Ladies and gentlemen, thank you for standing by, and welcome to the special conference call to discuss MetLife's risk transfer transaction. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. I will turn the call over to John Hall, MetLife's Global Head of Investor Relations.
Thank you, operator. Good morning, everyone. We appreciate you joining us to discuss the risk transfer agreement we announced earlier this morning. Before we begin, I would like to point out that today's presentation may include forward-looking statements. It's possible actual results may differ materially from the forecasts we make today. I refer you to slide 2, titled Cautionary Statement on Forward-Looking Statements in today's presentation, which can be found on the investor relations portion of metlife.com. In addition, this presentation may include references to non-GAAP measures that can be found in our quarterly financial supplements and other documents, which are also available on the investor relations portion of metlife.com. Joining me on the call today are Michel Khalaf, President and Chief Executive Officer, and John McCallion, Chief Financial Officer.
Michel and John will offer prepared remarks that speak to the presentation I referenced earlier, which is available on our website. Following prepared remarks, we will have a Q&A session, and I ask that you focus your questions on the transaction at hand. I'll turn the call over to Michel.
Thank you, John McCallion. Good morning, everyone, thanks for joining our call on short notice. We are very pleased to speak to you today about the agreement we've entered to reinsure a $19.2 billion block of business comprised of universal life, variable universal life, universal life with secondary guarantees, and fixed annuities to affiliates of Global Atlantic Financial Group. We believe this transaction is a clear example of our tactical execution to optimize our business mix and create long-term value for our shareholders. Since rolling out our Next Horizon strategy, MetLife has opportunistically unlocked significant value through strategic divestitures, including the sales of our auto and home business, our operations in Poland and Greece, now today's risk transfer deal. To arrive at this transaction, we've moved forward from a position of strength, we conducted an exhaustive, competitive process with a strong set of potential partners.
The risk transfer agreement we've entered will appropriately accelerate the runoff of our legacy business, MetLife Holdings, that we established in spinning off a portion of our former U.S. retail life insurance business. The transaction will improve MetLife's enterprise risk profile and balance sheet efficiency, is value-enhancing and attractive across a broad range of measures, including EPS, ROE, and RBC, all while freeing up capital for higher order use. This agreement is grounded with a strong counterparty, an efficient structure, and critical protections. Most importantly, our customers will benefit from the continuity of service as MetLife will remain as administrator and service provider for the policies to be reinsured. Finally, we believe this transaction underscores the substantial financial flexibility embedded in MetLife's business model and the overall strength of our balance sheet.
As noted in our press release, MetLife's board of directors has added an incremental $1 billion to our share repurchase authorization in recognition of today's announcement. This brings our full authorization to $4 billion. As always, we carefully weigh every use of capital with our goal to achieve the right balance between investing in responsible growth and returning capital to create long-term shareholder value. We are moving forward on the transaction with speed, and we are targeting a close in the second half of the year. I will now turn things over to John McCallion, who will share more detail on our announcement.
Thank you, Michel. Good morning. First, let me say we are pleased with this transaction, which checks many boxes from a financial, risk mitigation, and value creation perspective. I want to acknowledge the many MetLife associates across numerous teams who have worked tirelessly to get us to this point. As we have discussed in the past, MetLife Holdings is a well-seasoned and well-diversified legacy block. We continue to focus on our primary objectives to meet customer obligations, look for efficiencies in how we operate, and seek opportunities to further optimize the business. To this point, we have continued to take a third-party perspective, which helps us better manage the business internally, while also providing us optionality to appropriately accelerate the release of reserves and capital at the right value with the right strategic partner, which we have found in Global Atlantic.
Let's dig into the details on page 4. The transaction covers $19.2 billion of current statutory reserves, with approximately $14 billion of universal life, variable universal life, and Universal Life with Secondary Guarantees, with the remainder of balance being fixed annuities. We have structured the transaction on a coinsurance basis for general account reserves and modified coinsurance for separate accounts. We have included a number of important structural protections, including prescribed investment guidelines and the establishment of a comfort trust, including overcollateralization relative to the coinsurance obligation. In terms of value, the agreement is expected to generate $3.25 billion, comprised of a ceding commission of $2.25 billion, as well as approximately $1 billion of statutory capital released. In the aggregate, the transaction should add roughly 60 combined RBC points.
As a result, as Michel noted, we have increased our existing $3 billion share repurchase authorization by $1 billion to $4 billion. The transaction results in an approximate $200 million after-tax reduction in MetLife Holdings run rate adjusted earnings. We expect the transaction to be accretive to adjusted earnings per share and a positive contributor to our adjusted ROE target of 13%-15%. In addition, we are maintaining our enterprise average 2-year free cash flow ratio of 65%-75% of adjusted earnings, excluding notable items. On page 5, we highlight other key considerations. As part of the transaction, we are entering into a 5-year management agreement where MetLife Investment Management, or MIM, will manage approximately 40% of the general account assets transferred, or roughly $4.5 billion.
Turning to servicing, the business will continue to be administered by MetLife. Meeting our customer obligations will remain an overriding priority. As such, MetLife will receive a customary expense allowance throughout the term of the reinsurance agreement. Finally, we expect the transaction to close in the second half of this year, subject to regulatory approvals. With that, I will turn the call back to the operator for your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press one, then zero on your touchtone phone. You will hear an acknowledgment that you've been placed into queue, and you can remove yourself from queue at any time by repeating the one zero command. If you're on a speakerphone, please pick up your handset before pressing the numbers. Once again, for questions, it's one then zero at this time. We'll go to the line of Thomas Gallagher with Evercore.
Good morning. First question is: what are you thinking about the remaining $2 billion of capital from the deal? What are your plans there, and how are you thinking about that? Thanks.
Good morning, Tom. you know, at a high level, I just remind that to, you know, we view all capital as precious, and we always look to put it to its highest and best use, and that's across a range of options, including funding organic and inorganic growth. In the absence of appropriate risk-adjusted hurdle rate clearing options, we return it to shareholders. you know, as we've said, our board has approved an additional $1 billion for our buyback authorization, which brings the total to $4 billion. That's sort of indicative of our direction of travel here. you know, when we've established authorizations in the past, we've been deliberate and consistent in terms of bringing them down. Also keep in mind that the transaction should close sometime in the second half of 2023, which is when we would expect to realize value from the deal.
Thanks, Michel. The I guess my follow-up is how big of a part of the overall block was the SGL piece of the total? Then secondly, is or what about variable annuities? Is that still something you're considering doing risk transfer on within MetLife Holdings, or... Why life insurance, not DA? Was the life insurance transaction and life insurance and fixed annuity just a better value for you at this point?
There's, like, five questions, Tom, but we'll go with it.
Subparts.
Okay. Let me just try to hit your first one on ULSG. It's, you know, about 4 of the 14 ends up being roughly half of our exposure on ULSG. Just to give you a sense, we have, you know, give or take, $8 billion of reserves. This transaction brings it down to 3.7, which is what remaining, so a little over 50% of exposure there. Yeah, look, I think I think it goes back to just maybe Michel's opening comments around, you know, just the position we come from with regards to this is, you know, this isn't something we have to do. This is an opportunity, I think that's probably the same, you know, the way we look at all the blocks there.
We're very comfortable running these businesses ourselves, but if there's an opportunity that makes sense and it allows us to appropriately release capital reserves, then we'll transact, you know. There's a lot of other considerations with that. That's probably how I'd answer your question around just why this versus something else. I think we'll continue to maintain our approach, which is we take a third-party view on these blocks. Helps us manage them better internally. We learn a lot doing it that way. At the same time, if we see there's a, you know, a transaction that makes sense for our stakeholders, we'll do that.
Okay, thanks.
We'll go next to the line of Jimmy Bhullar with JP Morgan.
Hey, good morning. First, just had a question on the individual life blocks that are being reinsured, UL and ULSG. Are there any sort of aspects to the structure where you still will retain some risk if there's either a big change in experience on the block or maybe higher reinsurance costs going forward? Just trying to see any, think about any residual risk to MetLife from the reinsured blocks.
Hey, Jimmy, it's John. Good, thanks for the question. The answer is, all risk is transferred. So, it's a 100% transfer, including, YRT risk. That goes to 100%, as part of the deal.
Obviously, you've been trying to wind down the MetLife Holdings division for a while. On LTC, which wasn't part of this deal, is it fair to assume that the bid-ask spread is still fairly wide? People have been optimistic about deals for LTC for the last decade, and nothing major has happened. Has the environment for LTC offloading improved, or is it still unrealistic to assume something in the sort of near to intermediate term?
Yeah, it's, I don't think there's a big improvement or much improvement at all in that, in that space, at least as in terms of how we might look at it. you know, again, we feel comfortable with, you know, our reserving practices, our assumptions, how we manage the block, our expertise. Again, it's not something we feel like there's a burning platform that we have to do something, and we're very happy to manage it accordingly. Having said that, you know, I'd say my sense and our sense around this is that most external parties are probably looking at other things, and there's very limited kind of interest or, you know, incoming questions around LTC.
If I could just ask one more on Michel's comments on buybacks. Should we assume that the step up in the level of buybacks, because of the $1 billion that's been added, would really begin after the deal closes? Or are you going to step up the level of activity from now on, or would it be later in the year?
Yeah, I mean, I would just say, Jimmy, that, you know, we're going to follow our normal practice here. You know, we'll assess and, but, you know, as we've, I think, demonstrated in the past, you know, post-divestitures, we are, you know, deliberate and expeditious. You know, I think same here.
Okay. Thank you.
We'll go next to the line of Erik Bass with Autonomous Research. Please go ahead.
Hi. Thank you. Can you talk about the composition of the asset portfolio that will be transferred in the transaction?
Good morning, Erik. It's John. Generally, you know, it's a represented sample of our of the assets that we have. You know, you can't really transfer PEs, a little harder, so that doesn't move around. Other than that, you know, I'd say it's a component of every asset class and, you know, general representation.
Got it. Sort of no change to VII then, presumably, but some of your mortgage loan portfolio may transfer.
Yeah, we've no there's no private equity to move. It's just it's a more complicated setup. You know, there's there are private assets that moved, but I would say it's marginal on the private side and including commercial mortgages.
Thanks. Then can you just talk about the breakdown of the remaining liabilities in MetLife Holdings after this transaction?
Sure. I'll just rough justice here. You know, we have, call it, 40-ish of VA liabilities, maybe double that if you include then the closed block, right? Those liabilities, then there's, you know, obviously LTC, which is in the, you know, just above the 15 range. There's a, you know, some more open block life insurance policies term, you know, kind of ordinary life insurance.
Got it. Thank you.
We'll go next to the line of Tracy Benguigui with Barclays.
Thank you. Good morning. The other deals that I have seen, where a life insurer had done a block deal with ULSG that's co-marketed with fixed annuities, that actually resulted in a negative cede, and you guys got a nice positive cede. Can you share if there were certain assumptions that the counterparty found attractive, like a lapse assumption or something else, that speaks to the high quality of those, of that block?
Yeah. Good morning, Tracy. Thanks for the question. you know, I think as we've said in the past, and as, you know, over the course of other calls regarding these blocks, you know, these all have positive margin. I can't speak to others and how they've, kind of managed or. There's, you know, there's differences in product features. you know, obviously, you know, the assumptions you use, and, you know, even are, you know, kind of the riskier, if you will, of the, of the policies, I guess, perceived riskier of the ULSG. We had positive margin across the block there, so.
Okay. Just maybe adding to the conversation on capital, you're maintaining your free cash flow target of 65%-75%. I'm wondering if you could unpack that a little bit. Are you considering any type of credit downturn scenario when you're setting that target?
Yeah, no, that's, it does not, it does not take into account, like, I'd say, an adverse move from, you know, I'd say the general outlook. Obviously, our assumptions do assume kind of some level of stress here. We've been talking about that. You know, we expect some level of recession. I think what kind of recession is, really matters, right? You know, not all recessions are created equal, and, you know, we're not assuming, you know, kind of a real distressed recession. We think there's some headwinds ahead of us, and that's, you know, factored into the, to the guidance.
Thank you. We'll go next to the line of Suneet Kamath with Jefferies.
Thanks. Just a question on the RBC, the 60 points benefit. Is that before or after the additional $1 billion of buyback that I'm assuming you're going to upstream to the holding company?
Good morning, Suneet. That is before. That's kind of the, I'll say, the raw number, you know, of excess capital gets generated at close. Then we'd have to adjust for redeployment of that capital.
Got it. Then on the free cash flow, post this deal, is Holdings still 100% free cash flow or something in that neighborhood?
Yeah, I'd say in the neighborhood's probably a good term to use there. You know, I think there are some products that are a little over. There's some products that are still growing in terms of their reserves, you know, you could think like LTC. I'd say it's in the roughly, like, the 90% to 100%, and this block was commensurate with that.
Okay, thanks.
We'll go next to the line of Alex Scott with Goldman Sachs.
Hey, first one I had for you, more of a housekeeping item maybe. What are the GAAP book value implications of the transaction? Just trying to think through, you know, any need for debt reduction at all, if there's a impact.
Hey, good morning, Alex. I'll start with the kind of the back end question there on the debt reduction. No impact there. Marginal impact to, you know, kind of leverage ratio. You know, I will say, you know, in terms of GAAP book value, though, you have to consider, and there's just the way the timing of the accounting will work is, you know, upon signing, you know, this quarter, we would have to kind of move the assets to held for sale. At closing, you kind of do the reinsurance accounting. Obviously, with where rates are and stuff, you know, we have some unrealized losses that would have to be, you know, moved to retained earnings. There's a shift in your GAAP, where that resides in your GAAP book value.
That will come through earnings in the second quarter. Obviously, when the reinsurance happens, that results in a deferred gain. There's some timing and nuances. Obviously, that's just GAAP accounting. I wouldn't consider it, you know, too interesting because it's not really economics here. Those are just some nuances you have to consider. It's, I'd say it's about, we'd expect roughly at these rates, probably a $700 million net income impact in 2Q, negative.
Got it. Okay. Yeah, I get that a lot of that's non-economic. Just good to have visibility on it going in. Second one I had is just in light of going through this process, I assume you probably looked pretty hard at everything in Holdings. Could you help us think through how much of the statutory capital in, you know, Metropolitan Life Insurance Company is backing what's left in Holdings? You know, when I think through variable annuities, many LTC, long-term care, can you help us, you know, get a feel for how much that capital is backing that?
Yeah, it's a hard, it's a hard one. I hesitate because I'm just trying to think through how to best answer it, you know, because it's, obviously there's, you know, capital is supporting all of the blocks of business, right? It's hard to isolate. Holistically, you know, there's, you know, there's diversification in there and things like that. It's probably a little bit of a hard one. I'd say, you know, at the end of the day, relatively speaking, it's still a, you know, capital, you know, intensive relative to the other business that we have and that we're originating these days. That's probably the best qualitative answer I can give you.
Got it. Okay, thank you.
We'll go next to the line of Ryan Krueger with KBW.
Hi, thanks. Good morning. I just had a quick one. How does the $200 million of foregone earnings include the amortization of the positive ceding commission? If so, how much is that?
It does. It, it's minor, because it gets amortized over a long period of time, right? I guess, I think it's in there, but I think it's minor, right? I think the $200's really the kind of the true loss of earnings of this business. It's not really the offset by the positive cede.
Got it. Was the free cash flow on this block relatively similar to that $200 million number?
Yeah, it's probably 80%-90%.
Okay, great. Thank you.
We'll go next to the line of Joshua Shanker of Bank of America.
Yeah. Hi there. Just a couple questions. You know, this deal seems maybe opportunistic, as announced concurrently with the buyback. In terms of process, did this come suddenly? Has this been worked on for a while? What's changed in the market that pulled everything together?
Hey, Josh, it's John. Good morning. The way I'd answer that is, you know, and I think we've been pretty consistent for quite some time, I'd probably say almost 3-4 years. We've been talking about the fact that we have taken a third-party view. We have been in various discussions around, you know, with counterparties, understanding what they value, and, you know, everything evolves, and I think we've been methodical in that process, because as we've talked about, we're very, you know, we were always very comfortable managing this block ourselves. If there was an opportunity that made sense, for us to appropriate release capital and reserves, we would. It's just been, you know, kind of, I'd say, a, you know, part of our overall process.
As, you know, we were able to narrow it down over time, and we saw a good opportunity, then, you know, that's when we kind of, accelerated our process.
It happened concurrently with the share price falling off, you know, for macroeconomic reasons, making buybacks a more attractive opportunity. Is there any calculus in approaching deals that the relative value of managing the block yourself versus buying back your shares makes you more or less interested in getting deals done?
Yeah, I'd love to say that we could be that nimble, but it's not these are, you know, these are large, complicated, you know, blocks of business in terms of just everything that goes with it administratively, you know, different concepts. You know, you had talked about, like, any reinsurance associated with. You know, there's a lot of different dynamics in the block here, so there's a lot to get through. I would, it'd be nice to say that we were that nimble and agile on something like this, but this is a, you know, this is a process we've been going through just continuously, and we will be, and that will continue. That, that mentality will continue throughout.
You know, in terms of where share price is, I mean, we don't ignore it, but it couldn't be a factor just 'cause this takes so much time to think through. You know, it ultimately is, you know, we, you know, it's obviously in front of us, so.
Thank you very much.
We have time for one more question, and that will come from Michael Ward of Citi.
Thanks, guys. Good morning. Congrats. I guess I'm just wondering if you could sort of comment on the free cash flow target. Sounds like you're maintaining it going forward, but the $200 million of lost earnings. I'm wondering if it's bolstered at all by the proceeds from the deal or if you're sort of still pushing that forward longer term, that 65-75?
Yeah. Good morning, Mike. Oh, yes. It, it certainly, I think all else equal, you know, we're removing a block that has high free cash flow. That $200 is, you know, it's close to the free cash flow level. Having said that, you know, we've also been, over time, continuing to shift our mix and our new businesses, probably has a higher % of free cash flow. Now it takes a long time for that to shift, and we can still think that's the case. That's part of the reason why it gives us, you know, we're confident in maintaining the guidance.
Thank you. Was this the whole fixed annuity block from Holdings?
Yes.
Okay. Thanks, guys.
Thank you. I'll turn it back to John Hall for closing remarks.
Well, great. Well, thanks, everybody, for joining us this morning. If there's any further questions, please follow up with me, and have a good day. Thank you.
Thank you. Ladies and gentlemen, today's conference will be available for replay beginning at 2:00 P.M. Eastern Time today, running through midnight, May 31st. You may access the AT&T replay system by dialing 866 207 1041, and entering the access code of 662 9833. International participants may dial 402 970 0847. Those numbers again are 1866 207 1041 or 402 970 0847 with the access code of 662 9833. That does conclude our conference for today. Thank you for your participation and for using AT&T event conferencing. You may now disconnect.