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

And we're live. Again, we're broadcasting here at the Bank of America Annual U.S. Insurance Conference from One Bryant Park. And we're very excited because we have Michel Khalaf; John McCallion; and in the back, there's John Hall, broadcasting from the historic MetLife Building right above Grand Central Station. And so from 2 iconic New York buildings, we're really happy to be here. I mean, I think everybody already knows. But Michel, I think you're about 18 months into your job as CEO; and John, you're about 2 years in. So it's -- I think that's the timing, it's pretty correct on that. And obviously, when you came in, you didn't know this COVID was going to happen, and so it's been unusual time. But I really appreciate you making time for us today. I appreciate all the work your employees are doing to try and cope during these unusual times. And thank you for coming to the conference. We're really happy to have you. Just by way of introduction, I guess, again, Michel joined about 18 months ago. He was the CEO of MetLife's Middle East, Africa and South Asia region that they acquired through the acquisition of AIG's ALICO business. In 2011, Michel joined the MetLife Executive Group, where he was named President of the EMEA region. And in 2017, his responsibilities were added for U.S. businesses, Group Benefits, Retirement and Income Solutions and Property and Casualty. And John's been a CFO for about 2 years now, 2.5 years. Prior to that, he had many senior roles at MetLife since joining the company in '06, including the CFO of MetLife's Investment Department; Head of Investor Relations; CFO, EMEA; and he was the Treasurer. So thank you for coming again.

And I guess we can start with strategy. I mean, that's always -- talk about the new Horizon strategy you brought up at the 2019 Investor Day. And can you remind everyone what the guiding principles around Next Horizon is going to be?

Sure. And thanks for having us, Josh. John and I also share the distinction of both being Syracuse University graduates. So I thought I should mention that as well. First of all, let me say we're quite pleased with the progress we've made in executing on our strategy in 2020. I think that was reflected in not only our fourth quarter performance but full year as well. Having said that, we consider 2020 another installment in sort of our journey of delivering -- consistently delivering on our commitments. And the management team here is very much focused on relentless execution. When we designed our Next Horizon strategy, clearly, we did not have a pandemic in mind. Having said that, we did not also sort of project a rosy picture. We wanted sort of a strategy that would be all-weather. And based on, again, our performance in 2020, I think that's proved to be the case. There are 3 pillars to our strategy: Focus, simplify and differentiate. Focus is all about capital, and that's a most precious resource. So making sure that we're deploying it consistently to its highest and best use. If we look at 2020, for example, we deployed in total about $7.6 billion. $3 billion was to support organic growth, and our new business generating mid-teen IRRs with about 7 -- a 7-year payback. And then $1.8 billion went towards M&A, accretive M&A. We deployed $1.2 billion in share repurchases and about around $1.6 billion in common dividends. So again, very consistent with that focus pillar of our strategy. And then simplify is about driving operational efficiency. We made a decision that we're going to move away from serial expense programs here and continue to build an efficiency muscle. We feel that the direct expense ratio is a good proxy, is a good measure, of us being able to achieve that. We had committed to a 12.3% direct expense ratio for 2020. We achieved 12%, so 30 basis points better. And again that -- I think that speaks to the sort of the muscle that we're building here around efficiency. And important to mention that we've achieved this expense ratio while continuing to make important investments in our business, especially around meeting customer expectation, digitizing aspects of our business, which has served us well during the pandemic. And last but not least, differentiate. And that's about sort of the competitive advantages that are, in some instances, unique or distinguish MetLife. And how do we continue to drive those? And Group Benefits is a good example of we have a leading franchise where we've continue to introduce new capabilities, new products, to further our advantage, including an important M&A deal that we concluded in 2020. Another sort of area of differentiation that I think is worth mentioning is in our asset management, in the asset management space, where [ Met ] manages over $500 billion in our general account. Great expertise developed over the years there. And we're leveraging that to grow our third-party asset management business, and we saw good traction in that regard in 2020. So all in all, I think that we -- in a year where we dealt with significant unforeseen challenges, we continue to make really good progress in terms of advancing and making progress on our strategy.

On the earnings outlook call, you made the comment that M&A is a strategic asset. And of course, there was a number of transactions in the last couple of years. Can you talk more about your philosophy behind M&A and then what that statement means?

Sure. And let me begin by saying that we have a well-diversified mix of market-leading businesses. So frankly, we don't see any major gaps when it comes to our -- the products and markets that we are in. Having said that, we do consider M&A to be a strategic capability, and it's something that we use to leverage our strength. Our most recent activity, if you look at the last 2 or 3 years, was in asset management and then more recently, in Group Benefits. And again, I think that speaks to sort of the strategic fit [ element ] in terms of any M&A deal needs to be sort of consistent with our Next Horizon strategy and present an important strategic fit for us as well. Our philosophy, I would say, has been consistent, has not changed. We evaluate a deal on a consistent basis globally, and we look at several sort of element when it comes to any potential M&A deal. I talked about strategic fit, very important. We look at whether a transaction can accelerate revenue growth. Any transaction would have to be accretive over time. It would need to clear a minimum risk-adjusted hurdle rate as well. And then we also compare any potential transaction to other potential uses of capital, such as share repurchases. And last but not least, I would say that we also like to maintain a healthy balance between M&A and returning capital to our shareholders. We also continue to assess our portfolio of businesses, again, from the lens of a strategic fit. And we're, I would say, just as disciplined in terms of what I refer to as the pruning in terms of taking action that we believe makes sense is consistent with our strategy. And recent examples of divestitures that we've had include Hong Kong, the Argentina Annuities business and Russia. Any transaction would have to be in the long-term interest of MetLife, either offering compelling economics or helping us to further reduce our risk profile. So that's a little bit sort of our philosophy when it comes to M&A.

And how did the Versant transaction sort of fit into that framework?

Yes. I think if you think about Versant, it literally ticks every box in terms of this philosophy or this approach that I just outlined. The strategic fit is obvious in the sense that it furthers, it enhances, our Group Benefits business. And we've had a significant focus in recent years on voluntary benefits, where we're seeing really good traction. So fits right into that focus area for us as well. The boost in revenue is significant. And we're talking about responsible growth here. We're not talking about growth for growth's sake. And the improvements in our financial performance are also immediate, and returns are above our cost of capital. This is a high-teens IRR business, about 8-year payback. So it even compares favorably to capital we're deploying to support organic growth here. The revenue synergies, we feel, are real and achievable. Think about adding a market-leading capability to our market-leading franchise in Group Benefits. So we see great potential there and offering a really strong product to our existing customer base. So we look at this as potentially helping us expand the pie in terms of vision care. But also, we think there are opportunities for us also in time to take market share here, again, by virtue of offering a competitive and compelling value proposition. So all in all, we're sort of very pleased with the transaction and also very pleased with the reaction that we've seen from customers and intermediaries. I think that sort of speaks to -- again, the way that this transaction has been received, I think, further sort of tells us that this was the right deal for us. And the fact that we were able, I think, to conclude this transaction in a really tough environment, I think that, again, speaks volumes to our financial strength and flexibility here.

People should not be shy about asking questions. And there are 135 people online right now. And there's a question on Versant that I want to read. It just has to do -- [ more on the ] actual date. We know that Versant closed in 4Q. What was the actual date of the closure? And the individual wants to know: A, were there any earnings numbers for Versant included in the fourth quarter? And how is the integration going?

Yes. So I can answer that. So it closed, like, I'd say, the last week, I forget the exact day. So no to earnings in the fourth quarter. Just given materiality, we didn't post any earnings there. And then it was -- we did post the balance sheet. So the balance sheet was trued up for Versant, but no earnings. And then I think from integration, all things are moving forward as expected. Very pleased with the integration to date, and all speed ahead.

So in the frame of what you just talked about Versant, about why it made sense. Why did it also make sense to sell the P&C operations? Someone could say, you could say, "Oh, look, it's a high IRR business and it expanded our footprint." I mean, some of these arguments, you might be able to make, but of course, you're not getting rid of P&C, just you're going to continue to represent that business on your slate. But it's going to be -- the underwriting is going to be owned by somebody else. Can you talk about the thought kind of why one fits and the other doesn't?

Sure. Absolutely. So first of all, let me just say this is -- that transaction is also very consistent with our Next Horizon strategy. So it will allow us to do several things. One, it will allow us to focus on our core strengths. It will allow us to simplify the company operationally. And it further differentiates our offering in the Group Benefit space. This is a good business with a strong track record, but we feel it's a better strategic fit for Farmers. They specialize in personal lines. They're a top 10 player in that space, 90 years of experience and an excellent track record also in terms of customer service. We don't believe that our P&C business, its value has been fully reflected when we look at how our shares are valued. So from our standpoint, it was sort of the right transaction, the right deal at the right price, I would say. I don't know, John, if you want to add anything?

Yes. No, I would agree. I think it's that opportunity for us to, as Michel said, to kind of just continue to deploy our strategic thinking and our strategy around Next Horizon. It gets us a chance to accelerate what we're the best at with an excellent partner. And I think, as Michel said, we believe Farmers is probably better suited to grow that business at a rate faster than we could, to be quite honest. But then we can leverage what we're best-in-class at in terms of our Group Benefits distribution platform and continue to have a strategic partnership and to have a great product to deliver on that platform. So I think all in all, it was a win-win, we would see it as.

Shifting away from strategy and more to the outlook. I mean, let's talk about business in general. I guess some would be surprised at how strong 2020 results were. Obviously, there is a pandemic, high mortality, low interest rates, recessionary economy. I guess there's no offsets in the MetLife business. Why was the company able to navigate these things without an aggregate negative impact to the P&L?

Yes. I mean, I'll let John jump in, in a second. Let me just say here, Josh, and you referenced it in your opening, just how proud we are of how our people showed up and delivered for our customers and for our shareholders during this most unprecedented period. I think I heard it said that at times like -- in times like these, there's no place for companies to hide. You're either purpose-driven or you're not. And that shows up in how you deliver for your customers, for your communities. And our people have really gone above and beyond in making sure that we continue to deliver. And I believe that was a major factor in us having the year that we had in 2020. John?

Yes. I would just add, and I think Michel alluded to it earlier, just we have a great set of market-leading businesses, and a diverse set. And we have a diverse set of businesses, products, risks, geographies. And I think that resiliency really showed through in 2020. But it has to do with execution, and I think we prepared well heading into the crisis. I've said before that we were, from a financial and condition perspective and capitalization perspective and really kind of operational perspective, we were better prepared heading into this crisis than the last one. And we were -- and I think we did a very good job heading into the last one. But we took actions early, I think philosophically, with the belief that we need to manage uncertainty as opposed to letting it manage us. So being proactive there on the investment portfolio and a lot of the derisking happened prior to the crisis, being prepared for kind of different scenarios to emerge and then being responsive to all of our stakeholders throughout the year, I think, really put us in a position to leverage our strengths. And I think Michel pointed out earlier around Versant and the ability to act on that. I'd say that was leveraging some of our strengths, which is scale and financial strength. And so I think all in all, 2020 was a very unprecedented year, but I think a year that really showed the resiliency and the power of our business mix.

I mean, some of that strength, especially late in the year, was probably related to variable investment income being better than expected. And investors can't really rely upon that consistently quarter-to-quarter, it's volatile. But you upped your guidance for the new year to $1.2 billion to $1.4 billion of variable investment income. Is that going to be taking on more risk? Is the type of investments differing? Where does the confidence you have and -- I guess, confidence and comfort in taking that number up from the investment perspective?

Yes. So as you said, private equity was a very strong performer, particularly in the second half of the year. Don't -- let's not forget the fact that second quarter was a very big negative, one we haven't seen for quite some time. And I might just touch on a little bit of the returns that we saw and how, I will say, the fourth quarter felt a little different and emerged differently than we typically see. If you think about our private equity portfolio and variable investment income more broadly, but it tends to move at a kind of a less -- it reacts to a lesser degree to what you see in the overall market. Remember, it's recorded on a 1 quarter lag. So in any time, and we saw a big drop in the market in the first quarter. You saw, obviously, negative returns in the second, but to a lesser degree than what the S&P would have told you if you just took that and applied it to our portfolio. And similarly, you just saw that relationship carry until the fourth quarter. And we saw -- and again, so it's on a 1 quarter lag. You saw roughly high single-digit, roughly 8% return in the third quarter, and you saw something similar for private equity recorded for us in the fourth quarter. So that relationship of less volatile returns on a quarter lag broke. It actually was more like 1:1. But we think that migrates back to its normal course. So we ended the year -- actually, our full year return was just under 12%. We simply just applied, and that's kind of our best estimate that we typically apply for our outlook. We think on average, and it's hard to predict this asset class. But on average, it's a 12% type of returning asset. We effectively applied 12% to the new average balance that we're going to see for 2021. And while -- like you said, Josh, people can't necessarily rely on it because [ it's ] volatile. But I would just go back to -- I would put this back into the camp of diversification. We have built a strategic asset in our investment capabilities and the ability to have that as an asset class that we think we're best-in-class at kind of managing and investing in. We have a number of other asset classes. And all of those things kind of have built resilience into our spreads, into -- and into our investment spread earnings in the outlook. So I would just make it part of the overall capabilities that we can deploy in different markets.

Along -- another investment question, this one coming from the people who are online. How are the current low interest rate environment and the spread environment as well as ESG considerations affecting your investment policy?

So maybe I'll touch on the first couple of questions. And I don't know, Michel, if you want to just address the ESG. So first, as we've -- as you've seen throughout the year, there's been a resiliency in our spreads. So again, what we make relative to what we credit. And certainly, low interest rates has put pressure on that, and tighter spreads as well. But the fact that we've been -- we have a number of different investment capabilities that can work across the curve. The steepening of the curve has helped a lot, and so lower LIBOR has helped us be resilient in times like this, to be proactive and to manage different circumstances and environments. Remember, in the early part of 2020, we deployed quite a bit of money in the March time frame. We locked in some very good spreads then. So I think being nimble and agile in these environments is going to be really important because I think what we know is that volatility will remain. But nonetheless, I think what we've tried to articulate in the outlook is that despite all of this volatility, lower rates and kind of unprecedented level of lower rates, we're still able to keep our spread guidance equal to 2020 for '21. And that's a result and a testament to the various capabilities that we bring to bear. So I don't know if you want to touch on ESG.