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Metlife Inc (NYSE:MET)
Q1 2021 Earnings Call
May 6, 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 First Quarter 2021 Earnings Release 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 -- Global Head of Investor Relations

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's first quarter 2021 earnings call. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion at metlife.com in our earnings release and in our quarterly financial supplements, which you should review.

Michel Khalaf, President and Chief Executive Officer is on the call this morning along with other members of senior management who will be available to participate in the discussion. Last night, we released a set of supplemental slides, which addressed the quarter. They are available on our website. John McCallion is under the weather today. We are going to let him rest his voice, and I will speak to the supplemental slides following Michel's remarks.

An appendix to the supplemental slides features outlook sensitivities, disclosures, GAAP reconciliations and other information, all of which you should also review. After our prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up.

With that, over to Michel.

Michel A. Khalaf -- President and Chief Executive Officer

Thank you, John and good morning, everyone. As we reported last evening, MetLife delivered very strong financial results for the first quarter of 2021. Our diverse business mix, sound investment strategy and strong expense discipline combined to generate earnings well above consensus expectations. By the numbers, we reported first quarter 2021 adjusted earnings of $2 billion or $2.20 per share, up 39% from $1.58 a year ago.

The primary driver was exceptionally strong variable investment income or VII, partially offset by elevated COVID-19 related claims. Net income for the quarter was $290 million, down from $4.4 billion a year ago, primarily due to losses on derivatives that protect our balance sheet from declines in equity markets and interest rates.

Such gains and losses are the result of GAAP accounting rules that require us to mark certain of our derivative hedges to market through net income without similar treatment for the assets and liabilities being hedged. We believe the economics and the free cash flow of our business are captured than adjusted earnings. Regarding variable investment income, the key driver of gains in the first quarter was our private equity portfolio, which delivered returns of 13.3%. Recall that private equity returns are reported on a one quarter lag. The strong performance in the fourth quarter was driven primarily by three private equity sectors, domestic leveraged buyout funds, European LBOs, and venture capital.

In the second half of 2020, IPOs from US-based LBOs and venture capital firms more than doubled over the prior year and the market rewarded many entrants with strong valuations. Venture capital was our best performer across the three sub sectors, largely due to the market's appetite for tech companies. We see deal volumes hit a record in 2020 and the increase in digital activity spurred by the pandemic drove attractive valuations for early stage tech firms positioned to capitalize on that trend. While our private equity portfolio return in the quarter was robust, it was in line with industry benchmarks, most notably, Cambridge Associates private equity index. We are confident this asset class will continue to be a significant source of alpha for MetLife in the future.

Turning to the performance of our business segments, I'll begin with our US Group Benefits results. Adjusted earnings were down 70% year-over-year on elevated COVID-19 life claims. In the US, overall COVID-19-related deaths were 40% higher in the first quarter of 2021, than they were in the fourth quarter of 2020.

For MetLife, our Group Life mortality ratio was 106.3%, well above the high end of our target range of 85% to 90% with approximately 17 percentage points attributable to COVID -19 claims. The top line performance of the Group Benefits business was strong with sales up 46% year-over-year. We are doing especially well with national accounts and if trends hold, we expect the group business to deliver a record sales year.

Adjusted PFO growth was also solid at 16% with the addition of Versant Health being a large contributor. In retirement and Income Solutions or RIS, adjusted earnings were up 92% year-over-year, driven by higher VII. Beyond VII, adjusted earnings were still strong on favorable underwriting and volume growth.

Looking ahead, we continued to see a robust pension risk transfer pipeline. Rising equity markets and interest rates have improved pension plan funding levels and lowered the cost for plan sponsors to transact with an insurer. Within Asia, we saw a similar earnings pattern to RIS. Adjusted earnings were up 70% year-over-year on a constant currency basis, driven by higher VII.

However, even allowing for VII, adjusted earnings were strong, driven by favorable foreign exchange rates, volume growth, and underwriting. Sales in the region were up 12% on a constant currency basis, even with the COVID resurgence in certain markets. In Latin America, adjusted earnings were down 57% year-over-year on a constant currency basis, primarily due to the pandemic. COVID-related claims in the quarter totaled approximately $150 million, mainly in Mexico. In EMEA, adjusted earnings of $71 million were down 11% on a constant currency basis on higher COVID-related claims as well as higher expenses compared to the favorable prior-year quarter. Sales were up 4% on a constant currency basis with strong momentum in the UK employee benefits space.

To finish my business segment discussion, I think a theme is clear. If you look past higher VII and mortality in the quarter, the underlying performance of the business was very solid. On the fundamentals, we continue to demonstrate consistent execution with strong earnings power across a range of different economic scenarios.

Turning to cash and capital management, MetLife ended the first quarter with cash at the holding company of $3.8 billion near the top end of our $3 billion to $4 billion target buffer. Our two-year average free cash flow ratio remains within our guidance range of 65% to 75%. Currently, our cash balances are much higher following the receipt of $3.94 billion of proceeds on the sale of our US P&C business.

During the quarter, we were pleased to return $1.4 billion of capital to shareholders, $1 billion in share repurchases, and approximately $400 million in common stock dividends. So far in Q2, we have bought back an additional $210 million of common shares, and we have roughly $1.6 billion remaining under our current repurchase authorization.

Last week, our Board of Directors approved a second quarter 2021 common stock dividend of $0.48 per share, up 4.3% from the first quarter. Over the last decade, we have increased our common dividend at a 10% compound annual growth rate. Our consistent execution continues to generate strong free cash flow that allows us to invest in growth and return capital to our shareholders, all with the goal of driving long-term value creation.

As we look ahead, we see a path to a brighter future from both an economic and health perspective. In the United States conditions look promising for a period of employment growth, which is always good for our group business. On the pandemic front, we believe the worst of the underwriting effects on our Company are behind us as the vaccine rollout continues to advance. The progress is not yet uniform across the world, and certain areas are still struggling, but the trend line is clear, a slow but steady return to something we can call normalcy. While we welcome an improving external environment, we also remain laser-focused on executing our strategy to ensure we are prepared for the post-pandemic world.

For our customers, we continue to accelerate our digital transformation to meet their evolving needs. In Japan, for example, 95% of our policy submissions are now done digitally. For our employees, we will be implementing a more flexible workplace model in Q3, which for most will be a hybrid approach. While our people have performed exceptionally well working from home during the pandemic, we believe the office will continue to play a critical role in fostering collaboration, innovation, and career development.

We are equally confident that by incorporating more virtual work into our model, we will enhance productivity, gain access to a broader talent pool, and strengthen employee engagement. To close this morning, I want to emphasize the urgency we are feeling at MetLife to keep raising our game. As I said in my annual letter to shareholders, consistent execution is our new baseline. Continuous improvement is our new aspiration and expectation.

Thank you and with that, I'll turn right over to John.

John Hall -- Global Head of Investor Relations

Thank you, Michel. I will start with the 1Q 2021 supplemental slides, which provide highlights of our financial performance and an update on our cash and capital positions. Starting on page 3, we provide a comparison of net income to adjusted earnings in the first quarter. Net income in the quarter was $290 million or approximately $1.7 billion lower than adjusted earnings.

This variance was primarily due to net derivative losses as a result of the significant rise in long-term interest rates as well as stronger equity markets in 1Q 2021. Our investment portfolio and our hedging program continued to perform as expected. On page 4, you can see the year-over-year comparison of adjusted earnings by segment.

There were no notable items for either period. Adjusted earnings per share benefited from exceptionally strong returns in our private equity portfolio and were up 39% and 38% on a constant currency basis. Moving to the businesses, starting with the US group benefits, adjusted earnings were down 70% year-over-year, largely driven by unfavorable group life mortality due to elevated COVID-19-related life claims. Favorable non-medical health underwriting and volume growth were partial offsets.

Overall, results for Group Benefits were mixed. Adjusted earnings were down, but underlying fundamentals including top line growth and persistency were strong. Group Benefits sales were up 45% year-over-year primarily due to higher jumbo case activity. We believe that we are on track to deliver a record sales year in 2021.

Adjusted PFOs were $5.6 billion, up 16% year-over-year due to solid volume growth across most products, the addition of Versant Health and roughly five percentage points related to higher premiums from participating contracts, which can fluctuate with claims experience. I will discuss Group Benefits underwriting in more detail shortly. Retirement and Income Solutions or RIS adjusted earnings were up 92% year-over-year. The primary driver was higher variable investment income, largely due to strong private equity returns. In addition, elevated COVID-19 mortality and volume growth were positive contributors. RIS investment spreads were 234 basis points up 120 basis points year-over-year primarily due to higher variable investment income.

Spreads excluding VII were 88 basis points, up 5 basis points year-over-year primarily due to the decline in LIBOR rates. RIS liability exposures including UK longevity reinsurance grew 12% year-over-year due to strong volume growth across the product portfolio, as well as separate account investment performance.

With regard to UK longevity reinsurance, we have continued to see strong growth since completing our initial transaction in 2Q 2020. The notional balance stands at $8.8 billion at March 31, up nearly $5 billion from year end 2020. As previously announced, first quarter results for property and casualty are reflected as a divested business in our quarterly financial statements. The sale of the Auto and Home Business to Farmers Insurance closed on April 7, and we expect to record an after-tax gain of approximately $1 billion in 2Q 2021.

Moving to Asia, adjusted earnings were up 78% and 70% on a constant currency basis, primarily due to higher variable investment income as well as volume growth and favorable underwriting margins. Asia's solid volume growth was driven by higher general account assets under management on an amortized cost basis, which were up 6% and 4% on a constant currency basis. Asia sales were up 12% year-over-year on a constant currency basis with growth across most markets. Latin America, adjusted earnings were down 58% and 57% on a constant currency basis, primarily driven by unfavorable underwriting, partially offset by the improvement in equity markets.

Elevated COVID-19-related claims primarily in Mexico impacted Latin America's adjusted earnings by approximately $150 million after tax. Looking ahead, we expect COVID-19 claims to decrease throughout the year more significantly in the second half and adjusted earnings to return to 2019 levels in 2022, which is consistent with our outlook.

Latin America adjusted PFOs were down 6% year-over-year on a constant currency basis due to lower single premium immediate annuity sales in Chile. EMEA adjusted earnings were down 9% and 11% on a constant currency basis, primarily driven by higher COVID-19-related claims as well as higher expenses compared to the favorable prior-year quarter.

EMEA adjusted PFOs were down 5% on a constant currency basis, but sales were up 4% on a constant currency basis due to strong growth in UK employee benefits. MetLife Holdings adjusted earnings were up 123%. This increase was primarily driven by higher variable investment income, largely due to private equity returns. Also favorable equity markets and long-term care underwriting were positive drivers. Long-term care benefited from higher policy and claim terminations as well as lower claim incidences.

The life interest adjusted benefit ratio was 54.8%, higher than the prior year quarter of 51% and at the top end of our annual target range of 50% to 55% due to elevated COVID-19 mortality. Corporate and other adjusted loss was $171 million. This result is consistent with our 2021 adjusted loss guidance range of $650 million to $750 million.

The Company's effective tax rate on adjusted earnings in the quarter was 20.8% and within our 2021 guidance range of 20% to 22%. Now, I will provide more detail on Group Benefits 1Q 2021 underwriting performance on page 5. There were approximately 200,000 COVID-19-related deaths in the US in the first quarter, the highest single quarter since the pandemic began and up nearly 40% versus the fourth quarter of 2020.

In addition to the higher number of claims, there were more deaths at younger ages below 65, which resulted in increased claims severity. Apart from COVID-19, the number of life insurance claims of greater than $2 million nearly doubled versus a typical quarter. The Group Life mortality ratio was 106.3% in the first quarter, which included roughly 17 percentage points related to COVID-19 life claims. This reduced Group Benefits adjusted earnings by approximately $280 million after tax. For group non-medical health, the interest adjusted benefit ratio was 71.1% in the first quarter with favorable experience across most products.

The 1Q 2021 ratio was below the prior year quarter of 71.7% and at the low end of our annual target range of 70% to 75%. Now let's turn to VII in the quarter on page 6. This chart reflects our pre-tax variable investment income over the last five quarters, including approximately $1.4 billion in the first quarter of 2021. This very strong result was mostly attributable to the private equity portfolio, which had a 13.3% return in the quarter.

As we have previously discussed, private equities are generally accounted for on a one-quarter lag. Our first quarter results were essentially in line with private equity industry benchmarks. While all private equity classes performed well in the quarter, our venture capital funds, which account for roughly 20% of our PE account balance of $10.3 billion were the strongest performer across subsectors with roughly 25% quarterly return due to a broad increase in tech company valuations.

On page 7, first quarter VII of $1.1 billion post-tax is shown by segment. The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio. As noted previously, RIS, MetLife Holdings and Asia generally accounted for approximately 90% or more of the total VII and are split roughly one-third each, although it can vary from quarter to quarter. VII results in 1Q 2021, were more heavily weighted toward RIS, and MetLife Holdings as Asia's portfolio has a smaller proportion of the venture capital funds that I referenced earlier.

Turning to page 8, this chart shows our direct expense ratio over the prior five quarters and full year 2020 including 11% in the first quarter of 2021. As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. In 1Q 2021, our favorable direct expense ratio benefited from solid top line growth and ongoing expense discipline as well as delayed investment spending in the quarter. We expect the direct expense ratio for the remainder of 2021 to be consistent with our full year outlook.

Now, I will discuss our cash and capital position on page 9. Cash and liquid assets at the holding companies were approximately $3.8 billion at March 31, which is down from $4.5 billion at December 31, but well within our target cash buffer of $3 billion to $4 billion. The sequential decrease in cash at the holding companies was primarily due to the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $1 billion in the first quarter as well as holding company expenses and other cash flows.

Looking ahead, we expect HoldCo cash will be significantly higher in the second quarter as a result of the sale of our Auto and Home Business to Farmers Insurance. Next, I would like to provide you with an update on our capital position. For our US companies, our combined NAIC RBC ratio was 392% at year end 2020 and comfortably above our 360% target. For our US companies. excluding our property and casualty business, preliminary first quarter 2021 statutory operating earnings were approximately $1.5 billion while statutory net income was approximately $570 million. Statutory operating earnings increased by roughly $2.3 billion year-over-year driven by lower VA rider reserves and increase in interest margins, higher net investment income, and lower operating expenses.

Statutory net income excluding our P&C business increased by roughly $430 million year-over-year, driven by higher operating earnings, partially offset by an increase in after tax derivative losses. We estimate that our total US statutory adjusted capital excluding P&C was approximately $16.7 billion as of March 31, down 2% compared to December 31. Favorable operating earnings were more than offset by after tax derivative losses and dividends paid to the holding company.

Finally, the Japan solvency margin ratio was 967% as of December 31, which is the latest public data. In summary, MetLife delivered another strong quarter, which benefited from exceptional private equity returns, solid business fundamentals and ongoing expense discipline. While higher mortality in the US and Mexico dampened adjusted earnings in Group Benefits and Latin America, our financial performance demonstrates the benefits of our diverse set of market-leading businesses and capabilities.

In addition, our capital, liquidity, and investment portfolio are strong, resilient, and position us for success. 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

Thank you. [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. Just to start, can you go into a bit more detail on the group life claims trends this quarter and the implications of population deaths skewing younger, which it sounds like can lead to higher severity and is this something we should expect to have continued impact in the second quarter?

Ramy Tadros -- President of US Business

Hi, Erik. It's Ramy here. As we have discussed in John's remarks, the group results this quarter were primarily a frequency effect. So we saw the significant increase in the total number of population deaths and that was accompanied by a secondary effect, which is the severity effect whereby we did see an increase in the percentage of claims under 65 and those claims, which tend to be for working employees do have higher phased amount.

So if you think about it and if you think about the outlook going forward, we're watching that composition very carefully, but I would say that the primary driver in the second quarter is still going to be the frequency, right. So, as you know, with the rollout of the vaccine, the COVID-related deaths in the population has been declining and if you do any comparison between say January average death number to in April, there has been a significant decline. So while we still have substantial number of coming through and therefore expect to see an elevated mortality ratio in the second quarter, we do expect the underwriting ratio to come down from its Q1 high.

Erik Bass -- Autonomous Research -- Analyst

Thank you. And then maybe if we could turn to Asia. I was hoping you can provide some more color on the underlying growth dynamics there where it seems like your sales and account value growth are both trending a bit stronger than many peers. I was wondering where you're seeing the best opportunities.

Kishore Ponnavolu -- President of Asia

Erik, this is Kishore. So we did have a pretty strong quarter in terms of sales growth, 7% sequentially and 12% compared to prior year. This is certainly a good performance, especially given the COVID environment, even in Japan, that several prefectures under the state of emergency they're doing much of Q1, and then the other Asian markets had varying degrees of social distancing measures in place. Clearly COVID and the resurgence here in Asia is a significant headwind given that the vast majority of our sales are face to face.

However, and as I mentioned earlier, the diversity of our channels and products, the strength of our bank partnerships and the strong execution focus of our businesses, that's what powers MetLife sales resiliency even in this tough environment. In addition, we've been making significant investments in digitizing our sales processes all the way from video conferencing, corporate housing, remote closing, and they have certainly aided our performance as well. As Michel mentioned in his opening remarks, 95% of our new sales application submissions in Japan are digital, and the other markets are at similar range as well.

For example, in China almost all our agent onboarding and new business submissions are done digitally. Specifically with regards to Japan, it's again 8% up sequentially and even after taking seasonality into account, our face-to-face channels that sell life and A&H products were quite resilient while we recorded strong annuity sales growth through the bank channel. We have strengthened the FX denominated products and our bank relationships and that strength shows.

Other Asia are 8% up, sequentially up 30% year-over-year. Again, this speaks to, I think the strength of our market presence across these markets and strong execution across the Board, and our digital solutions are also helping us in a big way. With regards to the outlook, for the rest of the year, we're very comfortable and on track to meet the full guidance of our double-digit sales growth. Thank you.

Operator

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

Elyse Greenspan -- Wells Fargo -- Analyst

Hi, thanks, good morning. My first question is on capital. So you guys bought that $1 billion in the quarter. Just want to get a sense, any color that you can give in terms of how we should think about the quarterly run rate given that you guys close the Property-Casualty transaction in the second quarter and given that you guys will have a good amount of capital coming from that deal, is there asserted level that we should think about you guys looking to have as a HoldCo above but normal buffer as you kind of put those proceeds to work?

Michel A. Khalaf -- President and Chief Executive Officer

Yeah, hi, good morning Elyse, it's Michel. So let me start at a high level by just reiterating our philosophy and our approach, which is that beyond supporting organic growth and in the absence of strategic accretive risk adjusted hurdle rate clearing M&A, excess capital belongs to our shareholders and we defined excess capital as cash or cash equivalents at our holding companies above our liquidity buffer, which is still the $3 billion to $4 billion that we've discussed.

As you know, we bought back $1 billion in the first quarter. We ended the quarter with $3.8 billion in cash at our holding companies, so that's within our $3 billion to $4 billion buffer. And we did so with the full knowledge that we would close shortly on the sale of our P&C company and substantially boost our cash on excess capital position. We have $1.6 billion remaining on our repurchase authorization, which we will extinguish in 2021 and historically, we've managed our authorizations deliberately and expeditiously, particularly in the wake of major divestments, so expect us to do the same here.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay, that's helpful and then maybe my follow-up will build upon that, you guys announced this transaction, the P&C sell late last year and you kind of put it right that feel kind of balanced capital return as well as I think looking at what M&A is potentially out there. So as you guys have kind of thought through kind of M&A plan and it's kind of five so months since you announced the transaction, I just have a sense of what type of businesses you would look to pursue deals and as you look at transaction multiples or anything made you more or less likely to go down the route of M&A?

Michel A. Khalaf -- President and Chief Executive Officer

Yeah. Again here, I would just maybe start with sort of our approach and philosophy, which again has been very consistent and no change there. So we will always look for M&A opportunities that fit our strategy that are accretive over time for our shareholders. We have a constant basis globally through which we evaluate opportunities based on value and cash generation. All M&A opportunities will need to earn more than their cost of capital and we determine what we're willing to pay for a business by evaluating capital markets, the cost of raising capital and synergies, and acquisition opportunities will need to be more attractive than share repurchases.

So what we do is we try to achieve a healthy balance between returning cash to our shareholders and investing in attractive future growth through M&A, and I think some of the sort of recent transactions that we've done such as Versant Health last year but first acquisition prior to that, Logan Circle couple of years back, I think those give you a sense of sort of what that sort of approach or strategy that I outlined. So no change here.

Elyse Greenspan -- Wells Fargo -- Analyst

Okay. Thanks for the color.

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 a question on the private equity portfolio, which I think John cited venture capital is 20% of $10.3 billion and generated a 25% return in the first quarter, Met has always seemed in the last years like a prominent name in venture capital. Could you flesh out that story a little bit more. How much does Met invest each year in venture capital? Are there particular areas of VC that are strengths, just very interested in that area and the prospects at MetLife.

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Andrew, it's Steve Goulart. Good morning. Let me talk a little bit about the overall strategy because we've been investing in private equity for a number of years and I've always felt it to be a very strong component of our overall strategy. Venture capital of course is a significant portion of the portfolio, but basically, we take a look at this portfolio the same way we look at our credit portfolio, our real estate portfolio, it's about diversification and that's what we have really tried to build in this. Again, just sort of recapping some of the numbers, our PE portfolio produced an income of almost $1.3 billion or 13.3% return, again venture capital, led the way as far as total return, but think about what was happening in the market too, with a lot of IPO activity and the like, things that Michel cited in his comments.

So the important thing is that our returns were attractive across the portfolio, and I look at things like our LBO portfolio, both domestically and in Europe. And again, this reflects the diversity that's in the entire portfolio and when we look to invest, we continue to invest in a diverse way across all the different sectors as well. I mean, just to give you a little bit more flavor on it, we have over 600 funds that we've invested in. We have almost 200 managers. So again, very broad, very deep exposure across all the sectors of private equity.

And again, I think you have to take into consideration what was happening in the environment and when we think about it, despite the pandemic, equity valuations continue to climb in the fourth quarter. The combination of fiscal and monetary stimulus continue to be major contributors that led to strong equity performance really across all sectors and so I would think about it in that respect that we really think of this as a diversified private equity portfolio.

Now that all said, we do think that the past quarter was probably something of an anomaly because when we look at our historical experience at least until this quarter, it has been that our PE returns have always been moderated versus the S&P 500, particularly in high market return quarters. So this was an unusual quarter in that respect and when we think about future returns or relationships, we still think that what we've been saying for the last couple of years as far as our plans go, the kind of low-double digits,12% is still the right way for us to think about these returns. Again, it's going to be very quarter-by-quarter, but that's how we think about this on a long-term basis and again, it just reflects our continued efforts to have a very diversified portfolio across all sectors.

Andrew Kligerman -- Credit Suisse -- Analyst

Got it. It sounds like it's a real area of excellence in BC though, but I'll move on from that and then Erik was asking a question a little earlier about sales in the Asia region, and I'm still trying to reconcile those numbers with what we've been seeing at other companies, which is sales pressures, flattish premium growth, and Met, having a very large proportion of its business in Japan, which is a more mature market, it's just kind of striking to see 12% year-over-year sales growth and then a target of double-digit. So if you could flesh that out a little bit more specifically, is it the banks that are driving the sales growth in Japan and what particular other countries are kind of driving growth in other parts of Asia?

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

Sure, Andrew. So if we parse out the total Asia sales into Japan and other Asia, say we spend for a minute, while sequentially and even in the previous calls right, we've been making steady progress in Japan sales since Q2, right. Q3 was better than Q2 last year. Q4 was better than 3, and Q1 just a build up of Q4 from last year. And if you then say OK, where is this coming from, a couple of things, we have three broad product lines, which is Life, A&H and annuities and then we have a couple of channels right. We've got essentially what I would broadly classify as face-to-face channels, we can go and further breakdown on that, but that's not needed for this call and banker.

The good news for us is, even in this tough environment, our face-to-face channels were pretty resilient from a year-over-year perspective. There is a little bit of pressure on A&H but our Life segment, pretty much held flat and then much of the growth came in from the annuities, which are primarily sold through banks and in the previous calls I talked a lot about our advantages in the annuity space on the FX because these are all foreign currency or dollar-denominated and we have many advantages that we bring to the table on that and also the strength of the bank partnerships that we bring to the table as well.

So because of this diversification of products and diversification of channels and are leaning on our strengths, that's basically contributed to the resiliency of our sales in Japan. Now with regards to and by the way, this has not been easy. I have to tell you that, but our teams on the ground have done, I think, a fantastic job with regards to that. Now, again, this is playing out right. I can't sit here and say, this is definitive because COVID is the factor that's an ongoing concern across Asia. With regards to other Asia, again, very strong sales growth. But remember, last year the pressure started early outside of Japan, in China, right because of COVID and so the year-over-year comparisons look very favorable on the other Asia segment.

But again, I think I'd lean more on the strength of our businesses and our market presence in terms of how we've executed this quarter and though Korea was very strong in terms of performance, India was also strong in performance from a sales perspective. We've recovered nicely in China, which is a major factor. Again, COVID still a factor in all these markets and we continue to stay focused on execution. At the end, that's what it boils down to. Hope that helps.

Andrew Kligerman -- Credit Suisse -- Analyst

Very helpful.

Operator

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

Tom Gallagher -- Evercore ISI -- Analyst

Good morning. Just a question on RIS spreads declining excluding VII, I think John McCallion, I know you mentioned last quarter that the over 100 basis point spread level was probably not sustainable, but I guess the big drop back into the high 1980s seemed a bit surprising to me, question is, is that now a good level to run rate or would you expect to trend up or down and any color as to why such a large sequential drop?

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

Good morning, Tom. Sorry for the voice just overcoming little COVID recovery here. So, all right. Let me try to take that, look, probably I'm going to go too far back because that was the whole reason we gave you new guidance, right. But look, we talked about some pretty large one-time items in the third and fourth quarter last year from prepayments and other things like that and we knew those things aren't going to recur and so those, that's probably one items. Second is, we did reference that we reclass and real estate funds up in the VII and that probably caused another 4 points of shift.

So we really kind of migrate back to the range, I mean I wouldn't go backward so much as I would think about how we look relative to the guidance we gave in February and I think we're right in line. I mean maybe even slightly above this quarter but honestly the 80s is probably a little above, and I think outlook putting aside the excess VII is intact.

Tom Gallagher -- Evercore ISI -- Analyst

Okay. Appreciate it, John. Hope you recover soon. Sorry to draw you into the call too, but I guess my only follow-up is maybe for Steve Goulart. Just a reminder VII, does that no longer include prepayment income or it is prepayment income still included in that number.

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

Prepayment income is still in that number, it's just dwarfed by our alternatives income, they're fairly modest on the prepayments.

Tom Gallagher -- Evercore ISI -- Analyst

Yeah. Got it.

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

Let me clarify and where you're going. So that I'm not talking about prepayment income when I said that there are prepayment activities impacting the non-VII spread in the third and fourth quarter. What happened was we saw just a real jump in refinancing and that was impacting to need RMBS securities and how they were running off and that was having a jump in our non-VII spread, so hopefully that helps.

Tom Gallagher -- Evercore ISI -- Analyst

That does and Steve, just to clarify, could you quantify of the billion for VII, how much is pre-payment income?

John Hall -- Global Head of Investor Relations

Yeah, Tom, this is John Hall, we typically haven't broken out that number, but if you got your ruler out and you took a real careful measurement of that table in the supplemental slides, you could probably reasonably get close.

Tom Gallagher -- Evercore ISI -- Analyst

Understood. I'll get my ruler out. Thanks.

Operator

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

Suneet Kamath -- Citigroup -- Analyst

Thanks. I wanted to start with the direct expense ratio guide, just so I understand, it obviously came in much better in the first quarter, in terms of your comments about the next couple of quarters, is the expectation that you'll be sort of above your 12.3 separate so that you get the full year to land around 12.3 or is it the expectation over the next few quarters that you'll be somewhere around 12.3 so you could end up with a lower full year number, I just didn't quite get the guide there.

Michel A. Khalaf -- President and Chief Executive Officer

Yeah, I'm not sure. Hi, Suneet, Michel. I'm not sure we provided a guide, but let me just remind of what we said on the outlook, which is that this year's expense ratio will be pressured because of the sale of P&C, which has a lower direct expense ratio and that we would expect to get back to at or below the 12.3 by 2022. Now obviously, we came in at 11% in Q1, a few factors that contributed to this, one as the PFO growth obviously, and I think there were in John's comments, we mentioned some of the impact of participating group life contracts, for example, on that PFO growth, Versant was an important also factor there, then we had really good expense discipline across our businesses and we did have also some, I would say, timing-related expenses that may be benefited us by about 25 basis points.

So our expectation for the second to fourth quarter at the expense ratio will be consistent with our full year outlook guidance and as I said, we believe that 12.3 is the right level for us because that allows us to continue to make important investments in our business. So, no change in terms of how you should look at the balance of the year.

Suneet Kamath -- Citigroup -- Analyst

Okay, got it and then.

Michel A. Khalaf -- President and Chief Executive Officer

Suneet, I'll just add that, like just to the point of the guide, we give an annual guide. This quarter came in much better than we thought. But if you adjust for this quarter and think about the rest, we were expecting to be slightly above this year but trending well.

Suneet Kamath -- Citigroup -- Analyst

Got it, OK. And then just on the Group Benefits business, I'm just wondering if you could unpack some of the growth rates that we're seeing, PFOs I think were up 16%, how much of that was Versant versus the other parts of the business and then on the sales growth up 45%, can you just give a little color in terms of what's behind that? How much of it is sort of new clients, head count increases, or new products, just so we get a sense of where the growth is coming from?

Ramy Tadros -- President of US Business

Hey Suneet, it's Ramy here. So I'll start off with the sales. We're really pleased with our performance this quarter and as John mentioned, 2021 is shaping up to be a record year for us in terms of Group Benefits, I would say, the three drivers of sales. The first one is a significant uptick in the jumbo activity in national accounts but that's coming off a low in 2020, but this is our sweet spot. This is where we excel and we've done exceptionally well this quarter there.

I would also remind you just for jumbo accounts, these sales can be lumpy from year-to-year. Beyond that, if you look at products and markets, we've just seen, I would say, strength across the Board from a product perspective as well as increased sales in both regional and small. So its pretty even. And then the last driver of sales I'd point to is we continued to successfully execute on our enrollment and reenrollment strategy at the worksite that we've talked about on prior occasions. So we're seeing pretty strong underlying sales growth there. When it comes to PFO growth, which we think is the actual measure that best captures the top line of this business, you really need to peel back from that 16%, 5 points due to these participating contracts. So think about 11 as the underlying growth there and that is in line with our expectations and in line with our outlook.

So we're very pleased with that result as well. And the peer drivers, in addition to sales, would be strong persistency. We continued to see very high persistency with our customers and our value proposition is resonating with those customers and they're doing more business with us. We're getting all of our rate actions, renewals, also in line with our expectations and then also, what's driving the PFO number coming back to that reenrollment strategy is very disciplined execution of our voluntary strategy in the work site and so we continue to see those double-digit growth in voluntary in that PFO number.

Suneet Kamath -- Citigroup -- Analyst

Great, how much of that 11 was Versant, are you able to spike that out?

Ramy Tadros -- President of US Business

We don't break that out. Suneet, at the transaction, we did indicate that we expected to add about $1.3 billion of PFO from Versant in the year. So you can use that as a framework.

Suneet Kamath -- Citigroup -- Analyst

Okay, thanks.

Operator

Your next question comes from the line of Mike Ward from UBS. Please go ahead.

Mike Ward -- UBS -- Analyst

Thank you, guys, good morning. I just had a higher level question on holdings. Interest rates have come up a bit this year, they are still pretty low, COVID's kind of subsiding. Would you say there is an uptick in conversations on potential derisking there and if and when the time comes, just curious if you could comment at all maybe on which lines there that you're thinking you might want to work on first.

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

Hey Mike, good to hear you. Yeah. So I'd say things are trending positively in this space. It's still slow. Rates are still low. Bid-ask spreads are wide. But you know, things are emerging, and I think our philosophy has been to just continue to be ready but there's a lot of activity, and we're just going to make sure we're ready to act if something is value accretive and I don't think there is any material change from the last call.

Mike Ward -- UBS -- Analyst

Thanks, John, I appreciate that. And then just on the P&C proceeds, I know you said you're going to be thoughtful and balanced and you've got a solid track record, but this is a solid amount of capital there. So I was just wondering if there was any more detail you can give around if there is nothing inorganic out there, what the buyback run rate might look like as we move forward. Thanks.

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

Yeah. Hi, Mike. I mean, I would just refer you back to our overall sort of approach and philosophy and the track record also post divestments, and I think that should give you a good sense of how we would sort of move forward here.

Mike Ward -- UBS -- Analyst

Thank you.

Operator

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

Ryan Krueger -- KBW -- Analyst

Hi, good morning. Ramy can you provide some more underlying details on the non-medical health underwriting trends you saw in the quarter, both in dental and vision utilization and disability experience.

Ramy Tadros -- President of US Business

Sure. So I'll keep this pre-front, in the quarter, the two I would point out to, one is dental, we see some benefit from lower utilization early in the quarter. But as we expected, the utilization normalized back in line with historical levels as the quarter progressed. And then in disability, we're still seeing very favorable results. We saw a slight uptick in incidence rates from years ago, but we continued to see positive trends on recoverability there.

Ryan Krueger -- KBW -- Analyst

Got it. Thank you.

Operator

And it seems we have no time for any further questions, I would like to now turn the call back to Michel Khalaf for any closing remarks.

Michel A. Khalaf -- President and Chief Executive Officer

Great, thank you. So let me close by saying that we're very pleased with our first quarter financial results while there were puts and takes with variable investment income and mortality, our underlying results showed both strength and positive momentum across our business segments. We consider the quarter's results and other instalment on our commitment to consistent execution, and we look forward to continuing to generate long-term value for all our stakeholders. Thank you for joining us this morning and have a great day.

Operator

[Operator Closing Remarks]

Duration: 58 minutes

Call participants:

John Hall -- Global Head of Investor Relations

Michel A. Khalaf -- President and Chief Executive Officer

Ramy Tadros -- President of US Business

Kishore Ponnavolu -- President of Asia

Steven J. Goulart -- Executive Vice President and Chief Investment Officer

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

Erik Bass -- Autonomous Research -- Analyst

Elyse Greenspan -- Wells Fargo -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Tom Gallagher -- Evercore ISI -- Analyst

Suneet Kamath -- Citigroup -- Analyst

Mike Ward -- UBS -- Analyst

Ryan Krueger -- KBW -- Analyst

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