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

[indiscernible] with Bank of America Financial Service Conference for 2025. This sub is the room that we'll be discussing MetLife. We're really pleased. We have CEO, Michel Khalaf; and CFO, John McCallion here. Just a little bio even though maybe it doesn't seem necessary. But they both assumed their current roles in 2019. And maybe as Michel is kind of almost a lifer because he came with the Alico acquisition, And I looked at the bio and it seems like you were working for Alico from the beginning.

That's right.

Right. So that's pretty amazing to stay in the same place for an entire career. He's the member of the Board of the U.S -China Business Council, the Geneva Association, and the Partnership for New York City. We appreciate that. John has said many roles within the MetLife, I guess, ecosystem. And certainly, in addition to right now to being the CFO, he is also the Head of the MetLife Investment Management business, which has some interesting things we'll try to ask some more questions about that. And he's been there since 2006 before being a PricewaterhouseCoopers auditor. And thank you both for being here.

Both Syracuse graduates, too.

Both Syracuse graduates [indiscernible], very good.

[indiscernible] last night, in Miami.

That's why you're right here.

So I think that we'll start with talking about 5-year planning. And I think there's always going to be some trouble, and I understand. I talk to John that all, but next horizons, new frontiers, new horizon, next frontiers, there's a little bit of -- it's always -- it's not easy to remember which number. We are on the next 5-year plan here, which was laid out in December this year. Can you talk about sort of the core principles of the new frontier, which I think is the correct ablation for the current 5-year plan?

Absolutely. And well, thank you, Josh, for giving us a good excuse to escape the Northeast cold for this South Beach, beautiful weather here. Yes, I'm really pleased to roll out our New Frontier strategy in December. And I would say it was the combination of a rigorous 18-month effort on the part of the management team, also very much engaged with the Board on this. And the way to think about New Frontier is that it really builds on the way we've executed on the pillars of Next Horizon, which were focus, simplify and differentiate. And I think a good sort of measure of how well we've executed on those pillars is the fact that we've met, if not exceeded, all of our 5-year Next Horizon target. So that's a little bit of the backdrop. And then combine that with the fact that we are present and we have a strong presence in highly attractive markets with significant profit pools, we are -- so from a positioning perspective, we have also a number of competitive moats that are hard for others, I would say, to breach or to replicate. And then we considered some of the important, I would say, trends that provide some tailwinds to the industry as a whole. And I think to MetLife in particular. So think about the sort of increasing importance that employers and employees place on benefits. Think about the conversions of asset management and insurance, the demographics that are also sort of fueling demand for retirement products, a higher interest rate environment and another one that we see particularly in LatAm, but I think it's a trend that we're going to see play out in other parts of the world as well as what we call democratization of financial services. So all those trends helped also inform our New Frontier strategy. And at the core, I would say the strategy focuses on 4 areas. Those areas contribute 80% of our earnings today, and we believe they're going to help fuel our growth going forward. And I think what's new in New Frontier is that growth is very much front, right and center when it comes to our strategy. And by growth, I mean responsible growth. So we talked about 4 areas. One, continuing to expand our market-leading Group Benefits franchise. And here, we think that our size and scale actually are -- give us the sort of impetus to continue to drive growth there. The second one is around sort of our -- the retirement platforms and our ability to originate whether in the U.S., on the institutional front or in Japan on the retail front. So continuing to build on that. And then we talked about asset management, MIM, MetLife Investment Management becoming a segment, and '25, in our aspiration to achieve $1 trillion in assets under management. And last but not least, we talked about some high-growth markets where we're already quite well positioned and where we see further opportunities for growth, mainly in India, China, Mexico and Brazil. So I think taken together, we're really excited about this next 5-year journey. We think that New Frontier will give us -- gives us -- provides us with a strong platform to continue to achieve strong success going forward.

I think it might be worthwhile to mention a few of the achievements under the Next Horizon strategy and contrast them with what the new guidance is for the next 5 years and particularly ROE capital return? Maybe you guys want to share just a few you think are the primary drivers?

Yes. We -- the 3 we had for Next Horizon were ROE, which we started out 5 years ago at 12 to 14 in terms of our target. We've upped that to 15 to 17 as part of New Frontier. And obviously, throughout the Next Horizon, we had an opportunity to increase it to 13 and 15. So we've been gradually improving that. And I'll talk a little bit about maybe some of the drivers in a second. Expenses have been kind of, I'd say, a DNA-type muscle for us that we've been really working on over the time. And so we have this direct expense ratio that we've been focused on, and we've made tremendous progress on that in Next Horizon, and we put out another target for us to go down another 100 basis points over the 5-year period. And then the third one was cash. And we think given our business profile, our mix of business, we've been able to put out a cumulative cash flow metric. We had $20 billion plus in the last Next Horizon strategy. We've upped that to $25 billion as part of New Frontier. And then the fourth thing we added, which again, I think is a function of the evolution that we've seen in our business is adding an EPS growth target of double-digit growth over the 5-year period. And again, I think that's a function of things that have -- we've done over the last 5, quite honestly, probably a decade to get us to this position to position our portfolio. The market-leading businesses that Michel had, the diversification that we have with all of those, and that gives us the confidence to be able to put out those types of metrics, which we think are really differentiating from a value proposition when you think about who we are and what you get with this type of firm. I think from the ROE perspective, I'd just highlight a few things. One, on a new business perspective, we've been generating high-teens IRRs unlevered. Now it takes time in a big insurance company for those to find in a way to have a material impact, but we've been doing that for several years now. Second, higher interest rates have helped on the in-force. That has been a tailwind. And then the third thing is we've been running off a segment that's probably a lower ROE segment in MetLife Holdings. And we did some -- we shared some statistics at the Investor Day, just how that has changed over the 5-year period. So all of those things have put us in a position to be able to be more aggressive on the New Frontier targets.

The one thing that I would add here is that also over the Next Horizon period, we -- to John's point, we've managed to improve our returns while at the same time, reducing our beta in both absolute and relative terms. And I think as we think about New Frontier, really what's sort of unique in terms of our value proposition, I believe, is that you're getting growth, responsible growth, attractive returns and you're getting it at lower risk. And it's not one or the other, but all 3.

Let's talk on the large piece of the puzzle, the Group Benefits. I mean in terms of premium fees coming from Group Benefits and Group Life, Met is the industry leader, second to none, substantially. And you have a 4% to 7% growth target. How do you get there? What are the elements that are going to put that out? It's on -- it's mid- to high single digits, I guess, but at the same time, you are so big. What can you do there?

Yes. And I think one of the reasons why we feel confident in our ability to deliver on this is the fact that we're convinced that the size is an advantage here. And especially given the need to make meaningful investments in this business, something that we've been doing over a number of years here. And if you think about 2024, we grew at 5.3%, excluding for the impact of participating policies, which is how we measure PFO growth. And over the Next Horizon period, we added $6.6 billion to our Group business, which is sort of the equivalent of a top 5 player. And our PFOs now stand at close to $25 billion. So very significant and what I believe is the most attractive segment of the Life -- of the U.S. life industry. There are, I think, a few trends that we believe will allow us to achieve the 47% growth rate. The first one is we see consolidation, especially at the lower end of the market, broker consolidation with bigger brokers acquiring smaller ones. I think this is -- we tend to have very strong relationships with these big brokers. We tend to already be on their panel. So this gives us access to more employers in that space. And that's a highly fragmented market. So there is a good -- a really good opportunity for us there. I think the other area where we see opportunity is the fact that employers are looking to do more with fewer providers. And having the widest product set in the entire industry. And actually, our experience shows that the longer an employer is with us, the more products they have with us. On average, in the national accounts space, our employers are with us for 22-plus years. So that's another area where we see good growth potential. And the last one is what I would sort of call the protection and confusion gap when it comes to enrollment and reenrollment. So clearly, employers want their employees to use their benefits that they offer them. But our surveys show that the enrollment and reenrollment experience can be quite overwhelming. And here, we've invested in a capability that not only makes it much easier for employees to choose the right benefit structure that best fits their needs but also makes it easier, seamless for them to use those benefits, which is, again, which contributes to better persistency, the more people use their benefits. So those are some of the trends that I think are tailwinds for our business, and that's why we feel confident about our ability to deliver on the 4% to 7% PFO growth here.

And then on the margins, disability has been remarkably good for a long time. Maybe it's flex work so it's driving the changes, but this is obviously getting reunderwritten all the time. Some interesting volatility in post-COVID health outcomes on the Life side, dental utilization. Where are we entering the New Frontier period in terms of margins? And is the business target be over earning? Do we have to look, reset our view longer term?

Yes. I don't think it's over earning. I think it's -- this is obviously a competitive market, price matters. It's not the only thing that matters, but we think it's still pretty rational. And we've seen, for us, we have 2 kind of margin metrics that we provide. We have a life mortality ratio, benefit ratio, and we have a nonmedical health ratio, which combines a number of different things, disability, dental, and some of our voluntary products. And on the Life side, we certainly have seen better margins there for the last year. Our range was 84% to 89% benefit ratio. For the full year, we are slightly under that, if you exclude kind of the one-offs. So we didn't change our range in the outlook. Our view is for now, it's probably a good range, although if things continue the way we've seen like in the second half of the year, it's most likely that we will be at the bottom end of that range or bottom half. On the nonmedical health side, I think we came in slightly above the midpoint, [ 72.2% ], I think. Midpoint, [ 71% ] or [ 71.5% ] something like that. And so there, we think we get back to the mid part of the range. One of the things that was probably a bit of elevated for the last couple of years has been dental. We've been repricing, kind of repricing actions will take full effects in [ 1/1 ]. So our view is that all else equal, that we're back to the midpoint. So I think from a margin perspective, we think things kind of continue the way they have been, maybe a little better even relative to 2024. We also see that our mix of business, the efficiency focus that we have and other things, there's another part of our profit margin that's emerging, and we gave some additional guidance this year to kind of capsulate -- capture that. And so we think that continues to be a driver over the next several years as well. So all in all, we think margins stay healthy at this point. We think that it's been a pretty competitive and balanced market, and we see good things ahead.

Let's move a little bit to the U.S. retirement business. At some sense, I mean it seems like we've entered a new paradigm for interest rates and whatnot, and that clears a major input in how the business operates. Can you talk about the spread environment and what that means for MetLife?

Yes. I mean, spreads, we talked a little bit about this on the last earnings call. We had a few different dynamics going on in spreads. One, we had some roll-off of some interest rate caps that were very profitable. And that has been happening over the last 2 years. They ended at end of '24. And at the same time, on the other side, we've had VII improving, variable investment income, our private equity, LP returns and some real estate LP returns. So that has been gradually getting better. We saw that throughout '24. So now the caps have rolled off. We saw stability in that core spread ex variable investment income between third and fourth quarter. We think -- and we're probably, for the first time, have a pretty good sense of the next few years around core spreads where typically, we would be hesitant to go beyond a year. We think core spreads kind of stabilize from here. And then we see VII improving. So if you look at where we ended last year, I think the full year all-in spread was somewhere around 117. The range for next year has kind of the midpoint in the 122 plus area. So we actually think, all-in spreads improve year-over-year with a full benefit of VII and core spreads stabilize from here forward. You might get a little headwind from a steepening of the curve. That's actually a tailwind for us. But in the short term, there's a little bit of a 1 to 2 basis point headwind from the short end coming down. But ultimately, it's a tailwind for that business. But all in all, we think spread environment is stable and, I think, getting healthier with VII improving.

And as you talk about VII improvement. 2024 was a below plan year. What were some of the headwinds that we're preventing if you're realizing you're -- it is volatile. It's variable, [indiscernible] case. At the same time, why you have confidence that it gets better from here?

Yes. I mean we did see it certainly improved dramatically over '23, which is probably a low year, right? We had about $1 billion of VII in '24. We're projecting $1.7 billion in '25. We believe there's just this gradual improvement that will occur in 2025. A few things going on. Obviously, public markets have been strong. That typically is a tailwind, although there's other dynamics going on in the private market. Having said that, we think the underlying portfolio companies are performing well. We're seeing kind of an improving regulatory environment, so kind of very -- more accommodating business-friendly environment emerging. We believe exits start to improve in 2025. That's kind of the word on the street and you all may know better than us. So that sets up a good backdrop for private equity. And then the other piece to the VII is real estate. And that has been -- it's gone through its own challenges. We see that improving. And so even in the first quarter, our view is that you'll see real estate start to come off its lower returns. They won't get to ultimate kind of longer-term historical returns. But it will start to emerge positively in the first quarter. We gave a sense of -- I think our VII in the fourth quarter was just about almost $300 million. If you were to take the $1.7 billion and divide by 4, that would be $425 million. We think we'll be somewhere between those 2 in the first quarter.

All right. And sticking with that theme on retirement a little bit. Obviously, for the past decade, even longer, pension risk transfer has been a huge benefit to revenue growth over time. There's not an infinite amount of pensions down there, but you're still pretty confident about what the pipeline looks like. And can we sort of scale that a bit?

Sure, sure. And I think we wrote our first PRT deal over 100 years ago. So I mean this is a well -- to your point, this is a well-established market that's grown significantly over the last 10 years. And if you think about sort of the DP plans out there and the opportunity is still sort of, I think, in the $1 trillion to $2 trillion range. So there's still plenty of potential business that over time, some of it at least should come to market. We're continuing -- we had a good year last year, $6.4 billion in PRT premium. We're off to a good start this year. We already wrote a deal in January. And so the pipeline continues to be healthy. And I think this is a valuable product for plan sponsors. So I don't think that's going to go away anytime soon. And a good indicator of sort of potentially what might come to market is the fact that funding levels are very healthy. That's always a very strong indicator, markets are performing well as well. So I think all those factors point to a pipeline that should continue to be strong in the coming years. From our perspective, we tend to focus on the jumbo end of the market where less competition, fewer players plays to our strength as well. Not that we don't do deals of all sizes, but I would say our sweet spot is the jumbo end. And again, we think that we'll continue to win our fair share there.

The last retirement question, let's move around the globe a little bit to the Japanese markets and how Met is positioned for growth there?

Yes. And Japan is an important business for us. It's our second largest market. It contributes around $1 billion a year in earnings to us. And we've -- over the Next Horizon period, we've improved our market standing. We're now the fourth largest player -- life player in that market. I think Japan is going through important change and transformation. Positive, I would say, on a number of fronts. Sort of -- if you think about the economy, we're seeing wage inflation that's driving consumer demand. We are seeing also a -- and I think we see that increasingly, people start to shift some of their savings away from bank deposits into other market-linked instruments, simply because in an inflationary environment, it's punitive to keep your money in cash. And I think that's something that's going to benefit the industry and MetLife over time. And then the third sort of important phenomenon in Japan is sort of this aging population, which is creating gaps when it comes to retirement and healthcare as well. So all those, I think, create opportunities for the industry. We are extremely well positioned from a distribution perspective, very well diversified. We are the #1 player in the general agency channel. We have our own career agency, and we're strong in the Banca channel as well. We also have very strong product manufacturing and innovation capabilities. We were the first to introduce U.S. dollar products in Japan. And then I think when you combine that with our financial strength, with our investment capabilities, also capabilities under reinsurance front, I think we think all those sort of play to our advantage in terms of continuing to drive success for our business in Japan. So we feel good about how Japan has performed for us over the last 5 years, but importantly, also in terms of its trajectory going forward.

To some extent, MetLife's Horizon presence in the investment management community is underappreciated. For many years, I don't think it was nearly [ targeted ] as well. And given the size is about $700 billion in AUM and then you're targeting $1 trillion. Can you talk a little bit about what are some of the advantages that MetLife has in that market, and you've done some bolt-on acquisitions recently. Maybe you want to talk about why MetLife is the right home for those businesses?

Yes. And we've been -- we've had a scaled investment business for quite some time for decades. And then a little over a decade ago, we started to deploy those activities to third parties. And look, scale matters, right? Unique capabilities matter, and we have those things. And so that's given us the ability to think about this business differently, and you heard Michel earlier talk about that actually being one of the 4 priorities in New Frontier. As we think about the next 5 years, that being a more prominent and more material business for MetLife. And we think that's an important aspect to our next 5 years plus. And with that, we see a market that's fairly fragmented, one where scale will matter. And we think we can be a beneficiary from that, I'll say, consolidation. And we saw that with a few announcements recently. We announced the acquisition of PineBridge recently. It's a $100 billion global asset manager, market-leading, strategic fit, and cultural fit. I mean just a really good way to kind of add and complement what we have and what they have together, and I think it's a 1 plus 1 equals more than 2. And so we're really excited about that. We're excited about welcoming them to the MetLife family. They have great public credit, private credit. Their presence in Asia is very additive to us. So we're really excited about that. We had another smaller acquisition we announced as well around just shortly after that with some more niche capabilities, about $6 billion of assets from asset manager called Mesirow. One of their primary ones is kind of a high-yield small cap capability that will fit very nicely into both the PineBridge-MetLife combined platform. So again, it's an exciting time. We're off to a great start, trillions of big aspiration. But it will be a complement to organic and inorganic. But right now, obviously, we have a lot to focus on here with these 2 acquisitions.

For what its worth, I have a lot more questions, but I also want to give the audience the opportunity to ask. If you want to ask a question, just raise your hand, and we'll -- I'll make that happen. We do have one over here.

Michel, you talked about the ability to penetrate the accounts when they're there for an extended period of time. I think you said the average client in the national accounts is about 22 years now. Can you just give a little more color about how deeply penetrated they are? And then what are the remaining opportunities within national accounts to further penetrate?

Yes. I mean I think the good news is that there's still long ways to go for us. On average, employers and the sort of national accounts space offer more than 10 products. And I think our average right now is just over 3 products per employer. So that gives you a bit of a sense of how much room to further grow we have there. And like I said, the fact that -- I think every employer today has some kind of a vendor optimization strategy, just given risks associated with -- and complexities with dealing with multiple vendors, and we do think this plays to our strength here from a relationship and product set perspective.

John, you said that MetLife has some unique investment capabilities, and one of those capabilities is in commercial real estate, which if we go back in time about 3, 4 years ago it was -- 3 years, it was generally a hot topic. People don't -- aren't talking about it as much. Can you talk a little bit about A, asset gathering interest in that space right now. Two, what your outlook is for one area in particular, office. And three, doing the postmortem on the post-COVID scare about office real estate, how Met's portfolio behaved?

Yes. It's definitely shifted over the last 3 years. It's no longer a question 1 on these webcasts. But look, I think our view right now is that there has -- we've gone through a lot over the last 3 years. We believe that things have kind of, I'll say, troughed. Depends on this. Non-office probably still has a bit to go. I'm sorry, office has a bit to go. Non-office likely troughed and is on the uptick. But office is pretty close. We believe we've reached peak vacancy rates. The return to office momentum is continuing. And then third thing, we've seen leasing increase, the number of leasing. So the office space is getting better. When we think about -- if you use like loan-to-value, we probably reach peak loan to values at this juncture. And then we're starting to see transactions pick up. So all of those -- and those are all a function of 2, on top of it is the backdrop is -- the construction pipeline has really slowed. So that supply/demand is starting to get to some better balance, and that generally improves the outlook. There's still obviously a number of things to occur for the dust to fully settle and we'll see that play out in '25. From an outlook perspective, and you think about some of our strategies, we see in the non-office space, I mean we are looking more, I'd say, we obviously are always core, core plus. We're also thinking opportunistic-type strategies at this juncture. And it's a good time for entry into that space. But look, this is a long-term asset class. You lean into your strengths is what we do. Everything goes through its own cycles. We have fared very well, and I think we have basically faired as we said we would. And we think there's more to come, but we think from a capital perspective, modest changes from here forward.

We talked a little about Japan, but MetLife is really a global company. There are some higher growth areas. And then in 2 countries in particular that I don't think people associate with MetLife broadly were highlighted during the Investor Day. One was Brazil, another one was India. Can you talk about your positioning in emerging markets for higher growth areas?

Sure. And I think one of the things to emphasize here is that this is not about planting flags. I mean these are well-established businesses where we are really well positioned and these are profitable businesses for MetLife today, and we believe they will be -- they will contribute even more to our earnings going forward. Brazil is an interesting market. I referenced earlier, this democratization of financial services. And I think we really see that play out in Brazil where some of the native digital banks have sprung up and taken very significant share of that market, a market traditionally dominated by a few large banks with also insurance manufacturing capabilities. So these new players have opened up a new distribution channel for us, we had invested. And we have seen this trend emerge, and we had invested in capabilities that allow us to integrate seamlessly into those digital natives' ecosystem systems. One of their sort of key criteria to be able to partner with these players is this ability -- you have to sort of be part of their journey. You cannot create your own journey and have that as part of their offering. We've done that very effectively, and that's really been fueling our growth in Brazil. We are the fastest-growing insurance company on the market. And we see sort of a pathway to continue to grow very nicely there. And now we see some of these banks move to other parts of the region of LatAm, such as Mexico and Chile, where we, again, have very strong presence. So we tend to benefit from that. And then India is another growth market for us. We have a strong presence, a partnership with the second largest public sector bank in India, Punjab National Bank or PNB. That partnership gives us access to over 10,000 branches, 180 million potential customers there. And we see really important opportunities and increasing -- we're in about [ 50% ] of their branches today. We see opportunities to grow that presence as well as increase our penetration, the take-up rates in the branches where we're already there. So we've increased our ownership in India to close to 49%. And again, I think this is -- this will be an important market for the future for MetLife.

I know we talked about those opportunities, but the truth is MetLife is a global company. One of the downsides is we're currently in a very protectionist kind of economic leadership position in this country, which is making the dollar quite strong. A, does this enable some M&A opportunities that -- given that MetLife's currency is very, very attractive right now. But two, from earnings or from earnings perspective, there's some headwinds. Can we sort of frame maybe those plus and minuses out there?

We did -- yes, we did mention as part of our outlook, the fact that based on the forward curves, we are seeing some FX headwinds. And I think we framed it in the $150 million to $175 million range for '25. But I mean, I think one of our superpowers is the fact that we are a very diversified company. I think diversification is our friend. And so -- and that part of the diversification is geography. It's product is channel. So we think that's an advantage. You will go through periods where there are pressures in one area or the other. But I think diversification gives us the chance to, despite that, perform. And I think a proof point to that is the fact that despite these FX pressures, the outlook targets that we came out with are very much consistent with our New Frontier, the New Frontier targets that we had announced back in December. So again, I think we'll have to see how things play out. Obviously, from an M&A perspective, and I think that was the question. We're very disciplined when it comes to M&A. We always look for strategic fit. We look for sort of -- what can sort of an M&A opportunity help us accelerate revenue growth, bring in a new product or a new capability that complements what we already have. On the asset management front, in particular, cultural fit is also very important, something that we look at. And then we look for M&A transactions to be accretive across a multitude of financial, think about EPS, ROE, free cash flow and the like. And we compare also any M&A transaction to other potential uses of capital. I don't think the new sort of geopolitical environment changes our view on M&A. And we have talked in the past about the group and asset management being the 2 areas where we wouldn't consider doing something that is complementary to what we have. And I would say that, that view hasn't changed.

And in terms of the outlook based on the forward curve, is there any way that we can track this? I mean you update us on a quarterly basis, but of course, these are moving right now. When we look at that forward curve, is there a place that investors should be looking at targets that's exposure to the dollar?

Yes. I mean I think the biggest places we've seen the impact has been Latin America. Mexico, obviously, has probably been the biggest change in the last 3 months or so. That's probably the biggest one in track. Look, obviously, it's that and a little bit of Asia, because we're a heavily U.S. dollar product in Japan, we're not as sensitive as you would think otherwise. About, I think, maybe 1/3 to maybe a little more of our book is U.S. dollar. So we're pretty almost naturally hedged there. Probably Mexico is the biggest one, and that's where we've seen the biggest headwind in the $150 million to $175 million.

On that, I think we'll call to close here. Thanks, everyone who is in attendance and people who are listening on the webcast. And thank you very much, John, Michel, for being here. Have a wonderful day. Thank you.

Thank you.

Thank you.