up 60% from the prior year, driven by higher recurring interest margins, better variable investment income and higher asset bases. Sales in the quarter were very strong across a range of products, including pension risk transfer with roughly $1.5 billion booked as well as structured settlements and U.K. longevity reinsurance. We are poised to generate close to $3 billion or more of sales in each of these 2 high-return product categories for the full year. Just after the close of the third quarter, we released our 2023 pension risk transfer poll, an example of our thought leadership in the space, which we have been publishing for the past 8 years. The poll, which serve plan sponsors with derisking goals, revealed several important observations relevant to the growth prospect for the PRT market. Let me offer some examples.
Following record PRT sales in 2022, market activity is expected to remain strong for the foreseeable future. Among companies who plan to derisk 9 of 10 companies plan to completely divest all their defined benefit pension plan liabilities. And finally, 85% of plan sponsors expressed concern over missing an attractive window to secure an annuity buyout at competitive rates. These findings confirm what I have said before, we should continue to see a strong pipeline for our pension risk transfer business.
Now shifting over to Asia. Adjusted earnings excluding notable items of $369 million were 23% above a year ago on better variable investment income. Sales in the region on a constant currency basis were up 5%, led by life insurance in Japan and Korea. For Latin America, adjusted earnings excluding notable items totaled $199 million. Further, Latin America posted healthy 16% gains in both sales and adjusted PFOs on a constant currency basis. Our digital initiatives don't stop at the U.S. border, they extend around the world, for instance, in Latin America we launched a digital platform that seamlessly integrates insurance solutions into the customer journeys of our LatAm business partners such as banks, financial institutions, retailers and others which we expect will lead to even more responsible growth in the region over time.
Expanding on the subject of responsible growth. In the third quarter, we released our Value of New Business, or VNB statistics for the full year 2022. And the results are powerful. To summarize, MetLife's deployed roughly $3.7 billion of capital to support the origination of new business in 2022. This capital was put to work at an average internal rate of return of 17%, with an expected payback period of approximately 6 years. The value of new business generated in 2022 is around $2.3 billion which represents the net present value of distributable cash flows in excess of the hurdle rate. When we reference terms of MetLife, like responsible growth and disciplined capital deployment, their application in our business is grounded in the systematic use of VNB. It is hard to overestimate the positive impact this analytical tool has had in managing our business starting with the deeply embedded practice of using IRRs and product pricing and ending with the establishment of business unit level, VNB goals and targets.
Simply put, VNB guides our effort to target and prioritize capital efficient and shorter payback business and measure our progress and success in doing so. Over time, we've sought to maintain the right balance of capital deployment across organic growth, acquisitions and share repurchase to drive value for shareholders. While we bought back $11.1 billion of our shares, and executed $2 billion of acquisitions from 2019 to 2022. We similarly deployed $13.5 billion to support responsible growth over the same period.
Moving to quarterly capital and cash, MetLife remained active with capital management during the third quarter. We paid about $400 million of common stock dividends to shareholders, and we repurchased nearly $800 million of our common stock. In addition to our activity in the third quarter, we repurchased roughly another $250 million of our common stock during the month of October. Year-to-date through October, we have repurchased about $2.5 billion of our common shares and there is approximately $2.7 billion remaining on our repurchase authorization. At the end of the quarter, we had $4.9 billion of cash at our holding companies which is above the top end of the $3 billion to $4 billion liquidity buffer we maintain.
Before I close, let me provide a quick update on our pending reinsurance transaction with Global Atlantic. At this juncture, we have received all necessary regulatory approvals, and we expect to close in short order. We do not anticipate any material changes to the terms announced in May.
In closing, we hosted a strategy session with our Board of Directors during the first week of October. This recurring annual meeting presents us with an opportunity to pressure test our strategy and to assess progress made toward our next Horizon investor commitments. On that front, we are on track to exceed each commitment made at our December 2019 Investor Day, and I am confident we will continue to deliver for our shareholders and other stakeholders.
Now I'll turn it over to John to cover our performance in greater detail.
Thank you, Michel, and good morning. I will start with the 3Q '23 supplemental slides, which provide highlights of our financial performance, including details of our Annual Global Actuarial assumption review. In addition, I'll provide updates on our value of new business metrics, our liquidity and capital positions as well as our commercial mortgage loan portfolio.
Starting on Page 3, we provide a comparison of net income to adjusted earnings in the third quarter. Net investment losses include the mark-to-market impact on securities that are expected to be transferred with the pending reinsurance transaction with Global Atlantic that we announced at the end of May. For GAAP purposes, any increase in gross unrealized losses on these securities are required to be realized through net income until we close the transaction. Also, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. In addition, we had net derivative losses due to higher interest rates and strengthening of the U.S. dollar versus multiple currencies, primarily the Chilean peso and [indiscernible]. That said, net derivative losses were partially offset this quarter by market risk benefit or MRB remeasurement gains due to higher interest rates.
Overall, the portfolio remains well positioned. Credit losses continued to be modest and the hedging program performed as expected. The table on Page 4 provides highlights of our Annual Actuarial Assumption Review and other insurance adjustments with a breakdown of the adjusted earnings and net income impact by business. Overall, the impact to adjusted earnings and net income was negligible.
In Group Benefits, we had a favorable impact from assumption changes in individual disability, primarily due to lower incident rates and favorable recoveries. In Retirement and Income Solutions, or RIS, we lowered our near-term assumption for mortality improvement, which resulted in an economic benefit given the longevity products in this business. In Asia, the net unfavorable impact was due to lapse rate changes across life and accident & health products in Japan, as well as lowering lapse rates and expected fund returns for variable life products in Korea.
On Page 5, you can see the third quarter year-over-year comparison of adjusted earnings by segment, excluding notable items associated with the Annual Assumption Review and other insurance adjustments in both periods. Adjusted earnings were $1.5 billion, up 35% and 33% on a constant currency basis. The primary drivers were higher variable investment income, or VII, strong recurring interest margins and favorable underwriting margins. Adjusted earnings per share were $1.95, up 43% and 40% on a constant currency basis.
Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were $483 million, up 16% versus the prior year period. The key drivers were favorable underwriting margins and solid volume growth. The Group Life mortality ratio was 83.6%, favorable to the prior year quarter of 85.7% and below the bottom end of our annual target range of 85% to 90%. As a reminder, mortality results tend to be more favorable in the third quarter, so we would expect our Group Life ratio to be back within the 85% to 90% range in the fourth quarter and full year of 2023.
Regarding non-medical health, the interest adjusted benefit ratio was 69% in the quarter or 70.4%, excluding the favorable impact related to the annual assumption review that I mentioned earlier. And at the low end of its annual target range of 70% to 75%.
Turning to the top line, Group Benefits adjusted PFOs were up 3% year-over-year. Taking participating contracts into account, which dampened growth by roughly 1%, the underlying PFO were up approximately 4% year-over-year, primarily due to solid growth across most products. Including continued strong momentum in voluntary and was within our 2023 target growth range of 4% to 6%. In addition, Group Benefit sales were up 11% year-to-date, driven by strong growth across most products and markets. RIS adjusted earnings were $409 million, up 60% year-over-year. The primary driver was favorable investment margins due to higher recurring interest and variable investment income. Solid volume growth year-over-year also contributed to the strong performance.
RIS investment spreads were 130 basis points. Spreads, excluding VII, were 138 basis points, up 26 points versus Q3 of '22 primarily due to higher interest rates as well as income from in-the-money interest rate caps. RIS adjusted PFOs, excluding pension risk transfers, were up 75%, primarily driven by strong sales of structured settlement products, growth in U.K. longevity reinsurance and postretirement benefits. With regards to PRT, we added transactions worth approximately $1.5 billion in Q3 of '23, bringing our year-to-date total to roughly $3.5 billion.
Moving to Asia. Adjusted earnings were $369 million, up 23% and 25% on a constant currency basis, primarily due to higher investment margins. Asia's key growth metrics were solid, as journal on assets under management on an amortized cost basis as well as sales both grew 5% year-over-year on a constant currency basis, driven by growth across most of the region. In Japan, sales on a constant currency basis were up 3% year-over-year, driven by strong life sales due to the ongoing momentum of a single premium FX Life product that was relaunched April 1 of this year. In other Asia, sales on a constant currency basis were up 8% year-over-year, primarily driven by strong life sales in Korea in advance of a prospective regulatory change that took place on September 1, and that impacts low cash value whole life products.
Looking ahead, while we anticipate Asia year-over-year sales will decline in the fourth quarter, we expect full year 2023 sales growth to be at the top end or exceed our annual guidance range of mid- to high single digits. Latin America adjusted earnings were $199 million, up 26% and 8% on a constant currency basis, primarily due to solid volume growth and favorable underwriting margins. Latin America's top line continues to perform well as adjusted PFOs were up 32% and 16% on a constant currency basis. And sales were also up 16% on a constant currency basis, driven by strong growth in Mexico and Chile and solid persistency across the region.
EMEA adjusted earnings were $70 million, up 43% and 40% on a constant currency basis, primarily due to higher volume growth, recurring interest margins as well as underwriting margins running favorable to expectations. This was partially offset by less favorable expense margins year-over-year. EMEA adjusted PFOs were up 9% on both a reported and constant currency basis, and sales were up 20% on a constant currency basis. Reflecting strong growth across the region.
MetLife Holdings adjusted earnings were $206 million, up 23%, primarily driven by higher variable investment income. Corporate and other adjusted loss was $262 million compared to an adjusted loss of $258 million in the prior year quarter. Higher expenses, including interest on incremental debt were partially offset by higher net investment income. The company's effective tax rate on adjusted earnings in the quarter was approximately 23% and within our 2023 guidance of 22% to 24%.
On Page 6, this chart reflects our pretax variable investment income for the prior 5 quarters, including $179 million in Q3 of '23. The private equity portfolio of $14.9 billion had a plus 1.4% return in the quarter. Real estate equity funds of $2.2 billion had a minus 3% return. As of now, we anticipate PE returns to remain consistent with the second and third quarter with a modest improvement in real estate funds in the fourth quarter. Therefore, VII would more closely resemble second quarter results.
On Page 7, we provide VII post-tax by segment for the prior 5 quarters. As we have noted previously, each of the businesses hold its own discrete investment portfolios, which have been built to match its liabilities. As reflected in the chart, Asia RIS and MetLife Holdings continue to hold the largest proportion of VII assets given their long-dated liability profile, while Corporate and Other continues to hold higher VII assets than historical levels.
Now turning to Page 8. The chart on the left of the page shows the split of our net investment income between recurring and VII for the past 3 years and Q3 of '22 versus Q3 of '23. While VII has had lower than trend returns over the last few quarters, recurring income, which accounts for approximately 96% of net investment income was up approximately $700 million year-over-year, reflecting higher interest rates and growth in asset balances.
Shifting your attention to the right of the page, which shows our new money yield versus roll-off yield over the past 3 years, new money yields continue to outpace roll-off yields in the recent quarters. In this quarter, our global new money yield continued its upward trajectory coming in at 6.26%, 156 basis points higher than the roll-off yield. We expect this favorable trend to continue assuming interest rates remain near current levels.
Turning to Page 9. I'll provide a few updates on our commercial mortgage loans. First, let me say that we are pleased with the commercial mortgage loan or CML portfolio, which continues to perform as expected. As we have noted last quarter, our real estate team [indiscernible] all U.S. office valuations through June 30, assuming a 25% peak to trough valuation decline. In this quarter, the team shifted its effort to revaluing other CML asset classes, which have not been under the pressure seen in the office sector. Not surprisingly, the average of the increased only slightly as a result with our CML portfolio now at an average LTV of 63% up from 62% in the second quarter of '23 and an average debt service coverage ratio of 2.3x, which represents no change versus 2Q '23. The modest increase in LTVs and stable debt service coverage rate are further indicators of the disciplined approach we take to investing in this asset class. The quality of our CML portfolio remains strong with only 1.6% of loans having LTVs more than 80% and DSCRs less than 1x.
With regards to CML loan maturities, we now have successfully resolved almost 90% of the portfolio scheduled to mature in 2023 and our expectation remains for minimal losses on the portfolio. Our CML portfolio scheduled maturities over the next 3 years are very manageable. 10% in 2024, 13% in 2025 and 16% in 2026.
Now let's switch gears to discuss expenses on Page 10. This chart shows a comparison of our direct expense ratio for the full year of '22 as well as the first 3 quarters of '23. In Q3 of '23, the ratio was 12.3%. As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. Our Q3 direct expense ratio benefited from solid top line growth and ongoing expense discipline. While we would expect our direct expense ratio to be higher in Q4, consistent with the seasonality of our business, we are confident we will beat our full year direct expense ratio target of 12.6% in 2023 despite the challenging inflationary environment. We believe this demonstrates our consistent execution and focus on an efficiency mindset.
Now let's turn to Page 11. This chart reflects new business value metrics for MetLife's major segments for the past 5 years, including an update for 2022. As mentioned by Michel, MetLife invested $3.7 billion of capital in '22 to support new business. This was deployed at an average unlevered IRR of approximately 17% with a payback period of 6 years, generating roughly $2.3 billion in value.
I will now discuss our cash and capital position on Page 12. Cash and liquid assets at the holding companies were approximately $4.9 billion at September 30, which is above our target cash buffer of $3 billion to $4 billion and higher than our $4.2 billion at June 30. The cash of the holding companies reflects the net effects of subsidiary dividends, a $1 billion senior debt issuance in July, payment of our common stock dividend, share repurchase of roughly $800 million in the third quarter as well as holding company expenses and other cash flows. In addition, we have repurchased shares holding approximately $250 million in October.
For our U.S. companies, preliminary third quarter year-to-date 2023 statutory operating earnings were approximately $3.1 billion, while net income was approximately $2.1 billion. Statutory operating earnings increased by approximately $1.6 billion year-over-year, primarily driven by favorable underwriting, partially offset by higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $17.7 billion as of September 30, 2023, up 2% from June 30, 2023. This increase was primarily due to operating earnings, partially offset by dividends paid and net investment losses. Total U.S. statutory adjusted capital has absorbed a negative impact of roughly $300 million associated with the investments expected to be transferred to Global Atlantic, which will be recovered upon closing.
Finally, we expect the Japan solvency margin ratio to be approximately 600% as of September 30, which we based on statutory statements that will be filed over the next few weeks.
Let me conclude with a few points. First, while VII remains below historical returns, core spreads remain robust and continue to benefit from higher yield environment. Second, the underlying strength of our business fundamentals continues to be displayed with strong top line growth, coupled with disciplined underwriting and expense management. Finally, our strong value of new business metrics provide further evidence of our disciplined approach to deploying capital to its highest and best use, consistent with our all-weather strategy.
To close, MetLife remains in a position of strength given our balance sheet, free cash flow generation and diversification of our market-leading businesses, and we are committed to deploying capital to achieve responsible growth and building 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] And we have a question from Ryan Krueger with KBW.
Can you provide some color on how January 1 renewals are shaping up so far in Group Benefits and also both in terms of persistency in the pricing dynamic in the market?
Ryan, it's Ramy here. I would say we're still in the middle of the season. Recall, the middle part of the market is still kind of active right now. But from everything we can see so far, we are doing extremely well here. Persistency in national accounts continues to be exceptionally high. We are seeing a tick up in the jumbo activity into next year as well, building on what we're doing this year. And with respect to our rate actions, we are getting the rates that the book needs in the market and continue to see that both in terms of new business as well as persistency.
And then in terms of capabilities within in Group Benefits and M&A, you've done a couple of things to round out the portfolio. Is there anything else you'd be interested in at this point? Or do you feel like you have what you need to grow organically?
Yes. Ryan, it's Michel. Yes. I mean I think we're very pleased with the capabilities that we've built with the transactions that we've done in the last few years in Group Benefits. I think they've been highly complementary, and we're very pleased in how they've performed. Think about our Pet First acquisition, our Versant acquisition. And we'll continue to invest in this business. We've said all along that this is a business where scale matters and to continue to meet customer expectations, you have to continue to make meaningful investment, something that we've done, and I think that's translating in terms of the momentum we're seeing, whether it's in variable benefits or in other areas. Whereas we don't see any gaps when it comes to our product set or our capabilities. We're always open to opportunities if we think those make strategic sense, if we think they can help us accelerate revenue growth, whereas we see a path to continue to grow at within the range that we provided organically if there was something that would help us accelerate that, that would make sense strategically. And that would make sense from a valuation perspective as well. We look for the type of transactions that are accretive over time that clear a minimum risk-adjusted hurdle rate. And we're always going to also compare any transaction to other potential uses of capital.
At the end of the day, our focus pillar is about deploying capital to its highest and best use. So hopefully, this helps.
Next, we go to the line of Tom Gallagher with Evercore ISI.
A couple of questions on capital. The SMR in Japan seems kind of low at 600% now. Is that something to watch? Or should we really be more focused on ESR since we're going to be pivoting to that new regime pretty soon. So that's the first question. The second is just the $1 billion increase in debt. Is that part of the permanent capital structure? Or are you prefunding a maturity there?
Tom, it's John. So first question on SMR. Yes, I think it's a balance when you start to look at these metrics. Obviously, we're looking forward at ESR higher rates are positive to ESR. So I think there's a transition happening in the market. We don't have any concerns with being at of roughly 600% right now. Also, we have other tools if needed, to the extent that rates would rise further, we have other internal reinsurance transactions we could do as of now. So no concerns from a capital perspective or dividend capacity perspective.
What was your second question?
The $1 billion debt increase.
On debt, yes, so we issued the debt in July. That is not considered permanent capital. That is to prefund a maturity in the first quarter of next year.
Okay. And then just one other quick one. The slightly improved real estate returns expected for alternatives in 4Q. Is that because you have some property sales resuming and related gains? Or is that just marks being stable?
Yes. I think it's more of the latter. I think it's just -- we've -- in a way, it's trailing a little bit of what's happened in PE, where we had kind of the markdown and then we've built -- you've kind of gotten to a trough for some time. So before we see kind of that U-shaped recovery. So it's more of that.
Next, we move on to Jimmy Bhullar with JPMorgan.
First had a question on just retirement spreads. Should we assume that core spreads in the RIS business will maybe compress a little bit as you go through 2024, given expiration of caps? Or are there other puts and takes?
Jimmy, it's John. As you said, so good strong core spreads this quarter, similar to last quarter, just to you guide to fourth. We think something in the same vicinity, maybe 135 to 40 is a good range to think about for fourth quarter. And then as you mentioned, over the course of '24, we will have some expiration of some of the caps. As we said before, this whole thing was constructed in a way for the caps to provide us time for the long rates to find their way into spreads. And those things, you've seen that come through in a healthy way. So we'll give some more guidance on that on the outlook call and provide some more detail as to how to think about 2024.
Okay. And then on the CRE portfolio, the metrics almost seem deceptively too good and stable. But you mentioned you've resolved 88% of your 2023 maturities. Are you resolving them similar to how you would have done in the past like in terms of either extending them yourself or third-party financing or stuff? Or are there differences in how the loans are being -- how the maturities are being resolved now versus maybe a few years ago when things were much more stable than CRE?
Yes, it's John again. Thanks. I take issue with your deceptively comments. But besides that, only kidding. But on the maturities, it's roughly speaking, we've talked about these contractual extension options. That's been about 60% of the maturities and how they've all had contractual right. If you're in good standing, you meet all the financial tests. They tend to be in the mid-50s LTV. So strong financial metrics, almost 30% as well in terms of paid off or refinanced. And then the remainder is probably 10% of that is loan modifications and then the remaining small single digits is the foreclosure or net payoff, which is honestly, that level is somewhat similar to what we've seen in the past. So nothing out of the ordinary given the environment. So I think overall, roughly in line with historical, maybe the people on the contractual options, those are floating rate. They're tending to wait to see when they lock in their long-term rates. So maybe there's been a little extra in terms of contractual extension options, but nothing out of the ordinary. I think is the way to think about it.
And the remaining 12%, that's just like a matter of time and you're going through stuff? Or is there something unique about those properties either by property location or otherwise?
Yes. And the -- the levels I gave you just now, they incorporate what we expect for the remaining 12%. So nothing unique or out of the ordinary. So I think -- I think the punchline we would share is everything is effectively in line with what we said in the first quarter when we gave an outline of what our expectation was for the year.
And our next question is from the line of Suneet Kamath with Jefferies.
Just first question on the value of new business side. So the amount of capital you've been deploying has sort of been the $3.7 billion. It's pretty similar to what you did in '18 and '19. But given where interest rates are, are you seeing incremental opportunities to deploy more capital in the business? And then relatedly, should we expect that IRR of 17%, which I acknowledge is pretty healthy, does that have upside in this rate environment?
It's John. Good question. So just in terms of deployment of capital, remember last year, I mean, just one reason for that is we had IBM case that came through in the third quarter of last year. But nonetheless, like you pointed out, very strong unlevered IRRs, strong payback periods. Very pleased with the results. We saw some great results actually in Japan as well. That's actually helping boost the VNB as well over the course of '22.
In terms of IRRs, some of the things we've talked about is we do see, I think, broadly speaking, yes, I mean we're starting to see demand for these annuity-type products to pick up, right? So I think a volume aspect is emerging. I'd say it's still emerging in the institutional and retail space, broadly speaking. In terms of IRR and pricing, typically, the rate environment will price in. These -- the counterparties were buying or selling, however you want to look at it, they're pricing in the current rate environment. So I wouldn't expect a big uptick in IRRs. I think 17% IRR is a pretty healthy level to be at. But we'll see how things evolve.
Okay. Got it. And then just on capital, should we expect a pickup in the sort of the pace of buyback once you close the Global Atlantic deal?
Yes. Suneet, it's Michel. So really pleased with the fact that we've secured all regulatory approvals for the Global Atlantic transaction. As we had mentioned, we expect that to add about 60 points to our RBC, and we consider that to be excess capital. When we announced the transaction, we increased the authorization by $1 billion, and that was to signal the sustainability of our buyback activity. We also have a track record post major divestitures of returning capital and a deliberate and expeditious manner. So I would suggest that we would conduct ourselves in the same manner here.
And our next question is from [ Wes Carmichael ] with Wells Fargo.
A follow-up on the Group business. It seems like we're seeing pretty favorable results across the industry, maybe not deceptively good but definitely good. But just wondering what your outlook is for the industry to retain better margins in that business or if it's kind of given back over pricing in the next couple of years?
It's Ramy here. I mean, look, I think a couple of points to note here. So one, we're, of course, extremely pleased with our record quarter here, which is, by the way, a record even if you exclude the notable in the quarter. In general, what we tend to see in our results is there's seasonality. And while the dynamics are different by product line, in aggregate, the third quarter tends to be the most favorable over the course of the year. If I think for us, specifically on a go-forward basis, you should think about the mortality ratio, which is below the guidance for this quarter. Think about that coming back in the fourth quarter to be within line for our guidance range.
The other one I would perhaps talk about here is disability. I mean disability continues to perform really well, both with respect to incidents and recovery levels. Some of this favorability is stemming from a favorable macro environment. And we believe that favorability will over time. It's not going to happen in any given quarter, but will, over time, come back into pricing. But having said that, and I'll refer back to kind of Michel's comments on having real focus and strategic intent here in terms of how we're investing in this business. The favorability we're seeing in disability is coming from solid underwriting, return to health capabilities, deployment of data, technology, predictive analytics in how we're running this business, in particular, investments we're also making in the live and absent space. Those are resonating really well in the market. And we believe over time will allow us to fuel further growth and maintain very robust margins here. And those are not going away. Those are differentiating capabilities that we have and distinct competitive advantages that we will maintain and continue to invest in.
And maybe sticking with the U.S. on the pension risk transfer market, it seems like maybe the market for full plan terminations has been heating up a little bit. I'm just wondering if you're willing to participate in those deals and also what the pipeline looks like as the fourth quarter has been pretty busy historically.
Thanks. So we're pretty pleased with our performance this quarter. So year-to-date, we've had $3.5 billion worth of sales. We've also added another $600 million of premium so far in the fourth quarter. And we see a very healthy pipeline ahead and really with a lot of visibility into 2024. And in particular, in the jumbo end of the market, which is where we focus and where we have distinct competitive advantages. Our focus so far has been on the immediate, [indiscernible] only part of the market, and we see significant pipeline there, and we're able to win business at healthy IRRs. But we always continuously evaluate opportunities here. And as we've always stated, it's value over volume here. And so if we see opportunities with the right IRRs and the right returns and the right risk profile, we're always going to be looking to evaluate those as we go forward.
Next, we go to the line of Alex Scott with Goldman Sachs.
First one I had for you on is LatAm. We continue to see good growth there. I think in the comments, you mentioned some of the digital initiatives and things like that. But I wanted to see if you could extrapolate further just on the sustainability of the really robust growth that you've seen in PFOs and how we should think about that business going into?
Yes. Alex, thanks for the question. This is Eric. So we're overall very pleased with our results for the quarter. This is the fourth consecutive quarter of adjusted earnings in the $200 million range. The quarter's results are primarily driven by volume growth, favorable underwriting as well as foreign currency tailwinds, which were partially offset by lower recurring interest margins. And on the top line side, the positive trajectory continues, as you mentioned with solid double-digit growth, consistent with our expectations. We're seeing growth across the region in both our retail and group business. We've been very deliberate in expanding beyond our core avenues of growth, developing third-party distribution channels, such as banks, financial institutions, retailers and others. And we've made significant technology-related investments in that space.
And a good example is what you referred to that Michel mentioned and is opening around the launch of our new integrated platform, which provides embedded insurance capabilities for our distribution partners and thus creating a differentiating competitive advantage for us across the region. So all these factors, combined with our disciplined underwriting, pricing as well as efficiency focus, are contributing to the solid earnings performance and sustained momentum.
Very helpful. And then second question was on net investment income. Wanted to see if you could help us just with the benefits of higher interest rates and what it means really for net investment income trajectory more broadly across the organization. And then also interested if there's any tactical things you can do, anything you're doing [indiscernible] that we should consider related to net investment income?
Alex, it's John. So a couple of things to point to for your question. We've given some sensitivities to interest rate movements in the past. And I think those are still fair approach to thinking about the impact generally driven by the benefits of roll-off and reinvest, and you're seeing that on the slides we shared. So that has an mental benefit. Obviously, we've also done a lot to reduce our interest rate sensitivity over the years. So it's not a hockey stick per se, but there's [ inertia ] there as you look at some of those sensitivities. So I don't know if I have a number to give because gross numbers maybe get lost, but those sensitivities are more from an earnings perspective, and those are probably pretty good things to follow and think through as you kind of model out earnings growth.
In terms of tactical. I think there's always tactical asset allocations that occur. We have a view of relative values that we take into account. But certainly, as rates grow, fixed-oriented products going to grow in relative value. And we're seeing some unique opportunities out there. It's very helpful to have a wide breadth of product and expertise to work through the opportunities that are in the space, and that's scale. That scale is a big benefit.
So we're excited for the opportunities that are out there. And having done that, we've been maintaining an up in quality mentality when it comes to investments. And with these rates, it's worked pretty well.
Our next question is from John Barnidge from Piper Sandler.
Question about the value of new business slide that's updated, not around IRRs, but can you talk about how higher rates in your outlook for that volume to possibly increase along with the value of new business?
John, it's John. Thanks for the question. I think there's a couple of ways to think through that, as I mentioned in the earlier comment, I mean we are seeing an increase in demand. And that is -- we've been able to solve that fairly efficiently with just annual capital generation. And that -- but we do think that it is going to grow, and we are constantly considering different ways to take advantage of that. I think eventually, as -- and maybe a little bit to an earlier question, as volume and demand grows, that could improve pricing to some degree. Right now, I think it's fairly consistent and adjust with interest rates. But there is dynamics between volume and how that can also improve value, but that will take some time.
And my follow-up question. I know we're in the thick of renewal season for group benefits, but some retailers have started to comment about the impact from GLP or obesity treatment. How do you -- is that something that's come up within the renewal conversation at all? Just wanted to ask that.
Yes. We're not really -- it's Ramy here, John. We're not really seeing any of those having any kind of material effect on our book of business. And remember, we're not in the major medical, we're not providing Rx. We are group life players and none of that is really having any material impact at this point.
And our next question is from Mike Ward with Citi.
I was just wondering if you could comment on the trends in Asia. It seems like the economy in Japan, at least, is reengaging or reopening. So any thoughts on maybe the near-term outlook there.
Mike, it's Lyndon here. So just as we look at broadly Asia, I'll just comment on sales and then maybe we can getting Japan more specifically. Overall, we've had a very strong quarter, and year-over-year sales continue to be very strong. We've seen a 5% growth overall and in Japan, 3%.
In Asia, in total, we've been up 8%, and that's driven broadly between Korea and China. If we look at the economy in Japan, it is really strong, but our sales are primarily driven by interest rates. And so the stronger interest rates have really helped us. So as long as that continues, we think we've got a really solid platform on which to leverage the higher sales.
And then maybe just could you guys maybe speak to your appetite specifically for inorganic growth in the U.S. around voluntary benefits, that would be helpful.
Mike, it's Michel. So as I mentioned earlier, whereas we don't see any gaps when it comes to our Group Benefits business here. We've been growing voluntary at -- in the high teens for a number of years. The employee paid component of our sales is also growing. We're always open to do something inorganically if we feel that it fits strategically if it adds the capability, if it helps us accelerate revenue growth, provided it is accretive over time and provided it also compares favorably to other potential uses of capital.
So whereas there are no gaps, we have M&A as a strategic capability here, and we'll deploy it as we believe it makes sense to do so. And if it's a better use of capital compared to other potential uses.
Michel. Maybe just one follow-up on that. Is Capesize something that makes you consider or not consider M&A and group overall?
Meaning, Mike, you're referring to sort of deal size?
No, sorry, like the target market employer size?
I mean, not really. I mean, I would say we have scale across our businesses and across markets. It's more around does 1 plus 1 equal more than 2, if you like, in terms of what we have and what we are potentially acquiring.
And we will turn the conference back to John Hall.
Great. Thank you, everybody, for joining us on this very busy morning for insurance earnings and have a nice day. Thank you.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.