MetLife Inc
NYSE:MET
Earnings Call Analysis
Q4-2023 Analysis
MetLife Inc
In their latest earnings call transcript, the company shared financial results which illustrated resilience and strategic progression. Fourth quarter net income was impacted by the fluctuation of interest rates, with long-term declines partially offset by net derivative gains. Despite this, the full-year performance saw a variance between net income and adjusted earnings primarily due to net derivative losses, influenced by stronger equity markets, foreign currency changes, and rising interest rates. The trading portfolio encountered net investment losses amid the rising interest rate context, yet the company has maintained a robust position with minimal credit losses.
Adjusting for certain notable items, such as a $76 million increase in asbestos litigation reserves, the company reported a 14% increase in adjusted earnings, symbolizing a considerable boost from recurring interest margins, variable investment income, volume growth, and favorable underwriting margins. This upturn is reflected in an earnings per share (EPS) increment of 21%, a strong indicator of the company's ability to maintain profitability amid challenging conditions.
Scrutinizing the business segments, the Group Benefits sector showcased a 19% rise in adjusted earnings, spurred by life underwriting margins and volume expansion. Particularly noteworthy is the lower-than-expected number of life claims during the fourth quarter. The Group Benefits sales ascended by 9% across the year. Meanwhile, the Retirement and Income Solutions (RIS) segment recorded an uplifting 10% increase in adjusted earnings. RIS investment spreads widened favorably, mirroring the positive influence of heightened interest rates and in-the-money interest rate caps. The segment's adjusted Premium, Fees, and Other revenues (PFOs) excluding pension risk transfers saw a tremendous 75% rise. Asia and Latin America also registered adjusted earnings growth, with Latin America enjoying an upswing in Chilean encaje returns. MetLife Holdings faced a downturn in adjusted earnings, largely due to lost earnings from a reinsurance transaction.
The pretax variable investment income (VII) was modest in the fourth quarter and fell short of the annual target, largely due to static returns from private equity and real estate equity funds. Contrastingly, the private equity portfolio did generate a significant $2 billion in cash distributions over the year. Notably, recurring income, a major part of the net investment income for 2023, was on the rise, which fortifies the company’s foundation for consistent revenue generation.
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Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter 2023 Earnings Release Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings.
With that, I will turn the call over to John Hall, Global Head of Investor Relations.
Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Fourth Quarter 2023 Earnings and Near-Term Outlook Call. Before we begin, I point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides, which address the quarter as well as our near-term outlook. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks. An appendix to the slides features outlook sensitivities, disclosures, GAAP reconciliations and other information which you should also review. After prepared remarks, we will have a Q&A session which will end promptly at the top of the hour. As a reminder, please limit yourself to one question and one follow-up. With that, over to Michel.
Thank you, John, and good morning, everyone. As we begin 2023, I shared our conviction that despite the uncertain times, MetLife would exit the year stronger than we entered it. We accomplished this by countering the challenging environment with the actions we've taken to focus, simplify and differentiate our business. We maintained an accelerated momentum in MetLife's diversified set of market-leading businesses driving strong results for the year and the quarter. And we illustrated our financial strength and flexibility with sound transactions and well-timed capital management ending the year with solid capital ratios and robust cash on hand. Clearly, our all-weather strategy stood up again in 2023. We remain steadfastly focused on what matters most in delivering for our customers and shareholders. In 2023, we exited a pandemic and have yet to enter a widely expected U.S. recession. We managed through a bank liquidity crisis and the resulting credit concerns, and we adapted to an inverted yield curve that has persisted longer than any in history. Against this backdrop, the fundamentals of our businesses are as strong as I have ever seen. Our successful 2023 is a testament to the resilience and durability of our business model, a relentless focus on execution, concentrating on the factors we control, our risk management culture and processes, the discipline we apply to managing our assets and liabilities, and the prudence of our investment portfolio. On that last point, the strength and stability of our commercial real estate portfolio, which we detailed a year ago, has borne out, as we said, a modest increase in LTVs and stable debt service coverage ratios, and we expect that to remain true in 2024. For the year, we delivered an adjusted return on equity, excluding notable items, of 13.8%, achieving our target for this all-important metric. We were unwavering in our expense discipline, employing efficiency and agility to post a full year direct expense ratio of 12.2%. We upheld our commitment to responsible growth, directing capital to its highest and best use with high-teen IRRs and mid single-digit payback periods on new business. We returned $4.7 billion to shareholders via common stock dividends and share repurchases, and we continue to generate strong recurring free cash flow and remain financially flexible with significant liquidity at our holding companies.
The resilience of our strategy and the clarity of our purpose remain powerful drivers of MetLife's success. Our diversified portfolio of market-leading businesses is well positioned to perform for years to come. Backed by a strong balance sheet and our demonstrated ability to generate cash flow, I am confident in MetLife's ability to create value for shareholders and other stakeholders and to deliver financial security to our customers as we have for over a century and a half. Now turning to our fourth quarter 2023 results. Last night, we reported quarterly adjusted earnings of $1.4 billion or $1.83 per share. Excluding notable items, we reported $1.93 per share, up 21% compared to $1.59 per share a year ago. Again, this quarter, our businesses showed strong underlying momentum with excellent underwriting results. Also, our recurring investment income grew on higher balances and higher new money rates. Shifting to the full year 2023, the differentiation and scale across our market-leading businesses were among the factors that helped fuel our underlying business fundamentals.
We generated adjusted earnings, excluding notable items, of $5.6 billion. On the strength of new money yields, our adjusted net investment income grew 9% year-over-year to almost $20 billion despite variable investment income falling below expectations. Adjusted PFOs, excluding pension risk transfers, climbed 6% with healthy growth across most business segments. Group Benefits posted adjusted earnings excluding notable items of $1.6 billion, up 22% from the prior year. The scale and breadth of this franchise business continues to drive organic growth and represents a clear point of competitive advantage. Sales gained 9% while adjusted PFOs, excluding the impact of participating policies, rose roughly 5%. We believe group PFO growth is sustainable at more than $1 billion per year. Higher interest rates serve as a tailwind to our leading Retirement and Income Solutions business with new money yields exceeding roll-off rates for the past 7 consecutive quarters.
Volume growth in RIS away from PRT was very strong with more than $5 billion of longevity reinsurance sales and more than $3 billion of structured settlements. Pension risk transfers totaled $5.3 billion for the year, the third largest annual total in MetLife's history. This followed an all-time record year in 2022, and we have a strong pipeline of new opportunities in '24 and beyond. Sales growth in Asia remains strong, propelled by market demand in Japan for FX-denominated life insurance products and a new cash value life product in Korea. Finally, Latin America continues to be a growing and important region for MetLife. Adjusted earnings on a reported basis in 2023 grew 15% over the prior year, and we've expanded our distribution capabilities as well as our product portfolio. One of the ways we hold ourselves accountable is against the Next Horizon commitments we made in 2019. On that basis, we are ahead of schedule to meet all criteria. In fact, we have even moved the goalpost on ourselves and raised the bar on certain of our Next Horizon commitments.
For instance, we initially committed to an adjusted return on equity of 12% to 14% and last year, we chose to push that target even higher to 13% to 15%. And as you've seen within our outlook disclosure, we further tightened our expense ratio target from 12.6% to 12.3%. While we have the strongest conviction in our Next Horizon strategy, we do not view it as a ceiling on our aspirations. We constantly look to set higher standards and position MetLife for even greater success. When I spoke of emerging from 2023 stronger, our capital and cash is another prime example. During the year marked by periods of financial and geopolitical turmoil, our balance sheet strength enabled us to repurchase $3.1 billion of our common stock and increase our common stock dividend per share, paying out roughly $1.6 billion in common stock dividends. Even still, we enter 2024 with robust levels of cash and higher capital ratios in our key markets. Our capital management has carried into 2024, and we have repurchased roughly $0.5 billion of net common shares in the month of January. We continue to have capacity for further action with approximately $1.6 billion remaining on our repurchase authorization. There is no doubt MetLife's financial strength and financial flexibility was on full view during 2023, particularly with the execution of our $19 billion risk transfer transaction that closed in November. This will free up more than $3 billion of capital over time and illustrates the disciplined approach we apply to evaluating our portfolio of businesses. We ended the year with $5.2 billion of cash and liquid assets on our balance sheet which is comfortably above our target cash buffer of $3 billion to $4 billion. We have consistently said that when responsible growth is attractive and available, we will deploy capital organically or inorganically. If not, we will return capital to our shareholders. I am pleased our Next Horizon strategy continues to prove its mettle amid uncertainty. Looking ahead, whether driven by Fed policy and changes to the yield curve, geopolitical events or the unfolding U.S. election cycle, it is prudent to anticipate more uncertainty in 2024. The supplemental slides we published last night include some near-term targets and elements of guidance.
It should be plain to see that we anticipate the underlying momentum building across our businesses to continue. This is evident in our flagship Group Benefits business where of a large embedded base we've established a strong growth outlook for premium fees and other revenues. And on further note, we've also increased our expectations for both Group Life and Non-Medical Health margins. Importantly, the outlook that we've provided reflects the world as we see it, not as we wish it to be. In that context, we assume a more modest private equity return of high single digits in the near term, down from the 12% assumption we have used in prior years. Private equity remains an important contributor to our well-tested asset liability matching program. It is an asset class well suited to diffuse long-term liabilities and our historical track record has been very strong. In closing, when we launched our Next Horizon strategy in 2019, we could not have predicted the many challenges we would face in the markets where we operate. But our unyielding execution against our strategy is serving us and our many stakeholders well, allowing us to positively impact our customers and live our purpose. Our 2023 results reflect our capacity to move ahead with urgency and deliver on our strategy. We saw very good underlying business performance, supported by a strong capital base. We will continue to concentrate on controlling what we can control, balance sheet security, responsible growth, expense efficiency and capital deployment among others. In the final year of the Next Horizon strategy time frame, we believe our past progress positions us to reach for new heights not possible 4 years ago. I am energized for the future of MetLife driven by the continued momentum I see building in our businesses for 2024 and beyond. Now I'll turn it over to John to cover our performance and outlook in detail.
Thank you, Michel, and good morning. I will start with the 4Q '23 supplemental slides, which provide highlights of our financial performance, an update of our liquidity and capital positions as well as our commercial mortgage loan portfolio. In addition, I will discuss our near-term outlook in more detail. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year of 2023. Market risk benefit or MRB remeasurement losses in the fourth quarter was due to the decline in long-term interest rates. Net derivative gains were only a partial offset as the favorable impact from lower long-term interest rates were mitigated by changes in short-term interest rates and higher equity markets in the quarter.
For the full year, the variance between net income and adjusted earnings was mostly attributable to net derivative losses, primarily due to stronger equity markets, changes in foreign currencies and higher interest rates in 2023. In addition, net investment losses were largely the result of normal trading activity on the portfolio in a rising interest rate environment as well as the mark-to-market impact on securities that were transferred as part of the reinsurance transaction with Global Atlantic. Overall, the portfolio remains well positioned with modest levels of credit losses and the hedging program continues to perform as expected. On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $76 million after tax, of an unfavorable notable item relating to asbestos litigation reserves in 4Q of '23 that was accounted for in Corporate & Other. There were no notable items in the prior year quarter. Regarding the asbestos reserve increase of $76 million, based on our latest review, while we continue to observe a declining claim count, the frequency of severe claims related to asbestos has not declined as expected. The total reserve is $364 million at the end of 2023.
Adjusted earnings, excluding total notable items were $1.4 billion, up 14% and 12% on a constant currency basis. The primary drivers were strong recurring interest margins, higher variable investment income, or VII, volume growth and favorable underwriting margins. Adjusted earnings per share, excluding total notable items were $1.93, up 21% and 19% on a constant currency basis. Moving to the businesses. Group Benefits adjusted earnings were $466 million, up 19% versus the prior year period. The key drivers were favorable life underwriting margins and solid volume growth. The Group Life mortality ratio was 83.5%, favorable to the prior year quarter of 87.3% and below the bottom end of our 2023 target range of 85% to 90%. Consistent with CDC U.S. mortality data, we saw a much lower number of life claims than typical in the fourth quarter. Regarding Non-Medical Health, the interest-adjusted benefit ratio was 70.7% in the quarter, and at the low end of its annual target range of 70% to 75%. We expect both the life mortality ratio and the Non-Medical Health ratio to be higher in Q1 given the seasonality of the business. Turning to the top line, Group Benefits adjusted PFOs on a full year basis were up 3% year-over-year. Taking participating contracts into account, which dampened growth by roughly 200 basis points, the underlying PFOs were up approximately 5% year-over-year within our 2023 target growth range of 4% to 6%. In addition, Group Benefits 2023 sales were up 9% year-over-year. The continued strong growth is primarily due to solid growth across most products, including continued strong momentum in voluntary. RIS adjusted earnings were $421 million, up 10% year-over-year. The primary drivers were favorable investment margins due to higher recurring interest and variable investment income, as well as favorable underwriting margins.
RIS investment spreads were 121 basis points. Spreads, excluding VII were 134 basis points, up 10 points versus Q4 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% year-over-year, primarily driven by strong sales of structured settlement products and post-retirement benefits, as well as growth in U.K. longevity reinsurance. With regards to PRT, we added transactions worth approximately $1.9 billion in the fourth quarter, bringing our full year total to roughly $5.3 billion. This marks the third highest PRT sales year for MetLife, and we continue to see an active market. Moving to Asia. Adjusted earnings were $296 million, up 12% and 11% on a constant currency basis, primarily due to higher investment margins and lower taxes. For Asia's key growth metrics, general account assets under management on an amortized cost basis were up 6% year-over-year on a constant currency basis, and sales were essentially flat versus the prior year quarter. For the full year, Asia sales were up 13%, driven by strong growth across the region, exceeding its 2023 guidance range of mid- to high-single digits. Latin America adjusted earnings were $207 million, up 13% and 4% on a constant currency basis, primarily due to solid volume growth, partially offset by less favorable underwriting margins versus a strong Q4 '22.
In addition, LATAM had favorable Chilean encaje returns of 7.9% in 4Q of '23 versus 6.1% in the prior year quarter. Latin America's top line continues to perform well as adjusted PFOs were up 29% and 19% on a constant currency basis, driven by strong sales and solid persistency across the region. For the full year, adjusted PFOs were also up 29% on a reported basis and 19% on a constant currency basis exceeding LatAm's 2023 guidance of low double-digit growth. EMEA adjusted earnings were $47 million, down 27% on both a reported and constant currency basis, primarily driven by an unfavorable tax charge following a favorable tax benefit in the prior year period, as well as less favorable expense and underwriting margins. This was partially offset by higher recurring interest margins year-over-year. EMEA full year 2023 adjusted earnings of $265 million exceeded our outlook expectations of roughly $55 million per quarter. EMEA adjusted PFOs were up 5% on both a reported and constant currency basis, and sales were up 18% on a constant currency basis, reflecting strong growth across the region.
MetLife Holdings adjusted earnings were $156 million, down 15%, largely driven by foregone earnings as a result of the reinsurance transaction that closed in November. Corporate and other adjusted loss was $156 million, excluding the unfavorable notable item of $76 million after tax that I referenced earlier. This compares to an adjusted loss of $210 million in the prior year. Higher net investment income and favorable taxes were the primary drivers. The company's effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits, primarily related to the true-up of the federal tax return to provision. On Page 5, this chart reflects our pretax variable investment income for the 4 quarters and full year of 2023. VII was $63 million in the fourth quarter, primarily driven by positive returns in our corporate and mortgage loan funds. The private equity portfolio and real estate equity funds had a combined return of essentially 0 in the quarter. For the full year, VII was $419 million, well below our 2023 target of approximately $2 billion. That said, while mark-to-market returns were below expectation in 2023, the PE portfolio generated approximately $2 billion in cash distributions during the year. On Page 6, we provide VII post-tax by segment for the prior 4 quarters and full year 2023. As reflected in the chart, RIS, Asia and MetLife Holdings continue to hold the largest proportion of VII assets given their long-dated liability profile. Now turning to Page 7. 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 as well as Q4 of '22 versus Q4 of '23. While VII has had lower than trend returns over the last couple of years, recurring income, which accounted for most of the net investment income in 2023 was up approximately $2.6 billion year-over-year, reflecting higher interest rates and growth in asset balances. The expansion of recurring income in 2023 more than offset the lower VII year-over-year. Shifting your attention to the right of the page, which shows our new money yield versus roll-off yield since 4Q of '20. New money yields continue to outpace roll-off yields over the past couple of years, consistent with rising rates. In this quarter, our global new money yield continued its upward trajectory coming in at 6.67%, 142 basis points higher than the roll-off yield.
Turning to Page 8. I'll provide a few updates on our commercial mortgage loans. Overall, the CML portfolio continues to perform consistent with expectations where we expect higher quality assets to outperform the asset sector broadly. The average LTV on our CML portfolio now stands at 64% as of December 31, up slightly from 63% in the third quarter of '23 and the average debt service coverage ratio remains steady at 2.3x. The modest increase in LTVs and stable debt service coverage ratio 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 2.6% of loans having LTVs more than 80% and DSCRs less than 1x. With regard to CML loan maturities, we resolved 100% of the loans that were scheduled to mature in 2023. Our expectation going forward remains for modest credit losses on the portfolio. Turning to Page 9. This chart shows the comparison of our direct expense ratio over the prior 8 quarters and full year 2022 and 2023. Our direct expense ratio in 4Q of '23 was up modestly at 12.4%, reflecting the impact from seasonal enrollment costs in Group Benefits, as well as higher employee-related costs.
That said, 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. For the full year of 2023, our direct expense ratio was 12.2%, below our 2023 target of 12.6%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment while continuing to make investments in our businesses.
I will now discuss our cash and capital positions on Page 10. Cash and liquid assets at the holding companies were approximately $5.2 billion at December 31, which is above our target cash buffer of $3 billion to $4 billion. The cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of roughly $900 million in the fourth quarter as well as holding company expenses and other cash flows. In addition, we repurchased shares totaling approximately $500 million in January.
For the 2-year period 2022 and 2023, our average free cash flow ratio excluding notable items totaled 74% and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, our combined 2023 NAIC RBC ratio is still preliminary, but expected to be approximately 400% and above our 360% target. For our U.S. companies, preliminary 2023 statutory operating earnings were approximately $4.5 billion, while net income was approximately $3.9 billion. Statutory operating earnings increased by approximately $1.9 billion year-over-year, primarily driven by favorable underwriting and impacts from the reinsurance transaction. This was partially offset by higher expenses.
We estimate that our total U.S. statutory adjusted capital was approximately $19.5 billion as of December 31, 2023, up 10% from September 30, 2023, primarily due to operating earnings and the impact of the reinsurance transaction. This was partially offset by dividends paid. Finally, we expect that Japan solvency margin ratio to be approximately 720% as of December 31, and which will be based on statutory statements that we filed in the next few weeks.
Before I shift to our near-term outlook, starting on Page 12, a few points on what we included in the appendix. The chart on Page 17 reflects new business value metrics for MetLife's major segments from 2018 through 2022. This is the same chart that we showed as part of our 3Q '23 supplemental slides, but we feel it's worth including, again, for the sake of completeness. Also, Pages 18 through 21 provide interest rate assumptions and key outlook sensitivities by line of business. Now let's turn to Page 12 for further details on our near-term outlook. Starting with the overview. We expect continued uncertainty to persist around inflation and unemployment in 2024. We expect the U.S. dollar to stabilize around current levels. Based on the 12/31/23 forward curve, we assume long-term interest rates to be largely unchanged in 2024, and the yield curve will move from inverted to modestly upward sloping as short-term interest rates decline, and we assume a 5% annual return for the S&P 500. For our near-term targets, we are maintaining our adjusted ROE range of 13% to 15%. We expect to maintain our 2-year average free cash flow ratio of 65% to 75% of adjusted earnings. Also, given continued focus on expense discipline, building capacity to reinvest in growth initiatives and our overall efficiency mindset, we are lowering our direct expense ratio guidance for 2024 from 12.6% to 12.3%.
Specifically for 2024, VII expected to be approximately $1.5 billion. Our Corporate & Other adjusted loss target is expected to be $750 million to $850 million after tax in 2024. This represents an approximate $100 million increase from our prior adjusted loss guidance of $650 million to $750 million in 2023. The higher range reflects C&O's current run rate, given the impact of a higher rate environment on interest expense and pension costs as well as the impact of lower expected benefits from VII. We are increasing our expected effective tax rate range by 2 points to 24% to 26% to reflect our expectation for higher earnings in foreign markets with higher tax rates and lower tax credits in the U.S. At the bottom of the page, you will see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near term.
On Page 13, the chart reflects our VII average asset balances from $18 billion in 2022 to $19.7 billion expected in 2024. Private equity investments will continue to represent the vast majority of our VII asset balances. We are reducing our near-term expected annual return for private equity to be between 7% to 10%. And we are also lowering our expected returns for real estate and other funds to be in the range of 5% to 7% over the near term. We expect PE and real estate returns will remain pressured in the first quarter of '24 before trending higher. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII.
So now I will discuss our near-term outlook for our business segments. Let's start with the U.S. on Page 14. For Group Benefits, excluding the excess premium from participating Group Life contracts of approximately $300 million in 2023, adjusted PFOs are expected to grow at 4% to 6% annually over the near term. And for 2024, we expect growth to be in the top half of that range. This reflects the strong momentum in the business, particularly in voluntary products as well as exceptionally strong persistency in our national accounts. Regarding underwriting, we expect 2024 underwriting margins to be generally consistent with 2023. As such, we are reducing our near-term Group Life mortality ratio and Non-Medical Health interest-adjusted benefit ratio ranges by 1 percentage point to 84% to 89% and 69% to 74%, respectively. Finally, keep in mind, these are annual ratios and both typically skew to the higher end of the ranges in the first quarter given the seasonality of the business.
For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread and fee-based businesses. Regarding investment spread, full year 2023 was 125 basis points and is expected to be relatively flat for the full year of 2024. This incorporates both the impact of the roll-off of our interest rate caps with maturities throughout 2024 and the offsetting benefit of VII reemerging over the year as a more meaningful contributor. As such, we expect the investment spread range for 2024 is 115 to 140 basis points. We have also provided updated RIS sensitivities for interest rate movements in the appendix. Sensitivities reflect the anticipated impact from interest rate cap maturities throughout 2024. As such, our sensitivity to [indiscernible] declines throughout the year.
For MetLife Holdings, we are expecting adjusted PFOs to decline by approximately 13% to 15% in 2024 and then declining 4% to 6% annually thereafter. And we are lowering the adjusted earnings guidance range to $700 million to $900 million in 2024 to reflect the foregone earnings from the reinsurance transaction as well as lower expected PE returns and natural runoff of the business. Now let's look at the near-term guidance of our businesses outside the U.S. on Page 15. For Asia, we expect the recent sales momentum to continue and generate mid single-digit growth over the near term. In addition, we expect general account AUM to maintain mid single-digit growth. We are expecting adjusted earnings to grow roughly 20% in 2024 as we assume VII to have a greater impact throughout the year.
We are maintaining mid single-digit adjusted earnings growth expectation over the remainder of the near term. For Latin America, we expect both adjusted PFOs and adjusted earnings to grow by high single digits over the near term. Finally, for EMEA, we are expecting sales to grow mid- to high-single digits and adjusted PFOs to grow mid-single digits over the near term. The forward curve assumes a strengthening of the U.S. dollar relative to most currencies in EMEA. As such, we project EMEA's adjusted earnings run rate to be roughly $60 million to $65 million per quarter in 2024. And and then grow by mid-single digits in 2025 and 2026 based on the forward curve for these currencies.
Let me conclude by saying that MetLife delivered a solid quarter to close out another strong year. The underlying strength of our business fundamentals remains on display with strong top line growth, coupled with disciplined underwriting and expense management. While VII remains below historical returns, core spreads remain robust, and continue to benefit from the higher yield environment. While the current environment remains uncertain, we are excited about the outlook and growth prospects for our businesses over the near term and beyond. MetLife continues to move forward from a position of strength with a strong balance sheet, recurring free cash flow generation and a diversified set of our market-leading businesses. And we are committed to deploying capital to achieve responsible growth and build 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]. Our first question is from Ryan Krueger with KBW.
My first question is on the ROE target. And I recognize that you just raised the target by 100 basis points a year ago to 13% to 15%, but it seems like your segment outlook would suggest something at least a bit above 15%, maybe something closer to 15.5%. So I guess I just wanted to hear your perspective on -- am I thinking about that incorrectly or is there some potential upside to this ROE based on the current trends you're seeing?
Ryan, it's John. I think we wouldn't debate your model calculations there. I think it's fair to say that -- we certainly are trending to the high end of that range, if not with a plus sign, but we just moved it a year ago, and I think we'll take a year here and take stock at that time. But I'd say -- I think maybe just to help you with that, one other thing is it's -- like I said, we'll take stock. We think over time, and we've been talking about this, that there has been kind of -- as a result of higher rates, there has been a shift in volume and returns on our business. So it wouldn't preclude us from doing it again. We just -- I think we want to take some time to take stock.
Understood. Makes sense. And then I think you said that you expected the RBC ratio to be around 400%. I would have thought it would have been maybe a little higher than that following the reinsurance transaction. Do you have any more color on it if there are any offsets?
Yes, I think when we announced the deal, we thought this would give us 50 to 60 points. We still think it will and it's little bit of what happens immediately and then how things tread in over time. Also, there's a lot of other things going on, fungibility, growth. We had some very sizable growth in RIS. So we've deployed some extra capital this year. So I think a lot of those things. But in terms of the deal economics that we outlined at the time of signing, everything came in as expected.
Next, we go to the line of Suneet Kamath with Jefferies.
Appreciate all the color on the guidance. But maybe if we could just circle back to consolidated recurring NII. I think you talked about a pretty big lift in '23 relative to '22, that $19.3 billion. Any help in terms of what you think that could look like given all the moving pieces as we think about 2024?
Suneet, it's John. It's a good question. I mean, sometimes NII, it's a helpful metric certainly from, I'd say, mix and just to show that higher rates have more than offset or actually offset some of the depression in VII. And I think the point of that slide is to show that we -- there's more power there once things kind of reemerge on the VII front. Sometimes it's a little hard with just translating NII to earnings. So we're a little cautious on this given the target around that because we have different products that perform well in different environments and ultimately spread.
So I think we're a little hesitant to kind of forecast for you. I think the point of that slide was to indicate that it shows the growth in our business. It shows that we're well diversified. We can perform well in a variety of economic environments. And I think that's really the -- probably the theme to take away. So sorry, I didn't get to maybe your exact question -- answer, but that's probably the best I can do.
Okay. Got it. And then as we think about the benefit in the caps in '23 and what that looks like in '24 as they roll off, should we think about the improvement in VII is essentially like those 2 kind of net as a wash? Or is one kind of greater than the other? I just want to get some additional color on that, if we could.
Yes, it's a great question. I think what you just said at the end around -- in terms of them being a wash is a pretty good way of thinking about it. So we had 125 basis points last year all-in for 2023. We gave a range of 115 bps to 140 bps for next year. I think the midpoint is a little above 127 bps, I guess, if you did the math. And our view is, yes, there's -- the interest rate cash will roll off throughout the year, and then VII will emerge throughout the year and essentially offset the decline there. And so we think the best way to think about the spreads for the year is relatively flat to what you saw for the full year of '23. It will give and take here and there. As we point out on the slide, we think VII in the first quarter will continue to be pressured. Obviously, the caps haven't fully rolled off yet. So we'll have -- we'll still have income from them. And then as VII emerges, you'll see the caps roll off and they'll essentially offset.
Next, we have a question from Tom Gallagher with Evercore ISI.
So your assumed alternative returns are now around 7.5% for '24 and I think the RBC risk charge, if I was to do a weighted average would be 15% to 20% on most of that portfolio. Have you considered pivoting some of the portfolio into assets with comparable, let's say, 7% yields like private credit or just other fixed income, but much lower risk charges. I'm just thinking about it from the perspective of -- we've had 2 years of underperformance. Your outlook for a third year is below those levels and rates are higher. And if I think about both your cost of capital and ROE, I think it would be a fairly meaningful positive, not -- recognizing you can't do this overnight, but is that something you consider pivoting or shifting to?
Tom, it's John. I think the last point you made around you can't do this overnight is an important piece, but I think direction of travel, that's probably a fair point. And I think we've talked about the fact that -- we are in a different rate environment, so the relative value of investments are probably different than where they were when it was lower for longer. We pride ourselves in diversification. So it's not that we would make an abrupt shift, but we do believe that making some tweaks to allocations is appropriate in different environments. And that would -- I think what you're referencing is one that we would lean towards. We've had -- it's an asset class where you have prior commitments and those then get deployed judiciously and actually, there are probably some really good opportunities right now that we're leveraging. Having said that, we think distributions will likely outpace new contributions, just given our revised level of new commitments. And I think over time, you would see a moderate shift in allocation in that asset class versus others.
Okay. And then just a question on Group Benefits. The 100 basis points improvement in the margin target or at least the loss ratio targets. Can you comment on what's driving that? Is that stable pricing, sustainably higher visibility or low visibility loss ratios and maybe a little bit on the Group Life side, what you're thinking?
Tom, it's Ramy here. And I would say, at the highest level in terms of our near-term outlook here is, this is driven by the change in business mix both in terms of the customer segments that we serve as well as the products that we offer. So from a customer perspective, we've executed well on our strategy to target higher growth in regional markets. We're seeing the benefits of that in terms of growth. Regional markets has grown 2 to 3 percentage points higher than the overall average, and we see a clear path for that growth to continue and regional market is a segment that does carry a lower loss ratio across both the life underwriting ratio on Non-Medical Health and we're also seeing a shift from a product perspective.
We've executed well on our employee-paid strategy in general and voluntary strategy in particular. And in voluntary, we've seen double-digit growth over many years and we expect that to persist in the future given customer needs and the opportunity to drive penetration in the workplace. And the loss ratio here tends to be also more favorable to the overall portfolio. So between that customer segment and that product view, if you think about this over time, we feel kind of a shift to the outlook is warranted. Let me tell you what it's not been driven by. On the life ratio, this quarter was very favorable, and it's really driven, as John pointed out, to the population mortality experience. So this is not one quarter mix of trend. This is one quarter here that was favorable, and we do expect the Q1 numbers to tick up given the seasonality of life claims. And then on the disability side, our outlook in terms of the ratios does include an expectation and the profitability of our disability line of business will moderate over time, but that is outweighed by the other factors that I've just mentioned. And back to Q1 as well there, just remember, there's also seasonality in that ratio in Q1 given the seasonality of the dental business. So net-net, think about it as business mix customer and product mix that's really driving this shift downwards in the ranges.
Next, we go to the line of Jimmy Bhullar with JPMorgan.
So first question on retirement spreads. Can you discuss the driver of the sequential decline in spreads each for the last 2 quarters? And how much of this is being driven by mix of business versus maybe competition because what we're seeing is your yields have gone up, but the crediting rates seem to be rising even faster than that.
Jimmy, it's John. The simple answer just sequentially for us is, we just [developed] the lower rates late in the quarter caused a bit of compression on the spread number, just how the -- we had the caps in the money and lower rates came in. So it was different than the forward curve at the time of the third quarter when we gave the 135 to 140 range, came in at 134 ex VII. So that's the main driver. It's not pricing. Pricing has actually been pretty healthy, relatively speaking. We haven't seen any change in pricing. And so anything -- if anything, it's really just a simple change in the curve.
Okay. And then on the CRE portfolio, you mentioned resolving all of the maturities for '23. Can you give us a sense of how much of your book is coming due over the next 1 to 2 years, especially in office properties? And as you're resolving these loans, are you having to extend more of them than you've done in the past? Or are you resolving them similar to how you would have done it over the last several years?
Yes, sure, Jimmy. It's John again. So just as a reminder, for 2023, just rough percentages of the resolution, about 30% was pay off or refinance. Another 60 was these contractual extensions where the borrowers have to be in good financial condition. We have some pretty high level of requirements there. So those are contractual if you're -- if you meet those requirements, then you have the right and they tend to be more floating rate nature loans where they're just waiting to lock in fixed rates.
There's less than 10% on just, I would say, maturity extensions where we agree with the borrower. It's a good -- there's a good positive situation for us to extend, and then there's kind of a couple of points of foreclosures. In terms of 2024, about 10% of the balance comes due in terms of maturities, the overall PBO that we have. I'd say that -- in terms of resolutions, probably a similar mix to what we saw in terms of percentage. And I think in terms of -- we gave a little bit of magnitude this past year in terms of what we thought were at risk loans and level of charge-offs. Our view in 2024 is that we'd see a similar order of magnitude on both loans at risk and level of charge-offs as well.
Next, we go to the line of Elyse Greenspan with Wells Fargo.
My first question is on the PRT side. I think we've stopped seeing, right, the seasonality where deals are much more weighted to the fourth quarter. So just trying to get a sense of your outlook for '24 and how we should think about the cadence of potential transactions there?
Elyse, it's Ramy here. I think you're right to point out kind of the -- we've seen less of that seasonality, we're seeing deals being done throughout the year. Our outlook there remains pretty positive. We continue to see a very healthy pipeline, in particular, a pipeline at the larger end of the market, where we are most competitive. And all the macro indicators in terms of what the plant sponsors are saying in terms of the funding level, the magnitude of assets sitting in frozen defined benefit plan, all kind of indicate expectations of continued kind of high level of activity in this market into '24.
So no change in terms of our view of the robustness of the pipeline. And look, I mean, if you step back and look at RIS more broadly, the liability exposures are all -- are up 3% year-over-year. And most of that growth is coming from our spread earning general account business, which is actually growing at 4%. And that's coming off 2022 where we had the $8 billion PRT deal, and that growth is not just PRT. I mean, PRT was about $5.3 billion, but we're also seeing continued strength across a range of spread-based products, be it structured settlements and be it some of our products in our Risk Solutions business and so on.
And then my second question, how should we think about dividends to parent that you guys could take in '24 as you could look to upstream the capital that you guys are getting from the holdings transaction?
Elyse, it's Michel. Thanks for the question. So we talked about the reinsurance transaction as providing us with significant financial flexibility. And as you heard from John, our RBC ratio is approximately 400%. And I would just note here that the 5.2% HoldCo cash does not yet include any of the reinsurance proceeds. So the excess capital is sitting in our statutory entities. And it will ultimately migrate to the HoldCo. We view excess capital as fungible, and we will redeploy it over time.
And in the absence of attractive organic or inorganic growth opportunities, I think we've built a good track record in terms of being deliberate and expeditious post major divestitures and how we return capital to shareholders. And as you've seen since we closed on the transaction, we've leaned into buybacks with -- especially in January. I wouldn't sort of consider January as a monthly run rate for the full year, but we're going to continue to be opportunistic here. I hope that helps.
And I would just add, Elyse, I mean, just to kind of put a finer point on just the financial flexibility and the fungibility of that. I mean, we might -- because we have excess capital at the OpCo, we might think differently at the HoldCo, it will depend, right? I mean, I don't think we have to necessarily have it all at the HoldCo. We have a range of 3 to 4, it might give us some ability to manage more differently in that -- within that range because we have excess OpCo. So I think we just want to -- I think the flexibility is the key point.
Next, we go to the line of Alex Scott with Goldman Sachs.
First one I had is just going back to the VII guidance quickly. Could you frame for us how much of the lower VII guide, it is maybe a little more specific to first quarter VII and what you see in the results that you sort of already have eyes on since it's lagged as opposed to level setting like the ongoing expectation?
Alex, it's John. I'd love to say that we have great insights into -- as a result of having the lag. But I'm not so sure that has proven out the way we thought it would each quarter. I think all we know is that we think -- we kind of believe that it will bump along the kind of the bottom again before becoming a more meaningful contributor in the outer quarters.
We think managers -- even though the S&P jumped up in the quarter, it was kind of late in the quarter. We believe managers will be a bit cautious in their year-end remarks and maybe remain conservative before writing investments based on some of the public market multiples. So that's our -- that's kind of our base case assumption. We don't have a lot of insight yet in actual financial statements that have come through. So we'll -- obviously, those will come through as we move through the quarter.
Got it. Okay. That's helpful. Maybe for a second one, just on what you saw around pricing in Group Benefits, maybe in the U.S. and LatAm, around year-end enrollment and so forth, I mean, margins are really good. Are you seeing any competition that's starting to heat up there?
Thanks, Alex. It's Ramy here. I would say, we're really off to a strong start in '24. If you look at '23 overall sales were up 9% year-over-year, as John mentioned, and we saw a very strong persistency in line with our expectations. And we also saw the rate actions that we were able to take also in line with our expectations across market segments. So while there is competition, and it is a competitive market, when we think about pricing as well as persistency, I think all the nonprice factors of differentiations that we've talked about in the past are playing into our favor here and we've been able to hold margins and as you've seen, expanded the margin outlook. 1/1, I can give you a bit of a flavor on that. We're still in the midst of it. But initial indications in terms of our sales growth are in the 5% to 10% again year-over-year with really solid growth across the product portfolio, across both core and voluntary. So these are really good indicators for us both in terms of volume and margin as we look into '24.
And ladies and gentlemen, we have time for one last question from John Barnidge with Piper Sandler.
Maybe sticking with Group Benefits, can you maybe talk about growth in employee counts among your corporate partners, whether it's larger in the small or the jumbo end, maybe a viewpoint of 1/1 renewals with that?
John, I don't have that number handy specifically in terms of the employee count. The best thing you could look at for an indicator for that is just overall employment levels because we have a very diversified book up and down market. It's highly diversified by industry. So you could think of us as reflecting the broader economy in terms of our employee count. The one that I would look at more closely is, and this is where we see a lot of white space with respect to employee cost is the penetration rate in the workspace.
We still see plenty of opportunity to drive penetration of our own products, be it voluntary or employee paid. And that's through the deployment of the right technology, the right tools, the right engagement capabilities and that's really what's been fueling our voluntary growth over the past few years, and that's where we see continued future growth opportunities.
My follow-up question. You talked about the frequency of asbestos claims hasn't declined as expected. Can you maybe talk about that versus what the assumption was?
Yes. John, it's John. So as we said, this is something that we look at each third and fourth quarter where we conduct our experience study and this is an exposure where there is a declining claim count, but what hasn't declined as expected or as fast as expected is some of the severe claims, so the larger claims. And that's really what we trued up this quarter. Again, it's a kind of a runoff claim count exposure has -- we've been seeing that for some time. But in the last 12 months, we just saw a slightly different trend that we needed to adjust for. I mean, the overall reserves just above $350 million.
And I'll now turn the conference back to John Hall for closing remarks.
Great. Thank you, operator, and thank you, everybody, for joining us this morning. Have a great day.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.