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

[Audio Gap] of Financial Services Conference. This is sort of the insurance sleeve if you're joining this webcast. Starting today with really one of the highlights of the whole conference. We have here MetLife presenting. And we have President and CEO, Michel Khalaf, and CFO and Executive Vice President, John McCallion here. Let me just get through a few introductory remarks. I mean, people probably know who you are, but it's always good. I mean Michel became the President and CFO of the company in the middle of 2019. Obviously, a very challenging period of time to begin. Joined from ALICO back in 2010, where he became the head of MetLife's Mid East, Asia, international operations and whatnot. And he joined the executive leadership in 2011. Since that time, he took on the responsibility for Group Benefits, Retirement, Property & Casualty. And finally, the CEO job. John McCallion. He's been the CFO since 2018. He had many senior leadership roles in the company, joined in 2006 and in various times, he's Head of the Investment Department CFO, Head of Investor Relations, CFO of EMEA and the Treasurer, a lot of things. And obviously, great leadership and the stock performance speaks for itself. So obviously, it sounds very well. Congratulations on the strong performance in 2022.

And let's talk a little bit about where we're going from here. The -- I think the sort of by words of the firms, the Next Horizons since it has been out for a couple of years, where are we in the process? We never probably can get over the horizon, but that's always beautifully in the distance. So what are the next steps and where we're going?

Sure. So first of all, thanks for having us, Josh. And it's -- I'm really glad we're able to do this in-person this year. It's really great to be here with you and to meet face-to-face with our investors as well. So the way to think about next horizon is that it rests on a foundation comprised of 3 pillars. The first pillar is the focus pillar. And this is about deploying our capital and our resources to their best and highest use. And our teams have been relentlessly focused on making sure that we deploy capital in support of new business at attractive returns and paybacks. And I think you would have seen our evolution on this front in terms of our value of new business disclosures. Focus is also about how we are opportunistic in redeploying existing capital. And in terms of continuing to evolve our business mix and trying to lower the risk profile of the company as well. And if you think about some of the work we've done on the M&A front, whether it's some of the dispositions, accident and home, some of the markets we've exited and some of the additions to our portfolio, Versant and other businesses as well. I think those also that aspect of our focus pillar has helped us lower the risk profile, improve the returns of the firm and overall improve our enterprise value proposition as well. The second pillar is simplify, and this is cultural for us, this is about us building an efficiency mindset as part of the DNA of the organization, I would say. And again, here, I think we've made really good progress here. This is about relentlessly focusing on lowering costs, reducing complexity, continuing to drive capacity so that we can invest in our business, invest in growth and protect our margins as well. And again, this is something that we're continuing to evolve. And I think we've shown that even in the phase of a challenging inflationary environment, this efficiency mindset has helped us maintain our sort of direct expense ratio below the target that we had set for the firm. And the third pillar is differentiate. And differentiate is about leveraging some of our sort of competitive advantages. Think about our scale, our brand, other advantages that we have for the benefit of our customers and our shareholders. And I think what we've done in Group Benefits is a good example of that where we've managed to leverage our scale to continue to make important investments in our business to meet customer, whether employee or employer expectations. This helps us add to our scale which allows us to make further investments. It's sort of a virtuous cycle if you like. Another aspect of differentiate that is important to us is the diversification that we have in terms of our portfolio. And we have very strong market-leading positions in businesses and markets that generate growth and cash today. We're also well positioned in markets that have more of attractive secular trends. I think about India, Brazil and China. So that business mix, I think, is also quite unique and a differentiator for the firm. Now coming to some of the goalposts that we had set back in 2019 when we launched our Next Horizon strategy. We committed to an adjusted ROE of 12% to 14%. We also committed to generating $20 billion in free cash flow over the 5-year period and freeing up $1 billion in capacity to invest in innovation and growth, again, over that 5-year period. And I would say that in terms of all of these commitments, we are ahead of schedule. As a matter of fact, the goalposts have moved with regard to our ROE target. As we announced on our outlook, we have raised the target range by 100 basis points to 13% to 15%. And I would say that our ability to execute on Next Horizon also relies heavily on our strong capital and liquidity position. This gives us the financial flexibility to continue to invest in growth and to be opportunistic if we see attractive opportunities emerge that can help us further accelerate that growth. So all in all, really pleased with the progress we've made on our Next Horizon strategy and we continue to believe that this is the right strategy for MetLife going forward.

So let's talk about opportunism. You mentioned Versant. And it's not really an M&A transaction, but you obviously have committed a lot of capital to longevity retransactions and the de novo business was started up just last week or 2 weeks ago, Raven Capital, very different sort of stories for all 3, like how do the different blocks sort of fit together in the picture? And we don't have to stick those 3, but it makes for a good sort of conversation on what is the -- how the building box fits?

Sure, sure. And as I referenced, I mean, we think of M&A as an important strategic enabler in how we execute on our -- on the focus pillar of our strategy. And the best way for me to describe our approach to M&A or philosophy, if you like, is that it's strategic, it's opportunistic and it's disciplined. And I think we've demonstrated over time that we're always going to look for opportunities that fit strategically with what we're trying to accomplish and that are accretive over time for our shareholders. We like to be opportunistic as well. And we think of M&A as an important tool in the toolbox, if you like, in terms of given us that sort of ability to be opportunistic. But we are also disciplined in that we view all opportunities. We assess them on consistent basis globally. We always look to clear a minimum adjusted hurdle rate when it comes to returns, we compare any transaction to other potential uses of capital. We like to maintain a healthy balance between investing in growth, including M&A and returning cash to shareholders. And I would say that and I referenced this earlier, dispositions are as important as investments we make in the M&A field because they're part of this sort of strategic view that we take and if you think about what we've done since the ALICO acquisition in 2010, we have reduced the number of markets that we're in by 40% since then. More recently, we've divested Poland and Greece to the NN Group for close to $740 million, that was in 2021. Prior to that, also in 2021, we sold our Auto & Home business to farmers for close to $4 billion. And these sort of -- the cash that we generate from these sales provide us with the added flexibility to redeploy that capital in support of organic growth or in support of M&A deals that I think over time, again, help us reshape the portfolio and by lowering the risk profile and improving the returns. And I think Versant in particular, is a good example on how we execute on our M&A philosophy because Versant -- and again, the cash flows from those deals may not perfectly aligned, but it's all part of that strategy. And Versant is the third largest provider of managed vision care so a market leader in that field. It's highly complementary to our Group Benefits business, made a lot of sense from that perspective strategically. Also a business with high returns, high free cash flow generation and predictable underwriting. So it ticks a lot of the boxes when it comes to the discipline I referenced earlier. And it's certainly a business that is helping us fuel growth in our Group Benefits business. And prior to that, we had added other capabilities to our Group Benefits business as well, Pet Insurance, and we've recently announced that we are bringing Snoopy out of retirement to support create more awareness around the importance of Pet Insurance. We added to our legal plans offering. We've also introduced an identity protection product. So we are continuing to add capability there. And on the asset management front, we recently announced a transaction, but if you think about what we have done over the last few years, back in 2017, we bought Logan Circle for $250 million. Logan Circle had about -- they specialize in public fixed income. They had about $35 billion in AUM. Over that 5-year period, we've managed to double that. So a very successful transaction for us. And more recently, we announced the acquisition of AIM, Affirmative Investment Management specialists. In ESG, again, a capability that we know our clients need. So it accelerates, it gives us that capability faster than if we were to build it ourselves. And AIM has $1 billion in assets. But then more recent Raven Capital, a deal we announced couple of weeks ago. And again, this is a specialist in -- an asset-based credit specialist, again, gives us -- allows us to sort of expand in terms of our product set and some of the strategies that we're pursuing. And then, I mean MIM is fundamentally an institutional public fixed income, real estate and private credit provider and MIM celebrate its 10th anniversary recently. So from a standing start, we've built MIM to over $160 billion in AUM. And we're continuing to see really good momentum organically. Last year, we had net positive net flows. But if we see opportunities, and there's a lot of activity in the market deals of all sizes, if we think that something going to make sense to sort of accelerate our growth trajectory there, we would consider that.

You mentioned the 12 to 14% ROE profile, do you have an ROIC profile requirement that we can think about in that regard?

No, I would say it's our 2 kind of metrics ROE, but we also share our value new business in IRRs, right? And I think those have been key components to continuing to deliver that discipline in the firm. It's a great capital allocator for us. And you saw some very strong improvement in IRRs and payback periods there. But those are kind of our 2 key metrics, I'd say.

And let's talk a little bit about divestiture but not necessarily in terms of businesses, let's talk about in terms of transactions. We're always wondering whether or not others since sort of capital efficiency that can be gleaned from managing closed blocks. New Yorkers regulates a lot of your businesses and it's one of the most disciplined with the regulators in the country. Can you talk about, a, how that can help you, but, b, the very creation of MetLife Holdings was based on New York's discipline in regulating the policies, what optionality do you have there?

We'd like to say we're very disciplined as well. And so we're -- it's a good partnership there. And look, MetLife Holdings is, it's a large closed block, well-diversified, great diversification of risk and profitability. And I think the team has done a great job and how they manage it. I think the optionality that you kind of referenced there is important to us, right? And we've talked a lot about the fact that we are talking to third parties, and that's been a consistent theme for close to 2 years, I'd say. It's a constructive process. These are reinsurance arrangements in our case. So it's not a sale of an entity. Reinsurance is natural when it comes to insurance businesses. But certainly, the markets evolve, and there are other players there. And I think my summary of it is it's been very constructive. I think it's been a healthy addition to the industry to have this -- these players kind of enter and -- but it's not something that we have no burning platform, right? So this optionality is value to us, valuable to us. It's valuable because it gives us maybe a chance to appropriate release of capital and reserves and to accelerate that as opposed to just optimizing it over time. But at the same time, we're not a distressed seller. So we don't have to do anything. And I think it -- what we look at it as it's a positive regardless because those discussions force us to be even better on how we manage the runoff. And at the same time, if we can find an opportunity that makes sense and we're comfortable with counterparty structure, price, risk transfer, things like that, then we would execute.

Now you talked about the 12% to 14% ROE goal. I think you actually -- your near-term goals are a little better than that. And can you talk about some of the mechanics around the near-term outlook?

Yes. I mean from a -- as you referenced, we've increased the ROE range by 100 basis points to 13% to 15%. And I think this is a reflection of sort of our ability to continue to generate strong returns and to continue to grow our business. In terms of mechanics, call it, 50-50 LDTI versus business fundamentals. From a business fundamental perspective, if we go back to 2015, which is when we launched our -- what we called at the time, accelerating value initiative, which is really the laser focus on value of new business on cash and how we price new products. We have deployed $26 billion since in support of new business at an average, mid-teen -- average mid-teen IRRs. And whereas it takes time for new business to start to have an impact. Some of that is starting to sort of impact our overall returns and performance. And that focus continues to this day. And I would say it is as relentless and as intense as it has ever been. And we feel good about our ability to continue to support new business growth at the same, if not better, returns and paybacks. I think a good sort of indication of the progress we've made there is -- if you think about 2022, a year in which COVID had a significant impact and VII command lower what our outlook called for. We still generated -- we were still within the 12% to 14% range at 12.3% ROE. And if you adjust for COVID and for PE being more at the 12% rather than the 7% that it came in at then we'd be at close to 14% ROE. And I think that speaks to sort of the progress that we've made in terms of the fundamentals of our business and how that's being reflected in the returns we're generating.

I can't predict where the private equity returns are going to go, but we can have some view on where the more traditional investment portfolios added and depending on what maturity you're looking at, But treasury is around 4% right now. On the other hand, COVID is a permanent thing. It's not going to be as bad as it was in '01 -- in 2021 or even 2022, but there's going to be more deaths from COVID, it's like a flu in perpetuity. Between higher interest rates and permanent COVID, what's the benefit and weight on the outlook in the portfolio.

We referenced this when we released our outlook discussion last -- on the earnings call. And First on COVID, we view it more as endemic and moving in that direction. It's not going away, but it's -- I'd say it's part of the kind of the trend. Look, we think long-term mortality trends kind of revert back to pre-COVID and this COVID becomes part of it. So that's kind of our assumption. But I'm not so sure that -- what's important is how do we think about things in the short term and what we've done to manage where we can take action, for example, in pricing and things like that. And I think what you've seen, and if you look over the last few quarters, as you've seen this reversion to the mean in terms of underwriting ratios, whether it's in group business, Mexico is another good example in Latin America. So our view is that it's kind of reverted back to, I'll say, normal levels kind of move back to kind of normal volatility or fluctuations if you think about just like flu coming in, in a quarter, I think now COVID need to just be considered part of that. So I think the good news is that I think profitability targets are kind of back to that. Never know. Things could change. But for now, that's kind of our view. On interest rates, as we've talked about for our firm collectively, higher U.S. rates are -- there's positive momentum to that, right? It's a modest positive. In the near term, I put the modest word around it. And over time, there's inertia. So it should build over time. But in the near term, and we've given sensitivities around 50 basis points move in the curve or 10 bps move on the short end and I'd say it's very manageable, right? It's not too big of an increase and certainly the downside, we have other protections as well. So I think it's a directionally good story. And you can see it in a couple of things that we talk about. So one is our new money yields, right? And we saw it at the highest level, it's been in the last decade at kind of just above 5.5% at 5.66%. The second place you can see it is our spreads in RIS. It's another kind of indicator. And you saw those that kind of, I'd say, the highest level they've been since I can remember. And so look, we're seeing benefits of that. It's not a windfall today, but there is an inertia factor to that over time for our firm.

Let's go into the business for a second, but I do want to let the audience know that if there's an urgent question, you can interrupt me, but I'll keep you asking questions till I see hands, and that's where we're going to operate. So let's talk about Group Benefits. I mean MetLife is second to none. On the one hand, that's an amazing market share position. On the other hand, it's harder to grow faster than the industry when you're such a giant. I mean you talked about Pet, but I mean it's still a small business. What are the prospects for MetLife benefits in the U.S. keeping up with inflation and exceeding it over the long term?

Yes. I mean, first of all, I would say we are really -- we feel really good about the fundamentals as we move back to sort of a more stable mortality environment. And I would say that there are several sort of aspects to our business that position us very well strategically if you think about our scale, our brand, our set of capabilities, I think -- and our product set, which is the widest in the entire industry, those all give us advantages. We've always said and I will repeat here that Group Benefits is a business that requires a significant investment, and scale does matter because scale gives us the ability to make those investments as you think about employer -- employee expectations, the entire benefits ecosystem, ability to integrate there, if you think about enrollment and reenrollment so an impact on voluntary benefits. And what we've seen is, those investments have helped us grow the business, achieve more scale. And as I referenced earlier, it gives us also the ability to continue to make investments that we feel are going to continue to fuel our growth going forward. you mentioned, obviously, we're the strongest in terms of our presence in the 5,000-plus segment of the market we call it national accounts. And we're growing -- we're continuing to grow faster than market in that segment. What's been very helpful to us is our ability to sell a new product to existing customers there. Voluntary has been a focus area for us. We're continuing to see really good momentum there. Our growth CAGR over the last 3 years is 20% on the voluntary front. And again, I referenced earlier the investments that we've made in enrollment and reenrollment which have been very helpful. And we continue to see sort of a path to us building on that going forward. And last but not least, I will mention our regional market, which is the 100 to 5,000 employee space. And there, we're continuing to grow at a very nice pace, I would say, above our 4% to 6% target range. from a PFO perspective. And this is a business where we've been able to add about $1 billion in PFOs since we launched our Next Horizon strategy and we're now at near $5 billion in PFOs just from that sort of segment of the market. So I think we have the right strategies in terms of market focused, customer focused, and we feel sort of good about our ability to continue to grow that business. We guided again to a 4% to 6% PFO growth for the '23 and the near term. And I think there's a few things that give us confidence in our ability to deliver that. One is that I think 2022 gave us a very strong base in terms of the rate actions that we've been able to implement on renewals and very strong persistency there, very good enrollment and re-enrollment season as well. And I think we're off also to a really good start in 2023 in terms of sales. It's still early days. But in national accounts, in particular, you get a good sense of sort of momentum in January. And again, although we haven't seen much in terms of jumbo sales, our sales have been very strong to start the year. So for all these reasons, we feel good about our ability to continue to achieve strong growth in this business.

Pivoting to Group Retirement, particularly institutional side. Obviously, a big flow benefit to you guys have been your great Pension Risk Transfer business. There's not so many competitors. All -- I think in the jumbo market, clearly, the companies you compete with also have very strong capital positions. What are the competitive advantages that MetLife brings to those bidding processes, I guess? And two, where are we in the maturity of that business? I mean you've seen some very lower transactions in recent years, but it's not an infinite pool obviously.

Yes. So -- let me just start by saying that RIS is more than just PRT, but I'm going to talk about PRT. But then maybe you will also give me the chance to say a few words about some of our...

You can say whatever you want.

I got a good deal here. So from a PRT perspective, I mean, we've been in this business for 125 years. So we know this business really, really well, a lot of experience. And as you know, 2022 was a record year for us, over $12 billion in sales, including the landmark IBM deal, which was the largest deal in our history as well. And we've seen the market grow in the last few years. If you look at the sort of aggregate funding levels for sort of S&P 500 companies, those funding levels are very healthy, higher rates help in this regard. And that's typically a good indicator of sort of the market and what's potentially going to come to market. So we continue to see a healthy pipeline for 2023. As you referenced, we focus on the jumbo end of the market, the [indiscernible] deals, if you like. We won't see less competition at that size. And this is where the size of our balance sheet, our rating, our investment capabilities also are differentiators for us. So we feel good at our ability to continue to win our fair share of deals in that segment. And as I mentioned, we think that this will again be a strong deal from sort of overall market perspective for PRTs. I would also mention here that we are extremely disciplined. We treat those deals in exactly the same manner as we do M&A transactions. And those deals have to meet our return objectives of 13% to 15%. I mentioned that RIS is more than just PRT, so just want to sort of mention a couple of our businesses there, stable value, which is a business that tends to do extremely well and highly volatile market environment. We saw that in 2020. We saw it again in 2022. And again, if you think about that business over the last 3 years, we've managed to increase balances by $11 billion. Obviously, we're a market leader, and we continue to be bullish on this business. Another business where we've seen the market continue to grow as in structured settlements. And again, last year was a good year for us there with $1.3 billion in sales. And you mentioned earlier, Josh, the U.K. longevity reinsurance business. And this is a business we entered in 2020. So from a standing start, we had another good year in 2022 with 7 deals. Overall, we've done 21 deals and $20 billion in sales since 2020. So again, this is another business that adds to the diversification that we have in RIS. And I think one of the features of RIS is we have these different businesses that perform differently depending on the external market environment. So it gives us good diversification within RIS.

So let's move out of the United States, I mean, obviously, MetLife is truly global company. Can we talk about growth prospects for our Asian businesses to start, I suppose? And what are some of the -- both headwinds and tailwinds?

Sure. So Asia -- first of all, I would say, really pleased with how Asia has performed in the face of a really challenging environment, if you think about COVID impact especially lockdowns. And again, some of the also impact, especially in Japan on the deemed hospitalization front. So what we said in our outlook is that our expectation is really maintaining our sort of projection from last year is that we think we're going to grow sales by mid- to high single digits, and this is on top of 11% growth in 2022. And AUMs, we think we will grow at about mid-single digits earnings likewise. So I think there are several sort of aspects to our business in Asia that gives us confidence in our ability to continue to grow and deliver these results. Obviously, Japan is an important component in our ability to deliver that. It's about 80% of Asia earnings. Although yen is only 15% of overall Asia earnings, and this speaks to sort of the strength that we have on the FX product front in Japan. And Japan, I think we have a number of competitive advantages, the diversification that we have in terms -- in our product set and in our distribution channels, our ability, which we've enhanced to bring product to market faster. This allows us to pivot when we see changes in the environment while still being able to take advantage of longer-term trends that we see in that market. I think a good example of that, that I would point to in 2022 was where we saw really intense competition in the Banca channel when it comes to FX products, we held the line and we maintain discipline there. And we saw really great traction in the career agency and independent agency channel, which allows us -- which more than offset sort of the impact from the Banca channel. So that diversify, we think, is an advantage. We've invested also heavily in digitizing our sales and service capabilities in Japan and the rest of Asia. So I think for all those reasons, we feel good about sort of the outlook that we provided and the momentum that we see in Asia.

So the strong sales in dollar denominated Japanese products in 2022 make a difficult comp for '23. If people want to buy those products, bought them this past year now that the yen is weak, they're probably less have to buy them or it should still be another strong year?

We'll meet our commitment. We've given our outlook, we'll meet it. I mean I think there's a diversity in product and distribution. I think that's what we can leverage when we think about the outlook. And so we're not afraid about having a tough, tough compare. And I think the team is always up for the challenge and they've shown it.

Pivoting, I guess, to Mexico and Latin America a little bit. Obviously, the Mexico market is covering very nicely. Maybe you want to talk about some of the things you're doing there.

Yes. So for LATAM, we've -- the outlook calls for us to grow PFOs by, I would say, the low teens. And to grow earnings by high single digits. This excludes the positive sort of market impacts about $80 million in 2022. So again, overall, there are also several reasons why we feel good about sustaining the momentum that we've seen in LATAM as COVID continues to recede. I think one, we have leading positions in 2 of the biggest markets in LATAM, Mexico and Chile. And we have an emerging position in Brazil, which is, again, a major LATAM market. If you think about the levels of penetration, insurance penetration in those markets, still trail sort of OECD countries, so potential there. We're also seeing a heightened level of awareness, especially when it comes to protection products and LATAM post-COVID and something that we've referred to as a flight to quality, which includes greater customer interest and digital tools and solutions, which is an area where we've invested significantly in LATAM. So for all these reasons, we feel good. We're trying -- we're continuing to diversify our distribution channels in LATAM, a lot of focus on bancassurance and D2C growing those channels. And you referenced to Mexico. I mean we had a record year in 2022 in Mexico from a top and bottom line perspective. We have a very strong worksite government business in Mexico. And we are growing our private worksite business as well as our employee benefits and other channels in Mexico. And for all these reasons, I think we feel confident in the sort of outlook that we provided.

One more question as we're running out of time, where are we in terms of HoldCo cash we enter the year over your buffer? And as a general rule within that 12% to 14%, up to 13% to 15% ROE guidance. What is the long-term view on cash flow conversion that underlies that?

Yes. I mean I think just to kind of hit those quickly, I think, one, we're at $5.4 billion. So like you said, well above our $3 billion to $4 billion cash buffer. We consider excess capital to be anything above that range. And I think we've been -- we've shown kind of a good track record here on how we return capital, right? And we returned almost $5 billion of capital this past year to shareholders, $3.3 billion of that in share repurchases. I think along with the kind of the theme of a consistent executor, I would consider returning capital to shareholders a component of that.

We are out of time. Thank you, Michel Khalaf and John McCallion and John Hall for all the work you do and [indiscernible] your time with us. Have a wonderful day.

Thank you.

Thank you.