MetLife Inc (NYSE: MET) Q4 2022 earnings call dated Feb. 02, 2023
Corporate Participants:
John Hall — Senior Vice President and Head of Investor Relations
Michel A. Khalaf — President and Chief Executive Officer
John D. McCallion — Executive Vice President and Chief Financial Officer
Ramy Tadros — Regional President, U.S. Business
Eric Clurfain — Regional President, Latin America
Steven J. Goulart — Executive Vice President and Chief Investment Officer, MetLife, Inc., and President, MetLife Investm
Analysts:
Erik Bass — Autonomous Research — Analyst
Tom Gallagher — Evercore — Analyst
Ryan Krueger — Keefe, Bruyette & Woods, Inc. — Analyst
Alex Scott — Goldman Sachs — Analyst
Suneet Kamath — Jefferies — Analyst
Elyse Greenspan — Wells Fargo — Analyst
Presentation:
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter and Full Year 2022 Earnings and Outlook Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.
Before we get started, I refer you to the cautionary note about the 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 — Senior Vice President and Head of Investor Relations
Thank you, Operator. Good morning, everyone. We appreciate you joining us for MetLife’s Fourth Quarter 2022 Earnings and Near-Term Outlook Call. Before we begin, I’d point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release, and in our quarterly financial supplements, which you should review.
On the call this morning are Michel Khalaf, President and Chief Executive Officer, and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management.
Last night, we released a set of supplemental slides which address the quarter as well as our near-term outlook. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to the slides features outlook sensitivities, disclosures, GAAP reconciliations, and other information which you should also review. After prepared remarks, we will have a Q&A session. In light of the busy morning, Q&A will promptly end at the top of the hour. In fairness to everyone, please limit yourself to one question and one follow-up.
With that, over to Michel.
Michel A. Khalaf — President and Chief Executive Officer
Thank you, John, and good morning, everyone. As I look back on 2022, I am pleased with the relevance of our Next Horizon strategy and how it positioned us to absorb the challenges presented in the year and to succeed going forward. 2022 was a year still affected by COVID and we incurred an impact of more than $650 million pretax. For the year, we saw pretax variable investment income come in 19% lower than our outlook expectations on lower returns in our private equity portfolio. And from a macroeconomic perspective, we felt pressure from rising inflation, falling equity market, and a stronger dollar. Yet, despite these hurdles, MetLife performed. Our strategy proved its resilience and our consistent execution driven by disciplined and determination paid off in 2022. We delivered an adjusted return-on-equity of 12.3% for the year, meeting our target for this important metric. We pushed ourselves, driven by our efficiency mindset, and succeeded in posting a full-year direct expense ratio of 0.2%. Our strong 2022 free cash flow generation enabled us to hit our two-year free cash flow ratio target of 65% to 75%. This fueled the return of $4.9 billion of cash to our shareholders. And finally, we ended the year with $5.4 billion of cash and liquid assets at our holding companies, arming us with ample financial flexibility. With our great set of market-leading businesses, good growth prospects around the world, and the strength of our balance sheet and our free cash flow generation, I believe MetLife is very well-positioned for the future.
When we established our Next Horizon strategy at the end of 2019, we made several five-year commitments against which we measure ourselves, and more importantly, hold ourselves accountable. I’m pleased with our success to date in meeting those commitments. Even more, I’m confident that we will beat each one. We committed to an adjusted return-on-equity of 12% to 14%. Today, we are boosting our target adjusted ROE range to 13% to 15%. This reflects in part our growth combined with our sustained discipline and pricing our products and in managing our capital. We said we would generate $20 billion over five years of free cash flow. We expect to exceed this target. We committed to freeing up an additional $1 billion over a five-year period to invest in growth and innovation. Again, we are on track to overachieve against this target and we are reaping the benefits of these investments.
When we made these commitments, we did not expect U.S. interest rates to approach the lowest level in history neither did we contemplate a global pandemic. While the environment may change, our accountability does not. We are also not content to maintain the status quo. We seek to challenge ourselves and push for more to raise the bar.
Now let’s turn to our fourth quarter 2022 results. Last night, we reported quarterly adjusted earnings of $1.2 billion, or $1.55 per share, which compares to $1.8 billion, or $2.17 per share a year ago. We generated strong underwriting results as COVID losses retreated further while our recurring investment income continues to grow on higher new money rates. This was offset by variable investment income falling below our quarterly outlook expectation and a stronger dollar. Shifting to the full-year 2022, the diversification of MetLife’s portfolio of market-leading businesses once again proved its value. Most of our businesses and segments have returned to underlying levels of earnings equal to or greater than prior to the pandemic.
Our U.S. group benefits business is a clear leader in this attractive segment of the life insurance industry. During the year, we grew our group benefits’ PFOs roughly 5% on top of double-digit growth the year prior. Our growth in group benefits represents more than $1 billion of new PFOs, bringing full-year group benefit PFOs to approximately $23 billion. These numbers matter. First, we bring the broader set of products to our customers: life, dental, disability, vision, A&H, legal, and pet insurance among many others, more than any other carrier. Second, group benefits is a business where you have to make significant investments to keep up with evolving customer and employer expectations. Our scale enables us to make those investments to add products and capabilities and to further digitize and enhance the customer experience. All of this adds up to drive the growth and persistency we’ve achieved in our group benefits business over the last several years as well as the growth we expect to achieve in the future.
Moving to highlights from other segments and businesses. Our retirement and income solutions business produced its strongest year of pension risk transfer volume in our history, more than $12 billion including our largest-ever single deal. Our Asia segment continued to generate strong sales growth, topping 11% on a constant-currency basis in a market that remained in COVID’s grip for much of the year. And our Latin America segment enjoyed both strong top- and bottom-line results, particularly in Mexico, as a heightened awareness of the importance of the products we offer, coupled with a flight to quality drove sales up 26% on a constant-currency basis, pushed persistency higher, and added to adjusted earnings.
Moving to capital and cash. MetLife is well-capitalized and has plenty of liquidity, well above our target cash buffer of $3 billion to $4 billion. Our U.S. and international insurance businesses are self-funding. Our strong capital and liquidity position allows us to meet our commitments and obligations but also equips us with the financial flexibility to seize attractive opportunities that may present in unsettled environments. We have built a clear track record in terms of how we deploy capital to its highest use. If we have opportunities to put capital to work organically or via mergers and acquisitions at appropriate risk-adjusted hurdle rates, we will do so. Case in point, we deployed approximately $3.8 billion of capital to support organic new business in 2022. Absent such opportunities, we will return capital to shareholders.
In 2022, we paid to MetLife shareholders $1.6 billion of common stock dividends, and we repurchased $3.3 billion of common stock. In January, we purchased roughly an additional $250 million of common stock and we have around $900 million remaining on our current authorization.
Before I close, I would like to take a moment to recognize a true visionary and the history of MetLife. Harry Kamen, MetLife’s Chairman of the Board and Chief Executive Officer from 1993 to 1998, passed away on December 20 at the age of 89. Harry spent nearly his entire career at MetLife, starting as a junior attorney. As Chairman and CEO, Harry infused MetLife with a new corporate vision and an emphasis on profitable growth, something very much in line with our current focus on responsible growth. Harry’s passing reminds us of the debt we owe at MetLife to those that went before us in building this great company since its founding in 1868.
In closing, our Next Horizon strategy continues to prove its resilience in a changing and shifting environment. Our total shareholder return of more than 19% in 2022 underscores the significant value we created for our shareholders against this backdrop. As we look ahead, our work is not done. We are raising the bar and setting our standards higher. As much as we have accomplished in recent years, I believe there is still much ahead for us to achieve. As the world has opened up, I was able to spend more time on the road in the last half of 2022 since the start of the pandemic. I’m more invigorated than ever to get out and meet face-to-face with our customers, our distribution partners, our employees, and our shareholders. I look forward to updating some and introducing others to what we’re building at MetLife, a company capable of being a quality compounder across a range of economic cycles.
Now, I’ll turn it over to John to cover our performance and outlook in detail.
John D. McCallion — Executive Vice President and Chief Financial Officer
Thank you, Michel, and good morning. I will start with the 4Q ’22 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions, and more detail on our near-term outlook. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in 4Q of ’22 was $1.3 billion, or $88 million higher than adjusted earnings. Net investment gains in the fourth quarter were primarily driven by real estate sales, which were partially offset by losses on the fixed maturity portfolio due to normal trading activity in a rising rate environment. Credit losses in the portfolio remained modest. In addition, we had net derivative gains, primarily due to the weakening of the U.S. dollar in the quarter. For the full year, net derivative losses accounted for most of the variance between net income and adjusted earnings, primarily due to higher interest rates in 2022. Overall, our hedging program continues to perform as expected.
On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment. Excluding $140 million of notable tax items that were favorable in the fourth quarter of ’21 and accounted for in corporate and other. Adjusted earnings in 4Q of ’22 or $1.2 billion, down 28%, and down 26% on a constant-currency basis. Lower variable investment income drove the year-over-year decline, while higher recurring interest margins and favorable underwriting were partial offsets. Adjusted earnings per share were $1.55, down 23% year-over-year, and down 21% on a constant-currency basis.
Moving to the businesses, starting with the U.S. Group benefits adjusted earnings were $400 million versus $20 million in 4Q of ’21, primarily due to significant improvement in underwriting margins, aided by lower COVID-19 life claims, as well as higher volume growth. This was partially offset by less favorable expense margins year-over-year. Group life mortality ratio was 87.6% in the fourth quarter of ’22. in the middle of our annual target range of 85% to 90%. Regarding non-medical health, the interest-adjusted benefit ratio was 69.4% in Q4 of ’22, slightly below its annual target range of 70% to 75%, and below the prior year quarter of 74.2%. The non-medical health ratio benefited from favorable disability severity while dental was in line with expectations.
Turning to the top-line. Group benefits adjusted PFOs were essentially flat year-over-year. As we’ve discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q4 ’21 versus Q4 of ’22 resulted in year-over-year decline in premiums from participating contracts, which dampened growth by roughly six percentage points. The underlying PFO increase of approximately 6% was primarily due to solid growth across most products, including continued strong momentum in voluntary. For the full year, group benefits adjusted PFO growth was 3% while underlying growth, excluding excess premiums from participating contracts in 2021 versus 2022, was up 5% and within the 2022 target range of 4% to 6%. Retirement and income solutions, or RIS, adjusted earnings were down 40% year-over-year. The primary driver was lower variable investment income, mostly due to weaker private equity returns. This was partially offset by favorable recurring interest margins year-over-year. RIS investment spreads were 96 basis points and 112 basis points excluding VII, up 21 basis points versus Q4 of ’21 and up 11 basis points sequentially, primarily due to income from in-the-money interest rate caps. RIS liability exposures were down 1% year-over-year due to certain accounting adjustments that do not impact fees or spread income. That said, RIS had strong volume growth, driven by sales of 23% in 2022. This was primarily driven by pension risk transfers and stable value products. In addition, we had a record sales quarter for structured settlements, demonstrating the strength of product diversification within RIS. With regards to PRT, we completed six transactions worth $12.2 billion in 2022, a record year for MetLife. And we continue to see an active market.
Moving to Asia. Adjusted earnings were down 63% and down 62% on a constant-currency basis, primarily due to lower variable investment income. In addition, we had a write-down of a deferred tax asset in China as it was determined that the accumulated tax losses were unlikely to be utilized within the required five-year statutory period. The write-down of the DTA reduced Asia’s adjusted earnings in Q4 of 2022 by $34 million after tax, and was accounted for in net investment income due to the equity method of accounting treatment for our China joint venture. While Asia’s underwriting was modestly unfavorable versus Q4 of ’21, we saw a significant sequential improvement due to lower COVID claims in Japan. Asia’s key growth metrics remained solid as general account assets under management on an amortized cost basis grew 4% on a constant-currency basis, and sales were up 12% year-over-year on a constant-currency basis, primarily driven by FX annuities sold through face-to-face channels in Japan.
For the full year, Asia sales were up 11%, exceeding its 2022 guidance of mid-to-high single digits. Latin America adjusted earnings were $181 million, up 45%, and up 51% on a constant-currency basis. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19 related deaths in Mexico were down significantly year-over-year. In addition, the Chilean encaje, which had a positive 6% return in 4Q ’22, versus 4% in the prior year, and higher recurring interest margins, were positive contributors. These two favorable items were partially offset by lower variable investment income year-over-year. LATAM’s top-line continues to perform well as adjusted PFOs were up 20% year-over-year on a constant-currency basis and sales were up 22% on a constant-currency basis, driven by growth across the region. EMEA adjusted earnings were $70 million, up 67%, and up 112% on a constant-currency basis, primarily driven by favorable underwriting versus Q4 of ’21, which had elevated COVID-19 related claims, particularly in the U.K. This was partially offset by less favorable expenses year-over-year. EMEA adjusted PFOs were up 2% on a constant-currency basis and sales were up 13% on a constant-currency basis, reflecting solid growth across the region.
MetLife Holdings’ adjusted earnings were $208 million, down 57%. This decline was primarily driven by lower variable investment income. In addition, less favorable expense margins and adverse equity market performance also reduced adjusted earnings year-over-year. Corporate and other adjusted loss was $219 million versus an adjusted loss of $177 million in the prior year, which excludes favorable notable tax items of $140 million. Higher taxes and lower net investment income were partially offset by lower expenses year-over-year. The company’s effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits, primarily related to the settlement of an IRS audit. Excluding these favorable items, the company’s effective tax rate was approximately 22% within our 2022 guidance range of 21% to 23%.
On Page 5, this chart reflects our pretax variable investment income for the four quarters and full year of 2022. VII was $24 million in the fourth quarter. The private equity portfolio, which makes up the bulk of the VII asset balances, had a negative 0.3% return in the quarter. As we have previously discussed, private equity is generally accounted for on a one quarter lag. For the full year, VII was $1.5 billion, below our 2022 target range of $1.8 billion to $2 billion. Our private-equity portfolio had a positive 7% return in 2022, a solid performance in comparison to the public equity markets with the S&P 500 down 19%. While VII underperformed in 4Q ’22, our new money rate increased to 5.66%, which was 150 basis points above our roll-off yield of 4.16%.
On Page 6, we provide VII post-tax by segment for the four quarters and full year 2022. On a full-year basis, you will note RIS, MetLife Holdings, and Asia continued to earn the vast majority of variable investment income, consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-dated liabilities, which are mostly in these three businesses.
Turning to Page 7. This chart shows a comparison of our direct expense ratio over the prior eight quarters and full-year 2021 and 2022. Our direct expense ratio in 4Q of ’22 was elevated at 13.1%, reflecting the impact from seasonal enrollment costs in group benefits, as well as higher employer-related costs and timing of certain projects. That said, as we have highlighted previously, we believe our full-year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. For the full year of 2022, our direct expense ratio was 12.2%, below our annual target of 12.3%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment, while continuing to make investments in our businesses.
I will now discuss our cash and capital positions on Page 8. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.2 billion at September 30 and remained above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $600 million in the fourth quarter, as well as holding company expenses and other cash flows. For the two-year period 2021 to 2022, our average free cash flow ratio, excluding notable items, totaled 68%, and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, we expect our combined 2022 NAIC RBC ratio will be above our 360% target. Preliminary 2022 statutory operating earnings for our U.S. companies were approximately $2.6 billion, while net income was approximately $3 billion. We estimate that our total U.S. statutory adjusted capital was $18.3 billion as of December 31, 2022, a decrease of 3% sequentially, primarily due to derivative losses and dividends paid, partially offset by operating earnings and investment gains.
Finally, while our Japan solvency margin ratio dipped below 500% as of September 30, we expect the Japan SMR to be approximately 700% as of December 31, which was based on statutory statements that will be filed in the next few weeks. As we have discussed on prior calls, our Japan business as well as MetLife overall does better economically in a higher interest rate environment. However, given the asymmetrical nature of how the SMR is calculated, the ratio declines in a rising rate environment as assets are mark-to-market, but not to corresponding liabilities. As a result, we executed an internal reinsurance transaction in December with our Bermuda entity, which has an economic-based solvency regime. This transaction improves the Japan SMR ratio by approximately 250 percentage points.
Before I shift to our near-term outlook starting on Page 9, a few points on what we included in the appendix. The chart on Page 15 reflects new business value metrics for MetLife’s major segments from 2017 through 2021. This is the same chart that we showed as part of our 3Q ’22 supplemental slides, but we felt it was worth including again for the sake of completeness. Also, Pages 16 through 19 provide interest rate assumptions and key outlook sensitivities by line of business.
Turning back to Page 9, our 2023 to 2025 outlook reflects the impacts of the new accounting requirements of long duration targeted improvements, or LDTI. While 2022 actually used for growth rate calculation to remain as previously reported on a pre-LDTI basis, in mid-April, or roughly two to three weeks prior to the reporting of our 1Q ’23 earnings, we planned to provide you with a re-casted QFS based on LDTI for each of the quarters in 2022. While there would be certain positive and negative effects depending on product and segment, we do not expect the underlying run rate of adjusted earnings for the firm overall to change materially.
Now let’s turn to Page 10 for further details on our near-term outlook. We assume COVID-19 to be endemic, consistent with the recent trends that we have been experiencing. We expect continued uncertainty to persist around inflation and a potential recession in 2023. Based on the 12/31/22 forward curve, we expect interest rates to rise in 2023. Finally, for purposes of the near-term outlook, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our long-term historical returns for PE.
Moving to near-term at targets. We are increasing our adjusted ROE range to 13% to 15%. This increase of 100 basis points from our prior 12% to 14% ROE range is a function of the growing impact of our mix of business and higher new business returns over the last several years, as well as the impact of LDTI. We expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings, excluding total notable items. Our direct expense ratio guidance for 2023 is being recalibrated to reflect LDTI by approximately 30 basis points to 12.6%. This captures an approximate $1 billion reduction in adjusted PFOs excluding PRTs due to the change in accounting. This is primarily related to certain annuity contracts within RIS as well as shifting certain variable annuity fees to market risk benefits, which are reported outside adjusted earnings. Since this change in accounting to LDTI will be retroactively applied back to the beginning of 2021, our previously reported direct expense ratios will likewise be recalibrated to put 2021 and 2022 on the same basis as 2023 and beyond.
Our VII for 2023 is expected to be approximately $2 billion after applying our historical average returns on asset balances. I’ll provide more detail on VII in a moment. Our corporate and other adjusted loss target is expected to remain at $650 million to $750 million after tax in 2023. We are increasing our expected — effective tax rate range by one point to 22% to 24% to reflect our expectation for higher earnings in foreign markets and lower tax credits in the U.S. At the bottom of the page, you will see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near-term.
On Page 11, the chart reflects our VII average asset balances from $14.7 billion in 2021 to $19 billion expected in 2023. Private equities will continue to hold the vast majority of our VII asset balances. We are applying our historical annual returns for each asset class within VII. In addition to the PE annual return of 12%, we expect an annual 7% return for real estate and other funds. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII.
So, now, I will discuss our near-term outlook for our business segments. Let’s start with the U.S. on Page 12. For group benefits excluding the excess premium from participating group life contracts of approximately $750 million in 2022, adjusted PFOs are expected to grow at 4% to 6% annually. Regarding underwriting, we expect the group life mortality ratio to be between 85% to 90%. We’re also maintaining the expected group non-medical health interest-adjusted benefit ratio at 70% to 75%. Keep in mind, these are annual ratios and are typically higher in the first quarter for both group life and non-medical health, given the seasonality of the business. For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general count spread and fee-based businesses. We are increasing the range of our expected annual RIS investment spread by 40 basis points to 135 to 160 basis points in 2023. The majority of this increase is driven by continued expectations of rising interest rates on the short end of the curve and the resulting benefit of interest rate cap income, which we expect to peak in the first half of 2023. In addition, LDTI will contribute approximately 10 basis points to the investment spread calculation while not increasing adjusted earnings. Upon transition to LDTI, the unlocking of future cash flow assumptions to current best estimate increased our deferred profit liability, which is amortized into earnings, and will now be included in the spread calculation, reducing other sources of earnings. Overall, the conversion to LDTI will not significantly change RIS run rate adjusted earnings.
For MetLife Holdings, we’re expecting adjusted PFOs to decline 12% to 14% in 2023, driven by the normal runoff of the business, market declines, and the transition to LDTI. Beyond 2023, we expect annual PFOs to decline 6% to 8%. We’re lowering the life interest-adjusted benefit ratio target to 40% to 45% in 2023 from the prior 45% to 50% target, to reflect the impact of lowering policyholder dividend levels. Finally, we’re maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2023.
Now, let’s look at the near-term guidance of our businesses outside the U.S. on Page 13. For Asia, we expect the recent sales momentum to continue and generate mid-to-high single-digit growth on a constant-currency basis over the near term. In addition, we expect general account AUM to maintain mid-single-digit growth on a constant-currency basis. We expect Asia’s adjusted earnings, excluding $270 million of COVID-19 claims in 2022, to grow at mid-single-digits over the near term. For Latin America, we expect adjusted PFOs to grow by low-double-digits over the near term. We expect our adjusted earnings to grow high-single-digits over the near term excluding roughly $80 million due to favorable market-related factors in 2022. Finally, for EMEA, we’re expecting sales and adjusted PFOs to grow mid-to-high single-digits on a constant-currency basis over the near term. We expect EMEA run rate-adjusted earnings to be roughly $55 million per quarter in 2023, reflecting the impact of currency headwinds, and then grow by high-single-digits in 2024 and 2025.
Let me conclude by saying that MetLife delivered a good quarter to close out another strong year, reflecting the strength of our business fundamentals: solid top-line growth, favorable underwriting, and ongoing expense discipline. While private equity returns were down this quarter, core spreads remain robust. In addition, results in our market-leading franchises, group benefits, and Latin America continued their strong growth and recovery. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build 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] And we go to the line of Erik Bass with Autonomous Research. Please, go ahead.
Erik Bass — Autonomous Research — Analyst
Hi. Thank you. So, we’ve recently seen an increase in the number of layoff announcements, particularly, from larger employers. So, I was just hoping if you could talk about what you’re seeing from your clients, particularly, in the group business, and then what you’re assuming for employment and wage inflation in your 4% to 6% PFO growth outlook.
Ramy Tadros — Regional President, U.S. Business
Thanks, Erik. It’s Ramy here. So, the short answer is we’re not seeing any impacts across our group business today. In fact, quite the opposite. So, maybe let me give you just a couple of overall points before I get into the specifics of our business. So, if you think about a recession and a potential recession, as you know, no two recessions are the same. So, sitting here, it’s really difficult to speculate how a potential recession scenario could play out in terms of the employment levels, in particularly, as to which segment of the economy that would impact. And the second point before I get into the specifics of the business, we’ve all seen the headlines, but overall, we’re still sitting in a pretty tight labor market with pretty — with low unemployment levels. And you also have to remember when you look at group benefits, there are underlying long-term trends with respect to the dynamics in the workplace which really favor benefits, and we see those trends continuing far out in the future. So, if you think about specifically our franchise, while we’re certainly not immune to our downturn, there are a number of important mitigants in our business which make us fairly resilient from a top-line and a bottom-line perspective, and I would say, give us real confidence sitting here today with respect to our guidance ratios in terms of PFO growth.
So, let me just give you a — kind of a bit of a sense of what gives us that confidence. From a top-line perspective, our book is highly diversified by industry and by size of employer, which limits our diversification — our exposure to any single segment. So, really, diversification is our friend here and is crucial to our ability to perform. As we stand here in January, we’re off to a great start in ’23. We’re seeing excellent sales momentum across the business. And we had an enforced book that has performed exceptionally well both with respect to the one-one persistency and renewal as well as the rate actions. And we still see significant growth opportunities in our market. And those are direct results of the investments which Michel referenced. So, we’ve spoken about those in the past, be they be the voluntary opportunity with respect to enrollment strategies in the workplace, be it the market-leading national accounts business that we have, or be it growth in the regional markets where we see a fragmented marketplace that’s consolidating. So, all in all, you put all of this thing — all of this picture together in terms of our starting point and the profile of our business, and that gives us a pretty high degree of confidence with respect to the guidance range.
The underlying assumptions specific to your second question, really I’ll guide you back to the assumptions that John mentioned in the outlook assumptions with respect to an uncertain environment with the potential for a recession. But despite that, we’re — we feel pretty good about our guidance ranges.
Erik Bass — Autonomous Research — Analyst
Great. Thanks, Ramy. And then my second question was just on what’s enabling the earnings for MetLife Holdings to be so resilient despite the decline in PFOs and then the lower equity markets that we saw last year? And I guess related, at what point should our earnings start to follow the PFOs lower?
John D. McCallion — Executive Vice President and Chief Financial Officer
Good morning, Erik. It’s John. Great question. We have had some resiliency in our run-off business here. So, we did provide a guidance range of $1 billion to $1.2 billion. Let me start with just PFO decline versus earnings. So, as I referenced in my opening remarks, one aspect of LDTI is for our VAs, we do move some of the fees down below the line. That’s a revenue decline but it’s not an earnings decline. The way we have — our policy has been that we’ve attributed fees to the guarantees and to the extent that they’re below the line. We would put a 100% of those fees below the line. So, as you move, we have a number of SOP 031, which is kind of the accrual-based accounting, as you move them down below the line, so does the claims. So, you see this like — this kind of breakage between revenue decline but earnings staying flat. And then we did have — this is probably one of the businesses with marginal positive from LDTI in it. So, that’s probably another item. And then, thirdly, I think it’s the optimization efforts. Now the team has done a great job and continue to look for ways to find improvements around expenses, around contracts. And I think all in all, we think with the guidance in terms of equity outlook $1 billion to $1.2 billion is a good range.
Erik Bass — Autonomous Research — Analyst
Thank you.
Operator
And our next question is from Tom Gallagher with Evercore. Please, go ahead.
Tom Gallagher — Evercore — Analyst
Good morning. Hey, sticking with Holdings, been a few of your peers like Aegon and Ameriprise saying they’re going to pass on doing VA risk transfer deals because the pricing didn’t work. I’m wondering whether your view has changed at all, or maybe just give an update on what are you thinking about a potential risk transfer deal for Holdings. Has the environment changed there or pricing changed at all?
John D. McCallion — Executive Vice President and Chief Financial Officer
Hey. Good morning, Tom. It’s John. Yeah. I don’t think any update or change for us. I think we’ve been pretty transparent about this. This is not an easy solution, particularly when you’re talking about a reinsurance arrangement. It is complex. I think particularly when there’s a reinsurance, you’re looking for a good partner and you’re looking for — to ensure that not only is it beneficial for us but beneficial for them. And so, there is a — you do have to look for ways for common ground. And sometimes that works out and sometimes it doesn’t. It hasn’t changed our perspective on optimization. And so, I think things are the same for us, so which is we continue to look for ways to optimize internally and we are, and I just referenced that on the previous comment, and that’s helped us be resilient in terms of our earnings. And at the same time, we’re still going to look and speak and converse with third parties and look for ways to see if we can accelerate the release and runoff of that block in an appropriate way. And if we can, we would do a deal. If we can’t, then we’ll continue to optimize internally.
Tom Gallagher — Evercore — Analyst
Okay. Thanks. And just follow-up on, if I look at your group life and Individual Life mortality experience within Holdings, are you seeing worse experience versus pre-pandemic levels right now, or are you more or less back to those types of levels? The reason I ask is if you look at the broader CDC data for all-cause mortality, it still looks to me like it’s running around 5% to 10% worse, yet I look at your guidance, I look at the results you’ve had for the last three quarters, are kind of back to your targets. So, I’m just curious what you’re seeing. Maybe it’s the insured population experience is better than general population. But any way you can kind of reconcile that? Thanks.
Ramy Tadros — Regional President, U.S. Business
Yeah. I mean, it’s — you’ve got to really factor in a lot of different, call it, lenses as you go from an aggregate data to an insured population or a specific book of business. I would say in terms of what we’re seeing this quarter, it’s very much shift to an endemic. With respect to COVID, we see continued reduction in the number of deaths below 65, which also reduces the severity of any potential impacts from COVID. But overall, you really should think about this moving to an endemic environment, one that we’ve priced for. And therefore, we feel pretty good about our guidance range and coming back to the midpoint of the range on an annual basis. You will still see some of the seasonality we’ve historically seen. So, think about Q1 as typically being mortality-heavy, which is — was the same dynamic that played out pre-COVID from a mortality perspective.
Tom Gallagher — Evercore — Analyst
Okay. Thanks.
Operator
Next, we go onto Ryan Krueger with KBW. Please, go ahead.
Ryan Krueger — Keefe, Bruyette & Woods, Inc. — Analyst
Hi. Thanks. Good morning. I had a question on the RIS spread outlook. I guess, more so to the extent that you can comment beyond 2023 and how to think about the interest rate cap? How much they’re contributing in ’23? And how we should think about them rolling off beyond ’23?
John D. McCallion — Executive Vice President and Chief Financial Officer
Good morning, Ryan. It’s John. So, as we mentioned, we’re raising the guidance. And I think just to kind of frame it in terms of, if you use fourth quarter, we were at about 112 ex-VII. If you add 10 for LDTI, which we referenced is more of a mechanic than it is necessary a earnings change or run rate change, and then on top of that, you add kind of a normal VII balance, that gets you to the to the range we gave. And we are benefiting from the caps. I mean, this is really how we constructed the portfolio, is to put these in place to address short-term, headwind of rising rates and really rising short-term rates to allow for longer end of the curve for the rollover and reinvest to start to manifest itself in portfolio yield. So, it’s all part of the plan. They’ll be pretty healthy in ’23, they’ll start to roll off over the next two-plus years. And that should give us some time to allow for the longer end of the curve to kind of improve in terms of contribution. We typically stick to ’23, the one year, and there’s a reason for that. I mean, if you — we tried to predict more than one year, I think we would have been wrong every time. So, I think we’ll stick with that.
Ryan Krueger — Keefe, Bruyette & Woods, Inc. — Analyst
Okay. Got it. Thanks. And then, I guess, on capital deployment in — are you — I guess, there’s lots of talk about the risk of recession, I mean at this point, have you — is there anything about the economic outlook that would lead you to pull back some on the capital deployment at this point? Are you kind of viewing that as a somewhat status quo situation for now?
Michel A. Khalaf — President and Chief Executive Officer
Yeah. Hi, Ryan. It’s Michel. I mean, I would say the short answer is no. No change in philosophy in our approach. And I might sound like a broken record here, but that’s probably a good thing. So, from our standpoint, the approach is that beyond supporting organic growth and in the absence of strategic accretive M&A, excess capital belongs to shareholders. And we’ve defined that as cash and equivalents at our holding companies above our liquidity buffer of $3 billion to $4 billion. And we do expect to migrate back to those levels over time. But just given the environment, I think having the financial flexibility that being above that range also is not a bad thing. We’ve bought back $3.3 billion in 2022, an additional $250 million in January, and we have $900 million left on our current authorization. And as we’ve done in the past, we’re going to continue to manage the authorization deliberately and in a consistent manner, I would say. So, from that perspective, no change in terms of approach nor philosophy.
Ryan Krueger — Keefe, Bruyette & Woods, Inc. — Analyst
Thank you.
Operator
And our next question is from Jimmy Bhullar with J.P. Morgan. Please, go ahead. Mr. Bhullar, do you have your phone muted by chance? We will move on to the next person. One moment here. We’ll move onto Alex Scott. Please, go ahead.
Alex Scott — Goldman Sachs — Analyst
Hey. Good morning. First one I had is just on LDTI. Could you provide an update on how book value is impacted as we sort of move over to that accounting as of year end? And the reason I ask is just I want to better understand the ROE guidance that you’ve provided as part of your outlook. And then maybe if you can comment at all on how sensitive that will be to interest rates as we think through decline in rates in the first quarter.
John D. McCallion — Executive Vice President and Chief Financial Officer
Good morning, Alex. It’s John. So, we gave a range before and we’ll be providing a point estimate as we file our 10-K. The middle of that range was, call it, all-in, about a $22.5 billion change in total equity and about a $5 billion — so $22.5 billion and a $5 billion change in book value ex-AOCI excluding FCTA. That was at 01/01/21. Since that time, obviously, a lot has changed in terms of economic and interest rate environments. And so, I think if you were to compare to year end this year of ’22, the deltas would be much different or smaller, at least, certainly on book value ex-AOCI, it would be about a two — little less than a $2 billion, call it, impact on book value ex-AOCI. And then if you include AOCI, it actually flips a little bit to $2 billion positive from the overall $22.5 billion negative to GAAP equity. So, hopefully that helps.
Alex Scott — Goldman Sachs — Analyst
Yeah. That’s very helpful. Thank you. And the second one I had is on LATAM and the outlook. You guys have had a really strong growth there. How influenced has it all been by the macro-environment and the employment in Mexico, which candidly I’m a little less doubting on myself, and I just wanted to understand like to what degree that’s been fueling things and and what that could look like if it more levels off or is not as robust as it’s been? And then maybe also, if the Chile pension reform does go into effect in 2024, would that change your view on the growth rates on sort of the outer years of the guidance you gave?
Eric Clurfain — Regional President, Latin America
Okay. Hi, Alex. This is Eric. Let me take the first question regarding the LATAM outlook. So, as you mentioned, you’ve seen 2022 results and our near-term guidance, we’re excited about our prospects in Latin America for a number of reasons. And let me put things in perspective. So, we — as you know, we have a strong franchise across the region. We have a significant footprint in three of the largest insurance markets across LATAM. We are market leaders with a very strong brand in Mexico and Chile and we have a fast-growing business in Brazil. So, in addition, the market in the region has significant potential for three reasons in addition to the one that you mentioned. But the three core reasons that are really pushing things forward are, one, the insurance penetrations rates remain very low. We are also seeing heightened protection awareness, resulting in increased demand for our products. We’re also observing an increased expectations from customers for more of a digital and seamless experience. And this is leading to a flight to quality that I mentioned during last year. And these evolving customer needs have been met by our franchise because we have invested significantly in our digital transformation over the past few years. And that digital transformation in both sales and service levels is now paying off, clearly. And in parallel, we’ve been expanding and diversifying our distribution and product reach by growing bancassurance, direct marketing channels, while continuing to strengthen and grow our retail and group business across the region. A good example of that diversification strategy in Mexico where we had a record top- and bottom-line year in 2022.
So, we’ve been also expanding successfully in the private business in both retail and group, while continuing that strong franchise that you know very well in worksite government. So, all in all, I think there are market factors that are helping, but the strength of our franchise and our strategy is certainly positioning us well for the future and moving forward. So, I hope this helps on the on the LATAM question. And I’ll pass it to Michel regarding the the Chile view.
Michel A. Khalaf — President and Chief Executive Officer
Yeah. I mean, the thing I would say about Chile is that I think all in all, we feel better about the environment. The pension reform is going to play out over, I would say, a number of months, and we’ll have to see how things turn out. But all in all, I think compared to maybe six months ago, I would say the environment is better, more favorable.
Alex Scott — Goldman Sachs — Analyst
Got it. Thank you.
Operator
And we will go back to the line of Jimmy Bhullar with J.P. Morgan. Please, go ahead. Mr. Bhullar, we are still unable to hear you. We will move on to Suneet Kamath. You may go ahead.
Suneet Kamath — Jefferies — Analyst
Hi, can you hear me?
Michel A. Khalaf — President and Chief Executive Officer
Yes, Suneet. Go ahead.
Suneet Kamath — Jefferies — Analyst
Okay. Great. Perfect. So, my first question just on VII. I think I know the answer, but I figured I’d ask anyway. It looks like you’ve kept your return assumption consistent despite the economic uncertainty that you’ve talked about on this call. Is that just to — for the simplicity of being consistent with the past or is that at all informed by what you’re hearing from your private equity partners?
Steven J. Goulart — Executive Vice President and Chief Investment Officer, MetLife, Inc., and President, MetLife Investm
Hey, Suneet. It’s Steve. Thanks for the question. And this really reflects the fact that we don’t want to try and predict near-term market and quarterly or annual returns. This really reflects our long-term experience for the asset class, and therefore, our expectation going forward. So, that’s why, I think if you go back, it’s been 12%, 13% a quarter as long as I can recall. And again, it reflects the fact that we know that a couple of things, one is that there is volatility in the returns, but basically, our PE portfolio has generally moved directionally in line with the broad markets. When you look at the fourth quarter, what happened, we had basically strong kind of broad market returns, NASDAQ was down a little bit. I’m sure that will reflect its way through the portfolio as well. The key though is despite any volatility we see in the returns on the portfolio, we’re also getting very solid cash distributions. And last year, we had over about $2.5 billion of cash distribution. If you look at the last five years, they’ve totaled $9 billion. So, it really is a very reliable portfolio in that respect as well. And I think a lot of it just reflects the diversification in the portfolio. And we’ve said a number of times we’re very diversified by strategy, by manager, by vintage. Yes, LBOs and BS are the biggest part of the portfolios. But we also have significant investments in specialized strategies like special situations, energy, power, and the like. So, all in all, our expectations really reflect the long-term experience we’ve seen in the portfolio that represents the strong diversification we have.
Suneet Kamath — Jefferies — Analyst
Got it. That’s helpful. And then I guess for John, it looks like you’re able to use this Japanese reinsurance transaction to help solve for some of the uneconomic pieces of the SMR. Should we be thinking about this as another tool that you have going forward in terms of capital optimization, or was this really just to solve that issue?
John D. McCallion — Executive Vice President and Chief Financial Officer
Good morning, Suneet. Yes, I think you’ve done a nice job summarizing. It’s a tool in the toolbox. We — it’s not our only. We did use it to solve that situation. It was in the fourth quarter we executed an internal reinsurance transaction, which improved the ratio by approximately 250 points. And so — and also remember, there is two other things. One, rising rates are good for this business, so that’s important to remember from an economic perspective. Second is, the solvency regime is meant to be replaced in a few years’ time and move to a more economic solvency framework that will better reflect the economics. So, this is really to deal with, I’ll say, a temporary situation. And ultimately, I think these tools and allow us to have no concerns over capital generation or dividend capacity.
Suneet Kamath — Jefferies — Analyst
Okay. Thanks.
Operator
And ladies and gentlemen, we have time for one last question. That’s from Elyse Greenspan with Wells Fargo. Please, go ahead.
Elyse Greenspan — Wells Fargo — Analyst
Thank you. Good morning. My first question, with your guidance and comments on Holdings, you guys have a pretty good hand on how LDTI will impact the income statement. Can you help give us a sense of the total impact to net from LDTI on adjusted earnings as well as on net income?
John D. McCallion — Executive Vice President and Chief Financial Officer
Good morning, Elyse. It’s John. As I mentioned, I think our summary around earnings run rate is there’s a few puts and takes, but net-net for the firm, overall, run rate is intact for adjusted earnings. Net income will probably become, I’d say, directionally smoother than it has been, is probably the best way to describe and you’ll probably — and you’ll see that when we provide our restated QFS in kind of early-April and you’ll see that there’s a bit more symmetry between net income and adjusted earnings. But it’s — there’s still some volatility and fluctuations that you’ll see. But, net-net, it should be directionally better.
Elyse Greenspan — Wells Fargo — Analyst
Okay. Thanks. So then, in terms of PRT, can you just give us a sense of your outlook for deal volume during ’23? And would you expect to see seasonality during the quarter, as I think typically, sometimes you’ve seen heavier activity to end the year?
Ramy Tadros — Regional President, U.S. Business
Hey, Elyse. So, as you know, we had a record year last year with respect to PRT. And sitting here today, we’re still seeing a pretty healthy pipeline given funded status of pension plans. And we’re seeing that pipeline also geared towards the jumbo end of the market, which is the place where we compete the most and where we focus on. The seasonality has largely dissipated. If you looked at the timing of the deals over the last few years, we’ve seen less seasonality. We’ve seen more deals earlier on in some cases and more deals later on. So, I wouldn’t speculate on the seasonality, but the pipeline is certainly healthy.
Elyse Greenspan — Wells Fargo — Analyst
Thank you.
Operator
And ladies and gentlemen, we do have no more time for questions. I’ll turn you back to John Hall, Head of Investor Relations, for closing comments.
John Hall — Senior Vice President and Head of Investor Relations
Great. Thanks, everybody, for joining us today and have a good day.
Operator
[Operator Closing Remarks]