Before we get started, I would like to read the following statement on the behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to trends in the company's operations and financial results and the business and the products of the company and its subsidiaries. MetLife's actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife, Inc.'s filings with the U.S. Securities and Exchange Commission. MetLife, Inc. specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments, or otherwise. With that, I would like to turn the call over to Conor Murphy, Head of Investor Relations.
Ladies and gentlemen, one moment, please. Again, ladies and gentlemen, one moment, please. Again, ladies and gentlemen, we ask that you hold one moment, please. Again, ladies and gentlemen, we are having technical difficulty with our host site. We will be joining you all together in one moment.
Me on this mic? Hello?
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Yes.
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Please begin.
Good morning, everyone. Welcome to MetLife's third quarter 2010 earnings call. We are delighted to be here this morning to talk about our results for the quarter. We will be discussing certain financial measures not based on Generally Accepted Accounting Principles, so-called non-GAAP measures. We have reconciled these non-GAAP measures to the most directly comparable GAAP measures in our earnings press release and in our quarterly financial supplements. Both of which are available at metlife.com on our investor relations page. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible, because MetLife believes it is not possible to provide a reliable forecast of the net investment-related gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income.
Joining me this morning on the call are Rob Henrikson, our Chairman and Chief Executive Officer, Steve Kandarian, our Chief Investment Officer, and Bill Wheeler, our Chief Financial Officer. After our brief prepared comments, we will take your questions. Here with us today to participate in the discussion are other members of management, including Bill Mullaney, President of US Business, Bill Toppeta, President of International, Bill Moore, President of Auto and Home, and Donna DeMaio, President of MetLife Bank. With that, I would like to turn the call over to Rob.
Thank you, Conor, and good morning, everyone. Today, I'd like to begin with some comments on the acquisition of Alico. As you know, we expect to complete the deal very soon, let me remind you what this will do for MetLife. It will be rewarding to our shareholders and will significantly accelerate our strategy by improving our long-term growth in revenues, in earnings, and in ROE. It will increase our global presence in both emerging and mature markets, many in which MetLife will have a top five market share. Will give us the opportunity to become the leading life insurance and employee benefits provider in the world. Now let me share our overall MetLife results for the quarter. MetLife performed well, with continued growth in both our top and bottom lines.
We generated premium fees and other revenues of $8.6 billion, up 2% over the third quarter of 2009. We increased operating earnings to $878 million, up 22% over the prior year period. I'm also pleased to report that our book value improved considerably, up 24% over the year ago period, and 8% sequentially, driven by our strong operating earnings and our investment performance. Driving this quarter's growth is our continued focus on the fundamentals: disciplined growth, excellent underwriting, solid expense control, and strong investment returns. You'll hear more from Steve Kandarian in a moment, but I'd like to say that we continue to be pleased with the investment portfolio's performance. Investment losses, including impairments, continue to trend lower. This is partly due to our best-in-class real estate portfolio, where loan-to-values improved again this quarter.
Our reserve against future losses came down further. Now our delinquencies have fallen back to just two basis points. Turning to our domestic business segment results, US Business generated premium fees and other revenues of $7.1 billion, flat over the prior year period, though up modestly excluding the impact of lower pension close-out activity, which, as you know, can vary from quarter to quarter. Operating earnings grew by 21%, with significant increases in each of the major segments, largely driven by very strong underwriting results, as well as the benefit of ongoing expense management. In our insurance product segment, premium fees and other revenues were consistent with the third quarter of 2009 at $5 billion, and operating earnings grew 14%, up in each product line. group life premiums grew 2%, and operating earnings were up 6% compared with the prior year period.
The group life mortality ratio was very good at 89% and has remained below Investor Day guidance each quarter this year. Non-medical health revenues were up slightly, reflecting higher Dental revenue, though partly offset by lower disability revenue. Operating earnings grew by 49%, driven by improved interest and underwriting margins. The non-medical health benefits ratio remained good at 88%, consistent with the second quarter. Individual life premium fees and other revenues were down due to unusual items in the year-ago period, and flat when normalized. Operating earnings grew by 5%, reflecting solid mortality results. In retirement products, the top line grew to $738 million, up 11% on sales, high persistency, and higher fee income. Variable annuity sales reached a record of $4.7 billion, up 35% over the third quarter of 2009, driven by momentum in third-party distribution channels.
We also are benefiting from additional distribution relationships launched over the past year. Operating earnings increased 42% due to growth in net flows and higher net investment income. In corporate benefit funding, premium fees and other revenues of $618 million were down year-over-year, driven by less pension close-out activity. Structured settlement premiums grew by 2% over the prior year period and 4% sequentially. Operating earnings increased 35% over the prior year, due primarily to higher investment income. Auto and Home had another strong quarter. Net written premiums increased 3% to $780 million. Operating earnings were strong at $81 million. The combined ratio, excluding catastrophes, was excellent at 88.2%. MetLife Bank had a record quarter. Total operating revenues for the bank increased 8% to $410 million, driven by higher mortgage servicing revenue and more refinancing activity. Operating earnings grew 26% to $101 million.
Turning to our current international business, we achieved another very strong quarter with growth across all three regions. On a recorded basis, premium fees and other revenues of $1.3 billion grew 16% over the prior year period. Operating earnings increased by 25% to $191 million due to growth in the business and a one-time tax related benefit. In our Latin America region, growth in Mexico, Chile, and Brazil contributed to its top line growth of 21%. The Asia Pacific region grew 11%, due primarily to higher sales in Korea and Hong Kong. In our Europe, Middle East, and India region, the top line increased by 7%, reflecting continued growth in Europe and India. Earlier this morning, we announced the sale of our Japanese joint venture to our joint venture partner. The agreement we have reached is in the best interest of our shareholders, policyholders, and employees.
Though we have enjoyed an excellent partnership and much success with the joint venture, we can now leverage our expertise and position in the Japanese market to focus on Alico in Japan. As we move forward, we will transition to a global enterprise through refreshed strategies, enhanced operating models, expanded global branding, and engaged and a committed management. I look forward to our Investor Day on December 6th, when you'll hear more about how we will deliver increased value to our customers and shareholders as the leading global insurance company. With that, let me turn it over to Steve.
Thanks, Rob. I would like to review some key components of our investment results for the quarter. First, let me begin with variable investment income. Pre-tax variable investment income for the third quarter was $292 million, which is $92 million above the top of the plan range that I provided on Investor Day. This was primarily driven by strong private equity returns across our global portfolio. We are currently seeing some of our private equity funds take advantage of improving market conditions to accelerate realizations, which is leading us to believe that barring any unforeseen market events, variable income should remain strong throughout the rest of the year. Now let me cover investment portfolio gains and losses. Gross investment losses for the third quarter were $215 million. Gross investment gains were $212 million, and write-downs were $98 million for a net investment loss of $101 million.
These levels are in line with the past several quarters and we believe are modest given the current economic environment. Gross unrealized losses on fixed maturity and equity securities were $4.8 billion, down from $10.8 billion at year end. For the quarter, gross unrealized gains increased $5.5 billion to $19.7 billion as interest rates and credit spreads declined. For example, the 10-year U.S. Treasury note declined 46 basis points and spreads for investment-grade corporate credit declined approximately 20 basis points. Overall, the fixed maturity and equity securities portfolio was in a net unrealized gain position of $14.8 billion at quarter end, a dramatic improvement from a $24.4 billion net unrealized loss just six quarters ago.
As to our commercial mortgage portfolio, as Rob mentioned, the loan-to-value of our portfolio improved again this quarter to 67%, down from 68% last quarter, as valuations continued to improve in markets in which we invest. Our commercial mortgage valuation allowance declined by $48 million to $573 million. Approximately $20 million of the decline was a reduction in our FAS 5 general reserve due to improved market conditions. The remaining decline is largely due to the resolution of certain delinquent loans in our U.S. portfolio. Total delinquent commercial mortgage loans decreased to $8 million from $137 million last quarter, with no delinquencies in our U.S. portfolio at the end of the third quarter. The decrease in delinquencies was driven by one loan being paid off at 98% and the transfer of a high-quality property to our real estate equity portfolio.
I should caution that our delinquency numbers will fluctuate over time as challenges remain in the commercial real estate market. Nevertheless, we believe that we will continue to maintain relatively low loss levels and outperform the overall market. Finally, let me comment on our cash position, which increased from $20.4 billion last quarter to $26.1 billion this quarter. The vast majority of this increase can be attributed to the cash that we are holding for our Alico purchase. In addition, cash collateral balances relating to our derivative counterparties increased. Excluding the impact of these two factors, our cash position remains consistent with second quarter levels and is down approximately $4 billion since Investor Day, as we reinvest it into higher yielding assets. In summary, we believe that our portfolio remains well-positioned for the current economic environment. With that, I will turn the call over to Bill Wheeler.
Thanks, Steve. Good morning, everybody. MetLife reported $0.99 of operating earnings per share for the third quarter. This quarter's results include a dilutive impact of $0.08 per share resulting from the Alico equity and debt issuance completed in early August. This morning I'll walk through our financial results and point out some highlights as well as some unusual items which occurred during the quarter. Let's begin with the top line. Total premiums, fees, and other revenues, which were $8.6 billion in the third quarter, were up 2% from the third quarter of last year and up 4% when adjusting for closeout sales in both periods. As we have noted before, closeout sales can fluctuate from quarter-to-quarter and have been adversely impacted by this low interest rate environment.
U.S. business premiums, fees, and other revenues of $7.1 billion were essentially flat as compared to the prior year quarter. This includes a modest decrease in insurance products revenue due to individual life's 4% decline. Adjusting for a few unusual items recorded in each of the periods, individual life's top line was actually down less than 1%. Group life premiums were up 2% from the prior year quarter. As you may recall from my second quarter remarks, growth in group life is being helped by a change in financial terms, large retrospectively rated contracts, which resulted in less reinsurance ceded. As this change occurred in the fourth quarter of 2009, the benefit to group life's top line growth over the prior four quarters will not repeat in the fourth quarter of this year.
Overall, group insurance revenue continues to be impacted by high unemployment and our unwillingness to chase business at below desired margins or returns. Revenue and retirement products increased by 11% due to higher separate account fees from positive net flows and favorable separate account investment returns. Group revenue in corporate benefit funding was down 13% from the prior year quarter, driven by the lower closeout premiums, which I referenced before. Structured settlement premiums remained strong. Auto & Home's revenues were up by 2%, and MetLife Bank's revenues grew by 11%. International's revenue was up 16% on a reported basis and 11% on a constant currency basis over the prior year quarter, driven by growth across all three regions and led by Mexico, Korea, and Chile. Operating margins. Turning to our operating margins, let's start with our underwriting results. In U.S. business, our mortality results were favorable this quarter.
The group life mortality ratio for the quarter was 89% versus our estimated range of 90%-95%, which is a good result. Our individual life mortality ratio for the quarter was 86.7%. This quarter's results were higher than the very favorable prior quarter of 80.4%. That said, the ratio was significantly below the prior year quarter of 91.2% and also below our plan. Overall, another good result. At 88% for the third quarter, the non-medical health total benefits ratio was up slightly over the sequential quarter of 87.8%, but favorable to the prior year quarter of 90.7% and well within our Investor Day guidance range of 86%-90%. Dental underwriting results continue to see stable utilization and favorable pricing. Disability margins continue to be below plan as incidence levels remain elevated and recoveries continue to be below expectations.
Turning to our auto and home business, the combined ratio including catastrophes was 93.6% for the quarter, which was up over the prior year quarter's results of 91.1% due to higher catastrophes in the current quarter. The combined ratio excluding cats was 88.2% in the third quarter versus 87.7% in the prior year period. A non-catastrophe prior accident year reserve release of $3 million after tax was taken in this quarter, and that's compared to a $7 million after tax release in the prior year period. Moving to investment spreads. We saw continued solid investment spreads this quarter, driven in part by strong variable investment income results. For the quarter, variable investment income after tax and the impact of deferred acquisition costs was $56 million, or $0.06 per share above the top of the 2010 guidance range. As Steve explained, this was primarily driven by strong.
Moving to expenses, our operational excellence initiative continues to prove successful. Our expense ratio for the quarter was 22.5%, which was a solid result and within the 2010 guidance of 21.8%-22.5% given at Investor Day. Turning to our bottom line results, we earned $878 million in operating earnings or $0.99 per share. Included in our third quarter results was an unfavorable market impact of $36 million or $0.04 per share, as the increase of 11% in the S&P 500 this quarter was more than offset by the impact from our variable annuity hedge program. In the second quarter of this year, we had essentially the opposite situation, where a 12% decline in the S&P 500 was more than offset by the results of our hedge program, creating a $0.05 favorable market impact in that quarter.
In addition, our total operating taxes of $378 million includes a true-up in our effective tax rate for the year from 27%-28% as well as a net tax benefit of several one-time items in the quarter. Overall, the results of various international and domestic tax issues impacted operating earnings by $19 million, or $0.02 in the quarter. With regard to investment gains and losses, in the third quarter, we had after-tax net realized investment losses of $222 million, which includes net investment portfolio losses of $72 million after tax. Impairments were $64 million after tax in the third quarter and continued to trend down. In addition, as Rob mentioned, we have sold our Japanese joint venture, announced the sale to our joint venture partner and recorded an impairment which shows up in realized investment losses. With regards to derivatives, we had after-tax losses of $190 million.
MetLife uses derivatives in connection with its broader portfolio management strategy to hedge a number of risks, including changes in interest rates and fluctuations in foreign currencies. The decline in the relative value of the dollar, as well as the tightening of MetLife's own credit spread, partially offset by declines in interest rates, resulted in the derivative loss for this quarter. Derivative gains or losses related to MetLife's own credit spread do not have an economic impact on the company. Our preliminary statutory earnings for the third quarter of 2010 were approximately $850 million, and our preliminary statutory net income was approximately $800 million, which is a good result. Cash and liquid assets at the holding company at quarter end were $9.8 billion. Please keep in mind this total includes the Alico financing, which we completed in early August, the total was $6.5 billion.
In summary, MetLife had a good third quarter. Our investment performance continued to improve, our operating margins remained strong by disciplined underwriting expense management, and our earnings continued to grow. With that, I'll turn it back to the operator for your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, press star then one on your touch tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, we ask that you pick up your handset before pressing the numbers. Once again, to ask a question, press star one at this time. Our first question, we go to the line of Nigel Dally from Morgan Stanley. Please go ahead.
Great, thanks. My question is on interest rates. Appreciate the commentary you provided surrounding the impact for 2011. A couple of questions on that, though. First, is that just the expected spread compression, or does it also incorporate other factors such as top-line pressure and pension expenses? Also, how much of an offset is foreign exchange going to be to the interest rate impact as we look to 2011? Thanks.
I forgot to turn on my mic. Just for everybody's benefit, we filed an 8-K a month or so ago, which said that in 2011, sort of given the current interest rate environment, we expected that to impact operating earnings by $0.20 a share. Now, the way we came up with that calculation, most of that $0.20 is from investment spread compression. We also did factor in at least a preliminary estimate of how our pension costs might change. Obviously, that'll get trued up at year-end, given where the stock market is and frankly, where the interest rates are on December 31st, because that's how the math works on the pension costs. That was factored in, Nigel. We did not consider impacts to what I would say, top-line issues, which are obviously a little harder to quantify.
The most obvious impact of that is where our pension close-out sales, which are soft now and which I suspect we don't think are going to get meaningfully better next year until interest rates start to improve. That's most of the issue. I forget, is that all your question? FX, right. FX is actually having you saw a very strong decline in the value of the dollar versus the yen and the euro this quarter. The FX impact for international is actually quite modest. I mean, it's a gain, but it's less than a penny. With Alico, that will change, and the FX impact will be more pronounced. If you think about it, what that really means is Alico's earnings expressed in dollars are probably going to be stronger, all things considered, than we originally estimated.
When we announced the deal, we assumed one set of exchange rates, the dollar has weakened since then. Alico's earnings impact is going to be better. We don't really take the spot rate right now. We look at the forward, what we consider to be the forward exchange rate, which where the dollar, I think, is expected to rally a little bit. The impact may not be as significant as you might first think. We'll obviously kind of wrap that all up in our guidance for 2011 on Investor Day.
That's very helpful. Thank you.
Thank you. Our next question, we go to the line of Colin Devine from Citi. Please go ahead.
Good morning. I have a couple questions. Bill, Ameriprise on their call yesterday brought up the issue that they're seeing much higher persistency on their annuities than they had modeled, and adjusted their DAC amortization period rather dramatically in response to that. I was wondering if you've done anything at Met on that, if you're seeing those trends. If that's the sort of thing we should be expecting from you? I believe Ameriprise took their fixed annuity DAC amortization out to 30 years and doubled their VAs to 40. That's the first question. The second one, and really perhaps for you or really for Rob. While I'm happy to see you get out of the VA joint venture in Japan, frankly, does this signal somewhat of a change in strategic direction for Met with respect to your global appetite for variable annuity business?
Okay, that second one's a real heavy one.
That's why I directed it to Rob. You're off the hook.
I'm not going to comment on Ameriprise. I refuse. I will say this, we'll do our normal DAC unlocking study that we do in the fourth quarter. We'll obviously do that again in this quarter. I would say the following. We do see persistency improving in our variable annuity business, and that shouldn't surprise anybody, frankly given where interest rates are and where the stock market is. I don't believe that's going to cause us to change our DAC amortization policy or the period of time. Just for everybody's benefit, we would amortize a variable annuity DAC over 20 years, and our fixed annuity DAC we would amortize, I think, also over 20 years. The way that works is there's a rate guarantee in your deferred annuity contract.
What we assume is when the rate guarantee comes off, the DAC model would assume a pretty big shock lapse. Something like crudely 50%. Most of the DAC amortization would be very front-end loaded. If people stay, the rest of it would run out to 20 years. That's sort of our policy, and I don't really expect that to change.
Thank you. Now for Rob.
Good morning, Colin. I agree with you, I'm glad you stated it the way you did. We're really quite pleased at the way we've been able to exit our JV in Japan both for us and quite frankly, for our JV partner. This, of course, from our point of view gives us, as I mentioned in my comments, the ability, without any distraction, to focus 100% on our Alico business in Japan. That's a good thing. Relative to variable annuity appetite, I think everyone expects from me somewhat of the same comment about variable annuities, it's the same worldwide as it would be in the United States.
That is, we think that there's a terrific need in the savings arena for the type of products and services we can provide both from the standpoint of the accumulation of assets and the creation of income for life. We think that's very important. At the same time, we've always said we do not want to become overly dependent on any one product for our financial health. I would include variable annuities in that statement so that the growth opportunities for us worldwide, it varies by country to country. I don't think you would see our growth being driven, for example, 100% by variable annuity sales anywhere. We do see significant opportunities. Relative to Alico, as I've mentioned, our first focus is on bringing home exactly the business that we analyzed and that we love so much, the accident and health, life insurance, and so forth.
In addition to that, of course, we bring competencies to the Alico that they were, in some cases, precluded from using because of their sister companies at AIG and so forth. We're very excited about it. We love the variable annuities. We're not in love with it. It is a very attractive product for our customers worldwide.
Rob, given the relatively negligible amount of money involved on this JV for a company of your size, then I'm glad you brought up your last comment because I was going to play it back to you. Should we really be interpreting this is that you're a little less in love with the VA than you were before?
Well.
You could have stayed in this JV if you wanted to.
I don't want to go into a long explanation of how in love I have been.
I think the actions state it.
Whether or not that answer would meet your expectation. Look at it this way. We have been very focused on return on capital and the returns we can get relative to our breadth of products and services that can both increase our ROE, increase our margins, and have the best use of capital for the company. So that's basically the answer. I am definitely in love with anything that can deliver that kind of result to our shareholders.
Okay, thanks.
Thank you. Our next question comes from the line of John Nadel from Sterne Agee. Please go ahead.
There's a lot of love this morning. I got a couple questions. Any update you can provide as to the outlook for the earnings accretion from Alico, given the changing interest rate and FX environment since the deal was announced? I was just wondering if the move, especially the move in rates, has had any impact on your estimates for VOBA or goodwill. We saw some impacts across the river, and I was just wondering if we should think about any altering of the earnings stream upon the closing there. Also related to Alico, wondering if you have any update for us on the progress you're making with regulators overseas as it relates to getting dividends out. Finally, I had a question on your group disability business.
Can you give us a sense for where the new claims discount rate sits and what kind of sensitivity we should think about? Is that in your 20% estimate for interest rate pressure, too?
Okay. I think we got all that. I'll start with Alico earnings accretion. Again, just for everybody's benefit, when we did our financings in August, we refreshed the guidance we gave. We said we expected to be $0.40-$0.45 accretive in 2011. Interest rates were pretty low then. I think they're actually a little lower now. I think probably the dollar's a little weaker.
Yes.
I'm not sure they'll quite offset each other, but obviously they do net. In terms of the purchase accounting, well, again, we did revise purchase accounting when we did the financings in August. Now that we're hopefully going to close the deal very soon, we will put out some revised purchase accounting in an SEC filing, I guess, later in November. You'll get to see the math as it currently stands. It's interesting. It's complex, okay? The punchline is that you will see some changes in the VOBA and goodwill balances. A little bit more of the purchase price will end up getting pushed to goodwill versus VOBA. That has the effect of probably improving earnings accretion. I think directionally, in terms of reported earnings accretion, there's upward pressure.
Okay.
That's all good, I think.
Certainly. Any progress on the capital?
John, it's Bill. You want the answer on the regulatory one first?
Thank you.
Okay. We're just about there. We had to get, as you know, a large number of regulatory approvals. We've got just about all of them at this point, and we fully anticipate that we will have all of them, and we will close on November 1.
Oh, okay. I'm glad to hear that. I was more interested in, I know there'd been some discussion early on, maybe it was right around the announcement of capital levels in Alico being sort of substantially higher than is sort of required under a reasonable solvency level or solvency capital level. I was just wondering if there was any progress on timing for being able to get some of that capital back out into the holding company.
Yeah. Look, our expectation is that we will pay dividends out of Alico in 2011, probably later in the year. I would say the capital level, we express our RBC ratios. We talk about an RBC ratio for Alico, and we talk it being at 400 or comfortably above 400. When we actually do the final audits of the opening balance sheet when we buy the business, we'll know exactly what it is. I think the punchline is that capital levels of Alico are quite attractive.
Yeah.
We'll be able to pay out a very healthy dividend out of Alico in late 2011. The question mark is really, will we be able to get anything out of Japan in 2011? Just because sort of some wrinkles about how the regulatory issues will work there. I don't think there's anything new to say other than we think Alico Japan is very well capitalized, but it could very well be a couple of years before we'll be able to pay dividends out. Obviously, that'll be a subject of ongoing discussions with the regulator there. The money's there. It's a matter of whether we'll dividend it out in 2011. We just don't know yet.
I'm sorry, just to follow up, Bill. I think you said expect to pay dividends out of Alico in 2011, later in the year. Is that from just other geographies, or does that get to the holding company, or does it get to an intermediary holding company? I'm not clear.
Well, great question. Actually, yeah, it's coming from other geographies.
The capital levels in those other geographies are frankly quite good.
whether it comes back to the U.S. holding company or sits in some sort of international holding company is all about the tax regime in a given country, and it's all over the map.
as you know, I think Japan dividends can come back to the U.S. holding company because the Japan corporate tax rate is basically the same as the U.S. corporate tax rate. I think people know that. In other geographies, it's.
The policy differs.
Understood. That's great. Thank you.
Thank you. Our next question, we go to the line of Mark Finkelstein from Macquarie Securities. Please go ahead.
Hi, good morning. I have two margin questions. I guess firstly, how should we think about this level of variable annuity sales? I mean, obviously very strong in the quarter, given where rates are margins meeting targets on new sales? I assume hedging costs are higher, do you need to reprice? That's number one. Secondly, can you just discuss what is the strategy to improve margins in disability? It sounds like we had adverse experience both incidence and recovery rates. Thanks.
Mark, it's Bill Mullaney. I'll handle both of those questions. First of all, on VAs. The market for VAs continues to be good, I think you saw from our sales results really for the whole year that sales have been pretty strong. We've been getting sales primarily from the GMIB product, but also increasingly from an GLWB product as well. Given where the current interest rate levels are, the margin on the products that we're selling today are below what I would say are our target margins. I think you've got to think about this business over a cycle. Earlier in the year when interest rates were higher, margins were good, we were writing out returns that were higher than what our target returns are.
We think, over time, as interest rates come back, we'll start to see returns improve closer to the target. We're also going to be taking some steps in 2011 to continue to improve the overall margin in the product and the overall level of return. We'll be telling you more about that in the coming months. As it relates to disability, obviously, our disability results continue to be challenged. In this quarter, we saw higher incidence levels than we've seen in prior quarters. Our recoveries ticked up a little bit, it was very modest improvement in recoveries. As a result, the overall loss ratio in disability was pretty high. It was probably one of the highest that we've had over this past cycle.
There's a number of things that we continue to do from an operational perspective to try and improve our disability business. We're also taking some pricing actions, again, with both our new business and our renewal business for 2011. We're in the market right now with, I would say, high single-digit disability price increases as a way for us to bring in more revenue for that product and begin to get the loss ratios and the margins back to target.
Okay. I guess just to follow up on that, I mean, will the market accommodate that level of rate increase based on what you're seeing currently?
Well, we have seen, I think, a little bit of an improvement from a marketplace perspective. I would say over the last couple of years, disability pricing has been fairly aggressive. When we've gone into the market with price increases, we've lost some business, and we haven't been as competitive on new business. It's one of the reasons why the top line in the non-medical health area really hasn't grown very much. I expect that we're going to see that trend continue to a certain degree. I think based upon the early results, and it's still a little early in the sales cycle, pricing seems to be moderating a little bit more in this renewal season than it was in a couple of earlier years. We think we have a better chance of getting our pricing.
What I'll tell you is if we can't, we're not afraid to walk away from business if we don't feel that we can get the right level of margin and begin to get our returns back to the right level.
Okay. Thank you.
Mark, this is Rob. I would just add, Bill's answer was right on across the board. One thing I would just remind everyone, because we've said it before, even though on variable annuities, we may not be at our target rate, we're still exceeding the cost of capital on that business. It's not like we're writing variable annuity product without adding value to the enterprise. That maybe goes without saying, but I think I ought to say it anyway.
Okay. That's helpful. Thank you.
Thank you. Our next question, we go to the line of Jimmy Bhullar from J.P. Morgan. Please go ahead. Mr. Bhullar, your line is open. Mr. Bhullar, did you have a question? Right. We will move on then to the line of Andrew Kligerman from UBS. Please go ahead.
Hey, good morning. A few quick questions. First, on the Japan JV and the divestiture. I see over the newswire, I think you received $275 million. What was the impairment that you took? I think Bill mentioned it a little earlier.
Yeah. The answer's complicated. I'll take you through it. We're selling our interest at below where we have it recorded on our books, we're actually not going to close the deal until in the first part of next year. The accounting for this sale is actually sort of in two steps. If you collapse them, maybe the most useful way to think about it is let's collapse the two steps, and I'll give you sort of the net impact. We'll ultimately have to record an after-tax loss on the sale of this of about $60 million on a sale price of $275. You think, well, that's not good. The $60 million really has more to do with the fact of how we allocated goodwill in the Travelers acquisition five years ago than it has with really the economics of this transaction.
We actually expect this transaction to be modestly accretive from an EPS point of view, we're very pleased with the valuation we received. There is a little impairment, that frankly has to do with purchase accounting five years ago than sort of the reality of the situation today.
That makes a lot of sense. Following on Colin's question, what are Alico Japan's prospects for VA sales? Do they have good prospects? Maybe a little color.
Andrew, it's Bill Toppeta. I would say the opportunity, the prospects are certainly good. The reason for that is twofold. One is certainly the technical capabilities that we bring from the MetLife side on variable annuities, which I think are clear to everybody. On the other side, Alico has very strong relationships with all the banks and the distributors. Obviously, they have strong independent and captive agency forces in Japan. It's clear that there is an opportunity there. As Rob said earlier, I think what this transaction with MSA indeed does for us is it gives us the ability to focus on Alico in Japan, and that's exactly what we plan to do.
It sounds much more promising. Just shifting over to interest rates. We all know that you'll kind of take a maybe $0.20 hit to what we would have been earning had interest rates not been where they are. Can you walk us through to three years from now, four years from now? What would be the incremental impact if the 10-year treasury stays where it is? You talked about how it's based on spread compression, I guess it wouldn't be a focus on the 5.17% yield and where that would go. More on spread. In essence, what would happen to expected earnings three years from now? Would you be getting to your long-term goal of 13%-15% ROE?
Andrew, it's Bill. I think that's a really serious question. I hesitate to give an off-the-cuff answer. I think we'll do our best on Investor Day to really kind of talk through that issue with people if interest rates stay really low for a long time. I would say a couple things. One is these interest rate floors that we have, that we're benefiting from today, obviously, are really quite a good hedge against this problem. The very first one of those, I think, expires in late 2014. Most of them, often they go into 2015 and 2016. So those are going to be there to help us for a very long time. That's a good thing. The second question is obviously it is an earnings drag if things stay that low for a long period of time.
I do think that will make hitting our long-term ROE targets much more challenging. The other kind of a little bit of a subjective wild card is if we really get convinced that interest rates are going to stay low for a long time, will we start managing the business differently? I think the answer is absolutely. How do you quantify that in terms of the numbers? I'm not sure I can really do today. I think those are two things to keep in mind as we think about this potential issue.
Perfect. That's very helpful. Just real quickly, RBC and excess cash at the holdco post the Alico transaction. Roughly where do you expect that to be?
Well, the cash at the holdco will be three-plus billion dollars at something of year-end. I think RBC, as I've said before, we don't give out an interim RBC number. We do the full calculation once a year, that's frankly what we're comfortable with. I would say this, our RBC ratio is 432 at year-end 2009. It's clearly higher today, obviously that doesn't take into account cash at any holding company. We've had good statutory earnings, at the same time, there aren't any other kind of extraneous issues which affect the RBC. We don't like to give an interim number out, but it's clearly moving north.
Thanks a lot.
Thank you. Our next question, we go to the line of Tom Gallagher from Credit Suisse. Please go ahead.
Thanks. First question is for Steve. You commented on expecting strong 4Q private equity returns. If we remain in the current environment, do you think that's going to persist into 2011? Maybe just give some overall views as to what you think is driving those returns and if nothing changes in the macro environment, whether it's likely to keep seeing those continue.
Okay. I think part of what's driving the returns this year relates to sales driven by improved capital markets around sub-debt and low investment grade debt that's allowing firms to either sell their businesses to other PE firms or industry players or do refinancings and dividending out. Those markets, I think, are driving a lot of that, and people are searching for yield right now as yields are so low. As of now, at least, those markets are quite robust in helping returns. There's also some valuations being done that are showing improvements based upon higher equity pricing across the board. That's really taking some very low valuations of a couple of years ago during the crisis and kind of moving them up on the equity methods. Those two things, I think, are keys.
The third probably is concern by people in the private equity world about their tax rates. Accelerating some profits now before their personal tax rates may go up based upon how the tax treatment of carried interest. How much of that will go on into 2011? We're still doing some work on that. I'll have some numbers for you on Investor Day. We'll provide you probably our range again like we did last year. We're finalizing those numbers now, I'm reluctant to kind of give out an estimate before we finish our work.
Okay. If I understood you correctly, maybe the one that would not be sustainable, the one piece of it would be into 2011, there might not be the same incentive on the part of the actual private equity owners to continue to monetize gains.
It depends on policy issues around tax and what happens in terms of congressional action on that issue. I think that's going to unfold over the coming months.
Okay. The other question I had, actually two more quick ones. One, I guess for Donna. Can you talk a bit about the Bank earnings? They were very strong this quarter. Can you talk a bit about whether these are sustainable? I think the comment was they were refi-driven. Should we view these as really peak earnings that are likely to come down? Or do you think there's sort of a higher baseline of earnings we've developed here? That's one question. Lastly, in terms of the low interest rate environment, do you see any real signs of repricing yet by competitors for things like variable annuities and Universal Life, or do you think that's still to come? That's it for me.
Hi, this is Donna DeMaio from the Bank. Yes, we did have a great third quarter. A lot of it is driven by refis as well as the fact that margins are holding in the mortgage business. That is not sustainable. As the mortgage market continues to come down, those who have the ability to refi have pretty much tapped that out, and we don't see that continuing into the fourth quarter or into 2011.
Tom, I'll answer your question about the interest environment in one second. I want to just get back to a question we didn't answer that John Nadel raised about disability and what was happening with the discount rate there on new claims. We don't disclose that discount rate publicly. I will tell you that it's below 5% today, and it has been for some time. We continue to look at it. I would say we look at it semi-annually. Based on the current interest rate environment, I will tell you that we'll be looking at it again, and it is under some pressure. We'll let you know in the future if we decide to make any changes to that discount rate.
In terms of interest rates overall and the impact on pricing, I don't think we've started to see it a lot yet, though I think we're going to see it if interest rates continue to stay low. I think that the marketplace may be just staying on the sidelines a little bit longer to see whether or not rates do stay low for a while. If they do, I think we're going to start to see that show up in pricing. My own sense, it's just a little early yet to see it.
Okay, thanks.
Thank you. Our last question today comes from the line of Jeff Schuman from KBW. Please go ahead.
Thank you. Good morning. A couple things. Tax rate you marked up to 2010 tax rate. I was wondering if you give us any perspective on 2011. Then secondly, any updates on Retained Asset Accounts in terms of either customer behavior or the level of sort of regulatory inquiry or where we stand there? Thanks.
Okay, I'll do the tax rate. As you heard in my remarks, we've sort of moved up the effective tax rate. We started the year with a 27% effective tax rate. Given sort of various factors, we've decided to move it up to 28%. I think for MetLife, when I think about 2011, MetLife pre-Alico, probably the effective tax rate we should be thinking more like 29%. Maybe ticking up another point. There's not one thing which is driving that. There are a couple of things. Just keep in mind, though, Alico's effective tax rate, which isn't really changing, is something like 34%. The blended rate for the two companies will obviously be higher than MetLife standalone. There is a little pressure on the margin on tax rates.
Okay.
Jeff, real quick, this is Rob. On the Retained Asset Accounts, there's really nothing to report in terms of change of activity relative to regulatory and that sort of thing. I would say that, as I mentioned on the last call, we have a very high level of customer satisfaction with those accounts, and our cash flows would indicate that they're even more satisfied than they've been in the past. Other than that, there's really nothing to add at this point.
Customers are continuing to utilize accounts about the same rate, and there's no change in withdrawals from the existing accounts?
Yeah. Remember, to get in the account, you have to pass away. We don't have an open account for deposits, but retention is actually drifting a little bit higher than it has been in the past.
Great. Thank you.
Yep.
Would you care to make any closing comments?
I just look forward to seeing you all at Investor Day on December sixth. Thank you.
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