MetLife, Inc.
Q3 2020 Earnings Call Transcript

Published: 5 Nov 2020

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Third 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. Instructions will be given at that time. 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 SEC filings.

[John Hall:]

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife’s third 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 discussion 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. In fairness to all participants, please limit yourself to one question and one follow-up. Before I turn the call over to Michele, I have a quick scheduling note. When we report MetLife full year results in February. We will consolidate our annual outlook call with our fourth quarter 2020 earnings call, making for an impactful 60 minute call. Stay tuned. With that, over to Michel.

[Michel Khalaf:]

Thank you, John, and welcome everyone. As you saw in our earnings release last night MetLife delivered strong financial results in the third quarter of 2020. These results are a testament to the kind of company that MetLife has become. We are simpler and more predictable. For example, the impact of our Annual Actuarial Assumption review was modest and consistent with the sensitivities we provided last quarter. We had a well-diversified mix of market leading businesses that diversity was on display and the largely offsetting impacts of COVID-19. And we have an ongoing commitment to consistent execution. A good quarter at MetLife is just another installment in what investors have come to expect of us. And what we expect of ourselves. Turning the numbers, we reported third quarter 2020 adjusted earnings of $1.6 billion, or $1.73 per share, compared to $1.27 per share a year ago. Net income of $633 million, was below adjusted earnings, mostly due to losses on derivatives held to protect our balance sheet against movements and equity markets and interest rates. For year-to-date 2020, MetLife has generated $5.1 billion of net income. Excluding all notable items, we reported quarterly adjusted earnings of $1.8 billion, or $1.95 per share, compared to $1.4 billion or $1.64 per share a year ago.

[John McCallion:]

Thank you, Michele. And good morning. I will start with the 3Q 2020 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. In addition, the slide provides more detail on our annual global actuarial assumption review as well as an update on our cash and capital positions. Starting on page three, the schedule provides a comparison of net income and adjusted earnings in the third quarter. Net income in the third quarter were $633 million, or $945 million lower than adjusted earnings. This variance is primarily due to net derivative losses resulting from higher long-term interest rates, as well as the stronger equity markets in the quarter. The investment portfolio and hedging program continue to perform as expected. In addition, the actuarial assumption review accounted for $98 million of the variance between net income and adjusted earnings, which I will now discuss in more detail on page four. During the quarter, the actuarial assumption review reduced net income by $301 million, of which $203 million impacted adjusted earnings. The most significant driver was the reduction of our long-term US 10 year treasury interest rate assumption from 3.75% to 2.75%. In addition to this 100 basis point reduction, we have extended our mean reversion rate to 12 years. These changes reflect expectations of lower interest rates for a longer period of time. The overall impact to earnings is consistent with the sensitivities provided on our second quarter 2020 earnings call.

[Operator:]

Thank you Your first question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

[Elyse Greenspan:]

Hi, thanks. Good morning. My first question is on the capital discussion. You guys mentioned you have a good amount of excess capital above the buffer you'd like to hold at the holding company, even if we adjust for the preferred stock that you paid back subsequent to the end of the quarter. So just trying to get a sense of how you're thinking about kind of working your way back down to kind of the target buffer. And as we think about the environment normalizing combined with potentially holding on to some excess capital for potential M&A as we hear about some kind of new properties that could potentially see out there in the life space?

[Michel Khalaf:]

Hey. Good morning, Elyse. It's Michel. So let me begin by saying that at a high level, we have a well-diversified mix of market leading businesses and I think that diversity was on display and the largely offsetting impact from COVID-19. In addition, we believe that our capital liquidity and investment portfolio are strong, resilient and well-positioned to manage through and come out stronger in this challenging environment. And ultimately, I think this, we believe, underscores the durability of our all-weather next Horizon strategy and our consistent execution across a range of economic scenarios. What I would say around sort of our capital management philosophy is that it has not changed. So we believe excess capital above and beyond what's required to fund organic growth belongs to our shareholders and should be used for share repurchases, common dividends or strategic acquisitions that clear a minimum risk-adjusted hurdle rate. As you mentioned, as you referenced, after we complete our buyback authorization by year-end and the Versant acquisition, we expect to have a cash buffer well in excess of our $3 billion to $4 billion target, but no change in terms of our philosophy and how we would deploy excess capital.

[Elyse Greenspan:]

Okay. That's helpful. And then my second question, I wanted to get a little bit more color on the group side. The non-medical results have been pretty strong this year. Can you kind of alluded to favorable dental results, and it sounds like that you continue into the fourth quarter at the low-end of your range. How should we think about that business performing into 2021? Do you just have some initial thoughts, obviously, given that the business has been a little kind of volatile this year to see the impact of COVID?

[Ramy Tadros:]

Good morning, Elyse. It's Ramy here. So with respect to the non-medical health ratio, first, you've got the disability part of that business. Historically, you've seen a linkage, although be delayed linkage between recessions and increases in frequency and lower recoveries on the LTD book. We have not seen that yet. The results continue to track pretty favorably on the LTD side. But there is a lag, and we're continuing to monitor this pretty carefully. On the STD side, the COVID impact has been a push for us, as we look forward. So higher coverage related claims have been offset by lower claims due to delays of elective surgeries, et cetera. So we continue to monitor the LTD book into next year. But I would remind you, we can re-price just shy of 50% of that business every year. So our block is about 13% of our PFOs and about half of that can be re-priced every year. So this is a short term business, and we have a track record of being able to appropriately react to changes in the environment and get the rate changes that we need. On the dental side, this year has been an exceptional year in the sense that we've had all the shutdowns and that are COVID related in the second quarter, and hence, the rationale and the reason why you've set up the unearned premium reserves. As we look forward, in terms of the dental business, as John mentioned, as the quarter progressed, dental offices are more fully opened. And we started seeing utilization levels primarily in September that came in above our typical levels, as the patients made up for those services. And this was offset by the partial release of the dental premium that was set up in the second quarter. Sitting here today, we expect to continue to see above typical utilization levels in the fourth quarter for dental. And you will also see us release the balance of the unearned premium reserve in the fourth quarter for the dental business.

[Elyse Greenspan:]

Okay. That's helpful. I appreciate all the color. Thank you.

[Operator:]

Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.

[Tom Gallagher:]

Thanks. First question is on MetLife Holdings. Just following the equitable risk transfer deal, a New York company with pretty attractive pricing on that deal. Would you say it makes you more likely to consider risk transfer for that business?

[John McCallion:]

Good morning, Tom. It's John. So let me just start with - I don't think our commentary would change here. So one, as I said before, our focus is on optimizing MetLife Holdings. It's a large and stable well-seasoned in force. It's diversified. It's got a number of natural offsets. It's a good source of sustainable free cash flow. That said, we've continued to take an external perspective in a third-party view of the business. And one, I think it makes us better at managing the business. Two, we need to do this work because it has got some complex - complexity to it. So you need to do the work upfront. And I think it can give us an opportunity to accelerate albeit appropriately, the release of capital and reserves. So I think it was an interesting data point. I think data spreads are still wide. But certainly, as I said before, I think some increases in supply here can narrow that. And I don't think it's changed the sense of urgency we have on how we optimize the business.

[Tom Gallagher:]

Okay. Thanks. And just my follow-up is top line in group benefits, it's holding up pretty well and better than most peers. You see that trend continuing as you think about 2021?

[Ramy Tadros:]

Hey, it's Ramy here. We're clearly pleased with the performance this quarter, and we're exceptionally pleased with the performance, especially in the context of a difficult environment. I mean, think about the rise in unemployment rates, think about we're in the middle of a pandemic as the largest group life insurer in the country and where they're paying claims and fulfilling promises to our customers and beneficiaries. So just to give you a sense on top line, for the full year, we would expect to be - from a year-over-year perspective, close to the bottom end of our PFO guidance range of 4% to 6% and that's even if you factor in the premium discounts that we've given in Dental. And I would remind you that you should expect to also see top line PFO growth be in double-digits next year with the addition of Versant. So if you're thinking about the top line growth, we still have a pretty robust view of next year.

[Tom Gallagher:]

Okay. Thanks.

[Operator:]

Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.

[Ryan Krueger:]

Thanks. Good morning. First, I had one follow-up to Tom's question. One piece of MetLife Holdings is participating in Life, which I assume would be a pretty attractive liability to re-insurers. But my question is, because it's participating in from pre-demutualization, is there any impediment to you looking for risk transfer for that specific block?

[John McCallion:]

Hey, Ryan. It's John. I would just say to start that - I would say nothing is necessarily off the table, but there is a closed block, and then there's an open block that have participating policies associated with it. And I think, certainly, the closed block has different complexity associated with it. Both are very well-performing blocks of business. And as I said before, we have a number of businesses that are actually complementary, have a number of natural offsets, which - some of which you actually saw come through this quarter. But yes, I think just to answer your question directly, certain blocks would have different complexities than others.

[Ryan Krueger:]

Got it. Thanks. And then on retirement spread, they did pick up quite a bit on an underlying basis ex VII in the quarter. And I heard your comment on the full year, but as we look a little bit longer into 2021, can you give us any sense of kind of the rough range to think about here?

[Michel Khalaf:]

So you may have heard John's opening remarks. We'll give - we're going to have an outlook call in February, and we'll give more color there. But look, I would just give maybe some qualitative commentary to start. One is, we've seen this - we've seen some resiliency here in our spreads. And it goes back to just a diverse set of businesses we have, not just in terms of source of earnings, but even across spread businesses. We have diverse set of spread businesses, some of which do well in a lower rate, steeper curve environment. And then we have longer tail legacy blocks that obviously would have some spread pressure over a long period of time. And so all things considered, I think we've seen a pretty resilient spread levels this year. Nonetheless, I think over time, there would be longer-term pressure on some of those other long-term blocks, but that ignores new business.

[Ryan Krueger:]

Got it. Thanks.

[Operator:]

Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.

[Nigel Dally:]

Great. Thanks and good morning. So we're optimizing your businesses. Can you discuss the importance of the property Casualty business the article back in September highlighting potentially the division could be put up to sale. Now you probably don't want to speak to that specific article, but hoping you can discuss just where it fits strategically into our overall mix?

[Michel Khalaf:]

Yes. Hi, Nigel, sure. So first of all, I would say this is a well-run, good business, our P&C business. It's been consistently profitable. It generates mid-teen ROEs. And it does have an important strategic connection to our Group business. It also produces a steady source of non-correlated free cash flow. So I think those are the comments that I would make about the business. And as you said, we're not going to speculate or we're not going to respond to any potential rumors here.

[Nigel Dally:]

Okay. That's helpful. Thank you.

[Operator:]

Your next question comes from the line of Eric Bass from Autonomous Research. Please go ahead.

[Eric Bass:]

Hi. Thank you. Just going back to RIS, volumes have also been pretty strong year-to-date despite a lower level PRT activities, so just can you talk about what's been driving this and how you see the outlook for liability growth?

[Ramy Tadros:]

Hey, Eric. It's Ramy here. So as we've talked about, there are a number of different parts or businesses within RIS, we have seen a significant pickup in sales and stable value deposits this year. A lot of that was driven by individuals seeking the safety, that stable value offers them inside their DC plans. Offsetting that, if you think about the other parts of RIS, we've seen more pressure in the structured settlements business, the institutional annuity business. And a lot of those businesses are rate sensitive. So the value proposition to the customer, if you will, is diminished and lower rate environment. And so think about the volumes there, as being - continuing to be driven by the rate environment. PRT, we're seeing it starting to pick up. As John mentioned, we're looking at a pretty healthy pipeline in Q4. But as we've talked about before, we're not chasing top line here. We continue to be highly disciplined, in terms of our pricing of every single deal that we look at, in the PRT space. And then finally, as you probably have seen, we are now well into our entry into the UK longevity market. So far this year, we're close to $1 billion in sales, in terms of longevity swaps. And we continue to see a robust pipeline there, into Q4 into next year. I would just come back and reiterate for RIS. We've seen a very healthy top line. We've seen very healthy growth in liability balances. But discipline is the name of the game here, in terms of looking for the returns, as opposed to chasing growth.

[Erik Bass:]

Thank you. And then maybe, if I could ask one for Steve Goulart, just hoping you could discuss your outlook for the commercial real estate sector? And how you see the current stresses affecting both, your commercial mortgage loan portfolio as well as CMBS more broadly?

[Steven Goulart:]

Sure. Thanks, Erik. I think we've talked about this on a couple of prior calls. Obviously, it's an important topic. It's an important investment for us, in commercial mortgage loans. We continue to be optimistic, about the sector. We like it. We continue to invest in the sector. I think back actually to some of the comments I made, I think it was actually in perhaps a response to one of your questions. But we did see deferral requests, as we entered into the COVID pandemic. I think I mentioned on our last earnings call that those got to about 9%, of our principal balance outstanding, but that appears to be sort of where we topped out. And what's most important now is, as those are rolling off the deferral cost, we've seen 60% of them roll off. And they've all gone back to resuming payment. So I think that supports our underlying view of strength in this sector, Eric. And it continues to be important for us.

[Erik Bass:]

Thank you.

[Operator:]

Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.

[Suneet Kamath:]

Thanks. I wanted to ask about Asia sales. They're down year-over-year, but up pretty sharply, on a sequential quarter basis. Just curious, what's going on there? We had heard from another company, that there was a pull forward of sales because of some rate changes that helped their sales growth. Just wondering, if there was any kind of similar dynamic at met? Or more specifically what you're seeing, in terms of driving that growth?

[Kishore Ponnavolu:]

Suneet, this is Kishore. Let me say that the premise of your question is correct in the first part, so let me - based on your question, let me start by putting a little bit of context to our sales performance in Q2. In the second quarter, lockdowns and social distancing restrictions had a significant impact on our sales. And Q2 sales for Asia overall dropped 44%, 55% in Japan compared to prior year. To overcome this challenge, we took several distribution and product actions. As you're well aware of all the past investments, we've been making in sales platforms. And on top of that, we implemented several digital solutions to augment our face-to-face interactions. And we also stepped up our sales management activities as well. And because of these actions, we've seen a very strong recovery in Q3 sales, as you rightly pointed out. Q3 sales increased sequentially, 63% for overall Asia, 85% in Japan. And our year-over-year drop is now reduced to 16%. So you asked about the re-pricing that was we did re-price our level premium FX product. It was contributing, but not a major factor in driving our sequential growth. So another way to look at this is to how we're seeing, how this is going to play out for the rest of the year. We expect the impact of our actions that we've taken so far to sustain our Q3 momentum. While the environment is still challenging for face-to-face sales environment, we're seeing a pickup in our sales pipeline, and you should expect a positive year-on-year growth for Asia as a whole.

[Suneet Kamath:]

Got it. Thanks for that. And then I guess - yes. No, it does. Another quick one for John on the VA block. Just curious, as you've mentioned something about reserves on a statutory basis, but is this block sort of past the peak reserve funding period? Or are you still sort of building reserves as the block matures? And at what point do you think you'd be at sort of peak reserves? Thanks.

[John McCallion:]

Good morning, Suneet. Just as a reminder, we have roughly $50 billion of VA account balances. Half of it is a living benefit guarantee. As we showed you back at Investor Day, and that has been rolling off consistently over time. Having said that, there are certain components of that block that are building reserves and others that are, I'd say, kind of have - kind of settled down in terms of the reserve build. So it depends on which vintage you're talking about.

[Suneet Kamath:]

Is there any way to give us a percentage of the block at that peak reserves versus the block that's still building?

[John McCallion:]

I probably have to get back to you on that. I don't have it handy.

[Suneet Kamath:]

Okay. Thanks.

[John McCallion:]

Yes.

[Operator:]

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

[Jimmy Bhullar:]

Hi. Good morning. I had a couple of questions. First, on your Latin America business, sales were down a decent amount year-over-year. I'm assuming that's mostly because of COVID. And to the extent it is, can you give us any color on whether things got better as the quarter went on? And how do you see things working out through the next quarter or two? And then I have another one.

[Oscar Schmidt:]

Yes. Hi, Jimmy. This is Oscar. So let me talk about the quality of our top line overall. So as you said, sales are down because of social distancing because of COVID that affects the entire region. But if you think about it, the sales that we're performing are all done remotely is really good performance considering the potential after social distancing goes away. But if you think about our premiums and fees, and you exclude PF. And let me say that PF in Chile, sales are really down because most of Chileans are deferring their decision to retire. So PF sales are really down. If you exclude PF impacts in our premiums and fees, year-over-year, we are growing above mid-single digits, which is pretty healthy considering the COVID environment. And that speaks about the quality of our persistency, not just the resilient sale . So we are very confident about our topline health, particularly if you strip out the PES, which, as I said are, obviously, related to a few number of silencing to retire. So we're very confident as well that as our agents are for core channels, they learn to remotely as they can start dealing face-to-face with these customers, sales are going to go back to normal and it's happening. So we're very happy about the potential.

[Jimmy Bhullar:]

And then maybe a bigger picture question. You've done a few sort of niche acquisitions in Group benefits. But - and obviously, you're deploying capital towards buybacks as well. Given your - where your stock price is, can you comment on your interest in sort of larger acquisitions and how you think about those because there are - there is a decent amount of activity in the business lines that you're in. Are you interested in large acquisitions as well? Or not as much given sort of the potential accretion from buybacks at this price?

[Oscar Schmidt:]

Hi, Jimmy. Look, I mean, I go back to our strategy and what we shared with you at Investor Day last December. If I look at our portfolio, especially factoring in some of the recent acquisitions, Versant Health, that in PetFirst and Digital Willing I don't - we don't see gaps in terms of the portfolio that - of businesses that we have. We see plenty of organic growth opportunities. And we're focused on getting the synergies and whether cost or revenue synergies from those acquisitions that I referenced. So hopefully, that gives you a bit of sort of insight into our thinking here.

[Jimmy Bhullar:]

Thanks.

[Operator:]

Your next question comes from the line of Humphrey Lee from Dowling & Partners. Please go ahead.

[Humphrey Lee:]

Good morning and thank you for taking my questions. My first question is, when looking at the annual assumption review, should we think about where there's going to be some ongoing run rate earnings impact into some of your segments?

[John McCallion:]

Good morning, Humphrey. Its John. No, we don't expect any material changes in ongoing run rate earnings as a result of the assumption review.

[Humphrey Lee:]

Got it. My second question is, I think, in Michel's prepared remarks, you talked about entering into absence management business. How should we think about the corresponding expense impact from the investment into the business? Especially since some of your peers have incurred quite a meaningful labor expenses for this business as they ramp up?

[Ramy Tadros:]

Hi, Humphrey. Its Ramy here. So in terms of our actual expenses relating to our disability business this quarter, we're running right on line with expectations. So, we're not really seeing any impact here whatsoever. What Michel was talking about is some of our broader investments in technology and platform around disability and absence management. All of those numbers on all of those investments have been baked into our run rate that you've seen over the past many quarters. And our investments here are in areas like pricing sophistication, contract competitiveness, clinical model in terms of the return to health initiatives, which are critical for the LTD business. And we've already seen positive business outcomes and end-to-end disability and absence management solution, which Michel is talking about is already resonating in the market with the larger employers. It includes things like the digital interface for claimants, AI-driven automated claim processing, sophisticated data analytics for employers so that they can understand their workforce. And we're expecting to see growth here, although growth with discipline in this area going forward.

[John McCallion:]

And Humphrey, it's John. I would just add just to Ramy's point there. In a little bit the way you asked the question, this is all part of the - as we refer to as the efficiency mindset concept, where we continue to drive efficiencies every quarter in the firm and look for opportunities then to redeploy that into strategic reinvestments to support our market leading businesses and doing all of that within our run rate costs. So I would just go back to that point. We made that point at Investor Day, and I think it's a key component for us as we move forward.

[Humphrey Lee:]

Got it. Appreciate the color.

[Operator:]

Your next question comes from the line of John Barnidge from Piper Sandler. Please go ahead.

[John Barnidge:]

Thank you. Another licensure that reported last night talked about elevated non-COVID mortality from delaying care, heart attacks and deaths of despair in their book. As it relates to the Group Life business and benefits, are you seeing signs of this?

[Ramy Tadros:]

No, we're not.

[John Barnidge:]

Okay. And then, are you seeing any signs of permanent change of behavior coming out of COVID that may impact claims utilization trends on a more secular basis? Thank you for the answers.

[Ramy Tadros:]

Not yet.

[Operator:]

And at this time, there are no further questions. I'd now like to turn the call back to Michel Khalaf.

[Michel Khalaf:]

Thank you. In closing, I believe our performance in Q3 and so far in 2020, underscores the sense of urgency and laser focus and how this leadership team is executing on our Next Horizon strategy to create long-term shareholder value. I am thankful and proud of the effort and commitment of our employees around the world, who are going above and beyond to deliver for our customers. Please be safe and talk soon.

[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.