MetLife, Inc. (NYSE:MET) Q4 2022 Earnings Call Transcript
MetLife, Inc. (NYSE:MET) Q4 2022 Earnings Call Transcript February 2, 2023
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter and Full Year 2022 Earnings and Outlook Conference Call. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about the forward-looking statements in yesterday's earnings release and to risk factors discussed in MetLife's SEC filings. With that, I will turn the call over to John Hall, Global Head of Investor Relations.
John Hall: Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's fourth quarter 2022 earnings and near-term outlook call. Before we begin, I'd point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides which address the quarter as well as our near term outlook. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along.
An appendix to the slides features outlook sensitivities, disclosures, GAAP reconciliations and other information, which you should also review. After prepared remarks, we will have a Q&A session. In light of the busy morning, Q&A will promptly end at the top of the hour. With that, over to Michel.
Michel Khalaf: Thank you, John, and good morning, everyone. As I look back on 2022, I am pleased with the relevance of our Next Horizon strategy and how it positioned us to absorb the challenges presented in the year and to succeed going forward. 2022 was a year still affected by COVID, and we incurred an impact of more than $650 million pretax. For the year, we saw pretax variable investment income come in 19% lower than our outlook expectation on lower returns in our private equity portfolio. And from a macroeconomic perspective, we felt pressure from rising inflation, a falling equity market and a stronger dollar. Yet despite these hurdles, MetLife performed. Our strategy proved its resilience and our consistent execution driven by discipline and determination paid off in 2022.
We delivered an adjusted return on equity of 12.3% for the year, meeting our target for this important metric. We pushed ourselves, driven by our efficiency mindset and succeeded in posting a full year direct expense ratio of 12.2%. Our strong 2022 free cash flow generation enabled us to hit our 2 year free cash flow ratio target of 65% to 75%. This fueled the return of $4.9 billion of cash to our shareholders. And finally, we ended the year with $5.4 billion of cash and liquid assets at our holding companies, arming us with ample financial flexibility. With our great set of market-leading businesses, good growth prospects around the world and the strength of our balance sheet and our free cash flow generation, I believe MetLife is very well positioned for the future.
When we established our Next Horizon strategy at the end of 2019, we made several 5 year commitments against which we measure ourselves and, more importantly, hold ourselves accountable. I am pleased with our success to date in meeting those commitments. Even more, I am confident that we will beat each one. We committed to an adjusted return on equity of 12% to 14%. Today, we are boosting our target adjusted ROE range to 13% to 15%. This reflects, in part, our growth combined with our sustained discipline in pricing our products and in managing our capital. We said we would generate $20 billion over 5 years of free cash flow. We expect to exceed this target. We committed to freeing up an additional $1 billion over a 5 year period to invest in growth and innovation.
Again, we are on track to overachieve against this target, and we are reaping the benefit of these investments. When we made these commitments, we did not expect U.S. interest rates to approach the lowest level in history, neither did we contemplate a global pandemic. While the environment may change, our accountability does not. We are also not content to maintain the status quo. We seek to challenge ourselves and push for more to raise the bar. Now let's turn to our fourth quarter 2022 results. Last night, we reported quarterly adjusted earnings of $1.2 billion or $1.55 per share, which compares to $1.8 billion or $2.17 per share a year ago. We generated strong underwriting results as COVID losses retreated further, while our recurring investment income continues to grow on higher new money rates.
This was offset by variable investment income falling below our quarterly outlook expectation and a stronger dollar. Shifting to the full year 2022, the diversification of MetLife's portfolio of market-leading businesses once again proved its value. Most of our businesses and segments have returned to underlying levels of earnings equal to or greater than prior to the pandemic. Our U.S. Group Benefits business is a clear leader in this attractive segment of the life insurance industry. During the year, we grew our Group Benefits PFOs roughly 5% on top of double-digit growth the year prior. Our growth in Group Benefits represents more than $1 billion of new PFOs, bringing full year Group Benefit PFOs to approximately $23 billion. These numbers matter.
First, we bring the broader set of products to our customers, life, dental, disability, vision, A&H, legal and pet insurance among many others, more than any other carrier. Second, Group Benefits is a business where you have to make significant investments to keep up with evolving customer and employer expectations. Our scale enables us to make those investments, to add products and capabilities and to further digitize and enhance the customer experience. All of this adds up to drive the growth and persistency we've achieved in our Group Benefits business over the last several years as well as the growth we expect to achieve in the future. Moving to highlights from other segments and businesses. Our Retirement and Income Solutions business produced its strongest year of pension risk transfer volume in our history, more than $12 billion, including our largest ever single deal.
Our Asia segment continued to generate strong sales growth, topping 11% on a constant currency basis in a market that remained in COVID's grip for much of the year. And our Latin America segment enjoyed both strong top and bottom line results, particularly in Mexico, as a heightened awareness of the importance of the products we offer, coupled with a flight to quality, drove sales up 26% on a constant currency basis, pushed persistency higher and added to adjusted earnings. Moving to capital and cash. MetLife is well capitalized and has plenty of liquidity, well above our target cash buffer of $3 billion to $4 billion. Our U.S. and international insurance businesses are self-funding. Our strong capital and liquidity position allows us to meet our commitments and obligations, but also equips us with the financial flexibility to seize attractive opportunities that may present an unsettled environment.
We have built a clear track record in terms of how we deploy capital to its highest use. If we have opportunities to put capital to work organically or via mergers and acquisitions at appropriate risk-adjusted hurdle rates, we will do so. Case in point, we deployed approximately $3.8 billion of capital to support organic new business in 2022. Absent such opportunities, we will return capital to shareholders. In 2022, we paid to MetLife shareholders $1.6 billion of common stock dividends, and we repurchased $3.3 billion of common stock. In January, we purchased roughly an additional $250 million of common stock, and we have around $900 million remaining on our current authorization. Before I close, I would like to take a moment to recognize a true visionary in the history of MetLife.
Harry Cayman, MetLife's Chairman of the Board and Chief Executive Officer from 1993 to 1998, passed away on December 20 at the age of 89. Harry spent nearly his entire career at MetLife, starting as a junior attorney. As Chairman and CEO, Harry infused MetLife with a new corporate vision and an emphasis on profitable growth, something very much in line with our current focus on responsible growth. Harry's passing reminds us of the debt we owe at MetLife to those that went before us and building this great company since its founding in 1868. In closing, our Next Horizon strategy continues to prove its resilience in a changing and shifting environment. Our total shareholder return of more than 19% in 2022 underscores the significant value we created for our shareholders against this backdrop.
As we look ahead, our work is not done. We are raising the bar and setting our standards higher. As much as we have accomplished in recent years, I believe there is still much ahead for us to achieve. As the world has opened up, I was able to spend more time on the road than the last half of 2022 since the start of the pandemic. I'm more invigorated than ever to get out and meet face-to-face with our customers, our distribution partners, our employees and our shareholders. I look forward to updating some and introducing others to what we're building up MetLife, a company capable of being a quality compounder across a range of economic cycles. Now I'll turn it over to John to cover our performance and outlook in detail.
John McCallion: Thank you, Michel, and good morning. I will start with the 4Q '22 supplemental slides, which provide highlights of our financial performance and update on our cash and capital positions and more detail on our near-term outlook. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year. Net income in 4Q of '22 was $1.3 billion or $88 million higher than adjusted earnings. Net investment gains in the fourth quarter were primarily driven by real estate sales, which were partially offset by losses on the fixed maturity portfolio due to normal trading activity in a rising rate environment. Credit losses in the portfolio remain modest. In addition, we had net derivative gains primarily due to the weakening of the U.S. dollar in the quarter.
For the full year, net derivative losses accounted for most of the variance between net income and adjusted earnings, primarily due to higher interest rates in 2022. Overall, our hedging program continues to perform as expected. On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $140 million of notable tax items that were favorable in the fourth quarter of '21 and accounted for in Corporate and Other. Adjusted earnings in 4Q of '22 were $1.2 billion, down 28% and down 26% on a constant currency basis. Lower variable investment income drove the year-over-year decline, while higher recurring interest margins and favorable underwriting were partial offsets. Adjusted earnings per share were $1.55, down 23% year-over-year and down 21% on a constant currency basis.
Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were $400 million versus $20 million in 4Q of '21, primarily due to significant improvement in underwriting margins aided by lower COVID-19 life claims, as well as higher volume growth. This was partially offset by less favorable expense margins year-over-year. Group Life mortality ratio was 87.6% in the fourth quarter of '22, in the middle of our annual target range of 85% to 90%. Regarding non-medical health, the interest adjusted benefit ratio was 69.4% in Q4 of '22, slightly below its annual target range of 70% to 75% and below the prior year quarter of 74.2%. The non-medical health ratio benefited from favorable disability severity, while dental was in line with expectations.
Turning to the top line, Group Benefits adjusted PFOs were essentially flat year-over-year. As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q4 '21 versus Q4 of '22 resulted in year-over-year decline in premiums from participating contracts, which dampened growth by roughly 6 percentage points. The underlying PFO increase of approximately 6% was primarily due to solid growth across most products, including continued strong momentum in voluntary. For the full year, Group Benefits adjusted PFO growth was 3%, while underlying growth, excluding excess premiums from participating contracts in 2021 versus 2022 was up 5% and within the 2022 target range of 4% to 6%.
Retirement and Income Solutions, or RIS, adjusted earnings were down 40% year-over-year. The primary driver was lower variable investment income, mostly due to weaker private equity returns. This was partially offset by favorable recurring interest margins year-over-year. RIS investment spreads were 96 basis points and 112 basis points excluding VII, up 21 basis points versus Q4 of '21 and up 11 basis points sequentially, primarily due to income from in-the-money interest rate caps. RIS liability exposures were down 1% year-over-year due to certain accounting adjustments that do not impact fees or spread income. That said, RIS had strong volume growth driven by sales up 23% in 2022. This was primarily driven by pension risk transfers and stable value products.
In addition, we had a record sales quarter for structured settlements, demonstrating the strength of product diversification within RIS. With regards to PRT, we completed 6 transactions worth $12.2 billion in 2022, a record year for MetLife, and we continue to see an active market. Moving to Asia. Adjusted earnings were down 63% and down 62% on a constant currency basis, primarily due to lower variable investment income. In addition, we had a write-down of a deferred tax asset in China as it was determined that the accumulated tax losses were unlikely to be utilized within the required 5 year statutory period. The write-down of the DTA reduced Asia's adjusted earnings in Q4 of 2022 by $34 million after tax and was accounted for in net investment income due to the equity method of accounting treatment for our China joint venture.
While Asia's underwriting was modestly unfavorable versus Q4 of '21, we saw a significant sequential improvement due to lower COVID claims in Japan. Asia's key growth metrics remained solid as general account assets under management on an amortized cost basis grew 4% on a constant currency basis. And sales were up 12% year-over-year on a constant currency basis, primarily driven by FX annuities sold through face-to-face channels in Japan. For the full year, Asia sales were up 11%, exceeding its 2022 guidance of mid to high-single digits. Latin America adjusted earnings were $181 million, up 45% and up 51% on a constant currency basis. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19related deaths in Mexico were down significantly year-over-year.
In addition, the Chilean encaje, which had a positive 6% return in 4Q '22 versus 4% in the prior year and higher recurring interest margins, were positive contributors. These two favorable items were partially offset by lower variable investment income year-over-year. LatAm's top line continues to perform well as adjusted PFOs are up 20% year-over-year on a constant currency basis, and sales were up 22% on a constant currency basis, driven by growth across the region. EMEA adjusted earnings were $70 million, up 67% and up 112% on a constant currency basis, primarily driven by favorable underwriting versus Q4 of '21, which had elevated COVID-19-related claims, particularly in the U.K. This was partially offset by less favorable expenses year-over-year.
EMEA adjusted PFOs were up 2% on a constant currency basis, and sales were up 13% on a constant currency basis, reflecting solid growth across the region. MetLife Holdings adjusted earnings were $208 million, down 57%. This decline was primarily driven by lower variable investment income. In addition, less favorable expense margins and adverse equity market performance also reduced adjusted earnings year-over-year. Corporate and Other adjusted loss was $219 million versus an adjusted loss of $177 million in the prior year, which excludes favorable notable tax items of $140 million. Higher taxes and lower net investment income were partially offset by lower expenses year-over-year. The company's effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits primarily related to the settlement of an IRS audit.
Excluding these favorable items, the company's effective tax rate was approximately 22%, within our 2022 guidance range of 21% to 23%. On Page 5, this chart reflects our pretax variable investment income for the four quarters and full year of 2022. VII was $24 million in the fourth quarter. The private equity portfolio, which makes up the bulk of the VII asset balances, had a negative 0.3% return in the quarter. As we have previously discussed, private equities generally accounted for on a one quarter lag. For the full year, VII was $1.5 billion, below our 2022 target range of $1.8 billion to $2 billion. Our private equity portfolio had a positive 7% return in 2022, a solid performance in comparison to the public equity markets with the S&P 500 down 19%.
While VII underperformed in 4Q '22, our new money rate increased to 5.66%, which was 150 basis points above our roll-off yield of 4.16%. On Page 6, we provide VII post-tax by segment for the four quarters and full year 2022. On a full year basis, you will note RIS MetLife Holdings in Asia continue to earn the vast majority of variable investment income, consistent with the higher VII assets in their respective investment portfolios. VII assets are primarily owned to match longer-dated liabilities, which are mostly in these three businesses. Turning to Page 7. This chart shows the comparison of our direct expense ratio over the prior eight quarters and full year 2021 and 2022. Our direct expense ratio in 4Q of '22 was elevated at 13.1%, reflecting the impact from seasonal enrollment costs in Group Benefits, as well as higher employee-related costs and timing of certain projects.
That said, as we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results. For the full year of 2022, our direct expense ratio was 12.2%, below our annual target of 12.3%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment while continuing to make investments in our businesses. I will now discuss our cash and capital positions on Page 8. Cash and liquid assets at the holding companies were approximately $5.4 billion at December 31, which was up from $5.2 billion at September 30 and remained above our target cash buffer of $3 billion to $4 billion. The sequential increase in cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $600 million in the fourth quarter as well as holding company expenses and other cash flows.
For the 2 year period, 2021 to 2022, our average free cash flow ratio, excluding notable items, totaled 68% and was within our 65% to 75% target range. In terms of statutory capital for our U.S. companies, we expect our combined 2022 NAIC RBC ratio will be above our 360% target. Preliminary 2022 statutory operating earnings for our U.S. companies were approximately $2.6 billion, while net income was approximately $3 billion. We estimate that our total U.S. statutory adjusted capital was $18.3 billion as of December 31, 2022, a decrease of 3% sequentially, primarily due to derivative losses and dividends paid, partially offset by operating earnings and investment gains. Finally, while our Japan solvency margin ratio dipped below 500% as of September 30, we expect the Japan SMR to be approximately 700% as of December 31, which will be based on statutory statements that will be filed in the next few weeks.
As we have discussed on prior calls, our Japan business as well as MetLife overall does better economically in a higher interest rate environment. However, given the asymmetrical nature of how the SMR is calculated, the ratio declines in a rising rate environment as assets are mark-to-market, but not the corresponding liabilities. As a result, we executed an internal reinsurance transaction in December with our Bermuda entity, which has an economic-based solvency regime. This transaction improved the Japan SMR ratio by approximately 250 percentage points. Before I shift to our near-term outlook, starting on Page 9, a few points on what we included in the appendix. The chart on Page 15 reflects new business value metrics for MetLife's major segments from 2017 through 2021.
This is the same chart that we showed as part of our 3Q '22 supplemental slides, but we felt it was worth including again for the sake of completeness. Also, Pages 16 through 19 provide interest rate assumptions and key outlook sensitivities by line of business. Turning back to Page 9, our 2023 to 2025 outlook reflects the impacts of the new accounting requirements of long-duration targeted improvement or LDTI. While 2022 actually used for growth rate calculations remain as previously reported on a pre-LDTI basis. In mid-April or roughly two to three weeks prior to the reporting of our 1Q '23 earnings, we plan to provide you with a recasted QFS based on LDTI for each of the quarters in 2022. While there would be certain positive and negative effects depending on product and segment, we do not expect the underlying run rate of adjusted earnings for the firm overall to change materially.
Now let's turn to Page 10 for further details on our near-term outlook. We assume COVID-19 to be endemic, consistent with the recent trends that we have been experiencing. We expect continued uncertainty to persist around inflation and a potential recession in 2023. Based on the 12/31/22 forward curve, we expect interest rates to rise in 2023. Finally, for purposes of the near-term outlook, we assume a 5% annual return for the S&P 500 and a 12% annual return for private equity. This is consistent with our long-term historical returns for PE. Moving to near-term targets. We are increasing our adjusted ROE range to 13% to 15%. This increase of 100 basis points from our prior 12% to 14% ROE range is a function of the growing impact of our mix of business and higher new business returns over the last several years as well as the impact of LDTI.
We expect to maintain our 2 year average free cash flow ratio of 65% to 75% of adjusted earnings, excluding total notable items. Our direct expense ratio guidance for 2023 is being recalibrated to reflect LDTI by approximately 30 basis points to 12.6%. This captures an approximate $1 billion reduction in adjusted PFOs, excluding PRTs, due to the change in accounting. This is primarily related to certain annuity contracts within RIS as well as shifting certain variable annuity fees to market risk benefits, which are reported outside adjusted earnings. Since this change in accounting to LDTI will be retroactively applied back to the beginning of 2021, our previously reported direct expense ratios will likewise be recalibrated to put 2021 and 2022 on the same basis as 2023 and beyond.
Our VII for 2023 is expected to be approximately $2 billion after applying our historical average returns on asset balances. I'll provide more detail on VII in a moment. Our Corporate and Other adjusted loss target is expected to remain at $650 million to $750 million after tax in 2023. We are increasing our expected effective tax rate range by 1 point to 22% to 24% to reflect our expectation for higher earnings in foreign markets and lower tax credits in the U.S. At the bottom of the page, you'll see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near term. On Page 11, the chart reflects our VII average asset balances from $14.7 billion in 2021 to $19 billion expected in 2023.
Private equities will continue to hold the vast majority of our VII asset balances. We are applying our historical annual returns for each asset class within VII. In addition to the PE annual return of 12%, we expect an annual 7% return for real estate and other funds. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII. So now I will discuss our near term outlook for our business segments. Let's start with the U.S. on Page 12. For Group Benefits, excluding the excess premium from participating group life contracts of approximately $750 million in 2022, adjusted PFOs are expected to grow at 4% to 6% annually. Regarding underwriting, we expect the Group Life mortality ratio to be between 85% to 90%.
We are also maintaining the expected group non-medical health interest adjusted benefit ratio at 70% to 75%. Keep in mind, these are annual ratios and are typically higher in the first quarter for both Group Life and Non-Medical Health given the seasonality of the business. For RIS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread and fee-based businesses. We are increasing the range of our expected annual RIS investment spread by 40 basis points to 135 to 160 basis points in 2023. The majority of this increase is driven by continued expectations of rising interest rates on the short end of the curve and the resulting benefit of interest rate cap income, which we expect to peak in the first half of 2023.
In addition, LDTI will contribute approximately 10 basis points to the investment spread calculation while not increasing adjusted earnings. Upon transition to LDTI, the unlocking of future cash flow assumptions to current best estimate increased our deferred profit liability, which is amortized into earnings and will now be included in the spread calculation, reducing other sources of earnings. Overall, the conversion to LDTI will not significantly change RIS run rate adjusted earnings. For MetLife Holdings, we are expecting adjusted PFOs to decline 12% to 14% in 2023, driven by the normal runoff of the business, market declines and the transition to LDTI. Beyond 2023, we expect annual PFOs to decline 6% to 8%. We are lowering the life interest adjusted benefit ratio target to 40% to 45% in 2023 from the prior 45% to 50% target to reflect the impact of lowering policyholder dividend levels.
Finally, we are maintaining the adjusted earnings guidance of $1 billion to $1.2 billion in 2023. Now let's look at the near-term guidance of our businesses outside the U.S. on Page 13. For Asia, we expect the recent sales momentum to continue and generate mid to high-single-digit growth on a constant currency basis over the near term. In addition, we expect general account AUM to maintain mid-single-digit growth on a constant currency basis. We expect Asia's adjusted earnings, excluding $270 million of COVID-19 claims in 2022, to grow at mid-single digits over the near term. For Latin America, we expect adjusted PFOs to grow by low double digits over the near term. We expect our adjusted earnings to grow high single digits over the near term, excluding roughly $80 million due to favorable market-related factors in 2022.
Finally, for EMEA, we are expecting sales and adjusted PFOs to grow mid to high single digits on a constant currency basis over the near term. We expect EMEA run rate adjusted earnings to be roughly $55 million per quarter in 2023, reflecting the impact of currency headwinds and then grow by high single digits in 2024 and 2025. Let me conclude by saying that MetLife delivered a good quarter to close out another strong year, reflecting the strength of our business fundamentals, solid top line growth, favorable underwriting and ongoing expense discipline. While private equity returns were down this quarter, core spreads remained robust. In addition, results in our market-leading franchises, Group Benefits and Latin America continued their strong growth and recovery.
Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build sustainable value for our customers and our shareholders. And with that, I will turn the call back to the operator for your questions.
Q - Erik Bass: Hi. Thank you. So we've recently seen an increase in the number of layoffs announcements, particularly from larger employers. So I was just hoping you could talk about what you're seeing from your clients, particularly in the group business and then what you're assuming for employment and wage inflation in your 4% to 6% PFO growth outlook?
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