All right. So we will jump right into the next one. Thank you, everybody, for being here. And special thank you to Michel Khalaf, President and CEO of MetLife, and John McCallion, CFO of MetLife. I'm sort of kicking all of these things off with a broad strategy update. So maybe an update on the Next Horizon Strategy that you all have laid out. And, you know, it's been a few years now. I would be interested if you can provide an update on what you've achieved to date, as well as those areas that you're focused on as we think through the medium term.
Sure. First of all, thanks for having us, Alex, and great to see everyone. So we launched our Next Horizon Strategy almost exactly four years ago. And we built the strategy, you know, we call it all weather. So we wanted a strategy that would allow us to perform across economic cycles. And we're really pleased in how we've executed on the strategy. We, you know, we thought it was the right strategy four years ago. We continue to think it's the right strategy in the context of the current environment. You know, in terms of the commitments we made, and those were five-year commitments, I would say we're ahead of schedule on pretty much all of those. So we talked about generating $20 billion in distributable cash. We're ahead of schedule on that front.
We talked about freeing up $1 billion in operating leverage that we will reinvest in, in growth and in the business, on track to achieve that. We talked about a free cash flow ratio, a two-year average of 65%-75%. We're achieving that. And, last but not least, we talked about an ROE of 12%-14%, and we've increased that to 13%-15%. You know, at the beginning of the year, we rallied our leadership team around the theme of raising the bar, and this was really in recognition of the fact that the environment is likely to continue to be highly uncertain.
So, controlling all that we control becomes, you know, all the more important and, you know, glad to see that our team has really embraced this message. I think you can see it in the underlying business momentum across our businesses, building on, sort of, coming into this year from last year and sustaining that throughout this year. I think we can see it as well in the discipline around our direct expense ratio in the face of inflationary pressures continues to come in under 12.6%, which is our target. I think we see it also in how we're deploying capital in support of organic growth at mid-teen to high-teen IRRs and a relatively short payback.
I think we also see it in just how we are continuing to deploy capital to its best and highest use, and I think the reinsurance transaction with Global Atlantic was another demonstration of that. And we also see it in... We do an annual survey to get sort of the pulse of the organization, and we've had our highest engagement score ever, which tells me that our people are highly energized and you know, really believe in the company's direction. And I've had the chance to travel much more this year compared to, you know, I did some of that last year, much more so this year. And you know, I think the consistency and precision with which our teams are executing gives me great confidence in the sustainability of our momentum here.
Looking ahead, I would say, you know, a couple of things I would point to, one, as the higher rate environment is likely to drive higher demand for fixed rate products. I think this will benefit—I think this is true for retail and institutional. It will benefit our RIS business as well as our asset management business. And I think also with the advent of new technologies and the investments we've been making consistently in those technologies, I think there is a further opportunity for us to leverage our size to drive a scale advantage. So all in all, you know, pleased with the way that we're executing on the strategy, and again, we think it's highly relevant in the current context.
Great. So next, I want to jump right into group benefits. The margins have come a long way from the depths of the pandemic. Things are feeling a lot better. Are you seeing, you know, any impact to the competitive environment? I feel like we were going through a period where pricing was actually going up, coming out of the pandemic.
Mm-hmm.
Are you seeing any areas where it's, you know, maybe starting to get more competitive?
Yeah. So I mean, I think you've heard me say it before, Alex, I think that group benefits is the most attractive segment of the life, U.S. life insurance industry. You know, it's capital light, it's healthy margins, and it has good growth, and we're the market leader here. To your point, we have seen underwriting revert to, I would say, pre-pandemic levels. Disability, I would say, in particular, has seen favorable underwriting. I think, over time, and it will take a while, I think this will eventually be competed back because it is a competitive market....
I think the short-term nature of the products here almost act as a deterrent in terms of irrational behavior or too much, you know, too aggressive underwriting, because results tend to show up in a sort of fast time frame. So that's sort of a deterrent. So what we're seeing is a competitive market, but not irrational. And you know, I think price definitely matters here, but there is also other areas that act as differentiators her.
You know, we've talked about the importance of scale, and an integral component of our strategy has been to invest significantly, whether it's in our servicing capabilities, whether it's in how we engage with employees, how we integrate seamlessly into the employer benefits ecosystem, enrollment and re-enrollment capabilities. So all those things, you know, matter as well. And, you know, we feel good about our ability to continue to grow this business and to continue to maintain healthy margins here.
So next, I wanted to ask you about the uptake of voluntary benefits. You know, I think it's been a trend since even before the pandemic that you know there was greater penetration there. You know, are you continuing to see that at this point? Is wage inflation adding anything incremental to it? Is there anything that you've gathered from the year-end enrollment process?
Yeah, I think wage inflation is a, you know, tailwind mostly for the core product, I would say, so life and disability in particular, maybe less so for voluntary. But we are continuing to see really good traction here. I mean, voluntary is not new to us. It's been a core strategy for a number of years. We've been able to grow our voluntary business in the high teens for a number of years, and we think that growth trajectory is sustainable. You know, it's... Employee paid now accounts for about 20% of our sales in any given year, so it's becoming significant. And we were, you know, we touched on margins earlier.
I think that's another sort of reason why we feel good about our ability to maintain healthy margins. You know, the more voluntary becomes an employee paid becomes, you know, the more prominent it is in terms of its the overall pie, I think that's going to contribute to margins as well. You know, there are three, I think, key areas for us that are helping us, you know, maintain this momentum here. One is continuing to introduce new products to existing customers. We're the market leader in accident and health and legal plans, and we've added pet insurance, which is a category where we think there are good growth trends going forward.
We also investments that we're making in enrollment and re-enrollment capabilities, the way we partner with the benefits providers and communication firms to personalize our communication and education to employees, those are important drivers of take-up rates, and we're seeing that materialize. And then our ability to bring our full suite of voluntary products down market, so to the under 5,000 market, where over 50% of employers don't offer any type of employee benefits at all. You know, those are all sort of important components that are allowing us to sustain this, you know, this growth momentum in voluntary.
Very helpful. Pivoting over to retirement, pension risk transfer has been a growth avenue for you as well, tends to see a bit higher volumes in Q4. How is that progressing as we work towards the end of the year?
Yeah, really well. And, you know, to the point you're making, I think, comparing to a few years ago, I think we're seeing business come through now, more evenly throughout the year. So we wrote $2 billion in Q2, we wrote $1.5 billion in Q3. Year- to- date, so far this quarter, we're at $1.8 billion. So, you know, overall for this year, will be north of $5 billion, which will make 2023 our third highest year ever. And 2022 was a record year for us. We had the IBM deal, which was $8 billion. 2018 was our second highest. We had the FedEx deal at $7 billion.
So, you know, this year we haven't had, you know, any deal of that magnitude or size yet. It's still a very, very strong year. You know, we're very disciplined here. We, you know, we look at the risk profile, and we apply an M&A-like approach to how we assess pension risk transactions. We play in the jumbo end of the market, where there are less competitors, and I think where also, you know, our capabilities act as a differentiator. And, you know, we see a healthy pipeline into the future. I think the fact that funding levels remain quite healthy, you know, significant assets are sitting in frozen DB plans.
I think plan sponsors are looking at risk transfer as an important component of their overall risk management strategy and approach. I think all those are indicators, and funding levels being high, I think plan sponsors are looking at this environment as a window, where they can transact at favorable terms. So all in all, I think, you know, we see a healthy pipeline, and we are confident in our ability to continue to win our fair share here.
So we've, we've seen some peers start to use sidecar vehicles. You know, I think in pension risk transfer, in particular, I think some have talked about that being a potential opportunity to, to do it in, in the most capital-efficient way possible. Is that something that, that's of interest to you? Is the opportunity that big that, that you'd actually pursue third-party capital to help grow it?
Yeah, I mean, so far we've, you know, been able to... and we've been happy, I would say, to deploy our own capital to support PRT. You know, we've had the capacity to do so, the flexibility to do so, and we're doing it at attractive returns and, and paybacks. You know, I think the, you know, and, you know, maybe I should point out here as well, is that the, the reinsurance transaction with Global Atlantic also sort of adds to our excess capital. So it gives us even more flexibility there.
Sure.
You know, I think, if we, if demand was to grow to a level that would sort of outstrip our, you know, capacity to generate capital to support this business, you know, we have solutions in place that would allow us to add capacity. And I would say that, you know, we would consider sidecars as also, you know, a way of raising capital, so it is something that we would consider.
Before I leave retirement, I wanted to ask a little bit more nuanced question. Can you, can you describe the sensitivity of the retirement segment to the shape and level of interest rate, interest rates? You know, how, how much higher or how much are higher interest rates helping the business? And how much, have the hedges that you have in place held down the funding costs?
Yeah, I mean, I think we have, we've certainly benefited from some hedges we've put on, you know, years and years ago for protecting the short end of the curve and for the potential of an inverted curve, and we've seen an extended long period of an inverted curve. So we have, we have significantly benefited from that. And that we expect those to start to roll off during the course of 2024. You know, you know, in terms of normalcy or, you know, kind of more normal state, I mean, I think, you know, a steeper curve is generally better for this business. And so, you know, we'll see some, you know, reduction from the benefit of that over the course of next year.
I think offsetting that, and one thing to point out is, you know, VII has underperformed pretty significantly this year. So-
Yeah
... I think you could think of that as a partial, if not a full offset to some of that, if it were to return, not even to the historical levels, but even something just, you know, maybe 34 of the way there. So, I think overall, you know, there'll still be some resiliency to spreads, and, but I think the benefits from those hedges will start to, you know, wear off.
Yeah, maybe a similar vein, net investment income for the broader organization. You know, how is the higher interest rate environment, albeit a little bit of a pullback recently, but, you know, how is that environment helping, you know, different areas of your business? You know, is there any, you know, specific area you'd call out?
Yeah, I mean, I think we've done a lot over the years to reduce our sensitivity, but nonetheless, you know, higher rates are a net positive. Even going back to retirement, you know, our roll-off reinvest is a, you know, powerful tool there. I think we're at 6% and 6.26% of reinvest, and I think our roll-off was, you know, 150+ basis points below that. So, you know, we're seeing, we're seeing, you know, that momentum continue. I think you could think of businesses like RIS, our Holdings business, even Japan, and maybe in a few different ways. And, you know, certainly growth is one piece that has really helped with the higher rates, but also similarly, the roll-off reinvest, because we sell a lot of U.S. dollar products there.
It's not every business, but there are businesses that benefit from higher rates.
Just before we leave NII, I do want to ask about the alternatives, you know, the limited partnerships and so forth. It's been a pressure point. You know, at what point do you feel like higher interest rates and some of this rationalization of real estate prices will you know, at what point is that going to be more fully in? Is there any magic to the end of the year and kind of get it into 2024?
Yeah. Good, good question. I mean, you know, some of the things that we've said over the course of the, this year was, you know, we saw obviously late last year, early this year, kind of a sharp correction. Then it kind of, you know, it's kind of bottomed out, if you will. Remained in positive territory, second quarter, third quarter, which is what we expected. We didn't expect kind of a V-shaped recovery. We're we think of it more of a U-shaped recovery, bump along the bottom, if you will, but albeit positive. And then probably sometime next year, you start to see some reversion to higher levels. Look, I think we still have another couple quarters ahead of us.
We talked in the third quarter call about the fourth quarter being somewhere similar. You know, early signs right now in the fourth quarter, we're, you know, part of the way through. We've received some statements in, and it's probably a little lower than the third, like at least the trend. We'll have to see where we end up. If we extrapolate it from here, it's probably $50 million lower than what we had in the third quarter in total VII, mainly in some of the private equity, you know, fund returns that we've seen so far. But, yeah, it could, you know, it depends how the rest come in. But so far, that's what we're seeing for the fourth quarter.
On the commercial mortgage loan portfolio, particularly office, I think you mentioned on your last earnings call, you've resolved, I think it's 88% of the 23 maturities.
Yeah.
How's the remaining slug going? Do you anticipate all of this having any impact on, on cash flow as, as we think through 2024?
Yeah. I think to the team's credit, you know, we gave a bit of an outlook, if you will, in the first quarter. I'd say it's come through as expected in terms of resolutions and maturities. As we said in the third quarter call, we're about 88% of the way there. We're slightly higher right now, but a lot of the maturities are year-end. We don't expect, you know, those to re-create any additional losses at this juncture. We think they'll be resolved accordingly in a without extra losses in hitting capital.
And then maybe I'd also just ask for, as one of the largest asset managers doing real estate, what is your view of the real estate markets? Is there anything you can capitalize on, whether it's within your asset manager or in your general account?
Yeah, I mean, higher rates certainly have been a headwind in terms of funding costs for borrowers. You know, office, specifically, has been a bit of a headwind, just as a result of the evolution and how office is being used. Although, we're seeing some kind of, you know, small positive signs of that starting to reverse a bit. You know, the pendulum swung pretty hard as a result of the pandemic, and we're starting to see, and you can see it in the paper, you know, firms start to revert back to some level of in-office. And so that will be a-- that's a positive trend for that. Look, I think capital is still scarce out there. Higher rates, as I said, kind of create a headwind. But that dislocation does create opportunities in other sectors within real estate.
So, you know, there's good low unemployment, job growth. In a way, lower construction has started to... You know, that will kind of creep in, and we've seen that in the other sectors over time. And you think retail, pockets of retail now are scarce when it comes to supply, so you're seeing actually supply-demand dynamics start to improve there. So, you know, these things go through cycles. It's how we invest in this space. We assume they will go through cycles, which is why our philosophy is the way it is. And you need to find, you know, you need to do so in a disciplined way, so that when you get here, you can manage it quarterly. Overall, we think quality will win out in every class in real estate.
So let me pivot over to some of your growth markets outside of the U.S. In Asia, particularly in Japan, I think the environment's improving for some of the products you sell. You know, is that offering you more opportunity in terms of the product set, the volumes that you anticipate?
Yeah, I think certainly, higher, you know, U.S. rates, and I would say the differential, you know, U.S., yen, which has expanded, you know, are a tailwind, especially the product sets where we, you know, have a lot of expertise in, in Japan. So, you know, we've had very strong growth. Year- to- date, we're up, in the high teens, in Japan, Asia overall as well. And, you know, even though the second half, I would say, is a tougher compare, given the growth we had last year, you know, we're still fully expecting to be, ahead of, you know, what we said on the outlook in terms of the, you know, mid to high, single-digit sales growth.
You know, a few things I would point to here, you know, one is the strength of the relationships that we have in Japan through on the bancassurance front, with over 100 relationships, but also the diversification that we have from a channel perspective. That's very helpful because we've seen also very good traction in terms of our face-to-face channel this year. And then the speed to market and our ability to bring new products to market. I had pointed out in the second quarter that a U.S. dollar single premium life product that we had introduced had contributed significantly to our growth, continues to do so.
So those factors, along with, you know, our investment origination capabilities, you know, I think act as differentiators when it comes to, especially single-premium U.S. dollar products in that market. So really pleased with the momentum. And again, I think it's, you know, as long as sort of that differential remains healthy, I think that's sustainable.
Cool. Next, on capital ratios in Japan, my understanding is this, this Solvency Margin Ratio is sort of being phased out, and it can—it's got issues with the way it responds to interest rates. So I want to focus a little more on the Economic Solvency Ratio and sort of the future regime. Can you, you know, either quantitatively or qualitatively talk about where that ratio is relative to, you know, requirements to the industry? And, you know, is it benefiting from higher interest rates? Are there any knock-on effects to cash flow we should be considering?
Yeah. Our collective view certainly is that we are supportive of the shift from SMR to the Economic Solvency Ratio. As you said, SMR has some asymmetrical accounting, where rates go up, ratio goes down, yet the economics of the firm are improving. Where the Economic Solvency Ratio regime will be more aligned with economics, right? So the ratio will improve as rates go up, and that's generally what, you know, is occurring today, particularly since we sell a lot of U.S. dollar products. Look, I think we've always been a firm that leverages some economic framework as well as statutory and other frameworks to evaluate our product pricing, so we don't see any issue with that.
We think, you know, at least so far, and we haven't put out any numbers yet, but I think ratios look healthy. I think there's still some things the industry is trying to work with regulators on, just to refine a few things. But I think as it is today, even if it were even if we didn't get those things, we think we'll be okay. And no issues with cash flow right now, I don'..
Understood. Latin America, you know, that's an area where the growth momentum has been pretty notable. Can you talk about, you know, the drivers of that, but also, you know, what you see moving forward?
Yeah, sure. You know, so we're market leaders in LatAm, and we continue to see really, you know, good growth. You know, pre-pandemic, our earnings were in the $150 million range a quarter. We're now in the $200 million zip code, and sales and PFOs are growing double digit. And we think that's sustainable. You know, we have a... Our strategy in LatAm is sort of centered around three pillars. One is we, you know, we call it protect the core. So we have we're market leaders in Mexico, market leaders in Chile. We have very well-established businesses there, and we're continuing to see... So think about worksite government business in Mexico, for example.
So we're doing a good job in terms of maintaining a high persistency, but we're also seeing moderate growth in even in that business, which is helpful. The second pillar is all about diversification. So taking some of the expertise that we have, for example, in the government business, translating it into worksite private, and we've been doing this for a number of years now. We see traction there. We're growing in other product categories, employee benefits, accident and health, and channels as well, such as banca and telemarketing. So those are also sort of contributing. Those are higher growth areas that are contributing to our growth overall. And then lastly, I would mention Brazil, which is now about 20% of our overall sales in LatAm.
And there, what we've seen is, you know, digital banks and financial institutions grab a significant share of the market and a growing share of the market, and we're natural partners for those banks. So that's also fueling our growth in Brazil. We're growing ahead of the market, and we think that's sustainable. So combined, I think those, you know, those three pillars are, you know, contributing to our overall growth. And again, here, I think, you know, based on the traction we're seeing, we think this is sustainable.
So, you know, you mentioned earlier the Global Atlantic transaction. Now that it's closed, can you talk about some of the strategic benefits that you're seeing from that and financial impact?
Yeah, I think it's... You know, we've been talking quite a bit around just our opportunity to evaluate risk transfer deals. You know, we're beneficiaries of the fact that we didn't have to do anything, but if we could find a win-win with a good partner, you know, we would do something. We think we did. You know, we had a ceding commission of $2.25 billion, release of capital in over $1 billion, and then we're losing about $200 million of after-tax earnings in Holdings. So, you know, roughly, we think the financials of that made sense. It gives us excess capital to deploy to kind of our going concern businesses. You know, we estimate 50-60 points of RBC benefit from that.
Maybe 50 initially, and then 60, another 10 after, you know, we reposition some of the portfolio. But overall, you know, really, a lot of hard work. It takes time, these things, if you want to be disciplined and maintain optionality, but we think we got to a good place in the end.
Got it. Outlook for, you know, further potential reinsurance transactions?
I mean, I think we'll apply the same approach, right? We think it's healthy to be out there talking with third parties. It's our runoff block and holdings. You know, I think we're happy to manage, and we have all the capabilities to manage internally, but if something were to arise where someone and we could partner with someone in an effective way, and again, I think win-win is very important. We don't need to do it, but it needs to be incremental and value creative, if you will, for us, then we'll consider it.
Next, on capital management, maybe just an update on how you approach the capital management. You obviously have a bit more flexibility at the moment after this transaction. Is there anything you see on the M&A front that could be interesting or, you know, with your shares where they are, is that a priority? How are you thinking through all that?
Yeah, I mean, I think we've had a consistent approach when it comes to our capital management, and you know, basically, we want to continue to support organic growth. You know, again, we're achieving really attractive IRRs and paybacks. And then, you know, what we've said is, in the absence of accretive strategic M&A, excess capital belongs to shareholders, and we return it in the form of dividends and buybacks. You know, post major divestitures, I think, again, here, we've built a track record of being expeditious and deliberate in how we return capital to shareholders. So, you know, you can expect the same here. From an M&A perspective, you know, M&A is a strategic capability. You know, we take a very disciplined approach.
Strategic fit is important, and, you know, strategic fit is about making sure that there is alignment to core growth areas, and no access in terms of non-core elements that come with any potential deal. And, you know, the discipline is also in terms of how we you know value a deal in terms of you know minimum risk-adjusted hurdle rates, accretive over time. And any deal would have to compare favorably to other potential uses of capital as well. Ideally, we'd like to maintain a healthy balance between all of these elements, but it's also down to the opportunity set, I would say.
Understood. Maybe the next one on technology. We-- you know, you see a lot of the news on some of the advancements that are occurring out there. It seems like it's accelerating, I suppose. I think you guys have been more on the forefront of investing, and obviously it's reflective in the expense ratio, but are you seeing any incremental opportunities coming out of some of those advancements?
Yeah, I think we'll... You know, those will emerge over time, and certainly the investments that we've been making, we continue to make. You know, I think large incumbents today with size with a lot of customer data do have an advantage, provided they can move at pace and invest in the right areas. So, you know, we're certainly at the forefront of that. We have been for a number of years. You know, some of the catchwords like AI, et cetera, those are things that we've been, I think, deploying for a number of years. You do see significant advancement more recently. So we, we think this ability to sort of translate our size into a scale advantage over time will be a differentiator for MetLife.
Got it. Well, look, thank you very much for being with us today. Very much appreciated, and, you know, thank you to everybody that's here. So-
Thank you for having us.
Appreciate it.
Good to see you.
Take care.
Appreciate it.