Metlife Inc (MET) Q4 2020 Earnings Call Transcript

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Metlife Inc (MET 0.69%)
Q4 2020 Earnings Call
Feb 4, 2021, 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 Fourth Quarter 2020 Earnings Release and Outlook Conference Call. [Operator Instructions] Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings.

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

John Hall -- Senior Vice President and Head of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Fourth Quarter 2020 Earnings and Near-term Outlook Call. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release, and in our quarterly financial supplements which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management.

Last night, we released a set of supplemental slides, which addressed 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'll have a Q&A session. In light of the busy morning, Q&A will extend no further than the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up.

With that, over to Michel.

Michel A. Khalaf -- President and Chief Executive Officer

Thank you, John, and good morning, everyone. No matter which lens you used to look at MetLife's performance, the fourth quarter, full year 2020 or the progress we've made toward our Next Horizon strategy, the portrait that emerges is one of a resilient company with consistent execution that delivers for its stakeholders. The year 2020 was an especially unforgiving environment for life insurers, marked by the worst pandemic in a century, record low interest rates and extreme market volatility. And yet at MetLife, by reducing and diversifying our risk, controlling expenses, staying true to our investment principles and executing on our capital deployment philosophy, we overcame these challenges to produce strong earnings, cash and book value per share growth.

Let's begin with our fourth quarter 2020 results. As you saw last night, we delivered quarterly adjusted earnings of $1.8 billion or $2.03 per share. One of the primary drivers was the exceptionally strong returns we earned on our private equity portfolio, which has long been an important source of value creation for MetLife. Overall, adjusted earnings, excluding notables, rose 30% year-over-year. Just as noteworthy during the quarter was the resilience of our business in the face of COVID-19. MetLife's balanced risk exposure across the spectrum of mortality, morbidity and longevity was clearly evident in the quarter and the year. Certain parts of our business experienced significant adverse mortality, such as Group Life and Mexico.

But those effects were more than offset by lower utilization and growth and EMEA and favorable underwriting in MetLife Holdings. We believe the strong diversification of our businesses represents a meaningful differentiator for MetLife and the current crisis and beyond. If we look at 2020 as a whole, some additional attributes of MetLife's culture, strategy and performance come into view. I must begin by commending the way MetLife's people stepped up for each other and our customers during the pandemic. It is our very purpose as a company to provide financial protection and support for people during lives most de-stabilizing moments.

The pandemic was one of those moments for so many people who rely on MetLife, and we were pleased to go above and beyond for them and for our broader communities. Between premium credits and contributions from the Metlife Foundation, we provided more than $250 million of relief to help people cope with COVID-19. What enabled us to preserve our financial strength through the crisis was having the right strategy and an unwavering commitment to execution. We are a less interest-sensitive company than we used to be. In a year where the 10-year treasury spent nine months below 1%, we delivered an adjusted return on equity, excluding notables, of 12.3%. And the positive earnings impact from volume growth significantly outweighed the drag from lower recurring investment income.

That volume growth showed up in a number of ways. We recorded our second highest year of pension risk transfer sales ever. Our stable value sales jumped significantly, helping our reported liability balances within retirement and income solutions to grow by a very strong 14%. And we successfully entered the U.K. longevity reinsurance market where we see the potential for additional deals. Our expense discipline, which is one of the most critical levers we control, was exceptional. We promised to deliver a 2020 direct expense ratio of 12.3%. Despite the challenges we faced during the year, our actual direct expense ratio came in at 12% or 30 basis points lower.

Year-over-year, this represents an enterprisewide direct expense reduction of roughly $300 million, all while continuing to make critical technology investments to improve the customer experience. Our cash generation, the ultimate measure of value creation, was strong. We ended the year with $4.5 billion of cash and liquid assets at the holding company. This is well above the top end of our target buffer and comes during a year when we deployed approximately $4.5 billion toward common stock dividends, share repurchases and accretive M&A, in addition to continuing to invest in new business growth.

M&A remains a strategic asset for MetLife and a key tool as we evolve our portfolio too in the future. For example, we have long the premier group benefits platform in the life insurance space and continue to deepen our competitive advantage in this highly profitable business. In 2019, we announced a suite of attractive new voluntary benefits, digital wealths, health savings accounts and pet insurance. In 2020, we grew group benefits adjusted PFOs by 5% and positioned the business for double-digit adjusted PFO growth in 2021 with the acquisition of Versant Health. And in the second quarter of this year, we expect to close on the sale of MetLife Auto and Home to Farmers insurance.

This transaction includes a 10-year strategic partnership that allows each company to do what it does best, Farmers to manufacture high-quality P&C products and MetLife to distribute those products through the 3,800 employers in our U.S. group benefits network. At MetLife, the process of planting and pruning to ensure we have the optimal business mix is nothing new. In 2020, we closed on the sale of our Hong Kong business, sold our Argentina annuity business and agreed to sell our Russia business, which closed last month. I am so proud of what the team at MetLife has been able to accomplish during an atmosphere of disruption and chaos.

I have heard 2020 referred to as a lost year. For MetLife, it was anything but. We seized on the opportunities in front of us and we will use our momentum as a springboard to emerge from the crisis in even stronger shape. Consider our P&C divestiture. We expect the accretion benefits will start to materialize in 2021 and will drive double-digit earnings-per-share growth in 2022. If we pull back further and look at MetLife's performance relative to our Next Horizon strategy, and to the commitments we made at our Investor Day in December 2019, we remain firmly on track. This was far from a given in light of the unprecedented challenges we faced in 2020.

As a reminder, three of our anchoring commitments were: first, maintain a two-year average free cash flow ratio of 65% to 75%; second, preserve a $3 billion to $4 billion cash buffer; and third, generate approximately $20 billion of free cash flow over five years. We are confident in our ability to achieve each of these commitments. As you know, based on market conditions at the end of March, we discussed a scenario in which our free cash flow ratio could fall below our two-year average target range of 65% to 75%. As John will discuss later, this is not a scenario we currently contemplate, and we are affirming a 65% to 75% target range for our near-term outlook.

As I mentioned earlier, the cash balance at our holding companies at the end of the year totaled $4.5 billion. Keep in mind that we expect to receive $3.5 billion in net cash as soon as our P&C divestiture closes. And perhaps most impressive, given the economic backdrop, we remain on course to generate approximately $20 billion of free cash flow over the five-year period from 2020 through 2024, an amount equal to more than 40% of our current market cap. We believe that no matter which lens you use, the evidence of MetLife's transformation is clear. It begins with our purpose of building a more confident future for all.

By inspiring and enabling our people to deliver for our customers, we create value that extends to our shareholders and communities. Our commitment to preserving MetLife's financial strength is really just another way of saying that we will always keep our promises and manage this company sustainably for the long run. This requires discipline, determination and dedication to consistent performance. More than ever, we are convinced that we have the right ingredients to generate strong value creation, a sound strategy, an attractive set of businesses and the management team with a relentless focus on execution.

With that, I will turn the call over to John McCallion to cover our financial results in greater detail and to discuss our 2021 outlook.

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

Thank you, Michel, and good morning. I will start with the 4Q '20 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions and more detail on our near-term outlook. Starting on page three, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in the quarter was $124 million or $1.7 billion lower than adjusted earnings. This variance is primarily due to net derivative losses from higher long-term interest rates and stronger equity markets. For the full year, net income of $5.2 billion, which included net derivative gains of $1.1 billion, was more in line with adjusted earnings. Our investment portfolio and our hedging program continued to perform as expected.

On Page four, you can see the year-over-year comparison of adjusted earnings by segment. This comparison excludes net favorable notable items of $420 million in the fourth quarter of '19, which were accounted for in corporate and other. Excluding such items, adjusted earnings per share were up 33% and 34% on a constant currency basis. Moving to the segments, starting with the U.S. Group benefits adjusted earnings were up 16% year-over-year, driven by expense margins, underwriting and volume growth. The Group Life mortality ratio was 96.3%, which is above the top end of our annual target range of 85% to 90%, and included roughly nine percentage points related to COVID-19 claims.

For approved non-medical health, the interest adjusted benefit ratio was 61.7%, below our annual target range of 72% to 77%, due to favorable dental and disability results. The higher dental utilization at the end of the third quarter did not continue in 4Q as we had anticipated, most likely due to the resurgence in COVID-19 cases. Turning to top line. Group Benefits adjusted PFOs were up 10% year-over-year on solid product growth as well as the release of approximately $200 million of the remaining unearned dental premium reserve established in 2Q. Excluding this reserve release, Group Benefits PFO growth fell within our annual target range of 4% to 6%. Retirement and Income solutions, or RIS, adjusted earnings were up 64% year-over-year.

The primary drivers were strong investment margins, mostly due to higher variable investment income and volume growth. RIS investment spreads were 177 basis points, up 71 basis points year-over-year, primarily due to higher variable investment income. Spreads, excluding VII, were 104 basis points, up 21 basis points year-over-year, primarily due to the decline in LIBOR rates. RIS liability exposures, excluding U.K. longevity reinsurance, grew 14.3% year-over-year due to strong volume growth across the product portfolio as well as separate account investment performance. We completed five pension risk transfer deals totaling $4.2 billion in the fourth quarter, a very strong result. For the full year of 2020, PRT sales were $4.7 billion.

As Michel noted, that was our second highest year ever, and we see a good pipeline going forward in 2021. Property and Casualty, or P&C, adjusted earnings of $112 million were up $87 million, as fewer miles driven led to favorable auto underwriting margins. As previously announced, we expect to close the sale of the auto and home business to farmers insurance in the second quarter. The purchase price is not subject to any adjustment for changes to the business performance or economic conditions from the deal announcement through closing. And starting with the first quarter of 2021, Property and Casualty results will be reflected as a divested business in our financial statements and excluded from adjusted earnings for all of 2021.

Moving to Asia. Adjusted earnings were up 45% and 42% on a constant currency basis, primarily due to higher variable investment income as well as favorable underwriting, volume growth and expense margins. Asia's solid volume growth was driven by higher general account assets under management on an amortized cost basis, which were up 5% on a constant currency basis. Latin America adjusted earnings were down $139 million on a constant currency basis, primarily driven by unfavorable underwriting.

Elevated COVID-19-related claims, primarily in Mexico, impacted Latin America's adjusted earnings by approximately $150 million after tax. EMEA adjusted earnings were up 23% and 27% on a constant currency basis, primarily driven by favorable expense and underwriting margins. MetLife Holdings adjusted earnings were up 58%. This increase was primarily driven by higher private equity returns as well as favorable long-term care underwriting and expense margins. The life interest adjusted benefit ratio was 59.6%, higher than the prior year quarter of 55.5% and our annual target range of 50% to 55%.

While life claims were elevated due to COVID-19, this was more than offset by favorable long-term care results, which benefited from both lower claim incidents and higher policy termination rates. Corporate and other adjusted loss was $198 million. This result is consistent with the expectation that we laid out for the second half of 2020. The company's effective tax rate on adjusted earnings in the quarter was 20% at the bottom of our 2020 guidance range of 20% to 22%. On page five, this chart reflects our pre-tax variable investment income for the four quarters and full year of 2020. VII was $778 million in the fourth quarter.

This strong result was mostly attributable to the private equity portfolio, which had an 8.4% return in the quarter. For the full year 2020, VII was $1.2 billion and above our 2020 target range of $900 million to $1.1 billion. This outperformance was primarily attributable to exceptional private equity returns in the second half of the year. On page six, we provide VII post-tax by segment for the fourth quarter and full year 2020. The attribution of VII by business segment is based on the quarterly returns for each segment's individual portfolio. As a general rule of thumb, MetLife Holdings, RIS and Asia will account for approximately 90% or more of the total VII and are split around 1/3 each.

Turning to Page seven. This chart shows our direct expense ratio from 2015 through 2020 and each quarter of 2020. In 4Q, our direct expense ratio was 12.3%. More significantly, our full year 2020 direct expense ratio was 12% and better than our annual target of 12.3%. Our five-year goal was to realize at least $800 million of pre-tax profit margin improvement by 2020, which represents an approximate 200 basis point decline from the 2015 baseline year. We exceeded that goal and reduced our direct expense ratio by 230 basis points, clearly demonstrating our consistent execution and focus on an efficiency mindset.

I will now discuss our cash and capital position on page eight. Cash and liquid assets at the holding companies were approximately $4.5 billion at December 31, which is down from $7.8 billion at September 30, but still above our target cash buffer of $3 billion to $4 billion. The sequential decrease in cash at the holding companies was primarily due to the completion of the Versant Health acquisition and the previously discussed redemption of preferred stock. Further, cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of $571 million in the fourth quarter as well as holding company expenses and other cash flows.

In 2020, we returned $2.8 billion to shareholders through common stock dividends and share repurchases. So far in 2021, we have repurchased another $434 million of shares with roughly $2.4 billion remaining on our current authorization. For the two-year period, 2019 and 2020, our free cash flow ratio, excluding notable items, totaled 78%, which was above the high end of our 65% to 75% target rate. In terms of statutory capital, for our U.S. companies, we expect our combined 2020 NAIC RBC ratio will be above our 360% target. Preliminary 2020 statutory operating earnings for our U.S. companies were approximately $4.3 billion, while net income was approximately $3.6 billion. We estimate that our total U.S. statutory adjusted capital was $19.3 billion as of December 31, 2020, an increase of 4% year-over-year.

Operating earnings more than offset dividends paid to the holding company. Finally, the Japan solvency margin ratio was 906% as of September 30, which is the latest public data. Before I shift to our near-term outlook on Page 10, a few points on what we included in the appendix. The chart on Page 14 reflects new business value metrics for MetLife's major segments, updated for 2019. We continue to have a relentless focus on deploying capital and resources to the highest value opportunities. MetLife invested $3.8 billion of capital in 2019 to support new business, which was deployed at an average unlevered IRR of approximately 15% with a payback period of seven years.

Also, Pages 15 through 18 provide interest rate assumptions and key sensitivities by line of business. Turning back to Slide 10. The macro environment remains uncertain, and we expect COVID-19 impacts to remain with us through the first half of 2021. Also, we expect pent-up demand in certain utilization products to emerge in 2021, albeit more noticeably post first quarter. While we expect interest rates will remain low, the steepening of the yield curve has helped support our investment spreads. Finally, based on the forward curve, the U.S. dollar is expected to weaken. Moving to near term targets. We are maintaining our adjusted ROE range of 12% to 14%.

Despite the headwinds associated with the lower interest rates and the realized gain from the sale of our P&C business, we expect to migrate back to the range over the near-term period. We also expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings. In the early part of 2020, we presented a scenario based on economic conditions as of March 31, indicating that such conditions for an extended period of time could pressure our free cash flow ratio. However, since then, macroeconomic conditions, credit markets as well as the company's business mix and performance have been resilient and support our current outlook.

In addition, we remain committed to maintaining a direct expense ratio below 12.3%, while the sale of the P&C operation will put pressure on this target in 2021 due to its lower expense ratio. We expect to be back below the target starting in 2022 as a result of our commitment to an efficiency mindset. We are raising our VII guidance range in 2021 to $1.2 billion to $1.4 billion. We project private equity to remain strong in 2021. Our plan assumes a 12% annual return on an average balance of approximately $9 billion. In addition, a portion of our real estate exposure has been shifting from direct ownership to indirect ownership through certain real estate funds. The net result will be a migration of around $100 million of recurring net investment income to VII in 2021 and beyond.

Our corporate and other adjusted loss is expected to remain at $650 million to $750 million after tax, and we are maintaining our effective tax rate of 20% to 22%. At the bottom of the page, you will see expected key interest rate sensitivities relative to our base case, which incorporates the forward curve as of December 31. The takeaway is that the changes in interest rates are expected to have a relatively modest impact on adjusted earnings over the near term.

So now I will discuss our near-term outlook for our business segments. Our comments will be anchored off full year 2020 reported results in our QFS, unless otherwise noted. Let's start with the U.S. on Page 11. For group benefits, we are expecting adjusted PFOs to have low double-digit growth in 2021, aided by the Versant Health acquisition. Following 2021, we expect top line growth to revert to our historical target range of 4% to 6% annually. Regarding underwriting, we expect the annual group life mortality ratio to be between 85% to 90%.

However, we do expect the first quarter of 2021 Group Life mortality ratio to be above the range as COVID-19-related mortality remains elevated. The group non-medical health interest adjusted benefit ratio of 65.3% in 2020 was extremely favorable, driven by unusually low utilization in dental, and lower incidence in disability. Although we do not believe the 2020 ratio is sustainable, dental utilization remains low so far in '21. In addition, we are lowering our expected annual Group non-medical health interest adjusted benefit ratio to 70% to 75% from 72% to 77%.

The reduction reflects our continued shift in business mix toward products, with lower benefit ratios, including voluntary products and the addition of Versant Health. For RIS, we are maintaining our 2% to 4% expected annual growth for total liability attritions across our general account spread business and fee-based businesses. We are also maintaining our expected annual RIS investment spread of 90 to 115 basis points in 2021. For MetLife Holdings, we are expecting adjusted PFOs to decline between 5% to 7% annually, roughly consistent with the natural runoff of this legacy business. While the top line continues to decline, we are widening our adjusted earnings guidance of $1 billion to $1.2 billion in 2021.

Finally, we are also maintaining the life interest adjusted benefit ratio of 50% to 55% in 2021. While COVID-19-related life claims are expected to remain elevated in the first half of 2021, this will be more than offset by the benefit from a lower approved policyholder dividend scale. Now let's look at our non-U.S. businesses near-term guidance on Page 12, which is presented on a reported basis for adjusted earnings and PFOs and on a constant currency basis for sales and AUM.

For Asia, we expect the recent sales momentum to continue and generate double-digit growth in 2021, followed by mid- to high single-digit growth in '22 and '23. In addition, we expect general account AUM to maintain mid single-digit growth, we are expecting adjusted earnings to be essentially flat in 2021, increasing to mid single-digit growth in 2022 and 2023. Our Latin America business has been the most negatively impacted by COVID-19. And the environment remains less certain as vaccine protocols are still emerging. Given this backdrop, we expect adjusted PFOs to have high single to low double-digit annual growth over the near term. We expect 2021 adjusted earnings to grow high teens, aided by favorable FX impacts of approximately $25 million.

For the first quarter, adjusted earnings are expected to be comparable to the fourth quarter of 2020 with gradual improvement, particularly in the second half of the year. Looking ahead to 2022, we expect Latin America's adjusted earnings to return to 2019 levels. In contrast to Latin America, EMEA had a very strong 2020, benefiting from lower utilization in group Medical and accident and health businesses due to COVID-19-related lockdowns. Regarding the top line, we expect EMEA sales and adjusted PFOs to grow mid- to high single digits over the near term. Given the unsustainable benefit ratio in 2020, we expect EMEA's adjusted earnings to grow low to mid-single digits against the more appropriate baseline year of 2019.

Let me conclude by saying MetLife delivered another strong quarter to close out a very strong year, fulfilling our financial commitments to shareholders and keeping our promises to customers. Our capital, liquidity and investment portfolio are strong, resilient and well positioned to manage through this challenging environment and come out stronger. We are confident that the actions we are taking to be a simpler, more focused company, will continue to create long-term, sustainable value for our customers and our shareholders.

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

Questions and Answers:

Operator

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

Erik Bass -- Autonomous Research -- Analyst

Hi. Thank you. Can you talk about your preferred uses for the proceeds to the P&C business? And do you have a time frame over which you expect fully deploy the excess capital post-closing the transaction?

Michel A. Khalaf -- President and Chief Executive Officer

Yes. Erik, Michel. So let me start by just reiterating, and you've heard me say this many times that we believe excess capital above and beyond what's required to fund organic growth belongs to our shareholders. And we would use it for share repurchases, common dividends and strategic acquisitions that clear a risk-adjusted hurdle rates. So no change there. And that's why we also announced in December that our Board had approved a $3 billion buyback authorization. We repurchased 571 million of MetLife shares in the fourth quarter. In total, for the year, we repurchased approximately $1.2 billion.

And so far in 2021, we've repurchased another 434 million shares. So we still have roughly $2.4 billion remaining on our current authorization. We would expect to complete the new $3 billion authorization in 2021. And look, I think we've also built a track record here of being deliberate in how we manage capital. So expect that once we complete the current authorization, we will review, assess the environment and then we will have a discussion with our Board about potentially a new authorization. So I hope that gives you a bit of color in terms of how we would sort of use the proceeds.

Erik Bass -- Autonomous Research -- Analyst

Yes. Thank you. And secondly, can you talk about the outlook for RIS spreads? Why doesn't the spread range for 2021 increase given the benefits that we've seen from the steeper yield curve as well as the higher outlook for DII in 2021?

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

Erik, it's John. Look, I think that we've had some strong performance in 2020 too, and we should recognize that VII obviously came in very strong. We've also had -- we've had some kind of onetime pops, I'll say. And we talked about this in the third quarter from things like, we had some higher prepayment activity on some RMBS securities that were purchased at a discount several years ago. We actually saw that continue into the fourth quarter.

So all in all, the way we see it is we're able to maintain spreads despite the low rate environment. I think it's -- we're not immune to low rates, but I think we have a number of diverse set of products and businesses that where some performed well in low rates and others, quite honestly, there is some roll-off reinvest risk. So all in all, we're very pleased to be able to maintain the spread guidance that we gave a year ago. And I think we're happy with the outlook.

Erik Bass -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

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

Andrew Kligerman -- Credit Suisse -- Analyst

Hey, good morning everyone. Just to follow-up on the last question. With regard to the environment for M&As, are you -- are there more Versants out there that might be of interest to you? What are you seeing out there that might be of interest? And is there a lot of activity going on? And on the flip side, with regard to MetLife Holdings, is there a heightened interest in annuity blocks, in Life blocks and LTC? What are you seeing in that environment without necessarily specifically commenting on that?

Michel A. Khalaf -- President and Chief Executive Officer

Yes. Andrew, it's Michel. Let me start, and then John will talk to you about holdings. What I -- let me start by saying that we are quite happy, pleased with our portfolio of businesses. We don't see -- I don't see any major gaps there. We look at M&A as a sort of a strategic capability here. But we also have an approach, a global, consistent approach and how we look at M&A opportunities. From a strategic fit perspective, they -- those opportunities would need to earn more than their cost of capital. We also look at potential M&A in terms of it being more attractive than share repurchases.

And we also seek to sort of achieve a healthy balance between returning cash to our shareholders and investing in attractive future growth through M&A. So that's really the approach here. But if you were to ask me about sort of any gaps that we see, I would say we don't see any major gaps in terms of our portfolio of businesses. And let me turn it over to John.

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

Good morning, Andrew, yes. I would say that there's not a lot to update on relative to what I said back in the third quarter. Obviously, as I mentioned then, we do see that there's a kind of the supply of capital out there is starting to pick up. I think that's a good thing. Obviously, rates rising is a good thing. And as I said before, part of our process in Holdings is we take a third-party external perspective of this business. We're working through different combinations, ideas, to think about how do we optimize and optimization can be how do we do things better internally to manage this business as well as look for ways that there might be kind of value-enhancing transaction for us and for someone else.

But no one transaction can be replicated. I think that's certainly one thing we've all learned. I think everyone has a unique situation. And so we're working -- we work through our own and see if we can find an optimal solution, but we don't have to do anything. And I think that's important. We have some pretty, I'd say, best-in-class capabilities to manage the runoff. But nonetheless, we continue to take a third-party and external perspective.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it. Thanks for that. And then just a follow-up would be, there's a lot of talk now. Now that we're pretty deep into the COVID that there's kind of a pull-forward on claims and so forth. So we've seen a financial benefit to the LTC line. And of course, in MetLife Holdings also the negative impacts on mortality. So could you talk a little bit about how you see that affecting your mortality and your long-term care claims, respectively, going forward maybe into later 2021 or 2022? Do you think there'll be any differences that we see going forward?

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

Yes, it's tough, Andrew, to really handicap that at this point. I mean it's -- certainly, we saw across, I'd say, all key trends. There was some favorability in LTC this quarter. And that's probably the first quarter where we had kind of an all drivers, claim incidence was down, higher claim and policy termination rates, average claim size was a little lower. So we did see that. We still believe at this juncture, and our long-term view is that this is an aberration and a short-term aberration that will revert back to trend. But I think it's something that we'll need to monitor closely and continue to evaluate as more data comes available.

Andrew Kligerman -- Credit Suisse -- Analyst

Thanks, John.

Operator

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

Tom Gallagher -- Evercore -- Analyst

Good morning. One question I had is, John, I think you've mentioned your LTC block is hedged on the interest rate side for about five years. If the long end of the curve keeps moving higher and we get a bit of a reflation move here for the next couple of years, would you guys plan on extending the rate protection back in that block to further protect and immunize that business? Is that something you're contemplating right now?

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

I would say we always contemplate updating our ALM and hedging across all portfolios, not just LTC. It's proven to be a very valuable tool to constantly evaluate, look at different opportunities, develop the playbooks, be ready when things change, not reactive but proactive. So we would obviously consider that. Now as you said, we're well hedged from an interest rate perspective in LTC. Also, there's just some inherent natural offsets in long-term care. So it does depend what drives rates up, right? So you talked about inflation. You got to be careful about inflation when it comes to long-term care, because that can have an offsetting effect. That also helps mitigate sometimes when rates get low. So all those things have to be considered.

Tom Gallagher -- Evercore -- Analyst

Got you. And then my follow-up is just on Asia. I thought the guidance there was pretty constructive, mid-single digits in 2022, 2023. That certainly compares very favorably to the big Japanese competitors. Is there something that's different about your Japanese business? Or would you say it's your non-Japanese Asian businesses are just growing a lot faster that are offsetting it? Can you provide a little color for what's allowing Met to hold up better than others?

Kishore Ponnavolu -- President, Asia

This is Kishore. Certainly, one of the -- and we've referenced this before, a few strengths for our Adaptive business is, number one is the diversified channel mix that we have. We play across multiple channels. And we're strong in banker We've got 120-plus banker relationships that run for quite extended period with a lot of depth there. We also are a very strong player in the IA channel, where our relationship with some of our federated agents run many, many, many, years and similar to the large agencies as well. In addition, we have a fantastic resilient career agency channel, which we've been investing in.

And for the past couple of years, we've actually made significant investments in that channel for growth as well. And similarly, on the product side, we're also well diversified with focus on annuities and as well as A&H and as well as Life. And so we play in all segments of that, too. So that's a pretty different orientation with regards to that. Now certainly, the other Asia also helps to that story because we are in a number of markets where the growth is pretty aggressive. And you saw that play out over the last couple of years, and that's -- and we expect that to play out down the road as well.

Tom Gallagher -- Evercore -- Analyst

Thanks Kishore.

Operator

Your next question comes from the line of Jimmy Buehler from J.P. Morgan. Please go ahead.

Jimmy Bhullar -- JPMorgan -- Analyst

Hi, good morning. First, just had a question on claims trends in the Group business. You mentioned dental utilization is favorable. I'm assuming it's not as good as it was or as low as it was early last year. But if you could talk about that, what -- also what you're seeing for disability claims? And how much of an offset do you think these will be to elevated group Life claims in this year?

Ramy Tadros -- President, U.S. Business

Sure, Jimmy, it's Ramy here. So let me just first kind of describe the fourth quarter for you and maybe 2020 in general. So for dental, we did see a significant dip as COVID hit and the dental offices were closed. And as you recall at the time, because of lack of availability of services, we did set up an unearned premium reserve back in the second quarter. From a utilization perspective, we did expect some sort of catch-up effect or pent-up demand. And we did see some of that in the third quarter, but in the fourth quarter, that kind of pulled back. And in particular, it's pulled back for preventative services, so think regular checkups, cleaning, etc.

And as we go into Q1 for dental, we're still seeing some softness in that utilization. So it is coming in below expectations, again, driven by those preventative services. So that's kind of the dental picture last year and coming into this quarter in terms of what we have visibility into. For disability, just let's dimensionalize the book for you. So disability is about 12% of our PFO. 1/3 of that book is short-term disability and 2/3 is long term disability. So for the FTD book, it's not really a macro unemployment story. It's really all about injuries and minor surgeries, etc.

And what we've seen in that book last year and what we continue to see this year, so far, is the rising COVID claims have been basically offset by a decrease in some of the other claims with respect to injuries and surgeries. So it's basically flat on the STD portion of the book. The LTD portion of the book is -- continues to be favorable. Now if past recessions are any guide, you would expect to see some impact in terms of frequency and recoveries on the LTD book, we typically see those impacts coming in with a lag. We continue to monitor this very carefully, but we're not yet seeing any unfavorability, but we're seeing favorability rather in terms of frequency for the LTV book so far.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. Thanks. And then just a question on the -- obviously, your operating income was very strong, but net income was not as much and you had a large derivative loss. I think you've mentioned that the majority of these derivatives are -- or the losses, uneconomic or it's hedging loss. But is a portion of it economic? And how do you think about sort of below the line versus above the line? Just the difference between operating versus net?

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

Good morning, Jimmy. So first, yes, that's the case for the fourth quarter. I mean if you look full year, I think they're much more aligned, and that's been the case now for some time. So we're going to see volatility on a quarterly basis, and that should not be a surprise. But yes, it is part of our hedging program. Obviously, we put some of that mark-to-market noncash time horizon below the line just because the -- what we're hedging doesn't move in the same direction, so it could be confusing otherwise. And yes, I think as markets rise and you saw equity markets rise significantly, you can think that's where predominantly a level of our losses came. Also interest rates rose, so that's another place. So I would say, as expected, would be the punchline for us and very pleased with how it's performed so far.

Jimmy Bhullar -- JPMorgan -- Analyst

Okay. Thanks.

Operator

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

Ryan Krueger -- KBW -- Analyst

Hi, good morning. Can you comment on the key drivers of the expected upside to your ROE getting back to the 12% to 14% target over the next few years?

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

Hey, Ryan, it's John. So as you mentioned, we said in our outlook that we're comfortable with migrating back to the target of 12% to 14%. As I mentioned in my opening remarks, a few things. For certainly, Next year, and to some degree, into 2022, the low interest rate environment and the impact from the sale of the P&C and the related realized gain, that will put pressure on ROE. But we do see an upward trajectory, given our current business mix, our growth outlook, our diverse set of investment capabilities, the returns that we've been generating on new business in the current environment and then lastly, the deployment of some excess capital. I think all of those things get you to migrate up and suggest that kind of based on the current macro outlook for us achieving probably the lower end of that range, but nonetheless in the range.

Ryan Krueger -- KBW -- Analyst

Got it. Thanks. And then I just had a follow-up on non-medical health. Given your comments on favorable dental utilization in the first quarter so far, would you anticipate setting up an unearned premium reserve again in 2021? Or is that more of a kind of one-off practice due to the volatility we saw in 2020?

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

Yes. I would just remind you, Ryan, the reason that we were able to do that is because services were not available. Dentist offices were closed. We don't forecast that, that will be the case in 2021. So we would not expect the need or the requirement to set up an unearned premium reserve for that.

Ryan Krueger -- KBW -- Analyst

Got it. 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. With your free cash flow ratio, given your guidance, I'm assuming that you expect relatively benign credit conditions. Just hoping to get a clarification as to whether that's accurate? Are you still looking at opportunistically derisking your portfolio? Or is that now won't be necessary?

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

So Nigel, it's John. Maybe I'll start and if Steve wants to dive in on the kind of the credit outlook, I'll let him do that. So just as you said, on our free cash flow outlook. And just to help reconcile and reiterate some of the things I just said in my opening remarks. We gave a scenario back in Q1 that assumed an extension really of the March 31 macroeconomic conditions. And then as Steve articulated in that call, some assumptions around credit losses and downgrades. So what's different, right? As we said, market conditions have improved, interest rates are higher, equity and credit markets are resilient. And as a result, we've seen limited credit losses with the portfolio.

And it's -- but notwithstanding the fact that environment remains uncertain here. So that's kind of one. The other thing is we have gone through as a result of those macro factors and kind of completing our year-end cash flow testing requirements and the final update for our VA principal-based reserving in New York. And as a result, we expect our combined NAIC-RBC ratio to remain above our target. And again, I'd just say that's a real testament to the team's approach and proactive approach to ALM and hedging. So therefore, we -- our outlook for our cash flow guidance stays intact. So maybe Steve, can give some color on credit outlook?

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

Sure. Nigel, it's Steve. And I think John set the stage for that, too, just thinking back, March 31 was a very different time period than we are in today. And we certainly did look at how bad could the downside be. Since then, we've seen, obviously, the Fed is really playing an active role in the markets. We've seen fiscal stimulus. And so the markets continue to trundle along. However, what I'd say on all of that is our watchword continues to be one of caution in these markets. Again, some of the fundamentals are positive.

The economic recovery continues -- seems to be continuing, although a lot of it is going to be based on the vaccine rollout now and what happens there. I look at some of the actions we made over the past nine months or so, continuing to really manage the portfolio, particularly in those sectors that we thought were more exposed in this economic environment. And we're very pleased with how we are positioned today. But again, we're cautious. And we look at spreads in the market today. Spreads are very tight. And it's not clear that the return we're getting, particularly in the public fixed income markets, really matches the risk there.

So we are cautious. We really continue to favor high-quality names in the public markets. And most importantly, we continue to move to private assets and then private markets, which are a strength of ours and really do continue to show relative value and better risk reward trade-offs that we see in a number of the private markets. And that's where we're continuing to put the majority of our new investment flows.

Nigel Dally -- Morgan Stanley -- Analyst

That's very helpful. Thank you. [Technical Issues] results in the back half of 2021, but you also mentioned vaccine distribution as an area of uncertainty. So I just wanted to get some clarity as to what you're assuming with regards to the vaccine distribution? Just trying to understand whether that's a potential area of vulnerability or whether you're being relatively cautious with the guidance or assumptions that you're building into second half?

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

Nigel, you broke out -- broke up a little bit. But I think the question was around just our -- what are we assuming in terms of vaccine rollout, is that right?

Nigel Dally -- Morgan Stanley -- Analyst

Yes, vaccine rollout, especially for LATAM?

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

For LATAM? Okay. Yes, maybe I'll start and...

Michel A. Khalaf -- President and Chief Executive Officer

Yes. We have Eric Clurfain who took over as Head of Latam, effective January one with us, so he can provide some color.

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

Yes. And I'll just say, as I said, broadly speaking, I think how that rolls out across the U.S. and Latin America, TBD. But -- so there still remains quite a bit uncertainty. Maybe I'll turn it over to Eric.

Eric Clurfain -- Head of Latam

Sure. Thanks, John. So as you may recall, compared to the U.S., Latin America was really roughly on a quarter lag from the onset of the pandemic. And this lag continues to hold. Regarding the -- looking ahead, the rollout of the vaccine, we expect delays and -- especially in Mexico. However, we are very pleased with the fundamentals and the financial strength of our business in the region, and that remains strong, and our leading franchise in the region remains intact.

We expect our revenues to grow also, really supported by strong persistency, which we've seen across the region. And a good example is our flagship product in Mexico, our Met 99 product. And this will support growth in 2021. So just to close, as you've seen on John's comments in our outlook, we expect 2022 earnings to really come back and return to historical levels by then.

Nigel Dally -- Morgan Stanley -- Analyst

That's great. Thank you.

Operator

Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.

Suneet Kamath -- Citi -- Analyst

Thanks. Good morning. I wanted to go to the Group Benefits guidance, particularly the longer-term outlook. So after a big lift in PFOs next year due to Versant I think you're reverting back to 4% to 6% growth, which is consistent with your outlook for last -- from last year. I would have thought maybe there could be some upside to that just given the opportunity to cross-sell some of the Versant products to your existing clients. So is the 4% to 6% conservative? Or is there an opportunity to maybe the high end or exceed that based on cross-selling of the Versant product?

Ramy Tadros -- President, U.S. Business

Hi, Suneet, it's Ramy here. So just the headline number, remember here, the 4% to 6% comes on top of a double-digit next year. So we are applying a 4% to 6% to a bigger PFO number. But if you were just to step back and look at that franchise and look at the 2020 results, we're seeing very strong momentum here. Our value proposition is resonating with our customers and intermediaries. And our 2020 results, full year had a 5% PFO growth, and I would remind you that includes about one point of headwind from the dental premium discount that we provided in the second quarter.

So this is -- the results, we're really pleased with, especially in the context of a challenging external environment. But looking forward, in terms of our confidence in the outlook, we talked about Versant. And we -- the strategic fit is there. We continue to see a very good reaction from our customers and intermediaries about Versant. And the integration is well under way. We continue to see very strong persistency across our book, and rate actions that have been consistent with our expectations. In the jumbo market, which was light in 2020, the activity has returned in 2021. And we are kind of winning our fair share. So we are expecting to see strong sales figures coming into Q1.

And then finally, if you think about our outlook, I would say, what's coming into sharp focus here is the increasing importance of the investments we have been making and continue to make in our capabilities broadly and specifically, our digital capabilities to kind of meet changing needs of our customers. And this is where our scale and ability to invest is paying off dividends. So to give you just a sense of that, in voluntary PFOs, we saw a 20% growth in our PFOs in 2020 over '19, and we're expecting a similar growth in 2021. Those numbers compound. So our 2020 PFOs in voluntary were more than double our 2017 numbers. But this is a big ship to move. And hence, kind of the guidance is, we think, is the right one, beyond 2021.

Suneet Kamath -- Citi -- Analyst

Okay. I'll stop there given the time. Thanks.

Operator

And at this time, there are no further questions. I'd now like to turn the call back to John Hall.

John Hall -- Senior Vice President and Head of Investor Relations

Great. Thank you very much, everyone, for joining us, and have a good day.

Operator

Ladies and gentlemen, this conference will be available for replay after 11:00 a.m. Eastern Time today through February 11. You may access the AT&T executive replay system at any time by dialing one (866) 207-1041 and enter the access code 1393262. International participants dial (402) 970-0847. And those numbers once again are one (866) 207-1041 or (402) 970-0847 with the access code 1393262. That does conclude your conference for today. Thank you for your participation and for using a T&T teleconference. You may now disconnect.

Duration: 61 minutes

Call participants:

John Hall -- Senior Vice President and Head of Investor Relations

Michel A. Khalaf -- President and Chief Executive Officer

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

Kishore Ponnavolu -- President, Asia

Ramy Tadros -- President, U.S. Business

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

Eric Clurfain -- Head of Latam

Erik Bass -- Autonomous Research -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Tom Gallagher -- Evercore -- Analyst

Jimmy Bhullar -- JPMorgan -- Analyst

Ryan Krueger -- KBW -- Analyst

Nigel Dally -- Morgan Stanley -- Analyst

Suneet Kamath -- Citi -- Analyst

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