Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter and Full Year 2021 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 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 A. Hall - Global Head of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's fourth quarter 2021 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 evening, 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 these 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 last no later than the top of the hour. [Operator Instructions] With that, over to Michel.

Michel A. Khalaf - President and Chief Executive Officer

Thank you, John, and good morning, everyone. MetLife's financial performance in the fourth quarter and full year of 2021 was outstanding. Our strategic decisions to diversify MetLife by product and geography, allocate a prudent portion of our assets to private equity, balance growth with cash generation and return excess capital to shareholders paid off in the form of banner adjusted earnings and adjusted earnings per share.

In the fourth quarter of 2021, MetLife delivered adjusted earnings of $1.8 billion, level with Q4 2020. Adjusted earnings per share were $2.17, up 7% year-over-year. Excluding the notable tax item in the quarter, adjusted earnings per share were $2.01.

Heading into the quarter, one of the biggest questions facing life insurers was whether Q4 COVID-related impacts would be as challenging as they were in Q3. In the U.S. group business, that remains the case as lower severity was offset by higher frequency to keep the group life ratio well above normal. Yet MetLife's diversity remained evident and the continued outperformance of our investment portfolio. Variable investment income contributed $1.3 billion in the quarter. Our private equity holdings returned 7.9% with venture capital once again to standout at 13%. As we noted last quarter, PE generates significant cash for MetLife. Over the last six years, cash distributions from the portfolio have totaled $8.6 billion.

Looking at 2021 as a whole, it was a year of performance, purpose and progress. MetLife delivered strong performance across the board. Despite the divestiture of P&C and other businesses, adjusted PFOs, excluding PRTs were still up 2% to $45.5 billion. Full year sales were up 40% in U.S. group, 19% in Latin America and 11% in Asia. The return on our private equity portfolio was above 40%. Our direct expense ratio was down 40 basis points to 11.6%, and we reported adjusted earnings of $8 billion and adjusted earnings per share of $9.15, both the highest amount ever posted by MetLife. We believe our growing track record of consistent execution even in the face of adversity has reinforced the narrative of MetLife as a resilient company.

MetLife's purpose is to be there for our customers always, helping them build a more confident future. Nowhere is a life insurance company's purpose more evident than in the grips of a pandemic. Over the course of 2021, COVID claims totaled $2 billion globally and $3 billion since the beginning of the pandemic. We cannot heal the pain of losing a loved one, but we can and do help families recover from the financial damage so that they can move forward. We are honored to be part of an industry that makes such a positive difference in people's lives.

Finally, 2021 was a year in which we continued to make progress on the pillars of our Next Horizon strategy. We remain focused on deploying capital to its most productive use. In the absence of attractive M&A opportunities, we returned significant capital to shareholders. We continue to simplify the company through strategic divestitures and further strengthening our operating leverage.

Despite higher inflation, we still expect our direct expense ratio to be below 12.3% for the full year 2022. And we further differentiated MetLife with an entry into the financial wellness space called Upwise, that allows us to connect directly with consumers and help them build the habits of financial success.

MetLife continues to invest billions of dollars every year in organic growth with attractive payback periods and internal rates of return. But as we have said many times, we will not pursue growth for growth's sake. When growth is attractive, whether organic or by acquisition, we will invest. When it is not, we will return capital to shareholders to redeploy elsewhere in the economy.

We were pleased in 2021 to return a record of nearly $6 billion of capital to MetLife's shareholders. We paid $1.6 billion in common stock dividends and repurchased $4.3 billion worth of common shares. Even after these significant distributions, we ended 2021 with $5.4 billion of cash and liquid assets on our balance sheet, well above the top end of our $3 billion to $4 billion target buffer. We repurchased $1.2 billion of common shares in the fourth quarter and we have $1.5 billion left on the repurchase authorization our Board of Directors approved in August.

As a management team, we have no higher obligation to shareholders than to be responsible stewards of the capital they have entrusted us with. As we look ahead, we see a landscape marked with both opportunities and risks. But on balance, we are more optimistic than we were a year ago. John McCallion will provide our detailed outlook expectations shortly.

I would like to discuss the road ahead at a more thematic level. While we are always cautious about the external environment, which consists of many factors we cannot control, we do see a unique confluence of tailwinds that should provide positive momentum to our business. Rising interest rates are an obvious one, provided the yield curve cooperates and we are pleased that the Federal Reserve has signaled a return to more normal monetary policy.

Our U.S. Group Benefits business should benefit from rising overall employment and compensation levels. The war for talent is as intense as we have ever seen it, and we believe that Benefits will remain a powerful tool to help companies compete. As our most recent employee benefit trend study found, this applies across the spectrum. Baby boomers are placing higher value on their physical health. For example, 71% say vision insurance is a must have, up from 53% in the prior year. And Gen Z is showing heightened interest in benefits such as legal services, student debt relief and life insurance. In Asia and Latin America, consumer demand for insurance products is strong. In Latin America, our sales are back to pre-pandemic levels. And in Asia, especially Japan, the business is benefiting from new offerings and the positive impact of rising U.S. interest rates on foreign currency-denominated products.

None of this is to deny the uncertainty we still face from COVID. We have seen false dawns before only to be hit with new waves of the virus. Our view is that the wisest call on the pandemic is not to make a call. We are steadfastly making good on our promises while continuing to evaluate and reflect the new reality in our pricing.

I'll close this morning by emphasizing what we believe makes MetLife unique. We have significantly reduced the capital intensity and market sensitivity of our business. We have built some of the premier insurance franchises in the world. We remain wedded to the true economics of the life insurance business, which is cash. And finally, we have cultivated a culture of relentless focus on efficiency and execution.

We recognize that MetLife's success has set a new higher baseline against which we will be judged. The next 10 yards will not be as easy to gain as the last 10, but we are up for the challenge.

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 '21 supplemental slides, which provide highlights of our financial performance and 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 the quarter was $1.2 billion or $662 million lower than adjusted earnings. Net derivative losses were primarily due to the stronger equity markets and the strengthening of the U.S. dollar in the quarter. For the full year, net derivative losses of $1.8 billion, primarily due to higher interest rates in 2021 accounted for most of the variance between net income and adjusted earnings.

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 & Other. Adjusted earnings, excluding notable items, were $1.7 billion, down 8% and down 7% on a constant currency basis. Adjusted earnings per share, excluding notable items, was $2.01, down 1% year-over-year on a reported basis and essentially flat on a constant currency basis, aided by capital management.

Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were down 95% year-over-year due to unfavorable underwriting margins. I will discuss group life underwriting in more detail shortly. Regarding non-medical health, the interest adjusted benefit ratio was 74.2% in 4Q of '21, at the upper end of its annual target range of 70% to 75%, but generally in line given fourth quarter seasonality for dental utilization. That said, the ratio was higher than the prior year quarter ratio of 61.7%, which benefited from low dental utilization and favorable disability incidences.

Turning to the top line. Group Benefits adjusted PFOs were up 15% versus 4Q of '20 and up 18% for the full year. The strong full year PFO growth of 18% included 6 percentage points, mostly related to higher premiums from participating contracts, which can fluctuate with claim experience. The balance of PFO growth of 12% was at the top end of our low double-digit annual guidance in 2021. This was equally attributable to the addition of Versant Health and solid growth across most products, including continued strong momentum in voluntary.

Retirement and Income Solutions, or RIS, adjusted earnings were up 18% year-over-year. The primary driver was higher variable investment income, largely due to strong private equity returns. Favorable volume growth also contributed to year-over-year performance. RIS investment spreads were 202 basis points, driven by another strong quarter of variable investment income. Spreads, excluding VII, were 91 basis points, down 13 basis points versus 4Q '20, primarily due to lower paydowns in our portfolios of residential mortgage-backed securities and residential mortgage loans. RIS liability exposures increased 3% year-over-year, driven by strong growth in U.K. longevity reinsurance. With regards to pension risk transfers, we completed five transactions worth $3.6 billion in the fourth quarter and continue to see an active market.

Moving to Asia. Adjusted earnings were up 19% and 21% on a constant currency basis, primarily due to higher variable investment income as well as favorable expense margins and volume growth. This was partially offset by lower recurring interest margins and unfavorable underwriting margin due to higher COVID-19-related claims. Asia's solid volume growth was driven by higher general account assets under management, on an amortized cost basis, which were up 7% on a constant currency basis. In addition, sales were up 13% year-over-year on a constant currency basis, primarily driven by growth across most markets.

Latin America adjusted earnings were $125 million versus $14 million in the prior year quarter. While COVID-19-related claims remain elevated in 4Q '21 at roughly $37 million after tax, they were down significantly versus the prior year quarter and sequentially. In addition, higher recurring interest margins, favorable tax items and volume growth also contributed. Lower Chilean and encaje returns were a partial offset. Top line continues to demonstrate strength as adjusted PFOs were up 13% year-over-year on a constant currency basis, and sales were up 35% on a constant currency basis, driven by solid growth across the region.

EMEA adjusted earnings were down 48% and 45% on a constant currency basis, primarily driven by unfavorable underwriting from COVID-19-related claims as well as higher expenses and the exclusion of divested businesses in the current year period. MetLife Holdings adjusted earnings were up 13%. This increase was primarily driven by higher variable investment income as well as a reduction in policyholder dividend levels. This was partially offset by lower recurring interest margins and less favorable underwriting.

Corporate & Other adjusted loss was $177 million, excluding favorable notable items in the quarter versus an adjusted loss of $198 million in the prior year quarter. Higher net investment income and lower taxes were partially offset by higher expenses in the quarter.

The company's effective tax rate on adjusted earnings in the quarter was 12% due to several favorable tax items. These include an IRS audit settlement, a release of a deferred tax liability and a true-up associated with the filing of our 2020 corporate tax return. Adjusting for these items, the effective tax rate was within our 2021 guidance range of 20% to 22%.

Now I'll provide more detail on Group Benefits mortality results on Page 5. This chart reflects our Group Life mortality ratio for the four quarters of 2021, including the COVID-19 impact on the ratio and on Group Benefits adjusted earnings. The Group Life mortality ratio was 106.3% in the fourth quarter of 2021, which is well above our annual target range of 85% to 90%. COVID reported claims in 4Q of '21 were roughly 18 percentage points, which reduced Group Benefits adjusted earnings by approximately $300 million. While U.S. COVID deaths were higher in 4Q versus 3Q, we did see a favorable shift in the percentage of deaths under age 65, declining from approximately 40% in 3Q to roughly 33% in 4Q. As a result, these two competing factors essentially offset. In regard to non-COVID deaths, they were within our normal expected quarterly fluctuations.

On Page 6, this chart reflects our pretax variable investment income for the four quarters and full year of 2021. VII was $1.3 billion in the fourth quarter. This strong result was mostly attributable to the private equity portfolio, which had a 7.9% return in the quarter. As we have previously discussed, private equity is generally accounted for on a one-quarter lag. While all private equity classes performed well in the quarter, our venture capital funds, which accounted for roughly 25% of our PE account balance of $14 billion we're the strongest performer across subsectors with a roughly 13% quarterly return. For the full year, VII was $5.7 billion, more than 4 times above the top end of our 2021 target range of $1.2 billion to $1.4 billion.

On Page 7, we provide VII post-tax by segment for the four quarters and full year 2021. As we had previously noted, RIS, MetLife Holdings and Asia generally account for 90% or more of the total VII and are split roughly one-third each. For the full year, these three businesses accounted for 92% of the total VII with RIS and MetLife Holdings benefiting from the outperformance from venture capital funds relative to Asia.

Turning to Page 8. This chart shows a comparison of our direct expense ratio over the prior 8 quarters and full year 2020 and 2021. As expected, our direct expense ratio in 4Q of '21 was elevated at 12.9%, reflecting the impact from seasonal enrollment costs and group benefits, timing of certain technology investments and employee costs. That said, as we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. For the full year of 2021, our direct expense ratio was 11.6%, well below our annual target of less than 12.3%, clearly demonstrating our consistent execution and focus on an efficiency mindset.

I will now discuss our cash and capital position on Page 9. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.1 billion at September 30 and remains 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 $1.2 billion in the fourth quarter as well as holding company expenses and other cash flows. In 2021, we returned approximately $6 billion to shareholders, the most in any year through share repurchases and common stock dividends.

For the two-year period 2020 and 2021, our average free cash flow ratio excluding notable items, totaled 59%, while the ratio was below our 65% to 75% target range due to the strength of our adjusted earnings in 2021, our statutory free cash flow in absolute dollar terms remains strong. In terms of statutory capital for our U.S. companies, we expect our combined 2021 NAIC RBC ratio will be above our 360% target. Preliminary 2021 statutory operating earnings for our U.S. companies were approximately $5 billion, while net income was approximately $3.8 billion. We estimate that our total U.S. statutory adjusted capital was $19.1 billion as of December 31, 2021, an increase of 12% year-over-year. Favorable operating earnings and net investment gains were partially offset by derivative losses and dividends paid to the holding company.

Finally, the Japan solvency margin ratio was 911% as of September 30, which is the latest public data.

Before I shift to our near-term outlook on Page 11, a few points on what we included in the appendix. The chart on Page 16 reflects new business value metrics for MetLife's major segments from 2016 through 2020. This is the same chart that we showed as part of our 3Q '21 supplemental slides, but we felt it was worth including again for the sake of completeness. Consistent with our Next Horizon strategy, this chart demonstrates that we continue to have a relentless focus on deploying capital and resources to the highest value opportunities. Also Pages 17 through 20 provide interest rate assumptions and key outlook sensitivities by line of business.

Turning back to Page 11. We expect COVID-19 to remain with us in 2022. But given the uncertainty of the environment, we are not going to speculate on the magnitude or timing. Therefore, our near-term targets do not reflect COVID impacts. Based on 12/31 forward curve, interest rates are expected to rise. However, we would expect favorable impacts to be offset in part by higher LIBOR rates, resulting in a flatter yield curve.

FX rates based on the forward curve indicate the U.S. dollar is expected to remain strong, which will be a headwind for our businesses outside the U.S. As a result, we would expect adjusted earnings in 2022 versus 2021, will be reduced by roughly $50 million in Asia, roughly $25 million for both Latin America and EMEA. Finally, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our historical returns for PE.

Moving to near-term targets. We are maintaining our adjusted ROE range of 12% to 14%. We also expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings. Given the strong adjusted earnings in 2021, we would expect to be closer to the bottom end of the range in 2021 and 2022 before moving higher in 2022 through 2024. This is just a function of math, given the outsized earnings in 2021 as well as the lagging nature of statutory dividend payments to the holding company. In addition, we remain committed to maintaining a full year direct expense ratio below 12.3%.

We are raising our VII guidance in 2022 to $1.8 billion to $2 billion. After applying our historical average returns on higher asset balances, I'll provide more detail on VII in a moment.

Our Corporate & Other adjusted loss is expected to remain at $650 million to $750 million after tax, but we are increasing our expected effective tax rate by 1 point to 21% to 23% 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'll see expected key interest rate sensitivities relative to our base case, which incorporates the forward curve as of December 31. The takeaway is that changes in interest rates are expected to have a relatively modest impact on adjusted earnings over the near term.

Now I'd like to provide you with more detail on what informed our 2022 VII guidance range of $1.8 billion to $2 billion, as highlighted on Page 12. The chart reflects the growth in our VII average asset balances from $8.4 billion in 2020 to nearly double at $16.5 billion expected in 2022. This growth is due to both the strong private equity returns in 2021 as well as the inclusion of over $2.6 billion of real estate and other funds in 2021. These were previously part of the recurring investment income portfolio and were reclassed to VII beginning in 2021 as we've begun to partially shift the form of our investment in certain asset classes, such as real estate equity investments through participation in funds. In addition, our 2022 average VIII asset balance also factors in, our expected sale of $1 billion of private equity in the secondary market in 2022.

Finally, in addition to the asset balances, we are applying our historical annual returns for each asset class within VII. In addition to the PE return of 12%, which I previously discussed, we expect 6.5% return for hedge funds and a 7% return for real estate and other funds.

So now I will discuss our near-term outlook for our business segments. Our comments will be anchored off full year 2021 reported results in our QFS, unless otherwise noted. Let's start with the U.S. on Page 13.

For Group Benefits, excluding the excess premium from participating Group Life contracts of $1.1 billion in 2021, adjusted PFOs are expected to resume their historical target range of 4% to 6% annually, albeit from a higher base.

Regarding underwriting, we expect the annual Group Life mortality ratio to be between 85% to 90%, excluding COVID impacts. We are also maintaining the expected group nonmedical health interest adjusted benefit ratio at 70% to 75%.

For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread and fee-based businesses. However, we are increasing our expected annual RIS investment spread by 5 basis points to 95 to 120 basis points in 2022, consistent with our higher VII range. Overall, we would expect a significant decline in RIS adjusted earnings in 2022, given the exceptional private equity returns in 2021 as well as 2021 benefiting from higher mortgage paydowns and excess mortality gains, we believe were likely due to COVID.

For MetLife Holdings, we are expecting adjusted PFOs to decline between 6% to 8% annually, higher than our prior guidance of 5% to 7%. We are lowering the life interest adjusted benefit ratio to 45% to 50% in 2022 from the prior 50% to 55% in 2021 to reflect the impact of lowering the policyholder dividend levels. Finally, we are maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2022.

Now let's look at the near-term guidance for our businesses outside the U.S. on Page 14. For Asia, we expect the recent sales momentum to continue and generate mid- to high single-digit growth over the near term. In addition, we expect journal account AUM to maintain mid-single-digit growth. We are expecting mid-single-digit adjusted earnings growth when excluding the excess VII over plan of approximately $800 million post tax in 2021. In Latin America, we expect adjusted PFOs to grow by high single digits over the near term. Relative to its 2021 reported adjusted earnings, we expect Latin America adjusted earnings to double in 2022, excluding COVID impacts, and then grow by high single to low double digits in 2023 and 2024.

Finally, for EMEA, we expect sales to grow mid- to high single digits over the near term. We expect adjusted earnings and PFOs to decline in 2022 due to the impact from the stronger U.S. dollar and divestitures in the region. For 2023 and 2024, we expect to me adjusted earnings and PFOs to grow to mid- to high single digits on a constant currency basis.

Let me conclude by saying MetLife delivered another strong quarter to close out a very strong year, highlighted by outstanding private equity returns, solid top line growth, ongoing expense discipline and the benefits of our diverse set of market-leading businesses and capabilities. In addition, our capital, liquidity and investment portfolio remains strong and position us for further success.

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'll turn the call back to the operator for your questions.

Question & Answers

Operator

[Operator Instructions] And first, we go to Suneet Kamath [phonetic] with Jefferies. Please go ahead.

Suneet Kamath - Jefferies - Analyst

Thanks. Good morning. Just wanted to start off on the VII. Can you give us a sense of how much of the VII or excess VII came from marks as opposed to realized gains in 2021 and maybe how that would compare to prior years?

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

Suneet, in general, think about what Michel said. I mean, over the last - since 2016, basically, we've had equal amounts of cash distribution as well as marks. Last year was a little bit more heavily weighted toward marks just given, I think, market returns, but that's still been the trend. I mean we get a significant amount of cash distributions that I think we wanted to really sort of emphasize that this just isn't marks.

Suneet Kamath - Jefferies - Analyst

Got it. Sorry, I missed that. I got on late. And then I guess, for John, on the direct expense ratio, I mean, less than 12.3% guide. Can we look at 2021, the 11.6% is sort of a reasonable place for this year? And can you talk a little bit about inflationary pressures on your cost base?

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

Sure. Good morning, Suneet. Welcome back. So now overall, I would just say and as we said in prior meetings, I think the in general, the team continues to execute here and it's really been embedded in our culture from an efficiency mindset perspective. And fourth quarter was elevated. It's in line with what we expected. We have those seasonal enrollment costs. We had some timing on some investments in technology. And then we did see a creep up in employee costs occur in the quarter.

That was that was offset from a ratio perspective by the fact that we did have some elevated participating claims, which impacts PFOs in the group business. And full year, that's a little over $1 billion, as we mentioned earlier. So you need to - if you think about the full year ratio, you almost need to adjust for that. So maybe 30 basis points normalization. So nonetheless, I mean, still a very healthy margin relative to our 12.3%.

And I think as we look forward, we continue to target 12.3%. I mean we do see an inflationary environment ahead of us. We think our - we believe and we expect to still manage within our 12.3%. We think it's the right target for us. And I think it allows us to utilize our expense leverage to fund investment in growth and technology. If circumstances dictate, we can let some of that leverage fall to the bottom line and manage the firm that way. But ultimately, this kind of mentality helps us to build our efficiency muscles in the firm. It keeps us away from those disruptive, often fleeting big bang expense program. So all in all, we're still committed to the 12.3% at this point.

Suneet Kamath - Jefferies - Analyst

Okay. Thanks, John.

Operator

And next, we have a question from Tom Gallagher with Evercore. Please go ahead.

Tom Gallagher - Evercore - Analyst

Thanks. Couple of questions on Group for me. On - first, just on the elevated non-medical health benefit ratio. John, you mentioned, it was mainly dental utilization being higher. How is disability trending also? And taking these together, would you expect 2022 to more likely stay towards the high end of the 70% to 75% guidance range? Or do you think midpoint is still a good base case?

Ramy Tadros - Regional President, U.S. Business

Tom, it's Ramy here. So first of all, with respect to the range, the guidance still remains between 70% to 75%. So we're not changing that range. And as you correctly pointed out, the uptick in this quarter for the ratio was largely driven by the seasonality of the dental claims. I would point out that this is kind of entirely expected as we typically see an increase in the utilization in the fourth quarter was participants and providers look to the annual maximums in mind and essentially look to utilize the benefit. So we typically see that uptick in the fourth quarter with Dental.

With respect to disability, I'll maybe break it down for you into two pieces. First is the long-term disability piece. We did see a slightly higher incident rates this quarter compared to historical pre-pandemic norms. This is a slight tick up and well within the range of the normal variations we've seen around these claims. At the same time, for long-term disability, we continue to see pretty strong offsets with respect to recoveries, which are also trending higher than the historical norms. So that's kind of the long-term piece on this ability. The short-term disability piece, we have seen a rise in COVID claims in the quarter. And we've also seen a rise in some noncovered incidents, which rise in pregnancies as an example. But however, the financial impact on our bottom line from the STD block is really small, and that's driven by the relative size of the STD block. It's about a third of our overall disability block as well as the mix of our STD business, where half of the block by live is ASO business where we're not on the hook for the claims.

So all in all, when you just step back from a disability perspective, while we've seen that small increase in the LTD levels, we are not seeing any evidence of a trend here at this point, but we clearly continue to watch this very carefully.

Tom Gallagher - Evercore - Analyst

Got you. Thanks, Ramy. And just a follow-up. So a number of peers are showing weak group sales this quarter. Met seems to be holding up better. Can you talk a little bit about pricing and what you're seeing competitive-wise right now, whether are you getting rate in low of recent results? Or are you holding the line on pricing and opting for growth?

Ramy Tadros - Regional President, U.S. Business

Thanks, Tom. I'll start off with sales and then give you some color on the pricing side. So first of all, I would say we're extremely pleased with the sales in '21. They're record sales for us, and that's something we're very happy about. If you look at the composition of those sales, we've had positive momentum across all of our products and markets. But what really stood out in '21 is the main driver of the increase in sales was the jumbo end of the market. And remember, this is the higher end of our national accounts business. So different companies define that differently. But our national accounts business comprise employers with 5,000-plus employees, and this is at the higher end of that segment.

Those sales came from across the entire portfolio of products across core and voluntary. The other kind of color I'd give you here is that almost 90% of those jumbo sales came from our existing customers. So these are customers who have been with us for years and in some instances, decades.

And the other thing I'd point out on sales here, and we've discussed this in the past, this jumbo end of the market is a part of the market where price is not the sole determining factor for winning the business. There are a lot of nonprice elements here, such as service, administration, capabilities, etc., that are an important part of the decision-making.

And then maybe the last piece on sales is those jumbo sales can be lumpy. And as we look forward into '22, we are seeing less movement in the jumbo market. And so we're expecting that activity to come down in '22 from a jumbo perspective. So that's kind of a bit of a color on sales.

With respect to pricing, I'd make a few points. One is that we've had an approach that's been disciplined and consistent in the market. We've had a very long track record of being disciplined. And a big part of that is working closely with our customers and intermediaries to ensure that they understand our actions and they're transparent and understood in the marketplace. And that's been true over the last year.

So we have been implementing a range of price increases across life and disability blocks commensurate with our profitability target and commensurate with our views on near- and medium-term mortality as well as their views on employment and rates. And the data point I would give you here with respect to pricing, if you look at the 1/1 renewal season, we've been able to achieve our desired margin for those renewals, and we've maintained strong persistency in our book. And so our view is that the market is generally absorbing those price increases, and you do see that in the PFO number that we've posted. And at the end of the day, another kind of point for you on the discipline is our guidance ranges for both mortality and nonmedical health ratios, which kind of remain unchanged into '22.

Tom Gallagher - Evercore - Analyst

Okay. Thanks for all that color.

Operator

And next, we have a question from Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar - JPMorgan - Analyst

Yes. Good morning. So just a question on interest rates, and you touched on this a little bit in your comments as well. But how do you think about the benefit of rising interest rates based on what the forward yield curve is predicting right now being sort of negated by and just a likely flatter yield curve. And if you could just discuss what are the businesses that would be most affected by that dynamic. But how much of the benefit of rates would actually be taken away by a flatter yield curve?

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

Good morning, Jimmy. It's John. So I think the - and you can see it in our sensitivities at the bottom of the first page and the outlook. We're generally still a net positive to rising rates and the curve is flattening in the base case, right? And that's based on the forward curve as the 12/31. But it's - as we talked about, our sensitivity is much less these days. So it's a modest benefit. And then you have to kind of look deeper into why rates are rising. I think there's a number of things around like inflationary pressures, is that it? And what the other drivers are.

So just on an interest rate perspective, as we - as I said in my opening remarks, the higher rates are positive, and they're partially offset by the fact that the curve is flattening. And partly - you can see that a little bit in, say, the RIS spreads as they emerge in 2022. That's one of the drivers for why they would come down. The XVII spreads would come down off of '21, not the only one, but one of them.

And then I think just holistically on - as you think about what could drive if it's inflationary pressures, and that could be another thing for consideration. I think again, we're probably a net neutral to positive on inflationary pressures. If you think about our businesses and certainly the group business and is probably a net positive, what also could it be a GDP growth along with that. So a number of different factors that go into it. But all in all, I'd say just the short answer to the question would be kind of a modest positive for rising rates.

Jimmy Bhullar - JPMorgan - Analyst

Okay. And if I just ask one more on just dental usage, when COVID had initially hit obviously dental usage had dropped a lot. It doesn't seem like the anecdotally, that that's happening with the Omicronserts that we've seen recently, which if it was happening, obviously, I think it would show up in 1Q. But have you seen a similar decline in usage and dental with the surge in claims that we've seen or surge in cases that we've seen over the past month and half?

Ramy Tadros - Regional President, U.S. Business

Hi, Jimmy. It's Ramy. I think the big driver in the beginning of the pandemic was the actual closure of the dental offices. So you've got - that was - just the offices were not open. Now clearly, there was also some sort of hesitancy on the part of people to go out as well. I would say at this point, the dental offices are open, and it's pretty much a return to normal kind of outcome in terms of the utilization patterns that we're seeing in dental.

Jimmy Bhullar - JPMorgan - Analyst

Okay. Thank you.

Operator

And next, we have a question from Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan - Wells Fargo - Analyst

Hi. Thanks. Good morning. My first question is on Holdings. You guys provided pretty stable earnings outlook this year with what you had expected at the start of last year. And I know in the past, you guys have mentioned the cash flow being generated by the business is a reason that you kind of counterbalance against potentially entering into a risk transfer transaction. Can you just provide an update on your thoughts relative to transactions within the blocks within holdings? And if perhaps the rising rate environment increases your prospects of entering into a deal?

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

Good morning, Elyse. It's John. I think in terms of the kind of the back end of your question and risk transfers, I'd say nothing's really changed I think from the comments we gave in the third quarter. We're continuing to kind of stick with our primary objectives of optimizing the business, meeting customer obligations and continuing to look for further efficiencies as the block runs off. And at the same time, we're taking a third-party perspective of this block. I'd say - and I think I mentioned this in the third quarter. I think the environment has continued to be robust. Interest rates rising would be another positive factor, I think, in doing a transaction like that, that would be value creative and maybe helps close the bid-ask spread. So that's probably a consideration.

I think as you point out in the kind of the first part of your question around MetLife Holdings. It's been a resilient runoff. It's probably a way to comment on that maybe better than we thought. And obviously, I think that's hats off to the team and the efforts that they've made on different actions on optimizing the business and really doing well on expenses. And in addition, we did - I did comment on lower policyholder dividend levels that does have an impact. It's impacting the ratio and that's helping kind of keep earnings up as well as just the higher equity market.

So there's just a variety of factors that have allowed for a stable outlook in terms of earnings range. But - so we feel very good about it, but it's just a number of items that's kind of getting us there. I think that's how I summarize it.

Elyse Greenspan - Wells Fargo - Analyst

Thanks. And then my second question, you guys called out - you guys said you didn't see any excess mortality within Delta wave from COVID. I was just hoping to just get some more color there. I know we've seen some companies that flagged elevated mortality. I just wanted to get additional color on what you're seeing in your book. Thank you.

Ramy Tadros - Regional President, U.S. Business

Hi, Elyse, it's Ramy here. So as you heard in our prepared remarks, the COVID-specific impact was 18 points. And just to be really clear about the definition of that, these are deaths where COVID is marked as the actual cause of death. What we do every quarter as part of our analysis is we look at additional excess mortality, which appears to be COVID-driven. And so what I mean by that are increases in death, reasons that kind of are related to perhaps heart or lung disease. And for this quarter, that appears to be about another point as well. Now that has come down from prior quarters, where it was hovering in the kind of 2%, 2.5% range. So there is, call it, another point of what appears to be COVID in the results for this quarter.

Elyse Greenspan - Wells Fargo - Analyst

Thank you.

Operator

And our next question is from Erik Bass with Autonomous Research. Please go ahead.

Erik Bass - Autonomous Research - Analyst

Hi. Thank you. Can you talk a little bit more about the free cash flow outlook? And given the lagged impact of statutory ordinary dividends that you mentioned, should we expect a higher level of cash flow coming through in 2022 on a dollar basis?

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

Good morning, Eric, it's John. Thanks for the question. Yes, I think that's a good way to put it. Certainly, this year, as I mentioned earlier, it's simply math, outsized earnings. Free cash flow was at or above actually expectations for us. And then - but the ratio is a bit down. But the expectation - and you can think of it, it's $1 billion roughly, give or take, right, if you think about the middle of the range, and we'd expect that to come in over the next year or two. So all in all, we would expect a higher level in '22 and '23.

Erik Bass - Autonomous Research - Analyst

Great. Thank you. And then just a question on VII. And I guess as you're thinking about the sizing of your alternatives portfolio over time. And certainly, it's been an important contributor to results and the portfolio continues to grow, but is there kind of a limit on kind of where you would want that to get to as a percentage of investments, and how are you thinking about managing that and the ability to grow it further?

Steven J. Goulart - Executive Vice President and Chief Investment Officer, MetLife, Inc., and President, MetLife Investm

Hi. It's Steve. And I'll refer to John's comment during the outlook about the sale of $1 billion of PE interest. What I'd say on it is this is part of our normal investment process. And part of that was a consideration of the size of the alternatives portfolio as well. It does have a valuable position in the portfolio from an ALM perspective. As far as hedging long-term tails go, equity is very valuable in that respect. But again, we've seen a run up, obviously, in the last couple of years in the PE portfolio, particularly. And so part of our overall process is continuing to evaluate the exposures, and that's what's led to the decision to go forward with that sale. So I think that's reflective of how our process works and how we'll continue to look at our overall asset allocation and particularly the VII and alternatives.

Erik Bass - Autonomous Research - Analyst

Got it. Thank you.

Operator

And next, we have a question from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger - KBW - Analyst

Hi. Good morning. Could you give a little bit more color on how you expect the RIS spread, excluding VII to trend in 2022?

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

Hey, Ryan. It's John. Good morning. So yes, I would say, so full year '21 spreads were 229 bps. And with XVII spread around 93 bps, so 136 bps contribution from VII. And so as we talked about focusing on the XVII spread, it's been elevated paydown activity on our residential mortgage loans and securities portfolio. We also saw a pretty sizable drop during the course of the year in LIBOR, right?

And so when you look forward, we're assuming holistically, obviously, private equity returns get more in line with our historical average, the paydown activity continues to moderate, LIBOR rises. And so therefore, all in, we'd expect that RIS spread, as we talked about to be 95 bps to 120 bps. And then just on - going back to the XVII, we'd expect like sequentially because of the last two factors I mentioned, it lead to like a 5 to 7 basis point drop sequentially from where we are today, and maybe for full year, so call it a 7 to 9 basis point drop versus '21.

Ryan Krueger - KBW - Analyst

Great. Thank you.

Operator

And our next question is from Alex Scott with Goldman Sachs. Please go ahead.

Alex Scott - Goldman Sachs - Analyst

Hi. One of the things that caught my eye in the outlook was just a pretty strong anticipated recovery in LatAm and pretty strong growth in the out years. So I was just interested if you could talk about what some of the drivers are there and some of the things you're doing as part of that horizon strategy to give you the confidence in that growth?

Eric Clurfain - Regional President, Latin America

Yes. Sure, Alex. Hi. This is Eric. Thanks for the question. Let me focus on a couple of things. If you think about our top line and what we've seen in 2021, we've achieved really a great momentum across the region. Sales reached a pre-pandemic level - levels in the third quarter. And then again, in the fourth quarter, our persistency has also been very resilient and above expectations across most markets. And coupled with the strong sales has really delivered a strong and solid PFO growth in 2021. And when we're seeing this, we're confident to see this moving forward, that momentum to continue. And that demonstrates really the strength, the diversity and the resiliency of our distribution channels and product mix, right?

So if you combine this with the swift implementation of several digital capabilities in our largest markets, that allows us to service our customers faster and better and to be more efficient. So all in all, this highlights the underlying fundamentals of the franchise and the strength and the view that once the pandemic returns to normal, and the pandemic recedes, our earnings run rate also will return to normal. And to John's point on outlook, we expect earnings to double, excluding COVID next year.

Alex Scott - Goldman Sachs - Analyst

Thank you.

Operator

And next, we move on to Humphrey Lee with Dowling & Partners. Please go ahead.

Humphrey Lee - Dowling & Partners - Analyst

Good morning and thank you for taking my questions. I have a follow-up question on VII. Just looking at the outperformance to date and just this year alone, you had over $4 billion above your plan. How should we think about the impact of the strong appreciation on your capital going forward? You talked about doing a secondary sales this year for $1 billion, which would be one way to monetize it. But if I were to think about the increasing carrying value of these assets on a statutory basis, it should help your capital base even with the high-risk charge. So maybe just can you talk about the capital implication of the strong VII to date?

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

Hey, good morning, Humphrey, it's John. So I think you've articulated it well, we are getting a benefit of the strong appreciation in our capital levels. I mean we talked about - we expect to be above 360%. I mean, I'd say, yes, that will definitely be the case. And I think you can see that in some of the statistics I gave in the earlier part around just growth in TAC.

In terms of how you monetize that from a dividend perspective, I would say the sale doesn't really change that, right? Just kind of monetizes the unrealized to realized, if you think about that $1 billion. And then the way this gets monetized through status is through growth in earnings, which comes through in cash just if we're going to get into a little bit of accounting. It's the cash distributions that come through as well as we have kind of a greater of test with regards to a percent of surplus versus earnings. So just if surplus is greater than - and apply that percentage, that will be another way you can kind of realize that through dividends.

Humphrey Lee - Dowling & Partners - Analyst

Got it. And then just to follow up your earlier comment about the free cash flow conversion should trend higher kind of in '22 through '24. As I think about these kind of VII cash flow come through on a LAC basis, like should we actually think about the free cash flow conversion could be towards the upper end or even maybe above your guided range kind of over the next several years as some of these cash flows come through?

Michel A. Khalaf - President and Chief Executive Officer

Yes. So we - remember, we give our guidance ranges on a two-year average. And just because of this lumpiness as we're basically talking about, right? And so I think you're referencing kind of on a one-year basis. And so certainly, that's why we use an average. When we think about that 65% incentive, so it's a little lower this quarter. I mean this year, on an annual basis, we'd expect it to be higher next year, and then on average get us back into the range, maybe at the low end as we do our math. But I think you've articulated the direction correctly.

Humphrey Lee - Dowling & Partners - Analyst

Got it. Thank you.

Operator

And ladies and gentlemen, we have time for no further questions. I will now turn the call back to the CEO, Michel Khalaf. Please go ahead.

Michel A. Khalaf - President and Chief Executive Officer

Thank you, operator. At our Investor Day in December 2019, we said, and I quote, “MetLife is a simpler and more focused company with a great set of businesses that generate strong free cash flow.” That is more true than ever. And as we enter 2022, we do so with a high degree of confidence that we will continue to create value for our stakeholders. Thank you for joining us this morning and have a great day.

Operator

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METLIFE INC

Q4 2021

Earnings Transcript

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