America Financial Services Conference. This is sort of the insurance sleeve if you're joining this webcast. We're starting the day with really one of the highlights of the whole conference. We have here MetLife presenting. We have President CEO Michel Khalaf and CFO and Executive Vice President John McCallion here. Let me just get through a few introductory remarks. I mean, people probably know who you are, but it's always good. I mean, Michel became the present CFO of the company in the middle of 2019. Obviously a very challenging period of time to begin. Joined from Alico back in 2010, where he became the head of MetLife's Middle East, Asia, International Operations and whatnot.
He joined the executive leadership in 2011. Since that time, he took on the responsibility for Group Benefits, retirement, property and casualty, and finally, the CEO job. John McCallion, he's been the CFO since 2018. He had many senior leadership roles in the company, joined in 2006. In various times he's head of the investment department, CFO, head of investor relations, CFO of EMEA, the treasurer, a lot of things. Obviously great leadership, and the stock performance speaks for itself, so, I mean, obviously it's done very well. Congratulations on the strong performance in 2022. Let's talk a little about where we're going from here. The...
I think the sort of bywords of the firm is the Next Horizon. It's been out for a couple of years. Where are we in the process? We're never probably gonna get over the horizon, but. You know, that's always beautifully in the distance. What are the next steps and where are we going?
Sure. First of all, thanks for having us, Josh, and it's, I'm really glad we're able to do this in person this year. It's really great to be here with you and to meet face-to-face with our investors as well. You know, the way to think about Next Horizon is that, you know, it rests on a foundation comprised of three pillars. The first pillar is the focus pillar, and this is about deploying our capital and our resources to their best and highest use. You know, our teams have been relentlessly focused on, you know, making sure that we de-deploy capital in support of new business at attractive returns and paybacks.
I think, you know, you would have seen our evolution on this front in terms of our value of new business disclosures. You know, focus is also about how we are opportunistic in, you know, redeploying existing capital, and, you know, in, you know, in terms of continuing to evolve our business mix, and, you know, trying to lower the risk profile of the company as well.
You know, if you think about some of the work we've done on the M&A front, whether it's some of the dispositions, Auto & Home, some of the markets we've exited and some of the additions to our portfolio, you know, Versant and other businesses as well, you know, I think those also that aspect of our focus pillar has helped us, you know, lower the risk profile, improve the returns of the firm and overall improve our enterprise value proposition as well. The second pillar is simplify. This is cultural for us. This is about us building an efficiency mindset, you know, as part of the DNA of the organization, I would say.
Again, here, I think we've made really good progress here. You know, this is about, you know, relentlessly focusing on lowering costs, reducing complexity, continuing to drive capacity, so that we can invest in our business, invest in growth and protect our margins as well. You know, again, this is something that, you know, we're continuing to evolve, and I think we've shown that even in the face of a challenging inflationary environment, you know, this efficiency mindset has helped us, you know, maintain, you know, our sort of direct expense ratio below the target that we had set for the firm. The third pillar is differentiate. You know, differentiate is about leveraging, you know, some of our sort of competitive advantages.
You know, think about our scale, our brand, other advantages that we have for the benefit of our customers and our shareholders. And I think, you know, what we've done in Group Benefits is a good example of that, where, you know, we've managed to leverage our scale to continue to make important investments in our business to meet customer, whether employee or employer expectations. This helps us add to our scale, which, you know, allows us to make further investments. It's sort of a virtual cycle if you, if you like. Another aspect of Differentiate that is important to us is the diversification that we have in terms of our portfolio.
You know, we have, you know, very strong, market-leading positions in businesses and markets that generate growth and cash today. We're also well positioned in markets that have more of, you know, attractive secular trends. I think about India, Brazil and China. You know, that business mix I think is also quite unique and a differentiator for the firm. Now, coming to some of the goalposts that we had set back in 2019 when we launched our Next Horizon strategy. You know, we committed to an adjusted ROE of 12%-14%. We also committed to generating $20 billion in free cash flow over the five-year period. And freeing up $1 billion in capacity to invest in innovation and growth, again, over that five-year period.
I would say that, you know, in terms of all of these commitments, we are ahead of schedule. As a matter of fact, the goalposts have moved with regards to our ROE target. As we announced on our outlook, we have raised the target range by 100 basis points to 13%-15%. I would say that our ability to execute on Next Horizon, you know, also relies heavily on our strong capital and liquidity position. You know, this gives us the financial flexibility to, you know, to continue to invest in growth and to be opportunistic if we see, you know, attractive opportunities emerge that can help us, you know, further accelerate that growth.
All in all, really pleased with the progress we've made on our Next Horizon strategy, and we continue to believe that this is the right strategy for MetLife going forward.
Let's talk about opportunism. You mentioned Versant and, you know, it's not really an M&A transaction, but you obviously commit a lot of capital to longevity re-transactions, and a de novo business started up. Just last week or two weeks ago, Raven Capital. Very different sort of stories for all three. Like how do the different blocks sort of fit together in the picture? We don't have to stick to those three, but it makes for a good sort of conversation on what is the... How the building blocks fit?
Sure, sure. As I referenced, I mean, we think of M&A as an important, you know, strategic enabler in how we execute on the Focus pillar of our strategy. The best way for me to describe our approach to M&A or philosophy, if you like, is that, you know, it's strategic, it's opportunistic, and it's disciplined. I think we've demonstrated over time that, you know, we're always gonna look for opportunities that fit strategically with what we're trying to accomplish and that are accretive over time for our shareholders. You know, we like to be opportunistic as well.
You know, we think of M&A as an important tool in the toolbox, if you like, in terms of, you know, giving us that sort of ability to be opportunistic. We are also disciplined in that we, you know, view all opportunities. We assess them on a consistent basis, globally. We always look to, you know, clear a minimum adjusted hurdle rate when it comes to returns. We compare any transaction to other potential uses of capital. We like to maintain a healthy balance between, you know, investing in growth, including M&A and returning cash to shareholders.
I would say that, you know, and I referenced this earlier, dispositions, you know, are as important as investments we make in the M&A field, because, you know, they're part of this sort of strategic view that we take. If you think about what we've done since the Alico acquisition in 2010, we have reduced the number of markets that we're in by 40% since then. You know, more recently we've divested Poland and Greece to the NN Group for, you know, close to $740 million. That was in 2021. Prior to that, also in 2021, we sold our Auto & Home business to Farmers for close to $4 billion.
You know, these sort of, the cash that we generate from these, sales, provide us with the added flexibility, to redeploy that capital, in support of organic growth or, in support of M&A deals that, you know, I think over time, you know, again, help us, you know, reshape the portfolio and, you know, by lowering the risk profile and improving the returns. I think, you know, Versant in particular, you know, is a, is a good example on how we execute on our, you know, M&A philosophy because, you know, Versant. Again, the cash flows from those deals may not perfectly align, but, you know, it's all part of that strategy.
you know, Versant is the third largest provider of managed vision care, so a market leader in that field. It's highly complementary to our Group Benefits business, so it made a lot of sense from that perspective strategically. It's also a business with high returns, high free cash flow generation, and predictable underwriting. It ticks a lot of the boxes when it comes to the discipline I referenced earlier, and it's certainly a business that's helping us fuel growth in our Group Benefits business. Prior to that, we had added other capabilities to our Group Benefits business as well, you know, Pet Insurance, and we've recently announced that we are bringing Snoopy out of retirement to support, you know, create more awareness around the importance of Pet Insurance.
You know, we added to our Legal Plans offering. We've also introduced an Identity Protection product. We're continuing to add capability there. On the asset management front, you know, we recently announced a transaction. If you think about, you know, what we've done over the last few years, back in 2017, we bought Logan Circle for $250 million. You know, Logan Circle had about, you know, they specialize in public fixed income. They had about $35 billion in AUM. Over that 5-year period, we've managed to double that. You know, a very successful transaction for us. More recently, we announced the acquisition of AIM Affirmative Investment Management, a specialist in ESG.
Again, a capability that we know our clients need, so it accelerates. It gives us that capability faster than if we were to build it ourselves. And AIM has $1 billion in assets. And then more recently, Raven Capital, you know, a deal we announced a couple of weeks ago. And again, you know, this is a, you know, a specialist, a specialist in an asset-based credit specialist. Again, gives us, you know, allows us to sort of expand in terms of our product set and some of the strategies that we're pursuing in MIM.
I mean, MIM is fundamentally an institutional public fixed income real estate and private credit, you know, provider and, you know, MIM celebrated its 10th anniversary recently. From a standing start, we've built MIM to over $160 billion in AUM, and we're continuing to see really good momentum organically. Last year, we had net positive net flows. But, you know, if we see opportunities and there's a lot of activity in the market, deals of all sizes, if we think that something were to make sense to sort of accelerate our growth trajectory there, we would consider that.
You mentioned the 12.4% ROE profile. Do you have a ROIC profile requirement? That we can think about in that regard?
No, I would say it's, you know, our two kind of metrics are ROE, but we also share our value new business and IRRs, right. I think those have been key components to continuing to deliver that discipline in the firm. It's a great capital allocator for us, and you saw you know, some very strong improvement in IRRs and payback periods there, but those are kind of our two key metrics, I'd say.
Let's talk a little about divestiture, not necessarily in terms of businesses. Let's talk about in terms of transactions. People are always wondering whether or not there's some sort of capital efficiency that can be gleaned from managing closed blocks. New York regulates a lot of your businesses and is one of the most disciplined of the regulators in the country. Can you talk about, A, how that can help you, but B, the very creation of MetLife Holdings was based on New York's discipline in regulating the policies. What optionality do you have there?
We like to say we're very disciplined as well, so it's a good partnership there. Look, MetLife Holdings is, you know, it's a large closed block, well-diversified, great diversification of risk and profitability, and I think the team's done a great job in how they manage it. You know, I think the optionality that you kind of referenced there is important to us, right? We've talked a lot about the fact that we are talking to third parties, and that's been a consistent theme for close to two years, I'd say. You know, it's a constructive process. You know, these are reinsurance arrangements in our case, so it's not a sale of an entity. You know, reinsurance is natural and when it comes to insurance businesses.
Certainly the market's evolved and there are other players there. I think, you know, my summary of it is it's been very constructive. I think, you know, I think it's been a healthy addition to the industry to have this, you know, these players kind of, you know, enter. You know, it's not something that... We have no burning platform, right? This optionality is value to us, valuable to us. It's valuable because it gives us maybe a chance to appropriate release of capital and reserves, and to accelerate that, as opposed to just optimizing it over time. At the same time, you know, we're not a distressed seller, so we don't have to do anything.
I think what we look at it as, it's a positive regardless because those discussions force us to be even better how we manage the runoff. At the same time, you know, if we can find an opportunity that makes sense and we're comfortable with counterparty structure, price, risk transfer, things like that, then we would execute.
Now you talked about the 12.4% ROE goal. I think you actually, your near-term goals are a little better than that.
Mm-hmm.
Can you talk about some of the mechanics around the near-term outlook?
I mean, from, as you referenced, we've increased the ROE range by 100 basis points to 13%-15%. I think this is a reflection of sort of our ability to continue to generate strong returns and to continue to grow our business. In terms of mechanics, call it 50/50 LDTI versus business fundamentals. From a business fundamental perspective, if we go back to 2015, which is when we launched our, what we called at the time, Accelerating Value initiative, which is really the laser focus on value of new business, on cash, and how we price new products. We have deployed $26 billion since in support of new business at an average mid-teen IRRs.
You know, whereas, you know, it takes time for new business to start to have an impact, you know, some of that is starting to sort of impact our overall, you know, returns and performance. That focus, you know, continues to this day, and I would say is that it is as relentless and as intense as it's ever been. You know, we feel good about our ability to continue to, you know, support new business growth at, you know, at the same, if not better, you know, returns and paybacks.
You know, I think a good sort of indication of the progress we've made there, is, you know, if you think about 2022, a year in which, you know, COVID had a significant impact, and VII came in lower than, you know, what our outlook called for. You know, we still generated, we were still within the 12%-14% range at 12.3% ROE. If you adjust for COVID and, for, you know, PE being more at the 12% rather than the 7% that it came in at, then, you know, we'd be at close to 14% ROE.
I think that speaks to sort of the progress that we've made, you know, in terms of the fundamentals of our business and how that's being reflected in the returns we're generating.
I can't predict where the private equity returns are going to go, but we, again, have some view on where the more traditional investment portfolio is headed, depending on what mature you're looking at. Treasury yield's around 4% right now. On the other hand, COVID's a permanent thing. It's not gonna be as bad as it was in 2001, and in 2021 or even 2022, there's going to be more deaths from COVID, just like the flu, in perpetuity. Between higher interest rates and permanent COVID, what's the benefit and weight on the outlook in the portfolio?
We referenced this when we released our outlook discussion last on the earnings call. First on COVID, we view it more as endemic and moving in that direction. It's not going away, but I'd say it's part of the kind of the trend. Look, we think long-term mortality trends kind of revert back to pre-COVID, and just COVID becomes part of it. That's kind of our assumption. I'm not so sure that's what's important is how do we think about things in the short term and what we've done to manage where we can take action, for example, in pricing and things like that.
I think what you've seen, and if you look over the last few quarters, is you've seen this reversion to, you know, the mean in terms of underwriting ratios, whether it's in group business, Mexico is another good example, in Latin America. You know, our view is that it's kind of reverted back to, I'll say, normal levels. You know, kind of moved back to kind of normal volatility or fluctuations, if you think about just like flu coming in in a quarter. I think now COVID needs to just be considered part of that. I think the good news is that I think profitability targets are kind of back to that. Never know. Things could change, but for now, that's kind of our view.
You know, on interest rates, you know, as we've talked about for our firm, collectively, higher US rates are, there's positive momentum to that, right? It's a modest positive. In the near term, I would put the modest word around it, and over time, there's inertia. You know, so it should build over time. But in the near term, you know, we've given sensitivities around 50 basis points move in the curve or 10 basis points move on the short end. I'd say it's very manageable, right? It's not too big of an increase and certainly the downside, we have other protections as well. I think it's a good, it's a directionally good story. You can see it in a couple things that we talk about.
One is our new money yields, right? We saw at the highest level it's been in the last decade at, you know, kind of just above 5.5 at 5.66. You know, second place you can see it is our spreads in RIS. That's another kind of indicator. You saw those at kind of, I'd say, the highest level they've been since I can remember. Look, we're seeing benefits of that. It's not a windfall today, but there is an inertia factor to that over time for our firm.
Let's go into the businesses for a second, but I do wanna let the audience know that if there's an urgent question, you can interrupt me, but I'll just keep asking questions until I see hands, and that's the way we're gonna operate. Let's talk about Group Benefits. I mean, MetLife is second to none. On the one hand, that's an amazing market share position. On the other hand, it's harder to grow faster than the industry when you're such a giant. I mean, you talked about pet, I mean, but I mean, still it's a small business. What are the prospects for MetLife benefits in the U.S. keeping up with inflation and exceeding it over the long term?
Yeah. I mean, you know, first of all, I would say we're, you know, really. We feel really good about the fundamentals of our business, especially as we, you know, move back to sort of a more, stable mortality environment. You know, I would say that, you know, there's, you know, there's several sort of aspects to our business, that, position us very well strategically. You know, if you think about our scale, our brand, our set of capabilities, you know, I think. Our product set, which is the widest in the entire industry, those all give us advantages. You know, we've always said, and I will repeat here that, you know, Group Benefits is a business, that requires significant investment.
Scale does matter because scale gives us the ability to make those investments. If you think about employer-employee expectations, the entire benefits ecosystem, ability to integrate there, if you think about enrollment and re-enrollment, so, you know, an impact on voluntary benefits. You know, what we've seen is, you know, those investments have helped us, you know, grow the business, you know, achieve more scale, and as I referenced earlier, you know, gives us also the ability to continue to make investments that we feel are gonna continue to fuel our growth going forward. You know, you mentioned, you know, obviously we're the strongest in terms of our presence in the 5,000+ segment of the market.
We call it national accounts. We're continuing to grow faster than market in that segment. What's been very helpful to us is our ability to sell new products to existing customers there. You know, voluntary has been a focus area for us. We're continuing to see really, you know, good momentum there. Our growth figure over the last three years is 20% on the voluntary front. You know, again, I referenced earlier the investments that we've made in enrollment and re-enrollment, which have been very helpful, and we can continue to see sort of a path to us building on that going forward. You know, last but not least, I will mention our regional market, which is the 100 to 5,000 employee space.
There, you know, we're continuing to grow at a very nice pace, I would say above our 4%-6% you know, target range from a PFO perspective. You know, this is a business where we've been able to add about $1 billion in PFOs since we launched our Next Horizon strategy, and we're now at near $5 billion in PFOs just from that sort of segment of the market. You know, I think we have the right strategies in terms of, you know, market focus, customer focus. You know, we feel sort of good about our ability to continue to grow that business.
We guided again to a 4%-6% PFO growth for, you know, the 2023 and the near term. And I think, you know, there's a few things that give us confidence in our ability to deliver that. One is that, you know, we I think 2022 gave us a very strong base in terms of the rate actions that we've been able to implement on renewals, and very strong persistency there. You know, very good enrollment and re-enrollment season as well. And I think we're off also to a really good start in 2023 in terms of sales. It's still early days, but in national accounts in particular, you get a good sense of momentum, you know, in January.
Again, although we haven't seen much in terms of jumbo sales, you know, our sales have been very strong to start the year. For all these reasons, we feel good about our ability to continue to achieve, you know, strong growth in this business.
Pivoting to group retirement, particularly institutional size, obviously a big flow benefit to you guys have been your great pension risk transfer business. There's not so many competitors. All the... I think in the jumbo market, clearly the companies you compete with also have very strong capital positions. What are the competitive advantages that MetLife brings to those bidding processes, I guess? Two, where are we in the maturity of that business? I mean, we've seen some very large transactions in recent years, but it's not an infinite pool, obviously.
Yeah. You know, let me just start by saying that RIS is more than just PRT, but I'm gonna talk about PRT.
Yeah.
And then maybe you-
You made me know that that's something institutional side.
maybe you'll also give me the chance to say a few words about some of our-
You say whatever you want.
All right. Good.
You got the floor.
I got a good deal here. You know, from a PRT perspective, I mean, we've been in this business for 125 years, so, you know, we know this business, you know, really, really well, a lot of experience. You know, as you know, 2022 was a record year for us, over $12 billion in sales, including the landmark IBM deal, which was the largest deal in our history as well. We've seen the market, you know, grow in the last few years. If you know, look at the sort of aggregate funding levels for sort of S&P 500 companies, you know, those funding levels are very healthy. Higher rates help in this regard.
That's typically a good indicator of sort of, you know, the market and what's potentially gonna come to market. You know, we continue to see a healthy pipeline, and for 2023, as you referenced, we focus on the jumbo end of the market, the billion-plus deals, if you like. You know, we, one, see less competition at that size. You know, this is where the size of our balance sheet, our rating, our investment capabilities also are differentiators for us. You know, we feel good our ability to continue to win our fair share of deals in that, you know, in that segment.
As I mentioned, we think that this will again be a, you know, strong deal from a sort of overall market perspective for PRTs. I would also mention here that we're extremely disciplined. We treat those deals in exactly the same manner as we do M&A transactions. You know, those deals have to meet our return objectives of 13%-15%. You know, I mentioned that RIS is more than just PRT. Just wanna sort of mention a couple of our businesses there. You know, stable value, which is, you know, a business that tends to do extremely well in, you know, highly volatile market environments. We saw that in 2020. We saw it again in 2022.
You know, again, if you think about that business over the last three years, we've managed to increase balances by $11 billion. You know, obviously we're a market leader and, you know, we're, you know, we continue to be bullish on this business. You know, another business where we've seen the market continue to grow is in structured settlements. Again, last year was a good year for us there, with $1.3 billion in sales. You mentioned earlier, Josh, the UK longevity reinsurance business, and this is a business we entered in 2020, so from a standing start. We had another good year in 2022 with seven deals. Overall, we've done 21 deals and $20 billion in sales since 2020.
Again, you know, this is another business that adds to the diversification that we have in RIS. I think one of the features of RIS is we have these different businesses that perform, you know, differently depending on the external market environment. It gives us good diversification within RIS.
Let's move out of the United States. Some sending in Jamie, obviously, MetLife's a truly global company. Can we talk about growth prospects for your Asian businesses to start, I suppose, and what are some of the both headwinds and tailwinds?
Sure. You know, Asia, you know, first of all, I would say, you know, really pleased with, you know, how Asia has performed in the face of a really challenging environment, if you think about COVID impact, especially lockdowns. You know, again, some of the also, you know, impacts, especially in Japan on the deemed hospitalization front. What we said in our outlook is that our expectation is, you know, really maintaining our sort of, projection from last year, is that, you know, we think we're gonna grow sales by mid-to-high single digits. This is on top of 11% growth in 2022. AUMs, we think we will grow at about mid-single digits, earnings, likewise.
You know, I think there are several sort of aspects to our business in Asia that gives us confidence in our ability to continue to grow and deliver these results. You know, obviously, Japan is an important component in our ability to deliver that. It's about 80% of Asia earnings. You know, although JPY is only 15% of overall Asia earnings, this speaks to sort of the strength that we have on the FX product front in Japan. You know, Japan, I think we have a number of competitive advantages. The diversification that we have in terms in our product set and in our distribution channels. Our ability, which we've enhanced to bring product to market faster.
This allows us to pivot when we see changes in the environment while still being able to take advantage of, you know, longer term trends that we see in that market. I think a good example of that that I would point to in 2022 was, you know, where we saw really intense competition in the banker channel when it came to FX products. We held the line, and we maintained discipline there, and we saw really great traction in the career agency and independent agency channel, which allows us, which more than offset sort of the impact from the banker channel. That diversification, you know, we think is a, is an advantage. We've invested also heavily in digitizing our sales and service capabilities in Japan and the rest of Asia.
you know, I think for all those reasons, we feel good about sort of the outlook that we provided and the, you know, momentum that we see in Asia.
Do the strong sales in dollar-denominated Japanese products in 2022 make a difficult comp for 23? Have the people who wanted to buy those products bought them this past year, now that the yen is weak, they're probably less apt to buy them or it should still be another strong year?
Yeah, we mean.
We'll meet our commitment.
Yeah.
We've given our outlook.
Yeah.
We'll meet it. I mean, I think if there's a diversity in product and distribution, I think that's what we can leverage when we think about the outlook. We're not afraid about having a tough.
Tough compare. I think the team's always up for the challenge, and they've shown it.
Pivoting, I guess, to Mexico and Latin America a little bit.
Mm-hmm.
Obviously, the Mexican market is governed very nicely.
Yeah.
Maybe you wanna talk about some of the things you're doing there?
Yeah. You know, for Latin, we've, you know, the outlook calls for us to grow PFOs by, I would say, the low teens and to grow, you know, earnings by high single digits. You know, this excludes, you know, the positive sort of market impacts, about $80 million in 2022. Again, overall, you know, there are also, you know, several reasons why we feel good about, you know, sustaining the momentum that we've seen in LatAm, as COVID continues to recede.
you know, I think, one, we have leading positions in two of the biggest markets in LatAm, Mexico and Chile, and we have an emerging position in Brazil, which is again a major LatAm market. If you think about the levels of penetration, insurance penetration in those markets still trail sort of OECD countries, so potential there. We're also seeing a heightened level of awareness, especially when it comes to protection products in LatAm post-COVID, and something that we've referred to as a flight to quality, which includes greater customer interest in digital tools and solutions, which is an area where we've invested significantly in LatAm. For all these reasons, we feel good.
We're continuing to diversify our distribution channels in LatAm. A lot of focus on bancassurance and D2C, growing those channels. You referenced Mexico. I mean, we held a record year in 2022 in Mexico from a top and bottom line perspective. We have a very strong work site government business in Mexico and we are, you know, growing our, you know, private work site business as well as our employee benefits and other channels in Mexico. For all these reasons, I think we feel confident in the sort of outlook that we've provided.
One more question as we're running out of time. Where are we in terms of holdco cash as we enter the year over your buffer? As a general rule, within that 12%-14%, up to 13%-15% ROE guidance, what is the long-term view on cash flow conversion that underlies that?
Yeah. I mean, I think just to kind of hit those quickly, I think, one, we're at $5.4 billion, like you said, well above our $3 billion-$4 billion cash buffer. We consider excess capital to be anything above that range. I think we've been, we've shown kind of a, you know, good track record here on how we return capital, right? I mean, we returned almost $5 billion of capital this past year to shareholders, $3.3 of that in share repurchases. You know, I think, along with the kind of the theme of a consistent executor, I would consider share, you know, returning capital to shareholders a component of that.
We are out of time. Thank you, Mustafa, and Tom McEligot and John Hall, for all the work that you do, and just for sharing your time with us. Have a wonderful day with your loved ones.
Great. Thank you.
Thank you.