MetLife, Inc. (MET) Earnings Call Transcript & Summary

Yes, this is -- so these items are now closed, particularly that last 1 is a closed item and the first 1 with regards to those issues. I'd say the other -- the other thing I would just add, we did have -- above and beyond that $475 million, we did have some other positive items come through. So there was a revision of the GILTI tax in the early part of December. So we had baked that into our 20% to 22% effective tax rate outlook. But it did have a positive impact in the fourth quarter. And then we had some return to provision refinements at the end. So tax rate -- tax was a pretty large positive in the quarter, excluding those other items, which is about $65 million, you get to a run rate of something like 18.5%.

Okay. Okay. On the expense side, Michel, you rightly pointed out, you brought the expense ratio down. You've been doing this over many years. But the fourth quarter expenses were elevated. You had mentioned seasonality, some onetime factors. Can you just get into this in a little bit more detail to make us comfortable that the trajectory is still on track?

Yes. So we referenced that the seasonality is really tied mostly to the group business. So we tend to have to spend money for enrollment periods, that premium comes in the following year, right? So there is just a disconnect between when the expenses come through and when the new premium comes through. So we tend to see that get elevated in the third and fourth quarter. In the third quarter this year, we actually pointed out those expenses, actually, probably didn't get incurred in the third. And so it ultimately all got pushed to the fourth. So we knew that there would be elevated expenses, seasonality is typical. On top of that, we had another 50 or 60 basis points, we'd say, on top of that direct expense ratio expectation that we had for a variety of items, I'd say, in 2 broad buckets. One was, we had some elevated employee benefit costs. Now if you listen or if you go back to the transcript of the first 3 quarters, you'll notice that we talk about market impacts of -- on employee benefit costs having the opposite impact. So the -- on a full year basis, they've effectively neutralized themselves. And then we also had some corporate initiatives that were incurred in the fourth quarter that I'd say, that were opportunistic for us. So not necessarily planned at the time. But as we work through, when you think about the discussion Michel had earlier around our next horizon strategy and some of the thinking around focus, simplify and differentiate, it was just an opportunity for us to spend that money in the fourth quarter. And then I go back ultimately to full year ratio, right? And we've talked a lot about, there will be volatility in our quarters. But -- so we think focusing on a full year is appropriate because you'll have these fluctuations from 1 quarter to the next. And as Michel mentioned earlier, we're down 30 basis points. So that trend continues, and we feel very confident about the trend heading into 2020 and to meet our objective of 12.3%.

People like me agonize over basis points per quarter. And it just doesn't work the way as you point out...

That's right. It's a big diverse, so...

Yes, no doubt. Let's talk about the P&C business, which did have a challenging quarter. And the team, the results seem to be a little different than what we've heard from others. But can you talk about -- there was some adverse underwriting results in the auto side specifically. And I guess -- so talk about that. And also, how do you get comfort that we're not going to see the same thing as we enter 2020.

I may jump?

Yes.

I mean let me maybe just say to open, that we like P&C. It's a nice niche business for us. It's a nice complement also to our Group business. We're the biggest distributor of auto and home in the group space. And it's also a nice diversifier in terms of -- if you think about sort of macroeconomic trends and correlation to those trends, it's a nice diversifier from that perspective. It's -- it delivers good cash for us in terms of dividends and has a mid-teens ROE. And it's a business where we have the ability to reprice fairly quickly to adjust to certain trends that we see in the marketplace as well. And I'll let John, maybe, talk more about sort of the -- what we've seen and what we're doing about it as well.

Yes. So we started to see this trend, I'd say, during the summer into the third quarter, where bodily injury -- the severity around bodily injury was increasing. I think others are seeing that in the -- as well throughout, right? But we are seeing that begin in the third quarter. We put up reserves for current accident year in that quarter. Fourth quarter comes along, we see kind of an increasingly deteriorating trend come through. And so in the fourth quarter, we actually added to those current accident years and to prior year development. So we had a combined overall ratio for the entire book, home and auto, of above 100%, 101.6%, I think, and we had about 6 points on top of that related to that on prior year development. So we have -- we are focused on it. I think there's pricing actions that we're instituting right away. We've actually already had some success in the first quarter. We're looking at other operational reviews around claims practices and underwriting to make sure that there's nothing there that's causing some leakage, but we believe we're on top of it. We -- as we -- as Ramy said in the fourth quarter call, our view is that with current levels and kind of -- if you take current levels as today's loss pick going forward and pricing actions in 2020 that we have planned, that will be within our ranges that we provided at Investor Day.

Got it. Let's talk about the Benefits business, where obviously it has been a fantastic business, outperformed others and a great generator of earnings. The question always comes and I get is the sustainability, as you are not alone, others have had good results in this business. You have added size and scale relative to others though. So can you talk about that issue of sustain -- if someone asks you, are they sustainable? How do you answer that question?

Okay. So first of all, there's no question that a healthy economy near full or near full employment wage growth are tailwinds, right? So those are helpful to that business. No question about it. However, when we look at sustainability, we look at it from -- in terms of 3 major areas, I would say. The first is the quality of our top line. And here, we feel really good about the discipline that we've consistently had and how we price this business and how we renew the business and our ability to get renewal actions when we deem those to be necessary. Very strong persistency in that business as well. So I think that's important. And we don't compete strictly on price. There are other elements, other attributes that we bring to the table that help us retain and win business. So that's one area. And when we feel confident in our ability to continue to do that. I think the other area is scale related and it has to do with our ability to grow revenues faster than expenses. This is a business, and I think you see through some of the consolidation that's taking place in the industry, that requires continuous investment because customer expectations are rising, the bar keeps getting higher, the ecosystem is also evolving and changing. And that requires investment on our part and technology and new capabilities and the like. Investments that we've been making for a number of years and that we plan to continue to make. So again, from that perspective, we think that, that sort of advantage that we have in terms of continuing to drive scale while growing expenses at a lower clip is something that we can sustain. So those are 2 important components. The third one obviously is underwriting. And we've always said and I'll repeat here that when you think about underwriting and benefit ratios, you have to consider that those are going to fluctuate. They're going to fluctuate quarter-to-quarter. And that's why we always guide to the midpoint of the ranges that we provide. I'll give you an example, in the fourth quarter of 2019, we saw favorable underwriting when it came to life mortality, for example. Whereas in 2018, due to higher severity, we were towards the higher end of our range for that quarter. So we're going to continue to see fluctuation when it comes to underwriting. If we have a really good year, we're still going to guide to the midpoint of the ranges that we provide because we believe that it's possible, maybe even likely that the experience will revert towards the midpoint.

I would just add just to the point of ranges. Recall in nonmedical health range, right, we did adjust that downward as we did see product mix shift occurring in there. And so as Michel said, we -- the ranges are thought -- we think about those ranges and think about what the right outlook is. And there's a reason why we ultimately guide back to the middle as we've kind of gone through and thought about our book and what's -- and what we see in the future.

Yes. And I would also add, I mean, 1 of the reasons that we adjusted the range was the fact that we continue to grow our voluntary business. And that's a business that tends to have a lower benefit ratio. And we're continuing to see tremendous momentum when it comes to our -- to growth in our Voluntary business. And again, I think, that's the sort of positive indicator in terms of sustainability in that business.

It also seems like this market is fairly rational. So -- competitive, but you don't have a lot of irrational players out there; again, speaking to the sustainability aspect of it. I guess in this business, you probably have a pretty good view into 2020 given the early year in the renewal season. Can you talk about kind of what you saw during that renewal season?

Yes, I think, you sort of -- we're pleased with our sort of sales and renewals, I would say, consistent with expectations. In this business, jumbo cases influence sales in any given year. And so that's down to the number of cases. We define jumbo as cases over $20 million in premium. So we're seeing less activity on the jumbo side this year. But given sort of the overall -- our overall sales and our renewal actions, we feel confident in the range that we provided during the outlook that PFOs are going to grow between 4% and 6% in 2020.

Got it. I want to shift to interest rates. Obviously, rates have come down over the past 6 months.

They're up today. Not that we're watching, not that we're watching, right?

Back above $160 million, I think.

Yes, yes, yes, exactly.

It's pretty pathetic that we're cheering for that. But obviously this is a big issue for investors. And I'd like to get a sense of how it impacts your statutory capital, your free cash flow. Can you give us an update on your New York cash flow testing, John, that might be helpful?

Yes. Yes. So we -- we're still working through, I'd say, the overall RBC capital and finalizing that, and that will come out at the end of the month. But I can say that on cash flow testing, the work has been done. There's no -- in our book of business, there's no reserve increase for year-end '19. And actually, rates were higher at year-end. We do a lot of our testing as of -- actually, we do our testing as of September 30 and roll it forward. And even at those rates, which are very consistent with where we are today, we still had healthy margins. And look, I think, a lot of that comes down to -- we're focused on that. You know, we've been working through this for some time. Even the -- go back to the expense program that we have, that's also powerful when you think about cash flow testing, right? The present value of expense reduction on your reserves is helpful when it comes to cash flow testing. So we've been focused on -- around ALM, expense management, and as a result of all of those actions, we still have pretty healthy margins from a cash flow testing perspective.

Got it. Let's -- I guess we'll stick with the issue of capital and talk about buybacks. When we think about the pace of buybacks in 2020, how should we be thinking about this?

I mean I would go back to sort of our philosophy or approach, which is that excess capital belongs to shareholders, absent M&A opportunities that are a strategic fit and that are accretive. And I think, we've built a consistent track record when it comes to that. If you think about 2019, we've returned $4 billion in common dividends and share repurchases. Share repurchases, in particular, the fourth quarter was probably light in terms of we return -- we repurchased $250 million, but we had indicated on our third quarter call that we had opportunistically pulled forward some of the repurchase activity in Q3. For the year, we returned $2.3 billion in share repurchases. So that's our philosophy, that's our approach, and we're sticking to it.

And I guess, just for me, last question. I mean arguably, your most important job is allocating capital. And so walk us through your priorities when you think about capital allocation.

Yes, it's really -- the fact that we understand that capital is a scarce resource, and we have to be very disciplined, very judicious in how we deploy it, whether it's to support a new business. And if we look at our sort of how we're deploying capital in support of new business, we're doing it at returns that are well above our minimum hurdle rates. We are doing it at -- with paybacks that are around 7 years. So we feel good about that as well. But also disciplined in terms of how we deploy capital in support of in-force, continue to look for portfolio optimization opportunities that make sense for us. And then excess capital, again, we think that M&A is a strategic capability that we have. But we're very disciplined also on how we consider M&A opportunities. I go back to strategic fit, accretive. Does it help us grow in a market or a business that we like? What are some of the synergy aspects of it? And then we also compare that to other uses of capital to determine if that's the best use or not. And then excess capital obviously belongs to shareholders. So that's really how we look at capital. We look at it in terms of how do we maximize value creation for the firm and for our shareholders.

Makes sound kind of easy, but that's really isn't. So we're running right up against the end of the session. Why don't we end it here? Guys, thank you very much. Great. Great session. Thank you.

Thank you.

Thanks, Jay.