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

Good morning, everyone. I am Ryan Krueger from KBW. I cover the life insurance. It's great to have MetLife back with us again this year. Up on stage with me is Michel Khalaf, President and CEO in the middle; and John McCallion, CFO, and head of MetLife Investment Management on the right. I also want to acknowledge John Hall, Charlie [ Meesha ] from Investor Relations. So I guess just to start, you're approaching the completion of the Next Horizon strategy, which was a 5-year strategy. You have an Investor Day scheduled later this year to discuss the new strategy called New Frontier, I believe. So to start, I was hoping you could reflect on your performance over the past 5 years and also any preliminary thoughts on what we should expect for the next 5-year strategy?

Sure. And great to be here, Ryan. Thanks for having us back this year. So if we look back at the sort of the environment, the industry, MetLife from 5 years ago compared to today, I would say there's a big difference. So from an environment perspective back in 2019, we were looking at historically low interest rates. We were also just right around the corner was a global pandemic with significant human and economic cost to follow. And if you had asked me 5 years ago, where disruption might come from for the life insurance industry, I would have probably pointed to [ insure techs ] who were looking to zero-in on certain sort of components when it comes to the value chain. So fast forward 5 years and, today, interest rates have rebounded. The reinvest rate exceeds the roll-off rate. The pandemic has become endemic and to a large degree, we're back to a BAU type situation. And what we're seeing from advancements in technology, whether it's AI or technology more broadly suggests that incumbents have an advantage here to convert their scale into a real -- their size into a real scale advantage and so it's a different environment, I would say. And there are also some population shifts that also support sort of renewed momentum in the industry. So if you think about that, you think about demographics, you think about a more stable economy. I think that's all sort of putting the industry in a more of a growth mode today compared to 5 years ago. For MetLife, I think, for us 5 years ago, we were in improvement mode. And this is why we came out with an aggressive set of commitments, 5-year commitments. We're very much on track to exceed all of those commitments. So namely, we talked about $20 billion in distributable cash, so we will exceed that. We talked about $1 billion in operating leverage to reinvest in growth and in technology to support our business. We will exceed that as well, 13% to 15% ROE. And again, we are sort of clocking higher than that currently. And then a 65% to 75% 2-year free cash flow target, which we've exceeded throughout the Next Horizon period. So we feel good about our performance throughout this period about how we're positioned going forward. So as we think about New Frontier, we will look to build on the success that we've achieved during the Next Horizon period. And here, I think there are -- whereas maybe back in 2019, we were more sort of on the defensive. I think we now are more in a growth and offense mode. New Frontier will look to build on the strong foundations we achieved under Next Horizon and really look to accelerate our growth to boost our returns and to basically ensure even greater consistency and outperformance in our results. I would also point out that beyond achieving the commitments and targets throughout Next Horizon, we also continue to reshape our business. And here, we've made, I would say, timely acquisitions and divestitures managed to redeploy capital, again, which makes us an enterprise that has a lower risk profile but also has a lower range of potential outcomes as well. So don't think about New Frontier as a departure from Next Horizon. We are not looking to go into places where we don't feel we have a right to win. This is really a growth platform that is intended to build on next horizon and to take us to what we believe will be new heights in terms of levels of performance going into the future. And of course, we look forward to sharing more at our Investor Day on December12.

Great. So you mentioned that you're exceeding the 13% to 15% ROE target. I think the original target was actually 12% to 14% as well, right? When we look at the first half results, I think your ROE was 15.5%, and that was even after having your kind of lower variable investment income than the long-term assumption. So the question is, do you see the ROE continuing to expand from here as you have MetLife Holdings continue to gradually run off and you've been illustrating for several years that your new business IRRs are more like in the 17% range.

Yes. And I think you summarized it pretty well. And I think just if you take some of the comments that Michel just made and, as you highlighted, we started out at 12% to 14%, we've been in ROE expansion mode for the last 5 years, right? And I think those factors that you just highlighted are certainly key. A few other things I would just kind of call out, right, I mean I think the rising rate environment has been beneficial. So while new business levered, the roll-off reinvest has been a powerful tool as well. And I think you got to bring into the fact our risk profile has changed. How capital intensive we are, has changed. And so all of those things and those factors have been beneficiaries in terms of our -- to our ROE. And I think we would argue that that's probably continuing. We're definitely punching at the high end, if not above that for this year and VII is below trend. So if you get back to full strength, we expect to continue to post high teens IRRs at this juncture. In terms of new business, we see the roll-off of holdings continuing. That's probably a high single-digit ROE business, right? So that kind of continues to migrate down. So there's certainly momentum for the ROE to be accretive from here. And as kind of that we saw in Next Horizon going from 12% to 14% to now the high end of 13% to 15%, I think it's fair to say that there's opportunity ahead of us.

On VII specifically, it's been improving, but still a bit below your expectations. Can you give any update on what you're thinking for VII in the back half of the year maybe relative to the first half?

Yes. It's -- we gave an outlook on it. We said that we thought return would continue to start to migrate upwards. We've seen that in the first half. We saw some pressure in real estate early, but offset by some -- probably a little bit better than expected PE returns. Remember, we have about $19 billion in total, about $14 billion of that is PE, and then we have other funds, real estate and other funds. And so we saw a little better performance in PE. We think -- we thought the next second half of the year would be kind of upward trajectory. We still think there's an upward trajectory from here. For third quarter, early days here, but if we extrapolate what we're seeing so far, we're running a bit below second quarter, probably 50%. So we're seeing PE a little bit have some headwinds, still positive. We're seeing real estate recover, but overall, for the third quarter, we're seeing about 50% of what we saw in the second quarter. We still think we're on that upward trajectory view. I wouldn't change our view of fourth quarter on, but we are seeing a little pressure in the third quarter.

And then I guess just one more related question. You had -- for the outlook for this year, you had brought down your VII assumptions. Was that intended to be more of a 2024 view? Or should we think about that more as your view over the next few years?

Yes, so we still think that returns would migrate upwards. But one of the things that we've been seeing over the last several years is we are probably in a net distribution mode. So rough justice distributions have been north of $2 billion for the last 3 years. We actually think that's going to continue to tick up, right? So we think returns will grow, but maybe the quantum of earnings may not because your balances are coming down a bit, right? So kind of our mix shift, and we've talked about this in a higher rate environment, we might kind of move in the margin a little lower in terms of our allocation to this asset class. And so -- but distributions have been coming in strong. So off of like $14 billion of book value, we're seeing north of $2 billion a year in distribution, we think that probably grows in the outer years.

Got it. Shifting gears to Group Benefits. There have been a lot of questions about the competitive environment lately just given favorable industry returns for a lot of companies. What's your view on the competitive environment in Group Benefits? And also, have you really seen it change much over the past year or so?

Yes. I would describe it as competitive, but not irrational. And that's been consistent over the past year or so, I would say. I think trends have been -- returns have been favorable in the industry, so you might see a competitor from time to time get overly aggressive, but I wouldn't sort of -- I wouldn't point to anything that's irrational here. Price matters and is important, but I think we've talked in the past about the importance of investing in this business and building capabilities because it's not just price, it's more than price. And I think we're seeing that in an even more pronounced way, I would say, in terms of what customer expectations are and that continues to be a factor in terms of not only winning new business, but also continuing to achieve very healthy persistency in this business.

On the growth side, you've been targeting mid-single-digit premium and fee growth in Group Benefits and you've been achieving that. I think a question that often comes up is you have a large market share in this market, how are you still able to grow kind of at least in line, if not maybe above the market. So can you talk about kind of what's driving that? And also to what extent does it differ between some of the key market segments that you compete in?

Sure, sure. Very pleased with our growth, above-market growth consistently over sort of the Next Horizon period. And if you look at -- if you say, well, at 5% growth rate is healthy for this business, I would just -- I think what's more impressive from our standpoint is the fact that we are growing off of a very significant base. And so this 5% growth translates into more than $6 billion in PFOs over the 5-year Next Horizon period, which is the equivalent of a reasonable-sized player, I would say, in the market. So very pleased with that. And we are confident in our ability to continue to grow this business. Our strategy has been to identify secular trends that will drive growth and group and then to be laser-focused on investing in capabilities that differentiate us and continue to drive our competitive advantage. And whereas there are some trends that are, I think, well publicized in terms of -- if you think about employers continuing to see benefits as a key component and their ability to attract, retain talent also in terms of engaging talent and ensuring better productivity. I think those are things that the entire industry will continue to benefit from. But there are a few maybe less talked about trends that I would point to where we see a real opportunity also for MetLife. And 3 areas I would touch on here: one is the complexity that employers are telling us they are facing and this is a real issue. And the ability to solve for that is an important consideration. So think about a complexity when it comes to the number of providers that companies have to deal with. Think about complexity in terms of the benefits, human capital ecosystem that employers have to deal with. And I would sort of particularly also note complexity when it comes to leave and absence management due to state-by-state regulation. So that's a real pain point that we've been hearing about from customers. And on all of these fronts, having the largest and widest product range in the industry allows us to help customers consolidate with fewer providers. Having seamless connectivity to that Benefits ecosystem also helps us simplify things for customers. And important investments that we've made in building best-in-class leave and absence management capabilities. My Leave Navigator being our flagship product here, is allowing us to win significant business. Just to give you a sense of that, through the 5-year Next Horizon period, we have more than doubled the number of covered lives when it comes to leave and absence. And overall, 80% of our sales in the national account space, the 5,000-plus market come from existing customers, so that's one area. Another area that I would point to is the consolidation that's taking place has been and continues to take place in the broker intermediary market, where we are seeing bigger brokers consolidate some of the smaller ones, especially in the lower and middle end of the market. And again, here, given our relationships with those brokers, given that those brokers like to focus on a select panel of best-in-class insurers, this is giving us added access to that segment of the market that is quite fragmented. And then maybe one last thing that I would point to here in terms of from an end user or from an employee perspective, all surveys point to the fact that close to 50% of employees say that they are confused when it comes to choosing their benefits. And I think all of us have participated in enrollment and reenrollment exercises and maybe we can attest to that. And so here, again, we've invested in a capability, a significant investment to really help employees select wisely, but also to ensure that they have a seamless experience in terms of how to use products, and this is true for life and health. We are deploying this capability in the market. And if you consider that currently for voluntary products, our take-up rate is in the low teens, there's a lot of sort of room for that to grow over time. So I think we feel good about sort of the momentum that we have in this business, but also about the future trajectory in terms of our growth here.

Sticking with Group Benefits, on the underwriting side, can you discuss the underwriting results you saw in the first half of the year as well as any key trends you're seeing in the different product areas?

Sure. I would say that what we've seen in the first half is largely seasonality being back to pre-pandemic levels. So if you think about the first half, our life ratio is at the low end of our range, 84.6%, whereas -- or 84.7%, whereas nonmedical health was slightly above the midpoint of the range. On the life front, we saw as we typically would, higher loss ratios in the first half of the -- in the first quarter of the year. The second half benefited from, and this is consistent with what we saw from CDC data, favorability in terms of the working age population mortality had dropped. We don't think this is necessarily a trend. We think that we're more likely to revert to more normal seasonality, which means that in Q3, that's typically our lowest quarter when it comes to the life ratio, so we would expect Q3 to be at the low end, if not slightly below our range. And then on the non-medical health front, this is primarily dental and disability. I think dental, we saw sort of seasonality revert where plans reset in the first quarter, that tends to be a high quarter. We saw utilization drop in the second quarter. And I would say, last year, beginning of last year, we were seeing an increase in the trend, in the dental trend. So we did take pricing action. We were proactive on that front, and that's largely behind us. So I would expect sort of the experience to continue to be consistent with what we would see in the past. And then disability, I would say, has been -- we benefited in Q2 from a nonrecurring reserve adjustment. But that aside, I think our experience there is consistent with our expectation, slightly higher utilization, offset by lower severity and strong recoveries.

Great. Moving into your Retirement and Income Solutions business. The spreads, excluding variable investment income have been declining in recent quarters as your interest rate caps roll off. Can you give an update on expectations for spreads in that business in the back half of this year? And then also just any thoughts on how to think about it as we move into 2025.

Yes, sure. And as you mentioned, we had these caps on. We bought them a number of years ago for this exact environment when we see kind of a sharp rise in rates. The front end of the curve can put some pressure on spreads. These caps have hedged that, right, and it gives us time for the long end to find its way to roll off and reinvest into our earnings, and so that's basically happened. As we've talked about, the cash will mature this year, and they kind of do 1/3, 1/3, 1/3, first quarter, second and then third. We expect that to result in about 8 to 10 bps a quarter of declining spread and then flatten out in the fourth quarter. And I'd say generally in line with expectations, I think, the second quarter probably came in a little better. I think rates were a bit higher than we had thought they would be, but we still think the third quarter will be 8 to 10 bps off of where we were in 2Q. We'll give more perspective at the outlook on 2025 because a lot matters with the curve. But I think at least the curve is expected to steepen, which should be a positive and I think to kind of stabilize spreads, especially as the caps have rolled off, so that's maybe a good way to kind of frame it for now.

Got it. In that business, you have a target to grow spread-based liabilities 2% to 4% a year. You've kind of generally been exceeding that some lately. Can you talk about where you're seeing the best growth opportunities in that business.

Sure. RIS is an important source of earnings and cash for the company. I would say we're diversified at scale in terms of our product set there, which allows us also to perform across a range of different environments. To the point you made, we have seen healthy growth in our spread business. We have $157 billion in liability exposures in our general account that's benefited from momentum that we've seen in several of our businesses. PRT is certainly one. Over the last couple of years, we've written about $20 billion in PRT business. So that's been a contributor. And whereas PRT can be lumpy, clearly, with our focus on the jumbo end of the market, it can have -- it does have an impact in terms of our growth there. We continue to see a healthy pipeline there. If you look at funding levels continue to be very healthy, higher rates, strong equity markets help there. So we believe that this market is going to continue to grow and we're focused on the jumbo end where we think that with our investment capabilities, underwriting capabilities, balance sheet strength, credit ratings, we would continue to win our fair share there. Another business that I would point to is structured settlements where post pandemic, we saw sort of court activity resume, higher rates also are helpful to this product. We're the market leader there, continue to achieve a very healthy return and we continue to see strong momentum. And then I think we've been also focused on RIS on product development. And I think that's contributing and will continue to contribute going forward. Think about UK longevity reinsurance, which is a business we entered in 2020, and it's exceeded $20 billion so far in terms of business that we've written. So we feel good about sort of the mix of business and our ability to continue to grow our liability exposures there.

In Asia, you sell a diverse set of products, that includes annuities, life insurance, accident and health. Can you talk broadly about kind of how is the interest rate -- the higher interest rate, at least somewhat higher interest rate environment or how is that in Japan impacting demand for the products as well as we've seen quite a bit of FX volatility recently?

Sure. Japan, again, is a very -- and Asia are important markets for MetLife. Japan contributes, call it, $1 billion or more a year in earnings to the company. We have a very, very strong presence there, 50-plus years, 6 million customers and diversified set of products and distribution. And I think post pandemic. And during the Next Horizon period, we've really -- credit to our team because we have managed to outgrow the market from a sales perspective, from a premium income perspective as well. Our premium income growth is more than double the market growth and the strength in our distribution and product is important. If you think of it from a distribution perspective, we are the #1 player in the general agency market, which is an important distribution channel, and we're top 10 in all other channels. And from a product perspective, we're #1 in the U.S. dollar products, and we're top 10 and all other product categories as well. To your question specifically, what -- 2 things are happening in terms of FX products in Japan. One is, it's a tough compare year-on-year. Last year, we grew 14% in Japan. So this year, growth was always going to be challenged by that. And the second factor, whereas the interest rate differential continues to be attractive, the fluctuation in currency in yen is -- did cause people to sort of take a wait-and-see attitude in the first half of the year. With a more stable yen of late, we are seeing that moderate, so we're seeing an uptake in terms of demand for these products and we think that should continue for the balance of the year going into next year. And the other thing I would say here is that -- and you also mentioned this, Ryan, that we're not just about U.S. dollar products in Japan. We launched a yen VUL product and a yen cancer product late last year. Those products are doing extremely well and we have other also product plan -- in the pipeline. And we think with yen rates potentially inching higher, we're going to see more opportunity on the yen front. And maybe one last -- just taking a step back, one last comment on Japan. I was there a few months ago. And after decades of stagnation, I think there's renewed energy in Japan. What's happening is that with an uptick in inflation, that's potentially leading to wage growth, which is also leading to an increase in consumption. So I think, for the first time in a long time, it's a different dynamic. And considering that close to 50% of savings sit in cash and bank deposits, which is punitive in a higher inflationary-type environment, the government is very interested and encouraging that those savings to move into other instruments. I believe that over time, the industry would be a beneficiary of that. And as a leader in that industry, I think we're very well positioned to take advantage of that as well. And the last comment I would make is that as investors consider beneficiaries from this change environment in Japan, I think, MetLife deserves consideration there.

I guess in Latin Americas, as you've emerged from the pandemic, you've had really good growth there. Can you talk just about what's really driving that? And do you see any risk to this momentum continuing from here?

Yes. I mean very -- really pleased with the momentum that we've seen over a number of post pandemic, I would say, in Lat Am, and I think that's being sustained. We're market leaders in Lat Am overall, and we have very strong positions. We're the #1. We're very -- we have very strong positions in both Mexico and Chile, #1 player in Lat Am overall and a strong emerging presence in Brazil. The growth that we're seeing, I would attribute to a few things: one is our core business, we're continuing to grow that and diversify it. So if you think about Mexico, for example, our flagship business there is our worksite government business, where we have a very dominant position. And whereas we've managed to continue to grow that business, we've also transferred a lot of the know-how and experience from that to the private sector. So if I look back 5 years ago, sales from private were about 50% of our overall sales. Today, they're about 70% of overall sales whilst continuing to grow the government sector as well. And that's due to, again, product and channel diversification, strong distribution capabilities that we have and investments that we've made in technology as well. And then Brazil has been a really good story for us. We're growing at 3x the market there, 30% growth rates. An interesting development in Brazil is how native financial institutions, digital natives, have really sprung up and taken significant share in that market. So this was a market that was dominated by the 4 largest banks, and they had also a major share in the insurance sector. That's now opening up through these digital natives. And we invested in a capability that we are calling Accelerator that allows us to integrate seamlessly with these digital natives, provide embedded insurance, integrate into the customer journeys rather than create a separate journey, and we're seeing really significant traction from that. We have more than 3 million policies already on that platform, and we think that number is going to grow significantly as we move forward. We also think that this capability is transferable to Mexico and Chile, where we have also strong positions and, obviously, a very strong brand. So we feel good about our sort of growth prospects in Lat Am. From a risk perspective, I would say, you always have to keep an eye on the political regulatory environment there. Nothing that we see on the horizon that would cause us to be concerned, but it's something that we certainly keep an eye on.

The questions on commercial real estate have died down some, but I'll still ask one. I guess, can you just give us an overall update on how your commercial mortgage loan is -- portfolio is performing in the current environment?

Yes, they died down until you just asked that question. But no, it's generally performed as we've expected, I think, since kind of the pressure started a few years ago, and I think partly due to the fact that we're a well-seasoned real estate manager. And I think even -- and the way we kind of approach this, and really the industry for that matter, is more thinking about cycles, right, and kind of managing for the long term. Our portfolio, even through distress, has got an LTV of 66%, debt service coverage ratio of 2.2x. And we probably think we're kind of close to the trough of this cycle. I think last year, on a $50 billion portfolio, we had about $20 million of charge-offs. We think that will grow a little bit this year, but still be south of $100 million. So very modest kind of loss expectations relative to what some have said is a very stressful real estate environment. I think a couple of factors, right? One is how you manage the portfolio. And I think, as we said, we kind of -- we always go into these situations, into these investments with the idea that we're going to hit a cycle, right, so kind of thinking about origination in the 50% LTV ranges when we underwrite loans. I think, two, is the economic environment has actually been pretty positive and that's a positive for real estate. I think third is when these cycles hit is, the first thing that kind of happens is construction moderates, so the kind of fix the supply and demand. And that tends to kind of fix situations and kind of allow things to come out. You saw that in like strip malls is a great example years ago, right? And now it's one of the hottest places for real estate. And I think the third thing that's emerging, right, is with the expectations of rates moderating, right, maybe even coming down in the future, you're starting to see that kind of find its way through people's view of the outlook, appraisals, things like that. So all in all, I think we feel very comfortable with the portfolio. It's well diversified. We have a great team and platform to manage it. We're both on the debt and equity side, which gives us an advantage. And we think that while we'll have some charge-offs, it will be very modest over time.

Great. We've seen a number of life insurers established third-party capital site cars. Is that something that could be of interest to Met in the future?

Yes. I mean, I think -- of course, it would be. If you think about our sort of philosophy approach, it's always about deploying capital to its highest and best use. And we want to continue to make sure that we take advantage of growth opportunities. And I think you can see from our disclosures how we've been deploying capital in support of new business at mid-to-high-teen IRRs and healthy paybacks as well. And I think so far, we've been able to fund this from our own balance sheet. I think in a higher-rate environment, we do see -- we do expect demand to accelerate. And given our strong liability origination capabilities, it's important for us to build optionality here in case demand exceeds our capital generation. There are different sort of tools that we can use here, internal reinsurance, external reinsurance and third-party site cars as another form of external reinsurance, if you like. So -- and we have access to some of these tools. Obviously, we deployed them, as you've seen also with the Global Atlantic transaction, for example. So -- and again, we think about this also as we think about growing our asset management business, MIM, in terms of how that can be also a vehicle to allow us to provide access to third-party capital to some of the strong origination capabilities that we have within MIM. So that's a little bit how we look at this.

John, you touched on this a little bit before, but can you speak a little more broadly on how we should think about Met's sensitivity to both short-term interest rates, long-term interest rates and, I guess, the slope of the curve?

Yes. And we give some sensitivities annually on that. And I think the last one there was off of year-end of last year with the forward curve, and then we gave some kind of parallel shift of 50 basis points up and down. And I think those are fairly good kind of expectations even where we are today. So it's a fairly modest uptick in earnings on a 50-bp move and similarly on a decline. I think the shape of the curve, to your point, is probably the more interesting one right now. And we do see a steepening, and that would be -- that's beneficial, right? And we would think that's kind of the ideal situation is kind of these higher rates. And we won't -- we don't call them high, but we'll call higher rates but with a more -- with a steeper curve. That's generally where we can perform kind of the best across all of our businesses. So kind of our outlook would indicate that we think that will be beneficial. And certainly, as these caps roll off, as I said earlier, that would be kind of a beneficial outcome.

Great. And then final question was on capital management, just how you're prioritizing buybacks, dividends, M&A and also, if any further divestitures would also be considered?

Yes. I mean I think maybe the key message here is that there would be no change. I think we've been very consistent in our approach, and New Frontier will not -- does not signal any change in that approach. As we've always said, again, I go back to deploying capital to its best and highest use. We want to continue to support organic growth. We are -- when we look at M&A, we look at it from a strategic fit perspective as well as it being accretive, clearing minimum adjusted hurdle rates, and we look at the types of opportunities that don't come with other baggage that are sort of a real set. And we compare those transactions to other potential use of capital. And then from a -- excess capital belongs to shareholders, and we'd like to maintain also a healthy balance in terms of a growing dividend yield. And we've seen that also over a number of years, our dividend growing more or less in line with our earnings, I would say, adjusted earnings. And then I think also post the divestitures, we've been quite deliberate, expeditious in how we return capital in terms of buyback. And if you look at the period '19 to '23, I think that speaks to that balance because we've deployed $17 billion in support of new business. We have about $14 billion in buybacks, over $7 billion in dividends, and we made $2.3 billion in acquisitions. So I think a very balanced approach and expect that to continue going forward.

Great. Well, we're going to wrap it up there. Thanks to Michel and John and the MetLife team for attending, and we will wrap it up.

Thank you.

Thanks, Ryan.

Thanks, Ryan.