Thank you for coming to the Bank of America Securities U.S. Financial Services Conference. If you're in this session, you're in the MetLife session right now. We're really pleased to have John McCallion and Michel Khalaf from MetLife here. I was just looking. I think we're, like, two or three months away from your five-year anniversary as CEO.
That's right.
I mean, John, you've been with MetLife for a long time, but I think six years as CFO. Usually sometimes it gets bios, but I feel like at this point the bio is. This is the team, you know, and, and, and so we're really pleased to have you. Thank you for coming. If people do want to ask questions, I guess give me a hand signal and I'll stop my prepared remarks and give you a chance. But, we're just going to get started. The strategy announced, when you came on board, the Next Horizon strategy, you know, do long-term planning.
I feel we're sort of at the end and, you know, in terms of trying to figure out what goalposts were achieved, where the new goalposts go, the secret term that we're going to talk about for the next five-year plan, you know, tell us, tell us where we're at right now in the story.
Yeah, time flies, I guess.
Yeah.
Thanks for having us here in sunny Miami, and it's great to see everyone. Yeah, I think, you know, to illustrate where we're headed, I think it's maybe would be good to just frame where we've been. If I, you know, look at 2023, you know, very strong year, EPS growth of 4%, which is remarkable considering that our VII contracted by 70%. You know, this is really on the back of strong top-line growth, healthy underwriting margins, good expense discipline. You know, we saw a significant jump in our recurring investment income, and then that was all supplemented by consistent capital management. We also ended the year with strong capital ratios and significant cash on hand.
I would say I would attribute, you know, the 2023 performance to our Next Horizon strategy, the fact that it's all-weather, allows us to perform across economic cycles in a variety of environments. That's very important. As I look back at 2019 when we first designed and announced the strategy, you know, a couple of things. One, I think we were at an inflection point, just in terms of the transformation that we had been on to, you know, reduce the market sensitivity of the company, which is something that we continue to build on. But I also think we were in prove-it mode, and that's why we decided to come out with a, I would say, aggressive set of targets, five-year targets, and objectives.
The fact that we are meeting, if not exceeding, those goals, I think speaks to our ability to deliver on the strategy. Just as a reminder, you know, we had committed back then to generating $20 billion in distributable cash, and we're on track to meet, if not exceed that, to create $1 billion in operating leverage so we can reinvest in the business, which we are, which we have done, and we are on track for that as well. 13%-15% ROE, up from the 12%-14% that we came up out with in 2019. And a 65%-75% free cash flow ratio. This is a two-year average, and we've delivered that, you know, throughout the Next Horizon period. You know, pleased with our ability to deliver here.
I think this really gives us, also, sets the foundation for, you know, our next journey. I think MetLife is a more predictable company now. You know, as we look to the future, I think we have an opportunity to accelerate top-line growth, to maximize returns and margins, and to drive operating consistency as well. I think that's sort of those are the hallmarks of our future success, and that's what's going to allow us to continue to deliver long-term shareholder value.
So in my mind, 2023 is going to be the benchmark year. Can you just talk about framing where we were in 2023? I mean, obviously, VII, variable investment income, skews the results a little bit, but what is, what is the basis for measurement, I guess, going forward with, like, 2023 being the, the sort of, I guess, measuring stick?
Yeah, I'll, I'll let John take that. I just want maybe a reflection on 2023. You know, we started the year with the 10-year at 3.9%, and we ended the year with the 10-year at 3.9%. But in the interim, you know, we had tremendous volatility. Think about Fed policy, geopolitics, I mean, you name it. And, you know, I think that's, again, speaks to the all-weather nature of the strategy, our ability to, to deliver, you know, despite that. And I would say that, you know, if I look at the underlying fundamentals of our business, I've never seen them stronger. And the fact that we have, you know, excellent momentum in group, in RIS, in Asia, in LatAm, I think speaks to that as well. But I'll, I'll turn it over to John.
Yeah, thanks, and great to be here, Josh. Thanks for having us. I mean, as Michel said, and we, we've referenced this before in other meetings, I mean, 2023 was, you know, like, like you said, was just a remarkable, powerful year. And obviously we had some market volatility, and we have headwinds with variable investment income. But if you kind of exclude that, I mean, adjusted earnings were up, roughly 17% on an underlying basis, right, if you kind of move, you know, take away VII. You know, as you said, you know, we were within the 13%-15% ROE target despite VII headwinds. You know, we had strong growth kind of across all markets. You know, PFOs in general were up 6%. You know, group was right in the middle of its 4%-6% PFO growth range at 5%.
LatAm had, you know, constant currency basis, growth of 19%. So strong top-line growth, as Michel referenced. Expense discipline is kind of now core to our DNA. So we saw that, you know, kind of maintain its level of importance through the year and 12.2% direct expense ratio compared to a target of 12.6%. You know, in terms of just capital, you know, we had a large transaction we did with Global Atlantic that, you know, helped free up some capital for us. So capital ratios were very robust come at the end of the year. Roughly 400% is going to be our combined RBC ratio here in the U.S., about 720%, solvency ratio in Japan. And then we had over $5 billion of liquidity at the holding company. So again, just a real, you know, solid, strong, set of results for the year.
That gave us the ability to return cash of $4.7 billion throughout the year in share repurchases and dividends. So again, just across the board, again, you know, while there were some market headwinds and volatility, you know, the underlying fundamentals were was very robust.
So you said 12.2% for the Direct Expense Ratio last year, 12%-12.6% range. Is that range a stable range, or should size change that over time? I guess ROE goal for going forward, cash flow goal going forward, I guess each of those.
Yeah, as we mentioned on our outlook, and as Michel referenced, we went from 12%-14%. We raised it to 13%-15%. You know, with a resurgence of VII, you know, we are probably operating at the top end of that range, if not even a little above. But we just changed it, so we'd probably give ourselves another year to look at that. Direct expense ratio was 12.6%. We lowered that to 12.3% a function of what you just said, I think, one, our discipline on expenses, and two, the growth that we're seeing. So there's operating leverage in the business that's coming through. And then, you know, we've been pretty consistent over the five-year period with a free cash flow ratio between 65%-75%. I think the two-year average this year was 74%.
So we think we'll continue to operate within that range, but those are probably the headline targets for us.
So if I think about just focusing on some of the various businesses, Group Benefits, I mean, that's MetLife and it's everybody else. And it's hard to grow. I mean, a lot of everyone else is looking at smaller customer size generally than you are, but you still have a guidance, you know, 4%-6% growth in premium volumes. Is that all? Is that GDP? Is that inflation? What kind of ability do you have to seize share from the position that you're in right now?
Yeah, I think generally speaking, it's a GDP+ business, group is. You know, however, we've been able to grow the business consistently in the 4%-6% range. And, you know, to the point you made, Josh, the important thing to re-remember here is that we're growing it off of a very, very large base. I mean, just to give you a sense of that, from 2019 to 2023, we've added $5 billion in PFOs to that business. So that's just sort of the, you know, gives a sense of, you know, just the growth that we are seeing and off of the base that we already have. You know, we feel good about the trajectory of this business. We guided again to 4%-6% in the near term. We think we'll be in the top half of that range, in 2024.
You know, I would attribute that to a number of strategies that we've been pursuing and that have been quite impactful. You know, we have a very strong position in the National Accounts space, the 5,000+ market segment. And, you know, we continue to sort of, you know, I think earn the right to be the provider of choice for employers. They're also looking to do business with fewer providers, which is, you know, I think helpful to us. And we continue to see very strong persistency in that segment as well. And then we've had a, you know, our strategy was to accelerate growth in the under 5,000. We call it Regional Market. That's a much more fragmented space.
There we've seen, we're seeing growth 2-3 percentage points above the overall growth for that business, again, indicative of sort of our trajectory there. And that's a combination, I would say, of products, ability to bring products down market, technology, which is important in that space, and distribution capabilities as well that we are leveraging. And then we've had a voluntary benefit strategy for a number of years. You know, we've seen very strong growth in terms of our voluntary benefits, mid- to high-single digits for a number of years. And, you know, think of that as a force multiplier to all of our market segments. And this continues to be the case.
Again, you know, investments we've made there in better integrating with the employer ecosystem, benefits ecosystem, as well as in capabilities to drive take up rates when it comes to enrollment and re-enrollment, are really paying dividends. So we think that's, you know, that, you know, that's why we feel confident in terms of the 4%-6% range. And as I said, we think this year will be at the high end of that. Just to give a bit more color, we grew sales by 9% last year for group overall. Q1 is an important renewal and, you know, sales season for National Accounts in particular. And our Q1 sales are 5%-10% higher than last year, so with very good persistency. So this tells us, gives us confidence in terms of the outlook we provided.
If we shift focus to Retirement and Income Solutions, obviously, you know, the strong capital position at MetLife has created a huge opportunity for jumbo pension risk transfers. You know, there seems to be always large deals moving, but it's obviously a much more well-penetrated market than it was 10 years ago. Where are we in the life cycle of that business as a source of flows for the company overall?
Sure. And just before I go to RIS, want to just maybe spend two more minutes on group because.
Not allowed.
We also not only did we, you know, guide to 4%-6%, we also, you know, reduced the mortality and non-medical health ratios for that, for that business. And again, I think the strategy that I described earlier is really sort of what gives us confidence in the fact that, you know, we believe that those ratios will be in the same zip code as what we saw in 2023. You know, I would just caution here that, you know, those are annual ranges. And, you know, the life as well as non-medical health, especially dental, tends to skew towards the high end of those ranges in the first quarter. But we feel confident in sort of the range for the full year. And again, this is a, you know, combination of growth in the Regional Market. That's now 25% of our overall PFOs.
That tends to have a lower benefits ratio. And then, you know, accelerating growth in voluntary benefits, which also tend to have lower ratios, life and non-medical health. Switching to RIS, maybe I just want to start by, just reminding that RIS and I will talk about PRT, I promise, but RIS is more than just PRT for MetLife, and we love the diversification that we have.
I only have like 35 minutes, so I think I have to limit the amount of questions, you know what I mean? Go ahead, go ahead.
But, you know, if you think about 2023, we generate it was a record year for us in terms of structured settlement sales, $3 billion+. We had $5 billion in longevity reinsurance sales as well. It was a very good year from a PRT perspective. We had $5.3 billion in PRT business. That was our third highest year, ever. If you think about the last five years, we've taken on over $30 billion in pension liabilities over that period. We've, you know, we've been a top three player every single one of those five years. So that gives you a sense of our, you know, standing in that business. We like to concentrate on the jumbo end of the market. We continue to see a very healthy pipeline.
We do some research with PlanS ponsor that gives us indications in terms of their willingness to transact. Funding levels are healthy. That's also another indicator that, you know, this business is going to continue to be, the pipeline is going to continue to be strong, going forward. And we're very disciplined in our approach. We use an M&A-like approach to in terms of how we price this business, but we feel confident in our ability to continue to win there.
The next 10 years can be as good if not better than the previous 10?
Yeah, I mean, I don't know if I want to look out 10 years, but I can tell you that, you know, over the next several years, we see a very healthy pipeline for sure.
And you mentioned earlier about the unusual beginning of the year at a 3.9% industry environment or 10-year environment, ending the year at the same, but of course, revisiting the mid-fives during the year. What did that mean for the pricing of such large transactions, and what does it mean now? Are we in the same place we were suddenly one year ago, or is something different than it was a year ago?
I mean, it's a competitive market. So, you know, we have to price competitively. I think where you might see that sort of evolve over time, if the demand outstrips the supply of capital, you might see sort of a hardening in terms of the pricing at that point. But for the time being, I would say it's still a rational but competitive market, and we're able to achieve, you know, returns, you know, in line, if not above our, you know, hurdle rates requirements. You know, think about our ROE range and the like.
So I'll just remind the audience if there is a demand for a question, I'm not going to you can raise your hand. I'll look out and I'll change up, but if there's no questions, I'm just going to keep going. Okay. So in all this, obviously, the 2023 year was a good year, but it is less strong than it looks when you because they're layering the VII in there. Are there any lessons learned? What's given the higher interest rate environment right now? Does that make you more or less attached to private equity as an asset class? How should investors think about the VII sort of strategy, I guess, for the next three years and MetLife's commitment to it?
Yeah, I mean, I think we always start with that this is, you know, part of our, you know, some of our, you know, kind of unique skill sets, one, two. It's, you know, used to help defease the liabilities, and it's a good asset for the tail. But we, we recognize that in the near term, and we reference this in the outlook, that, you know, we think these returns will be a little below what historical averages have been. And over time, they would revert back to those. So, you know, so we've kind of lowered our guidance a bit. We're at $1.5 billion this year, and then we think it'll improve a little bit more. I think what's important to also highlight is that's an annual number. Again, a little bit of what Michel referenced around just seasonality.
You know, we actually think the first quarter will continue to be pressured, similar to what we saw in the fourth. And if you take into account what Michel referenced around margins in the group business, you know, that's typically seasonally low in the first quarter too. So those are important things as you think about the first quarter. But, you know, our guidance, that's all contemplated in our guidance that we gave. And, you know, a good reference is actually probably prior year, Q1, you know, obviously adjusting for the lower share count. And then, you know, I think on the margin, we'll probably see ourselves tilt to a little less in terms of run rate commitments to this asset class. And obviously, there's some good relative value in the fixed income markets these days.
All in all, it's still going to be a important asset class for us.
Okay. Well, let's pivot to some of the geographies around the world where MetLife operates. Talk about Asia a little bit, working at Japan, whatnot. I guess to give you a chance to talk about the different businesses, what the growth outlook there is, and what the opportunity set is in those markets.
Sure. Again, Asia had a very strong year in 2023. You know, we had sales growth of 13% on a constant rate basis. Japan had a very, you know, good year as well, 14% sales growth. And our, you know, other, I would say, important markets, primarily Korea, 19% growth, China, 25% growth, and India, 16% growth, also performed very well for us. You know, off of this, you know, high increase in terms of sales in 2023, we've, you know, in our outlook, we've guided to a mid-single-digit sales growth for 2024. We think that's a, you know, reasonably reasonable range for us in terms of just the size and scale and breadth of our business in Asia. And, you know, I think the other thing that's important there is really the work that our Asia team have done around driving, you know, margin improvement.
I think we're seeing really attractive VNBs and VNB and VNB margin come out of Asia. And that's a function of, you know, a few things. One, continuing to evolve the product and channel mix there, product repricings and ability to introduce products faster to market as well, reducing unit cost as we increase scale in our key markets. We've also leveraged captive reinsurance to also, you know, drive some capital efficiency there for new business. So all those are positive indicators. And, you know, we feel good about sort of, you know, again, the underlying business fundamentals in Asia.
Given the material devaluation of the yen over the past few years, two years, I guess, and you're selling a very successful currency-stable product there, are the buyers more prone to say that there's a greater need for that product right now, or are they saying, "Well, gee, the yen's already depreciated. This is not going to depreciate further"? What is the mentality among the buyers of the retail product there?
Yeah, so it's interesting because what we're seeing is, you know, with the higher U.S. rates, you know, customers in Japan continue to see value, and also diversification benefit in FX products. So, you know, those performed very strongly for us in 2023. And we think, again, in a higher interest rate, U.S. dollar interest rate environment, that's likely to continue in 2024.
Okay. Let's go to Mexico and Latin America a little bit. I think we want to touch upon both the growth opportunities there for you, also a little bit about the political stability of those different geographies, maybe valuable for some people.
Sure. Again, very strong year for LatAm in 2023, you know, growth across the board, sales, PFOs, and earnings. You know, if you think about LatAm pre-pandemic, we were averaging about $150 million a quarter in terms of earnings. We've now had five consecutive quarters of, you know, averaging $200 million in earnings a quarter. So I think this speaks to just how strong we came out of the pandemic, but also the momentum that we continue to see in our business there. The, you know, the outlook we guided in terms of PFOs and earnings to high single digits, we feel confident in our ability to deliver on those. You know, I would say a few things that give us that confidence. One is that we're extremely well-positioned in some of the key markets in LatAm, market leaders in Mexico and Chile.
You know, we see also, you know, market trends that are favorable in terms of demand for insurance products post-pandemic, much better awareness, I would say, also a, you know, flight to quality, which we're benefiting from. And then, you know, our strategy, which is based on protecting our core business, so think about worksite, government business in Mexico, our insurance business in Chile, you know, while driving or accelerating growth through diversifying, you know, into new channels like direct marketing, like banca, and then a focused strategy to accelerate our growth in Brazil. And that's, you know, we're seeing really good momentum there. So I think all of these are really contributing to the, you know, momentum we're seeing in LatAm, and we think that's sustainable.
Have the political pressures that might come into restructuring the pension system in Chile in a way that I guess is bad for private market, has that risk passed?
I don't know that this risk ever passes, frankly, because every time, you know, it looks like it's behind us, it sort of rears its ugly head again. So, you know, I think that risk is still there. I don't believe that in the near term, it's going to have an impact on our business, but it's something that we're keeping a very close eye on. And, you know, obviously, we're very engaged with the rest of the industry in making sure that we build awareness in terms of some of the, you know, potential ramifications of, you know, a reform that ends up hurting capital markets and maybe the interest of the participants in the pension system as well.
Are there any implications? I mean, and any is a very vague term, but Mexican elections are this year also. Seems like there could be a shift in the political fortunes of the opposition group getting to power, whatnot. Does it matter for what you do?
I mean, we always keep a close eye on what's happening, but, you know, as we said here, I don't think we, you know, see any sort of near-term impact.
So I'm going to oversimplify MetLife. It's a life insurance company. There's a big pool afloat. More, more, more funds come in, and the claims jump in and mature over time. What is the, when we think about the architecture of the duration of the portfolio overall, new money yields, expiring yields, what is the shape of just the natural flows to what's going to happen to investment income over time based on what's available in the market now and what's rolling off the books?
Yeah, it's a good, good, good, good question. I mean, I think, you know, we've pointed out, and you've seen it in some of the sensitivities, at the end of the day, higher rates are better for this business directionally. You know, we've, we've done work to kind of reduce interest rate sensitivity, but ultimately, higher rates are a better economic, you know, improves the economic value of the firm broadly. And, and we've seen, you know, over the last, year plus of, you know, where we've had this positive, reinvest versus the roll-off rates, you know, just this last quarter is probably, I think, 145 basis points difference. So that's, that's powerful, right? And that, that should continue, as, you know, in the current rate environment. And, and in addition, it's also, you know, we're seeing it in kind of the strength in some of our flows, right?
It's creating a more higher demand in the broader market for fixed income-oriented products, which we issue. And, and so it's overall, it's having a very, you know, kind of positive impact on the on the business model.
Continue a little bit with investments. It's always topical. I think there's many places it can go. 1Q 2023, commercial real estate became the great topic, obviously. MetLife is very large in the real estate markets at this point right now. You know, what's the state of the portfolio, the level of concern around certain investments? What do we know now that we didn't know 12 months ago? Or are we going to have to wait five years and find out?
I hope not. But, you know, we, we are a large real estate investor. I think, you know, what we've tried to articulate is that I'd say the generalizations of the headlines are not necessarily a good representation for us or even for the insurance industry. I think, you know, our approach and the insurance industry, for that matter, approach to lending to commercial real estate is really collateral lending, right? I mean, we underwrite the collateral. You know, we tend to loan at kind of the mid-50% LTV ranges. And that's different from, you know, other models. Like, you know, I think if you compare that to, like, a regional bank model, it tends to have more of a relationship lending model. I think those results can kind of skew differently.
So what we've said is that, you know, while there's pressure in the market, like if you take 2023, we expected to resolve the vast majority of our maturities. I think on a $50 billion portfolio, we had a $20 million of write-off. And that's kind of what we projected, right? We think 2024 will remain modest in terms of that. So, you know, we've spent quite a bit of time having to kind of wrestle the headlines, a little bit. But, you know, we think the portfolio health is still in good shape.
What about looking at the opportunities to deploy more, obviously, you know, a little bit? First of all, it's a big thing. Office is not everything, of course.
Yes.
Office is on everyone's mind. You know, like, are we comfortable deploying in real estate broadly right now in 2024? And when do I think that people will feel a lot better when people want to start buying offices again. Like, that's going to be a signal that the normalcy has come back into the market.
Yeah, I think the office sector has created opportunities in other sectors of the real estate market. And that's probably where we're focused the most right now. So we do see good relative value outside of office. I think office will emerge over the next three years and probably become a good time to get back in. We also, given our kind of relative, you know, weighting of that, we probably are just looking to kind of balance that out a little bit over the total portfolio. But there are some really unique opportunities right now. And I think as a result, office has created that with, you know, some wider spreads that have kind of, you know, been pushed out to other sectors in the real estate area.
We think, you know, we think office will eventually get there too, but it's probably a little early.
Let's shift away from investments into structure. The Global Atlantic transaction is closed. What benefits is it providing the company? And, I guess we'll pivot to, like, what that means for future structuring of opportunities.
Yeah, so it was roughly $19 billion of reserves that we transferred to Global Atlantic through a reinsurance transaction. You know, this is something where we've talked about being opportunistic. It wasn't something we had to do, but we were continuing to evaluate this with different partners. And if we found out it was value accretive for us to accelerate the release of those reserves and capital, we would. And so we did. We got $2.25 billion of ceding commission, another $1 billion release of capital, and then we lost roughly $200 million of run rate earnings out of holdings. But, you know, it was accretive for if you think about EPS and you think about the freed up capital, it's accretive to ROE. We've maintained no impact really on our free cash flow, as a firm in terms of ratio.
So overall, it was, you know, just a great transaction, great execution. You know, we had to pick a good partner and think through that, which we did, and, you know, very pleased with the outcome. And, you know, I think that also helped us with, you know, year-end roughly 400% RBC ratio for the combined NAIC basis in the U.S. there. And, you know, that's about 40 points above our target level.
Given where we are in the reinsurance of the interest rate markets right now, does that make more transactions likely, less likely? Maybe it's no difference that the market that the cost of capital changed in the same way, so it's not how you see it? What should we think about there?
Yeah, there's a lot of different things that go into whether, you know, the, these transactions make sense. Certainly, a higher rate environment, I would say, is a marginal positive to that. And I'd say the discussions continue to be fairly robust out there, you know, even emerging in certain asset classes or, I should say, liabilities that maybe weren't as active before. They're starting to become a little more active. And I think we'll take the same approach, right? We'll look at them. We'll be opportunistic if it makes sense. We're very comfortable with our portfolio. It's well-diversified. We have great expertise. We can run it, we can manage it and run it down ourselves. Or if there's a great opportunity to do it with a partner, we'll take a look at that.
So I guess we'll end unless, if you want one more question on capital management. And I guess it's a two-parter. I mean, obviously, the company's very committed to returning capital to shareholders in the form of healthy dividend, but also very robust buybacks. But you're obviously looking all the time if there's opportunities in M&A. What are the benchmarks of return that would cause the company to slow the pace of buyback in favor of adding to the business? What's the hurdle? What's the payoff time? How long should we not that I'm trying to force you into anything, you know? But, but, but, but I just want to understand what changes the calculation behind the buyback, which is obviously hugely important in the stock.
Yeah, I mean, we like a balanced approach, I would say. And, you know, I think we've sort of built real consistency when it comes to our capital management approach over several years. You know, our focus better is all about deploying capital to its best and highest use. And that's really how that's the mindset, I would say. You know, we want to continue to invest in responsible growth. And, you know, you can see from our VNB disclosures that we've been able to do that at, you know, attractive mid- to high-teens IRRs and low paybacks. From an M&A perspective, so if we can complement organic with inorganic opportunities, we're very much open to do so. We think of M&A as a strategic capability at MetLife. And, you know, there, we look for, you know, strategic fit is very important.
And, you know, opportunities that align with core growth areas and don't bring with them, you know, other things that necessarily don't align to our core, is important. It's also important that any opportunity clears, you know, what we deem to be an appropriate, risk-adjusted hurdle rate. You know, we like opportunities that, you know, we look at value and cash as also key factors. And we want opportunities that are accretive across many sort of factors over time. So that's really the mindset when it comes to M&A. And then, you know, as we've said, you know, in the absence of M&A and, you know, after deploying capital in support of responsible growth, excess capital belongs to shareholders, and we're going to return it.
I think we've demonstrated, especially in the aftermath of major divestitures, that we would do so deliberately and expeditiously. If you look at sort of the from 2019 to 2023, we've deployed 17 or close to $17 billion to support organic growth. We've made $2.3 billion in acquisitions. And we've returned. We bought back close to $14 billion of our shares. So, you know, again, this is the balance that I referred to earlier. I think that's sort of how we, you know, think about, you know, our approach going forward.
You have a high dividend yield.
Yes, and absolutely. That's important to us as well.
Yes. Well, I want to thank Michel and John for giving us time today. Thank you all for being here. There's going to be a panel in here on climate change, topically on Florida, as well as uninsurable property that I hope you stick around for. But in the meantime, please give a hand for John and Michel. Thank you.
Thank you.