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

I'm Ryan Krueger, Life Insurance Analyst at KBW. It's great to have MetLife back with us again this year. Up on stage with me to my immediate right is Michel Khalaf, President and CEO, to the far right is John McCallion, CFO and Head of MetLife Investment Management. Also want to acknowledge John Hall, Treasurer and Head of Investor Relations; and other members of the IR team in the front row. So with that, Michel you launched a new 5-year strategy called New Frontier, last December at an Investor Day. Can you review the key components of New Frontier, how they differ and have evolved from the next -- the prior -- next Horizon strategy and then just how things are going so far, even though it's only a couple of quarters in.

Sure. Thank you, Ryan. It's great to be with you today. I think to put the new strategy in context, it might be useful just to take a step back and reflect on the journey that we've been on for the last 5, 6 years. We've undergone an important transformation moving away from capital-intensive businesses, improving the return profile of the company as well as reducing risk. And this was sort of all through intentional actions that we've taken, starting with continuing to grow our most attractive businesses such as group LatAm and MetLife Investment Management. It was also helped by divestitures that we made especially in relation to sort of a more volatile business, for example, such as our former Auto & Home business as well as other businesses that were not meeting our return thresholds. And I think the also transformation from capital heavy to capital light was turbocharged by strategic reinsurance transactions that we made to accelerate the runoff of our legacy business. All that while continuing to drive efficiency in the company and reducing our direct expense ratio as well. I think an important proof point of this transformation is reflected in our return on equity. And back when we launched -- Next Horizon we set a target of 12% to 14%, and we were running actually at the low end of that. Last year, we posted a 15.2% ROE, and I would argue without necessarily hitting on all cylinders. And we have the confidence now to -- as part of New Frontier to commit 15% to 17% ROE, which is not very common in our space, I would say. So I think that's important, because New Frontier really builds on Next Horizon, it's not a departure from it. We've set more ambitious targets that reflect some of the opportunities that we see in terms of important trends and how we're positioned to be able to capture those trends. We've set for major strategic priorities, I would say, that will drive our sort of higher aspirations as part of New Frontier. The first is extending our leadership in group benefits, where we're the leader by some margin. The second is further leveraging our global retirement platforms from an origination perspective and some of the most attractive retirement markets, the U.S., Japan and the U.K. The third is to accelerate the growth of our -- of MetLife Investment Management with an aspiration to reach $1 trillion in AUM, and lastly, in terms of international markets, it's really expanding our presence in some of those key markets, such as China, India, Brazil and Mexico. So those are sort of some of the priorities related to the strategy. And I would say that its launch has been extremely well received. I've been able to tour many of our offices since we launched that, and there's a lot of excitement. But I would also emphasize that whereas it's important to have the right strategy, I would say, equally important is to have strong execution because that's ultimately what determines success. And I think we understand that really well at MetLife. I'm pleased with the sort of -- with how we've sort of started on our New Frontier journey in the first half of this year. Aside from alternative investment income, which has been challenged in the first half of the year, I would say, very strong execution. We announced 3 important strategic initiatives this year, the PineBridge Investments acquisition, the -- Talcott reinsurance transaction both of which we are working very hard to close in the second half of the year and on track to do so. And then -- and then we launched Chariot Re with the reinsurance transaction that we announced also in July there. Coupled with that, growth is a central theme for our new Frontier strategy. And when we look at the topline and the momentum that we're seeing there, very encouraged by it, 9% growth in group sales in the first half, RIS liability balances are -- have grown -- total balances have grown 6%. So above the 3% to 5% range that we had committed to in our outlook, really good growth in Asia, also Japan posting a 29% growth in sales in the second quarter. And then EMEA and LatAm also very strong top line growth. So all in all, pleased with the underlying momentum when it comes to sort of the early days of the strategy and with the execution levels as well. And I think this bodes well for the future.

Great. I think that's good overview to start and then dig into a lot of those topics. One was on the expense ratio. You have a target of improving the direct expense ratio 100 basis points over the next 5 years. Can you talk a little bit about what you're doing to achieve that? And also, should we expect the improvement to be fairly gradual throughout the 5 years? Or is there any aspect of it that's more back-end loaded?

Yes. First, I just want to say thanks for having us again, and thank you for these nice loungers. They're very comfortable. Just heading -- using the ROE concept that Michel talked about, maybe there's really 3 legs to that stool. One was kind of the returns we're seeing on new business. The second is looking at our portfolio mix. And then the third expenses, right? And going back to next year, we dropped the expense ratio, I think, a little over 200 basis points over that period. Our plan is to continue to reduce the expense ratio over the New Frontier strategy, another 100 basis points. And we really think of this as like a growth lever for us actually. -- right? We believe that we have operating leverage that we can build upon. Some of that can be moved to the bottom line, but we also want to just increase the capacity of discretionary spend to fund growth. And that goes back to really the New Frontier strategy, putting our thumb on the scale when it comes to growth and responsible growth. And so that discipline and that cultural piece to kind of who we are right now, we think it's very important. And I think the team has done a tremendous job. It's become part of our DNA. We've really tried to embrace the concept of moving away from these big bang expense initiatives where we're going to spend a lot of money to save a lot of money. It's all built into our expense ratio. And we see a lot of momentum and certainly with the advent of some of these new technologies that are coming in front of us. We certainly see a nice path to the 100 basis points. And -- right now, we -- at least in the outlook call, we assume kind of an evenly distributed reduction over the 5-year period. But in the first half, we're at 11.8%. The second half tends to be seasonally higher, but we are off to a really good start.

Great. In the Group Benefits business, you raised the premium and fee growth target to 4% to 7% from 4% to 6% previously. You're already the market leader -- so what are you doing to drive top line growth at or above the industry at this point?

Sure. Yes. And as we said, Ryan, we're the market leader by some margin, I would say, we're 3x the size of our nearest competitor in that space. And I've described group benefits as the most attractive segment of the U.S. life insurance industry, I believe that. It's a business that benefits from economic growth. So typically, GDP growth translates into growth in the profit pool for that business. It's a business where scale really matters and scale drives further scale and there are important barriers to scale in that business. And what we've seen over the last few years is that investing in capabilities that customers tell us they need to meet their expectations is absolutely critical and continuing to grow this business, something that we've been doing for a number of years now. Beyond just sort of the growth that comes from economic growth, we -- the way that we extend our leadership in group is through adding more employers, adding more products to existing employers and increasing employee participation and employee-paid products. And national accounts where we have a leading position there. It's -- and we have a very large customer base there. It's about really focusing on increasing the number of products that we have with our customers. And with the trend that we see in terms of customers wanting to do more with fewer providers, this is something that plays to our strength, just having just the widest and most comprehensive product portfolio in the industry. And just to give you a sense of the opportunity there. On average, we have just over 3 products with our -- on average with our customers. The longer a customer with us, the more products we have with them, and on average, customers tend to have more than 10 products on offer. So still a lot of opportunity to grow there. In regional market, which is much more fragmented, there, it's about adding more employers and we benefit there from channel consolidation that again plays to our strength given our broad relationships with the broker community. And there also, it's about bringing our full product suite to that market. So transferring the sort of the product set that we have in national to regional as well. And then across the board, it's about increasing take-up rates or employee participation. And here, investments that we made in a benefits experienced digital platform called Upwise, which actually we showcased at Investor Day -- is very important in closing the sort of confusion gap that exists when it comes to employees choosing their benefits and making their benefit selections. We're continuing to deploy this capability, extending its access to more employers. Our recently announced partnership with Workday is another step in that direction. And for those that have used this platform what we've seen is, one, they're telling us that it's made their selection experience much easier. And two, seen a significant uptick in take up rates for our voluntary products in particular. So all of these sort of factors combined give us confidence in terms of our ability to continue -- to extend our leadership in this space.

In the first half of this year, it seems like you're trending towards the lower end of that 4% to 7% premium growth target. Are there any unique factors that are causing some headwinds in 2025 that you would expect to abate going forward? .

Yes. That's partially due to the rate action that we took in 1/1 on our dental block. So that had an impact on persistency for dental and for some of the products that we tend to bundle with dental as well, just to be clear, we are perfectly willing to let business move away if we can get -- if we can clear our return hurdles for that business. And although this is sort of somewhat dampened our growth in the first half of the year. I would argue it's value-enhancing, because it improves margins and in dental as well as earnings as well. And we've seen our experience in dental back to very much in line with expectations. Most of these rate -- most of the rate action is behind us now. We have good line of sight as far as the second half of the year as a concern. And we think persistency is going to be strong going forward here.

From a margin perspective in Group Benefits, you saw some elevated nonmedical health claims in the second quarter. You also continue to see favorable group life mortality -- can you review a little bit again what you saw in the second quarter and then what your outlook is going forward for the rest of this year?

Yes. So we did see the nonmedical health ratio above our outlook range for the year, so that's in the second quarter. And our expectation is that we're going to see improvement mainly due to seasonality, both in the third and fourth quarter, so in the second half of the year. And to sort of frame that for you we're expecting a 2-point improvement sequentially in the nonmedical health ratio in the third quarter and a further 2-point improvement in the fourth quarter. What we saw in the quarter is from a dental perspective, experience in line with expectations, this is a seasonal business. So second half tends to be more favorable than the first half, especially the fourth quarter. So we're expecting that trend to play out in the second half of the year. For long-term disability, again, I would say, very consistent with expectations, both from an incidence and recoveries perspective. And again, we keep a close eye, obviously, on this business, and we're not seeing any signs of deviation from that. What we saw in disability is in the second quarter, our elevated claims with 2 specialty customers. Those are accident related, so nothing that would suggest a trend or something that would persist going forward. The disability and dental from a PFO perspective constitute about 2/3 of the nonmedical health ratio -- the remaining 1/3 are other products. Think about A&H and hospital indemnity, critical illness and other products. And those products tend to fluctuate within a certain band in any given quarter. What was unusual in the second quarter is that we had elevated loss ratios. And so everything went in one direction. Typically, they tend to offset. Again, we -- there's no connection between these sort of the experience. When it comes to these products, there's nothing macro that would suggest that this is a trend that should persist. So our expectation here is that this will moderate in the coming quarters. And that's why as I said earlier, our expectation is that we're going to see a 200 basis point improvement in the ratio in the third and a further 200 basis point improvement in the fourth.

Moving to the Retirement Income Solutions business, there's a few different products that are within that business. Can you talk about where you're seeing the best growth opportunities right now?

Yes. I mean really pleased with the growth that we're seeing in RIS. And I think we're benefiting from the diversification that we have within RIS in terms of our product set there. That's leading to strong, but also very balanced growth, I would say. We expect to be within the 3% to 5% liability balances, growth range for the year, even after seeding the $10 billion of -- to charity of liabilities charity. In the second quarter, we were at 6% in terms of total liability balance growth. And that's -- I think the nice thing that we see is that we see strength in our spread earning-generating businesses such as PRT and structured settlements as well as our fee earning businesses such as U.K. Longevity Re and stable value. And we continue to see a healthy pipeline going into the second half of the year as well. And if you consider some of the demographic and retirement trends as well. I think the outlook for this business in terms of ongoing growth is quite positive.

Can you discuss the -- in that business, the outlook for spreads, excluding variable investment income? And then just how to think about the potential impact of more Fed interest rate cuts or the shape of the yield curve and how that could influence where spreads end up coming out.

Yes, sure. So in the second quarter, spreads were around 100 basis points roughly. And that's pretty much on target with what we projected in the first quarter earnings call. And we talked about there being a stabilization of spreads. We had a number of [ caps ] roll off last year. We thought this was probably a good landing area. We did say that in the third quarter, there tends to be a few basis points of seasonality for some real estate investments that we have. They tend to be hotels and corporate events tend to lessen during that period, the third quarter period of time. So all else equal, we would expect that to revert back to the roughly 100 basis points. Now that's with the current forward curve. That's also with an inverted or flat curve depending on how you look at it. The reality is for our collective business, which going back to Michel's point, has a diversification of product, both in terms of duration and the short end of those products, the shorter products, I should say, tend to do better when there's a steepening of the curve, right? And so lower short end of the rates, longer, higher longer end of the rates. That tends to be kind of the sweet spot for RIS generally, sometimes there's some transitional pieces to that. I wouldn't consider them to be material. But overall, a Fed cut and the steepening of the curve is beneficial for that business.

You talked a little bit about Chariot Re, which is your new Bermuda-based reinsurer. Can you talk a little bit about the motivations you had to launch Chariot Re and -- and also just how do you anticipate utilizing it going forward?

Yes. And I'll go back to Michel's opening remarks on the strategy. And if you think through the 4 strategic initiatives there, one of which is retirement. And that's a function of trends. And given the higher interest rates, given the demographic shifts that are occurring globally, certainly for us, that's RIS and in Japan as well as using our capabilities in the U.K. Those trends are what caused us to think through the formation of Chariot Re. We're doing that with our partner, General Atlantic, we launched at July 1. Super excited about the launch, $10 billion out of the gate. The other thing you kind of -- to remember, that's scale, right? I mean, it's $10 billion. And people would, I think, be pretty happy to get to $10 billion sometimes when they start these sidecars. So already a sizable entity -- and this allows us to augment our existing capital generation. Up until now, our annual capital generation was sufficient to fund our growth. Based on the trends, we believe there is more growth opportunity out there and supplementing our own capital generation with third-party capital, helps us take advantage of that trend. And then at the same time, we get to leverage the collective best-in-class asset management capabilities between us and General Atlantic to produce a unique value problem. And that ultimately helps us also fund the growth of another strategic initiative of growing our asset management business. So again, it just fits nicely into that new frontier strategy and set of initiatives and off to a great start and looking forward to continuing to grow that.

Let's shift to the international businesses, starting with Asia. You've seen a pickup in growth this year, really, especially in Japan and Korea. Can you talk about what's driving that? And just how are these markets evolving and reacting to higher interest rates and a continued aging of the population.