Metlife Inc. (MET) Q2 2020 Earnings Conference Call Transcript

Metlife Inc. (NYSE: MET) Q2 2020 earnings call dated Aug. 06, 2020

Corporate Participants:

John Hall — Head of Investor Relations

Michel A. Khalaf — President and Chief Executive Officer

John D. McCallion — Executive Vice President and Chief Financial Officer

Steven J. Goulart — Executive Vice President and Chief Investment Officer

Analysts:

Erik Bass — Autonomous — Analyst

Tom Gallagher — Evercore ISI — Analyst

Ryan Krueger — KBW — Analyst

Elyse Greenspan — Wells Fargo — Analyst

Jimmy Bhullar — JPMorgan — Analyst

Humphrey Lee — Dowling & Partners — Analyst

Ramy Tadros — President of US Business

Andrew Kligerman — Credit Suisse — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2020 Earnings Release Conference Call. [Operator Instructions] Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday’s earnings release and to risk factors discussed in MetLife’s SEC filings.

With that I will turn the call over to John Hall, Head of Investor Relations.

John Hall — Head of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife’s second quarter 2020 earnings call. We hope you and your families are both safe and healthy. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com in our earnings release and in our quarterly financial supplements, which you should review.

On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management. Last night, we released a set of supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. In appendix to these slides features disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants please limit yourself to one question and one follow-up.

Now, over to Michel.

Michel A. Khalaf — President and Chief Executive Officer

Thank you, John and welcome, everyone. My focus this morning would be on how MetLife is successfully managing through the current crisis financially, operationally and culturally. I’ll begin with our financial performance in the second quarter which demonstrates three key fundamentals about our business. First, we have become a simpler and more predictable company. On our last earnings call, we said the major pandemic related impact in the second quarter would be the loss in our private equity portfolio. The negative 8.2% return we reported fell squarely within the range provided. Second, our businesses are well diversified by both geography and product providing meaningful offsets to increased claims from COVID-19. In aggregate, the second quarter was not an underwriting event. And third, we remain a company that is committed to and generates strong free cash flow, providing us with significant liquidity and flexibility.

In the quarter, we reported adjusted earnings of $758 million or $0.83 per share compared to $1.38 per share a year ago. Net income of $68 million, well below adjusted earnings primarily due to losses on derivatives held to protect our balance sheet against declining equity markets. On a 2020 year-to-date basis, MetLife has generated $4.4 billion of net income. As you know, our private equity portfolio is reported on a one-quarter lag. So our results reflect the extremely difficult first quarter equity market. The percentage decline in our private equity portfolio was much smaller than the 20% drop in the S&P 500, but still generated an after-tax quarterly loss of $0.48 per share, consistent with the expectations we shared with you.

Given the substantial rebound in the equity market, we expect a significant recovery in our private equity portfolio when we next report our quarterly results. Our roughly $500 million investment portfolio remains a key strength for MetLife. We believe the diversity, quality and liquidity of our portfolio as well as our early actions to reduce risk position us well for a variety of market outcomes. Year-to-date, we have seen only modest realized investment losses. Our underwriting results in the quarter reflect the broad diversity of our businesses. For example, higher claims frequencies in the US were largely balanced by fewer auto insurance claims of turning longevity impact and lower claims and utilization of other protection products globally.

Our Group Benefits business is instructive. Higher mortality drove our group life benefit ratio beyond our annual target range. But this was offset in part by a decrease in dental utilization. Looking ahead, we expect group life mortality to improve, but remain elevated in the third quarter, and while dental utilization should increase as we move through the year with deferred recognition of dental premium given the significant decrease in the availability of dental services. This has the effect of limiting outsized results in any one quarter. Overall, we continue to expect that the diversity of our business mix will mitigate the global underwriting impact of COVID-19.

Turning to free cash flow. We have long spoken of a life insurance capacity to generate cash as one of the most critical measures of the strength and sustainability of its business model. In the second quarter, we were able to grow total cash and liquid assets at our holding companies to $6.6 billion. This is up from $5.3 billion sequentially and well above our cash profit target of $3 billion to $4 billion. Our strong cash reserves provide us with significant financial flexibility to navigate an uncertain and changing economic landscape, including taking advantage of opportunities as well as managing potential impacts to our investment portfolio.

Beyond our financial results, I would like to spend a few minutes on other ways we are managing the challenges presented by the pandemic. Operationally, our people continue to show grit and determination, and not only stepping up to respond effectively to a challenging environment, but in accelerating some of the trends that will be critical to our long-term success. Enterprise wide, 75% of our employees continue to work remotely. Throughout the crisis, we have been able to deliver for our customers without interruption. In our US group business for example, we continue to meet or exceed our service level agreements. The crisis is also causing us to fast forward the digitization of our Company, which will produce lasting benefits.

Turning to the US group business again, we have expedited and now completed the rollout of an enhanced digital platform that makes it easier for customers to get benefit information, make payments and file claims. Since the start of the year, the number of people eligible to access the platform has grown by more than 30 million. In addition to continuing to invest to improve the customer experience, we also provided our customers with significant premium relief in the second quarter. While this created some top line pressure, we remain committed to strong expense discipline. We moved quickly to find savings as part of our efficiency mindset and are still on track to achieve our full year direct expense ratio target of 12.3%.

For the first six months of the year, the ratio is 12.2%. An essential part of being a high performing company is having a strong culture and here too, we are seeing improvements. One of the biggest concerns about the shift to working from home was that employee engagement would suffer. We have been experiencing the opposite effect. In all three of our priority areas, collaboration across the enterprise, a strong focus on the customer and the spirit of experimentation, employee engagement has actually strengthened. Part of this, is the deep sense of purpose that our employees feel at a time when what we do matters more than ever. Another factor is our commitment as a leadership team to communicating at unprecedented levels.

For example, we have been holding interactive global town halls for all of our employees every other week. Our commitment to building momentum for our next horizon strategy has a new urgency as well. More than 5,000 employees have participated in immersive virtual sessions to build the strong sense of ownership. The pillars of our strategy remain more relevant than ever, focused on deploying scarce capital to its highest use, simplify MetLife by driving operational efficiency and improving the customer experience and differentiate to derive competitive advantage in the marketplace.

Apart from slowing us down, the current crisis is accelerating our efforts to find attractive opportunities. In June, we closed our first ever deal in the UK longevity reinsurance market. Longevity risk is a business that allows us to tap several competitive advantages, including our world-class actuarial talent. In addition, the underwriting on capital dynamics of this business fit well with our internal rate of return and payback period requirements. Another growth opportunity is the new suite of products, we are adding to our market leading employee benefits platform.

In January, we closed on the acquisition of PetFirst to give us access to the fast-growing pet insurance market. Even though we will not launch the product on our platform until later this year, only five large employers with approximately 250,000 eligible employees have already signed up to offer pet insurance as a voluntary benefit.

Before I close, I would like to say a word about MetLife’s commitment to diversity and inclusion. A topic that has taken on greater importance in light of recent protests across the United States. MetLife has taken a number of steps to contribute to a more just and equitable society. We have spoken out in the face of injustice. We have committed to improving diversity within our own workforce, and we have contributed financially to organizations that advance racial equity. While we know there is more work to do both as a company and as a society, our purpose is motivating us to help make forward progress. What I hope you will take away from today’s call is that MetLife feels a tremendous sense of urgency about the future. Everyone has heard the expression, don’t let a crisis go to waste. At MetLife, we are taking that to heart and doing the work now to position ourselves for long-term success. We’re becoming more efficient, we’re getting new customer insights, we’re strengthening our culture and we’re remaining laser-focused on consistent execution.

With that I will turn the call over to John McCallion to discuss our second quarter results in greater detail.

John D. McCallion — Executive Vice President and Chief Financial Officer

Thank you, Michel and good morning. I will start with the 2Q ’20 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. In addition, this slide provide more detail on our outlook for the third quarter as well as an update on our cash and capital positions.

Starting on page 3, the schedule provides a comparison of net income and adjusted earnings in the second quarter. Net income in the second quarter was $68 million or $690 million lower than adjusted earnings of $758 million. This variance is primarily due to net derivative losses resulting from the stronger equity markets as well as higher long-term interest rates in the quarter. On a year-to-date basis, net income was $4.4 billion, compared to net income of $3 billion in the first half of 2019. The investment portfolio and hedging program continue to perform as expected.

Also, as highlighted on page 3, adjusted earnings included a $438 million after-tax loss in variable investment income or VII. I will provide more details on this shortly. On page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding total notable items. This quarter’s results do not include any notable items while the prior-year quarter had $70 million associated with our recently completed unit cost initiative, which was accounted for in Corporate & Other. Excluding the UCI costs in the second quarter of ’19, adjusted earnings were down 45% and down 44% on a constant currency basis. On a per share basis, adjusted earnings were down 43% and down 41% on a constant currency basis. Overall, variable investment income was lower than the second quarter of ’19 by $702 million after tax. This decline in VII was more than the decline in total adjusted earnings year-over-year. Positive year-over-year drivers included solid volume growth, favorable expense margins and equity market strength in the quarter. This was partially offset by the lower recurring interest margins and less favorable taxes compared to 2Q of ’19.

Turning to the performance of our businesses. Group Benefits adjusted earnings were down 20% year-over-year. The group life mortality ratio was 95.9% due to elevated claims related to COVID-19. This is above our annual target range of 85% to 90% and less favorable to the prior-year quarter of 85.3%. The interest adjusted benefit ratio of group non-medical health was 58.5%, which is well below our annual target range of 72% to 77% and also favorable to the prior-year quarter ratio of 75.4%. The primary driver was extremely low dental utilization, which I will discuss in more detail shortly.

In regards to the top line, Group Benefits adjusted PFOs were down 5% year-over-year primarily due to lower dental premiums from the deferral of revenues given a significant decrease in the availability of dental services and to account for 25% premium credit to all fully insured customers in April and May. Excluding these dental premium adjustments, which totaled approximately $500 million in the quarter, Group Benefits PFOs would have been within its annual target range due to solid growth across all markets. Retirement and Income Solutions or RIS adjusted earnings were down 45% year-over-year due to unfavorable investment margins related to the decline in variable investment income which was partially offset by favorable underwriting margins.

RIS investment spreads for the quarter were 25 basis points, down 94 basis points year-over-year. Spreads excluding VII were 85 basis points in the quarter, up 1 basis point year-over-year due to a decline in LIBOR rates. RIS liability exposures grew 11% year-over-year, driven by strong volume across all products, and separate account investment performance in the quarter. While liability exposures grew, RIS adjusted PFOs excluding pension risk transfers were down 22% year-over-year due to lower structured settlement and institutional income annuity sales. Property & Casualty or P&C adjusted earnings were up 19% versus the prior-year period, driven by favorable underwriting margins, partially offset by unfavorable investment margins related to variable investment income.

The overall combined ratio was 91.1%, which was more favorable than our annual target range of 92% to 97% and the prior-year quarter ratio of 96.1%. P&C results benefited from lower auto claim frequencies due to a decline in miles driven in the quarter. This was partially offset by higher catastrophe losses of $89 million after tax compared to $62 million after tax in 2Q of ’19. Moving to Asia. Adjusted earnings were down 29% and 27% on a constant currency basis due to lower investment margins resulting primarily from the decline in variable investment income in the quarter. This was partially offset by solid volume growth, which was driven by a 5% increase in general account assets under management on an amortized cost basis as well as favorable expense margins.

Latin America adjusted earnings were down 17% as foreign exchange rates across the region dampened year-over-year results. If today’s FX rates hold, we would expect the year-over-year impact to Latin America’s third quarter earnings to be similar to the second quarter. On a constant currency basis, adjusted earnings were up 3% driven by higher equity markets favorably impacting our Chilean encaje returns, which were up 14% in the quarter, as well as favorable underwriting margins. This was partially offset by unfavorable investment margins.

EMEA adjusted earnings were up 51% and 59% on a constant-currency basis. This was a record adjusted earnings quarter for EMEA, primarily due to favorable underwriting margins as a result of lower claims in group medical and accident and health policies in the region as well as better expense margins. We would expect EMEA’s underwriting results to be closer to historical levels in the third quarter. MetLife Holdings’ adjusted earnings were down $279 million year-over-year. This decline was primarily driven by lower variable investment income of $250 million after tax compared to the prior year as well as lower recurring interest margins and unfavorable underwriting due to COVID-19 related claims. The life interest adjusted benefit ratio was 59.1%, which was above the prior-year quarter of 53.9% and above our annual target range of 50% to 55%.

Higher equity markets in the quarter were a partial offset to the year-over-year decline in adjusted earnings. The separate account return in the quarter was 14.8% which resulted in a positive $13 million initial impact, which compares to a positive $5 million initial impact in 2Q ’19. Corporate & Other adjusted loss was $289 million. This result was less favorable to the prior-year quarter, which had an adjusted loss of $237 million excluding $70 million of UCI costs. The decline in variable investment income was the primary driver for the higher loss in the quarter.

Looking ahead, we would expect Corporate & Other losses to be between $325 million to $375 million in the second half of the year. The Company’s effective tax rate on adjusted earnings in the quarter was 19.2%, modestly below our 2020 guidance range of 20% to 22%. Now let’s turn to page 5. This chart reflects our pre-tax variable investment income over the prior five quarters, including a loss of $555 million in the second quarter of 2020. The loss was entirely attributable to the private equity portfolio, which had a negative 8.2% return in the quarter. As we have previously discussed private equities are generally accounted for on a one-quarter lag, and the negative marks included in our 2Q ’20 financial results are in line with our disclosures from the last earnings call.

With regards to recurring investment income, our new money rate was 3.41% versus a roll-off rate of 3.72% in the quarter. This compares to a new money rate of 4.01% and a roll-off rate of 4.34% in 2Q ’19. We have added a table on page 6 that breaks out the second quarter negative VII of $438 million after-tax by segment, the largest VII impacts to adjusted earnings in the quarter were MetLife Holdings and Retirement and Income Solutions followed by Asia and Corporate & Other. In the quarter, certain timing adjustments have shifted the relative VII impact between Asia and Corporate & Other. Going forward, these timing adjustments will be eliminated. And as such, we would expect Asia’s adjusted earnings to have a larger contribution from VII and corporate and other to have less as compared to the second quarter.

Now let’s turn to page 7. This chart provides one approach to illustrate the impact of below trend VII on our reported earnings. The box in red reflects the adjusted EPS impact of $0.48 related to the negative VII experienced in the quarter. This was the first quarterly loss for VII since 2009. The $0.22 highlighted in the green box illustrates the adjusted EPS impact assuming VII at the quarterly midpoint of our 2020 annual target range of $900 million to $1.1 billion. To be clear, this chart should not be viewed as quarterly guidance, but rather as one approach to illustrate the below trend VII impact on the second quarter results.

Moving to page 8. This walk provides more detail on the group non-medical health interest adjusted benefit ratio. As I noted earlier, the reported ratio of 58.5% was very favorable driven by low dental utilization. However, two adjustments are needed for comparability to our annual target guidance of 72% to 77% and the sensitivities, we provided on our outlook call last December. First, the ratio should be adjusted by 3.9 points for the 25% dental premium credit referenced earlier. Second, the ratio should also be adjusted by 7.1 points related to the establishment of an unearned premium reserve. We established an unearned premium reserve to appropriately align dental revenue recognition with the availability of dental services. As dental offices have begun to open across the US, we have seen utilization pickup in July for more involved treatments and procedures, which represent less than 20% of our typical overall dental claims. However incidents remains low for more routine visits. We expect dental utilization to pick up in the second half of the year, pushing the ratio closer to the low end of our 72% to 77% target range.

Turning to page 9. This chart shows our direct expense ratio from 2015 through 2019 and the first two quarters of 2020. Interest ratio was 12.2%. While the ratio was elevated in 2Q at pressure from premium credits in our dental and auto businesses as well as the establishment of a dental premium reserve, we remain on track and committed to achieving our full year target of approximately 12.3% as we continue to deploy an efficiency mindset, investment and to protect the margins of the firm.

Now I’d like to spend some time reviewing several key considerations for the third quarter, given the continued uncertainty of the current environment. These considerations are summarized on page 10. Starting with investments. We expect a strong recovery in variable investment income in the third quarter with our best estimate for private equity returns to be a positive mid-single-digit, which is based on a $7.2 billion PE balance at June 30. Regarding recurring investment income, we continue to experience downward pressure from lower rates. However reinvestment rates have held up reasonably well during the first half of the year, given our diverse market leading asset origination capabilities.

Finally, we expect the short end of the yield curve to remain favorable supporting investment spreads. Moving on to underwriting margins, we continue to anticipate modest underwriting impacts from COVID-19 on a combined basis, assuming death rise in the US to approximately 200,000 through the third quarter. We expect life insurance claims frequency in the US to moderate, with life insurance benefit ratios in group benefits and MetLife Holdings moving closer to the respective annual target ranges. However, we do expect claims activity significantly increase in Latin America in the third quarter, as the region is behind other parts of the world in COVID-19 emergence.

Additionally, we would expect some level of offsets from businesses with longevity risks, most notably in Retirement and Income Solutions. So currently, we expect a limited overall impact underwriting margins on a combined basis for 3Q. Turning to top line metrics, we would expect global face to face sales to remain challenged, negatively impacting most of our segments. However, we do anticipate modest sequential sales improvement in Japan. We expect lower adjusted PFOs in most segments with the exception of Group Benefits, which we expect to have mid single-digit growth year-over-year. While we expect to encounter volume and top line growth pressures, our efficiency mindset is a core tenet of our strategy to manage margin pressures across our business.

As I noted earlier, we remain on track to meet our direct expense ratio full year target of approximately 12.3% despite the challenges of the current environment. Now let’s turn to page 11. Given the persistent low interest rate environment, we decided to add this page on estimated impacts to our income statement and balance sheet, if we were to lower our long-term actuarial US interest rate assumption of 3.75% by 25 basis points, 50 basis points, 100 basis points or 150 basis points.

For each hypothetical scenario, GAAP loss recognition is not triggered, and there will be a relatively modest impact to net income, specifically with respect to the 150 basis point down scenario, which would bring our long-term mean reversion rate assumption to 2.25%. I would highlight two points, first, the approximately $425 million net income impact is consistent with the guidance range disclosed on our 1Q ’20 earnings call. And second, we will continue to have a significant margin for purposes with GAAP loss recognition. Overall, I believe the sensitivities to test to MetLife’s significantly reduced risk profile.

I will now discuss our cash and capital position on page 12. Cash and liquid assets at the holding companies were approximately $6.6 billion at June 30, which is up from $5.3 billion at March 31 and well above our target cash buffer of $3 billion to $4 billion. A $1.3 billion increase in cash in the quarter reflects, the net effects of subsidiary dividends, payment of our common stock dividend, as well as holding company expenses and other cash flows. Next, I would like to provide you an update on our capital position.

As a reminder for our US companies, our combined NAIC RBC ratio was 395% at year-end 2019 and comfortably above our 360% target. For our US companies, preliminary second quarter year-to-date 2020 statutory operating earnings were approximately $1.8 billion, while net income was approximately $2.1 billion. Statutory operating earnings decreased by approximately $600 million from the first half of 2019, primarily due to higher VA rider reserves and the impact of a prior-year dividend from the investment subsidiary. This was partially offset by lower operating expenses. Year-to-date net income was driven by derivative gains, partially offset by lower operating earnings.

Our expected total US statutory adjusted capital was approximately $21.1 billion as of June 30, up 13% compared to December 31, 2019. Derivative gains and operating income more than offset dividends paid and other investment losses. Finally, the Japan solvency margin ratio was 799% as of March 31, which is the latest public data. In summary, this quarter’s adjusted earnings were dampened by the negative private equity returns, which are based on a one-quarter accounting lag. However, the underlying business fundamentals from our diverse market-leading businesses were evident in our results despite the challenging environment.

Looking ahead, we expect our third quarter adjusted earnings to benefit from a strong recovery in private equity returns while continuing to absorb modest underwriting impacts from COVID-19. In addition, we believe our capital, liquidity and investment portfolio are strong, resilient and well positioned to manage through this unprecedented environment. Finally, we are confident that the actions we are taken to be a simpler and more focused company will continue to create long-term sustainable value for our customers and our shareholders.

And with that I will turn the call back to the operator for your questions.

Questions and Answers:

 Operator

Thank you. [Operator Instructions] Your first question comes from the line of Erik Bass from Autonomous. Please go ahead.

Erik Bass — Autonomous — Analyst

Hi, good morning. Thank you. The first question, with $6.6 billion of holding company liquidity and credit impact [Technical Issues] and is that something that’s potentially on the table for the third quarter? Do you want to wait longer to see how the environment evolves?

Michel A. Khalaf — President and Chief Executive Officer

Erik, we lost you there in the middle. Could you — do you mind repeating the question?

Erik Bass — Autonomous — Analyst

Certainly. Michel [Phonetic] on the outlook for capital return and with the $6.6 billion of HoldCo liquidity and credit impacts trending a bit below fierce so far, just how are you thinking about the timing of resuming share repurchases? And is that something that’s potentially on the table for 3Q?

Michel A. Khalaf — President and Chief Executive Officer

Sure. So, as you know, last quarter, we put our share repurchase program on pause and we felt that was prudent to build our cash and capital and to maintain, in order to maintain financial flexibility. Our view is that, there remains substantial uncertainty in the economy as well as with the pandemic, which is going to take more time to clear. Yes, having said that, over the past three months, we’ve seen a resilient equity market and tighter credit spreads as you referenced, both beneficiaries of government and Fed reserve policy. And our cash position has grown to $6.6 billion, which gives us greater financial flexibility and optionality. So if you take all of these factors, together, we would not rollout capital management in the latter part of 2020, but we remain on pause for the time being. So I hope that answers your question.

Erik Bass — Autonomous — Analyst

Yes. That’s helpful. Thank you. And then just a follow-up for John on group. I just wanted to clarify kind of, is the idea of the unearned premium reserve to essentially better align the timing of revenues and expenses? So should we think of this is essentially taking some excess earnings from the second quarter and allocating them to future periods when you expect claims and incidents to be higher?

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Erik. Yes, it’s very much about the availability of service. And so, in the second quarter, dental offices were closed for quite a bit of time, remind and part of that, we gave back 25% premium credit to fully insured customers. And then as you said, we also then said we needed to defer some revenue, so that it would be recognized when those services are available. And so those are, that is the timing item.

Erik Bass — Autonomous — Analyst

Got it. So it is essentially the earnings. If you hadn’t booked that would have been higher in the second quarter, but you’ll recoup that at some point in the future.

John D. McCallion — Executive Vice President and Chief Financial Officer

That’s correct.

Erik Bass — Autonomous — Analyst

Thank you.

Operator

Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.

Tom Gallagher — Evercore ISI — Analyst

Good morning. The reduction that you gave on free cash flow guide for 2021 last quarter. I think a piece of that was driven by elevated credit loss assumptions. My question is, if interest rates stay low for credit remains fairly benign, where do you think that would land you in terms of the free cash flow conversion heading into 2021?

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Tom. I would just remind you that was a scenario, not a guide. It was — there’s a lot of different factors. We had a one to two year assumption in how this may play out. It was based on macro factors as of March 31, when spreads were wider, equity markets were worse. I will say, interest rates are modestly down, if you look at the 10 years since then. So, things as Michel said, there has been somewhat resilient equity and credit market for the last three months. I’d still say we’re in the mode of caution. At this point, in terms of what the outlook, it will be and how this will play out. I also talked about last time that factors in some level of cash flow testing, and so it’s a range of outcomes, and that some, the estimates we provided were based on New York special consideration letter that we receive every year. The last one we got was a year ago is based on a certain macroeconomic environment. We’ll work through hopefully constructively with them this time, but we wanted to just give a, I’ll say a stress set of scenarios for what the possible outcome. But I wouldn’t call it a guide, I’d just say that those are kind of possible outcomes based on where, but it depends on where macro factors are at the end of the year.

Tom Gallagher — Evercore ISI — Analyst

Got you. And then my follow-up is, any update on MetLife Holdings in the potential for risk transfer or interest rates than the current level of interest rates, too low making the bid-ask spread too wide or do you think something could still happen there even if rates remain kind of where they are?

John D. McCallion — Executive Vice President and Chief Financial Officer

Yeah, I think we’re in the same mode that we’ve been in for the last few quarters. We are preparing for the opportunity for something to occur although macro factors are creating a wider bid-ask spread, having said that, there is still kind of a bias push to supply being greater. And so that could narrow the bid ask over time. So I’d say we continue to maintain readiness, but, interest rates, I would say do present a headwind.

Tom Gallagher — Evercore ISI — Analyst

Okay, thanks.

Operator

Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.

Ryan Krueger — KBW — Analyst

Hi. Thanks. Good morning. On the holding company cash, were there any meaningful timing considerations that that you’re going to increase in the quarter or I guess would you expect a further build in the cash revision in the second half of the year depending on your uses of free cash flow.

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Ryan. Yes, we did have some lower outflows in the second quarter and we did receive some proceeds from the sale of Hong Kong. So was another item, which we did not disclose, as you know. And so on — looking at the remainder of the year, I would say, I would not expect the same rate of increase that you’re seeing here.

Ryan Krueger — KBW — Analyst

Got it. And then could you provide some updates on what you’re seeing in the commercial mortgage loan portfolio in terms of things like forbearance request and grants and any other statistics that you could provide on what’s going on there?

Steven J. Goulart — Executive Vice President and Chief Investment Officer

Sure, Ryan. It’s Steve Goulart. I think — let’s step back and start with an overview of the portfolio. Again it’s nearly $51 billion now in commercial mortgages. And again, we continue to believe it’s very conservatively positioned. The average loan to value is 57%. The average debt service coverage ratio in the portfolio is 2.4 times, it’s very well diversified geographically and by property type, and we also feel, it’s concentrated in high-quality assets that are typically located in larger primary markets. So again backdrop of a very strong fundamentally built diversified portfolio.

That said, there clearly are signs of stress in sectors like hotel and retail. For us, that’s less than 25% of the total and not surprisingly, as I talked about on the previous earnings call, we have received requests for temporary debt service payment deferrals on the portfolio. We’ve reached a point where we’re really not seeing much in the way of new requests. But we’ve granted about 9% on a principal balance outstanding of those, and again they are heavily concentrated in hotel and retail. But again, these are — these are payment deferrals.

We don’t expect losses and we’re not projecting losses from any of those today. It’s just they’re going to be delayed and receiving the principal and interest and in addition to just those that we’ve granted deferrals on. We actually have received 100% of all other expected payments in June. So, this is — it’s something we’ll deal with in this crisis, but again, given our long-term history of performance in commercial mortgages, and I’ll remind you, from 2009 to ’19, we had less than $120 million in cumulative losses. The portfolio, we believe is well positioned and we’ll manage through this time period.

Ryan Krueger — KBW — Analyst

Thank you.

Operator

Your next question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan — Wells Fargo — Analyst

Hi, thanks. Good morning. My first question is on the expense side of things. You guys obviously see on track to hit that target of 12.3% for the full year. And Michel I know, since you took over your role, you kind of put out the message that expense management is a core part of what’s going on in Met [Phonetic] even beyond this year. So as we’ve been in the corporate environment and we’ve heard companies talk about becoming more efficient. You know, have you guys learned anything or see anything within your expense base that perhaps could lead to more sustainable savings beyond 2020, into 2021 and beyond?

Michel A. Khalaf — President and Chief Executive Officer

Yeah, hi, Elyse. So you know, as you mentioned, we do believe that driving an efficiency mindset. And then, just keep in mind coming off our UCI initiative where we’ve exceeded our target is very important and the management team here is highly committed to this. And if anything, we’re seeing an acceleration of this — during this pandemic, if you consider that we do have some incremental costs related to the pandemic that we are managing to offset, if you take into account, the fact that, this quarter, we have about $500 million, our top line is suppressed by about $500 million due to the, done for credits and the UPI [Phonetic] that we discussed earlier. We’re seeing also some top line pressure just from the pandemic in general. Yet we are, is continuing, we continue to be committed to our top 3 expense ratio. I think that gives you a sense of just, the urgency and the momentum that we’re seeing in terms of the adoption of this efficiency mindset.

And clearly as we see further adoption of some of our digital tools, we think those trends are going to persist even coming out of this crisis, as we continue to find ways of further simplifying the Company. We feel good about sort of what we discussed during Investor Day about our EBIT ability to create additional capacity that’s also going to help us continue to invest in growth and innovation. So, again I cannot stress enough, in times of crisis, it’s about the things that you control and that’s one area that we feel we do control. And as I said, we’re very committed to maintaining the 12.3% despite all the other things that I mentioned earlier.

Elyse Greenspan — Wells Fargo — Analyst

Okay, thanks. And then my second question on the investment spreads within RIS were compressed in the quarter, but that was really due to VII, because away from that, they actually held up pretty well. Given your outlook, can you give us a sense of where spreads within RIS for the rest of the year, I guess could come in relative to your 2020 guide.

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Elyse. Yes. So Q2 spreads were certainly on an overall basis depressed driven by the negative returns on our private equity portfolio. And as, just as a reminder, we have said that RIS typically takes about, call it a third of the results from VII. And then excluding spreads we’re 85 basis points up slightly from Q1. Most of that is driven by the drop in LIBOR. This has helped us, be a little, be resilient, when it comes to our spreads, the shape of the curve against some headwinds, lower rates do hurt ultimately, but the shape of the curve matters a lot as we said before. We also have seen some headwinds in real estate equity in particular around hotels. So, but nonetheless, I think the fact that as you said, spreads have been resilient. We expect them to be resilient for the rest of the year ex-VII, where the shape of the curve would help offset some of those other headwinds.

Operator

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Jimmy Bhullar — JPMorgan — Analyst

Hi, good morning. First, I had a question for Steve Goulart. On — if you think about the credit environment, obviously things haven’t ended up being as bad as it was feared, but there is still uncertainty. So where do you see good value and what are some of the areas that you might be avoiding? And then relatedly, can you talk about what your new money yields are that you’re earning right now versus, and the gap between that in the portfolio yield. So we get a better idea for where your core spreads are headed.

Steven J. Goulart — Executive Vice President and Chief Investment Officer

Sure. Good morning, Jimmy. Let’s step back and just talk about the current environment, though, and John made some comments on this too, and then I’ll pick up, but we’re still dealing with essentially an unprecedented crisis in the markets. And in our mind that’s presented a fair amount of uncertainty around what the shape of the recovery would look like and what long-term impacts could be. Now, we all know, the Fed came to the rescue and through really unprecedented intervention has calmed the markets. And in general, the market tones have certainly improved where we were a quarter ago. And when you look at things like a lot of the downgrade projections that were in the market just about all of those participants have reduced their projections, however, we are still seeing defaults and bankruptcies and that trend is going to continue.

You know, if you think back to our first quarter call, we talked about how we are looking at that, different scenarios and analysis we’ve made. And what the potential impact would be on our portfolio and on our risk-based capital and what we said was, through all the analysis, we’ve done, we think that all the risks are manageable. So put that in the context of today, things have improved and therefore the risk that we saw a quarter ago have also modestly improved. And therefore I guess I’d describe it as continuing to be very manageable. But all that said, we are still very cautious about the market, because there is a disconnect, we think between kind of technicals and fundamentals. So we continue to be cautious. We’ve continued to reposition the portfolio. You know when we see price and spread action like we’ve seen in some sectors and names that we are still cautious about, we’re going to continue and have continued to reduce our exposure.

At the same time though there are attractive opportunities and we’re going to take advantage of them and we can. Particularly we’ve seen over the last quarter continued opportunities in private assets. And so we’ll continue to invest there. So again it’s really one of balance about continuing to take advantage of the market will give us to lighten up the portfolio in those sectors and names that we are still cautious about by taking advantage of opportunities that we see, which again right now seem to be more heavily concentrated again no surprise in private assets, which again, given our strong origination networks. Our reputation of commitment to those sectors and our conservative underwriting really serve us well.

And I think that’s when you just look at our commitment to sound underwriting to asset liability management, and most importantly to diversification across the portfolio that allows us to really continue to put up a long-term positive successful investing track record, even in markets like this.

Jimmy Bhullar — JPMorgan — Analyst

And are you able to quantify just your new money yields and build this end [Phonetic] relative to the — the gap between that and the portfolio.

Steven J. Goulart — Executive Vice President and Chief Investment Officer

Yeah. So our new money yield for the quarter was 3.41%. Our roll-off was 3.72%, and that reflects, I think that’s down a little bit from the last quarter, but it does reflect still being able to take advantage of opportunities that we do see in the market. And again, we’re obviously in a prolonged low interest rate and for now anyway tighter spread environment. So that trend is likely to continue in the near term, but again the diversification that we have available for us from an investing perspective will continue to serve us well.

Jimmy Bhullar — JPMorgan — Analyst

Okay. And then if I could I just ask one more for John McCallion. On your annual actuarial review, in the past you’ve brought your rate assumption down, but the adjustments have been fairly modest. Are you following a similar process as you’re looking at your rate assumption or could be, are you looking at a different lead to where your adjustments would be closer to what actual rates are right now.

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Jimmy. Yeah. We have a process, we will follow our process as we typically have, and we’ll go through that during the course of the third quarter and provide an update, next quarter’s earnings call. I don’t think there is — there is reasons to change. I don’t think, it — I would call the environment would require a change in process — process should dictate and drive the results. So I think we have a very healthy process, objective process and we’ll kind of manage through that over the course of the next several weeks.

Operator

Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.

Humphrey Lee — Dowling & Partners — Analyst

Good morning. And thank you for taking my questions. I just have a follow-up question on group benefits and how we should think about the PFO trend for the balance of the year. Clearly, this quarter, you mentioned you had the $500 million impact related to dental. Do you anticipate any of the unearned premium reserves are all kind of behind you and things should go back to normal or do you anticipate there could still be a little bit of a headwind, because not the entire country still fully open.

Ramy Tadros — President of US Business

Hey, Humphrey, it’s Ramy Tadros here. So, as John mentioned, we are expecting the utilization of some of the services for dental to be elevated at or more than above our normal expectations for the rest of the year. So think of that, our customers are making up services that were not provided in the second quarter. So there is that catch-up effect. This additional catch-up effect will be offset by the release of the unearned premium reserve in the subsequent quarters. So we will get — we will see UPR [Phonetic] if you will, release into premiums as we see that catch-up effect happen with respect to utilization. More broadly, with respect to PFO growth in the third quarter, we did talk about employment levels being one of the key drivers that drives PFO here for the — for the Group Benefits business. If you recall we talked about a number of attributes on the last call, which somewhat mitigate that employment level impact in terms of the — the diversification of our book, the focus towards more larger accounts, national accounts. So in aggregate, if you think about the third quarter, we are still looking at PFO growth in the solid mid-digits for Group Benefits.

Humphrey Lee — Dowling & Partners — Analyst

Got it. And then, in John’s prepared remarks, we talked about the — expecting some longevity benefits in the third quarter to offset some of the continued COVID-related underwriting impact. Is there any way to help us to think about the potential benefits from RIS and long-term care in the coming quarters.

John D. McCallion — Executive Vice President and Chief Financial Officer

Good morning, Humphrey. Yeah. Look, I would probably put this in the context of just overall view of underwriting. So just as a reminder as to what Michel mentioned overall for 2Q, we saw a modest impact in underwriting on a combined basis. We had higher claims in the US and they were largely offset by auto claims — auto frequency claims. Also we had some longevity impacts in the quarter and then we had other claims and utilization benefits outside the US, particularly EMEA. As we look into the Q3, we think the overall trend of kind of a neutral impact on underwriting on a combined basis is still be the case, even with deaths rising to 200,000 in the US. So a couple of things to highlight. We expect the mortality as I said before, on my opening remarks, for group life and MetLife Holdings to still be elevated, albeit migrating closer to the up — top end of our range. So, not as severe as 2Q.

I’d also highlight in LatAm again just particularly in Mexico, we expect impact to rise in Q3. So we’re forecasting about 40,000 deaths in Q3 for Mexico. And at this point, we’d estimate that would have roughly maybe high single to low double-digit impact on this segment benefit ratio. And then go into your point around offsetting impacts. So offsetting these elevated losses, we do expect longevity offsets to increase in both RIS and long-term care as these typically are delayed by a quarter or are slower to emerge from a reporting perspective. And then as I said in my remarks, we also expect EMEA would migrate back to normal trend. So in summary, we think the net underwriting result would generally offset and therefore COVID impacts would remain modest in Q3.

Humphrey Lee — Dowling & Partners — Analyst

Great. Thank you for the moving pieces [Phonetic] of color.

Operator

Your next question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.

Andrew Kligerman — Credit Suisse — Analyst

Good morning. Maybe just kind of following up on the capital management question taking more of the M&A stack, do you think that if any opportunities were to rise in this environment that you’d be able to — to act pretty quickly, do you have a desire to do so? And then finally, you mentioned the pet insurance acquisition. I’ve been hearing that is a very tough line to underwrite at the age, it becomes quite problematic in terms of the loss ratio. So I was wondering what the thinking was when we made that acquisition. So two questions there.

Michel A. Khalaf — President and Chief Executive Officer

Yeah. Hi, Andrew. I’ll take the first part on capital management and then Ramy will — would address your pet insurance question. So as I’ve said before, we view M&A as a strategic capability and that’s an important tool, but one of the tools in our toolbox. We are very disciplined in our approach to M&A, I would just remind that, we always look at strategic fit as a potential transaction going to help us grow revenues. Are there synergies involved, it would have to be accretive. Does it clear a minimum risk adjusted return hurdle rate or return? And we always, also compared to other potential uses of capital. So I would say that nothing changes here in terms of our approach. We are open for business and, but the discipline that I just described, we as how we view these types of opportunities.

Andrew Kligerman — Credit Suisse — Analyst

Michel, any areas that fits [Phonetic] that you currently would like to add to the MetLife portfolio in terms of M&As.

Michel A. Khalaf — President and Chief Executive Officer

Yeah, I mean just sticking you back Andrew to what we discussed during Investor Day, I think we talked about sort of certain lines of business, markets where given the right opportunity, we’d certainly be open to doing something. And I think if you just sort of — to add to that, if you consider sort of the pet insurance acquisition, a smaller acquisition that we made in digital wells which complement our legal plans offering again adding or enhancing our Group Benefits offering for example, group, obviously is a business that we like, here in the US. So those are the types of things that I would point you to in terms of going back to what we discussed during Investor Day and the businesses on the markets that we — were we, that we like and where we see opportunities to further grow revenues.

Andrew Kligerman — Credit Suisse — Analyst

I see. Thank you.

Ramy Tadros — President of US Business

Andrew, it’s Ramy here. Just building on Michel’s comment. The first acquisition was small, but important. It very much is aligned to our Investor Day strategy and we’re entering into a capital-light business, where we’ve identified a clear opportunity where we can bring value to customers, employers and employees. The pet insurance market, if you look at it more broadly, two-thirds of Americans have a pet, they spent collectively $18 billion every year on that care. But the penetration in the market is — in the insurance market is just 2% and it’s seeing percent CAGR year-on-year and clearly look the — we have purchased the company with immense data and history, we have our best actuaries working on this, and we are very much confident in our underwriting in this line of business going forward.

Andrew Kligerman — Credit Suisse — Analyst

Thank you.

Operator

And at this time, I’d like to turn the call back to Michel Khalaf for final comments.

Michel A. Khalaf — President and Chief Executive Officer

Let me thank you all for participating in today’s call. And I want to close today by reiterating how committed this leadership team is to controlling what is in our power to control. We know that capital and liquidity, consistent execution and expense management are vital during times of uncertainty. Please stay safe and have a great day.

Operator

Ladies and gentlemen, this conference will be available for replay until August 13. You may access the AT&T teleconference replay system at any time by dialing 1-866-297-1041 and entering the access code 3537992. Those numbers once again are 1-866-207-1041 with the access code 3537992.

[Operator Closing Remarks]