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

Hi. Good morning, everyone. I'm Erik Bass, the U.S. Life Insurance Analyst for Autonomous, and our next fireside chat is with MetLife. It's my pleasure to introduce Michel Khalaf, who's been the company's President and CEO since May of 2019. And Michel joined MetLife in 2010 as the CEO of its Middle East, Africa and South Asia region through the company's acquisition of ALICO from AIG. And then in 2011, Michel joined MetLife's executive leadership team when he was named President of the EMEA business. In 2017, he took on added responsibility for the company's U.S. businesses, which are Group Benefits, Retirement and Income Solutions, and at that time, Property and Casualty. So welcome, Michel, and thank you for participating in the Bernstein Strategic Decisions Conference. And also thank you to investors both in the room and on the webcast. [Operator Instructions].

But maybe to start off, so MetLife today is a very different company than it was 10 years ago. So maybe if you could talk about the business transformation that's taken place and the strategic thought process behind the decision to reshape the company, both in your business mix and the focus?

Sure. And thanks for having me, Erik. Really good to be here. So you mentioned I came to MetLife through the ALICO acquisition back in 2010, and I would say that acquisition really made MetLife a global company or transformed MetLife into a global company. But I believe the real transformation took place a few years later. In 2014, we made the decision to derisk our liabilities, and that was a decision really grounded in risk management. And the sort of objective there was to drive down our cost of equity and to drive up our return on equity. So we dialed back on long-dated, capital-intensive, interest-sensitive type products and we focused much more on capital-light, higher-return type products. And at the time, we introduced a capital allocation tool. We called that initiative at that time accelerating value, and the idea is that, that tool was helpful to us and how we allocate capital and how we make sure that our teams think about how that capital is being deployed and how we price and introduce new products. And over the years, that's had, I would say, a significant impact. I mean since 2016, we have deployed $26 billion in support of new business at mid-teen IRRs. So that was important, but I would say that we also had the courage to sort of apply the same data and approach to our legacy business. And that was, I think, the game changer for us. And that led to the separation and the spin-off of our -- of what became Brighthouse Financial, which is our retail business. And if you sort of think back about -- to our history, I mean, that business was very much intertwined with that history because its beginnings were sort of the beginnings of the company. So not really an easy thing to do, but something that was necessary and a very important step in that sort of derisking exercise. More recently -- and I would say that we've continued on the same sort of path post Brighthouse in terms if you think about Next Horizon and some of the additional moves that we've made, including some of the more recent risk transfer deal that we announced. Very recently, we celebrated 155 years and had a global town hall where we reminded our associates of sort of key moments in our history and of course, a lot of pride in that. But I think the overarching message was that the best way to honor our legacy is not to be beholden to it, and I think that's the mindset and that's the approach that persists to this day.

Thank you. And you mentioned the Next Horizon strategy, which you rolled out when you became CEO in 2019. So can you briefly talk about the key elements of that and your vision for the company moving forward?

Yes. So I wanted to start my tenure by sort of reaffirming our purpose as a company because it's important that we clearly articulate our north star, and we actually anchored our strategy in that purpose as well. And we also wanted to continue to evolve the culture at MetLife to one that is based on strong collaboration, alignment and accountability. At the core, I felt that we were at an inflection point at the time. We needed to continue to focus, which is one of our pillars in terms of the discipline around how we deploy capital to its best and highest use. We had work to do to continue to simplify the company to meet customer expectations, to drive efficiency as well. But we had also a big opportunity to differentiate, especially in our key markets, to drive our competitive advantage. So those were sort of the pillars of our -- the 3 pillars of our strategy. And as part of that strategy, we came out also with a clear set of commitments, 5-year commitments. So we committed to generating $20 billion in distributable cash over the 5-year period to freeing up $1 billion in operating capacity to invest in growth in our business. We also committed to an expense -- operating expense -- direct expense ratio at the time, which we have upheld. And we -- our commitment from an ROE perspective was to be in the 12% to 14% range. And of course, we've increased that to 13% to 15%. And I think -- the good news here is that thanks to the relentless execution of our teams, despite having a lot thrown at us, I would say we started off with very historically low interest rates, we had a global pandemic, then we've seen interest rates rise at the fastest pace in history. But despite it all, we are sort of on, if not ahead of track in meeting all of those commitments. And I attribute that to just the way that our teams have been executing on this strategy.

I think another thing that has been part of your strategy, and Met has been at the forefront, I would say, of leading the industry and investors to focus more on cash generation. So why do you think cash flow is the right metric on which to evaluate life insurers? And how much of a culture shift was this for the company over the past few years?

Yes. I mean, I hear, I don't know if I agree or not, but that insurance is a complex business, and to some degree, that's true. And at the core, we make promises and commitments to [ pay ] benefits at a future date or in the event of -- if certain events were to occur or in certain circumstances. So it's -- the real sort of profitability of the business doesn't emerge on day 1. It sort of -- it takes time for it to emerge, and our view is that cash is the great equalizer here because cash is tangible, is real and is the way to assess and measure value as well. This was a cultural shift for us. I mean if you look back at our history post demutualization, I think we were sort of running in a sort of 30% or around there, free cash flow ratio. So this has been a journey, but obviously, the derisking action that I mentioned were very helpful to us here. And it was also a cultural shift for our teams. I think the accelerating value initiative that I referenced helped, and explaining to our teams why this is the right way to sort of measure our value was extremely important. And I think another factor here is that we based our sort of goals and objectives on cash metrics as well, and that's true for me and for my team, but it's true to all of our business leaders as well. So all of those things, I think, helped bring back cash to the floor as we think about our businesses.

And you mentioned sort of historically being less than 50% cash conversion or free cash flow as a percentage of your operating earnings, and now, it's consistently been 65% to 75% of earnings. I guess you touched on it a little bit, but what are some of the things that have driven that ratio up? And why do you think that's the right ratio for the company going forward?

Yes. I mean I think certainly, the sort of deploying capital in support of new business at healthy returns, short paybacks over time starts to sort of make an impact. Some of the derisking that we've done over the years as well is helpful to us on that front as well. So it's the cumulative impact of those factors, I think, that's brought us to this point. And we like to sort of maintain a balance here as we think about sort of what's the appropriate ratio for MetLife. We think that 65% to 75% is the right sort of range for us because we would like to continue to invest in new business, especially that we're able to do it at very healthy returns and payback. So we can always sort of say, "okay, we can increase that ratio" by dialing back on growth and new business, but we don't feel that's sort of appropriate as we think about how we create long-term shareholder value here. So that's a little bit sort of the background why we think that, that ratio is appropriate. And I would say that over the years, as we say -- as we think about also cash flow, I mean we've also made some divestitures that have contributed to the capital that we've returned to shareholders. So I mean, I think since 2020, when we launched Next Horizon, we've returned $17 billion to shareholders in the form of dividends and buybacks, so quite significant.

Perfect. Yes, you mentioned one of the big things, obviously, you're using capital for -- as investing in growth. So maybe we can spend a few minutes going through each of the ongoing businesses. And I think it makes sense to start with your Group Benefits business, which is a market leader. So maybe you could talk about what is your strategy in Group? And what gives you confidence that you can sustain above-average growth when you're already the biggest player in the sector?

Yes. I mean we like to say that we like all of our children equally. But I would say that if I think about the most attractive segment of the life insurance industry, I would say Group Benefits would be that segment. The characteristics of the business in terms of it being capital light, healthy margins and good growth opportunities as well. We are a market leader in that space. Obviously, scale matters in that business. We've talked in the past about the importance of continuously making investments to meet customer needs and expectations. Those -- it's like a virtuous circle because the more you make those types of investments, the more you're able to grow the business, which enables you to make further investments. And we've seen really good growth in that business since 2020, again, about -- we've added about $4 billion in PFOs to our Group business. There are a few reasons why we feel confident in sustaining our growth trajectory, and we've sort of guided to the 4% to 6%. We were sort of slightly above the midpoint of that range in the first quarter, so we do think this is sustainable for a number of reasons. I would say the first one is we have great relationships in that business, and on average, our national account customers have been with us for over 20 years. So that's sort of the length of time that we've had these relationships. And as we've added more product to our product suite, which was already sort of the widest in the industry, we have the ability to introduce more products to existing customers and we're seeing sort of the impacts from that -- the positive impacts from that. Especially, I think, at a time when customers are choosing to do business with lesser providers. The second area that I would point to is around enrollment and re-enrollment capabilities. And if you think about our take-up rates especially for our voluntary products, those range from the low single digits to the high teens depending on customer. And a lot of that is due to sort of enrollment and re-enrollment capabilities, and the investments we've made in this area, we believe, would allow us to continue to drive those take-up rates higher. And voluntary is an area of focus for us. We've been growing that at -- in the high teens for a number of years. We think that's sustainable. And then the third area I would point to is that whereas we have a dominant position in the Large Case segment, the 5,000-plus, the under-5,000 segment is much more fragmented, if you look at the market. The other characteristic there is that 3 out of 5 employers don't offer any type of voluntary benefit at all. So a lot of white space as well. So we've been able to grow in that segment of the market at 2x to 3x the market average, so much faster than the market. And the more we're able to bring our full suite of products down market investments that we've made, for example, we have now an end-to-end admin platform for the under-100 market which is, again, as we segment that under-5,000, is an interesting opportunity for us. I think we are going to continue to see strong growth there. So for all these reasons, we feel confident in our ability to grow that business at sort of within the range and the guidance that we've provided.

Maybe if you could just quickly give some examples of some of the voluntary products and what you've added in recent years? And how you kind of have added to the toolkit and how you drive that into actually people's benefits enrollment?

Yes, absolutely. So we've -- we acquired Versant a couple of years ago, so that made us the third largest vision care provider in the market. So that's an important capability. And vision tends to be bundled with dental, which is we have a leading position in dental as well, especially as you go down market. So that's an important capability that we've added. We also bought a small pet insurance company, so we brought Snoopy back as well for that. So again, we see an interesting opportunity in the pet insurance space. We've added capability when it comes to our legal plans offering with digital wills. That was very helpful especially during the pandemic, and we're seeing that persist. And then we also -- we don't necessarily acquire, we can also partner, and we've done that with an identity theft product that we introduced last year, and that's also doing really well. So these are some of the capabilities that we think are going to help us continue to grow that business going forward.

Perfect. And then maybe shifting to the Retirement and Income Solutions or RIS business. Can you just walk through what are the major products that you offer there and the key growth drivers for the segment?

Sure. So RIS is a well-diversified set of products and businesses that perform under various economic and market conditions. So we have -- and RIS as an important source of earnings and cash for the company. We have -- RIS has annuities. It's an institutional business. Annuities, investments and life insurance. And on the annuities front, PRT gets sort of the -- talked about the most, and it's an important business. Last year, we had a record year with $12 billion plus in PRT sales. And here, we continue to see really good opportunities. Funding levels are healthy. That's an early indicator of sort of business coming to market. So we see a healthy pipeline. We focus on the jumbo end of the market, the $1 billion-plus cases. Fewer competitors, I think this is where also we can best leverage our credit rating, our balance sheet strength, our investment capabilities and the like. And we only sort of focus on retiree-only cases. That's the business where we can sort of match assets to liabilities. We like the risk profile there. So our expectation is that we're going to continue to win our fair share of that business going forward. Another business that's doing really well this year also back end of last year, tends to do well in a rising interest rate environment is our structured settlement business. So those are annuities that we offer as part of -- as a settlement option and a lawsuit. Think about a personal injury case, for example. So good traction there. We're a market leader in that space as well. And then we offer institutional income annuities, and the CARES Act sort of opened the door for that business. And those are offered as part of the defined contribution plan. So we think that over time, we're going to be able to grow that business. And then we -- in 2020, we entered the U.K. longevity market. So from a standing start, we -- this contributes now about $1 billion to our PFOs. So we've done really well and we continue to see good opportunities to grow that business. We have a stable value offering as well that tends to do well in periods of high market volatility, and we saw that during the pandemic where we had record sales. And then last but not least, we have our CMIP, Capital Markets business, where we offer funding agreement backed notes to institutional clients. So that's -- so RIS is all of that. And like I said, we really like the diversification that we have because it allows us to perform under different scenarios.

You mentioned higher interest rates being a tailwind for certain products. How much has the RIS business overall benefited from the rise in interest rates? And how should we think about the sensitivity of earnings in that business to changes in interest rates going forward?

Yes. So higher rates are a positive for RIS, higher long-term rates are a positive. We also have exposure in our Capital Markets business to the shorter end of the curve. We hedged these exposures through caps and floors, and obviously, in this environment, the caps have performed really well for us. And as we've said, our expectation is that we're going to continue to see the benefit from these caps for the next, I would say, 18 months or 6 quarters or so. And really, the caps are intended as a bridge. As sort of the impact from the higher long-term rates kick in, that helps smooth that sort of trajectory, if you like. We did offer, as part of our outlook, on our outlook call in February, some sensitivities to the short end and the long end of the curve. So those -- I would say, those sensitivities still hold.

Maybe moving to international. And you've done a lot of acquisitions, and you mentioned ALICO at the beginning being the big one, but also some disbursements over the past few years. So can you talk about how you've selected which markets you want to be in? And do you think you're now in the places globally that ultimately, you want to compete in?

Yes. I think as part of our Next Horizon strategy, we characterized markets in terms of their cash contribution to the enterprise. And just by way of background, post the ALICO acquisition, we were in close to 70 markets, and today, we're in around 40 markets. So we've done a lot to sort of reshape the portfolio, I would say, over that period of time. So the way we've characterized our markets are in terms of -- in 3 buckets. The first are mature markets, mature businesses. Typically in the mature markets that are very strong contributors, cash contributors today. Japan RIS would fall into that category, for example. Markets that have very attractive growth potential and are strong cash contributors as well or businesses, and the Group Benefits and that TAM would fall into that bucket. And then longer-term secular growth markets that we expect will contribute cash-wise down the road, and India, Brazil, China would fall into that category. So that's sort of the view we take. We always consider a strategic fit, first and foremost. But then we look at each market from the perspective of does that -- is that market meeting our minimum risk-adjusted hurdle rates? Or do we see a path to it, a reasonable path to it accomplishing that? And if the answer is no, then we would consider all options, including potentially divesting. So that's a little bit the approach. We've also added, I mentioned Versant earlier. We increased our shareholding in India more recently. So we also look at opportunities. We've done a few deals on the asset management front. So again, we -- that's the view that we take to sort of how we consider the portfolio. And it's an, I would say, an ongoing exercise.

Makes sense. So it won't be surprising to people that MetLife is actually the largest life insurer in Latin America, and I think that has been an underappreciated business for you. So can you talk a little bit more about that business and your competitive advantages, and then the sustainability of the recent growth that you've seen?

Absolutely. So Mexico is our third largest market globally and Chile is our fourth largest market globally in terms of earnings contribution to MetLife, and we are the #1 company in both of these markets. A very strong, well-established presence in LatAm. I was out there very recently, visited all 3 markets, including Brazil, and what I will say is that we're seeing tremendous momentum in all of our markets. We have a very clear strategy that we're executing on, and that's really sort of paying off for us. If you think about sort of our approach in LatAm, I would say maybe 3 sort of main pillars. One is to protect our moats, if you like. So think about worksite government in Mexico, which is a very sizable business for us. We have an 80% plus market share there. And protecting doesn't just mean maintaining. I mean it's also growing, but we have to recognize that it's a mature business. So mid-single-digit growth is a healthy growth with strong persistency, obviously. And then the second pillar, I would say, is really all around growth through diversification. So whereas we're very strong agency in both Mexico and Chile, we see really tremendous opportunities in alternative channels, direct marketing, bank sponsorship-type partnerships. And that's really fueling our growth, I would say, in both markets. And the other thing we're seeing in LatAm, Brazil in particular, to some extent, also Chile and Mexico, is the advent of digital banks and financial services. And that's very interesting because in a heavily concentrated market like Brazil, this gives us a whole new outlet from a distribution perspective. We've invested in our ability to really sort of partner and integrate with these new distribution outlets, and again there, we're seeing really good traction. Brazil now accounts for about 20% of our sales in LatAm, so it's growing and it's -- so all in all, I mean really pleased about sort of how we're positioned in LatAm. And I'm sorry, and the third pillar is all about transforming and making sure that we evolve our capabilities so that we can deliver for customers and meet expectations going forward. So feeling really good about -- we're seeing -- we saw good momentum coming out of COVID last year, and that's being sustained in the first quarter. And I think things are looking good for the remainder of the year as well.

Perfect. And maybe to wrap up, on the operating businesses, you alluded to MetLife Investment Management, which has been a third-party asset management business that you've been building, and it's currently reported in the corporate segment. So as you look going forward, what are things you can do to accelerate the growth of that business and make it a bigger contribution to the earnings and cash flow for the company?

Yes. So we started MIM, or MetLife Investment Management, 10 years ago. And in that period, we've grown it to $170 billion AUM, third-party and separate account assets. And for the most part, that was organic. We did the Logan Circle acquisition back in 2017, and we've done more recently a couple of tuck-in acquisitions as well. We continue to see a really good sort of organic growth opportunities for MIM. But as we've said before, we are open also to accelerating our growth trajectory should we find the right opportunity. We're very focused in terms of -- if you think about MIM, I mean, we leveraged our expertise and the general account to start that business. And our focus is really on public fixed income, real estate and private credit, and those are the areas that we sort of see good opportunities and continuing to develop. We're not going to veer far off from those areas. If we find adjacencies, we're open to that. New capabilities, we're open to that. So that's a little bit the thinking about -- around MIM. And at some point, we would like MIM to be -- it's currently in our corporate and other, but we'd like it to become a segment. I would say we're not there yet, but at some point, we think that in the not too distant future, I think that's -- that would be the plan.

And maybe if we can move to MetLife Holdings, where you had a big transaction announcement last week with Global Atlantic, and congratulations on getting that done. I guess this is something, a process you've been going to for a while in terms of looking at potential risk transfer, a way to accelerate the runoffs. So maybe if you could talk about why was this the right deal at the right time? And then how do you think about managing that block going forward? And is there interest in doing other transactions for things like your variable annuity portfolio, for instance?