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

So we will jump right into the next one. Thank you, everybody, for being here and special thank you. to Michel Khalaf, President and CEO of MetLife; and John McCallion, CFO of MetLife.

I'm sort of kicking all of these things off with a broad strategy update. So maybe an update on the next ride and the strategy that you all have laid out. And it's been a few years now. I'd be interested if you can provide an update on what you've achieved to date as well as those areas that you're focused on as we think through the medium term? .

Sure. First of all, thanks for having us, Alex. And great to see everyone. So we launched our next Horizon strategy almost exactly 4 years ago. And we built the strategy, we call it all weather. So we wanted a strategy that would allow us to perform across economic cycles. And we're really pleased in how we've executed on the strategy. We thought it was a strategy 4 years ago. We continue to think it's the right strategy in the context of the current environment. In terms of the commitments we made and those were 5-year commitments, I would say we're ahead of schedule on pretty much all of those. So we talked about generating $20 billion in distributable cash. We're ahead of schedule on that front. We talked about freeing up $1 billion in operating leverage that we will reinvest in growth and in the business, on track to achieve that. We talked about a 3 cash flow ratio, 2-year average of 65% to 75%. We're achieving that. And last but not least, we talked about an ROE of 12% to 14%, and we've increased that to 13% to 15%. At the beginning of the year, we rallied our leadership team around the team of raising the bar. And this was really in recognition of the fact that the environment is likely to continue to be highly uncertain. So controlling all that we control becomes all the more important. And glad to see that our team has really embraced this message. I think you can see it in the momentum across our -- the underlying business momentum across our businesses building on sort of coming into this year from last year and sustaining that throughout this year. I think we can see it as well in the discipline around our direct expense ratio in the face of inflationary pressures continues to come in under 12.6%, which is our target. I think we see it also in how we're deploying capital in support of organic growth at mid-teen -- mid- to high-teen IRRs and relatively short paybacks. I think we also see it and just how we are continuing to deploy capital to its best and highest use. And I think the reinsurance transaction with Global Atlantic was another demonstration of that. And we also see it and we do an annual survey to get sort of the pulse of the organization, and we've had our highest engagement score ever, which tells me that our people are highly energized and really believe in the company's direction. And I've had the chance to travel much more this year compared to I did some of that last year, much more so this year. And I think the consistency and precision with which our teams are executing gives me great confidence in the sustainability of our momentum here. Looking ahead, I would say, a couple of things I would point to; one, as the higher rate environment is likely to drive higher demand for fixed rate product. I think this will benefit our -- I think this is true for retail and institutional. It will benefit our RIS business as well as our asset management business. And I think also with the advent of new technologies and the investments we've been making consistently in those technologies, I think there is a further opportunity for us to leverage our size to drive a scale advantage. So all in all, pleased with the way that we're executing on the strategy. And again, we think it's highly relevant in the current contract.

Great. So next, I want to jump right into group benefits. The margins have come a long way from the depths of the pandemic. Things are feeling a lot better. Are you seeing any impact to the competitive environment? I feel like we're going through a period where pricing was actually going up, coming out of the pandemic. Are you seeing any areas where it's maybe starting to get more competitive?

Yes. So I mean, I think you've heard me say it before, Alex. I think that group benefits is the most attractive segment of the life U.S. life insurance industry it's capital light, it's healthy margins and it has good growth and we're the market leader here. To your point, we have seen underwriting revert to, I would say, pre-pandemic levels. Disability, I would say, in particular, has seen favorable underwriting. I think over time, and it will take a while. I think this will eventually be competed back because it is a competitive market. I think the short-term nature of the products here almost act as a deterrent in terms of irrational behavior or too much too aggressive underwriting because results tend to show up in a sort of fast time frame. So that's sort of a deterrent. So what we're seeing is a competitive market but not irrational. And I think price definitely matters here, but there's also other areas that act as differentiators here. We've talked about the importance of scale and an integral component of our strategy has been to invest significantly whether it's in our servicing capabilities, whether it's in how we engage with employees, how we integrate seamlessly into the employer benefits ecosystem enrollment and re-enrollment capabilities. So all those things matter as well. And we feel good about our ability to continue to grow this business and to continue to maintain healthy margins here.

Next, I wanted to ask you about the uptake of voluntary benefits. I think it's been a trend since even before the pandemic that there was greater penetration there. Are you continuing to see that at this point? Is wage inflation adding anything incremental to it? Is there anything that you've gathered from the year-end enrollment process?

Yes. I think wage inflation as a tailwind mostly for the core product, I would say, so Life and Disability in particular. Maybe less so for voluntary, but we are continuing to see really good traction here. I mean voluntary is not new to us. It's been a core strategy for a number of years. We've been able to grow our voluntary business in the high teens for a number of years, and we think that, that growth trajectory is sustainable. Its employee paid, now accounts for about 20% of our sales in any given year. So it's becoming significant, and we were we touched on margins earlier. I think that's another sort of reason why we feel good about our ability to maintain healthy margins. The more voluntary becomes an employee paid becomes the more prominent it is in terms of the overall pie, I think that's going to contribute to margins as well. There are 3, I think, key areas for us that are helping us maintain this momentum here. One is continuing to introduce new products to existing customers. We're the market leader in accident and health and legal plans, and we've added pet insurance, which is a category where we think there are good growth trends going forward. We also -- investments that we're making in enrollment and re-enrollment capabilities, the way we partner with benefits providers and communication firms to personalize our communication and education to employees. Those are important drivers of take-up rates, and we're seeing that materialize. And then our ability to bring our full suite of voluntary products down market, so to the under 5,000 market where over 50% of employers don't offer any type of employee benefits at all. Those are all sort of important components that are allowing us to sustain this growth momentum in voluntary.

Very helpful. Pivoting over to retirement, pension risk transfer has been a growth avenue view as well, tends to see a bit higher volumes in 4Q. How is that progressing as we work towards the end of the year?

Yes, really well. And the point you're making, I think, comparing to a few years ago, I think we're seeing business come through now more evenly throughout the year. So we wrote $2 billion in Q2, we wrote $1.5 billion in Q3 so far this quarter, we were at $1.8 billion. So overall, for this year, we'll be north of $5 billion, which will make '23, our third highest year ever. And '22 was a record year for us. We had the IBM deal, which was $8 billion. 2018 was our second highest. We had the FedEx deal at $7 billion. So this year, we haven't had any deal of that magnitude or size yet, it's still a very, very strong year. We're very disciplined here. We look at the risk profile and we apply an M&A like approach to how we assess pension risk transactions where we play in the jumbo end of the market where there are less competitors. And I think we're also our capabilities as a differentiator. And we see a healthy pipeline into the future. I think the fact that funding levels remain quite healthy. Significant assets are sitting in frozen DB plans. I think plan sponsors are looking at risk transfer as an important component of their overall risk management strategy and approach. I think all those are indicators, and funding levels being high, I think plan sponsors are looking at this environment as a window where they can transact at favorable terms. So all in all, I think we see a healthy pipeline, and we are confident in our ability to continue to win our fair share here.

So we've seen some peers start to use sidecar vehicles. I think pension is transfer in particular. I think some have talked about that being a potential opportunity to do it in the most capital-efficient way possible. Is that something that's of interest to you? Is the opportunity that big that you'd actually pursue third-party capital to help grow it?

Yes. I mean, so far, we've been able to -- and we've been happy, I would say, to deploy our own capital to support PRT. We've had the capacity to do so, the flexibility to do so. and we're doing it at attractive returns and payback. I think the -- if -- and maybe I should point out here as well is that the reinsurance transaction with Global Atlantic also sort of adds to our excess capital gives us even more flexibility there. I think if we -- if demand was to grow to a level that would sort of outstrip our capacity to generate capital to support this business. We have solutions in place that would allow us to add capacity. And I would say that we would consider side cars as also a way of raising capital. So it is something that we would consider.

So before I leave, retirement, I wanted to ask a little bit more nuanced question, but can you describe the sensitivity of the Retirement segment to the shape and level of interest rate interest rates. How much higher or how much are higher interest rates helping the business? And how much of the hedges that you have in place held down the funding costs?

Yes. I think we've certainly benefited from some hedges we put on years and years ago for protecting the short end of the curve and for the potential of an inverted curve, and we've seen an extended long period of an inverted curve. So we have significantly benefited from that. And that we expect those to start to roll off during the course of '24. In terms of normality or kind of more normal state, I mean, I think a steeper curve is generally better for this business. And so we'll see some reduction from the benefit of that over the course of next year. I think offsetting that and one thing to point out is VII has underperformed pretty significantly this year. So I think you could think of that as a partial, if not a full offset to some of that if it were to return, not even to the historical levels, but even something just maybe 3 quarters of the way there. So I think overall, there'll still be some resiliency to spreads. And -- but I think the benefits from those hedges will start to wear off.

And maybe a similar vein, net investment income for the broader organization. How is the higher interest rate environment, albeit a little bit of a pullback recently, but how is that environment helping different areas of your business? And is there any specific areas you'd call out?

Yes. I mean I think we've done a lot over the years to reduce our sensitivity, but nonetheless, higher rates are a net positive even going back to retirement, our roll-off reinvest is a powerful tool there. I think we're at 6.26% if reinvest, and I think our roll-off was 150-plus basis points below that. So we're seeing that momentum continue. I think you can think of businesses like RAS our holdings business, even Japan and maybe in a few different ways and certainly, growth is 1 piece that has really helped with the higher rates. But also similarly, the roll-off reinvest because we sell a lot of U.S. dollar products there. So it's not every business, but there are businesses that benefit from higher rates.

And just before we leave NII, I do want to ask about the alternatives, the limited partnerships and so forth. It's been a pressure point. At what point do you feel like higher interest rates and some of this rationalization of real estate prices, at what point is that going to be more fully in? Is there any magic to the end of the year and kind of get it into '24?

Yes, good question. I mean, some of the things that we've said over the course of this year was we saw obviously late last year, early this year, kind of a sharp correction then it kind of has kind of bottomed out, if you will, remained in positive territory, second quarter, third quarter, which is what we expected. We kind of -- we didn't expect kind of a V-shaped recovery. We think of it more of a U-shaped recovery, bump along the bottom, if you will, but albeit positive. And then probably sometime next year, you start to see some reversion to higher levels. Look, I think we still have another couple of quarters ahead of us. We talked in the third quarter call about the fourth quarter being somewhere similar. Early signs right now in the fourth quarter, we're part of the way through. We've received some statements in. And it's probably a little lower than the third is like at least the trend. We'll have to see where we end up. If we extrapolate it from here, it's probably $50 million lower than what we had in the third quarter in total VII, mainly in some of the private equity fund returns that we've seen so far. But it could -- it depends what the rest -- how the rest come in, but so far, that's what we're seeing for the fourth quarter.

And then on the commercial mortgage loan portfolio, particularly office, I think you mentioned on your last earnings call, you've resolved, I think it's 88% of the '23 maturities. How is the remaining slide going? Do you anticipate all of this having any impact on cash flow as we think through 2024?

Yes. I think to the team's credit, we gave a bit of an outlook, if you will, in the first quarter. I'd say it's come through as expected, in terms of resolutions and maturities. As we said in the third quarter call, we're about 88% of the way there. We're slightly higher right now, but a lot of the maturities are year-end. And we don't expect those to create any additional losses at this juncture. We think they'll be resolved accordingly in a -- without extra losses in hitting capital.

And then maybe I'd also just ask for, it's one of the largest asset managers doing real estate. What is your view of the real estate markets? Is there anything you can capitalize on, whether it's within your asset manager or in your general account?

Yes. I mean, higher rates certainly have been a headwind in terms of funding cost for borrowers. Office specifically has been a bit of a headwind just as a result of the evolution and how office is being used. Although we're seeing some kind of small positive signs of that starting to reverse a bit, that pendulum swung pretty hard as a result of the pandemic. And we're starting to see, and you can see it in the paper, firms start to revert back to some level of in office. And so that will be -- that's a positive trend for that. Look, I think capital is still scarce out there. Higher rates, as I said, kind of create a headwind. But that dislocation does create opportunities in other sectors within real estate. So there's good low unemployment, job growth in a way, lower construction has started to -- that will kind of creep in, and we've seen that into other sectors over time. And you think retail, pockets of retail now are scarce when it comes to supply. So you're seeking actually supply-demand dynamics start to improve there. So these things go through cycles. It's how we invest in this space. We assume they will go through cycles, which is why our philosophy is the way it is. And you need to find -- needing to do so in a disciplined way so that when you get here, you can manage accordingly. Overall, we think quality will win out in every class of real estate.

So let me pivot over to some of your growth markets outside of the U.S., in Asia, particularly in Japan, I think the environment is improving for some of the products you sell. Is that offering you more opportunity in terms of the product set, the volumes that you anticipate?

Yes, I think certainly higher U.S. rates. And I would say the differential U.S. Yen, which has expanded, or a tailwind, especially the product sets where we have a lot of expertise in Japan. So we've had very strong growth. Year-to-date, we're up in the high teens in Japan. Asia overall as well. And even though the second half, I would say, is a tougher compare given the growth we had last year, we're still fully expecting to be ahead of what we said on the outlook in terms of the mid- to high single-digit sales growth. A few things I would point to here. One is the strength of the relationships that we have in Japan through on the bank front with over 100 relationships. But also the diversification that we have from a channel perspective. That's very helpful because we've seen also very good traction in terms of our face-to-face channel this year. And then the speed to market and our ability to bring new products to market. I had pointed out in the second quarter that U.S. dollar single premium life product that we had introduced had contributed significantly to our growth continues to do so. So those factors along with our investment origination capabilities I think act as a differentiator when it comes to especially single premium U.S. dollar products in that market. So really pleased with the momentum. And again, I think it's as long as sort of that differential remains healthy, I think that's sustainable.

Next on capital ratios in Japan. My understanding is that the solvency margin ratio is sort of being phased out and it can got issues with the way of response to interest rates. So I want to focus a little more on the economic solvency ratio and sort of the future regime. Can you either quantitatively or qualitatively talk about where that ratio is relative to requirements of the industry? And is it benefiting from higher interest rates? Are there any knock-on effects to cash flow we should be considering?

Yes. Our collective view certainly is that we are supportive of the shift from SMR to the economic solvency ratio. As you said, SMR has some asymmetrical accounting where rates go up, ratio goes down, yet the economics of the firm are improving, where the economic solvency ratio regime will be more aligned with economics, right? So the ratio will improve as rates go up and that's generally what is occurring today, particularly since we sell a lot of U.S. dollar products. Look, I think we've always been a firm that leverages some economic framework as well as statutory and other frameworks to evaluate our product pricing. So we don't see any issue with that. We think, at least so far, and we haven't put out any numbers yet, but I think ratios look healthy. I think there's still some things the industry is trying to work with the regulators on just to refine a few things. But I think as it is today, even if it were -- even if we didn't get those things, we think we'll be okay. No issues with cash flow.

Understood. Latin America, that's an area where the growth momentum has been pretty notable. Can you talk about the drivers of that, but also what you see moving forward?

Yes, sure. So we're market leaders in LatAm, and we continue to see really good growth. Pre-pandemic, our earnings were in the $150 million range a quarter. We're now in the $200 million ZIP code. And sales and PFOs are growing double digit. And we think that's sustainable -- we have a -- our strategy in LatAm is sort of centered around 3 pillars. One is we call it protect the core. So we have -- we're market leaders in Mexico, market leaders in Chile. We have a very well-established businesses there. And we're continuing to see -- so think about work site government business in Mexico, for example. So we're doing a good job in terms of maintaining a high persistency, but we're also seeing moderate growth even in that business, which is helpful. The second pillar is all about diversification. So taking some of the expertise that we have, for example, in the government business, translating it into work site private. And we've been doing this for a number of years now. We see traction there. We're growing in other product categories, employee benefits, accident and health, and channels as well, such as Bank and telemarketing. So those are also sort of contributing those are higher-growth areas that are contributing to our growth overall. And then lastly, I would mention Brazil, which is now about 20% of our overall sales in LatAm. And there, what we've seen is digital banks and financial institution grab a significant share of the market and a growing share of the market. And we're natural partners for those banks. So that's also fueling our growth. In Brazil, we're growing ahead of the market, and we think that's sustainable. So combined, I think those 3 pillars are contributing to our overall growth. And again, here, I think based on the traction we're seeing, we think this is sustainable.

So you mentioned earlier the Global Atlantic transaction. Now that it's closed, can you talk about some of the strategic benefits that you're seeing from that and financial impact?

Yes. I think it's -- we've been talking quite a bit around just our opportunity to evaluate risk transfer deals. We're beneficiaries of the fact that we didn't have to do anything. But if we could find a win-win with a good partner, we would do something. We think we did. We had a ceding commission of $2.25 billion, release of capital and over the $1 billion, and then we're losing about $200 million of after-tax earnings in holdings. So roughly, we think the financials of that made sense. It gives us excess capital to deploy to kind of our going concern businesses. We estimate 50 to 60 points of RBC benefit from that. Maybe 50 initially and then 60 -- another 10 after we reposition some of the portfolio. But overall, really a lot of optionality, but we think we got to a good place in the end.

Got it. And outlook for further potential reinsurance transaction?

I mean I think we'll apply the same approach, right? We think it's healthy to be out there talking with third parties. It's our run-off block in holdings. It's, I think, we're happy to manage and we have all the capabilities to manage internally. But if something were to arise, where someone -- and we could partner with someone in an effective way. And again, I think win-win is very important. We don't need to do it, but it needs to be incremental and value creative, if you will, for us, then we'll consider it.

Next on capital management. Maybe just an update on how you approach the capital management. You obviously have a bit more flexibility at the moment after this transaction. Is there anything you see on the M&A front that could be interesting? Or with your shares with IRR, is that a priority? How are you thinking through all of that? .

Yes. I mean I think we've had a consistent approach when it comes to our capital management. And basically, we want to continue to support organic growth. Again, we're achieving really attractive IRRs and paybacks. And then what we've said is in the absence of accretive strategic M&A, excess capital belongs to shareholders, and we'll return it in the form of dividends and buybacks. Post major divestitures, I think, again, here, we've built a track record of being expeditious and deliberate in how we return capital to shareholders. So you can expect the same here. From an M&A perspective, M&A is a strategic capability. We take a very disciplined approach, a strategic fit is important. And strategic fit is about making sure that there is alignment to core growth areas and no excess in terms of non-core elements that come with any potential deal. And the discipline is also in terms of how we value a yield in terms of minimum adjusted hurdle rates accretive over time. And indeed, would have to compare favorably to other potential uses of capital as well. Ideally, we'd like to maintain a healthy balance between all of these elements, but it's also down to the opportunity side, I would say.

Understood. Maybe the next one on technology. You see a lot of the news on some of the advancements that are occurring out there. It seems like it's accelerating, I suppose. I think you guys have been more on the forefront of investing and obviously, it's reflected in the expense ratio. But are you seeing any incremental opportunities coming out of some of those advancements?

Yes, I think we'll -- those will emerge over time. And certainly, the investments that we've been making, we continue to make. I think large incumbents today would size with a lot of customer data do have an advantage provided they can move at pace and invest in the right areas. So we're certainly at the forefront of that we have been for a number of years. Some of the catch words like AI, et cetera, those are things that we've been, I think, deploying for a number of years. You do see significant advancement more recently. So we think this ability to sort of translate our size into a scale advantage over time will be a differentiator format life.

Got it. look, thank you very much for being with us today. Very much appreciate it, and thank you to everybody that's here.

Thank you for having us here. Appreciate it. Good to see you.

Appreciate it.