MetLife, Inc.
Q1 2020 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. Welcome to the MetLife First Quarter 2020 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's 8-K filed last night and its other SEC filings.
  • John Hall:
    Thank you, operator. Good morning, everyone. Now more than ever, we appreciate you joining us for MetLife's first quarter 2020 earnings call. Before we begin, I refer you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management. Last night, we released a set of supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. An appendix to these slides features disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. And fairness to all participants, please limit yourself to one question and one follow-up. Before I turn the call over to Michel, I have a quick scheduling update. As you might have concluded, given the environment, we will not be hosting an Investor Day in Tokyo this September. Now, over to Michel.
  • Michel Khalaf:
    Thank you, John, and good morning, everyone. I'd to begin by acknowledging the difficulties and challenges that so many people have injured as a result of the pandemic. What the world has been living through its tragic, yet it is also demonstrating the best of humanity. We see this every day as thousands of first responders, health care workers and other frontline employees risk their lives to care for others and provide essential services. And we see it at MetLife as our employees go above and beyond to deliver on our promises to customers. While we feel the effects of the crisis deeply, both the personal loss and the economic disruption, these are the moments that MetLife is built for. At our Investor Day last December, I led with the importance we place on being a purpose-driven company. Our purpose statement always with you, building a more confident future has taken on greater meaning in the current environment. People are counting on us like never before to provide the value, support and financial security they need. Our next horizon strategy is a road map for how the company will create value for all of its stakeholders
  • John McCallion:
    Thank you, Michel, and good morning, everyone. I'll start with the first quarter 2020 supplemental slides that we released last evening, which highlight information on our earnings release and quarterly financial supplement. In addition, the slides provide more detail on our investments, outlook for the second quarter as well as an update of our cash and capital positions. Starting on Page 3. This schedule provides a comparison of net income and adjusted earnings in the first quarter. Net income in the first quarter was $4.4 billion, or approximately $3 billion higher than adjusted earnings of $1.4 billion. This variance is primarily due to net derivative gains resulting from the significant decline in interest rates during the quarter. The results in the investment portfolio and hedging program continue to perform as expected. Turning to Page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding notable items. This quarter's results did not include any notable items, while the prior year quarter had $55 million associated with our unit cost initiative, which was accounted for in Corporate & Other. Excluding the unit cost in the first quarter of 2019, adjusted earnings were down 2% and essentially flat on a constant currency basis. On a per share basis, adjusted earnings were up 3% and up 5% on a constant currency basis. The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers include strong variable investment income, solid volume growth, favorable expense margins and lower taxes. This was offset by equity market weakness, lower recurring interest margins and less favorable underwriting compared to first quarter of 2019. Turning to the performance of our businesses. Group benefits adjusted earnings were down 9% year-over-year. The group life mortality ratio was 87.9%, which is slightly above the midpoint of our annual target range of 85% to 90%, but less favorable to the exceptionally strong prior year quarter of 85.3%, which was the best first quarter mortality ratio in over 15 years. The interest adjusted benefit ratio for Non-Medical Health was 71.7%, which is below our annual target range of 72% to 77% and also favorable to the prior year quarter of 72.9%. The primary driver was strong disability results, which benefited from higher claim recoveries, lower incidents and lower severity. With regards to the top line, group benefits adjusted PFOs were up 7% due to solid growth across all markets. Retirement and Income Solutions, or RIS, adjusted earnings were up 26% year-over-year. RIS investment spreads for the quarter were 114 basis points, up 18 basis points year-over-year and up 8 basis points sequentially. Spreads in the quarter benefited from higher private equity returns and a decline in LIBOR rates.
  • Operator:
    Okay. Your first question comes from the line of Tom Gallagher from Evercore. Please go ahead.
  • Tom Gallagher:
    Good morning. John, just to follow up on the updated free cash flow guidance. The – can you provide a little more color on how this works? How much of the impact would be related to interest rates and credit, because I know you mentioned both? And is it as simple as just thinking there would be AAT reserves of around $1 billion a year for 2020 and 2021. Is this the right way to think about this? And then just my follow-up would be, you had a competitor announce a big long-term care reserve charge recently after a regulatory review. Just want to see whether there’s anything similar going on with New York regulators in MetLife. Thanks.
  • John McCallion:
    Good morning, Tom. So on the first question, let me start by saying, I wouldn’t call it guidance, right? This is – let’s just be clear what our objective here is to provide a scenario. We anchored it on some data or market data as of March 31. So it was really to provide a scenario of free cash flow. And one, we’re considering a level of credit losses and downgrades based on our bottom-up analysis that our investment team has been working through and monitoring and thinking it will play out over a 12- to 24-month period. And two, looking at the potential impact of New York cash flow testing requirements using last year’s requirements. And remember, we get a special consideration letter every year and then considering any new requirements that we’re aware of. And so there, we applied those factors to estimate some level of cash flow testing reserves, again, based on March 31 macro factors. And as I said, Steve and team put forth a bottoms-up review to a value to range of credit losses. And for cash flow testing, we picked a point more stressful than where we are today, that being March 31, where interest rates – while interest rates are similar, credit spreads were wider back then, equity markets were lower then. I would also point you to just directionally the shape of the curve is more favorable. Actually, it’s more favorable than, I’d say, a year-end base case we used at the outlook call, just given the shape of the curve, given the significant drop in the short end. And then also, as I said, credit spreads, they’re important as well in this, and they have narrowed since March 31. So I think it’s important that to also know that we get this letter every year. The letter we – the requirements were used from last year’s letter was based on a different macroeconomic environment. So we’re – every year, we work through with New York in a constructive way, and we’re cautiously optimistic we’ll come to a regional place, but we wanted to give some sensitivity. And I think the other thing I would just add – this is, I would say, consistent with the direction that we’ve given in the past, right? We’ve said that our free cash flow range of 65% to 75% holds with a 10-year treasury of 1.5% to 4.5%. And then as rates go below that, we would expect that to decline for a year or a two-year average, I should say. And I think that’s kind of what we’re trying to share here. And then on LTC. So yes, look, I don’t – I’m not going to comment on someone else’s situation. For us, we work with New York every year. So we – I wouldn’t say there’s anything in particular for us. And we’re always looking at our reserves, and there’s nothing to point out different than what we’re seeing every year.
  • Tom Gallagher:
    All right. Thanks, John. And just one quick follow-up, if I could. Is the plan to stay paused with buyback? Or any color you can give on what you’re thinking about the buyback?
  • Michel Khalaf:
    Hi, Tom, it’s Michel. So as John mentioned, we completed $500 million in Q1, buybacks in Q1. We have $45 million left on our current authorization. Since early March, just given the stressed environment, we’ve been prudent to preserve and maintain capital and maintain optionality. There’s no change in our philosophy, I would say, in terms of – excess capital belongs to shareholders. We’d expect to distribute all free cash flow in the form of dividends and share buybacks while maintaining sufficient liquidity for stress events. Also, if you think about our liquidity buffer $3 billion to $4 billion, and we’re maintaining cash in excess of that, given the uncertain economic environment. And again, we believe that that’s the prudent thing to do. So we’re going to continue to evaluate the situation. We’ll assess our liquidity position based on business and macro conditions. And we’ll sort of – we’re in a – I would say, we’ve had the pause button for the time being, but we’ll continue to monitor things and decide when would be an appropriate time to resume buybacks.
  • Tom Gallagher:
    All right. Thanks, Michel.
  • Operator:
    Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
  • Ryan Krueger:
    Hi, good morning. Back to the free cash flow generation, I just want to maybe just clarify one thing. If rates remain low as in the scenario that you expressed, would that basically create one year of additional asset adequacy testing serves to account for that? And then after you made that reserve addition, you’d go back more towards normal cash flow afterwards?
  • John McCallion:
    Hey, Ryan, it’s John. Yes, I think that’s fair. As I said, again, those were off of March 31 rates. Rates are different today. It’s an estimate. We haven’t – that we apply. We go through a much more longer process to get to the final reserve number. So again, that’s why there’s a wide range there of outcomes. But I think directionally, the way to think of it is, it has an impact on one year’s free cash flow.
  • Ryan Krueger:
    Got it. Thanks. And then on your commercial mortgage loan portfolio, can you give us any statistics on kind of forbearance requests and how much has been granted so far?
  • Steve Goulart:
    Hey, Ryan, it’s Steve Goulart. Sure. I mean, obviously, we’ve been expecting to see elevated activity in this. I’ll start by reminding you and everyone else, about the portfolio itself, $50 billion of commercial mortgages with a loan-to-value ratio of 55% for the entire portfolio, 2.4 times debt service coverage. So again, a very secure, low-risk portfolio in our mind. Obviously, in this time, we are seeing elevated requests, as you’d expect, particularly in retail and hotels for forbearance request. We have been getting requests. We have a committee that deals with each and every one. Certainly, we believe that some of these make sense to grant and that’s what we’ve been doing. 90% of the requests have come from hotel and retail. And they’re typically for deferral of interest and/or principal, and typically, what we’ve been granting is in the range of three to four months of forbearance. And remember, it’s forbearance, not forgiveness. So we do expect that these will always be paid. And by the way, we saw virtually no impact on April payments for the portfolio overall. But basically, we’ve granted forbearance on essentially sort of just less than 2% of the total premium balance outstanding at this point in time.
  • Ryan Krueger:
    Got it. And then in April, you had almost all of the loans pay?
  • Steve Goulart:
    Correct.
  • Ryan Krueger:
    Thank you.
  • Operator:
    Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
  • Nigel Dally:
    Great. Thanks and good morning. A question on group insurance. Should we be taking some deterioration in the margins given this back-end unemployment? I know it’s typically related to disability claims. And just wanted to get your perspective as to whether that’s a headwind we should be watching out for?
  • Ramy Tadros:
    Hey, Nigel, it’s Ramy here. Well, maybe just on underwriting, stepping back and giving you an overall context across the U.S. business. We do have significant diversification across the U.S. business. So think about mortality and longevity across the group and the RIS businesses. And then we also have diversification within each one of those businesses. So if you were to focus on group your question, the current environment is leading to various offsets and give and takes across the product lines. We are seeing favorable impacts in dental, given the lower utilization. We’re seeing actually unfavorable impacts on the life block. And I would say, to date, on the short-term disability block, it’s been a push. We’ve seen an increased number of COVID-related incidents but that’s been more than offset in a decrease in other short-term disability claims, so think issues like elective surgeries and the like. So at this stage, while there’s still some uncertainty, I mean, relating to the overall number of deaths in the U.S. and the impact on the insured population versus the general population, it’s very reasonable to expect at this stage that the overall impact would more or less offset each other on a full year basis.
  • John McCallion:
    Maybe I’ll just add to a couple of points to what Ramy mentioned. So because you referenced, I think, unemployment, Nigel. And so a couple of things to point out here. One is that the segment that’s been hardest hit, which is small business. I think our total premiums there are at $1 billion. So it’s not a major component of our current portfolio. And two, if you think about our disability business, it’s 11%, as we showed on Investor Day of our total earnings. So – and obviously, there, we’ve been also taking steps from a pricing perspective in terms of the guarantees that we provide on – from a rate perspective to make sure that we are also well positioned for a downturn scenario.
  • Nigel Dally:
    That’s great. Thanks a lot.
  • Operator:
    Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.
  • Jimmy Bhullar:
    Hi, good morning, everyone. I had a couple of questions. First, your investment portfolio, can you discuss if you’ve run any stress test on what would happen to your capital and/or your RBC ratio in sort of a mild recession, deep recession? I appreciate your comments in terms of qualitatively, but anything that you’re able to share in terms of numbers on that.
  • Steve Goulart:
    Hi, Jimmy, it’s Steve Goulart again. Let me start by just reminding everybody, I know you probably think I sound like a broken record when I do this, but we’ve been prepositioning this portfolio for a downturn since 2018. And that’s been our outlook – remember what we talked about at Investor Day, John updated some of those slides. But even going back to Investor Day, we’ve continued to reduce sectors that we were very concerned about below investment grade. We reduced by another $600 million since Investor Day, bank loans also another $600 million since Investor Day. And I think I would have to say, and I think anybody, as you talk to who are involved in investments, would say that we’ve entered this crisis period in better shape than we probably ever have in the past. So we’re very comfortable moving into it. John showed a slide about sensitive sectors and the like, we’ve been analyzing the portfolio a number of different ways. We run it through a number of different tests and lenses. Frankly, many of you out there have actually conducted your own reviews. We actually go through every one of those in detail and just sort of compare to our own. We’ve done longer-term analysis using external models from the rating agencies and other outside experts. We've done a portfolio, kind of, top-down approach comparing the portfolio now to previous crises and downturns, emphasizing the sensitive exposures and how the portfolio has changed since those crises and imputing our historical default and loss experiences in those time periods. But John mentioned what we've actually spent the most time on is the real specific bottom-up individual exposure analysis by our credit and real estate research teams. Again, our core strength is in credit and structured underwriting, and we've been using them to really go through the portfolio to help us assess this. And the result is a very granular assessment of our exposures, we think, are vulnerable to downgrades and losses. And in this analysis, particularly, we really thought of it in two ways. One is sort of a nearer-term recovery, does the economy start opening up, say, sometime in the summer, or really, is it kind of a year-end scenario before the economy starts reopening. And the bottom line assessment is based on what we foresee today, the impact of downgrades and possible losses on our capital in these scenarios is very manageable. That analysis put possible losses of up to $1.4 billion over time, as John said, likely to occur over kind of a 12 to 24 month period and the impact on RBC from downgrades, in that, we would estimate also up to about 25 basis points as well. So again what I would say again is we’ve been preparing for this. In this environment, we expect losses and downgrades above normal. But based on the prepositioning we've done and based on what we noted that we feel very comfortable and think our position is very sound.
  • Jimmy Bhullar:
    Okay. And just one on the retirement business. Normally, you'd assume in a low rate environment, your spreads would actually be going down, but they've held in pretty well. So – and I'm assuming some of that's because of the benefit of this steeper yield curve. So assuming rates stay around here and the yield curves as steep as it is, would you expect your spread to hold up or potentially improve from these levels?
  • John McCallion:
    Yes, hi, Jimmy, it's John. Good morning. So yes, spreads were in line with what we've kind of been forecasting for the last few quarters as we said before and coming in at 114 basis points but ex-VII, 83 basis points. And we'll expect, given VII returns in Q2 that this will take our overall spread down and – in Q2. And just as a frame of reference for VII, 85% to 90% of our VII comes through three segments
  • Jimmy Bhullar:
    Thanks.
  • Operator:
    Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.
  • Elyse Greenspan:
    Hi, thanks. Good morning. My first question, in the past, you guys have been asked about potential transactions within MetLife Holdings. You've also done speculations surrounding some sales of certain overseas businesses. So what is the current environment, including lower rates kind of impact the potential for transactions? And would you guys just – are you guys looking and feel, like, I guess, that could potentially free up capital between either of those two routes?
  • John McCallion:
    Good morning, Elyse. This is John. Yes, look we have said this before because I don't think we're necessarily – I know it's lower rates, but we've been in low rate environments for some time now, and they've gotten lower, certainly, over the last 12-plus months. And so it does put some pressure on that bid-ask spread as we talked about in holdings. And – but what we've said before is that these are complex blocks of business. And what we always urge the team to do is make sure we're continuing to take an external perspective, doing the work now because when things – if things were to change and those pricing points were to converge a little more, maybe supply gets even that much greater, there could be a various variety of things. We want to be ready and opportunistic if something makes sense for us. But I'd say, just all else equal, yes, lower rates puts pressure on doing something in holdings at this juncture.
  • Ramy Tadros:
    And just maybe more broadly, Elyse, I would sort of add that, obviously, a more challenging macro environment, we cannot ignore that. But it doesn't change our approach to sort of M&A in terms of how we view it. We continue to constantly look at our portfolio and also think through timing and what does – when does it make sense to maybe do something. So certainly, the environment makes M&A more challenging, I would say, broadly speaking, but it doesn't mean that we stop the work that we do in terms of assessing our businesses. And also, there might be opportunities coming out of this crisis that certainly will spend time also thinking through.
  • Elyse Greenspan:
    Okay. And then on – in terms of PRT, can you just provide us on the outlook for that business? I would also think that there's probably been somewhat of an impact on deal flows, just given a low interest rate environment as well?
  • Ramy Tadros:
    Sure, and in terms of the overall pipeline, it has slowed due to the overall environment. A number of drivers within that, including the funding levels, the volatility in the capital markets, and frankly, the priorities of treasury and HR teams in the context of the pandemic. So we've seen a few deals that were pulled out or put on hold in the first quarter, and we're seeing a somewhat lighter pipeline. If activity were to kind of pick back up in the second half of the year, we expect to get our fair share. And I'd remind you that we were a top three player in that market last year. But when you think of RIS, again, remember, RIS has a lot more than PRT in it. PRT is one product line in the context of a diversified context. And as Michel and John referenced, we've seen a substantial pick up in our stable value business in the last quarter, and we're seeing very healthy over – year-over-year increase in the liability balances. And certainly for the full year in terms of liability balances, we'd expect to still be within the guidance range that we've talked about.
  • Elyse Greenspan:
    Okay, thank you for the color.
  • Operator:
    Your next question comes from the line of Erik Bass from Autonomous Research. Please go ahead.
  • Erik Bass:
    Hi, thank you. In the group business, can you help us think of the potential impact on premiums from the current environment? And how quickly would you start to see an impact? And does this differ materially by plan size?
  • Ramy Tadros:
    Sure, let me just maybe start by profiling the overall PFO mix and then talk about some of the dynamics coming out of that. So remember, 75% of our PFOs are coming from national accounts, so think large employers. And when you think about the headline unemployment numbers there that you're seeing in the economy, those have really disproportionately impact smaller employers, part-time workers and the like. And the other dynamic in our national accounts book that's important is that the ultimate impact that we would actually see is going to be also influenced by the benefit practices of certain large employers. So you've seen examples where employers have continued to provide benefits for furloughed workers. So that's kind of one just triangulation point for you. The other piece, when you think about top line for this business is that we have a diversified book by industry and geography. And just like what we do in the credit portfolio, we've done the same thing here in terms of looking at industries, which are most at risk in terms of unemployment levels and benefits being cut. And that percentage is just shy of 10% of our entire book. So as an example, hotels and leisure is less than 2%. So you put all of that together, you put the fact that we’re getting strong persistency above our expectations, we’re getting good renewal actions at expectations. You put all of that together, we'll see some headwinds to PFOs related to overall unemployment, but I would say we would still see some PFO growth for the full year, albeit modest and likely shy of the 4% to 6% range that we've talked about, but nevertheless, we will see growth. Two other points, just to bear in mind as you think about the timing, we have implemented a premium credit in our dental business for the months of April and May, given the significant drop in utilization of dental services. And we will align the dental premiums for the balance of 2020 with the expected utilization of services. So when you think about our Q2 number, we will be shifting some revenue recognition from Q2 to the second half of the year. And the second point to highlight here again in the context of $1 billion or so voluntary business that we talked about on our Investor Day, we talked about a 30% CAGR in that business, historically. We're still expecting for 2020 to still see double-digit CAGR in PFOs for voluntary. And while unemployment levels are a headwind, we have tailwinds here. We have increased awareness of the needs of – for this product, and we're starting from a place where there's relatively low penetration of these products with employee population.
  • Erik Bass:
    Thank you. That’s very helpful color. And then one for John, as we think about your GAAP interest rate assumption, is the sensitivity to changes still in line with what you've discussed in the past of rough $50 million per 25 basis point change? And is there a level where that kind of linearity changes, and I guess, loss recognition could become an issue for any of the blocks?
  • John McCallion:
    Good morning, Erik. So, I would say, to start, the answer – you kind of outlined it pretty well. In the beginning, the first few 25 bp reduction would be fairly consistent and then it would begin to grow. So if you said maybe the first – don't take this for like we've modeled it exactly, but let's say, the first two are roughly $50 million. And then if you move to another – the next 100 basis points, it would start to grow a little more each time. Look, we've actually done some sizing, rough sizing, and this isn't something that we're – there should be no indication of us making any change ahead of time or not. But we've looked at if it was 150 basis point move down, that would roughly be somewhere between $400 million and $450 million of an impact and no loss recognition testing impact still. So we have done some stress and sensitivities, but that's our best estimates at this time.
  • Erik Bass:
    Great, thank you. That’s helpful.
  • Operator:
    And at this time, I'd like to turn it back to Michel Khalaf for any closing comments.
  • Michel Khalaf:
    Thank you operator. When I took the job of CEO just over a year ago, I envisioned a lot of things happening during my first year on the job, the coronavirus was not one of them. At a time when we all need silver linings, mine is how MetLife's employees have stepped up for our customers. It's fashionable for companies to say they are purpose driven. The team at MetLife really walks the talk. I'm so privileged to lead this company at a time when we're making such a critical difference in peoples’ lives. Thank you for listening. Please stay safe, and have a good day.
  • Operator:
    Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconference. You may now disconnect.