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

Thank you for coming to the Bank of America Securities U.S. Financial Services Conference. If you're in this session, you're in the MetLife session right now. We're really pleased to have John McCallion and Michel Khalaf from MetLife here. I was just looking, I think you're like 2 or 3 months away from your 5-year anniversary as CEO. I mean, John you've been with MetLife for a long time, I think 6 years as CFO. Usually someone's got bios, but I feel like at this point, the bio is -- this is the team. And so we're really pleased to have you. Thank you for coming. If people do want to ask questions, I guess, give me a hand signal, and I'll stop my prepared remarks and give you a chance, but we're going to get started.

The strategy announced when you came on board, the Next Horizon strategy, do long-term planning, I feel we're sort of at the end. And in terms of trying to figure out what goalpost were achieve, where the new goalpost go, the secret term that we're going to talk about for the next 5-year plan. So tell us where we're at right now in the story.

Time flies, I guess, but thanks for having us here in sunny Miami, and it's great to see everyone. Yes. I think to illustrate where we're headed, I think it's maybe -- it would be good to just frame where we've been, and if I look at 2023, very strong year, EPS growth of 4%, which is remarkable considering that our VII contracted by 70%. And this is really on the back of strong top line growth, healthy underwriting margins, good expense discipline. We saw a significant jump in our recurring investment income. And then that was also implemented by consistent capital management. And we also ended the year with strong capital ratios and significant cash on hand. And I would say I would attribute the 2023 performance to our Next Horizon strategy, the fact that it's all-weather allows us to perform across economic cycles in a variety of environments. That's very important. And as I look back at 2019, when we first designed and announced the strategy, a couple of things. One, I think we were at an inflection point just in terms of the transformation that we have been on to reduce the market sensitivity of the company, which is something that we continue to build on. But I also think we were on an approve it mode. And that's why we decided to come out with a, I would say, aggressive set of targets, 5-year targets and objectives. And the fact that we are meeting, if not exceeding those goals, I think, speaks to our ability to deliver on the strategy. And just as a reminder, to generating $20 billion in distributable cash, and we're on track to meet, if not exceed that to create $1 billion in operating leverage, so we can reinvest in the business, which we are -- which we have done, and we are on track for that as well, 13% to 15% ROE, up from the 12% to 14% that we came out with in 2019. And the 65% to 75% free cash flow ratio. This is a 2-year average, and we've delivered that throughout the next horizon period. So pleased with our ability to deliver here. And I think this really gives us also the foundation for our next journey. And I think MetLife is a more predictable company now. And as we look to the future, I think we have an opportunity to accelerate top line growth to maximize returns on margins and to drive operating consistency as well. And I think that's sort of -- those are the hallmarks of our future success, and that's what's going to allow us to deliver long-term shareholders -- to continue to deliver long-term shareholder value.

So in my mind, '23 is going to be the benchmark year. Can you just talk about framing where we were in '23? I mean obviously, VII, variable investment income, skews the results a little bit, but what is the basis for measurement, I guess, going forward with like '23 being the sort of, I guess, measuring stick?

Yes, I'll let John take that. Just one maybe a reflection on '23. We started the year with a 10-year at 3.9%, and we ended the year with the 10-year at 3.9%. But in the interim, we had tremendous volatility. Think about set policy, geopolitics, I mean, you name it. And I think that, again, speaks to the all-weather nature of the strategy, our ability to deliver despite that. And I would say that if I look at the underlying fundamentals of our business, I've never seen them stronger and the fact that we have excellent momentum group in RIS and Asia and LatAm, I think, speaks to that as well. But I'll turn it over to John.

Yes. Thanks, and great to be here, Josh. Thanks for having us. I mean as Michel said, and we've referenced this before in other meetings. I mean 23 was, like you said, was just a remarkable powerful year. And obviously, we had some market volatility, and we have headwinds with variable investment income. But if you kind of exclude that, I mean adjusted earnings were up roughly 17% on an underlying basis, right? If you kind of move -- take away VII. As we said, we are within the 13% to 15% ROE target despite VII headwinds. We had strong growth kind of across all markets, PFOs in general were up 6%. Group was right in the middle of its 4% to 6%, PFO growth range at 5%. LatAm had constant currency basis growth of 19%. So strong top line growth, as Michel referenced. Expense discipline is kind of now core to our DNA. So we saw that kind of maintain its level of importance through the year and 12.2% direct expense ratio compared to a target of 12% to 12.6%. In terms of just capital, we had a large transaction we did with Global Atlantic. That helped free up some capital for us. So capital ratios were very robust come at the end of the year, roughly 400% -- is it going to be our combined RBC ratio here in the U.S., about 720% solvency ratio in Japan. And then we had over $5 billion of liquidity at the holding company. So again, just a real solid, strong set of results for the year, and that gave us the ability to return cash of $4.7 billion throughout the year in share repurchases and dividends. So Again, just across the board, again, while there are some market headwinds and volatility, the underlying fundamentals was very robust.

So the 12.2% for the direct expense ratio last year, 12 to 12.6% range, is that range a stable range? Or should size change that over time? I guess ROE goal going forward, cash flow going forward each of those?

Yes. As we mentioned on our outlook and as Michel referenced, we went from 12% to 14%. We raised it to 13% to 15%. With a resurgence of VII, we are probably operating at the top end of that range, if not even a little above. But we just changed it. So we probably give ourselves another year to look at that. Direct expense ratio was 12.6%. We lowered that to 12.3%, a function of what you just said, I think, one, our discipline on expenses and two, the growth that we're seeing. So there's operating leverage in the business that's coming through. And then we've been pretty consistent over the 5-year period with a free cash flow ratio between 65% and 75%. I think the 2-year average this year was 74%. So we think we'll continue to operate within that range, but those are probably the headline targets for us.

So if I think about just focusing on some of the fierce businesses, group benefits, I mean, it's MetLife, and it's everybody else. And it's hard to grow. I mean a lot of -- everyone else is looking at smaller customer size generally than you are, but you still have a guidance 4% to 6% growth in premium volumes, is that all? Is that GDP? Is that inflation? What kind of ability do you have to seize share from the position that you're in right now?

Yes. I think generally speaking, it's a GDP+ business group. However, we've been able to grow the business consistently in the 4% to 6% range. And to the point you made, Josh, the important thing to remember here is that we're growing it off of a very, very large base. I mean just to give you a sense of that from '19 to '23, we've added $5 billion in PFOs to that business. So that's just sort of the -- gives a sense of just the growth that we are seeing and off of the base that we already have. We feel good about the trajectory of this business. We guided again to 4% to 6% in the near term. We think, we'll be in the top half of that range in '24. And I would attribute that to a number of strategies that we've been pursuing and that have been quite impactful. We have a very strong position in the national accounts space based the 5,000-plus market segment. And we continue to sort of, I think, earn the right to be the provider of choice for employers. They're also looking to do business with fewer providers, which is, I think, helpful to us. And we continue to see very strong persistency in that segment as well. And then we've had a -- our strategy was to accelerate growth in the under 5,000, we call it regional market. That's a much more fragmented space. And there, we're seeing growth 2 to 3 percentage points above the overall growth for that business, again, indicative of sort of our trajectory there. And that's a combination, I would say, of products, ability to bring products down market, technology, which is important in that space and distribution capabilities as well that we are leveraging. And then we've had a voluntary benefit strategy for a number of years. We've seen very strong growth in terms of our voluntary benefits mid- to high single digits for a number of years. And think of that as a force multiplier to all of our market segments. And this continues to be the case. Again, investments we've made there and better integrating with the employer ecosystem benefits ecosystem as well as in capabilities to drive take-up rates when it comes to enrollment and re-enrollment or really paying dividends. So we think that's why we feel confident in terms of the 4% to 6% range. And as I said, we think this year we'll be at the high end of that, just to give a bit more color. We grew sales by 9% last year for group overall, 1/1 is an important renewal and sales season for national accounts, in particular, and our 1/1 sales are 5% to 10% higher than last year -- so with very good persistency. So this tells us -- gives us confidence in terms of the outlook we provided.

And if we shift focus to our Retirement and Income Solutions, obviously, the strong capital position at MetLife has created a huge opportunity for jump over transfers of pensions. There seems to be always large deals moving, but it's obviously a much more well-penetrated margin than it was 10 years ago. Where are we in the life cycle of that business as a source of flows for the company overall?

Sure. And just before I go to RIS, I want to just maybe spend 2 more minutes on group because we...

Not allowed.

We also -- not only did we guide to 4% to 6%, we also reduced the mortality and on medical health ratios for that business. And again, I think the strategy that I described earlier is really sort of what gives us confidence and the fact that we believe that those ratios will be in the same zip code as what we saw in 2023. I would just caution here that those are annual ranges and the Life as well as nonmedical health, especially dental, tends to skew towards the high end of those ranges in the first quarter, but we feel confident in sort of the range for the full year. And again, this is a combination of growth in the regional market that's now 25% of our overall PFOs. That tends to have a lower benefit ratio and then accelerating growth and voluntary benefits, which also tend to have lower ratios, Life and non-medical health. Switching to RIS, maybe I just want to start by -- just reminding that RIS -- and I will talk about PRT, I promise, but RIS is more than just PRT format life, and we love the diversification that we have.

I only have 35 minutes, [indiscernible]. Go ahead, go ahead.

But if you think about '23, it was a record year for us in terms of structured settlement sales, $3 billion plus, and we had $5 billion in -- launch every reinsurance sales as well. And it was a very good year from a PRT perspective. We had $5.3 billion in PRT business. That was our third highest year ever. And if you think about the last 5 years, we've taken on over $30 billion in pension liabilities over that period, and we've been a top 3 player, every single one of those 5 years. So that gives you a sense of our standing in that business. We like to concentrate on the jumbo end of the market. We continue to see a very healthy pipeline. We do some research with plan sponsor that gives us indications in terms of their willingness to transact. Funding levels are healthy. That's also another indicator that this business is going to continue to be -- the pipeline is going to continue to be strong going forward. And we're very disciplined in our approach. We use an M&A like approach in terms of how we price this business, but we feel confident in our ability to continue to win there.

But next 10 years can be as good, if not better than the previous 10?

Yes. I mean I don't know if I want to look out 10 years, but I can tell you that over the next several years, we see a very healthy pipeline for sure.

And you mentioned earlier about the unusual beginning of the year at 3.9% industry environment or 10-year environment ending the year at the same, but of course, visiting the mid-5s during the year. What did that mean for the pricing of such large transactions? And what does it mean? Are we in the same place we were suddenly 1 year ago, or it's something different than it was a year ago?

I mean it's a competitive market. So we have to price competitively. I think where you might see that sort of evolve over time as demand outstrips the supply of capital, you might see sort of a hardening in terms of the pricing at that point. But for the time being, I would say, it's still a rational about competitive market, and we're able to achieve returns in line if not above our hurdle rates requirements, think about our ROE range and the like.

[Operator Instructions]. Okay. So in all -- obviously, the 2023 year was a good year, but it is less strong than it looks when you [indiscernible] the VII in there. Are there any lessons learned? What's -- given the higher interest rate environment right now, is that you make you more or less attached to private equity as an asset class? How should investors think about the VII sort of strategy, I guess, for the next 3 years and MetLife's commitment to it?

Yes. I mean I think we always start with that this is part of our some of our kind of unique skill sets, one. Two, it's used to help [ diffuse ] the liabilities, and it's a good asset for the tail. But we recognize that in the near term, and we referenced this in the outlook, that we think these returns will be a little below what historical averages have been. And over time, they would revert back to those. So we've kind of lowered our guidance a bit. We're at $1.5 billion this year and then we think it'll improve a little bit more. I think what's important to also highlight is that's an annual number again, a little bit of what Michel referenced around just seasonality, we actually think the first quarter will continue to be pressured, similar to what we saw in the fourth. And if you take into account what Michel referenced around margins, in the group business, that has -- that's typically seasonally low in the first quarter, too. So those are important things as you think about the first quarter. But our guidance, that's all contemplated in our guidance that we gave and good reference is actually probably prior year Q1, obviously, adjusting for the lower share count. And then I think on the margin, we'll probably see ourselves tilt to a little less in terms of run rate commitments to this asset class. And obviously, there's some good relative value in the fixed income markets these days. So -- but all in all, it's still going to be an important asset class for us.

Okay. Let's pivot to some of the geographies around the world where MetLife operates. Talk about Asia a little bit, working in Japan, we're not -- I give you a chance to talk about the different businesses, what the growth outlook there is, and what the opportunity set is in those markets?

Sure. And again, Asia had a very strong year in 2023. We had sales growth of 13% on a constant rate basis. Japan had a very good year as well, 14% sales growth. And our other, I would say, important markets, primarily Korea, 19% growth; China, 25% growth; and India, 16% growth, also performed very well for us. Off of this high increase in terms of sales in 2023. We've -- in our outlook, we've guided to a mid-single-digit sales growth for '24. We think that's reasonable range for us in terms of just the size and scale and breadth of our business in Asia. And I think the other thing that's important there is really the work that our Asia team have done around driving margin improvement. I think we're seeing really attractive VNBs -- and VNB and VNB margin come out of Asia. And that's a function of a few things. One, continuing to evolve the product and channel mix their, product repricing and ability to introduce products faster to market as well, reducing unit cost as we increase scale in our key markets. And we've also leveraged captive reinsurance to also drive some capital efficiency there for new business. So all those are positive indicators, and we feel good about sort of, again, the underlying business fundamentals in Asia.

And given the material devaluation of the yen over the past few years, 2 years, I guess, and you're selling a very successful currency stable product there. Are the buyers more prone to the -- greater need for that product right now or [indiscernible] already depreciated this design and depreciate further. What is the mentality among the buyers of the retail product there?

Yes. So it's interesting because what we're seeing is with the higher U.S. rates, customers in Japan continue to see value and also diversification benefit and FX products. So those performed very strongly for us in '23. And we think, again, in a higher interest rate -- U.S. dollar interest rate environment, that's likely to continue in '24.

Okay. Let's go to Mexico and Latin America a little bit. I think we want to touch upon both the growth opportunities there for you, also a little about the political stability of those different geographies, valuable for some people.

Sure. Again, a very strong year for LatAm in 2023. Growth across the board, sales, PFOs and earnings. And if you think about LatAm, pre-pandemic, we were averaging about $150 million a quarter in terms of earnings, where we've now had 5 consecutive quarters of averaging $200 million in earnings a quarter. So I think this speaks to just how strong we came out of the pandemic, but also the momentum that we continue to see in our business there. The outlook we guided in terms of PFOs and earnings to high single digits, we feel confident in our ability to deliver on those. I would say a few things that give us that confidence. One is that we're extremely well positioned in some of the key markets in LatAm, market leaders in Mexico and Chile. We see also market trends that are favorable in terms of demand for insurance products post pandemic, much better awareness, I would say, also a flight to quality, which we're benefiting from. And then our strategy, which is based on protecting our core business, so think about worksite government business in Mexico, our insurance business in Chile, while driving or accelerating growth through diversifying into new channels like direct marketing, like Banca and then a focused strategy to accelerate our growth in Brazil, and that's -- we're seeing really good momentum there. So I think all of these are really contributing to the momentum we're seeing in LatAm, and we think that's sustainable.

Have the political pressures that might come into restructuring the pension system in Chile in a way that, I guess, is bad for private market? Has that risk asked?

I don't know that this will risk ever pass this, frankly, because every time it looks like it's behind us, it's sort of rears, its ugly head again. So I think that risk is still there. I don't believe that in the near term, it's going to have an impact on our business, but it's something that we're keeping a very close eye on. And obviously, we're very engaged with the rest of the industry and making sure that we build awareness in terms of some of the potential ramifications of every form that ends up hurting capital markets and maybe the interest of the participants in the pension system as well.

Are there any implications? I mean, any is a very vague term, but Mexican elections are this year also, there could be a shift in the political fortunes of the [indiscernible] power whatnot. Does it matter for what you do?

I mean we always keep a close eye on what's happening. But as we sit here, I don't think we see any sort of near-term impact.

So I'm going to over some MetLife Insurance Company. There's a big pool of float, the more funds come in, the claims jump-out mature over time. What is -- when we think about the architecture of the duration of the portfolio overall, new money yields, expiring yields, what is the shape of just the natural flows to what's going to happen to investment income over time based on what's available in the market now and what's rolling off the books?

Yes. It's a good question. I mean, I think we've pointed out, and you've seen it in some of the sensitivities at the end of the day, higher rates are better for this business directionally. We've done work to kind of reduce interest rate sensitivity, but ultimately, higher rates are better economic, improves the economic value of the firm broadly. And we've seen over the last year plus of where we've had this positive reinvest versus the roll-off rates, just with last quarter was probably 145 basis points difference. So that's powerful, right? And that should continue in the current rate environment. And in addition, it's also -- we're seeing it in kind of the strength in some of our flows, right? It's creating a more higher demand in the broader market for fixed income-oriented products, which we issue, and so it's -- overall, it's having a very kind of positive impact on the business model.

Continue a little bit of investments. It's always topical. I think there's many places we can go. 1Q '23, commercial real estate became the great topic, obviously, MetLife is very large in the real estate markets at this point right now. What's the state of the portfolio, the level of concern around certain investments? What do we know now that we didn't know 12 months ago? Or we just have to wait 5 years and find out?

I hope not. But we are a large real estate investor. I think what we've tried to articulate is that I'd say the generalization of the headlines are not necessarily a good representation for us or even for the insurance industry. I think our approach and the insurance industry, for that matter, approach to lending to commercial real estate is really collateral lending, right? I mean we underwrite the collateral. We tend to loan at kind of the mid-50% LTV ranges. And that's different from other models. Like I think if you compare that to like a regional bank model, that tends to have more of a relationship lending model. I think those results can kind of skew differently. And so what we've said is that while there's pressure in the market, like if you take 2023, we expected to resolve the vast majority of our maturities. I think on a $50 billion portfolio, we had a $20 million of write-off, and that's kind of what we projected, right? We think 2024 will remain modest in terms of that. So we've spent quite a bit of time having to kind of wrestle the headlines a little bit, but we think the portfolio health still in good shape.

What about looking at the opportunities to deploy more. First of all, it's a big thing. Every office is not everything, of course. Office is on everyone's mind. And though, are we comfortable deploying your real estate broadly right now in 2024? And when does -- I think that people feel a lot better if you want to start buying offices again, but that's going to be a signal that the normalcy has come back into the market?

Yes. I think the office sector has created opportunities in other sectors of the real estate market, and that's probably where we're focused most right now. So we do see good relative value outside of office. I think office will emerge over the next 3 years and probably become a good time to get back in. We also -- given our kind of relative weighting of that, we probably are just looking to kind of balance that out a little bit over the total portfolio. But there are some really unique opportunities right now. And I think as a result, office has created that with some wider spreads that have kind of been pushed out to other sectors in the real estate area. And we think office will eventually get there, too, but it's probably a little early.

Let's shift away from investments into structure. The Global Atlantic transaction was closed. What benefits is it providing the company? And I guess we'll pivot to like what that means for future structuring of opportunities?

Yes. So it's roughly $19 billion of reserves that we transferred to Global Atlantic through a reinsurance transaction. This is something where we've talked about being opportunistic. It wasn't something we had to do, but we were continuing to evaluate this with different partners. And if we found out it was value creative for us to accelerate the release of those reserves and capital, we would. And so we did. We got $2.25 billion of ceding commission, another $1 billion release of capital, and then we lost roughly $200 million of run rate earnings out of holdings. But it was accretive for -- if you think about EPS and you think about the freed up capital, it's accretive to ROE. We've maintained no impact really on our free cash flow as a firm in terms of ratio. So overall, it was just a great transaction, great execution. We had to pick a good partner and think through that, which we did. And we're very pleased with the outcome. And I think that also helped us with year-end, roughly 400% RBC ratio for the combined NAIC basis in the U.S. there, and that's 40 points above our target level.

And given where we are in the reinsurance -- the interest rate markets right now, does that make more transactions likely less likely, maybe it's no difference that the cost of capital changes in the same way. So how you see it? What should we think about that?

Yes. There's a lot of different things that go into whether these transactions make sense. Certainly, a higher rate environment, I would say, is a marginal positive to that. And I said the discussions continue to be fairly robust out there, even emerging in certain asset classes or I should say, liabilities that maybe weren't as active before. They're starting to become a little more active and I think we'll take the same approach, right? We'll look at them. We'll be opportunistic if it makes sense. We're very comfortable with our portfolio. It's well diversified. We have great expertise. We can run -- we can manage it and run it down ourselves. Or if there's a great opportunity to do it with a partner, we'll take a bit and we'll look at that.

So I guess we'll end unless you want one more question on capital management. I guess it's a 2-parter. I mean, obviously, the company is very committed to returning capital to shareholders in the form of a healthy dividend, but also very robust buybacks. But you're obviously looking all the time if there's opportunities in M&A. What are the benchmarks of return that would cause the company to slow the pace of buyback in favor of adding to the business. What's the hurdle? What's the payoff time? How long should we -- I'm trying to force you on anything, but I just want to understand what changes the calculation behind the buyback, which is obviously hugely important in the stock?

Yes. I mean we like a balanced approach, I would say. And I think we've sort of built real consistency when it comes to our capital management approach over several years. Our focus better is all about deploying capital to its best and highest use. And that's really how -- that's the mindset, I would say. We want to continue to invest in responsible growth. And you can see from our VNB disclosures that we've been able to do that at attractive mid- to high-teen IRRs and low paybacks. From an M&A perspective, so if we can complement organic with inorganic opportunities, we're very much open to do so. We think of M&A as a strategic capability at MetLife. And there, we look for -- strategic fit is very important and opportunities that align with core growth areas and don't bring with them other things that necessarily don't align to our core is important. It's also important that any opportunity clears what we deem to be an appropriate risk-adjusted hurdle rate. We like opportunities that -- we look at value and cash as also key factors. And we want opportunities that are accretive across many sort of factors over time. So that's really the mindset when it comes to M&A. And then as we've said, if -- in the absence of M&A and after deploying capital in support of responsible growth, excess capital belongs to shareholders, and we're going to return it. And I think we've demonstrated, especially in the aftermath of major divestitures that we would do so deliberately and expeditiously. And if you look at sort of the -- from 2019 to '23, we've deployed $17 -- or close to $17 billion to support organic growth. We've made $2.3 billion in acquisitions. And we've returned -- we bought back close to $14 billion of our shares. So again, this is the balance that I referred to earlier, and I think that's sort of how we think about our approach going forward.

And you have a high dividend yield.

Yes. And absolutely. And that's important to us as well.

Yes. Well, I want to thank Michel and John for giving us time today, and thank you all for being here. There's going to be a panel in here on climate change topically in Florida as well as uninsurable property that I stuck around for. But in the meantime, please give a hand for John and Michel.

Thank you very much.