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

All right. Good morning, everyone. We're going to get started with our next session. I'm Ryan Krueger from KBW. And it's great to have MetLife back with us today. Up on stage with me is Michel Khalaf, President and CEO; John McCallion, CFO and Head of MetLife Investment Management. I also want to recognize John Hall in the IR team from Met. So to kick it off with Michel, you launched a new 5-year strategy called New Frontier in December of 2024. Can you review the key components of that strategy and just how things are tracking so far relative to your targets?

Sure. And first of all, it's great to be back with you, Ryan, this year. So when we launched New Frontier, our goal was to deliver to accelerate growth, deliver strong returns and do so across cycles, positioning MetLife as a quality compounder over time. I think 2 years into the strategy or nearly 2 years into the strategy, really pleased with the progress that we're making. Our approach is simple. We want to deploy capital and resources to market-leading businesses where we have structural advantages, think about size, scale, distribution and product and origination capabilities. The 4 priorities that we set at Investor Day, I believe we're making good progress across the board. The first one was accelerating or expanding and accelerating growth in our Group Benefits business where we are the largest player, 3x the size of our nearest competitor, capitalizing on our unique origination retirement and liability origination capabilities in the U.S. and Japan and in the U.K., accelerating growth in our asset management business. We want them to become a greater contributor to our overall earnings over time. And then last but not least, accelerating growth in international markets and we feel that we're really well positioned. We are in markets that have strong tailwinds when it comes to trends that we're seeing in those markets, and we feel good about our opportunity to capitalize on those. So those are the -- our main strategic priorities. And we set, I think, an ambitious set of commitments and goals to support those. I would say we're tracking ahead of schedule in terms of delivering on those. We delivered a 10% EPS growth in 2025. We are exceeding that this year. A 16% adjusted ROE in '25. We're at 17% this year, which is at the top of our 15% to 17% range. Our direct expense ratio came in below target and 25. We're absorbing pine bridge this year, and we're still committed to achieving our 5-year target when it comes to the direct expense ratio. And then where the rubber meets the road on free cash flow. We delivered nearly [ $5 billion ] in '25, and the pace is continuing strong this year. so all in all, I think we feel good about the momentum we're seeing across our businesses. And one point I would make here is that our model is repeatable. Based on recurring revenues and the flexibility to invest where we see the most compelling risk-adjusted opportunities. And if you consider that technology and AI are force multipliers that further supports our ability only to deliver on our 5-year commitments, but hopefully to exceed those.

Great. maybe delving in a bit more. I mean one aspect of the New Frontier strategy you've been discussing is a balanced mix of earnings from capital-light and capital-driven businesses. Can you expand a little bit more on what you mean by that and how you see that evolving over time from here?

Sure. And I've described diversification as MetLife superpower. We really believe that, and it extends to every facet of our business, be it the geographies and markets that we operate in, our products and distribution channels, our -- the various risks that we take, our investment portfolio, and it also extends to this balance between capital-light and capital-driven businesses. That balance is roughly 50-50 today. We think of them as 2 engines that power the company. And one point I'd make is that those 2 engines have been constructed deliberately over time. We've made significant progress in achieving this balance, this 50-50 balance. On the capital light front, you have group benefits, Asset Management, LatAm, EMEA businesses that are not very capital intensive that deliver high ROEs. And then from a capital-driven perspective, you have our retirement and spread businesses. And again, here, we deploy our balance sheet to generate attractive risk-adjusted returns. And one point I would make here also is that one engine feeds the other because we -- our capital-driven businesses originate assets for MetLife Investment Management to manage, which fuels our fee-based, capital-light engine. So those businesses are highly complementary.

On expenses, you had mentioned being ahead of target so far. One of the targets was a 100 basis point improvement in the expense ratio over 5 years. Can you talk a little bit more about what types of things you're doing to drive down the expense ratio? And to what extent things like AI and technology are playing a role in that?

Yes, sure. And let me just echo Michel's comments. It's great to be here. So thanks for having us back. So maybe just 2 things. I might just tie in ROE to that as well because they're connected and also kind of just coming off of Michel's comments on the mix of business. I think a couple of things I would point out. The unit cost initiative is really like a cultural thing for us. And it's really not about cost reduction. We're really trying to drive a sustainable operating leverage within the firm where revenues outpaced expenses. We want to be able to invest in the business for growth. We've been doing that. And at the same time, we are seeing a reduction in our unit cost occur. We had that occur under Next Horizon. We're already off to a great start under New Frontier. And I think, as Michel pointed out, I would highlight, again, just a, point we acquired PineBridge, which is an asset management business, which is a high expense ratio business, right? That probably put about 50 basis point headwind on our expense ratio, yet it has not taken us off track. So we've absorbed all 50 basis points this year. If we hadn't had PineBridge, we would probably have a target of like 11.6% instead of the 12.1% we have for this year. So I think all in all, there's a real cultural inertia that's going on around our focus on driving operating leverage across the firm. And I wanted to bring ROE into that. And that's also helping with ROE. If you tie together the points Michel made around our mix of business, so we are -- we have been -- our pace of capital-light businesses is outpacing capital driven and it will likely continue. So that in and of itself will drive up ROEs. Unit costs will drive up ROE. We've been delivering high unlevered IRRs on new business, kind of high teens, call it, right? So if you take all of those things, couple that with the fact that we have a runoff block that's more capital intensive. That's also a one reason why you're starting to see the ROEs push up to the upper end of the range. We've been at 17% for the first half of this year relative to our 15% to 17%, and we see good momentum going forward. I would say the other thing, just point -- I think you referenced a little bit around just what's driving these things. We've been on a journey around delivering a foundational journey around a data strategy and now you embed AI and going back to how are you absorbing the 50? I mean these things are real. We're really seeing kind of the productivity gains come through the firm, and we see that continuing throughout workflows are changing, how we process claims are changing, how we underwrite is changing. And then there's opportunities for AI to drive growth. So that really continues to drive down that unit cost over time.

Great. Shifting into the businesses. Within the Group Benefits business, your premium and fee growth has been trending towards the lower end of your 4% to 7% target over the last couple of years. I certainly want to acknowledge it's a great business, and there's nothing wrong with growing 4%. But do you still see an opportunity to accelerate revenues within that target?

Yes, we do. To your point, PFO growth was -- the underlying growth was about 4% in the first half of the year. We're pleased with that. That's higher than market growth in the first half. We believe it will pick up somewhat in the second half of the year, and we certainly see a path to it migrating towards the midpoint of the range, if not higher over time. I think a few things that give us confidence in our ability to do that. As you think about our strategy, it's based on accelerating growth in regional market, which is a segment of the market that's more fragmented. We're seeing good momentum there. We're also given our relationships, especially at the high end of the market, we have the opportunity with more employers looking to do more with fewer providers to add more products to existing customers and then increasing the take-up rate on our voluntary products. So we've seen also good traction there, and we made investments that have been helpful to us in terms of driving up take-up rates there. So for -- I think all those strategies support our view that we'll be able to -- that the 4% is certainly not the ceiling. We think that we will be able to deliver certainly growth towards the midpoint of the 4% to 7% range that we declared. The other thing that I would point to is, again, it's not about growing for the sake of growing. It's about disciplined profitable growth. If you look at our earnings so far this year, up 22% versus last year. And we're certainly trending ahead of the 7% to 9% that we sort of discussed at the outlook from an earnings perspective. So we're growing, but we're growing in a way that also helps us protect margins.

Can you talk more about the underwriting trends you're seeing in the Group Benefits business across Group Life and nonmedical health and just any key things we should be thinking about there for the second half of this year?

Yes. Let me start with the fact that they certainly have been favorable to start this year-to-date, as Michel said, has had a strong growth in margins year-over-year. As you break it down, obviously, we've seen strong mortality trends when it comes to Group Life. In the second quarter, we had a benefit ratio of 79%, well below our range that we gave for the -- our annual range for the year. And while we did have call it, 2 points of favorability from prior year development and some claim severity. Nonetheless, it was a very strong mortality trends. And I think what's important in this business, particularly in the Group Life business is these tend to have 3- to 5-year guarantees. So we do expect some moderation to happen in the second half and as we move forward, but it will be slow moving. We don't expect everything to happen at once. But certainly, a group life mortality ratio has been a nice tailwind, and we expect it to continue in the near future. On the nonmedical health side, we did a lot to come into this year, much better position. We've got our dental repricing done. Disability has continued to maintain in line with expectations. So we've seen the seasonal improvement occur. We did have some headwinds, and I think the industry did around PFML in the early part of the year. We've seen that moderate in line with expectations now. So we expect the rest of the year to start to continue to see that seasonal improvement occur. So I think broadly speaking, Group Benefits underwriting margins will remain intact for the near term, and we see good momentum going forward.

I guess when it comes to competition in the Group Benefits market, how would you characterize how things stand today? And are there any particular areas, whether it be product or market where you're seeing more price firming or softening at this point?

I would say that overall, the market is competitive but rational. I think the fact that this business is short term in nature. So claims do show up fairly quickly. I think that acts as a sort of incentive for folks not to get overly aggressive. We've certainly seen that in recent years. And look, price matters and will always matter in this business. But it's not just about price. And I think increasingly so we are seeing service delivery and how you experience -- the experience that you deliver to employers and employees play a very important role in decisions that are made when it comes to this business. We've always talked about the importance of scale here because that's what allows you to make important investments to keep up with customer expectations, customer needs, something that we've done consistently over many years. A good example I would give you there is our investment in my leave Navigator, which is our leave and absence platform. That was a multiyear project. We deployed significant dollars into that. And that's paying off big time for us because it's been very well received by the market. it takes away from employers a burden when it comes to administering complex plants, especially as more and more state and at [indiscernible] leave regulation. And it's helping us grow, but not only grow that business, typically, we sell that product with 4 additional coverages. Again, ensuring that we're achieving returns and margins that we feel comfortable with and the support what we're seeing in terms of how we're protecting margins in that business. So yes, it's a competitive market, but I think it's not just price anymore.

In your U.S. retirement business, one component of it is pension risk transfer. The market as a whole has been pretty quiet so far this year. What do you think is driving that? And then how do you feel about the pipeline as we move forward?

Yes. I think it has been a slow, I would say, first half of the year. I would say that this business tends to be lumpy anyway, especially at the jumbo end where we tend to focus. Obviously, last year was a record year for us, $14 billion in sales and PRT sales. I think what we're seeing is more of a timing thing as opposed to sort of a structural shift in this market or in the attractiveness of this market. Because if you think about the $1.5 trillion sitting and plans that are well funded. If you think about the incentive for plan sponsors to transact reduce balance sheet volatility, remove admin burden and make sure that benefits payments are delivered by strong quality insurers. I think those fundamentals are still there and support a market that I believe, will continue to be robust for years to come. We already see a healthier pipeline in the second half of the year compared to the first. We're obviously a market leader here. We bring a lot of capabilities to the table. And again, I think we feel good about the mid- to long-term prospects of this market and our ability to continue to continue to win, but continue to be very disciplined in our approach as well.

The market probably focuses a lot on PRT, but you do have a lot of other products in the Retirement Income Solutions business. Can you talk more about the growth opportunities you're seeing outside of PRT and how you're feeling about the 3% to 5% target you have for growing retained liabilities there?

Yes. We feel good about the 3% to 5%, and we're confident in achieving that. To your point, I think PRT gets the headlines, but it's not just about PRT, and we're very well diversified and when it comes to our RIS business, we're market leaders in structural settlements and stable value, for example, and we've been able to tap into some, I would say, important growth areas as well. U.K. longevity reinsurance has been a business that we stood up in 2020, and that's contributed significantly over the years. We continue to see a healthy pipeline there. And U.K. funded Re, which is a business that we entered last year. We've already written $1 billion there this year. And then we talked about entering the retail annuity market here in the U.S. on a reinsurance basis. And since we did that last year, we've already written $2.5 billion there. So we're continuing to tap into areas well beyond PRT when it comes to growth. What's important for us is this flexibility of we want to be able to pivot to where we see the most compelling risk-adjusted opportunities. And again, I think that diversification that we have allows us to do that.

Spreads in the retirement business, excluding variable investment income have been pretty stable lately in the 95 to 100 basis point range. Would you expect that to continue going forward? And then how would you anticipate changes in the yield curve potentially affecting that outlook?

Yes. We -- it's been pretty stable now for some few quarters. And obviously, a few years ago, we came off some high just because we had some protection from the way to protect against a sharp rise in the short end of the curve. But since then, those have rolled off, we have a very diversified portfolio, as Michel said, both not just from an origination perspective but also across the curve, short and longer duration. So that has -- obviously, the higher-yielding longer rates have been a positive tailwind for us. and that's continuing. At the same time, a flatter curve on the shorter duration is not as ideal. So -- but they're balancing each other out. And what I'd say is we're well positioned to maintain the current spreads regardless of where I'm assuming there's no steepening of the front end of the curve from here, let's say. But whether it stays here or steepens, we would probably be able to sit within that range that we've talked about, which is like 95 to 100 basis points.

Got it. And then on variable investment income, I mean, it's volatile by definition. But for the overall first half of the year, it was pretty in line with your expectation, can you talk more about, I guess, the underlying pieces between venture capital, private equity, real estate and how you're feeling about the back half of this year?

Yes. It's -- the first half, if we take the first 2 quarters, we came in roughly $750 million of pretax. Our annual guidance range is $1.6 billion. We said in the second quarter earnings call that we still expect to hit our outlook of $1.6 billion. So that implies obviously a slightly higher second half than what we saw in the first half. And we saw -- and I think everyone has recognized the second quarter has produced some constructive backdrop for this portfolio, particularly VC, venture capital is about 25% of our private equity portfolio. And certainly, the IPO market, the AI-related investment activity in the second quarter, all those things are strong tailwinds for the VC portfolio. Even the broader PE portfolio is going to benefit from just the broader public equity mark that are occurring. So there's some good momentum going into the third quarter. Our senses will be at the $1.6 billion, if not upward bias at this point to the $1.6 billion for the year. And certainly, I would say for the third quarter, we have an upward bias relative to our quarterly annualized number just given that backdrop.