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

All right. So we'll go ahead and get started with the session. Thank you, everyone, for being here, both in person and those who are joining us virtually. Here with us, I've got Michel Khalaf, CEO of MetLife; and John McCallion, CFO of MetLife. Thank you all very much for being here as well. So the format would just be fireside chat. And I'll just jump right into it.

At your 2019 Investor Day, you highlighted some focus areas for growth that included two of your leading franchises, the U.S. Group business and the Mexico business. So I'd just be interested if you could update us on how that's going, maybe comment on the impact of COVID-19 on some of these initiatives and where you see growth headed?

Sure, and thanks for having us, Alex. Great to be here. Great to be in person. Hopefully, it's a sign of things to come. So you referenced our Investor Day back in December 2019, and when we designed our Next Horizon strategy that we unveiled at that meeting, clearly, we didn't have a pandemic in mind. But we wanted a strategy that would hold up well regardless of the environment in which we operate and that would allow us to create long-term shareholder value regardless. And I think the way that we've performed, including during the pandemic is a testament to our belief that Next Horizon is the right strategy for MetLife and to the sort of relentless focus and urgency with which we've been executing on the strategy. Clearly, the pandemic has created a lot of uncertainty and has had an impact from an underwriting perspective, especially on the two businesses you referenced, the Group Benefits and Mexico. But I would also say that -- I mean, this is precisely what MetLife was built for, right? I mean, we've been around for over 150 years to repair the damage -- the financial damage that some of life's most destabilizing moments create. So -- and we've been there for our customers throughout this pandemic, which is something that we're very proud about. I think there are a few areas that the pandemic has brought into focus. And I think those showcase some of the competitive advantages that we have and why we feel confident, not only in terms of our current performance, but going forward. I think the first one is around our diversified set of market-leading businesses. And I would just say that our portfolio today is sort of the result of action that we've taken over a number of years. And I think what this portfolio has showcased, and the diversification that we have within that, are the offsets that existed, especially if you look at 2020 from an underwriting perspective, but even in terms of how different businesses perform under different environments and circumstances. And an example of that is sort of our RIS business, where we saw a surge in stable value sales during the pandemic, given the uncertainties. Whereas, for example, the Institutional Annuities business was sort of impacted because of low interest rates and different types of offsets, even from a -- whether it's underwriting or from a growth perspective. I think the other area that I would also highlight, and I think also the pandemic brought into focus, is the stewardship that we've shown in how we deploy capital. And I think that demonstrates itself through sort of the consistent way in which we support organic growth. And even in a year like 2020, we're able to achieve mid-teen IRRs and 7-year paybacks in how we deployed capital, as well as the fact that the pandemic did not stop us from continuing to redeploy capital. So think about some of the divestitures that we made, our Auto & Home business, Poland and Greece and redeploying some of that in a really attractive segment and attractive business such as Versant Health, as well as our sort of consistent approach in how we return excess capital to shareholders, again, on full display this year. And last, but not least, I think the pandemic also brought into focus the importance of scale. And I think scale demonstrates itself in a number of ways. If you think about the expertise that we've built in our investments area over many years and how that's sort of, again, helping us through our VII performance this year, but also in terms of creating capacity to make important investments in our business. And here, the sort of efficiency mindset that we are embedding throughout the organization is very important because it allows us to make investments in digitizing our business. And if anything, I would say that pandemic was an accelerant for some of those trends that we were seeing pre pandemic. With regards to Group Benefits and Mexico, more specifically, we feel good about our growth initiatives in the Group Benefits space. I think there are four areas that we're focused on where we are seeing traction, and we believe that should persist post pandemic. The first is in leveraging the great relationships that we have, especially in the national accounts space. On average, our customers have been with us for over 20 years. And we feel that by continuing to enter new adjacencies based on feedback that we receive from them, from our customers, such as Versant Health. First, and as a good example of that, Vision Care; Pet Insurance is another example of that. HSA worksite, Whole Life, which is, again, a product that we've introduced recently, as well as enhancements to our legal plans offering are all good examples of such adjacencies. The second area that I would point to is around direct engagement with customers. And that's very important because it's helping us fuel our voluntary benefits strategy, and we're seeing consistent growth there. Enrollment and re-enrollment are very important, and our ability to continue to grow our voluntary business. So that's another area. And I would also add there that we recently introduced Upwise, which is our financial oneness engagement platform. Very early days, but again, very well-received by our customers so far. And then we believe that we can continue to outgrow the market in the under 1,000 employee space. Think about this space where employers -- 3/4 of employers in that space offer no voluntary benefits of any kind. So again, we feel this is a really good opportunity. And last, but not least, continue to make important investments in our business. I mean, we saw significant adoption of some of the digital servicing tools that we had introduced over the years. So continuing to move -- make those investments, again, we believe, is important in terms of continuing to fuel our growth in the Group space going forward. And lastly on Mexico. Obviously, Mexico has been impacted from an underwriting perspective from the pandemic. But we feel good about our sort of the underlying fundamentals of our business there. We continue to protect and enhance our presence in the worksite government space. And we complement that with growth opportunities on the private front through agency and through sponsor relationships as well. And I think one positive indicator there is that our sales are now back to pre-pandemic levels despite sort of some of the lockdowns that we continue to see in Mexico. And so -- and our persistency is very strong. So I think all of this gives us confidence that as the pandemic recedes, we -- Mexico should go back to its sort of growth trajectory for us going forward.

And maybe just drawing in, in the U.S. Group top line growth that you're seeing. I mean, you just outlined a bunch of the drivers of the growth there for us. I guess, how should we think about some of the more macro factors as well, things like the economic recovery, wage inflation and the labor market?

Yes. I think those are largely tailwinds. So on the one hand, I think the pandemic has brought into focus the importance of protection, broadly speaking, and some of the voluntary benefits that we offer. And in particular, wage growth typically is also a tailwind for the industry, and we should -- it's something that we should benefit from that. And lastly, the sort of competitive job environment and the competition for talent are sort of another reason for companies to offer competitive benefits, packages to their employees. So all in all, we think that those are -- those should be tailwinds.

And then maybe focusing on Group Life for a minute. I'd be interested in your views on sort of the impacts of COVID-19. We've seen the skew to younger ages, and it's been impacting Group Life much more so than earlier in the pandemic. What are your views on that? Where do you stand on repricing efforts? And whether you feel like that's necessary at this point?

Yes, sure. Maybe I'll jump in on that one and just echo Michel's comments about great to be here. Great to see you back also. It's nice to be in person with everyone. But yes, just to your point around COVID, it's -- I think, as we've said, it's fluid, right? That's a fluid situation. We did see in the third quarter an uptick in the percentage that were -- of death under the age 65 in the U.S., and that has had kind of a greater impact in severity on our Group Life business. And I think things continue to evolve in this quarter. I think our sense is that if you look at some of the projections out there, we're probably trending to something similar in size in terms of U.S. deaths, although I think the percentage under 65 is starting to tick down. So we'll see. We'll see how that unfolds and more to come. We have a few more weeks left in the quarter. In terms of repricing, we have started to take measured rate increases. We still think the pandemic is not a permanent situation. So we have to be mindful of that. Having said that, I think the data, we're watching it closely. I think we've been successful with the rate increases, while persistency has been very strong over the years, which gets back to the support of the top line. So overall, it's something we're watching every day and thinking about every day. But so far, I think we're very pleased with the rates we've been able to get so far.

Maybe sticking on Group for one more question. You talked about the voluntary growth. That's been a place where you've had outsized growth. Can you talk about what are some of the biggest drivers of that? And how should we think about that impact on the Non-Medical Health benefit ratio? Is that something that we'll continue to see as a tailwind there?

Yes. And I think maybe just dovetailing off of some of the comments Michel said, this is a very exciting space for us. It's -- first of all, we have a great platform to deliver these types of products. The strategic nature of these products with the employer-employee relationship is probably stronger than it's ever been. And this is an area where it's already $1 billion-plus premium business for us that's had, over the years, roughly a 20% CAGR or so. And I'd say there's nothing that kind of tells us that, that shouldn't continue. In our case, the way we define voluntary is, for us, it's just -- it's three products actually. It's Accident & Health, it's our legal plan, service plan that we provide. And now we've added Pet, and it's been very successful. They generally are a higher IRR product. In terms of relative to the Non-Medical Health ratio, it results in a slightly lower benefit ratio, although slightly higher expense ratio, but net-net is a higher IRR. So if the trend continues and the share of voluntary grows in Non-Medical Health, then that would tend to push the ratio down over time. But obviously, it's a large bucket and pool to impact. So -- but anyway, we're very excited about the prospects of our voluntary product opportunity.

So maybe moving to the Asia business, particularly in Japan. I think sales is more of a face-to-face process there. So I'd just be interested to hear how COVID-19 potential lockups and that sort of thing are affecting sales? And how do you see the recovery playing out?

Sure. Yes. And as you mentioned, Alex, the -- it's -- Asia is a retail business, primarily for us, very much a face-to-face business as well. So the pandemic has created a set of challenges. However, I think we have quite a unique franchise in Asia, several competitive advantages when it comes to the diversification that we have from a product and channel perspectives. Our team also took a number of proactive management actions that have helped us mitigate the impact from the pandemic and, as a matter of fact, outperform our competitors in several key markets. So some of the things that I would sort of point to in terms of mitigating actions are, one, the introduction of new products. Japan, as a case in point, we introduced recently our fifth generation flagship A&H product. We called it My Flexi, which has 15 riders very much customized to customer needs, very well-received by the market, actually want some, also, external claim as well. We've also been investing, and we continue to invest in digital sales capabilities end-to-end. And that's been helpful to our sales team across Asia, really, including in Japan. In Japan, we also introduced a new banca platform. Again, it's an engagement platform that offers also end-to-end servicing. So that's been helpful during the pandemic. So all in all, we're pleased in terms of the impact of the mitigating actions that we've taken so far. And this is why we still believe, although this was like in February when -- during our outlook call, we guided to a double-digit sales growth for Asia for this year, not knowing that the pandemic is going to sort of evolve in the way that it has. And we still feel confident in our ability to deliver that guidance.

And next on retirement, I thought maybe I'll ask a two-part question. First, I'd just be interested in your views around growth and pension risk transfer market and some of the other drivers of growth in retirement. Second part of it is just any thoughts on the spread? And certainly, low interest rates has -- continues to be a headwind. And I think there's also been some focus recently on securitized products and prepays and things like that impacting the spread side. Just be interested in -- any thoughts on that as well?

Sure. So I think we'll tag team on this one. I'll take the first part of it. So I think the market is -- we've seen a healthy market, I would say, in terms of the PRT pipeline this year. And I think that's going to persist going into next year. I think funding levels have improved. So that's sort of encouraging more plan sponsors to come to market. We are very disciplined in terms of our approach to how sort of we price for these deals. We follow an approach that's very similar to our M&A approach really. And we've said that this business tends to be lumpy. So for the first 9 months of the year, we did not win any deals. However, in the fourth quarter, we won five deals for $3.6 billion. And those deals were all sort of -- all generate healthy returns, very much in line with our enterprise ROE targets, also, accretive spreads in terms of our RIS in-force business. We only bid on retiree-only cases. That's been our approach for a number of years now and continues to be. So we think the pipeline is going to continue to be healthy going forward, and we feel good about our ability to win our fair share.

Yes. I'll just maybe tag on, and I would probably just reemphasize that the new business spreads have been very healthy. And that's certainly been a -- while there's low interest rate headwinds in general, the new business we put on has been at or above the range that we provided for that total segment. Yes, of late, we certainly have had kind of an accelerated income recognition from some of these prepays and -- or paydowns, I guess, is a better term used for some loans and securitized secure -- set of loans, I should say, where we bought these at a discount previously. And through the kind of the housing boom of late, there's been kind of this refi activity and a higher number of sales in the home front. And that's kind of resulted in an acceleration of paydown. So we have had elevated spreads relative to ex-VII, I should say, relative to what we had assumed at the outset of this year. One of the things we've said in the last couple of calls is that we would expect that to start to tick down. So like last quarter, I think we're at 93 basis points. It was down sequentially about 5 basis points. Still, again, above what we probably would have projected back in February when we did our outlook call. I would say that, that tick down of the spread as a result of less of those paydowns occurring should continue. We'd expect that to kind of happen again in the fourth quarter, and I'd say in the same general vicinity on a sequential basis. I think on '22, we'll probably wait to provide our outlook come February, if that's okay?

Yes. Understood. Next, on excess capital. You guys have a pretty healthy excess capital position at the holding company. Just be interested, any comments on that? And just maybe refresh us on priorities for deployment.

Yes. I mean, I think we've sort of -- our philosophy, our approach, we've been consistent, has been consistent and continues to be, I would say. Our position is that excess capital above and beyond what we need to fund organic growth, and in the absence of strategic, accretive, risk-adjusted hurdle rate clearing M&A, belongs to our shareholders. And I think that's been the approach and will continue to be the approach. You mentioned -- you referenced, we feel that a $3 billion to $4 billion cash buffer -- cash and equivalent buffer at the HoldCo is the right buffer for MetLife. We continue to hold that view. We were at -- we had bought back $1 billion in the third quarter of our shares. We were at $5.1 billion at the end of the third quarter, which is above that range. We had $2.5 billion left on our $3 billion authorization. So -- and I think, historically, we've been deliberate and expeditious in how we return capital, especially post divestitures. So I expect that to continue to be the case here.

So next, moving to MetLife Holdings. There's been a number of sort of risk transfer deals that have taken place in the life insurance industry lately. How do you view that supply capital dynamic? And does that offer opportunities for you at all in MetLife Holdings?

Yes. We've said previously that we certainly take a third-party and external view here. I mean, look, it's a runoff portfolio. It's a portfolio that we continue to optimize. And we've said one of the paths we have is if we can find an opportunity to accelerate the release of capital and reserves in an appropriate way, we would do it. I'd say the market itself and the deals we've seen, our sense is that it remains healthy. I think it's good, quite honestly, for the industry. I think some of these -- the players on the buy side are effectively building a core business. And they're acquiring noncore from other folks. And so it's -- I think it's become a kind of a healthy exercise for the industry. And the clearing prices are -- look better on certain blocks of business than they have been over the years. So I think, overall, we're -- we think it's good at this point in terms of the atmosphere there in that market. And we're continuing to work through it. We're not going to do anything at any cost, right? We're going to be judicious around making sure that this transfers risk, if we were to do a transaction, that is value-creative. But overall, I think, as I said in the last call, I think we're incrementally optimistic around just the environment.

Maybe next on the asset management business that you all have. I'd be interested in just hearing about how you plan to grow that out over time. We've also seen some, I guess, partnerships in the industry where larger asset managers have partnered up with insurance companies. And then I'd also just be interested in hearing if that's something that you will ever consider doing?

Sure. So back at our Investor Day in December '19, we had mentioned that we plan to double our third-party asset management in 5 years. And I think we're very much on track to achieving that. Our focus is on U.S. pensions, on insurance asset management and on international. And we see -- we continue to see growth opportunities in all three areas. I would say, international, in particular, is an area where, currently, between 15% to 20% of assets come from investors outside the U.S. And we think there is a significant opportunity for us to grow that. Our focus continues to be on public fixed income, on real estate, on private assets, and whereas we see, as I mentioned, a good trajectory for us to continue to grow that business organically, just as we did a few years ago with the acquisition of Logan Circle. If an organic opportunity that is attractive, that makes sense was to be available, then it's certainly something that we would consider as well. But we feel really good about our trajectory as far as continuing to grow that business.

So maybe next one on the accounting changes that are coming in 2023, a question I have to ask everybody. As these come closer, I know you're probably not ready to disclose specific numbers and so forth, but I'd just be interested, even if at a high level, if you could talk about what are some of the things that are impacted? I think you guys have shed certain businesses over the years, too, that maybe helped with some of this as well. So just any color you can provide.

Yes, sure. It's -- it certainly is a big change for accounting with regards to insurance. However, I think as I've said in multiple occasions, my initial view was that I was optimistic around this. I thought this was good for the industry as long as the industry works together. And I'd say, since that time, I've probably become more and more optimistic about that. I mean, I think this is a net positive for the industry. I think the industry is working really well together on this. Obviously, it's -- there's a lot to it, and we're going to have to work on the education aspect of that transition. But so far, the more we go through it, I think the more we can start to make sense of some of this. Some of it is hard to get through, and we're working diligently on it. We've made great progress. But you are right, we probably will not give you any quantitative facts today. In terms of just how I tried to describe the impact to others, or for our businesses, really, think about the segments we have. So let's start with our -- one of the segments you spent quite some time on early on was Group. Group is really not impacted at all by this. It's one of our largest, if not largest, business we have at times, and that will be basically a nonevent. Then if you move over to RIS, yes, there'll be more impact in there. That's probably, for the most part, all of those products will have some impact one way or the other. MetLife Holdings as well. But again, MetLife Holdings, we generally provide kind of an estimate on our outlook in terms of earnings. We'll continue to do the same thing. So I don't think the complication of that will be too challenging since we're going to continue with that practice. Asia, it's mixed. And you got to remember, in Japan, we actually have quite a bit of our business that's not subject to the new accounting. Because it's FAS 97 or a.k.a. FAS 97, so only, I think, 25% of the in-force would be impacted. On top of it, one of the changes is about remeasuring the liabilities to market. And you got to remember, we acquired ALICO, and that's where our Japan business came back in 2010, '11. So it's already been marked-to-market back then. And so there's really probably less of an impact as you kind of roll that forward for us. And then if you look at the other 2 segments, I would say, modest. You have Mexico, which is kind of a similar profile to our Group business, probably limited impact. And then it's somewhat mixed across the other countries within EMEA and the rest of Latin America. So overall, I'd say it's balanced, but it's hard. There's a lot of work to do. So -- and we're progressing.

Got it. I think in anticipation of all these accounting changes, I've increasingly found people are focused on cash flow. And so I thought maybe you all could talk about the cash you generated, but also just the total amount of capital you generate. And maybe any comment on the capital that's being redeployed into growth. I know you all also are one of the few companies that actually provides some of the details of that and the returns that you're targeting on that deployment of capital each year. So maybe you can help walk us through some of that.

Yes. And I think that's important, especially coming off the last question, because that doesn't change, right? Our cash flow is -- it remains the same. The economics of our products remain the same. Pricing remains the same. So really, that accounting change is just that. And in terms of cash flow, we've been fairly consistently delivering a 65% to 75% free cash flow ratio. Obviously, this year, with the private equity outperformance, that ratio in the 1 year would kind of be depressed, but our cash flow hasn't really changed. I mean, it's actually -- it's grown commensurate with kind of the growth rate you would typically see. But there's been a pretty sizable mark in some of our private equity portfolio that would kind of depress that ratio for this year only. And as you've said, we do give some disclosure around just redeployment of capital. So that $65 million to $75 million is free, so post us reinvesting in growth, post us reinvesting in the business or some of the investments that Michel referenced earlier around digital and other things like that. And that's free for distribution, whether it's back to shareholders, or if we found something with regards to acquisition or M&A, so redeployment -- other redeployment opportunities. New business redistribution or distribution and the impact on capital, that's ranged around $3 billion. So if you kind of marry those 2 things up, that's -- I think it's a pretty sizable amount of capital we're deploying every year, whether back into the business or back to shareholders.

Got it. Just maybe for the last one, if we could just circle back to M&A. I think you've mentioned it in pieces as you talked about asset management in some of the businesses. But just be interested if you could talk about what some of the areas are that you think are particularly interesting? And maybe even also how the Versant transaction is going in terms of the integration?

Sure. So maybe I'll start with Versant and say integration is going really well. And the market reaction has been really positive as well, so we're pleased about that. And if you think about our top line growth in our Group business this year, 6% of that is coming from Versant, which is very much in line with our expectations. So all good on that front. So I talked about -- so a little bit about sort of our M&A philosophy, which is, again, strategic fit is very important; accretive over time, also very important; exceeding any transaction -- has to exceed its cost of capital. And we also compare any transaction to other potential uses of capital. Typically, we'd like to maintain a healthy balance between returning cash and potential M&A transactions that are accretive. So -- whereas we don't see any major gaps in terms of -- as we look at our portfolio, we continue to look at opportunities that can help us accelerate revenue growth in businesses that we really like. And I think Versant is a good example. Logan Circle is a good example a few years ago. So those are the things that I would point to in terms of things that we would sort of consider doing going forward.

Got it. Okay. Well, it looks like we're just out of time. So we'll wrap it up there. Thank you so much for being with us today.

Thank you.

Thanks.

Thank you, everyone, for being here.

Thanks very much.

Thank you.