Metlife Inc. (NYSE: MET) Q3 2020 earnings call dated Nov. 05, 2020
Corporate Participants:
John Hall — Global Head of Investor Relations
Michel A. Khalaf — President and Chief Executive Officer
John D. McCallion — Executive Vice President, Chief Financial Officer
Ramy Tadros — President, U.S. Business
Steven J. Goulart — Executive Vice President and Chief Investment Officer, MetLife, Inc., and President, MetLife Investment Management
Oscar Schmidt — President, Latin America
Analysts:
Elyse Greenspan — Wells Fargo — Analyst
Thomas Gallagher — Evercore — Analyst
Ryan Krueger — KBW — Analyst
Nigel Dally — Morgan Stanley — Analyst
Erik Bass — Autonomous Research — Analyst
Suneet Kamath — Citigroup — Analyst
Kishore Ponnavolu — President, Asia
Jimmy Bhullar — J.P. Morgan — Analyst
Humphrey Lee — Dowling & Partners — Analyst
John Barnidge — Piper Sandler — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third Quarter 2020 Earnings Release Conference Call. [Operator Instructions]. Later we will conduct a question-and-answer session and instructions will be given at that time. [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, Global Head of Investor Relations.
John Hall — Global Head of Investor Relations
Thank you, Operator. Good morning, everyone. We appreciate you joining us for MetLife’s third quarter 2020 earnings call. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer.
Also participating in the discussions are other members of senior management. Last night, we released a set a supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to these slides features disclosures and GAAP reconciliations, which you should also review.
After prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants, please limit yourself to one question and one follow up. Before I turn the call over to Michel, I have a quick scheduling note. When we report MetLife’s full year results in February, we will consolidate our annual outlook call with our fourth quarter 2020 earnings call, making for an impactful 60 minutes call, stay tuned. With that, over to Michel.
Michel A. Khalaf — President and Chief Executive Officer
Thank you, John and good morning everyone. As you saw in our earnings release last night, MetLife delivered strong financial results in the third quarter of 2020. These results are a testament to the kind of Company that MetLife has become. We are simpler and more predictable. For example, the impact of our annual actuarial assumption review was modest and consistent with the sensitivities we provided last quarter.
We have a well diversified mix of market-leading businesses, that diversity was on display in the largely offsetting impacts of COVID-19. And, we have an ongoing commitment for consistent execution. A good quarter at MetLife is just another instalment and what investors have come to expect of us and what we expect of ourselves. Turning to the numbers, we reported third quarter 2020 adjusted earnings of $1.6 billion or $1.73 per share compared to $1.27 per share a year ago.
Net income of $633 million was below adjusted earnings, mostly due to losses on derivatives held to protect our balance sheet against movements in equity markets and interest rates. For year-to-date 2020, MetLife has generated $5.1 billion of net income. Excluding all notable items, we reported quarterly adjusted earnings of $1.8 billion or $1.95 per share compared to $1.4 billion or $1.54 per share a year ago.
The only notable item in the quarter was our annual actuarial assumption review, which had a negative $203 million impact on adjusted earnings and an incremental negative $98 million impact on net income. This is largely a function of lowering our long-term interest rate assumption from 3.75% to 2.75%. As expected, we experienced a significant recovery in our private equity portfolio, which we report on a one quarter lag.
The rebound that occurred, the 6.7% return, tracked with the mid-single digit forecast we provided in Q2. Other contributors, including hedge funds and prepayments added meaningfully to our $652 million of pre-tax variable investment income. Turning to some third quarter business highlights, our U.S. business segment produced very strong adjusted earnings driven by Group Benefits and Retirement & Income Solutions.
In Group Benefits, Group Life mortality experience improved from the second quarter and dental utilization and disability remains favorable. RIS benefited from the rebound in VII as well as temporarily wider recurring investment spreads. Offsetting this, property and casualty saw heavier than normal catastrophe losses that overwhelmed favorable auto claims frequency. Outside the U.S., Asia’s adjusted earnings ex-notables were up 34% from a year ago on higher VII, favorable underwriting, lower expenses and volume growth.
Adjusted earnings ex-notables and Latin America were down 67% year-over-year as COVID claims rose sharply as expected. In EMEA, adjusted earnings ex-notables increased 26% due to lower expenses, favorable underwriting and volume growth. And finally, for MetLife Holdings, adjusted earnings ex-notables rose 35% on higher VII and better long-term care underwriting results.
Our cash position strengthened during the quarter, ending at $7.8 billion, well above our target cash buffer of $3 billion to $4 billion. The increase in cash is mostly due to our issuance of $1 billion of fixed preferred stock during the quarter, which was used in October to retire $1 billion of floating preferred stock. As we committed in September, we have resumed repurchases of our common stock, roughly $80 million in the third quarter and about another $240 million since then.
Despite the extreme disruption 2020 has presented, we are on track this year to deploy $4.3 billion of capital towards strategic M&A, common stock dividends and share repurchases. We believe this underscores the durability of our All-weather, Next Horizon strategy and MetLife’s consistent execution across a range of economic scenarios.
We rolled out our Next Horizon strategy almost one year ago with three main pillars: Focus on deploying scarce capital and resources to their highest use; simplify MetLife by driving operational efficiency and improving the customer experience and; differentiate to derive competitive advantage in the marketplace. We believe we have made clear progress on all three fronts.
At Investor Day last December, I noted that our capital management philosophy at MetLife has not changed. Capital is precious and we are disciplined in deploying it to the highest value opportunities. Our purchase of Versant Health, which we expect to close before year end demonstrates our commitment to this approach. Vision Care is a capital-light business with strong risk-adjusted returns and high free cash flow generation.
Like our U.S. group benefits franchise more broadly, it is precisely the kind of business we want to grow. Knowing where not to play is just as important as knowing where to place our strategic bets.
During the quarter, we booked the sale of our annuity business in Argentina, which was no longer the right fit for MetLife. While not material to MetLife, this divestment helps illustrate our ongoing process of planting and pruning in an effort to achieve the optimal business mix. When we talk about simplifying MetLife, we have two goals in mind, continuously improving our operational efficiency and becoming an easier Company for our customers to do business with.
On efficiency, given the headwinds we have faced this year, we knew it was going to be a challenge to meet our target of a 12.3% direct expense ratio. But this is a firm commitment and we will keep it. Despite higher anticipated seasonal expenses in Q4, we are increasingly confident that we will beat this target for the full year. By embracing an efficiency mindset, we are also freeing up resources that can be reinvested in critical areas to improve the customer experience. A case in point is the investment we are making in group disability in the U.S.
The shared goal of all stakeholders in the disability system whether employees, employers or insurance carriers is to achieve the best possible health outcomes and get people back to their lives and livelihoods as quickly as possible. We are implementing an end to end disability and absence management solution to meet changing customer expectations and extend our leadership in this space. By investing in the customer experience here and across our businesses, we deepen MetLife’s competitive advantage into the future.
The third pillar of our strategy is differentiation. Those competitive advantages that set us apart from our peers, one of the most important is our talent. A major strength of being a truly global Company is that we can redeploy talent to match it against our most promising opportunities. This is precisely what we have done in the latest round of leadership changes that MetLife announced last month. I want to begin by thanking Oscar Schmidt, for his exemplary service to MetLife over the past 26 years. Under his leadership, MetLife has grown to become the largest life insurer in Latin America with a well diversified set of leading businesses across the region.
When Oscar steps away from his executive position at the end of the year, we will rotate a number of executives into new roles. Eric Clurfain will move from CEO of Japan to Head of Latin America, Dirk Ostijn will move from Head of EMEA to CEO of Japan and; Nuria Garcia will move from deputy head of EMEA to running the region.
Taken together, these appointments demonstrate not only our commitment to talent development, but our deep bench of leaders who are ready to step up immediately and deliver value to our customers and shareholders. Another area of differentiation I want to highlight is sustainability which is core to our purpose at MetLife. The best talent want to work for sustainable companies. Corporate customers want sustainability embedded in their supply chains, and investors are increasingly interested in owning companies that incorporate environmental, social and governance principles into how they operate.
To highlight one example at MetLife, in September, we set ambitious new targets for our environmental performance. We committed to reduce our location-based greenhouse gas emissions by 30%, originate $20 billion in new green investments and direct $5 million to develop products and partnerships that will drive Climate Solutions, all by the year 2030.
We believe sustainability can be a competitive differentiator for us. At a daylong session with our Board of Directors in late September, we pressure tested every aspect of our Next Horizon strategy. We came away more confident than ever that our strategy will not only continue to guide us through the current environment, but position us to emerge from the crisis in even stronger shape.
From capital deployment and digital acceleration to expense rigor and a culture of experimentation, we are accelerating the pace of change to win with customers and create shareholder value. Before I close, I would like to say a few words about one of the towering figures in the history of MetLife. John Creedon, MetLife’s President and CEO from 1983 to 1989, passed away on October 11, at the age of 96. John’s past [Phonetic] at MetLife literally took him from the main [Phonetic] room to the boardroom.
Among his many notable achievements was hiring Snoopy and the Peanuts gang and furthering the Company’s expansion into global markets. But perhaps, what best captures John’s carrier was his passion for the customer. The overarching goal he had in every job was to exceed customer expectations. John’s passing reminds us that we are stewards of a great institution. MetLife was around long before we got here, and it will be around long after we are gone.
Our task is to create long-term value for MetLife’s many stakeholders, including our shareholders to ensure, in the words of our purpose statement, that we will be always with you building a more confident future.
With that, I will turn the call over to John McCallion.
John D. McCallion — Executive Vice President, Chief Financial Officer
Thank you, Michel and good morning. I will start with the 3Q’20 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. In addition, the slide provide more detail on our annual global actuarial assumption review 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 third quarter. Net income in the third quarter was $633 million or $945 million lower than adjusted earnings. This variance is primarily due to net derivative losses resulting from higher long-term interest rates as well as the stronger equity markets in the quarter. The investment portfolio and hedging program continue to perform as expected.
In addition, the actuarial assumption review accounted for $98 million of the variance between net income and adjusted earnings, which I will now discuss in more detail on Page 4. During the quarter, the actuarial assumption review reduced net income by $301 million of which $203 million impacted adjusted earnings. The most significant driver was the reduction of our long-term U.S. ten-year treasury interest rate assumption from 3.75% to 2.75%. In addition to this 100 basis point reduction, we have extended our mean reversion rate to 12 years. These changes reflect expectations of lower interest rates for a longer period of time.
The overall impact to earnings is consistent with the sensitivities provided on our second quarter 2020 earnings call. Page 5 provides a breakdown of the actuarial assumption review by business segment. The vast majority of the earnings impact was in MetLife Holdings, primarily due to the change in our long-term U.S. interest rate assumption. We also had a few adjustments in Asia, Latin America and EMEA, primarily due to lower interest rates and various changes in policyholder behavior.
On Page 6, you can see the year-over-year comparison of adjusted earnings by segment excluding notable items in both periods. Both quarters exclude the impact of their respective actuarial assumption reviews. In addition, the prior year quarter had $88 million associated with our completed unit cost initiative, which was accounted for in Corporate and Other. Excluding these notable items, adjusted earnings were up 24% and 25% on a constant currency basis.
On a per share basis, adjusted earnings were up 27% and 28% on a constant currency basis. Overall, variable investment income was higher than third quarter of ’19 by $257 million after tax. This year-over-year increase in VII accounted for nearly 75% of the total adjusted earnings growth. Favorable expense margins and solid volume growth were other key year-over-year drivers.
Turning to the performance of our businesses. Group Benefits’ adjusted earnings were up 7% year-over-year. The Group Life mortality ratio was 89.6%, which improved sequentially and included a roughly 3 percentage points related to COVID-19 claims. This is at the top end of our annual target range of 85% to 90%. We expect the Group Life mortality ratio in the fourth quarter to be modestly above the annual target range as fourth quarter tends to have higher seasonal life claims and we expect COVID-19 related claims will remain elevated.
The interest adjusted benefit ratio for the Group non-medical health was 67.4% which is below our annual target range of 72% to 77% driven by favorable dental and disability results. As the quarter progressed, dental utilization came in above the expectations, which was offset by the partial release of the unearned premium reserve we established in the second quarter. We expect this dental utilization trend to continue and would expect the Group non-medical health ratio in the fourth quarter to be at the low end of its annual target range of 72% to 77%.
In regards to the top line, Group Benefits’ adjusted PFOs were up 7% year-over-year due to growth across most products in markets as well as the partial release of the unearned dental premium reserve. Excluding the unearned dental premium reserve release, which totaled approximately $110 million, Group Benefits’ PFO growth would have been within the annual target range of 4% to 6%. Retirement and Income Solutions or RIS adjusted earnings were up 73% year-over-year. The drivers were strong investment margins primarily higher variable investment income, favorable underwriting margins of roughly $50 million in the quarter, of which we estimate approximately half is related to elevated COVID-19 mortality and volume growth.
RIS investment spreads for the quarter were 156 basis points, up 54 basis points year-over-year. Spreads excluding VII were 98 basis points in the quarter, up 19 basis points year-over-year primarily due to the decline in LIBOR rates and an increase in prepayments of RMBS held on our books at a discount.
Looking ahead, we expect RIS investment spreads in 4Q to decline sequentially, primarily due to lower VII, but still coming at the top end of the annual guidance range of 90 basis points to 115 basis points. RIS liability exposures grew 12.5% year-over-year, driven by strong volume across the product portfolio, as well as separate account investment performance.
While liability exposures grew, RIS adjusted PFOs excluding pension risk transfers were down 8% year-over-year, due to lower structured settlement and institutional income annuity sales. Regarding pension risk transfers, we had approximately $500 million of PRT sales in the quarter and are seeing a good pipeline building once again. Property & Casualty or P&C adjusted earnings were down 68% versus the prior year period, driven by unfavorable underwriting margins due to higher catastrophe losses.
The overall combined ratio was 104.2%, which was above our annual target range of 92% to 97% and the prior year quarter of 98.4%. Catastrophe losses were $115 million after-tax in the quarter, $60 million higher than 3Q of ’19. This quarter’s cat, primarily related to a tropical storm that impacted the Northeast and severe windstorms in the Midwest. It was the highest quarterly cat loss for our P&C business in nearly a decade.
Moving to Asia. Adjusted earnings were up 34% and 32% on a constant currency basis, primarily due to higher variable investment income as well as favorable underwriting and expense margins. In addition, Asia continues to benefit from solid volume growth, driven by higher general account assets under management, which were up 6% on an amortized cost basis.
Looking ahead, we expect Asia’s strong VII and favorable underwriting in 3Q to return to more normal levels in the fourth quarter. Latin America adjusted earnings were down 67% and 62% on a constant currency basis, primarily driven by unfavorable underwriting and lower Chilean encaje returns, which were essentially flat in the quarter.
Elevated COVID-19 related life claims primarily in Mexico impacted Latin America’s adjusted earnings by approximately $70 million after-tax in the quarter. We expect COVID-19 related claims in the fourth quarter to remain elevated. EMEA adjusted earnings were up 26% and 30% on a constant currency basis, primarily driven by favorable underwriting margins as a result of lower claims in group policies in the region, as well as better expense margins and volume growth.
MetLife Holdings’ adjusted earnings were up 35% year-over-year. This increase was primarily driven by higher private equity returns as well as favorable underwriting margins as lower claim incidents in long-term care more than offset marginally higher life claims due to COVID-19. The Life interest adjusted benefit ratio was 60.2%, which included 7.3 percentage points related to the actuarial assumption review. Adjusting for this impact, the Life interest adjusted benefit ratio was 52.9% within our annual target range of 50% to 55%.
Looking at the 4Q, we expect MetLife Holdings’ adjusted earnings to return to more normal levels due to lower VII and more normal underwriting results in long-term care. Corporate and other adjusted loss was $131 million. This result was modestly more favorable than the prior year quarter, which had an adjusted loss of $135 million excluding notable items. This quarter’s results reflect lower expenses, partially offset by less favorable investment margins as well as higher preferred stock dividends.
As we outlined in our 2Q earnings call, we expect an adjusted loss range of $325 million to $375 million in the second half of 2020 which implies Corporate and Other adjusted losses to be between $200 million to $250 million in 4Q. The Company’s effective tax rate on adjusted earnings in the quarter was 20% at the bottom of our 2020 guidance range of 20% to 22%.
Now let’s turn to VII in the quarter on Page 7. This chart reflects our pre-tax variable investment income over the prior five quarters, including $652 million in the third quarter of 2020. This strong result was mostly attributable to the private equity portfolio which had a 6.7% return in the quarter. As we have previously discussed, private equities are generally accounted for on a one quarter lag and the positive marks included in our third quarter results are in line with the outlook offered in our last earnings call.
There was also a positive contribution to VII from hedge funds, which had a 13% return in the quarter, as well as higher prepayment fees. In the fourth quarter we expect VII to remain strong, but closer to the pre-2Q20 trend levels. Now let’s take a look at VII by segment on Page 8. This table breaks out the third quarter VII of $515 million after-tax by segment. The three largest recipients of VII in the quarter were MetLife Holdings, RIS and Asia. The allocation of VII by business segment is based on the quarterly returns of their individual portfolios. That said, as a general rule, MetLife Holdings, RIS and Asia will account for approximately 90% of the total VII and roughly split one-third each.
Our new money rate was 2.76% versus a roll-off rate of 3.81% in the quarter. This compares to a new money rate of 3.41% and a roll-off rate of 3.72% in 2Q of ’20. The 65 basis points sequential decline in the new money rate was primarily due to tighter credit spreads in the quarter, purchases of short term investments to match short term issuances in our capital markets business as well as higher liquidity at the holding company.
We also purchased close to $1 billion in low-yielding foreign government bonds primarily JGBs to invest cash flows associated with recurring premium income from our Japanese Yen in-force block. Looking ahead, we expect new money yields in 4Q to remain at comparable 3Q levels as we maintain our disciplined approach to investing in high-quality assets despite persistently tight credit spreads.
Turning to Page 9, this chart shows our direct expense ratio from 2015 through 2019, and the first three quarters of 2020. In 3Q, our direct expense ratio was 11.4%. This low ratio was driven by a reduction in direct expenses, increased availability of our dental services driving higher premium and a reserve release in Corporate & Other. Year-to-date, our direct expense ratio was 11.9%. We expect the direct expense ratio to be higher than trend in 4Q, primarily due to seasonality. In our Group Benefits business, we incur higher enrollment in other costs, prior to receiving premiums. Also, certain corporate initiative costs are expected to be higher in 4Q.
Overall, as Michel noted, we are increasingly confident that we will beat our full year target of approximately 12.3%, as we continue to deploy an efficiency mindset to increase capacity for reinvestment and to protect the margins of the firm. I will now discuss our cash and capital position on Page 10. Cash and liquid assets at the holding companies were approximately $7.8 billion at September 30th, which is up from $6.6 billion at June 30th, and well above our target cash buffer of $3 billion to $4 billion. The $1.2 billion increase in cash at the holding companies was primarily the result of a $1 billion preferred stock issuance in the quarter.
The proceeds from this issuance were used in October to redeem $1 billion of preferred stock outstanding. In addition, cash at the holding companies reflect the net effects of subsidiary dividends, payments of our common stock dividend, share repurchases of $80 million in the quarter as well as holding company expenses and other cash flows.
Next, I would like to provide you with an update on our capital position. For our U.S. companies, preliminary third quarter year-to-date 2020 statutory operating earnings were approximately $3.2 billion, while net income was approximately $2.8 billion. Statutory operating earnings decreased by $200 million from the prior-year period, primarily due to higher VA rider reserves and the impact of a prior year dividend from an investment subsidiary.
This was partially offset by the favorable underwriting, higher separate account returns and lower operating expenses. Year-to-date, net income was lower due to the decrease in operating earnings and other realized losses. These were partially offset by derivative gains in the current year. We estimate that our total U.S. statutory adjusted capital was approximately $21 billion at September 30th, up 12% compared to December 31st, 2019.
Operating income and derivative gains more than offset dividends paid. Finally, the Japan solvency margin ratio was 892% as of June 30th, which is the latest public data. Overall, MetLife delivered a strong quarter, bolstered by an increase in variable investment income and supported by the solid fundamentals from a diverse set of market-leading businesses.
In addition, we believe our capital liquidity and investment portfolio are strong, resilient and well positioned to manage through and come out stronger in this challenging environment. Finally, we are confident that the actions we are taking to be a simpler and more focused company, will continue to create long-term sustainable value for our customers and our shareholders.
And with that, I will turn the call back to the operator for your questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions]. Your first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
Elyse Greenspan — Wells Fargo — Analyst
Hi, thanks, good morning. My first question is on the capital discussion, you guys mentioned you have a good amount of excess capital above the buffer you’d like to hold at the holding company. Even if we adjust the preferred stock that you paid back subsequent to the end of the quarter.
So just trying to get a sense of how you’re thinking about kind of working your way back down to kind of the target buffer and — as we think about the environment normalizing combined with potentially holding on to some excess capital for potential M&A as we hear about some kind of new properties that could potentially be out there in the life space.
Michel A. Khalaf — President and Chief Executive Officer
Good morning, Elyse it’s Michel. So let me begin by saying that at a high level, we have a well diversified mix of market-leading businesses and I think that diversity was on display in the largely offsetting impacts from COVID-19. In addition, we believe that our capital, liquidity and investment portfolio are strong, resilient and well positioned to manage through and come out stronger in this challenging environment.
And ultimately, I think this — this we believe underscores the durability of our All-Weather, Next Horizon strategy and our consistent execution across a range of economic scenarios. What I would say around sort of our capital management philosophy is that it has not changed. So we believe excess capital above and beyond what’s required to fund organic growth belongs to our shareholders and should be used for share repurchases, common dividends or strategic acquisitions that clear a minimum risk adjusted hurdle rate.
As you — as you mentioned, as you referenced, after we complete our buyback authorization by year-end and the Versant acquisition, we expect to have a cash buffer, well in excess of our $3 billion to $4 billion target. But no change in terms of our philosophy and how we would deploy excess capital.
Elyse Greenspan — Wells Fargo — Analyst
Okay, that’s helpful. And then my second question, I wanted to get a little bit more color on the Group side. The non-medical results have been pretty strong this year, and you kind of alluded to favorable dental results and it sounds like that should continue into the fourth quarter as a kind of low-end of your range. How should we think about — you know that business kind of performing into 2021? If you just have some initial thoughts obviously given that the business has been a bit of kind of volatile this year, given the impact of COVID.
Ramy Tadros — President, U.S. Business
Hi. Good morning, Elyse, it’s Ramy here. So with respect to the non-medical health ratio, first, we’ve got the disability part of that business, historically, you’ve seen a linkage although be it a delayed linkage between recessions and increases in frequency and lower recoveries on the LTV book.
We have not seen that yet. The results continue to track pretty favorably on the LTD side. But there is a lag and we’re continuing to monitor this pretty carefully. On the STD side, the COVID impact has been a push for us as we look forward, so higher, higher COVID related claims have been offset by lower claims due to delays of elective surgeries, etc.
So we continue to monitor the LTV book into next year, but I would remind you, we can reprice just shy of 50% of that business every year. So our block is about 13% of our PFOs and about half of that can be repriced every year. So this is a short-term business and we have a track record of being able to appropriately react to changes in the environment and get the rate changes that we need.
On the dental side, this year has been an exceptional year in the sense that we’ve had all the shutdowns that are COVID related in the second quarter and hence the rationale and the reason why we have set up the unearned premium reserves. As we look forward in terms of the dental business, as John mentioned, as the quarter progressed, dental offices are more fully opened and we started seeing utilization levels primarily in September that came in above our typical levels as the patients are made up for those services and this was offset by the partial release of the dental premium that we set up in the second quarter.
Sitting here today, we expect to continue to see above typical utilization levels in the fourth quarter for dental and you will also see us release the balance of the unearned premium reserve in the fourth quarter for the dental business.
Elyse Greenspan — Wells Fargo — Analyst
Okay, that’s helpful. Appreciate all the color. Thank you.
Operator
Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Thomas Gallagher — Evercore — Analyst
Thanks. First question is on MetLife Holdings. Just following the equitable risk transfer deal, a New York company with pretty attractive pricing on that deal, would you say it makes you more likely to consider risk transfer for that business?
John D. McCallion — Executive Vice President, Chief Financial Officer
Good morning, Tom. It’s John. So let me just start with — I don’t think our commentary would change here. So one, as I said before, our focus is on optimizing MetLife Holding. It’s a large and stable, well seasoned in-force, it’s diversified, it has got a number of natural offsets. It’s a good source of sustainable free cash flow. That said, we’ve continued to take an external perspective in the third party view of the business, and one, I think it makes us better managing the business. Two, we need to do this work, because there is — it has got some complex — complexity to it. So you need to do the work upfront. And, I think it can give us an opportunity to accelerate albeit appropriately the release of capital reserve.
So I think it was an interesting data point, I think bid-ask spreads are still wide. But certainly, as I said before, I think, increases in supply here can narrow that and I don’t think it’s changed the sense of urgency we have on how we optimize the business.
Thomas Gallagher — Evercore — Analyst
Okay, thanks. And just my follow up is topline in Group Benefits, it’s holding up pretty well and better than most peers. Do you see that trend continuing as you think about 2021?
Ramy Tadros — President, U.S. Business
Hey, it’s Ramy here. We’re clearly pleased with the performance of this quarter and we’re exceptionally pleased with the performance, especially in the context of a difficult environment. I mean, think about the rise in unemployment rates, think about that we are in the middle of the pandemic as the largest group life insurer in the country and we’re there paying claims and fulfilling promises to our customers and beneficiaries.
So just to give you a sense on top line, for the full year, we would expect to be from a year-over-year perspective close to the bottom end of our PFO guidance range of 4% to 6% and that’s even if you factor in the premium discounts that we’ve given in dental. And I would remind you that you should expect to also see topline PFO growth be in double-digits next year with the addition of Versant. So if you’re thinking about the top line growth, we still have a pretty robust view of next year.
Thomas Gallagher — Evercore — Analyst
Okay, thanks. Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Ryan Krueger — KBW — Analyst
Thanks, good morning. First, I had one follow-up to Tom’s question. One piece of MetLife Holdings is participating in Life, which I assume would be a pretty attractive liability to reinsurers. But, my question is, because its participating in some pretty mutual basin, is there any impediment to you looking for risk transfer for that specific block?
John D. McCallion — Executive Vice President, Chief Financial Officer
Hey Ryan, it’s John. I would just say — to start that, I would say, nothing is necessarily off the table, but there is a — there is a closed block and then there is an open block that have participating policies associated with it. And I think, certainly the closed block has different complexity associated with it.
Both are very well performing blocks of business and as I said before, we have a number of businesses that are actually complementary, have a number of natural offsets, some of which you actually saw come from this quarter. But yeah, I think just to answer your question directly, certain blocks would have different complexities than others.
Ryan Krueger — KBW — Analyst
Got it, thanks. And then on retirement spread, they did pick up quite a bit on an underlying basis, ex-VII in the quarter and I heard your comment on the full year, but as we look a little bit longer into 2021, can you give us any sense of kind of the rough ranges to think about here?
Michel A. Khalaf — President and Chief Executive Officer
So you may have heard John’s opening remarks, we’re going to have an outlook call in February, and we’ll give more color there. But look, I would just give maybe some qualitative commentary to start. One is, we’ve seen this — we’ve seen some resiliency here in our spreads and it goes back to just the diverse set of businesses we have, not just in terms of source of earnings, but even across spread businesses. We have diverse set of spread businesses, some of which do well in a lower rate steeper curve environment and then we have longer tail legacy blocks that obviously would have some spread pressure over a long period of time.
And so — so all the things considered, I think we’ve seen a pretty resilient spread level this year. Nonetheless, you know, I think over time, there would — there would be longer-term pressure on some of those other long-term blocks, but that ignores new business.
Ryan Krueger — KBW — Analyst
Got it. Thanks, John.
Operator
Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
Nigel Dally — Morgan Stanley — Analyst
Great. Thanks and good morning. So with optimizing your businesses, can you discuss the importance of the Property & Casualty business. There’s an article back in September highlighting potentially that we should include employee [Indecipherable] sale, I know you probably don’t want to speak to that specific article, but I think you can discuss just where it fits strategically into your above mix.
Michel A. Khalaf — President and Chief Executive Officer
Yeah, hi, Nigel, sure. So, first of all I will say this is a well-run good business, our P&C business. It’s been consistently profitable. It generates mid teen ROEs, and it does have an important strategic connection to our group business. It also produces a steady source of non-correlated free cash flow. So I think those are the comments that I would make about the business.
And as you said, we’re not going to speculate or we’re not going to respond to any potential rumors here.
Nigel Dally — Morgan Stanley — Analyst
Okay, that’s helpful. Thank you.
Operator
Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
Erik Bass — Autonomous Research — Analyst
Hi, thank you. Just going back to RIS. Volumes have also been pretty strong year-to-date despite a lower level of PRT activity. So just can you talk about what’s been driving this and how you see the outlook for liability growth?
Ramy Tadros — President, U.S. Business
Hi, Erik, it’s Ramy here. So, and as we’ve talked about, there are number of different parts of businesses within RIS. We have seen a significant pickup in sales and stable value, deposits this year. A lot of that was driven by individual seeking the safety that stable value offers them inside their DC plans. Offsetting that, if you think about the other parts of RIS, we’ve seen more pressure in the Structured Settlements business, the institutional annuity business and a lot of those businesses are rate sensitive. So, the value proposition to the customer, if you will is diminished in lower rate environment.
And so, think about the volumes there as being continuing to be driven by the rate environment. PRT, we are seeing it starting to pick up as John mentioned, we’re looking at a pretty, at a pretty healthy pipeline in Q4. But as we’ve talked about before, we’re not chasing top line here, we continue to be highly disciplined in terms of our pricing of every single deal that we look at in the PRT space.
And then finally, as you’ve probably have seen, we are now well into our entry into the U.K. longevity market so far this year, with close to $1 billion in sales in terms of longevity swaps and we continue to see a robust pipeline there into Q4 and into next year. I would just come back and reiterate. For RIS, it’s the — we’ve seen a very healthy top line, we’ve seen very healthy growth in liability balances. But discipline is the name of the game here in terms of looking for the returns as opposed to chasing growth.
Erik Bass — Autonomous Research — Analyst
Thank you. And then maybe if I could ask one for Steve Goulart, just hoping you could discuss your outlook for the commercial real estate sector and how do you see the current stresses affecting both your commercial mortgage loan portfolio as well as CMBS more broadly?
Steven J. Goulart — Executive Vice President and Chief Investment Officer, MetLife, Inc., and President, MetLife Investment Management
Sure. Thanks, Erik. I think we’ve talked about this on a couple of prior calls. Obviously, it’s an important topic, it’s an important investment for us in commercial mortgage loans. We continue to be optimistic about the sector. We like it, we continue to invest in the sector. I think back actually to some of the comments I made, I think it was actually in perhaps response to one of your questions, but we did see deferral request as we entered into the COVID pandemic.
I think I mentioned on our last earnings call that those got to about 9% of our principal balance outstanding. But that appears to be sort of where we topped out and what’s most important now is as those are rolling off the deferral request you know where we’ve seen 60% of them roll off and they’ve all gone back to resuming payment.
So I think that supports our underlying view of strength in this sector, Erik, and it continues to be important for us.
Erik Bass — Autonomous Research — Analyst
Thank you.
Operator
Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.
Suneet Kamath — Citigroup — Analyst
Thanks. I wanted to ask about Asia sales. They’re down year-over-year, but up pretty sharply on a sequential quarter basis. Just curious what’s going on there. We heard from another company that there was a pull forward of sales because of some rate changes that helped their sales growth. Just wondering if there was any kind of similar dynamic at MET or more specifically what you’re seeing in terms of driving that growth.
Kishore Ponnavolu — President, Asia
Suneet, this is Kishore. Let me say that the premise of your question is correct in the first part. So let me — based on your question, let me start by putting a little bit of context to our sales performance in Q2. In the second quarter, lock downs and social distancing restrictions had a significant impact on our sales and Q2 sales for Asia overall dropped 44%, 55% in Japan compared to prior year.
To overcome this challenge, we took several distribution and product actions. As you — you’re well aware of all the past investments we’ve been making in sales platforms and on top of that, we implemented several digital solutions to augment our face-to-face interactions. And we also stepped up our sales management activities as well.
And because of these actions, we’ve seen a very strong recovery in — with retails as you rightly pointed out. Q3 sales increased sequentially 63% for overall Asia, 85% in Japan and our year-over-year drop is now reduced to 16%. So, you asked about the repricing, that was — you know we did reprice our level premium FX product, it was a contributing, but not a major factor in driving our sequential growth.
So another way to look at this is to how we’re seeing how this is going to play out for the rest of the year. We expect the impact of our actions that we’ve taken so far to sustain our Q3 momentum. While the environment is still challenging for face to face sales environment, we are seeing a pickup in our sales pipeline and you should expect a positive year-on-year growth for Asia as a whole.
Suneet Kamath — Citigroup — Analyst
Got it. Thanks for that. And then I guess, [Speech Overlap] Yeah, no, it does. Thank you. Another quick one for John on the VA block. Just curious as you had mentioned something that reserves on a statutory basis, but is this block sort of past the peak reserve funding period or are you still sort of building reserves as the block matures and at what point do you think you’d be at sort of peak reserves? Thanks.
John D. McCallion — Executive Vice President, Chief Financial Officer
Good morning, Suneet. Just as a reminder, we have roughly $50 billion of VA account balances, half of it is a living benefit guarantee as we showed you back at Investor Day and that has been rolling off consistently over time. Having said that, there are certain components of that block that are building reserves and others that are, I’d say, kind of settled down in terms of the reserve build.
So it depends on which vintage you’re talking about.
Suneet Kamath — Citigroup — Analyst
Is there any way to give us a percentage of the block at that peak reserves versus the block that you’re still building?
John D. McCallion — Executive Vice President, Chief Financial Officer
I probably have to get back to you on that when I have it handy.
Suneet Kamath — Citigroup — Analyst
Okay, thanks.
Operator
Your next question comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead.
Jimmy Bhullar — J.P. Morgan — Analyst
Hi, good morning. I had a couple of questions. First on your Latin America business sales were down a decent amount year-over-year. I’m assuming that’s mostly because of COVID, and to the extent it is, can you give us any color on whether things got better as the quarter went on? And how do you see things working out through the next quarter or two? And then I have another one.
Oscar Schmidt — President, Latin America
Hi, Jimmy. This is Oscar. So let me talk about the quality of our topline overall. So as you said, sales are down because of social distancing because of COVID that affects the entire region. But if you think about it, the sales that were performing are all done remotely, it’s really good performance considering the potential after social distancing goes away.
But if you think about our premiums and fees and even exclude PF, and let me say that PFs in Chile sales are really down because of — most of Chileans are deferring their decision to retire. So PF sales are really down. If you exclude PF impacts in our Premiums and fees, year-over-year, we are growing above mid single digits, which is pretty healthy considering the COVID environment. And that speaks about the quality of our persistency, not just the resilient sales.
So we are very confident about our top line health particularly if you strip out this PF which as I said are really related to few number of Chileans deciding to retire. So we’re very confident as well that our agents, our support channels [Indecipherable] remotely as they did, as they can start dealing face-to-face with the customers, sales are going to go back to normal, and it’s happening. So we’re very happy about the potential.
Jimmy Bhullar — J.P. Morgan — Analyst
And then maybe a bigger picture question, you’ve done a few sort of niche acquisitions and Group Benefits. But — and obviously you’re growing capital toward buybacks as well. Given your — where your stock price is, can you comment on your interest in, sort of larger acquisitions and how you think about those as there are — there is a decent amount of activity in the business lines that you are you in.
Are you interested in large acquisitions as well or not as much given sort of the potential accretion from buybacks at this price?
John D. McCallion — Executive Vice President, Chief Financial Officer
Hi, Jimmy. Look, I mean I go back to our strategy and what we shared with you at the Investor Day last December. If I look at our portfolio, especially factoring in some of the recent acquisitions, Versant Health, Pet — PetFirst and as you know, Willing, I don’t, we don’t see gaps in terms of the portfolio, that of businesses that we have. We see plenty of organic growth opportunities. And, we are focused on getting the synergies and whether cost or revenue synergies from those acquisitions that I referenced. So hopefully that gives you a bit of, sort of insight into our thinking here.
Jimmy Bhullar — J.P. Morgan — Analyst
Thanks.
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. My first question is, when we look — looking at the annual assumption review, should we think about where there’s going to be some ongoing run rate earnings impact into some of your segments?
John D. McCallion — Executive Vice President, Chief Financial Officer
Good morning, Humphrey. It’s John. No, we don’t expect any material changes in ongoing run rate earnings as a result of the assumption review.
Humphrey Lee — Dowling & Partners — Analyst
Got it. My second question is, I think in Michel’s prepared remarks you talked about entering into Absence Management business. How should we think about the corresponding expense impacts from the investment into the business, especially since some of your peers have incurred quite a meaningful LIBOR expenses for this business as they ramp up?
Ramy Tadros — President, U.S. Business
Hi, Humphrey, it’s Ramy here. So in terms of our actual expenses, relating to our disability business this quarter we’re running right in line with expectations. So we’re not — we’re not really seeing any impact here whatsoever. What Michel was talking about is some of our broader investments in technology and platform around disability and absence management. All of those numbers and all of those investments have been baked into our run rate that you’ve seen over the past many quarters. And our investments here are in areas like pricing sophistication, contract competitiveness, clinical model in terms of the return to health initiatives which are critical for the LTD business and we are already seeing positive business outcomes.
And that end to end disability in Absence Management solution which Michel was talking about is already resonating in the market with the larger employers. It includes things like the digital interface for claimants, AI-driven automated claim processing, sophisticated data analytics for employers, so that they can understand their workforce. And we’re expecting to see growth here although growth with discipline in this area going forward.
John Hall — Global Head of Investor Relations
And Humphrey, it’s John. I would just add just to Ramy’s — add to Ramy’s point there, in a little bit to the way you asked the question, this is all part of the — as we refer to as the efficiency mindset concept where we continue to drive efficiencies every quarter in the firm and look for opportunities then to redeploy that into strategic reinvestments, to support our market-leading businesses and doing all of that within our run rate cost.
So I’ll just go back to that point, we made that point at Investor Day and I think it’s a key — key component for us as we move forward.
Humphrey Lee — Dowling & Partners — Analyst
Got it. I appreciate the color.
Operator
Your next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.
John Barnidge — Piper Sandler — Analyst
Thank you. Another life insurer that reported last night talked about elevated non-COVID mortality from delaying care, heart attacks and deaths of despair in their book. As it relates to the Group Life business and benefits, are you seeing any signs of this?
John D. McCallion — Executive Vice President, Chief Financial Officer
No, we’re not.
John Barnidge — Piper Sandler — Analyst
Okay. And then, are you seeing any signs of permanent change to behavior coming out of COVID that may impact claims utilization trends on a more secular basis? Thank you for the answers.
John D. McCallion — Executive Vice President, Chief Financial Officer
Not yet.
Operator
And at this time there are no further questions. I’d now like to turn the call back to Michel Khalaf.
Michel A. Khalaf — President and Chief Executive Officer
Thank you. In closing, I believe our performance in Q3 and so far in 2020 underscores the sense of urgency and laser-focus and how this leadership team is executing on our Next Horizon strategy to create long-term shareholder value.
I am thankful and proud of the effort and commitment of our employees around the world who are going above and beyond to deliver for our customers. Please be safe and talk soon.
Operator
[Operator Closing Remarks].