MetLife Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2024

There are 13 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

Operator

Before we get started, I refer you to the cautionary note about 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. Please go ahead.

Speaker 1

Thank you, operator. Good morning, all. We appreciate you joining MetLife's Q2 2024 Earnings Call. Before we begin, I 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.

Speaker 1

Other members of senior management are also available to participate. We released our supplemental slides last night, and they are available on our website. John McCallion will speak to them in his prepared remarks. An appendix to the slides features disclosures, GAAP reconciliations and other information for your review. Q and A will follow prepared remarks and will end just before the top of the hour.

Speaker 1

As a reminder, please limit yourself to one question and one follow-up. Now to Michel.

Speaker 2

Thank you, John, and good morning, everyone. We're very pleased with the Q2 results that we posted last night and believe the quarter clearly reflects MetLife's core strength, including the momentum across our businesses and the greater predictability of our performance achieved through our consistent execution. The expectations we shared about our performance came to pass in the 2nd quarter, in line with our forecasts and in some cases even better. After normal seasonal impacts in the Q1, the performance of our flagship group benefits franchise shone through in the 2nd quarter. Variable investment income or VII performed in line with the expectations we laid out in the Q1, with the recovery in private equity returns partially offset by the performance of real estate funds, which saw significantly narrower losses in the Q2.

Speaker 2

The broad diversification of our businesses has proven to be a fundamental strength for MetLife, creating many natural offsets and allowing us to generate growth while navigating the tides of shifting business and economic dynamics. And our ability to generate strong recurring cash flow, coupled with our discipline to apply capital to its highest and best use, enables us to drive sustained long term value for our shareholders. In the second quarter, we reported adjusted earnings of $1,600,000,000 or $2.28 per share, up 18% from the prior year period. This strong result was driven by favorable underwriting, good volume growth and higher variable investment income led by the positive performance I just mentioned. In total, net income in the 2nd quarter was $912,000,000 substantially higher than $370,000,000 in the prior year period.

Speaker 2

Strong adjusted earnings growth, aided by our unwavering focus on execution, generated outstanding results measured by several of our key performance metrics. MetLife posted a 17.3% adjusted return on equity in the quarter, well above our target range of 13% to 15%, and a powerful example of our ability to efficiently deploy capital and generate profitable growth for our shareholders. MetLife's direct expense ratio in the Q2 was 11.9%, an improvement year over year and below our 12.3% annual target. As we have noted before, the positive leverage in this ratio is not only a measure of our ability to control costs, but also our capacity to grow revenue at a faster rate than expenses. In the Q2, both top line growth and lower direct expenses were contributors to our excellent quarterly expense ratio.

Speaker 2

When we established our next horizon strategy almost 5 years ago, it was supported by the interconnected foundational pillars of focus, simplify and differentiate. Our success in executing against our focus pillar is evident in the high teen internal rates of return we achieve on new business and our strong enterprise wide return on equity. Similarly, our success in executing against our simplified pillar manifests in our improving expense ratio. Our drive to execute against our differentiate pillar is essentially funded by the success we've achieved through our focus and simplify pillars. When we activated Next Horizon, we committed to free up $1,000,000,000 of expense capacity to invest in growth initiatives and technology.

Speaker 2

And we have done so, matching both sides of this equation. This shows up in dozens of internal technology initiatives that are making it easier for customers to purchase our products as well as for them to receive their benefit and retirement payments. We see our capacity to invest in technology at MetLife's scale as a true differentiator relative to our competitors, which we believe will only get more impactful over time. There are many tools in our toolbox that will help drive this advantage forward, including artificial intelligence or AI. From our standpoint, we believe MetLife's large pool of data puts us in an advantage position with AI having the potential to act as a force multiplier and further widen the divide in our favor.

Speaker 2

Yet, this is not just future talk. AI has been part of our playbook at MetLife for years and we are seeing many initiatives move patient to implementation to create seamless and personalized customer experiences, improve decision making, and empower employees to focus on purposeful work. Be assured, we understand the power of AI commands great responsibility. With that in mind, we are at the vanguard of this topic and we'll be issuing our policy on the responsible use of AI in the Q3. Shifting to our business segment results, our leading Group Benefits business reported adjusted earnings of $533,000,000 representing an all time quarterly record as group life mortality experience snapped back from the seasonally impacted Q1.

Speaker 2

Group life mortality registered a benefit ratio of 79.1% in the 2nd quarter. For the year to date period, the group life benefit ratio is now firmly at the lower end of our annual target range of 84% to 89%. Our growth strategy in the attractive group benefit space is twofold. On a national accounts basis, employers with greater than 5,000 employees, we are driving penetration across employer groups via new product and greater employee participation. On a regional accounts basis, employers with less than 5,000 employees, we are seeking to accelerate growth via a more refined distribution focus, a broader suite of products and by attacking white space, the absence of any employer offered benefits.

Speaker 2

Across both avenues of growth, national and regional, increasing enrollment and utilization of voluntary products are primary elements of boosting sales and margins. Moving to RIS, business momentum was evident in our Retirement and Income Solutions segment, which enjoyed several notable wins. These included 2 jumbo pension risk transfer deals totaling $3,500,000,000 a $2,200,000,000 stable value addition as well as $3,300,000,000 of UK longevity reinsurance, underscoring the breadth of our liability origination in this segment. Beyond these wins, we continue to see strong flow for structured settlements where we are the market leader with more than $700,000,000 sold in the Q2. In Asia, we enjoyed solid growth across a range of metrics.

Speaker 2

While sales in Japan have been impacted by currency fluctuations, assets under management in Asia continued to grow, rising 5% on a constant currency basis in the quarter. Outside of Japan, sales were up 60% on the strength of a large group sale in Australia. Looking to Latin America, top line and bottom line results were strong again despite some currency headwinds. Adjusted premiums, fees and other revenues were up 12% on a constant currency basis, pointing to sustained business momentum in Mexico, Chile and Brazil. EMEA adjusted earnings rose 10% year over year on strong volume growth and higher recurring interest margins.

Speaker 2

Adjusted PFOs were up 12% on a constant currency basis due to strong sales across the region. Our business in EMEA is an example of our efficiency mindset at work. We simplified the structure of our business and refocused it on protection products with strong free cash flow producing positive tangible results. Moving to capital and cash, MetLife is well capitalized and our capacity to generate strong recurring free cash flow allows us to meet our commitments and provides flexibility to proactively seize attractive growth opportunities. And in the absence of compelling M and A opportunities, we will return capital to our shareholders.

Speaker 2

We were active on the capital management front in the 2nd quarter from both an equity and debt standpoint. We paid common stock dividends of roughly $400,000,000 reflecting a 4.8% increase to our common stock dividend per share. We also bought back around $900,000,000 of our common shares in the 2nd quarter and repurchased about another $270,000,000 worth in July. This brings total common stock repurchased for the year through July to about $2,300,000,000 We still have roughly $2,800,000,000 remaining on our board authorization. From a debt standpoint, we paid off or redeemed approximately $1,500,000,000 of debt and issued $500,000,000 of senior debt.

Speaker 2

We have now largely pre funded our 2025 maturing debt issues. And finally, at the end of the second quarter, we had $4,400,000,000 of cash and liquid assets at our holding companies, which is above our target cash buffer of $3,000,000,000 to $4,000,000,000 Turning to our recently published sustainability report, MetLife operates within a virtuous circle comprised of our customers, our people, our communities and our shareholders with the objective of delivering long term value to each of these stakeholders. Perhaps nowhere is the success of these efforts more evident than in the pages of our annual sustainability report and can be found on MetLife's website. In it, you'll see highlights of our efforts to build more confident futures for our stakeholders and updates on our sustainability commitments. Among our many successes, I am pleased to mention that the MetLife Foundation has surpassed $1,000,000,000 in total giving in its history.

Speaker 2

As a 156 year old company and the intent to log another 156 years more, sustainability is an essential part of MetLife's heritage. As I close, one of the objectives of our next horizon strategy was to emerge as a stronger, more predictable company. As we approach the finish line of that 5 year strategic cycle, we are on track to accomplish, if not exceed, each of the key targets and objectives we laid out relative to distributable cash, operating leverage and return on equity. As I have said before, we do not stand still here at MetLife. We constantly look for opportunities to raise the bar and challenge ourselves further, pursuing these new challenges with passion and enthusiasm.

Speaker 2

We are hard at work developing and pressure testing our next 5 year strategy, which we are calling New Frontier. This will build on the core pillars of next horizon, while looking to accelerate growth, boost returns and foster consistency. The first stop on this journey will begin with our annual Board strategy review in September. Subsequently, I look forward to sharing with you our plans for the future at our Investor Day scheduled for December 12 this year. Now I'll turn it over to John to cover our quarterly performance in more detail.

Speaker 3

Thank you, Michelle, and good morning. I'll start with the 2Q24 supplemental slides, which provide highlights of our financial performance and an update on our liquidity and capital position.

Speaker 4

Starting on

Speaker 3

Page 3, we provide a comparison of net income to adjusted earnings in the Q2. We had net derivative losses, primarily due to the strengthening of the U. S. Dollar versus the yen as well as higher interest rates. That said, derivative losses were partially offset by market risk benefit or MRB remeasurement gains due to the higher interest rates and stronger equity markets.

Speaker 3

Net investment losses were mainly the result of normal trading activity for fixed maturity securities in a higher rate environment. Overall, the investment portfolio remains well positioned, credit losses continue to be modest and our hedging program performed as expected. On Page 4, you can see the 2nd quarter year over year comparison of adjusted earnings by segment, which do not have any notable items in either period. Adjusted earnings were $1,600,000,000 up 9% and 11% on a constant currency basis. Favorable underwriting, volume growth and higher variable investment income drove the year over year increase.

Speaker 3

This was partially offset by lower recurring interest margins. Adjusted earnings per share were $2.28 up 18% and up 20% on a constant currency basis. Moving to the businesses, Group Benefits adjusted earnings were $533,000,000 up 43% year over year, primarily due to favorable underwriting margins. The group life mortality ratio was a record low of 79.1%, well below our annual target range of 84% to 89%, driven by favorable experience across all coverages. The strong Group Life results mirror the notably low number of U.

Speaker 3

S. Deaths between the ages of 2564 in April May according to CDC data. Regarding non medical health, the interest adjusted benefit ratio was 70.8% in the quarter toward the bottom end of our annual target range of 69% to 74% and below the prior year quarter of 73.7%. Favorable disability results benefited from a reserve adjustment of approximately $30,000,000 after tax. Turning to the top line, Group Benefits adjusted PFOs were up 3% year over year.

Speaker 3

Taking participating contracts into account, which dampened growth by roughly 200 basis points, the underlying PFOs were up approximately 5% year over year and at the midpoint of our 2024 target growth range of 4% to 6%. Group Benefits 2Q 2024 year to date sales were up 11%, driven by strong growth across most products, including our suite of voluntary products. RES adjusted earnings were $410,000,000 down 2% versus the prior year. Lower recurring interest margins were partially offset by higher variable investment income and strong volume growth. RES investment spreads were 121 basis points, down 6 basis points sequentially, mainly due to the expiration of interest rate caps in the Q2 of 2024.

Speaker 3

We anticipate that spreads will remain between our annual target range of 115 basis points and 140 basis points in the 3rd quarter. Although we foresee an increase in variable investment income, it will likely be balanced out by reduced earnings from the expiration of the interest rate caps. RIS adjusted PFOs excluding pension risk transfers were up 4% year over year, primarily driven by strong sales of institutional income annuities as well as growth in UK longevity reinsurance. With regards to PRT, we had approximately $3,500,000,000 in deals in the 2nd quarter and continue to see an active market. Moving to Asia, adjusted earnings were $449,000,000 up 4% 8% on a constant currency basis, primarily due to favorable underwriting margins and higher variable investment income.

Speaker 3

For Asia's key growth metrics, general account assets under management on an amortized cost basis were up 5% year over year on a constant currency basis. Sales were up 4% on a constant currency basis compared to a strong prior year quarter, while Japan sales were down 19% year over year on a constant currency basis, primarily due to the impact of yen volatility on foreign currency products. This was more than offset by strong sales growth of 60% in the rest of the region, including a large group case in Australia. Latin America adjusted earnings were $226,000,000 up 3% on a reported basis and 8% on a constant currency basis, primarily driven by solid volume growth across the region and favorable underwriting. CAHE returns of a negative 2.4% in Q2 of 2024 compared to a positive 1.4% in Q2 of the prior year.

Speaker 3

Latin America's top line continues to perform well as adjusted PFOs were up 9 percent or 12% on a constant currency basis, driven by growth across the region. EMEA adjusted earnings were $77,000,000 up 10% and 20% on a constant currency basis, driven by volume growth and higher recurring interest margins. This was partially offset by less favorable expense margins year over year. EMEA adjusted PFOs were up 7% 12% on a constant currency basis and sales were up 31% on a constant currency basis, reflecting strong growth in Turkey, the Gulf and the UK. MetLife Holdings adjusted earnings were $153,000,000 down 27% versus the prior year quarter.

Speaker 3

The primary driver was the foregone earnings due to the reinsurance transaction that closed in November. Corporate and other adjusted loss was $220,000,000 versus an adjusted loss of $228,000,000 in the prior year. The company's effective tax rate on adjusted earnings in the quarter was approximately 24% and within our 2024 guidance range of 24% to 26%. On Page 5, this chart reflects our pretax variable investment income for the prior 5 quarters, including $298,000,000 in Q2 of 2024. Private equity portfolio, which makes up the vast majority of the VII asset balance, had a positive 2.3% return in the quarter, while our real estate equity funds had a negative 1.4% return in the quarter.

Speaker 3

As a reminder, both private equity and real estate equity are reported on a 1 quarter lag. Looking ahead, we expect VII returns to continue to improve over the course of the second half of the year. On Page 6, we provide VII post tax by segment for the last 4 quarters and the Q2 of 'twenty 4. As you can see in the chart, Asia, RIS and MetLife Holdings continue to hold the largest proportion of VII assets given their long dated liability profile. Now turning to Page 7.

Speaker 3

The chart on the left of the page illustrates the split of our net investment income between recurring and VII for the last 3 years, including 2nd quarters of 2023 2024. Adjusted net investment income in Q2 of 2024 was up $120,000,000 year over year. Recurring investment income has benefited from higher interest rates, partially offset by the roll off of interest rate caps. In addition, we have seen VII improvement driven by higher private equity returns. Turning your attention to the right side of the page, this shows our new money yield versus roll off yields since Q2 of 2021.

Speaker 3

Over the last 9 quarters, new money yields have outpaced roll off yields consistent with higher interest rates. In the Q2 of 2024, our global new money rate achieved a yield of 6.27%, 63 basis points higher than the roll off rate. We anticipate that the new money yields will remain above roll off yields given the prevailing interest rate environment. However, the spread can fluctuate depending on the mix of sales across our businesses. Now moving to expenses discussed on Page 8.

Speaker 3

This chart shows a comparison of our direct expense ratio for full year 2023 of 12.2% and the 1st 2 quarters of 24, both at 11.9%. 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. Our Q2 direct expense ratio benefited from solid top line growth and ongoing expense discipline. Looking ahead, we would expect our direct expense ratio to be higher in the second half of the year consistent with the seasonal nature of our business. That said, our performance year to date positions us well to achieve a full year 2024 direct expense ratio of 12.3% or below, demonstrating our consistent execution and a sustained efficiency mindset.

Speaker 3

I will now discuss our cash and capital positions on Page 9. Cash and liquid assets at the holding companies were $4,400,000,000 at June 30, which is above our target cash buffer of $3,000,000,000 to $4,000,000,000 but down from $5,200,000,000 at March 31. The sequential decline in holding companies cash is primarily a result of approximately $1,500,000,000 used in April for a debt maturity and a debt redemption, partially offset by a $500,000,000 senior debt issuance in June. Beyond this, cash of the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend and share repurchases of roughly $900,000,000 in the 2nd quarter as well as holding company expenses and other cash flows. In addition, we have repurchased shares totaling approximately $270,000,000 in July.

Speaker 3

For our U. S. Companies, preliminary Q2 year to date 2024 statutory operating earnings were approximately $1,900,000,000 essentially flat year over year, while net income was approximately $1,300,000,000 We estimate that our total U. S. Statutory adjusted capital was approximately $18,000,000,000 as of June 30, down 2% from March 31, 2024, primarily due to dividends paid and derivative losses, partially offset by operating earnings.

Speaker 3

Finally, we expect the Japan solvency margin ratio to be approximately 6 70% as of June 30, which will be based on statutory statements that will be filed in the next few weeks. Before I wrap up, I would just like to highlight that we have an updated commercial mortgage loan slide as of June 30th in the appendix. Overall, the CML portfolio continues to perform as expected with attractive loan to value and debt service coverage ratios as well as the expectation of modest losses. In summary, the underlying strength of our business fundamentals was evident with strong top line growth, disciplined underwriting and prudent expense management. Our Group Benefits segment achieved record earnings.

Speaker 3

Higher interest rates continue to support flows and spreads, and we continue to see improvement in variable investment income. MetLife continues to move forward from a position of strength with a strong balance sheet and a diversified set of market leading businesses generating solid recurring free cash flow. And we are committed to deploying this free cash flow to achieve responsible growth and build long term sustainable value for our customers and our shareholders. And with that, I'll turn the call back to the operator for your questions.

Speaker 5

Thank you.

Operator

We will now begin the question and answer session. We'll go to our first question from Tom Gallagher at Evercore.

Speaker 4

Good morning. Wanted to ask a couple on the Group Benefits business. First is, can you just unpack the non medical health results? How were how was the underlying disability versus dental? And where also can you just comment on pricing maybe on both of those products and how you think about renewals?

Speaker 4

Thanks.

Speaker 6

Sure, Tom. Good morning. It's Rami Tadros here. So I think just from a headline ratio perspective, just to reference John's remarks, the overall ratio of 70.8%, you want to just normalize that for 1 off non recurring reserve adjustment. So that gets you back into kind of the 72.2 range.

Speaker 6

So on your question on dental and disability. So in the Q2 for dental, we did see utilization rates come down from the Q1. And what you're seeing here is just normal seasonality in that business and where Q1 tends to be heavier in terms of utilization as these benefits reset typically at the beginning of the year. And in terms of how we think about dental and dental pricing going forward, if you step back from the current quarter, as you know, Dental is an inflationary product, and we do deploy a number of levers to ensure we manage and stay within our target margins. And the 2 I would highlight here is that the majority of our claims come within our network, which gives us a greater line of sight and control over margin.

Speaker 6

And the other key lever here is renewal pricing. And this is a business where we remain disciplined in terms of our rate guarantee periods. And in aggregate, we can reprice about 80% of our book every year. And that's exactly what we've been doing. So we've been seeing overall trends in the last kind of call it year and a half tick up and we've seen pressure on margins because of that.

Speaker 6

And we've been taking appropriate action, pricing action across the entire block in response to that trend. At this stage, most of these actions are behind us. We've implemented them across the book and going forward, we'll continue to monitor the trend and take actions as necessary. But just think of that as more business as usual of how you manage an inflationary product like dental. On disability, I would say the underlying block is running very much in line with expectations.

Speaker 6

We see some slight increases in incidents, but severity has come down and we continue to still see very strong recoveries. And so the core business continues to be healthy and very much in line. And I would say just on renewals, in aggregate, we're hitting our target renewal pricing across the book and we're still maintaining very strong persistency here. So we feel pretty good about both the new business, both about the renewal pricing coupled with persistency and you clearly need to watch both in

Speaker 2

this business.

Speaker 4

Great. Thanks for that, Rami. And just my quick follow-up. How are you feeling about the level of competition in the market? We've heard about new entrants putting some pressure on sales and pricing.

Speaker 4

Are you guys seeing that or is it not affecting you in terms of margin and pricing?

Speaker 6

The short answer is that it's not affecting us. I would overall characterize the market as competitive, largely rational. You occasionally see aggressive pricing, but that is more of an outlier than the norm here, Tom. I mean, our perspective here is also informed by ongoing rigorous surveillance. We look at every single metric in the market on an ongoing basis.

Speaker 6

And I would say we have not seen any evidence of a change in the competitive environment. The key point here for us is, as we've always talked about before, we have positioned this business to compete on a range of factors, inclusive of price. So while price is important, the basis of how we compete extends to multiple factors beyond price. This is ultimately a scale business, capabilities matter, experience matter, product breadth matters and the ability to invest, which comes with scale also really matters. So some of the new entrants that you've referenced are pretty small in terms of their overall premium size.

Speaker 6

They largely operate at the very small end of the market with network capabilities and we haven't seen any meaningful impact or say any impact on our book from those new competitors.

Speaker 4

Great. Thanks.

Operator

We'll move next to Suni Komath at Jefferies.

Speaker 7

Thanks. Good morning. Maybe just to follow-up on Group Benefits. The earnings power of this business has improved pretty substantially. I mean, normally think about this as maybe a $400,000,000 business and excluding the reserve release, you're over $500,000,000 Is that a sort of a sustainable level of earnings power for this business?

Speaker 7

Or is there anything that we should be thinking about that maybe broke the right way in the quarter?

Speaker 6

Yes. Good morning. It's Rami here again. I think the one item I would point to here is the group life ratio. This is a historical low for us.

Speaker 6

It's mainly driven by lower volume. And the lower volume, if you step back and look at the CDC data, in terms of the all cause death in the U. S. Population, that has come down significantly in the Q2 as well. So I would say that's the one here that was tailwind in the quarter, which we're pleased with.

Speaker 6

But if you think about our expectations on a go forward basis, we think mortality will kind of moderate back in line with historical levels. You'll still see the seasonality that you see in this business. And so a better view of that on a run rate basis, I'll bring you back to our guidance range. And if you look at that on a year to date basis, we're about 84.7%. So I think that's the one that you want to kind of look out for in terms of the I would say the one item this quarter, which was material, which gave us a bit of a tailwind here.

Speaker 7

Got it. That makes sense. And then I guess on RIS, in terms of the spreads, I mean, I think last quarter you guided to maybe 8 to 10 bps of sequential compression. I think it came in much better than that. So just curious, what you'd attribute that to?

Speaker 7

And then how should we be thinking about the progress of that spread as we kind of transition to 3Q and then ultimately 4Q?

Speaker 3

Yes. Thanks, Suneet. It's John. Good morning. So as you mentioned, so in the quarter, we came at 121 basis points.

Speaker 3

That was within the 115 basis points to 140 basis points guidance. And then if you exclude VII, it was 119 basis points. And so a couple of things, right? We saw continued improvement in VII in the quarter. As you mentioned, we expected a decline from Q1 as a result of lower recurring interest margins due to the roll off of the interest rate caps.

Speaker 3

And we did anticipate it to be 8% to 10%. It came in less, and it's primarily due to higher than expected interest rates, which we took advantage of during the course of the quarter. And so it was a little better than we thought. Having said that, I think our guidance that we gave last quarter is we continued to believe another 8% to 10% would occur during the course of Q3 on an ex VII as most of the remaining interest rate caps mature over the course of the next few months. And then we should see spreads stabilize in Q4.

Speaker 3

Most of the in the money interest rate caps purchased primarily during kind of pre and even in the COVID era matures by then. So that's kind of how I would kind of play out the rest of this year. And I think if you go back to what we said at the outlook call, which was we thought all in 2024 would show an all in spread similar to 2023. That's generally where we're trending towards.

Speaker 7

Okay. Thanks, John.

Operator

Next, we'll move to Ryan Krueger at KBW.

Speaker 5

Hey, thanks. Good morning. I guess on Japan, could you give some perspective on the sales environment there? I think you had it was a tougher year ago comparison, but you had some declines in sales. So just hoping to get a little more color on the different product areas there.

Speaker 8

Hey, Ryan, it's Lindon here. So let me give you some color on sales across Asia, including what we're seeing in Japan. So sales for the quarter grew 5%, including our divested operations in Malaysia. We also saw a 5% growth in assets under management. While Japan single premium FX sales were impacted by the yen weakness, We did see an offset when we look at across the rest of Asia.

Speaker 8

Japan sales were lower in the single premium U. S. Dollar products. But as you said, we're up against a tough comparative. In the Q2, the weaker yen did impact the overall market for the foreign currency products.

Speaker 8

And so if we look at the overall banker market, this market has shrunk, but we continue to maintain our share in this space. Look, we have a diversified portfolio and we are rebalancing between product mix between yen and U. S. Dollars. So if you look at the outlook for yen products, it has improved with the higher interest rates and also with them in positive macro environment that we're seeing in Japan.

Speaker 8

Now we have introduced a couple of new products, both the variable life as well as the cancer product earlier this year and they both have performed very well. We've got other product launches planned in the pipeline, some coming in later this year as well as at the beginning of next year. We've got strong growth in the rest of Asia and that's also contributing to the overall story. We saw solid performance in Korea, in China, in India and also strong year over year growth in all these countries. And then in the quarter in Japan, we benefited from a large group case, which came on risk in the second quarter.

Speaker 8

If we look at the outlook, first half actual sales were in line with the prior year and we expect a similar trend as we go through the second half. So given this, we expect full year sales for Asia to be flat year over year. Hope that helps.

Speaker 3

Yes. And I would just it's a large group case in Australia. I think you mentioned Japan, but

Speaker 8

Oh, sorry. Yes, in Australia.

Speaker 5

Thanks. One quick follow-up. I think you I think there's been some elevated surrender activity in Japan. Just any more info on that and to what extent has that impacted earnings in recent quarters?

Speaker 8

Yes. Now we did see some benefit in earnings. We saw a 4% increase in adjusted earnings on a reported as well as an 8% increase on a constant currency basis. Now this was driven both by favorable underwriting given by the surrenders as well as variable investment income. When you look at surrender activities, it was higher than expected in the quarter given we had the weaker yen as some customers choose to lock in some of the gains.

Speaker 8

And if we look at the VII in the quarter, Asia does get a higher allocation of real estate equity funds. And so in the quarter, we did see better performance in the real estate relative to the prior year. We've also had good expense management in the quarter and that's contributed to the stronger earnings. If you look at the outlook for the year, we expect full year earnings to remain strong in line with guidance. VII performance will continue to be a factor that will impact our earnings going forward.

Speaker 9

Thank you.

Speaker 5

We'll go next to Wes Carmichael at Autonomous Research.

Speaker 9

Hey, good morning. Thanks for taking the question. Maybe just focusing on Japan for a second, but with the SMR ratio around 6 70% in the quarter, could you maybe just give us an update regarding the transition to ESR in Japan, if there's been any material changes and how you're feeling about implementation at this point?

Speaker 3

Hey, Wes, it's John. Good morning. So as you mentioned, $670,000,000 is our estimate for the quarter. We'll file that in a few weeks. I'd just like to start out by saying no concerns around capital generation or dividends, right?

Speaker 3

And that ratio tends to have some asymmetrical impacts when rates rise. But as we know, the overall economic value of the businesses improve. So the other thing we saw in this quarter is it's generally a heavier cash out quarter for us. We have higher dividends. We pay taxes.

Speaker 3

So there's a little bit of timing there. And then as you mentioned, the new ESR comes into effect April 1, 2025. We'll report on that for the first time March 31, 2026. And that is more of an economic framework, one of which that we have typically managed this business. We've used economic as well as status.

Speaker 3

We think about like product pricing and development and things like that. So that's kind of a good place to start from. In addition, I'd say implementation is going well. We don't see any big issues. There's some a few items that we're just continuing to work through with the regulator.

Speaker 3

But even if those don't come to fruition, we can certainly manage, but we're hopeful to make some improvements to the kind of the current situation. All in, we're comfortable and I'd say supportive of moving from the SMR to the ESR.

Speaker 9

Thanks, John. And just maybe switching to the commercial mortgage loan portfolio. I think the loan to value ratio has deteriorated a little bit, lease and office quarter over quarter. But could you give us an update on your watch list, any loans that are in the foreclosure process? And if there's any properties where you might be expecting to take them on balance sheet?

Speaker 9

Thanks.

Speaker 3

Okay, great. Thanks, Wes. A lot in there to unpack, but let me just maybe start with my LTV. So as you mentioned, and we kind of forecasted this in the Q1. We thought a year prior, we had kind of given some peak to trough views.

Speaker 3

We thought it had another 10% broadly to go in some of this in more distressed areas. And as you know, when we go through our annual appraisal process, it happens throughout the year. We typically wait for the Q2. We find it hard to do it in the Q1 because we'd like to get financial information in our hands before we start that. So 2Q tends to be a heavy revaluation quarter.

Speaker 3

And so that's kind of what we saw happen generally in line with expectations. Overall, LTV ticked up a point overall, a couple of points more in office. And then as we look out for the rest of this year, probably the heavier ones were done in the Q2. We'll still see some, I'd say, modest deterioration, maybe another point overall in the second half and a little more, maybe a couple of points in office. Look, I think it's playing out as expected.

Speaker 3

Last year, we had write offs of roughly 20. We think this year, you're in kind of closer to maybe 100, but maybe below. So still modest. We had a little under $30,000,000 year to date so far and we think we're on track for kind of that kind of closer to $100,000,000 of write offs for the year, very well within kind of the modest area for us in terms of our capital and size and position. So again, we think the environment is despite the pressure, economic growth remains healthy and that's actually good news for real estate fundamentals.

Speaker 3

Despite office sector still probably has some kind of some work to do there, but you also have moderating construction pipeline, which is benefiting all properties. And so this is how this sector generally works out. It takes time. It doesn't happen overnight. You need to be well positioned going into it to be able to kind of manage through the kind of the pressure and the distress.

Speaker 3

And generally, the demand and supply factors typically work themselves out. So all in all, I think things are performing as expected for us and no change to our view.

Speaker 8

Thanks, Jeff.

Operator

We'll move next to Jimmy Bhullar at JPMorgan.

Speaker 10

Hey, good morning. My questions are mostly answered, but I just wanted to follow-up on a couple of points. First on Japan, the decline in sales that you saw, how much of that is just a function of comps and maybe the volatility in the yen depressing sales of ForEx products versus an uptick in competition or price reductions by competitors or other market dynamics that are causing you to actively pull back?

Speaker 8

Jimmy, it's Lindon here. So yes, look, we did have a tough comparative last year. I think sales in Japan were up over 40% when we look at last year. So that is driving a lot of the results this year. But we are also seeing a weaker yen and this has impacted the overall market for foreign currency products.

Speaker 8

The bank market, as I said, has declined, but we continue to maintain our market position over there. So I do think the volatility in the end is driving some of the decline we're seeing in sales.

Speaker 10

Okay. And then on RIS spreads, I think you've been clear that there's interest rate gaps that are expiring later this year or in the Q3, but should we assume that they'll stabilize in 4Q on a core basis ex VII? And then are there other puts and takes as you're thinking about spreads going into next year, whether it's caps or sort of maturity of blocks or anything else business coming out of surrender to period that would drive a shift in spread margins one way or the other?

Speaker 3

Hey, Jimmy, it's John. Good morning. Yes, as I was alluding to in kind of the opening remarks and earlier is that we do have another quarter of 8 to 10 bps is what we forecasted. Like I said earlier, we thought we were going to have 8 to 10 this quarter, but interest rates were a bit higher than we had assumed at the time we were discussing this in the Q1 and we took advantage of that and a few different things we could do. So then the remainder the most of the remaining interest rate cash roll off this quarter and then you should see stabilization.

Speaker 3

Also we're projecting VII to marginally increase each of the next two quarters as well kind of similar to the trend that we saw here. So that would be kind of the offset comment I'd make to you and then you should see some stabilization in the Q4. In terms of beyond that, we'll wait for outlook to go through that information.

Speaker 10

Okay. And then on competition in Japan, is it still rational or are you seeing any evidence of price reductions with the higher interest rates in that market?

Speaker 8

Look, I mean, it is a competitive environment. But I would say it's rational where we always see a player get more aggressive once in a while, but we continue to maintain our pricing discipline and our focus on profitability. We've got a very diversified distribution platform. We've got a wide range of products set to both yen as well as U. S.

Speaker 8

Dollar. We've got good investment origination capabilities along with strong internal reinsurance capabilities. So all this combined kind of puts us in a good position, allows us to differentiate and maintain our competitive position in the market.

Speaker 10

Thank you.

Operator

We'll go next to Elyse Greenspan with Wells Fargo.

Speaker 11

Thanks. Good morning. My first question, maybe starting on the PRT side, can you just give some color just on what you see in the pipeline for the back half of this year and just any change in the competitive market for that business?

Speaker 6

Good morning, Elyse. It's Ravi here. With respect to the pipeline, we're still seeing a pretty healthy pipeline here, particularly on the larger end of the market, which is where we focus and where we have advantages. And if you step beyond the next couple of quarters, there are just secular trends here that bode really well for us and how we're positioned. If you survey corporate DB plan sponsors and survey after survey including ours, they all point to a significant and rising proportion of those plan sponsors who are looking to de risk and transfer the risk.

Speaker 6

You also have a very large stock of corporate DB assets, dollars 3,000,000,000,000 if you look at the private market only. And you've got funding status that's pretty good, which makes all of these risk transfers a lot more affordable. So these will always be lumpy, but sitting here now looking at the rest of the year, we're seeing a pretty healthy jumbo pipeline. And we're also very pleased with what we've done this quarter. As you saw, we did $3,500,000,000 of PRT and we're clearly very pleased with our performance here.

Speaker 11

Thank you. And maybe the second question, on Asia, the earnings were pretty strong in the quarter. I think you guys called out favorable underwriting maybe in the prepared remarks. Anything just more to think about just kind of the run rate earnings within that segment and anything that stood out in the quarter?

Speaker 8

Yes. Hi, Elyse. It's Lindon here. As I said earlier, I mean, we're pleased with the overall results in Asia and for earnings in the quarter. We did see higher than expected surrender activity and that was driven by the weaker yen as some customers start to lock in their gains.

Speaker 8

And that was higher than expected in the quarter. In addition, we did see Asia does get a higher allocation of real estate equity funds. And in the quarter, we saw better performance in real estate relative to the prior year. So those 2 are sort of drivers for the strong earnings results in the quarter for Asia.

Speaker 11

Thank you.

Speaker 5

We'll take our next question from John Barnidge at Piper Sandler.

Speaker 9

Good morning. Thank you for the opportunity. With the capital regime change in Japan, is there an opportunity to broaden out the Bermuda platform, create more capital light model? Thank you.

Speaker 3

Hey, John, it's John. Good morning. I'll take that one. So look, I think that's something we've always had in place for quite some time. We actually have 2 Bermuda entities right now and we've had them for close to a decade in place.

Speaker 3

So it's a tool we have used and probably one that we have used successfully with some of our Japan products. I think ESR will allow you to reevaluate some of that and determine what's fit for purpose. And it's really we look at one of the factors we always consider as we kind of take our own internal economic model and think about what's a prudent level of capital and then we evaluate that relative to some of the jurisdiction requirements. So but certainly Bermuda has been and continues to be an optimization tool for us. And I think we'll continue to do that, not just and by the way, not just with Japan, sometimes we use it with other jurisdictions as well.

Speaker 9

Thanks for the answer, John. And my follow-up question is on the opportunity to leverage the large data that you have. Can you talk about the opportunity set? Is it about driving greater profitability or revenues or close rates of persistency? Thanks.

Speaker 2

Yes. Hi, John. It's Michel. Thanks for the question. So as I mentioned in my remarks, we've been investing in technology and capabilities and that's part of our sort of the efficiency mindset that we've built here, freeing up capacity to make those important investments.

Speaker 2

And the fact that we have size here, we have a lot of data obviously is an advantage because we're able to leverage this data. And I would say there are 3 areas where we've seen in some cases early signs and other cases more advanced signs of real impact on progress. 1 is around the customer experience. And again, if you think about that, very important in terms of meeting not only current, but future customer expectations, driving our competitive advantage. I think the other area where we're seeing a potential impact is around driving revenue growth.

Speaker 2

So technology and data can help drive that. And the 3rd area is around efficiency. And again here, we see significant opportunities. You can see from our direct expense ratio, which has come in at below the 12.3% guidance that we provided in the first half. And our expectation is that whereas we'll see sort of a pickup in the second half, which is typical, we will still expect to come in under the 12.3%.

Speaker 2

And I would say going forward, those investments that we're making and our ability to leverage data will continue to drive sort of a downward trend when it comes to that as well.

Speaker 9

Thank you for that.

Speaker 5

And we'll move next to Mike Ward at Citi.

Speaker 12

Thanks guys. Good morning. I was hoping to ask about holdings to your scheme. I'm curious how active those discussions are. Any kind of pressure or change in activity to execute before Fed cuts?

Speaker 12

Or is it agnostic to that? Any update?

Speaker 3

Hey, Mike. Good morning. It's John. Thanks for the question. I think I can't remember the last time we spoke about this, but I'd say that obviously we did the transaction back in November of last year.

Speaker 3

And I think the environment has continued to progress is the way I think we would put it. We are still in the same position today, which is that we don't we are continuing to meet with 3rd parties. We continue to explore opportunities. This needs to be kind of a win win, but there's no burning platform where we have to do something. So it's a real it's an opportunity.

Speaker 3

It's not a requirement for us to or necessity for us. And so but that requires continuous discussions, evaluations, reviews. We did a large nontraditional life transaction last year. We generally have traditional life blocks left. We have obviously LTC and then we have VA.

Speaker 3

And obviously the traditional life is very attractive to people, but it's also very attractive to us in terms of returns. So I think that would be a price one. And then the other ones, there's limited supply of partners that would be willing to kind of think about that. So you're talking about a more narrow universe. So you continue to discuss those things and we're happy to manage it ourselves.

Speaker 3

But if we're able to find unique opportunities, then we'll do that. But I would say it's gotten discussions continue, but no material changes in terms of momentum.

Speaker 12

Helpful. Thanks, John. And then maybe on private credit, it seems to be an area of attention, maybe a bit frothy. Just curious how you guys see that landscape? Are you leaning in or being more cautious?

Speaker 12

And I guess, like what's the what's your strategy? How do you balance having the ability to originate directly versus investing in some of the boutique shops that you've done?

Speaker 3

Hey, it's John again. It's an interesting question. I think first, definitionally, private credit probably has 100 different definitions out there. So that's always a tough one to kind of decide which one you're talking which everyone's talking about. But I think at the end of the day, we have been in private credit, broadly speaking for 150 years, right?

Speaker 3

I mean, you can pretty if you cast a wide net there, whether it's our commercial mortgage loan origination, we have an ag loan platform, we're the largest ag loan lender outside of the U. S. Government. We're I think we're the number one infrastructure lender as well. And so and but we typically were higher grade and we have some higher yielding products as well.

Speaker 3

And so we have a number of origination platforms is something we've talked about over the years as a unique capability for us. And so but to your point, it's an area that everyone been jumping in. So now you need to be much very disciplined in your approach. There is kind of a hot kind of view around the term private credit. And so we have approached it our way, which is for the long term is the way we think about it.

Speaker 3

And so I think that's used to our approach and everyone has their own unique approach to it. But we're there are sectors that are much more competitive today that I think we would say you need to be mindful of.

Speaker 12

Thanks, John.

Speaker 5

And that concludes our Q and A session. I will now turn the conference back over to John Hall for closing remarks.

Speaker 1

Great. Thank you, operator, and thanks everybody for joining us this morning. Have a great summer.

Speaker 5

And this concludes today's conference call. Thank you

Operator

for your participation. You may now disconnect.

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Earnings Conference Call
MetLife Q2 2024
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