MetLife, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Feb 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter 2020 Earnings Release and Outlook 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 fourth quarter 2020 earnings and near-term outlook 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, which address the quarter, as well as our near-term outlook. 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 outlook sensitivities, disclosures, GAAP reconciliations and other information, which you should also review. After prepared remarks, we will have a Q&A session. In light of the busy morning Q&A will extend no further than the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up. With that, over to Michel.

[Michel Khalaf:]

Thank you, John, and good morning, everyone. No matter which lens to use to look at MetLife’s performance. The fourth quarter, full year 2020 or the progress we have made toward our Next Horizon strategy, the portrait that emerges is one of a resilient company with consistent execution that delivers for its stakeholders. The year 2020 was an especially unforgiving environment for life insurance, marked by the worst pandemic in a century, record low interest rates and extreme market volatility, and yet at MetLife by reducing and diversifying our risk, controlling expenses, staying true to our investment principles and executing on our capital deployment philosophy, we overcame these challenges to produce strong earnings, cash and book value per share growth. Let’s begin with our fourth quarter 2020 results. As you saw last night, we delivered quarterly adjusted earnings of $1.8 billion or $2.03 per share. One of the primary drivers was the exceptionally strong returns we earned on our private equity portfolio, which has long been an important source of value creation for MetLife. Overall, adjusted earnings excluding notables rose 30% year-over-year. Just as noteworthy during the quarter was the resilience of our business in the face of COVID-19. MetLife balanced risk exposure across the spectrum of mortality, morbidity and longevity was clearly evident in the quarter and the year.

[John McCallion:]

Thank you, Michel, and good morning. I will start with the 4Q ‘20 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions, and more detail on our near-term outlook. Starting on page three, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in the quarter was $124 million or $1.7 billion lower than adjusted earnings. This variance is primarily due to net derivative losses from higher long-term interest rates and stronger equity markets. For the full year net income of $5.2 billion, which included net derivative gains of $1.1 billion was more in line with adjusted earnings. Our investment portfolio and our hedging program continued to perform as expected. On page four, you can see the year-over-year comparison of adjusted earnings by segment. This comparison excludes net favorable notable items of $420 million in the fourth quarter of ‘19, which were accounted for in corporate and other. Excluding such items, adjusted earnings per share were up 33% and 34% on a constant currency basis. Moving to the segments, starting with the U.S. Group Benefits adjusted earnings were up 16% year-over-year, driven by expense margins, underwriting and volume growth. The Group Life mortality ratio was 96.3%, which is above the top end of our annual target range of 85% to 90% and included roughly 9 percentage points related to COVID-19 claims.

[Operator:]

Thank you. Your first question comes from the line of Erik Bass from Autonomous Research. Please go ahead.

[Erik Bass:]

Hi. Thank you. Can you talk about your preferred uses for the proceeds from the P&C business and do you have a timeframe over which you expect fully deploy the access capital closing the transaction?

[Michel Khalaf:]

Yeah. Hi, Erik, Michel. So let me start by just reiterating and you have heard me say this many times that, we believe excess capital above and beyond what’s required to fund organic growth belongs to our shareholders and we would use it for share repurchases, common dividends and strategic acquisitions that clearer risk adjusted hurdle rate. So no change there and that’s why we also announced in December that our Board has approved a new 3 billion buyback authorization. We repurchased 571 million of MetLife shares in the fourth quarter. In total for the year, we repurchased approximately 1.2 billion, and so far in 2021, we have repurchase another 434 million shares. So we still have roughly 2.4 billion remaining on our current authorization. We would expect to complete the new 3 billion authorization in 2021. And look, I think, we have also built a track record here of being deliberate in how we manage capital. So expect that to once we complete the current authorization, we will review assess the environment and then we would have a discussion with our Board about potentially a new authorization. So I hope that gives you a bit of color in terms of how we would sort of use the proceeds.

[Erik Bass:]

Yes. Thank you. And then, secondly, can you talk about the outlook for RIS spreads? Why doesn’t the spread range for 2021 increase given the benefits that we have seen from the steeper yield curve, as well as the higher outlook for the VII in 2021?

[John McCallion:]

Good morning, Erik. It’s John. Look, I think that we have had some strong performance in 2020 to -- and we should recognize that VIII obviously came in very strong. We have also had -- we have had some kind of one-time pops, I will say, and we talked about this in the third quarter from things like we had some higher prepayment activity on some RMBS securities that were purchased at a discount several years ago. We actually saw that continue into the fourth quarter. So all-in-all, the way we see it is, we are able to maintain spreads despite the low rate environment. I think it’s -- we are not immune to low rates, but I think we have a number of diverse set of products and businesses that where some perform well and low rates. And others, quite honestly, there is some roll-off reinvest risk. So all-in-all, we are very pleased to be able to maintain the spread guidance that we gave a year ago and I think we are happy with the outlook.

[Erik Bass:]

Got it. Thank you.

[Operator:]

Your next question comes from the line of Andrew Kligerman from Crédit Suisse. Please go ahead.

[Andrew Kligerman:]

Hey. Good morning, everyone. Just to follow-up on the last question, with regard to the environment for M&A is, are you -- are there more Versants out there that might be of interest to you. What are you seeing out there that might be of interest? And is there a lot of activity going on? And on the flip side with regard to MetLife Holdings, is there a heightened interest in your -- in annuity blocks in life blocks, in LTC? What are you seeing in that environment with necessarily specifically commenting on that?

[Michel Khalaf:]

Yeah. Hi, Andrew. It’s Michel. Let me start and then John will talk to you about Holdings. What I would -- let me start by saying that, we are quite happy pleased with our portfolio of businesses. We don’t see -- I don’t see any major gaps there. We look at M&A as sort of a strategic capability here. But we also have an approach -- a global consistent approach in how we look at M&A opportunities from a strategic set perspective. They -- those opportunities would need to earn more than their cost of capital. We also look at potential M&A in terms of it being more attractive than share. And we also seek to sort of achieve a healthy balance between returning capital to our shareholders and investing in attractive future growth through M&A. So that’s really the approach here. But if you were to ask me about sort of any gaps that we see, I would say, we don’t see any major gaps in terms of our portfolio of businesses. And let me turn it over to John.

[John McCallion:]

Good morning, Andrew. Yeah. I would say that there is not a lot to update on relative to what back in the third quarter. Obviously, as I mentioned then, we do see that there’s kind of a supply of capital out there that’s starting to pick up. I think that’s a good thing. Obviously rates rising is a good thing. And as I said before, part of our process in holdings is, we take a third-party external perspective of this business. We are working through different combinations, ideas, to think about how do we optimize and optimization can be how do we do things better internally to manage this business, as well as look for ways that there might be kind of a value enhancing transaction for us and for someone else. But no one transaction can be replicated. I think that’s certainly one thing we have all learned. I think everyone has a unique situation and so we are working through -- we worked through our own and see if we can find an optimal solution. But we don’t have to do anything. I think that’s important. We have some pretty, I’d say, best-in-class capabilities to manage the run-off, but nonetheless, we continue to take a third-party and external perspective.

[Andrew Kligerman:]

Got it. Thanks for that. And then just the follow-up would be, there’s a lot of talk now that we are pretty deep into COVID that there’s kind of a pull-forward on claims and so forth. So we have seen a financial benefit to the LTC line, and of course, in MetLife Holdings also the negative impacts on mortality. So could you talk how you see that affecting your mortality and your Long Term Care claim, respectively, going forward maybe into later ‘21 or ‘22? Do you think there will be any differences that we see going forward?

[John McCallion:]

Yeah. It’s tough, Andrew, to really handicap that at this point. I mean, it’s -- certainly we saw across, I’d say, all key trends there was some favorability in LTC this quarter and that’s probably the first quarter where we had kind of all drivers claim insurance was down, higher claim in policy termination rates, average claims size was a little lower. So -- we did see that. We still believe at this juncture and our long-term view is this is an aberration and a short short-term aberration that will revert back to trend. But I think it’s something that we will need to monitor closely and continue evaluate as more data comes available.

[Andrew Kligerman:]

Thanks, John.

[Operator:]

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

[Tom Gallagher:]

Good morning. One question I had is, John, I think you have mentioned your LTC block is hedged on the interest rate side for about five years. If the long end of the curve keeps moving higher and we get a bit of a reflection move here for the next couple of years, would you guys plan on extending the rate protection back in that block to further protect and immunize that business? Is that something you are contemplating right now?

[John McCallion:]

I would say we always contemplate updating our ALM and hedging across all portfolios, not just LTC. It’s a -- it’s proven to be a very valuable tool to constantly evaluate, look at different opportunities, develop the play books, be ready when things change, not reactive but proactive. So we would obviously consider that. Now, as you said, we are well-hedged from an interest rate perspective in LTC. Also there’s just some inherent natural offsets in Long Term Care. So it depends what drives rates up, right? So you talked about inflation, you got to be careful about inflation, when it comes to Long Term Care, because that can have an offsetting effect. That can also help mitigate sometimes when rates get low. So all those things have to be considered.

[Tom Gallagher:]

Got you. And then my follow-up is just on Asia, I thought that the guidance there was pretty constructive, mid-single digits in 2022, ‘23, that certainly compares very favorably to the big Japanese competitors. Is there something that’s different about your Japanese business or would you say, it’s your non-Japanese/Asian businesses are just growing a lot faster that are offsetting it? Can you provide a little color for what’s allowing Met to hold up better than others?

[Kishore Ponnavolu:]

This is Kishore. Thank you very much for that question. Certainly, one of the -- and this -- we referenced this before, a few strengths for our Japanese business is; number one, is the diversified channel mix that we have. We play across multiple channels. And we are strong in bank up, we have 120 plus banker relationships that run for quite extended periods with a lot of depth there. We also are very strong player in the IA channel, where our relationships with some of our federated agents run many, many, many, many years and similar to the large agencies as well. In addition, we have a fantastic resilient courier agency channel, which we have been investing in, and for the past couple years we have actually made significant investments in that channel for growth as well. And similarly on the product side, we are also well-diversified with a focus on annuity, as well as A&H and as well as life, and so play in all segments of that too. So that’s a pretty different orientation with regards to that. Now, certainly, the other area also helps to that story, because we are in a number of markets where the growth is pretty aggressive. And you saw that play out over the last couple of years and that’s -- and we expect that to play out down the road as well. Thank you.

[Tom Gallagher:]

Thanks. Thanks, Kishore.

[Operator:]

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

[Jimmy Bhullar:]

Hi. Good morning. So, first, just had a question on main trends in the Group business, you mentioned dental utilization is favorable. I am assuming it’s not as good as it was or as low as it was early last year, but if you could talk about that? What -- also what you are seeing for disability claims and how much of an offset do you think these will lead to elevated Group Life claims in this yea?

[Ramy Tadros:]

Sure. Jimmy, it’s Ramy here. So let me just first kind of describe the first quarter for you and maybe 2020 in general. So for dental, we did see a significant depth as COVID hit and the dental offices were closed. And as you recall at the time, because of lack of availability of services, we did setup an unearned premium reserve back in the second quarter. From utilization perspective, we did expect some sort of catch-up effect or pent-up demand and we did see some of that in the third quarter, but in the fourth quarter, that kind of pulled back. And in particular it pulled back for preventative services. So think regular checkups, cleanings, et cetera. And as we go into Q1 for dental, we are still seeing some softness in the utilization. So it is coming in below expectations, again driven by those preventative services. So that’s kind of the dental picture last year and coming into this quarter in terms of why we have visibility into. For disability, just as I mentioned whereas book for use. So disability is about 12% of our PFO. A third of that book is short-term disability and two-thirds is long-term disability. So for the STD book, it’s not really a macro unemployment story, it’s really all about injuries and minor surgeries, et cetera. And what we have seen in that book last year and what we continue to see this year so far is the rising COVID claims, have been basically offset by a decrease in some of the other claims with respect to injuries. So it’s basically flat on the STD portion of the book. The LTD portion of the book is continues to be favorable. Now if past recessions are any guide, you would expect to see some impact in terms of frequency and recoveries on the LTD book. We typically see those impacts coming in with a lag. We continue to monitor this very carefully. But we are not yet seeing any unfavorability quite there, we are seeing favorability rather in terms of frequency for the LTD book so far.

[Jimmy Bhullar:]

Okay. Thanks. And then just a question on the -- obviously your operating income was very strong, but net income was not as much and you had a large derivative loss. So I think you have mentioned that a majority of these derivatives are -- or the loss is uneconomic or it’s hedging loss. But is a portion of it economic and how do you think about sort of below the line versus above the line, just the difference between operating versus net.

[Michel Khalaf:]

Good morning, Jimmy. So, first, yes, that’s the case for the fourth quarter. I mean, if you look full year, I think, they are much more aligned and that’s been the case now for some time. So we are going to see volatility on a quarterly basis and that should not be a surprise. But, yeah, it is part of our hedging program. Obviously, we put some of that mark-to-market non-cash time horizon below the line, just because the -- what we are hedging doesn’t move in the same direction, so it could be confusing otherwise. And yeah, I think, as markets rise and you saw equity markets rise significantly, you can think that’s where predominant level of our losses came. Also interest rates rose, so that’s another place. So I would say as expected would be the punch line for us and very pleased with how it’s performed so far.

[Jimmy Bhullar:]

Okay. Thanks.

[Operator:]

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

[Ryan Krueger:]

Hi. Good morning. Can you comment on the key drivers of the expected upside to your ROE getting back to the 12% to 14% target over the next few years?

[John McCallion:]

Hey, Ryan. It’s John. So, as you mentioned, we said in our outlook that, we are comfortable with migrating back to the target of 12% to 14%. As I mentioned in my opening remarks a few things, for certainly next year and to some degree into 2022, the low interest rate environment and the impact from the sale of the P&C and related realized gain that will put pressure on ROE. But we do see an upward trajectory, given our current business mix, our growth outlook, our diverse set of investment capabilities, the returns that we have been generating on new business in the current environment. And then, lastly, the deployment of some excess capital. I think all of those things get you to migrate up and suggest that based on the current macro outlook for us achieving, probably, the lower end of that range, but nonetheless, in the range.

[Ryan Krueger:]

Got it. Thanks. And then I just had a follow-up on non-medical health, given your comments on favorable dental utilization in the first quarter so far. Would you anticipate setting up an unearned premium reserve again in 2021 or is that more of one-off practice the volatility we saw in 2020?

[John McCallion:]

Yeah. I would just remind you, Ryan, the reason that we were able do that is, because services were not available. Dentists’ offices were closed. We don’t forecast that will be the case in 2021. So we will not expect the need or the requirement to set up an unearned premium reserve for that.

[Ryan Krueger:]

Got it. 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. With your free cash flow ratio, given your guidance, I am assuming that you expect a relatively benign credit conditions. Just hoping to get clarification as to whether that’s accurate, are you still looking at opportunistically de-risking your portfolio or is that no longer necessary?

[John McCallion:]

So, Nigel, it’s John. Maybe I will start and if Steve wants to dive in on the credit outlook, I will let him do that. So, just as you said on our free cash flow outlook and just to help reconcile and reiterate some of the things I just -- I said in my opening remarks. We gave a scenario back in Q1 that assumed an extension really of the March 31st macroeconomic conditions. And then Steve articulated in that call, some assumptions around credit losses and downgrades. So what’s different, right? As we said, market conditions have improved. Interest rates are higher. Equity and credit markets are resilient. And as a result, we have seen limited credit losses with the portfolio. And it’s -- but notwithstanding the fact that, environment remains uncertain here. So that’s kind of one. The other thing is, we have gone through as a result of those macro factors and kind of completing our year-end cash flow testing requirements and the final update for our VA principal based reserving in New York, and as a result, we expect our combined NAIC RBC ratio to remain above our target. And again, I’d just say, that’s a real testament to the team’s approach and proactive approach to AUM and hedging. So, therefore, we -- our outlook for our cash flow guidance stays intact. So, maybe, Steve, can give some more on credit outlook.

[Steve Goulart:]

Sure. Thanks. Thanks, Nigel. It’s Steve. I think John set the stage for that too, just thinking back, March 31st was a very different time period than we are in today and we certainly did look at how bad could the downside be. Since then we have seen obviously the Fed is really playing an active role in the markets. We have seen fiscal stimulus and so the markets continue to trundle along. However, what I’d say on all of that is, our watch word continues to be one of caution in these markets. Again, some of the fundamentals are positive. The economic recovery continues -- seems to be continuing, although a lot of it is going to be based on the vaccine rollout now and what happens there. I look at some of the actions we made over the past nine months or so continuing to really manage the portfolio particularly in those sectors that we thought were more exposed in this economic environment and we are very pleased with how we are positioned today. But again, we are cautious and we look at spreads in the market today. Spreads are very tight. It’s not clear that the return we are getting particularly in the public fixed income markets really matches the risk there. So we are cautious. We really continue to favor high quality names in the public markets. And most importantly, we continue to move to private assets in the private markets, which are strengths of ours and really do continue to show relative value and better risk reward trade-offs than we see in a number of the private markets. And that’s where we are continuing to put the majority of our new investment flows.

[Nigel Dally:]

That’s very helpful. Thank you. The results in the back half of 2021, you also mentioned, vaccine distribution as an area of uncertainty. So just wanted to get some clarity as to what you are assuming with the guides of vaccine distribution. Just trying to understand whether that’s potential area of vulnerability or whether you have been a bit cautious with the guides and assumptions that you are building into that?

[Michel Khalaf:]

Yeah. Nigel, you broke up a little bit. But I think the question was around just our -- what are we assuming in terms of vaccine rollout? Is that right?

[Nigel Dally:]

Yeah. Vaccine rollout especially for LatAm.

[Michel Khalaf:]

For LatAm. Okay. Yeah. Maybe I will start and…

[John McCallion:]

Yeah. And we have Eric Clurfain who took over as Head of LatAm effective January 1st with us, so he can provide some more color.

[Michel Khalaf:]

Yeah. And I will just say, as I said broadly speaking, I think, how that rolls out across the US. .and Latin America, TBD. But, so the there still remains quite a bit of uncertainty. Maybe I will turn it over to Eric.

[Eric Clurfain:]

Sure. Thanks, John. So as you might recall, compared to the U.S., Latin America was really roughly on a quarter lag from the onset of the pandemic and this lag continues to hold. Regarding the -- looking ahead, the rollout of the vaccine, we expect delays and especially in Mexico. However, we are very pleased with the fundamentals and the financial strength of our business in the region and that remains strong and our leading franchise in the region remains intact. We expect our revenues to grow also really supported by strong persistency, which we have seen across the region and a good example is our flagship product in Mexico, our Met99 product and this will support growth in 2021. So just to close as you have seen in John’s comments in our outlook, we expect ‘22 earnings to really come back and return to a historical levels by then.

[Nigel Dally:]

That’s great. Thank you.

[Operator:]

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

[Suneet Kamath:]

Thanks. Good morning. I wanted to go to the Group Benefits guidance, particularly the longer term outlook. So after a big lift in PFOs next year due to Versant, I think, you are reverting back to 4% to 6% growth, which is consistent with your outlook for last year -- from last year. I would have thought maybe there could be some upside to that just given the opportunity to cross-sell some of the diverse end product to your existing clients. So is the 4% to 6% conservative or is there an opportunity to maybe the high-end or exceed that based on cross-selling of the Versant product?

[Ramy Tadros:]

Hi, Suneet. It’s Ramy here. So just the headline number, remember here the 4% to 6% comes on top of a double-digit next year. So we are applying a 4% to 6% bigger PFO number. But if you were just to step back and look at that franchise and look at the 2020 results, we are seeing very strong momentum here. Our value proposition is resonating with our customers and intermediaries. And our 2020 results full year had a 5% PFO growth. And I would remind you that includes about a point of headwind from the dental premium discount that we provided in the second quarter. So this is a result we are really pleased with especially in the context of a challenging external environment. But looking forward in terms of our confidence in the outlook, we talked about Versant and we -- the strategic fit is there. We continue to see very good reaction from our customers and intermediaries about Versant and the integration is well underway. We continue to see very strong persistency across our book and rate actions that have been consistent with our expectations. In the jumbo market, which was light in 2020. That activity has returned in 2021 and we are kind of winning our fair share. So we are expecting to see strong sales figures coming into Q1. And then, finally, if you think about our outlook, I would say, what’s coming into sharp focus here is the increasing importance of the investments we have been making and continue to make and our capabilities broadly, and specifically, our digital capabilities to kind of meet the changing needs of our customers and this is where our scaling ability to invest is paying off dividends. So to give you just a sense of that in voluntary PFOs, we saw a 20% growth in our PFOs in 2020 over ‘19 and we are expecting a similar growth in ‘21. Those numbers compound, so our 2020 PFOs involuntary were more than double our 2017 numbers. But this is a big ship to move and hence kind of the guidance is, we think is the right one beyond ‘21.

[Suneet Kamath:]

Okay. I will stop there given the time. Thanks.

[Operator:]

And at this time, there are no further questions. I’d now like to turn the call back to John Hall.

[John Hall:]

Great. Thank you very much, everyone, for joining us and have a good day.

[Operator:]

Ladies and Gentlemen, this conference will be available for replay after 11 a.m. Eastern Time today through February 11th. You may access the AT&T Executive Replay System at any time by dialing 1-866-207-1041 and enter the access code 1393262. International participants dial 402-970-0847. Those numbers once again are 1-866-207-1041 or 402-970-0847 with the access code 1393262. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect.