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MetLife (NYSE:MET)
Q1 2020 Earnings Call
May 07, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife first-quarter 2020 earnings release conference call. [Operator instructions] As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's 8-K filed last night and its other SEC filings.

With that, I will turn the call over to John Hall, head of investor relations.

John Hall -- Head of Investor Relations

Thank you, operator. Good morning, everyone. Now more than ever, we appreciate you joining us for MetLife's first-quarter 2020 earnings call. Before we begin, I refer you to the information on non-GAAP measures on the investor relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review.

On the call this morning are Michel Khalaf, president and chief executive officer; and John McCallion, chief financial officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides. They are available on our website.

John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to these slides features disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. [Operator instructions] Before I turn the call over to Michel, I have a quick scheduling update.

As you might have concluded, given the environment, we will not be hosting an investor day in Tokyo this September. Now over to Michel.

Michel Khalaf -- President and Chief Executive Officer

Thank you, John, and good morning, everyone. I'd like to begin by acknowledging the difficulties and challenges that so many people have endured as a result of the pandemic. What the world has been living through its tragic, yet it is also demonstrating the best of humanity. We see this every day as thousands of first responders, healthcare workers and other frontline employees risk their lives to care for others and provide essential services.

And we see it at MetLife as our employees go above and beyond to deliver on our promises to customers. While we feel the effects of the crisis deeply, both the personal loss and the economic disruption, these are the moments that MetLife is built for. At our investor day last December, I led with the importance we place on being a purpose-driven company. Our purpose statement: Always with you, building a more confident future has taken on greater meaning in the current environment.

People are counting on us like never before to provide the value, support and financial security they need. Our next horizon strategy is a road map for how the company will create value for all of its stakeholders: our people, our customers, our shareholders and our communities. As I have said before, it is our people who will deliver for our customers, and that in turn is how we will create value for our shareholders and communities. It starts with our people, which means making their health and well-being our top priority.

We've done that in a variety of ways. We rapidly moved employees to a work-from-home environment, expanded benefit to help cover COVID-19 testing and treatment, enhanced mental health support to help employees cope with stress and deployed tools and resources to keep people connected. I am proud of the level of engagement and motivation our people are showing, they know they are making a difference. Since we do business in many markets, MetLife got an early look at how the pandemic could affect societies and our own operations.

Our experience in Asia gave us a running start on the activation of our business continuity plan globally. Across our enterprise, 92% of our 38,000 non-agent employees are now working from home, including 98% in the United States. Of course, the true test of our business continuity plan was not merely whether employees could log on from home but whether they had full functionality to be able to deliver for our customers. On this front, we are very pleased that we've been able to maintain service levels with 95% of all customer calls, claims and other transactions successfully handled by employees working remotely.

This includes our group insurance business, where even in this highly disrupted environment, MetLife still expects to meet or exceed its performance guarantees. For our customers, this moment is crucial. The way we show up now will resonate with them for years to come. Across the enterprise, we are acting to provide them with comprehensive and compassionate care.

We are extending premium grace period, fast-tracking claims, crediting or adjusting auto and dental premiums and providing our digital financial wellness portal to small businesses and their employees at no cost. The shutdown of face-to-face distribution has also spurred us to innovate and accelerate the digital transformation of our business. In China, for example, sales of our medical reimbursement product rose sharply after we created a WeChat store for agents. In times of prices, we must do more for the communities where we work and live.

MetLife Foundation has committed $25 million and MetLife has donated millions of dollars and thousands of masks, disinfectant wipes and hand sanitizers to the COVID-19 spike. We also had a unique opportunity to help. As a large commercial real estate investor, we were pleased to work with the State of New York to offer the Intercontinental Times Square as free housing for medical workers. Most impactful is the social and economic benefit MetLife create as a life insurance company.

The heart of our business is a promise to pay when people need us most. For the power of risk putting, the premiums of the many become payment to those who need them. MetLife paid more than $24 billion in policyholder claims, benefits and dividends in the U.S. alone last year, an average of more than $65 million a day.

At a time when peoples' jobs and income are at risk, life insurers form a vital part of the social safety net that sustains people financially. MetLife entered the current period of uncertainty from the position of strength. As you know, we've made substantial changes to our strategy and product portfolio. The biggest change is to the profile of our liabilities.

We are now a less market-sensitive and capital-intensive company. At our investor day, we showed that approximately two-thirds of our adjusted earnings came from protection and fee-based products and only one-third from spread-related businesses. Within our investment portfolio, we took early action in anticipation of a recession. Beginning in 2018, we became concerned about certain lower-rated areas of the credit markets.

We reduced our holdings in sectors and names that we thought would carry heightened risk in a downturn. Overall, our investment portfolio is marked by broad diversification, high quality and ample liquidity. Notably, at our operating insurance companies, we have nearly $100 billion of U.S. government and agency securities, Japan government bonds and other cash and short-term investments.

MetLife has also further strengthened its already strong capital and liquidity position. As part of our planned capital actions, in late March, we accessed the bond market when few others could to raise $1 billion. For the quarter, this helped bring the company's total cash and liquid assets at our holding companies to $5.3 billion. Our combined U.S.

NAIC risk-based capital ratio as of year-end 2019 was 395%, and we enjoy higher ratings from all major credit-rating agencies. Another proactive step we've taken is to increase our focus on expenses. MetLife remains committed to meeting the expense target we set as part of our unit cost initiative program. In the current environment, perhaps no area gives us greater opportunity to demonstrate our commitment to consistent execution than expense discipline.

As we announced last week, our financial strength enabled us to increase our quarterly common stock dividend, which provides a steady and growing source of income to millions of people during this economically challenging time. We raised our second-quarter 2020 common stock dividend by 4.5%, which illustrates our confidence in MetLife's future. Given our strong starting position, we expect the impact of the pandemic to be an earnings event, not a balance sheet event. MetLife has a great set of globally diversified businesses, some of which may be pressured by today's unprecedented events while others act as offsets.

Take our retirement and income solutions, or RIS, business. While we are seeing a slowdown in new pension risk transfer deals, we are also seeing a surge in demand for our stable value offerings as 401(k) sponsors and participants seek the safety of these book value products backed by MetLife. And although rollover reinvestment rates continue to be pressured for our long-tailed businesses in RIS, the current configuration of the yield curve, very low at the short hand and a positive slope, is favorable for our capital markets, investment products and securities lending activities. Similar balance exists across our global protection businesses, where mortality, morbidity, longevity and property and casualty risks serve as natural offsets.

At the core, our scale, strong balance sheet and broad diversification are key strengths of our franchise. These trends enabled us to generate first-quarter adjusted earnings of $1.4 billion or $1.58 per share, up 7% from a year ago. The direct impacts on our adjusted earnings from the pandemic and economic slowdown were limited. Adjusted earnings reflected strong underwriting margins and group benefits and favorable underwriting margins in property and casualty.

Variable investment income was very strong mostly due to private equity, which is registered on a one quarter lag. These positives were offset in part by unfavorable market factors across interest rates, equities and foreign currency. Net income was $4.4 billion or $4.75 per share, up from $1.40 per year prior. Falling interest rates drove substantial gains in the derivatives we hold to protect our balance sheet.

Book value per share, excluding AOCI, other than FCTA, was $52.36, up 7% sequentially from year-end, while adjusted return on equity on the same basis totaled 12.6%. Looking ahead to the second quarter, we anticipate the greatest earnings impact will be felt within variable investment income, where we expect less favorable private equity returns for a time. The strong historical returns associated with our private equity portfolio and its role as a good match for our long-dated liabilities justify this asset class as an important ongoing component of the general account. In fact, the current economic turmoil is precisely the environment where the speeds of tomorrow's private equity returns are being planted.

We believe our Next Horizon strategy was the right approach before the pandemic struck, and we are even more confident that the pillars of focus, simplify and differentiate are the right approach today. By focusing even more intently on where we deploy capital and by further simplifying the company, we will enable MetLife to emerge from the current environment in the best shape possible. If anything, we must accelerate our Next Horizon work. This is how we will truly differentiate MetLife and capture the opportunities that periods of disruptions always bring.

MetLife has seen many such periods during this history, the 1918 flu pandemic, The Great Depression, World War II, 9/11, the financial crisis. Through all of them, we never faltered. We maintained our financial strength, kept our promises and provided people with the security and confidence they need. That's what we mean when we say, "Always with you," and it will be true throughout this pandemic and beyond.

I will now turn the call over to John McCallion.

John McCallion -- Chief Financial Officer

Thank you, Michel, and good morning, everyone. I'll start with the first-quarter 2020 supplemental slides that we released last evening, which highlight information on our earnings release and quarterly financial supplement. In addition, the slides provide more detail on our investments, outlook for the second quarter, as well as an update of our cash and capital positions. Starting on Page 3.

This schedule provides a comparison of net income and adjusted earnings in the first quarter. Net income in the first quarter was $4.4 billion or approximately $3 billion higher than adjusted earnings of $1.4 billion. This variance is primarily due to net derivative gains resulting from the significant decline in interest rates during the quarter. The results in the investment portfolio and hedging program continue to perform as expected.

Turning to Page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding notable items. This quarter's results did not include any notable items, while the prior-year quarter had $55 million associated with our unit cost initiative, which was accounted for in corporate and other. Excluding the unit cost in the first quarter of 2019, adjusted earnings were down 2% and essentially flat on a constant-currency basis. On a per-share basis, adjusted earnings were up 3% and up 5% on a constant-currency basis.

The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers include strong variable investment income, solid volume growth, favorable expense margins and lower taxes. This was offset by equity market weakness, lower recurring interest margins and less favorable underwriting compared to first quarter of '19. Turning to the performance of our businesses.

Group benefits adjusted earnings were down 9% year over year. The group life mortality ratio was 87.9%, which is slightly above the midpoint of our annual target range of 85% to 90%, but less favorable to the exceptionally strong prior-year quarter of 85.3%, which was the best first quarter mortality ratio in over 15 years. The interest adjusted benefit ratio for Non-Medical Health was 71.7%, which is below our annual target range of 72% to 77% and also favorable to the prior-year quarter of 72.9%. The primary driver was strong disability results, which benefited from higher claim recoveries, lower incidents and lower severity.

With regards to the top line, group benefit adjusted PFOs were up 7% due to solid growth across all markets. Retirement and income solutions, or RIS, adjusted earnings were up 26% year over year. RIS investment spreads for the quarter were 114 basis points, up 18 basis points year over year and up 8 basis points sequentially. Spreads in the quarter benefited from higher private equity returns and a decline in LIBOR rates.

RIS liability exposures grew 9%, driven by very strong growth in the second half of 2019 and exceptionally strong stable value sales in the quarter, which benefited from a flight-to-safety amid the turbulent equity markets, as well as opportunistic issuances in our capital markets investment products. While liability exposures grew, RIS PFOs were down 32% due to the mix of sales in the quarter, driven by lower structured settlement and income annuity sales. property and casualty, or P&C, adjusted earnings were up 12% versus the prior year. The overall combined ratio was 91%, which was below our annual target range of 92% to 97% and the prior-year quarter of 92.2%.

P&C results benefited from favorable non-catastrophe weather in homeowners and auto. P&C auto also benefited from lower auto frequency over the last two weeks of the quarter due to the COVID-19 shelter-in-place orders. Moving to Asia. Adjusted earnings were down 2% and flat on a constant-currency basis.

Solid volume growth was driven by higher general account assets under management on an amortized-cost basis, which were up 7%, and 9% on a constant-currency basis. This was offset by less favorable underwriting margins, unfavorable equity markets in Japan and Korea, and lower investment margins. Latin America adjusted earnings were down 29% and down 19% on a constant-currency basis. The primary year-over-year driver was lower equity markets impacting our Chilean encaje returns, which was a negative 11% in the quarter versus a plus 5% return in 1Q of '19.

Excluding the impact from encaje, Latin America adjusted earnings were up 23% on a constant-currency basis due to higher investment margins, solid volume growth and favorable underwriting. EMEA adjusted earnings were down 9% and down 6% on a constant-currency basis as lower equity markets and less favorable underwriting margins were partially offset by better expense margins and solid volume growth across the region. MetLife Holdings adjusted earnings were down 13% year over year, primarily driven by adverse equity markets. The separate account return in the quarter was a negative 14.4%, which was better than the 20% decline in the S&P as roughly 30% of funds are allocated to fixed accounts.

This resulted in a negative $20 million initial impact, which compares to an approximately $15 million positive initial impact in first quarter of '19. With regards to underwriting, the life interest adjusted benefit ratio was 51%, which is near the bottom end of our annual target range of 50% to 55%. Corporate and other adjusted loss was $131 million. This result compared favorably to the prior-year quarter, which had an adjusted loss of $138 million, excluding $55 million of UCI costs.

The company's effective tax rate on adjusted earnings in the quarter was 17.5% and 20.2% on a run-rate basis when adjusting for a favorable $45 million tax benefit in the quarter. Now let's turn to Page 5 to discuss variable investment income in more detail. This chart reflects our pre-tax variable investment income in 2019, including $351 million earned in the first quarter of 2020. Our private equity portfolio, which is generally accounted for on a one quarter lag, had another solid quarter.

With regards to recurring investment income, our new money rate was 3.56% versus a roll-off rate of 3.92% in the quarter. This compares to a new money rate of 4.04% and a roll-off rate of 4.15% in first quarter of '19. Lower interest rates have pressured this relationship, but wider credit spreads in the quarter have provided an offset. Now on Page 6.

The chart on Page 6 highlights our strong historical private equity returns. Steve Goulart presented a version of this slide at investor day showing private equity returns going back to 2016. Given the focus on our private equity in the current environment, we've decided to expand this view showing returns going back to the financial crisis in 2008. Our private equity portfolio was $7.6 billion as of March 31, which represents less than 2% of the general account assets under management.

It is well diversified across strategy, geography and portfolio managers and provides a good fit against long-term liabilities. As you can see from the chart, our private equity investments have generated an average return of 12% since 2008. And only in 2009, the trough of the financial crisis that this portfolio failed to generate a positive return. These next two slides were shown at our investor day, but they are helpful reminders.

On Page 7, you can see our portfolio loss history since 2008. The chart highlights a strong track record of performance as our cumulative impairment rate of 1.2% is roughly half that of the industry peer group. It also speaks to MetLife investment management's culture of disciplined underwriting, deep fundamental analysis and strong risk management, with a particular focus on private asset origination. Turning to Page 8.

As we've discussed previously, we have been proactive in improving the quality of our portfolio, with a focus on significantly reducing our exposure to below-investment-grade credit and syndicated bank loans. We're also highly focused on our low BBB exposure, given fallen angel risk. Our BBB- credit exposure is roughly 4% of the general account AUM and 46% of this is private placements, which benefit from better financial covenants in place. I would also call to your attention, Page 14 in the appendix, which displays that we have relatively modest fixed maturity exposures to stress sectors.

You can see our largest exposure on the chart is our energy portfolio of approximately $8.7 billion, of which 85% is investment grade. The energy portfolio is well diversified across subsectors and issuers. And we believe it is defensively positioned given the changes that we have made since the last downturn for the energy sector back in 2016. Turning to Page 9.

This chart shows our direct expense ratio from 2015 through 2019 and first quarter of 2020. Through year-end 2019, we have achieved 170 basis points improvement in our direct expense ratio. And while we expect top-line pressure in 2020, we remain committed to achieving our 12.3% full-year target as we continue to deploy an efficiency mindset, to increase capacity for reinvestment and to protect the margins of the firm. Now I'd like to spend some time reviewing several key considerations for the second quarter given the uncertainty of the current environment.

These considerations are summarized on Page 10 with further detail offered by segment on Page 13 in the appendix. Starting with investments. As Michel indicated, we anticipate the largest impact of the current environment to manifest in variable investment income with the return on our private equity portfolio. While we received a limited number of PE reports to date, our best estimate for the second quarter is a negative high-single to low double-digit return.

In thinking about our recurring investment income, we continue to experience downward pressure but reinvestment rates held reasonably steady during the first quarter as credit spreads widened to offset falling treasury rates and also provided good reinvestment opportunities. During the last week of March, we were able to invest roughly $2 billion in high-quality investments that yielded on average 5.4%. Additionally, while interest rates remained low, the curve has steepened, which improves margins in our capital market products and RIS in our securities lending program. Moving on to underwriting margins.

Broadly speaking, we anticipate modest underwriting impacts on a combined basis in the second quarter from COVID-19, but there are many moving parts. To date, while we've seen limited impact from COVID-19 on life claims in the U.S., we do expect this to increase during the second quarter. However, claims activity in dental has declined and auto claims frequency is down with fewer miles driven. Additionally, we would expect some level of offsets from businesses with longevity risks.

So currently, we expect a limited overall impact to underwriting margins on a combined basis, 2Q. Turning to top-line metrics. We would expect 2Q sales to be challenged in most of our markets with risk of further pressure in future quarters. Additionally, as Michel mentioned, for April and May, we've provided a 15% premium credit for MetLife personal auto customers and a 25% premium adjustment for our fully insured dental business within group benefits for the two months.

As far as variable product sensitivities to equity markets, our investor day guidance offered back in December still holds. While we expect to encounter volume and top-line growth pressures, efficiency mindset continues to be a core tenet of our strategy and managing margin pressures across our business. And as I noted earlier, our plans include meeting our direct expense ratio, full-year target of 12.3% despite the challenges of the current environment. I will now discuss cash and capital position on Page 11.

Cash and liquid assets at the holding companies were approximately $5.3 billion at March 31, which is up from $4.2 billion at December 31 and well above our target cash buffer of $3 billion to $4 billion. The $1.1 billion increase in cash in the quarter reflects the net effects of subsidiary dividends, share repurchases, payment of our common dividend, preferred stock and debt issuances, as well as holding company expenses. During the quarter, we repurchased $500 million of net common shares with $485 million remaining on our current authorization. We have not been in the market since early March, which we believe to be prudent at this time.

Our cash balances are high. Our next debt maturity is December 2022, and we like the optionality and financial flexibility those balances provide us at this time. Next, I would like to provide you with an update on our capital position. Using market inputs at the end of the first quarter, interest rates following the observable forward yield curves as of March 31 and equity markets down 20% in 2020, we estimate that our average free cash flow ratio for the two-year period, 2019 and 2020, will hold within our target range of 65% to 75%.

Looking forward to the two-year period of 2020 to 2021 and assuming the same March 31, 2020, forward yield curves and a return to normal 5% equity market growth in 2021, we estimate our free cash flow would be within a range of 40% to 60%. This range occurs as we estimate some level of credit losses due to the pandemic over the next 12 to 24 months and some level of additional reserves would be established under current New York cash flow testing requirements, which would impact dividend capacity at our New York domicile statutory company, metropolitan life insurance company, or MLIC. We would not expect such reserves to be required under NAIC standards, and therefore, would not impact our combined NAIC RBC levels. For our U.S.

companies, our combined NAIC RBC ratio was 395% at year-end 2019 and comfortably above our 360% target. For our U.S. companies, preliminary first-quarter 2020 statutory operating losses were approximately $650 million and net income was approximately $260 million. Statutory operating earnings decreased by $1.9 billion from the prior year, primarily due to higher VA reserves.

Net income was mostly driven by derivative gains in the quarter. We estimate that our total U.S. statutory adjusted capital was approximately $21.4 billion as of March 31, 2020, up $2.8 billion from $18.6 billion at December 31, 2019. Derivative gains more than offset operating losses in the first quarter of 2020.

Finally, the Japan solvency margin ratio was 931% as of December 31, which is the latest public data. Overall, MetLife delivered another solid quarter despite the significant volatility in the capital markets due to COVID-19. Looking ahead, we expect our second-quarter adjusted earnings to be dampened by negative private equity returns, but our underlying business fundamentals from our diverse market-leading businesses to remain intact. In addition, we believe our capital, liquidity and investment portfolio are resilient and well-positioned to manage through this challenging environment.

Finally, we are confident that the actions we are taking to be a simpler and more focused company will continue to create long-term sustainable value for our customers and our shareholders. And with that, I will turn the call back to the operator for your questions.

Questions & Answers:


Operator

OK. [Operator instructions] Your first question comes from the line of Tom Gallagher from Evercore. Please go ahead.

Tom Gallagher -- Evercore ISI -- Analyst

Good morning. John, just to follow up on the updated free cash flow guidance. Can you provide a little more color on how this works? How much of the impact would be related to interest rates and credit, because I know you mentioned both? And is it as simple as just thinking there would be AAT reserves of around $1 billion a year for 2020 and 2021. Is this the right way to think about this? And then, just my follow-up would be, you had a competitor announce a big long-term care reserve charge recently after a regulatory review.

Just want to see whether there's anything similar going on with New York regulators in MetLife? Thanks.

John McCallion -- Chief Financial Officer

Good morning, Tom. so on the first question, let me start by saying, I wouldn't call it guidance, right? Let's just be clear what our objective here is to provide a scenario. We anchored it on some data or market data as of March 31. So it was really to provide a scenario of free cash flow.

And one, we're considering a level of credit losses and downgrades based on our bottom-up analysis that our investment team has been working through and monitoring and thinking it will play out over a 12- to 24-month period. And two, looking at the potential impact of New York cash flow testing requirements using last year's requirements. And remember, we get a special consideration letter every year and then considering any new requirements that we're aware of. And so there, we applied those factors to estimate some level of cash flow testing reserves, again, based on March 31 macro factors.

And as I said, Steve and team put forth a bottoms-up review to a value to range of credit losses. And for cash flow testing, we picked a point more stressful than where we are today, that being March 31, where interest rates -- while interest rates are similar, credit spreads were wider back then, equity markets were lower then. I would also point you to just directionally the shape of the curve is more favorable. Actually, it's more favorable than, I'd say, a year-end base case we used at the outlook call, just given the shape of the curve, given the significant drop in the short end.

And then, also, as I said, credit spreads, they're important as well in this, and they have narrowed since March 31. So I think it's important that to also know that we get this letter every year. The letter we -- the requirements were used from last year's letter was based on a different macroeconomic environment. So every year, we work through with New York in a constructive way, and we're cautiously optimistic we'll come to a reasonable place, but we wanted to give some sensitivity.

And I think the other thing I would just add -- this is, I would say, consistent with the direction that we've given in the past, right? We've said that our free cash flow range of 65% to 75% holds with a 10-year treasury of 1.5% to 4.5%. And then, as rates go below that, we would expect that to decline for a year or a two-year average, I should say. And I think that's kind of what we're trying to share here. And then, on LTC.

So yes, look, I'm not going to comment on someone else's situation. For us, we work with New York every year. So I wouldn't say there's anything in particular for us. And we're always looking at our reserves, and there's nothing to point out different than what we're seeing every year.

Tom Gallagher -- Evercore ISI -- Analyst

All right. Thanks, John. Just one quick follow-up, if I could. Is the plan to stay paused with buyback? Or any color you can give on what you're thinking about the buyback?

Michel Khalaf -- President and Chief Executive Officer

Hi, Tom, it's Michel. So as John mentioned, we completed $500 million in Q1, buybacks in Q1. We have $485 million left on our current authorization. Since early March, just given the stressed environment, we've been prudent to preserve and maintain capital and maintain optionality.

There's no change in our philosophy, I would say, in terms of -- excess capital belongs to shareholders. We'd expect to distribute all free cash flow in the form of dividends and share buybacks while maintaining sufficient liquidity for stress events. Also, if you think about our liquidity buffer $3 billion to $4 billion, we're maintaining cash in excess of that, given the uncertain economic environment. And again, we believe that that's the prudent thing to do.

So we're going to continue to evaluate the situation. We'll assess our liquidity position based on business and macro conditions. And we'll sort of -- we're in a -- I would say, we've had the pause button for the time being, but we'll continue to monitor things and decide when would be an appropriate time to resume buybacks.

Tom Gallagher -- Evercore ISI -- Analyst

All right. Thanks, Michel.

Operator

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

Ryan Krueger -- KBW -- Analyst

Hi. Good morning. Back to the free cash flow generation. I just want to maybe just clarify one thing.

If rates remain low as in the scenario that you expressed, would that basically create one year of additional asset adequacy testing serves to account for that? And then, after you made that reserve addition, you'd go back more toward normal cash flow afterwards?

John McCallion -- Chief Financial Officer

Hey, Ryan, it's John. Yes, I think that's fair. As I said, again, those were off of March 31 rates. Rates are different today.

It's an estimate. We haven't -- that we apply. We go through a much more longer process to get to the final reserve number. So again, that's why there's a wide range there of outcomes.

But I think directionally, the way to think of it is, it has an impact on one year's free cash flow.

Ryan Krueger -- KBW -- Analyst

Got it. Thanks. And then, on your commercial mortgage loan portfolio, can you give us any statistics on kind of forbearance requests and how much has been granted so far?

Steve Goulart -- Executive Vice President and Chief Investment Officer

Hey, Ryan, it's Steve Goulart. Sure. I mean, obviously, we've been expecting to see elevated activity in this. I'll start by reminding you and everyone else, about the portfolio itself, $50 billion of commercial mortgages with a loan-to-value ratio of 55% for the entire portfolio, 2.4 times debt service coverage.

So again, a very secure, low-risk portfolio in our mind. Obviously, in this time, we are seeing elevated requests, as you'd expect, particularly in retail and hotels for forbearance request. We have been getting requests. We have a committee that deals with each and every one.

Certainly, we believe that some of these make sense to grant and that's what we've been doing. 90% of the requests have come from hotel and retail. And they're typically for deferral of interest and/or principal, and typically, what we've been granting is in the range of three to four months of forbearance. And remember, it's forbearance, not forgiveness.

So we do expect that these will always be paid. And by the way, we saw virtually no impact on April payments for the portfolio overall. But basically, we've granted forbearance on essentially sort of just less than 2% of the total premium balance outstanding at this point in time.

Ryan Krueger -- KBW -- Analyst

Got it. And then, in April, you had almost all of the loans pay?

Steve Goulart -- Executive Vice President and Chief Investment Officer

Correct.

Ryan Krueger -- KBW -- Analyst

Thank you.

Operator

Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.

Nigel Dally -- Morgan Stanley -- Analyst

Great. Thanks and good morning. A question on group insurance. Should we be taking some deterioration in the margins given this back-end unemployment? I know it's typically related to disability claims.

And just wanted to get your perspective as to whether that's a headwind we should be watching out for?

Ramy Tadros -- President, US Business

Hey, Nigel, it's Ramy here. Well, maybe just on underwriting, stepping back and giving you an overall context across the U.S. business. We do have significant diversification across the U.S.

business. So think about mortality and longevity across the group and the RIS businesses. And then, we also have diversification within each one of those businesses. So if you were to focus on group your question, the current environment is leading to various offsets and give and takes across the product lines.

We are seeing favorable impacts in dental, given the lower utilization. We're seeing actually unfavorable impacts on the life block. And I would say, to date, on the short-term disability block, it's been a push. We've seen an increased number of COVID-related incidents but that's been more than offset in a decrease in other short-term disability claims, so think issues like elective surgeries and the like.

So at this stage, while there's still some uncertainty, I mean, relating to the overall number of deaths in the U.S. and the impact on the insured population versus the general population, it's very reasonable to expect at this stage that the overall impact would more or less offset each other on a full-year basis.

John McCallion -- Chief Financial Officer

Maybe I'll just add to a couple of points to what Ramy mentioned. So because you referenced, I think, unemployment, Nigel. And so a couple of things to point out here. One is that the segment that's been hardest hit, which is small business.

I think our total premiums there are at $1 billion. So it's not a major component of our current portfolio. And two, if you think about our disability business, it's 11%, as we showed on investor day of our total earnings. And obviously, there, we've been also taking steps from a pricing perspective in terms of the guarantees that we provide on -- from a rate perspective to make sure that we are also well-positioned for a downturn scenario.

Nigel Dally -- Morgan Stanley -- Analyst

That's great. Thanks a lot.

Operator

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

Jimmy Bhullar -- J.P. Morgan -- Analyst

Hi, good morning, everyone. I had a couple of questions. First, your investment portfolio, can you discuss if you've run any stress test on what would happen to your capital and/or your RBC ratio in sort of a mild recession, deep recession? I appreciate your comments in terms of qualitatively, but anything that you're able to share in terms of numbers on that.

Steve Goulart -- Executive Vice President and Chief Investment Officer

Hi, Jimmy, it's Steve Goulart again. Let me start by just reminding everybody, I know you probably think I sound like a broken record when I do this, but we've been prepositioning this portfolio for a downturn since 2018. And that's been our outlook -- remember what we talked about at investor day, John updated some of those slides. But even going back to investor day, we've continued to reduce sectors that we were very concerned about below investment grade.

We reduced by another $600 million since investor day, bank loans also another $600 million since investor day. And I think I would have to say, and I think anybody, as you talk to who are involved in investments, would say that we've entered this crisis period in better shape than we probably ever have in the past. So we're very comfortable moving into it. John showed a slide about sensitive sectors and the like, we've been analyzing the portfolio a number of different ways.

We run it through a number of different tests and lenses. Frankly, many of you out there have actually conducted your own reviews. We actually go through every one of those in detail and just sort of compare to our own. We've done longer-term analysis using external models from the rating agencies and other outside experts.

We've done a portfolio, kind of, top-down approach comparing the portfolio now to previous crises and downturns, emphasizing the sensitive exposures and how the portfolio has changed since those crises and imputing our historical default and loss experiences in those time periods. But John mentioned what we've actually spent the most time on is the real specific bottom-up individual exposure analysis by our credit and real estate research teams. Again, our core strength is in credit and structured underwriting, and we've been using them to really go through the portfolio to help us assess this. And the result is a very granular assessment of our exposures, we think, are vulnerable to downgrades and losses.

And in this analysis, particularly, we really thought of it in 2 ways. One is sort of a nearer-term recovery till the economy start opening up, say, sometime in the summer, into the summer, or really, is it kind of a year-end scenario before the economy starts reopening. And the bottom-line assessment is based on what we foresee today, the impact of downgrades and possible losses on our capital in these scenarios is very manageable. That analysis put possible losses of up to $1.4 billion over time, as John said, likely to occur over kind of a 12- to 24-month period.

And the impact on RBC from downgrades, in that, we would estimate also up to about 25 basis points as well. So what I'd say, again, is we've been preparing for this. In this environment, we expect losses and downgrades above normal. But based on the prepositioning we've done and based on what we noted that we feel very comfortable and think our position is very sound.

Jimmy Bhullar -- J.P. Morgan -- Analyst

OK. And just one on the retirement business. Normally, you'd assume in a low rate environment, your spreads would actually be going down, but they've held in pretty well. And I'm assuming some of that's because of the benefit of this steeper yield curve.

So assuming rates stay around here and the yield curves as steep as it is, would you expect your spread to hold up or potentially improve from these levels?

John McCallion -- Chief Financial Officer

Yeah, Jimmy, it's John. So yes, spreads were in line with what we've kind of been forecasting for the last few quarters as we said before and coming in at 114 basis points, but ex VII, 83 basis points. And we'll expect, given VII returns in Q2 that this will take our overall spread down in Q2. And just as a frame of reference for VII, 85% to 90% of our VII comes through three segments: it's RIS, MLH and Asia, and it's roughly a third each.

But let me focus on how the shape of the curve is improving spreads ex VII. And again, I think this highlights some of the diversification that we have in our business products and the tools that we have to deploy in different environments. And so we think for the remainder of this year, we would expect kind of 5 to 10 basis points improvement as a result of the -- how the curve has changed, particularly even since March. I mean, if you just look at LIBOR, I think it's down 100 basis points since the end of the first quarter.

And then, maybe just to give you a quick update then on sensitivities because I know we gave those to you back at the outlook call. So now where LIBOR is, which is below 50 basis points, our sensitivity would be for every 10-bit move, it would be a $10 million plus or minus, depending on whether it goes up or down. The long-term sensitivity doesn't change but the near term one does. So it almost doubles.

So anyway, I thought I'd just provide that color as well.

Jimmy Bhullar -- J.P. Morgan -- Analyst

Thanks.

Operator

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

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi, thanks. Good morning. My first question, in the past, you guys have been asked about potential transactions within MetLife Holdings. You've also done speculations surrounding some sales of certain overseas businesses.

So how does the current environment, including lower rates kind of impact the potential for transactions? And would you guys just -- are you guys looking and feel, like, I guess, that could potentially free up capital between either of those two routes?

John McCallion -- Chief Financial Officer

Good morning, Elyse, it's John. Yeah, look, we've said this before because I don't think we're necessarily -- I know it's lower rates, but we've been in low rate environments for some time now, and they've gotten lower, certainly, over the last 12-plus months. And so it does put some pressure on that bid-ask spread as we talked about in holdings. And -- but what we've said before is that these are complex blocks of business.

And what we always urge the team to do is make sure we're continuing to take an external perspective, doing the work now because if things were to change and those pricing points were to converge a little more, maybe supply gets even that much greater, there could be a various variety of things. We want to be ready and opportunistic if something makes sense for us. But I'd say, just all else equal, yes, lower rates puts pressure on doing something in holdings at this juncture.

Ramy Tadros -- President, US Business

And just maybe more broadly, Elyse, I would sort of add that, obviously, a more challenging macro environment, we cannot ignore that. But it doesn't change our approach to sort of M&A in terms of how we view it. We continue to constantly look at our portfolio and also think through timing and what does -- when does it make sense to maybe do something. So certainly, the environment makes M&A more challenging, I would say, broadly speaking, but it doesn't mean that we stop the work that we do in terms of assessing our businesses.

And also, there might be opportunities coming out of this crisis that certainly will spend time also thinking through.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. And then, in terms of PRT, can you just provide us on the outlook for that business? I would also think that there's probably been somewhat of an impact on deal flows, just given a low interest rate environment as well?

Ramy Tadros -- President, US Business

Yeah, sure. And in terms of the overall pipeline, it has slowed due to the overall environment. A number of drivers within that, including the funding levels, the volatility in the capital markets, and frankly, the priorities of treasury and HR teams in the context of the pandemic. So we've seen a few deals that were pulled out or put on hold in the first quarter, and we're seeing a somewhat lighter pipeline.

If activity were to kind of pick back up in the second half of the year, we expect to get our fair share. And I'd remind you that we were a top three player in that market last year. But when you think of RIS, again, remember, RIS has a lot more than PRT in it. PRT is one product line in the context of a diversified context.

And as Michel and John referenced, we've seen a substantial pick up in our stable value business in the last quarter, and we're seeing very healthy year-over-year increase in the liability balances. And certainly for the full year in terms of liability balances, we'd expect to still be within the guidance range that we've talked about.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

OK. Thank you for the color.

Operator

Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. In the group business, can you help us think of the potential impact on premiums from the current environment? And how quickly would you start to see an impact? And does this differ materially by plan size?

Ramy Tadros -- President, US Business

Sure. Let me just maybe start by profiling the overall PFO mix and then talk about some of the dynamics coming out of that. So remember, 75% of our PFOs are coming from national accounts, so think large employers. And when you think about the headline unemployment numbers there that you're seeing in the economy, those have really disproportionately impact smaller employers, part-time workers and the like.

And the other dynamic in our national accounts book that's important is that the ultimate impact that we would actually see is going to be also influenced by the benefit practices of certain large employers. So you've seen examples where employers have continued to provide benefits for furloughed workers. So that's kind of one just triangulation point for you. The other piece, when you think about top line for this business is that we have a diversified book by industry and geography.

And just like what we do in the credit portfolio, we've done the same thing here in terms of looking at industries, which are most at risk in terms of unemployment levels and benefits being cut. And that percentage is just shy of 10% of our entire book. So as an example, hotels and leisure is less than 2%. So you put all of that together, you put the fact that we're getting strong persistency above our expectations, we're getting good renewal actions at expectations.

You put all of that together, we'll see some headwinds to PFOs related to overall unemployment. But I would say we would still see some PFO growth for the full year, albeit modest and likely shy of the 4% to 6% range that we've talked about, but nevertheless, we will see growth. Two other points, just to bear in mind as you think about the timing, we have implemented a premium credit in our dental business for the months of April and May, given the significant drop in utilization of dental services. And we will align the dental premiums for the balance of 2020 with the expected utilization of services.

So when you think about our Q2 number, we will be shifting some revenue recognition from Q2 to the second half of the year. And the second point to highlight here, again, in the context of $1 billion or so voluntary business that we talked about on our investor day, we talked about a 30% CAGR in that business, historically. We're still expecting for 2020 to still see double-digit CAGR in PFOs for voluntary. And while unemployment levels are a headwind, we have tailwinds here.

We have increased awareness of the needs of -- for this product, and we're starting from a place where there's relatively low penetration of these products with employee population.

Erik Bass -- Autonomous Research -- Analyst

Thank you. That's very helpful color. And then, one for John, as we think about your GAAP interest rate assumption, is the sensitivity to changes still in line with what you've discussed in the past of rough $50 million per 25-basis-point change? And is there a level where that kind of linearity changes, and I guess, loss recognition could become an issue for any of the blocks?

John McCallion -- Chief Financial Officer

Good morning, Erik. So I'd say, to start, the answer -- you kind of outlined it pretty well. In the beginning, the first few 25 bp reduction would be fairly consistent and then it would begin to grow. So if you said maybe the first -- don't take this for like we've modeled it exactly, but let's say, the first 2 are roughly $50 million.

And then, if you move to another -- the next 100 basis points, it would start to grow a little more each time. Look, we've actually done some sizing, rough sizing, and this isn't something that we're -- there should be no indication of us making any change ahead of time or not. But we've looked at if it was 150-basis-point move down, that would roughly be somewhere between $400 million and $450 million of an impact and no loss recognition testing impact still. So we've done some stress and sensitivities, but that's our best estimates at this time.

Erik Bass -- Autonomous Research -- Analyst

Great. Thank you. That's helpful.

Operator

And at this time, I'd like to turn it back to Michel Khalaf for any closing comments.

Michel Khalaf -- President and Chief Executive Officer

Thank you, operator. When I took the job of CEO just over a year ago, I envisioned a lot of things happening during my first year on the job, the coronavirus was not one of them. At a time when we all need silver linings, mine is how MetLife's employees have stepped up for our customers. It's fashionable for companies to say they are purpose driven.

The team at MetLife really walks the talk. I'm so privileged to lead this company at a time when we're making such a critical difference in peoples lives. Thank you for listening. Please stay safe, and have a good day.

Operator

[Operator signoff]

Duration: 73 minutes

Call participants:

John Hall -- Head of Investor Relations

Michel Khalaf -- President and Chief Executive Officer

John McCallion -- Chief Financial Officer

Tom Gallagher -- Evercore ISI -- Analyst

Ryan Krueger -- KBW -- Analyst

Steve Goulart -- Executive Vice President and Chief Investment Officer

Nigel Dally -- Morgan Stanley -- Analyst

Ramy Tadros -- President, US Business

Jimmy Bhullar -- J.P. Morgan -- Analyst

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Erik Bass -- Autonomous Research -- Analyst

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