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

Okay. All right. We'll go ahead and get started. First, I'd like to just welcome, Michel Khalaf, CEO and President of MetLife; and John McCallion, CFO of MetLife. Thanks very much for being with us today.

The first question I wanted to start with is more of a broad update on the strategy. It's been a little while since you updated on the Next Horizon strategy. So just interested to hear it, some of the successes that you've had in that strategy. And what, if anything, changes as we think about a more uncertain economic environment?

Sure. Well, first of all, it's great to be here. Thanks for having us. And I guess it was a year ago when we were here, and things were sort of starting to get into some lens of normalcy. So it's good to be back a year on and see how far we've gone. I think it was also a year ago that we talked about Next Horizon being an all-weather strategy. And certainly, with the backdrop of all the uncertainty that we faced this year, I think that our strategy has proven to be quite all-weather. So we're pleased with that. We hold ourselves accountable, and we measure progress based on the commitments we made back in 2019 as part of the strategy rollout. So if we look at those, we committed to an adjusted ROE of 12% to 14%, and we're achieving that. We committed to $20 billion over 5 years in distributable cash, and I would say we're ahead of schedule on that front. And we are also well within our 65 to 75 to year average free cash flow. And third, we committed to freeing up additional capacity of $1 billion over the 5-year period to invest in growth. And on that front, again, I think we are well on track, if not to achieve, if not to overachieve on that. So all in all, pleased with the progress. As we think about the environment in which we are operating and we conduct an annual exercise with our Board of Directors, where we pressure test every aspect of the strategy, there are a few things that I think are going to be important, especially with the expectation that the uncertainty that we're seeing will persist. I would start with the foundation, which is a strong capital position, not only allowing us to meet our commitments and obligations, but also providing us with the financial flexibility to see certain opportunities that may present themselves also in this environment. We pointed at the end of the third quarter to our cash and liquidity at the holding companies being at $5.2 billion, well above our $3 billion to $4 billion target range. Over time, we still -- we're still comfortable with the $3 billion to $4 billion, and we'll get back to that. But I think being well above it, given the environment, again, gives us that added financial flexibility. Another area that I think has been important and will continue to be very important as sort of the relentless focus on execution. And I think we've built a track record there and in an uncertain environment, it comes down to how well can we control the things that we can control and execution is critical in this -- from that perspective. I think we've also worked hard on building an efficiency mindset that is now, I believe, part of the DNA of the organization. That's also important in a challenging environment. I think the fact that we're able this year in the face of significant inflationary pressures to come in at and even under the 12.3% direct expense ratio, I think, speaks to this efficiency mindset that we've built in the organization. And we're also pleased with the diversification that we have in terms of our business mix. This provides us with a lot of natural offsets. And we believe allows us to perform across a variety of economic environments. And last but not least, I would also point to capital deployment, where I think we have a clear strategy and have built a track record in terms of how we deploy capital to its best and highest use. I think we are one of the few companies, maybe the only one that publishes its VNB figures. And we see there that -- we are supporting new business that is generating mid-teen IRRs, 6- to 7-year paybacks, so very healthy returns and paybacks. And we're also clear in terms of when we don't see opportunities to deploy capital at hurdle clearing, risk-adjusted returns, we will return capital to shareholders. And again, I think we have a track record there. So for -- I think this is what you get with Next Horizon, you get the sum of what I just described, and that's why we continue to feel good about how we're positioned, and that Next Horizon is the right strategy for us in the current environment.

So before we talk more about the businesses themselves, I wanted to ask a question on capital. It's been a hot topic in the industry recently. And I was hoping you could just describe how higher interest rates impact your statutory capital levels, whether it's in the U.S. or in Japan?

Sure. And I just want to echo Michel's comments. Alex, thanks for having us here, and great to see everyone. Look, I think the first thing to start with is higher interest rates are kind of economically a positive for the firm. And I think that certainly goes with no exception to the U.S. and the Japan entities. But the statutory frameworks, they do create other challenges that we have to work through, and I think actively work through. I think in the U.S., we're constantly reevaluating our positions, making sure that we can work through a variety of scenarios, not just uprates, but down rates. And I think the team has done a very good job of that over the course of this year and kind of in a new environment, if you will. So I think active management here in the U.S. is critical even if those metrics are slightly different than what you would think economically, nonetheless, you can't ignore them. In Japan, I would say the situation is a little more extreme in terms of like the divergence from what's economic and what's kind of the statutory framework partly because there's this asymmetrical accounting that occurs and the statutory framework you see higher rates and particularly in our business because in the higher rates being U.S. rates, we have a heavy weighting towards U.S. dollar products. So our entity is in Japan has a higher exposure to U.S. dollar rates shifting. And so that rising rate has depressed assets and yet the liabilities are kind of more on an accrual method. So you just see that temporary headwind on the SMR. But as I said before, economically, the value of that entity is improving. Nonetheless, you can't ignore it, right? And so we've been doing a number of things to evaluate. We have internal tools. I mentioned this on the earnings call, I mentioned that our second quarter SMR was 617%. And if you follow closely and have done some homework, you can see that it's actually below 500% now. Since between second quarter and third quarter, and that was just recently published. So that rise in rates did depress the SMR. But we mentioned we have a number of internal tools we can use. And actually, we just executed on an internal reinsurance transaction that will materially boost that ratio. So a couple of things. One, interest rates since third quarter, probably down 30 bps, probably gives us another 50 to 60 points off the -- I think the third quarter number was 457%. And then on -- and then the reinsurance transaction probably gives us another 200-plus points. So it kind of gets us back to a range from a reporting perspective that kind of removes that challenge -- and quite honestly, we did never really had concern with capital generation. It was more just a reporting metric created a bit of a temporary headwind. So all in all, we would report a much stronger SMR come the fourth quarter.

Just a quick follow-up on that. I know there's also this concept of economic solvency ratio in Japan. I mean, is the same dynamic there? Or does that actually capture a benefit from interest rate?

Yes, it's a good -- great point. In a few years' time, the economic solvency regime will come into play, and that will really much more eliminate this divergence in kind of economic and statutory framework. And in a rising rate environment, that would look better, actually. So this is really when I say temporary, I'd say, for the next few years until that framework comes into play.

Got it. So let's move over to Group Benefits. You've had pretty strong top line growth. Could you talk about the degree to which the macro tailwinds around employment have been helping that versus some of the idiosyncratic execution that you've done there? And to what degree do you feel like you can keep the growth going, even if employment levels are working a little bit against in '23?

Yes. So I would say that clearly, the strong jobs market is a tailwind. But I would sort of attribute the growth that we've seen over the last few years. I mean we've grown this business from $18 billion in 2019 to $23 billion this year. This includes Versant. I would attribute it primarily to our strategy and our execution. So from a strategic perspective, we've continued to invest in adding product and capability to what was already sort of the widest product portfolio in the industry. And we've continued also to invest in making sure that we are seamlessly connected to employers ecosystem when it comes to benefits. So those investments as well as investing in digitizing our business. So all of those investments are bearing fruit. And the other aspect also where I think is important is on the execution front, where I think the discipline that we have consistently had when it comes to our underwriting, our focus on continuously improving our service proposition. Those are resulting in a very strong persistency in this business and also enabling us to get the rate increases that we deem appropriate and necessary. So all in all, really pleased with the growth that we've seen in that business. And we think that, that growth trajectory is sustainable at mid-single digits. One of the reasons why we are confident in that is that this year and a year that comes on the back of what was a record jumbo sales year in 2021 and the year where we added Versant to the mix, we're able to still grow at mid-single digits at 5%. And so we feel good about sort of our growth prospects in that business.

Got it. Maybe sticking on Group Benefits for a minute. What are you seeing in terms of competition, pricing and as you look at the end of your process that goes on?

Yes. I mean it's a competitive market. I think there are some things that are -- that bode well for the industry. Broadly speaking, we mentioned the strong jobs market, the wage inflation, I think the war for talent as well are all sort of tailwinds, generally speaking. I think employers are also sort of more aware of the importance of some of the voluntary benefits, in particular, that are being offered. And I think -- I mean, this is a short-term business. So I think even when you see some irrational behavior that tends to correct itself fairly quickly. I think the other aspect here that has made it more unique to us and the benefits MetLife is the fact that scale matters in this business because this is a business where you have to make significant investments and keeping up with customer expectations and employer expectations. And this is precisely what we've been doing. And that's why we feel good about how we're positioned. So yes, it's a competitive market. From time to time, you might see some rationality in a specific product line, but all in all, I think -- and that's, I think, sort of reflected in our persistency. We're able to get the renewal action that we didn't necessary and also continue to win our fair share.

So on voluntary benefits, I think increased take-up by consumers has really driven pretty nice growth in that product. Are you still seeing that as a trend as we look forward to next year? I mean, are you seeing any evidence that maybe inflationary pressures on the consumer or change in that at all?

No, actually, what we're seeing is we've consistently been achieving double-digit growth in terms of our voluntary, this is a focus area for us. So we're continuing to see that play out. And I think some of it is attributed to on the sort of increased awareness as to the importance of some of those products. But I think there are also some a few areas that lead us to believe that this trajectory is sustainable. One, I think if you look at the under 1,000 market very few employers offer any type of benefits in that market. So there's a lot of white space there that potentially can grow the size of the pie overall, and we're focused on trying to capture that by bringing a lot of our voluntary product suite down market. Second, even at the higher end of the market, penetration rates are in the sort of low teens, I would say. So again, a good opportunity there and growing that. And I -- we've been investing significantly in our enrollment and reenrollment capabilities, and we think that's going to also help us achieve greater penetration. And last but not least, I think adding product is important, and we've added significant product with Versant, with Pet Insurance, with Digital Wealth, with identity theft. So we think that's, again, another factor, and we're seeing a lot of growth actually comes from existing customers on the voluntary front. So all in all, we think that's sort of the growth trajectory that we've been seeing is sustainable.

So if I move over to the spread business, you recently had some success in pension risk transfers. I'd just be interested in any commentary you can provide on how you see that pipeline headed into the end of this year? And if 2023 can sustain the pretty nice growth levels for the industry?

Yes. So this will be a record year for us on the PRT front. We -- I think this year, the sort of pipeline was front-ended. And we pointed to the fact that at the end of the third quarter, we were at $12 billion in PFOs, which is a record year for us. This includes the IBM deal. And what we've seen over the last couple of years is that this market has grown. We think that, that's likely to continue. We see a healthy pipeline into the future. Funding levels are healthy, are strong, above 100%. And for most plans or a lot of plans, I would say, which sort of would point to a continued strong pipeline. We -- just as a reminder, we focus on the jumbo end of the market, the $1 billion plus and we only bid on retiree only cases. And focusing on that sort of end of the market, I think, where you have fewer competitors where the strength of our balance sheet, our investment underwriting, admin capabilities can be differentiated for MetLife, we feel good about sort of our ability to win there. And we treat every PRT deal in exactly the same manner as an M&A transaction. It's the same discipline that we apply there. We expect every deal to achieve our return objectives of 12% to 14%. So that's the sort of approach and philosophy when it comes to PRT. But we think the sort of -- we see a healthy pipeline going forward in '23 and beyond.

Got it. So outside of PRT in the spread business. I think, over time, you've talked about LIBOR and how that kind of funnels into the crediting rate and so forth. And at times, it's been a headwind, the idea of LIBOR going up. I think recently, you actually talked about some caps being in place, where once it gets over 2%, it actually begins to be a tailwind. So I was hoping maybe you could unpack that a little bit for us and help us think through the current state of your LIBOR sensitivity.

Yes. And we try to give sensitivities every year, and they typically change the next day. So we do our best, though, right? And a lot has to do with your shape of curve and where things have gone. And certainly, I think interest rates have moved in a direction that were different than where we forecasted. Having said that, we typically use environments, think back in maybe the 2020 time frame when low LIBOR was a benefit, we typically use those opportunities to protect against a different scenario like a sharp rise in LIBOR that would otherwise be a headwind. And so we put on a number of interest rate caps during kind of several years back as a result of the way the curve is shaped and how kind of the Fed has acted, you've seen a sharp rise in LIBOR, and like you said, above 2%, you start to shift from a headwind to a tailwind. So we are seeing some very strong spreads as a result of that in our RIS segment, particularly. A good chunk of that being from the short end of the curve being so high. We'll have to see. I think -- so it's been pretty resilient, as I mentioned on the last few calls. We think that will maintain its kind of trajectory. And then we'll have to see where LIBOR goes in '23, but '23 would be another kind of, I'd say, strong year if the curve would stay where it is right now.

When I think about yields more broadly from MetLife, could you update us on where the portfolio yield is relative to the money yields and runoff yields and what we can expect there from just for the broad organization NII yield?

Yes. And we've -- certainly, we have, and I think the industry overall has been kind of battling a headwind for over a decade. And then in the early part of this year, we started to see that inflection point or things shift, right? We saw kind of parity in the early part of the year. And then we started to see our new money yields exceed our roll-off rates. I think we're a little above 20 point -- 20 basis points in the second quarter. We're close to 80 basis points positive spread in the third quarter. And that can fluctuate from quarter-to-quarter. It depends on what is rolling off and what type of assets. We have a pretty diverse global portfolio. But I think it's directionally constructive to kind of incremental value to the firm. Rising rates, as we've talked about is a net positive, it's probably a modest net positive to our firm because we have a variety of different tools. Some tools and capabilities performed very well in low rate environments, and some perform better in a higher rate environment. So there's a balance there. But net-net for the firm, that is kind of a positive aspect of where we are today.

If we move over to Asia, can you talk about the growth outlook there? And how COVID-19 is still impacting, if at all, the sales environment?

Yes. And I would say we're really pleased with the momentum that we're seeing in Asia. We are at the high end of -- from a sales perspective of the range that we had provided in our outlook calls. We're close to 10% year-on-year. And I attribute this to a few factors. One, very strong execution on the ground by our team. And I would say the introduction of some digital tools and capabilities have been very helpful to us. Two, I think we are well diversified in Asia from a geography, so Japan, ex Japan and from a product perspective, and I think that's -- and channel perspective. And that's been helpful to us as well. And new products have played a role in helping us also drive sales, especially this year in Japan. And last but not least, the higher dollar interest rates are helping our FX product sales in Japan, in particular. So for all these reasons, we're seeing really good momentum. Clearly, COVID has played out differently in different parts of Asia. But again, I mean, I would point to this diversification that we've had that's allowed us really to perform well regardless of this sort of -- of how COVID has played out in the region.

Just shifting gears over to LatAm, the growth rate has been very strong there. So I was hoping that you could talk about what are some of the things that have been driving that, particularly in Mexico? How sustainable do you see those kind of growth rates in 2023?

Sure. So I think during the pandemic, we had pointed to the fact that business fundamentals in that time remained very, very strong. And we said that we did not believe that the pandemic years would be lost years. And I think that's really been the case here. We expect our PFOs to be $1 billion above the level they were at in 2019. And I think that speaks to the progress we've continued to make despite the pandemic. A few things, obviously, Mexico is a big driver of that. And we're on track this year to have a record sales year in Mexico. The worksite government business is our flagship business there. And we're not only defending that business, I think we're enhancing our value and service proposition there, which is helping us achieve really good persistency. We're also sort of transferring the know-how and our capabilities into the private work site segment, where we see good growth potential. What we're also seeing in Mexico, will be a couple of things. One, much heightened awareness as to the importance of some of the products and services that we offer -- the industry offers, really. And two, a flight to quality. I think companies that were there for the customers at the time when people really needed us to be there. I mean we paid in Lat Am, close to $1 billion in COVID claims, mostly in Mexico. I think customers are rewarding companies that were there, that continue to serve them well and to pay claims. And we're seeing the benefit of that and our employee benefits business. We're also the strength of our brand is helping us grow our bancassurance and direct-to-consumer business as well. So we're really well diversified in Mexico from a channel perspective. Again, our flagship business continues to be very strong. And that's why we feel good about sort of our growth trajectory going into next year. The fundamentals are really solid there.

Next one I have views on MetLife Holdings. Have we gotten to a point where cash conversion is improving and it's actually generating more cash than earnings as you're getting capital released from that business. So I'd be interested in any commentary on that? And then also, if you have any comments on just the closed block risk transfer market in the latest on your views there.

Yes. On the first question, we do have certain products that are still kind of growing in terms of liabilities, so they have not reached a peak. I think like long-term care, even some of our USG and maybe some of our BAs, not all of them. So I'd say there's a balance. We're still close to 100%, I'd say, of earnings in terms of free cash flow from that business. But it's not quite exceeding yet because of that. On the risk transfer front, I think as we've been very, very transparent around our views here. One is, it's a well-diversified number of natural offsets, well managed. We have expertise here and has been performing very well. So the team has done a tremendous job. At the same time, we've always taken a third-party view, have had communications with external parties in light of the I'd say that growing risk transfer market that has evolved over time. And that's also made us better. And it's also given us some insight as to, is there an opportunity for us to potentially accelerate the -- appropriately accelerate, I'll say, the release of capital reserves and some products. There's no burning platform for us, but we recognize that to the extent that we could find something that's value creative, gives us a chance to reallocate capital maybe to some other growing business. But overall, we're very pleased with the performance. The team has done a tremendous job, and I think we're going to maintain our balanced approach to this.

The next one I had for you is on the ROE of the overall business. And if I go back far enough, I think there was a time that MetLife even talked about ROE targets in the context of where interest rates were. And so I wanted to see if there is still some level of connection there? I mean, as interest rates go higher, potentially or even just stay elevated where they are, does that change your thinking on cost of capital and where you'd want to hit in terms of ROE?

Yes. I mean I think we've changed the risk profile of the company since probably when we made those comments, which is good thing, I believe. But I mean, look, interest rates are a factor. And I think, as John mentioned earlier, sort of helpful on the sort of -- to a certain extent. But I think I would point to a few other things that are also important here as we think about ROE expansion. One, I think, clearly, sort of the discipline that we've had on the expense front and the efficiency mindset that I described, extremely important in terms of helping us over time when it comes to our ROE targets. I think the other aspect here that is important is our capital deployment. And again, I mean, we've been deploying capital in support of new business at high teen high IRRs, which, again, MetLife is a big ship, so to speak, but it takes time to move us. But over time, this is also quite helpful. So I think those are some of the things that give us confidence, not only in terms of the range, but also, I think, over time and our ability to move that in a positive direction. I don't know, John, if you...

Yes. And I'd just add that I think as Michel said, interest rates do have an upward bias towards that, quite certainly higher end of the range, we'll say. And I think there's a number of different factors that could go into kind of growth in ROE. As Michel mentioned, we've been shifting our business mix for quite some time. So we're not -- to be less exposed to interest rates, too. So it is a modest positive. We still have benefits of that. But we also have a number of businesses that are less. And I'll just give you one other metric. Just think -- just our variable annuity book, which is in MetLife Holdings, well, a component and it's not an overwhelming component, it's down probably 40% in terms of policy count since 2016. So there's a natural runoff of those capital-intensive businesses. And so I think over time, as we continue to shift, there is kind of a pull towards higher ROEs for a number of reasons, not just interest rates, but it's a gradual shift.

Understood. Could you remind us on the capital management priorities, how you all view that? Is there anything interesting you see in the M&A pipeline?

I mean we think of M&A as a strategic capability. We tend to be opportunistic, but we also -- we're very disciplined in terms of looking at strategic fit at accretive deals that potentially can enhance or accelerate revenue growth. We compare uses of capital in terms of M&A versus other potential uses of capital. So -- I mean that discipline is there and will not -- and it's a globally sort of standard approach to how we look at deals. We have pointed in the past to sort of certain areas where we might consider adding to what we have, potentially a capability that can help us accelerate growth. We talked about group. I mean, we -- and we did the Versant deal, whereas we don't see any major gaps in terms of our product offering. It's a business that we like. So given the right opportunity, we would certainly consider that. And we have talked also about asset management. And whereas we're really pleased with the growth trajectory of our asset management business, [ Met ] celebrated its 10th anniversary this year. We're at $160 billion, $170 billion in terms of third-party assets under management. And we see a good sort of trajectory to continue to grow that business organically. But if we can accelerate that inorganically given the right opportunity, it's something we would consider. We recently announced the acquisition of affirmative Investment Management, which is ESG, really focused asset manager. We think this adds an important capability, a growth opportunity for our asset management business. So those are some of the things. We increased our shareholding and our India JV to 47% this year as well, it's a market that we like. We think long-term prospects are really good for us in India. But again, I think from a capital deployment's philosophy perspective, we've consistently said. And I think we've shown and proven that in the absence of accretive hurdle or risk-adjusted hurdle clearing M&A opportunities, we will return capital to shareholders. And I think that philosophy that approach are unchanged.

Got it. Maybe if I could sneak one last one in. On the investment portfolio, broadly for MetLife, could you talk about the durability of that portfolio, the durability of your capital ratios? Do you expect if we do -- sort of go down the path of a stress scenario here?

Yes. I think for us, and I suspect for the industry as well, I think we've learned a lot over the years. And I think the one, I'd say, benefit over the last decade plus has been, I think, the stress testing people do, including us, is pretty robust. And so I think we feel comfortable about our position. We've looked at a number of different -- we always look at different scenarios. I think it's -- we've moved away from predictions or projections to scenarios and in how we manage the firm, and I think that's a key capability. I think from the investment portfolio broadly, just generally speaking, since pre-pandemic, we have been moving out of certain asset classes. We probably repositioned about $5 billion and during the pandemic, another 3-ish. So -- and we've never really gone down in quality or up in risk. We've been staying up in quality during that time. And I think that kind of puts us in a position where we feel comfortable about where we are today. And obviously, we have to see where things go from here. But overall, we feel good about our capital position.

Got it. Okay. Well, we're at time. So I'll stop it there. Thank you very much for joining us.

Thank you.

Thank you. Thanks. Thanks, Alex.