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

Good morning, everyone. I'm Ryan Krueger from KBW. I cover life insurance here. It's great to have MetLife back at the conference again this year. Up on stage with me, Michel Khalaf, who is President and CEO; and John McCallion, who is CFO. I'll just make some quick introductions, and then we'll get into the Q&A. Michel has been President and CEO since 2019. He originally joined MetLife in 2010 as CEO of the Middle East, Africa and South Africa regions from the Alico acquisition that MetLife did and became the President of EMEA in 2011 before taking on additional responsibilities as the head of the U.S. businesses in 2017 prior to his current role. And John became CFO in 2018. He originally joined the company in 2006 and has had several different senior management roles, including Treasurer and CFO of EMEA as well as Head of Investor Relations.

So with that, I'll kick things off. Earlier this year, you raised the ROE target to 13% to 15% from 12% to 14% previously. Can you talk about the key aspects of your strategy that led to that improved outlook?

Sure. And thanks for having us back, Ryan, always great to be here at this conference. It feels really comfortable and good chairs as well this year. So that's the good thing. I think the increase in our ROE target range is really a reflection of the transformation that we've undergone for a number of years now, whereby we've improved the overall enterprise risk profile while enhancing returns. And I think it also speaks the all-weather nature of our Next Horizon strategy and how well we've been executing on it. There are a few sort of contributors that I would point to here. The first one I would say is our focus pillar, which is all about deploying capital to its highest and best use and the consistency and discipline in which we've been able to do so. So if we consider capital in support of new business, we've been consistently achieving mid- to high-teen IRRs and low payback periods. And we disclosed our VNB numbers every year. So you can see that clearly. And we're big ships, so it takes time for that to start to have an impact. But over time, it does bleed into our -- the ROE. The other thing I would point to is also that sort of same discipline when it comes to M&A. And I would argue that the M&A transactions that we have done here have all created value, I would give you an example with Versant Health, where when we acquired the company, we had pointed to us achieving IRRs that were well in excess of our minimum risk-adjusted hurdle rates. And then when it comes to excess capital, again, here, we're guided by IRR when it comes to what we can achieve on share repurchases. The other area that I would say also as a major contributor here is around expense discipline and this efficiency mindset that we've talked about, that's really now part of the DNA of the company. And if you think that we've -- we reduced our direct expense ratio by 200 basis points, we've maintained it below 12.6%, absorbing a lot of inflationary pressures, but also freeing up capacity to continue to invest in the business, which is extremely important. Again, I think that speaks to sort of how that's been playing out. And besides these 2 sort of more strategic areas, I would say that the higher interest rates are generally good for MetLife. And over time, I think we're going to continue to see that. So really, the -- when we announced in February that we're increasing the ROE target to 13% to 15%, it was really a recognition of sort of the progress we've made on all of these fronts. And I think also reflective of the momentum that those actions are building as well.

Great. And then I guess if we think about the first half of this year, we've certainly had some headwinds to variable investment income like everyone. But if you look beyond that, how are your results tracking so far this year relative to your outlook expectations?

Yes. Maybe I'll jump in on that one and again, thanks for having us, Ryan. Its great to see you and everyone here. I think -- first half, like you said, VII certainly has had some headwinds, but again that asset class is there for purpose of this long-tailed part of the liabilities. But when you strip that out? I mean I think Michel and I have talked about this a few times. Quite honestly, the first 2 quarters of this year have been really tremendous across the board. I mean, the underlying fundamentals of all the businesses are going well. Higher rates, certainly, as Michel said, has been -- has helped us. But the reality is it's a lot of the actions that we've taken prior to that, that have put us in a good position for that growth and we saw this in the second quarter. Obviously, the U.S. Yes, now -- so sorry, if you didn't hear that. The first part was really good, but obviously, the U.S. has had it consistently strong, I'd say, a number of quarters here. We saw non-U.S. really starting to kind of rise up here. And I mean, I'd say the second quarter was tremendous across the board. And they've been a resilient bunch really, everything that they've had to go through. And obviously, everyone's had some challenges, but the growth aspects of the business overall, I'd say, everyone had -- did a great job in the second quarter, controlling what they can control and really positioning themselves and using quite honestly, the pandemic as an opportunity to come out stronger. And I'd say probably third thing, which Michel touched on was expense discipline remains a real core component of our strategy, of our DNA. Year-to-date were -- our direct expense ratio was 12.1%, again, comparing that to 12.6% target. So again, I think the team has just done a really tremendous job and we're really happy with the underlying fundamentals of the business right now.

Moving into group benefits specifically. You've been generating mid-single-digit top line growth. You also have a leading market share in the business. So I wanted to get your thoughts on kind of how you're still being able to drive that type of growth despite how high your market share is? And then just also how you look at the growth opportunity going forward over the next several years?

Sure. I mean group benefits is an attractive segment, I would say, of the life industry in the U.S. It's a capital-light business, healthy margins with good growth opportunities as well. And we're obviously market leaders in this space. We've talked before about how important scale is, and that's really because you need to continuously invest in this business, something that we've been doing over a number of years, and we continue to do. And it's sort of like a virtuous circle because the more you invest to meet customer needs and expectations, employers and employees, the more you're going to be able to build scale, the more you're going to be able to continue to make those investments. We've -- I said on the second quarter call that we expect that by the end of this year, our PFOs would reach $24 billion, which compared to 2019 would be an additional $5 billion in PFOs. That's a CAGR of 5%, so right in the middle of the range that we've pointed to. And we feel good about our ability to continue to deliver within that range. I would -- I think that confidence, I would say, is borne out of a few factors. The first, I will call out the importance of relationships and capabilities, and I would talk about those 2 in tandem. Relationships matter. We have a very strong position, a leading position in the national account space, which is the 5,000-plus market. And on average, our customers have been with us for over 20 years. And that's important. And I think a reflection of its importance is the fact that 75% of new sales are coming from either adding product or improving enrollment with existing customers. And I say I marry capability with relationship because to get these types of outcomes, we have invested significantly in the business and our ability to integrate with the employer benefits ecosystem and how we -- enrollment and re-enrollment capabilities. We've also deployed AI to help accelerate some of these initiatives, especially when it comes to underwriting and claims and customer experience. So all in all, we feel good about our ability to continue to grow in that segment. The other thing I would -- area I would point to here is the importance of product, and we have the widest product range in the industry. And that's, I think, particularly important when it comes to regional market, which is the 2,000 to 5,000 market segment. That's how we define it at MetLife. And here, based on our analysis, we believe we're a top 3 player already. We've been able to grow at high single digits, outgrow the market there. And one of the ways that we do that is by bringing more product to market. I think a good data point here is the fact that today, 50% of our customers in regional market have 2 or more products with us. So I think that's an area that we're excited about. And then I would also say that at the lower end of the market, really the -- only 1 and 4 employers offer any types of benefits at all. So there's a lot of white space as well that we think we can take advantage of here. And then the third area I would point to is voluntary. And voluntary is not a new strategy for us. It's been a focus area for us for a number of years. And for a number of years, we've been able to grow voluntary at high teens. And we believe, again, here that, that's sustainable. We're a market leader in A&H. We're a market leader in legal products. And we've added pet insurance where we see good growth opportunities as well to our product offering. And I think here, what -- just to give you a sense of sort of how the market is evolving, currently, 20% of our overall sales in group come from employee-paid products where the -- we're enhancing enrollment and take-up rates. So I think that speaks to sort of the opportunity there. And I think all of these things combined give us good confidence in our ability to sustain the growth momentum we've seen in the group business going forward.

We've seen, as we've emerged from the pandemic, I'd say most companies are reporting pretty favorable group benefits results right now. Are you seeing any impact to the competitive environment as a result of this favorable experience?

Yes. I think to your point, I mean, what we've seen certainly in recent quarters is sort of a reversion to pre-pandemic levels when it comes to underwriting ratios, seasonality and the like, that's especially true, I would say, for life and dental. Disability has seen strong results. I think that's down to a tight labor market. It's a smaller component of our business. But we've seen that as well as the rest of the industry. From a competitive landscape perspective, I would say, we don't see any substantive changes there. I think the market is competitive in some instances, highly competitive but not irrational. And I think the short nature of the products that are offered here acts in some ways as a deterrent where somebody sort of being irrational for a sustained period of time. I mean the other, I think, what we also see here as post pandemic, clearly, there's heightened awareness as to the importance of protection products. So we've seen more interest in those products. And what we also see is a continuation of the trend where employers value benefits as a tool to retain and attract talent and employers also are placing greater value. They're not expecting only a cheque from their employers. They're expecting much more. So all those things, I think, are good for the industry as a whole. And as a leader in the industry, I think we clearly expect to continue to benefit from those as well.

Great. Shifting over to the retirement business. There's a number of products there, pension risk transfer, structured settlement, stable value, funding agreement, a bunch of different things. Can you talk about kind of where you're seeing the best growth opportunities in that business right now?

Yes. I mean we've seen really strong results coming out of RIS, and we've always talked about sort of the diversification that we have in RIS. Which really enables us to perform across different market environments and conditions. And so RIS is a set of life insurance, institutional income annuities and investment products. And we continue to see good opportunities across the board, I would say. A couple of areas that I would point to here, one, I would say, PRT and I would say U.S. and U.K., we're seeing really healthy funding levels, which typically indicates that -- is an early indicator that plan sponsors are likely to transact. Last year was a record year for us in terms of $12 billion plus in PRT sales. Obviously, that was helped by the $8 billion IBM deal. We tend to play in the jumbo end of the market, retiree only cases, and we feel good about our ability to continue to win our fair share there. We're very disciplined in our approach to PRT. And I would also say that we never want one business to be sort of the oversized business when it comes to RIS or any other business, but we think this is a good business with healthy returns, and we expect to continue to play there. And from a U.K. perspective, we're in the U.K. longevity market, reinsurance market and from a standing start, we've built that to about $19 billion in notional and about $1 billion in recurring PFOs. And our entry to the market has been extremely well received, and we continue to see good prospects there. Another business that I would just also mention here where we're seeing really good growth is the structured settlement business. And a couple of things are happening there. One, the backlog in the courts from COVID has eased. So that's been helpful to that business. And then higher rates mean that the settlement options are more attractive as well. We're a market leader, and we're continuing to see a really good growth there, and we're achieving very healthy returns as well. So those are a couple of examples of sort of how this diversification comes into play and how different product sets react to different market environments. But overall, if you think about RIS, I mean, this is a business in 2019 that was generating $310 million or $300-plus million, $310 million is the exact number on average a quarter. And it's now generating $410 million a quarter. So I think that speaks to just the growth that we're seeing and how this business has performed post pandemic as well.

You've seen spread, excluding VII. You've seen spreads kind of continuously expand over the last several quarters in this business. Can you help us think through kind of the impact of the interest rate caps and how that is affecting your results? And then I guess, as we move forward, those are going to start rolling off at some point, but then you have the benefit of higher long-term interest rates. So how -- can you try to put all that together?

Yes, sure. Like you said, it was -- we took action at the time when the risk of rising rates weren't so great, right, to buy protection for that potential. And obviously, shape of the curve matters in that segment. Higher longer rates, good typically short end can put pressure on us. Caps have offset that pretty materially and has helped kind of manage that transition, I'll call it, right, from the fact that rates are getting -- are higher, they will kind of materialize and find their way into the overall spreads of the business, but those caps kind of give us that protection over the short term. And so that kind of protects our spreads, if you will. Look, we -- I think they'll start to roll off now, right? And so shape of the curve will matter and things like that. I think if you just use the second quarter, we're, I think, 142 bps of spread ex VII. I'd say our view is that the third and fourth quarter are in that vicinity maybe tick down a bit each quarter, a few basis points per quarter, but in general, should be pretty resilient this year relatively speaking. And then I think we'll have to see where the -- shape of the curve will matter going forward, right? And so we'll need to see where that is. And obviously, we'll provide some updates in our outlook call for the next year.

Let's moving to Asia. Interest rates have increased there. They're still low, but a lot higher than they've been. And then you also sell U.S. dollar-denominated products and interest rates are higher here as well. So can you talk about how this has impacted demand for your products in Asia?

Yes. I mean the higher U.S. rates have continued to sort of drive demand for single premium FX products in Japan. And we were sort of innovator in this space. I think we continue to be important players as well. We've -- and really pleased with sort of how our trajectory in Japan and the rest of Asia, but Japan, in particular, coming out of the pandemic. A couple of things I would point to there in terms of the FX annuities product. There, we're continuing to maintain our share, I would say. The Banca Channel is a major distributor of these products. It's a competitive channel. So again, we remain very disciplined in terms of our approach and returns that we generate on this business. And then we -- one of the things I think that we've been successful at in Japan is the speed in which we're able to bring new products to market. And a good demonstration of that was in the second quarter where the introduction of our single premium dollar life product. We saw really good take up for that product. And during the quarter, we think that's going to continue, hopefully. So that's been another sort of important factor for us. And the diversification that we have, whether it's product or distribution is also helpful to us in Japan in terms of maintaining our trajectory going forward.

Japan has a new economic solvency ratio proposal that has been talked about for many years. I believe it's supposed to happen in 2025 finally. It's more similar to Solvency II. How are you thinking about this and how it could impact MetLife in Japan?

Yes. I think our view has been that a more economic framework is way better. Right now, the SMR has an asymmetrical situation associated with. So higher rates, the ratio goes down and yet higher rates are better for the business. And certainly, as you just talked about, we have a heavy dose of U.S. dollar-denominated products, and that's where rates have really risen, but the reality is that's better economically. And I think that alignment will bring -- is much more better for the industry, and we've certainly been supportive of that. And we've always used an economic framework anyway within our company as well as looking at the statutory frameworks that are in each jurisdiction. So we're very supportive. Obviously, I think there are a few minor things that the industry is working with, the FSA on just to see if we can make some -- which we believe would be better refinements. So we're hopeful there. But ultimately, I think even where it stands today, we think it's a positive for the industry. I think in terms of business, I would say on the margin, it might affect some things like how we leverage reinsurance or some products that we have. But I think overall, in general, we've always worked under that economic framework, so we wouldn't expect a material impact.

Got it. In Latin America, you've had very strong growth for a while now. Can you talk about the key drivers of that, what you're seeing in that market?

Yes. I mean really pleased with LATAM's performance. And even during the pandemic, we had pointed to the fact that sort of the underlying strength of the franchise was really maintained, sustained and even enhanced, I would say, and we're seeing that play out coming out of the pandemic. And again, if you think about LATAM, pre-pandemic, we were generating about $150 million a quarter in adjusted earnings, where last 2 quarters have been in the $200-plus million range. I think a number of factors that I believe give us confidence in our ability to sustain momentum there. The first one is we have a really simple clear strategy with 4 pillars. The first is protect the core. We have some -- we're market leaders in Mexico and in Chile. We have a dominant position in Mexico, for example, on the worksite government front. So it's important to continue to maintain very good persistency there and to grow that business moderately as well, which we've been able to do. So that's one. And to do that, I would say we need to continue to make investments in customer experience and new capabilities and the like, which we've been doing in LATAM. The second one is growth through diversification. So taking some of -- leveraging some of the capabilities that we've built, for example, on the worksite government to build over time similar franchise in the private sector, for example, something that we've been working on for a number of years. We're starting to see good traction and also diversifying by growing in the group benefit space, and in the -- and in Banca and direct marketing. Those are very interesting channels. Again, we're seeing really good traction there. And I think that's also consistent with some of the overall dynamics we see in the region where if you think about overall penetration levels, they're still below OECD levels. The pandemic has heightened the awareness and the need for protection type products. So those all are good sort of factors for the industry as a whole. And the third one is a flight to quality that we've seen. I mean we've paid close to $1 billion in COVID claims in Mexico, and that counts for something coming out of the pandemic, and we're benefiting from that as well. And then the third sort of area that again gives us confidence in our ability to sustain our momentum is Brazil. And Brazil is a very interesting market, very heavily concentrated Banca dominated, I would say. But we're seeing that change. We've seen a number -- digital adoption in Brazil has been -- has risen extremely fast, and we've seen new players coming to the market, digital banks. We've also seen other sponsors become more prominent in the market as potential distributors for our products. And again, here, some of the investments we've made are helpful to us because they position us as really attractive partners. So Brazil has been a good story. It now accounts for about 20% of LATAM overall sales. I think that's going to grow over time. Last year, we grew sales by 30%. And Brazil, I think this year will be -- will run at a similar pace. So really bullish on Brazil. And then the last area is I think all the investments we've been making in the customer experience and digitizing our business, again, deploying some AI capabilities there. So that enables, I think, this growth trajectory. So for those reasons, we feel good about our prospects on -- as far as LATAM is concerned.

Switching gears a bit to the investment portfolio. Can you give an update on your commercial mortgage and real estate equity portfolios and how they're performing in this environment?

Yes, sure. So obviously, there's -- the environment is under a bit of stress in general. But I think what's important when you think about our approach to this is probably 3 things. First is ALM. These are really good assets for a sticky set of liabilities, right? Our liabilities do not change in duration under stress, right? So one, they work from an ALM perspective. Two, as we approach this, we focus on high-quality assets with strong institutional sponsors. Very important sponsors that have managed throughout cycles and crises and have been there before and understand what it takes to manage through and to effectively come out stronger. And then three is kind of how we enter, right? And so I think like the commercial mortgage loan portfolio, generally speaking, when we enter a loan, we're looking at kind of the 50s in terms of LTV, and we do that so that in times of stress, we can absorb that valuation hit. And we're seeing that today, right? And I think if you look at the second quarter, we had marked all of our office portfolio. We took the initiative to get through all the office since it had some focus in the industry. And obviously, like I said, they are high-quality assets, strong sponsors. And despite that, it was probably -- we estimate it's probably about a 25% peak to trough impact in that valuation of appraisals. Our LTV is moved, I think, overall from 58% to 62%. And debt service coverage ratio had a modest decline from 2.4% to 2.3%. So again, that kind of resiliency and robustness of our portfolio is a function of our approach to the market. And I think that's really important. I think the other thing I would highlight is we have the commercial mortgage loan space. We also are a leader in real estate equity investments. And having both of those, again, provide us the expertise and opportunity to underwrite the collateral correctly, be comfortable owning it. If we need to. But the reality is the portfolio is holding up very well. We've resolved about 70% or so of maturities this year. I think earlier in the year, we talked about maybe $200 million of pressure in terms of total loans for the year. That's still our estimate in terms of what could have some possible minor write-off of, say, $15 million to $20 million. So again, very manageable, but it all comes back to our approach to this asset class. And so overall, performing well. Obviously, there's stress in the market, but we're comfortable with the position we have today.

And can you talk about the composition of the alternative investment portfolio and also how you're thinking about the near-term performance there?

Sure. So again, go back to ALM. These alternatives are there to defuse liabilities. Typically, we use them for the tail, right? So it's a long term. Over time, these assets have -- particularly in the PE space, generated returns of around 12% or 3% a quarter, but they're a little under that today. Composition wise, we're about $14.5 billion of PE. There's another $100 million now of hedge funds. That was something that we intentionally reduced over the years. And then we have about $3.5 billion, I'll call it, real estate-related of funds, if you will. And so the last quarter, we saw things starting to stabilize. I mean, we saw some declines in the fourth, the first quarter. PE was a positive 1.5% return in the second quarter. We still saw some pressure from real estate of minus 1.9% in the second quarter. One of the things we highlighted we thought that -- we think we've had the trough. We don't think this is a V-shaped recovery in this asset class. We think it's more U-ish, if you will, if that's a term. So our view is in the third quarter it will be something similar. I think early signs so far is probably the PE returns. I mean we haven't seen much yet. We'll get a lot of that in September, but our conversations and everything indicate probably something similar to what we saw in the second quarter of 1.5%. Real estate, we're getting a little more insight. Now remember, all this is on a quarter lag. So I think -- I just mentioned that we marked our portfolio and there was a lot of marks to the portfolio in the second quarter. We're seeing that come through those marks on our real estate funds as well. So I think returns could be a little more negative in the real estate front. Maybe that's a $20 million to $30 million headwind off of our VII nummber of $220-ish million in the second quarter. But overall, we think we've hit the trough, and I think there will be, over time, recovery in the broad asset class here.

So MetLife has done a number of dispositions in recent years. The latest was the reinsurance transaction with Global Atlantic. Is there -- do you think there's still more to do on the disposition front? Or are you largely content with where the portfolio sits today?

Yes. I think we're always looking at our portfolio through the lens of strategic fit and whether our business or a market is able to achieve a minimum risk-adjusted hurdle rate or there's a reasonable path to achieving that. And that's an ongoing exercise, I would say. So we're going to continue to look at our portfolio through that lens. I think the good news, whether you think about sort of any gaps that we see or any burning platforms is that there aren't any that we see. And that puts us, I think, in a position of strength, of being opportunistic. And when we sort of transact, we transact from a position of strength, which I think allows us to achieve value, create value for shareholders here. So that's the approach. I think we're going to continue to deploy that same approach going forward. And like I said, whereas there's nothing -- there's no burning platform, I think we're going to continue with that same discipline. We think it's the right way to -- as we think about how to continue to shape and reshape our portfolio.

I think just to add to that, I mean, I think just to emphasize the point that not being forced to do anything is a real advantage. I mean you heard it with us with our commercial mortgage portfolio and our positioning here with how we manage and optimize the runoff. And then obviously, the capabilities we have, I think this in general, that is something we focus on a lot.

Then how are you prioritizing capital return between M&A, buybacks, dividends, especially now that you've freed up this $3.25 billion from Global Atlantic deal. I guess, I think a question that has been common is, are you looking to return all of that to shareholders, the capital that you freed up? Or would you like to maintain some cushion given uncertainty in the economy?

So I think from a -- let me start with dividend. I think from a dividend perspective, we'd like to have a competitive dividend that is -- that generally over time grows in line with the growth in our adjusted earnings, I would say. From an excess capital perspective, I mean, we've talked about our philosophy, which is, I think, now more than just a philosophy because I think we've been consistent in how we've gone about this. We've said that we're comfortable with the $3 billion to $4 billion buffer -- liquidity buffer at our holdcos. So -- and after investing in organic growth and in the absence of accretive value-creating M&A, we're going to return capital to shareholders. And as I said, I think we've been consistent. When we announced the deal, we also announced an increase in our buyback authorization to $4 billion. So that, I think, should give folks sort of an indication in terms of the direction of traffic here. And obviously, the deal hasn't closed. We still expect it to close in the second half of the year. And look at the time, we're going to obviously assess the environment. That's something that we would do anyway. But I would say that what we've done before in the wake of major divestitures in terms of being deliberate, expeditious and how we've returned capital should also serve as a good guide in terms of how we would proceed here.

Great. I think that we're about out of time. So I think we'll wrap it up here. Thank you very much for participating in the conference again this year.

Thank you, Ryan.

Thanks, Ryan.