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

Ladies and gentlemen, thank you for standing by, and welcome to the special conference call to discuss MetLife's acquisition of Versant Health. [Operator Instructions] As a reminder, the conference is being recorded. With that, I will turn the call over to John Hall, MetLife's Global Head of Investor Relations. Please go ahead, sir.

Thank you, Roxanne. Good morning, everyone. We appreciate you joining us on short notice, and we're pleased to announce MetLife's definitive agreement to acquire Versant Health, a leading vision care company. Before we begin, I would like to point out that today's presentation may include forward-looking statements. It's possible actual results may differ materially from the forecast we make today. I refer you to Slide 2 titled Forward-looking Statements in today's presentation, which can be found on the Investor Relations portion of metlife.com. In addition, this presentation may include references to non-GAAP measures, and reconciliations of these measures can be found in our quarterly financial supplements and other documents, which are also available on the Investor Relations portion of metlife.com. Joining me on the call this morning are Michel Khalaf, President and Chief Executive Officer; Ramy Tadros, President, U.S. business; and John McCallion, Chief Financial Officer. Michel, Ramy and John will offer prepared remarks that speak to the presentation I referenced earlier, which is available on our website. Following prepared remarks, we will have a Q&A session, and I respectfully ask that you limit your questions to the transaction at hand. Now I'll turn the call over to Michel.

Thank you, John, and good morning, everyone. We are very excited to talk to you today about our acquisition of Versant Health, which will catapult MetLife to the position of third largest U.S. vision insurer in this highly attractive and profitable market. Turning to Slide 3. As we announced, we are acquiring 100% of Versant Health from an investor group led by Centerbridge Partners in an all-cash deal totaling $1.675 billion. We believe this transaction is a perfect example of how MetLife is deploying capital to the highest value opportunities. Vision care is a capital-light business with strong risk-adjusted returns and high free cash flow generation. In short, it is right in the wheelhouse of our Next Horizon strategy. Versant is a well-run and well-respected leader in vision care. The firm's marketplace brands, Davis Vision and Superior Vision, have high name recognition and the track record of exceptional customer service. MetLife will gain access to Versant's roughly 35 million members, and our customers will gain access to Versant's extensive provider network, which is one of the largest in the industry. The U.S. vision care market is characterized by a number of attractive features. It is expanding with a 5% annual membership growth rate and favorable demographic trends. It is predictable with well-established utilization rates and the ability to reprice at regular intervals. And it is recession-resistant, like dental, that is a must-have service. We expect the combination of MetLife and Versant Health to create significant revenue synergies. The Versant team has deep product and service expertise and an experienced third-party sales force. When combined with the unrivaled distribution reach of our U.S. Group Benefits business, we see the opportunity to generate above-market growth in vision care. For our group business more broadly, we expect the addition of Versant to help drive double-digit revenue growth in 2021. MetLife is the clear leader in the U.S. Group Benefits space with a 15% market share. We offer more than 35 group products and services, the most in the industry, and serve approximately 41 million U.S. employees and their dependents. This transaction builds on our recent addition of pet insurance, digital estate planning and health savings accounts, strengthening our position as the partner of choice for employers across the country. Financially, we believe this transaction will create significant value for our shareholders. It will be accretive on day 1 to earnings and to free cash flow, and it will easily clear our risk-adjusted hurdle rate with an internal rate of return in the high-teens. As always, we carefully weigh every use of capital against the alternatives. Our goal is to achieve the right balance between investing in growth and returning capital to create long-term shareholder value. With Versant, our confidence could not be higher that we are making the right investment at the right time in the right business. As noted in our press release, we are also pleased to announce that we are resuming share repurchases. By the end of the year, we expect to complete the remaining $485 million on our current buyback authorization. Last but not least, we are financing this transaction 100% with cash on our balance sheet. As we noted on our Q2 earnings call, we ended the quarter with cash and liquid assets at holding companies of $6.6 billion. Even after the transaction and the completion of our buyback authorization, we still expect to continue to be above our target range. We are moving forward and targeting to close on the Versant acquisition by year-end. With that, I will turn the call over to Ramy Tadros.

Thank you, Michel. Turning to Slide 4. We believe this transaction represents the perfect strategic fit for our market-leading group benefits franchise. When you think about the progression of our Group Benefits business in recent years, it begins with a solid foundation we have built within national accounts, where we hold a 30% market share by premiums. From the stronghold, we have extended our reach into the midsized and small business markets, where we see continued opportunities for growth. The next stage in the evolution of our Group Benefits business was our ongoing expansion of voluntary benefits across products, capabilities and relationships. Voluntary continues to represent a tremendous growth opportunity as companies look to expand benefit options without adding costs. Our adjusted PFOs in accident and health and group legal plans have grown to more than $1 billion. This brings us to our latest focus within Group Benefits, which is a strategic expansion into new adjacencies. We are continually scanning for products and capabilities that meet customer need, strengthen our competitive advantage and deliver strong risk-adjusted returns. Over the past year, we've entered 3 such adjacencies, health savings accounts, pet insurance, and digital estate planning. 2 of these, pet insurance and digital estate planning, were done through acquisitions but are already exceeding our expectations. We are now accelerating this strategy with Versant, which will instantly make us a scale player in vision care. Turning to Slide 5. As Michel mentioned, managed vision care is an attractive business with annual market growth of about 5%. It is capital-light with highly predictable loss ratios. For the most part, managed vision care services include reimbursement for eye exams, glasses and contact lenses. These are generally purchased through a network of providers and retail stores with prenegotiated discounts for service. To be successful in this market, scale is essential. A large network of providers combined with a large customer base forms an effective barrier to entry into the market. As highlighted on Slide 6, this industry is highly concentrated, with the top 3 players sharing roughly 80% market share. By acquiring Versant, we will move to #3 in the industry with approximately 17% market share on a combined total of 38 million members. Beyond its large membership base, Versant has one of the broadest networks of independent providers in the industry and contracts with nearly every major chain. The provider networks and relationships that come with versant were built over decades and are very difficult to replicate. The time and effort required to do so creates a wide moat for any competitors to cross. Insurers with the largest memberships are best positioned to negotiate competitive rates with providers, and those with the broadest provider networks offer the best customer experience. By offering competitive pricing and access to broad networks, scale players become the insurer of choice for customers. This creates a virtuous cycle of self-reinforcing competitive advantage. Now let me provide you with an overview of Versant's revenue mix on Slide 7. About 75% of these revenues come from commercial accounts. This plays well with our strengths and will create an even more compelling value proposition for these clients. As you could see on the right-hand chart, roughly 1/4 of Versant's commercial account revenues will come from employers with more than 5,000 employees. As noted, this is the segment of the Group Benefits space where MetLife holds the largest market share of any company. Because Versant is relatively underpenetrated precisely where MetLife is strongest, we see a tremendous opportunity to distribute Versant's products to our large national account customer base. Overall, Versant's existing customer base has more than 9,000 employer groups, the majority of which are regional and smaller accounts. These also represent a significant opportunity as MetLife has been growing in this space and plans to continue to do so. Slide 8 really crystallizes the advantages of this deal. When you take the best of Versant and combine it with the best of MetLife, you get an engine that will drive faster revenue growth. Versant's product, pricing and network are all world-class. And MetLife's relationship and distribution reach are second to none. This is the combination that creates revenue synergies among larger employers who want to do business with partners that truly understand the unique needs of the most sophisticated benefits programs. MetLife is that partner. That's why our client base includes more than 90 of the Fortune 100 and over 80% of the Fortune 500. We know that when we add great products to the best benefits platform in the industry, we see rapid growth. I will now turn this over to John to discuss why this transaction is just as compelling for shareholders as it is for customers.

Thank you, Ramy, and good morning, everyone. Turning to Slide 9. In addition to the strong strategic fit of this acquisition, vision care is a capital-light business with predictable and stable underwriting and generate strong free cash flow. We expect our leading distribution platform will be able to produce significant revenue synergies over time, which can contribute to above-market growth from MetLife in both vision care and Group Benefits overall. Importantly, we expect this transaction to generate high-teens internal rate of return with an attractive payback period of less than 8 years. Also, we ended Q2 and with liquidity of $6.6 billion, which will provide us with more than enough capacity to comfortably execute this transaction. As Michel noted, post deal and the completion of our current buyback authorization, we still expect to have liquidity in excess of our target level, which will provide us with continued financial flexibility and optionality. Let me turn now to the financial metrics. Despite the high intangible amortization, we expect the transaction to be immediately accretive on an adjusted earnings per share basis in 2021. Given the cash flow characteristics of this capital-light business, free cash flow accretion will be even greater. We expect accretion to grow over time based on the combined impact of revenue and business growth as well as reduced intangible amortization. From a multiple standpoint, we've included an EBITDA multiple for reference. This is a common valuation metric for health insurance companies. The Versant deal compares favorably on that basis. The 2021 price earnings -- earnings multiple of 18.6x absorbs annual intangible amortization from purchase accounting of roughly $7 million. From our perspective, the most relevant metric is the 2021 free cash flow multiple of 12.9x. From day 1, this business generates free cash flow, and given the low capital-intensive nature and the strong free cash flow ratio, which is consistent with our focus over the last couple of years. It's not every day that you have an opportunity to invest in and grow one of the highest multiple businesses. It's even rare to be able to do so with such a compelling set of financial attributes. And let me assure you, when we evaluated this transaction, we took into full account the current and uncertain recessionary environment. For these reasons, we are confident that this is an excellent use of capital that will create value for our shareholders well into the future. I would now like to turn the call back to Michel to close.

Thanks, John. If I can summarize the deal on Slide 10 before we jump to Q&A, I would say it literally checks every box of what we're looking for in a transaction. The strategic fit with our existing employee benefits business is obvious. The books to revenue is significant and responsible. This is not growth for growth's sake. The improvements to our financial performance are immediate. The returns are well above our cost of capital, and we are confident that this is a compelling use of capital. On our earnings call, I spoke of the many ways we are preparing MetLife to emerge from the current crisis in even stronger shape, becoming more efficient, gaining new customer insights, strengthening our culture and remaining laser-focused on consistent execution. To these, we can now add scaling up our business to achieve greater growth and profitability. With that, we will be happy to take your questions.

[Operator Instructions] The first question we'll start with is Ryan Krueger from KBW.

Congrats on the deal. I just had a quick question. I know you mentioned you have a 15% overall market share in group benefits. But what's the market share in dental specifically? I was just thinking, kind of give a gauge on kind of how high you think you could take the market share in vision over time.

Ryan, it's Ramy. I don't have that exact number for you, but we are a top 3 player in the dental market.

Got it. And just one quick follow-up. John, how long will it take before the intangible amortization runs off?

It's generally, I'd say, 10 years. It takes some time. So it's a quite a bit of intangible is part of the purchase accounting. So it's a good chunk of it. So -- but over time, as I said, business growth will outpace what we're seeing in terms of the intangible and we expect good growth from this business.

Our next question is from the line of Erik Bass, Autonomous Research.

Maybe building off of that last point on the growth opportunity. Can you just talk a little bit more about what you see as the opportunity for the vision business post-2021? And do you expect to exceed the 5% growth rate from the industry over the near to immediate term?

It's Ramy here. And the answer is yes. We do expect to be able to outgrow the industry growth here. And that's going to come from maybe 2 areas. So first, we think we can grow the pie. The number of vision is a standard benefit that is offered, that's open enrollment. And we will be deploying our enrollment capabilities that have fueled our growth in the past, and we're going to deploy those capabilities to the vision product. So we, therefore, expect to drive higher penetration amongst employees in the workplace. And I would emphasize that this is a proven capability that we've deployed with significant success today. And then second for certain customer segments and, in particular, national accounts, we do expect to take share. As I've outlined, we're combining the best-of-breed product with the strength of our distribution and service capabilities in national accounts, and we therefore, expect to gain share that way. And our record here also kind of speaks for itself.

Our next question then is from Tom Gallagher, Evercore.

Just a question of the $1.3 billion of revenue that you're estimating for 2021, what kind of growth rate are you expecting from the most recent trend that they've -- that Versant has produced, say, if you could give us maybe annualized from 2Q '20? And I guess, relatedly, have there been any adverse impacts that you've seen from COVID on their business?

Yes, Tom, I would just go back to our point that -- but this is a business that grows -- a market that grows around 5%. We expect to grow in excess of that. And so I think I would just land with that and you can kind of model that from here forward. But I would say that the past financial information would support what we're saying will happen over time. In terms of the impact of COVID on this business, I don't know, Ramy, you want to touch on that?

Sure. So I mean, a couple of points on that one. First, as John mentioned, when we evaluated the transaction, we fully took into account the current environment. That includes the macro environment, and that includes also the current specific unemployment trends and bankruptcies, especially down market. All of the COVID impacts, if you will, have been fully factored into pricing of the deal.

And Ramy, has there been any like meaningful adverse impacts because I think it's a smaller employer-focused company? Has it been meaningful or not too bad?

It's been relatively minor. I mean you'd see some impacts more down market, like you've seen in other parts of Group Benefits. And as I've mentioned, we fully took those into account. And the benefit itself is a must-have benefit. It's a fairly cheap benefit. And the utilization with the usual ups and downs that people have seen in areas like dental has been fairly, fairly predictable. And when -- we'll incorporate all of that into the valuation.

Our next question comes from Drew Kligerman with Credit Suisse.

So you talked a bit about -- you talked about growing the vision product not only through Versant, but on your own platform. Kind of curious, could you talk about Versant's distribution and MetLife's ability to bring its own group and voluntary benefits product onto that distribution platform? And if you're interested in that, what might be the time frame for doing so?

Yes, it's really us bringing their products through our distribution, right? So think about that pie chart, Andrew. They are a monoline player. Only 1/4 of their business today is with those national accounts. We touch virtually every single one of those national accounts, and we touch every single national and regional brokerage network today. So it's really about bringing that best-of-breed product and driving it through our employer and broker relationships. That's kind of where the synergy is coming from.

Got it. So not even going into their smaller regional firms?

Well, that, I would say, is there. And that's a secondary element that will drive growth where -- just because the smaller and regional markets are more fragmented, we will look at their portfolio of smaller and midsized accounts, which we would look to further penetrate. And in that market, we would -- dental would be the most commonly bundled product as well as others. So I would say primary is in the upper -- primary synergy is the upper end of the market, and secondary synergy would be to cross-sell our products into their small to mid-sized customers.

Got it. And that would be primarily dental? And it sounds like something that you wouldn't really be focused on initially. Is that right?

No, I wouldn't say that. I think we're going to drive hard across both types of synergies in dollar terms, the first one is larger. And I would also remind you of the other synergy with respect to penetration that I've talked about. We have perfected enrollment and reenrollment in the workplace. And we're going to take those same capabilities around education, employee engagement that we've talked about extensively in our Investor Day. And we're going to apply those capabilities to that vision product. And clearly, these are capabilities that Versant doesn't have today as a monoline vision provider.