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

Good morning, everyone. I'm Ryan Krueger from KBW. And really pleased to have -- kick off the second day of our conference with MetLife. From the company, we have Michel Khalaf, President and CEO; John McCallion, CFO; and John Hall, Head of Investor Relations. I will just give a quick bio, and then we will jump in. Michel joined MetLife in 2010 as President of EMEA. He added responsibility for the U.S. businesses in 2017 and then became CEO in 2019. John McCallion has been with MetLife since 2006. He, most recently, prior to being CFO, was Treasurer and was appointed CFO in 2018.

So I will kick it off to Michel. It's been about 1.5 years since he became CEO. What are your key priorities for MetLife going forward? And to what extent does COVID and the potential aftermath of it change your thinking?

Sure. Ryan, thanks for having us. So we entered the crisis from a position of strength, given the action that we had undertaken over the last several years, in regards to our product portfolio and our strategy. We've also been preparing the company for a recessionary environment. Certainly no one would have or could have predicted COVID and its impact. But we believe that the derisking action that we took in regards to our investment portfolio also positioned us well for the environment that we find ourselves in. When we designed our Next Horizon strategy that we shared with you last year in December, we designed it as an all-weather strategy, a strategy that will serve us well, including in a challenging environment, such as this one. And if anything, I would say that the crisis -- the current environment is sort of a catalyst for us to accelerate certain elements of the strategy. And as a reminder, we wanted a simple strategy that is focused on 3 pillars: focus, simplify and differentiate. And at the core, this is about basing every decision that we make on 3 questions that we ask ourselves. The first one is, does this decision help accelerate our focus or strengthen our focus on value creation? Does it amplify the company and enhance the customer experience? And does it differentiate us vis-à-vis the competition? As I mentioned, the crisis is an opportunity to accelerate certain elements of it. But at the core, this strategy is how we will execute. And our focus on consistent execution where we -- I believe we've built a strong track record over the last couple of years continues to be paramount for this management team. We also have a great set of diversified businesses that we believe -- if you look at our sort of first half results, given the environment, that diversification is also serving us very well. And the crisis is also an opportunity to -- there are important learnings coming out of this, whether it's in terms of our working from home, some of the customer trends, expectations that we're seeing. So we are acting now to make sure that we position MetLife coming out of this very strongly and in a way that would further drive our competitive advantage.

Thanks. Well, the pandemic has certainly amplified the need for companies to become even more digital. How do you feel MET is positioned from a technology standpoint at this time? And what are some key areas that you're focused on there?

Yes. And I've heard some say that in a crisis, really, there's no place to hide. You either show up and deliver for your customers or you don't. And I'm very proud -- extremely proud of the way that our team has shown up during this crisis in terms of transitioning seamlessly to a work-from-home environment and, more importantly, maintaining, if not driving, our productivity levels and our ability to meet all of our service level guarantees to our customers, something that few companies have been able to do at the height of the pandemic. This would not have been possible had it not been for investments we had made over the years in technology and digitizing many of our processes in the company. And the crisis has been an opportunity for us to drive further adoption of these digital platforms and also has been a catalyst for us to further implement solutions, tools that we believe are important in terms of continuing to meet our commitments to our customers and continuing to drive efficiency in the company. I'll give you a couple of examples. In our Group Benefits business, market-leading Group Benefits business, we deployed a digital servicing platform that allows customers to access their benefits to make payments, to file claims. And in the first few months of this year, we've seen tremendous adoption. We added 30 million eligibles that are now -- that have access to this tool and to this solution. Late last year, we completed the acquisition of Willing, a digital wills platform, that complements our legal plan offering. And if you think about the fact that 60% of Americans don't have a will, certainly during the crisis heightened awareness for the need for a will. And also with the shutdown, with people not being able to go and see a lawyer, the ability to have a will in 15 minutes fully digitally. Again, I think that's another example of how we're bringing sort of technology and these solutions to bear when it comes to our customers. And last but not least, I will mention distribution where, again, we have a significant face-to-face distribution, retail distribution outside the U.S. In China, for example, we introduced digital distribution tools that allow our agents at a time when they're not able to go and visit clients to conduct those visits virtually. We've seen, again, high adoption of this tool. And now we're talking -- we're taking these solutions and implementing them in other parts of Asia and in LATAM as well. So those are some of the examples in terms of how we deploy resources -- digital tools and resources to better serve our customers. And I would also just remind you that part of our efficiency mindset is creating this capacity to continue to make important investments in innovation and digitization, so that we can continue to be at the forefront of how we serve customers. We continuously look at our technology portfolio to make sure that it is a portfolio that drives value, both from a customer perspective and from a shareholder perspective.

Well, I'm going to stick with the efficiency theme and move to the expense ratio. You've committed to achieving a 12.3% direct expense ratio this year and over the intermediate term, which is an improvement of 200 basis points from 2015. Do you see additional expense opportunities that are emerging from the pandemic that could potentially drive further improvement over time?

Yes. And I'll tag team with John on this. But clearly, we do. And I think -- again, in times of crisis, a lot of what we do is about controlling -- being focused on controlling everything that we can control. And this is something that this management team is highly focused and committed on. So in spite of the fact that we are seeing headwinds as far as our top line, our PFOs are concerned, we have reaffirmed our commitment to the 12.3% expense ratio. As I said, this is sort of, hopefully, another sign of how we are able to consistently execute and deliver here at MetLife. And again, that requires us to find additional areas of cost savings and able to maintain that 12.3%, and that's really what we're focused on. I'll let John maybe add some color as well.

Yes. I think we've been on a journey, as you said. It's been a multiyear journey. We've kind of shifted away from the unit cost initiative. Obviously, we're committed to meeting that target by the end of this year despite all the headwinds that are in terms of top line. And I think it's really a testament to the team building the DNA as a group and being on this journey for some time has really put in a position to react to this situation. And I think also, as Michel said, to recognize that there's further productivity gains that we can utilize to maybe redistribute towards more digital investments in the future. Or as we've talked about at Investor Day, to the extent we build productivity or capacity, if there is further headwinds, we can utilize that as an offset to, say, volume or interest rate pressure. So I think we feel very good about the position we're in. I think we're continuing to build the muscle every day as a collective team. And yes, we're seeing good momentum. And as we've talked about, we're despite premium credits and some headwinds in certain very large PFO businesses like RIS, we're still committed to meeting the 12.3% by the end of this year.

And then is there much expense seasonality that we should consider for the second half of this year?

Yes. We'll always have that. I'd say, we'll always have the seasonality, particularly because you have the enrollment cost from group, right? Having said that, just kind of put it in perspective. We -- in the first half of this year, we're at 12.2%. And as we said, we're committed to meeting the 12.3%, and we feel like we have a line of sight towards that. So there are other offsets that are occurring to probably absorb some of that seasonality. Also, don't forget, we do have an unearned premium reserve that we'll release in the second half of the year from dental, that we put up because of the lack of availability of dental services. So that will help mitigate some of that. But nonetheless, I think we're still committed. So I would expect roughly a similar outcome in the second half to what you saw in the first half in terms of ratio.

Got it. So shifting to underwriting in the U.S., the group non-medical health benefit ratio has trended kind of towards the low end of your 72% to 77% target over the last couple of years. Can you talk about what's been driving that? And then is there a particular reason to expect some upward reversion within that range as we get beyond this year?

Yes. So the last several years, we certainly -- last 2 years, let's say, we've been at the low end, and we continue to see good results in the non-medical health ratio. And we've talked about there being a few things that's driving that. One, disability, given the strong economy, has been relatively positive. Second, we have a mix, right? We have a higher growth in voluntary products. They have a lower expense -- or I should say, a benefit ratio. So that has caused us to drive some lower results, and that also caused us to shift our range recently. This year, we've seen low utilization in some of those products like dental, although we did give back a premium credit. So remember, dental, the nonmedical health ratio in the second quarter was in the 58% range. You need to make a few adjustments for the dental credits that we gave, which is to 25% of our insured population. And then also, we had an unearned premium reserve, as I just talked about, where we -- certain premiums, we put it into a reserve, given the fact that dental offices weren't open. So we needed to make that revenue recognition aligned with the availability of services. So adjusting for that, we were just below the range. If you think of it that way, in terms of impact to bottom line and relative to the outlook that we gave, so say, call it in the 68%, 69% range there. Look, going forward, we'll have to see. I think, as I said, disability has been strong because of the strong economy. We'll have to see where things go from here. Obviously, there's been a pretty resilient equity market and credit spreads. But -- and even unemployment has probably come in better than we thought this year. And I think we're still seeing some decent trends in disability. But it is a lagging type of indicator to the economy. So we'll have to be -- we'll monitor that, and we'll provide an update to our outlook at the end of the year.

From a growth standpoint, how is the economy impacting Group Benefits top line so far? And to what extent would you anticipate some pressure there as we kind of move into next year?

Yes. So I mean, overall, our Group Benefits business consists of -- it's a diverse set of products, and I think that's been very helpful to us in the current environment. The underwriting impact so far has been modest. And we do expect growth in PFOs this year despite the environment that we're in. So I think that's telling. Typically -- and I think John alluded to this. The impact that we would see in any sort of recessionary environment with high unemployment is typically mostly seen or felt in our disability business. That business has performed very well for the first half of this year. But if sort of unemployment levels remain elevated or rise from where they are today, then you would expect an increase in incidents. That's sort of typical. We have a good track record in terms of implementing great action that is appropriate. We factor in not only the experience, but also the outlook in terms of the environment that we operate in, in our pricing, which is important. This is a yearly renewable business. We have the ability to -- to a large extent, it's yearly renewable. So we have the ability to renew -- to reprice 45% of the book in 1 year. So I think all of those. And then, lastly, I would say that disability represents about 13% of our PFOs. So that goes back to sort of the diversified product set that we have. So all in all, we think that's where sort of most of the impact might be felt. Outside of that, as I said, we still expect growth this year in our PFOs, which speaks to the momentum that we've been having in this business.

I think the other thing I would just add to that is -- and we've said this on the prior earnings calls -- is that the impacted areas so far have not -- are not large in our book of business, right? It's the smaller -- small businesses. It's -- some of the impacted areas are relatively small percent of our overall book. So I think, overall, we feel that there's good momentum. We may not be as good as we thought we'd be coming out of last -- end of last year, but still growing, is certainly the case.

In Japan, foreign currency annuities had been a pretty meaningful contributor to growth in recent years. They've slowed considerably. Can you rejuvenate that product in this type of interest rate environment? And are there any new products that you could add to the portfolio in Japan?

Yes. And I'll tag team with John on this. But first, I just wanted to sort of remind some of the strength of our Japan business, which is a very resilient business, I would say. One, we've been operating in a low interest rate environment for decades. And I think we've been doing it quite successfully. If you look at the trends in Japan, you have a rising life expectancy and an acute need for health and savings products. So the need is there, which is important. We have a diversified set of products and diversified distribution in Japan as well. We're not beholding to a -- beholden to a single channel there. And on the banca front, we have over 120 relationships, partnerships with financial institutions. And we've been able to work with our bank partners on making sure that we continue to introduce products that are viable. I like to call them win, win, win. So a win for the customer, a win for our bank partners, but also a win in terms of the financial viability of those products for MetLife as well. And we see -- as I said, given the sort of the needs of the population there, we do see opportunities to continue to introduce products that would achieve those objectives.

Yes. I don't have a lot more to say on that. I think just to reiterate. It's 2/3 of the -- of the wealth is in pre-retiree and retiree. And those needs haven't changed. So the FX annuity product, it served a need for the customer when there was that larger gap between U.S. rates and JGBs. That gap has shrunk. There's still a gap, and there's still an opportunity. And so I don't think that market goes to zero, but certainly, it will be depressed relative to what we've seen over the last several years. And I think, as Michel said, the needs and the concerns of those -- of that population is the same. It's still how do I deal with the health -- rising health costs? And how do I think about savings? And so I think that shift to more of a hybrid product is the opportunity. And having the capabilities for a diverse set of product skills in our business, having a diverse set of distribution opportunities to serve our customers, I think, that's how you manage through changing environments, and we've been doing that for decades.

Got it. In the U.S., your Retirement and Income Solution business, you've kind of seen a good pickup in growth over the last year. Do you see opportunities for that to continue? And is that a business that you're actively looking to grow?

Yes. I mean, I think the simple answer is yes. We are a leader in the institutional retirement space here in the U.S. And really, I think it's important to remind that our focus has been on responsible growth, disciplined, responsible growth. I think we highlighted during Investor Day, the fact that within RIS, we have a diverse set of products and solutions. And that is helpful to us, including in more challenging environments and a low interest rate environment as well. So if we look at the current situation, we are seeing pressure on Institutional Income Annuities, just given the low interest rates. We've seen a slimming, I would say, of the pipeline on the PRT front, although we are now seeing sort of a pickup as we come into the latter half of the year. On the other hand, we've seen a flight to quality, which has benefited our Stable Value business, where we're seeing very significant growth there. And overall, if you look at the increase in our liability balances which we use as a proxy, and when we measure growth in this business, that's been very healthy and above sort of the range that we had sort of provided during our outlook call. So we think that this diversification in terms of our product set will -- serves us well -- will continue to serve us well regardless of the environment that we're in. Go ahead, John.

Yes. And in the second quarter, just to maybe give some metrics, liability exposures grew over 10 -- just over 10%. And I think our guide at the end of December of last year was in the 3% to 4%. So we've seen very strong growth. And liability exposures, we believe, is a better measure of volume growth just because PFO accounting in this segment is -- there's a wide variety of that. So we've seen some very strong growth. And I think as we've talked about, the diverse set of products that we offer in that segment helps us manage different environments. And we've seen that come through, and as you mentioned, Ryan, strong earnings already in the first half of this year. As Michel said, PRTs was one of the ones that were weaker, but that was well offset by some of the lower fee-based separate account type products. And so we think there's decent momentum. And the pipeline for PRT is starting to resume and become a little more healthy, but time will tell. I think the other thing we would just highlight is in the second quarter, you saw that we entered the U.K. longevity business, and we had our first deal in June. I mean, this is just a natural adjacency to some of our core competitive advantages. That U.K. bulk annuity market has remained resilient. So we're very kind of optimistic and we think the pipeline there is strong. So again, it just goes to another product that can help us manage different environments depending on what's -- where things are. So very pleased with the results so far.