MetLife, Inc. (MET) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the special conference call to discuss MetLife's Risk Transfer Transaction. [Operator Instructions] As a reminder, this conference is being recorded. With that, 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 forecast 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. Now I'll turn the call over to Michel.

Thank you, John. Good morning, everyone, and 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 $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. 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 & Home business, our operations in Poland and Greece and now today's risk transfer deal. To arrive at this transaction, we've moved forward from a position of strength , and 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 and 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. In addition, this agreement is grounded with a strong counterparty and 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. And 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, and 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. Now 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. Also, 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. However, we expect the transaction to be accretive to adjusted earnings per share and a positive contributor to our adjusted ROE target of 13% to 15%. In addition, we are maintaining our enterprise average 2-year free cash flow ratio of 65% to 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 and meeting our customer obligations will remain an overriding priority. And 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. And with that, I will turn the call back to the operator for your questions.

[Operator Instructions] We'll go to the line of Tom Gallagher with Evercore.

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?

Tom, at a high level, I'll just remind that 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. And in the absence of appropriate risk-adjusted hurdle rate clearing options, we return it to shareholders. As we've said, our Board has approved an additional $1 billion for our buyback authorization, which brings the total to $4 billion. So that's sort of indicative of our direction of travel here. When we've established authorizations in the past, we've been deliberate and consistent in terms of bringing them down. But 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. So the -- I guess my follow-up is, how big of a part of the overall block was the SGUL piece of the total? And then secondly, what about variable annuities, is that still something you're considering doing risk transfer on within MetLife Holdings? Or -- and why life insurance not VA, was the life insurance transaction and life insurance and fixed annuity just a better value for you at this point?

There was like 5 questions, Tom. But..

Subparts and parts.

Okay. Let me just try to hit your first one on ULSG. So it's about 4 of the 14 ends up being roughly half of our exposure on ULSG. So just to give you a sense, we have, give or take, $8 billion of reserves This transaction brings it down to 3.7%, which is what's remaining. So a little over 50% of exposure there. Yes, look, I think it goes back to just maybe Michel's opening comments around just the position we come from with regards to this is, this isn't something we have to do. This is an opportunity. And I think that's probably the same -- the way we look at all the blocks there. We're very comfortable running these businesses on ourselves. But if there's an opportunity that makes sense, and it allows us to appropriately release capital reserves, then we'll transact. And there's a lot of other considerations with that. So that's probably how I'd answer your question around just why this versus something else. And 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. And at the same time, if we see there's a transaction that makes sense for our stakeholders, we'll do that.

We'll go next to the line of Jimmy Bhullar with JPMorgan.

So 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 block.

Jimmy, it's John. Thanks for the question. The answer is all risk is transferred. So it's 100% transfer, including YRT risk that goes to 100% as part of the deal.

And then obviously, you've been trying to wind down the MetLife Holdings division for a while. And on LTC, which wasn't part of this deal, is it fair to assume that the bid-ask spread is still fairly wide because people have been optimistic about deals for LTC for the last decade and nothing major has happened. But has the environment for LTC offloading improved? Or is it still unrealistic to assume something in the sort of near-to-intermediate term?

Yes. It's -- I don't think there's a big improvement or much improvement at all in that space, at least as in terms of how we might look at it. Again, we feel comfortable with our reserving practices, our assumptions, how we manage the block, our expertise. So 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, 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 incoming questions around LTC.

And 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 now that you -- from now on? Or would it be later in the year?

Yes. I mean I would just say, Jimmy, that we're going to follow our normal practice here. So we'll assess. And as we've, I think, demonstrated in the past, post divestitures, we are deliberate and expeditious. So I think same here.

We'll go next to the line of Eric Bass with Autonomous Research.

Can you talk about the composition of the asset portfolio that will be transferred in the transaction?

Erik, it's John. So generally, it's a represented sample of our -- of the assets that we have. You can't really transfer PEs a little harder, so that doesn't move around. But other than that, I'd say it's -- there's a component of every asset class in general representation.

Got it. So sort of no change to VII then presumably, but some of your mortgage loan portfolio may transfer?

Yes. We -- there's no private equity to move that just is a more complicated setup. There are private assets that moved and . But it's -- I would say it's marginal on the private side and including commercial mortgages.

And then can you just talk about the breakdown of the remaining liabilities in MetLife Holdings after this transaction?

Sure. So just rough justice here. We have, call it, 40-ish of VA liabilities, maybe double that if you include then the closed block, right, and those liabilities and then there's obviously LTC, which is in the -- just above the 15 range. And then there's some more -- open block life insurance policies term, kind of ordinary life insurance.

We'll go next to the line of Tracy Benguigui with Barclays.

The other deals that I have seen where a life insurer had on the block deal with ULSG that's co-marketed with fixed annuities. That actually resulted in a negative feed, and you guys got a nice positive feed. 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 that block?

Tracy, thanks for the question. I think as we've said in the past and over the course of other calls regarding these blocks, these all have positive margin. I can't speak to others and how they kind of managed or -- but there's differences in product features, obviously, the assumptions you use and even kind of the riskier, if you will, of the policies, I guess -- perceived riskier of the ULSG we had positive margin across the block there so.

Okay. And then just maybe adding to the conversation on capital. You're maintaining your free cash flow target of 65% to 75%. I'm wondering if you can unpack that a little bit. Are you considering any type of credit downturn scenario when you're setting that target.