Welcome to the MetLife Second Quarter 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this call is being recorded. Before we get started, I refer you to the cautionary note on the forward-looking statements in yesterday's earnings release. With that, I will turn the call over to John Hall, Head of Investor Relations.

Welcome to MetLife's second quarter 2019 earnings call. Before we begin, I refer 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. Joining me this morning on the call are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also here with us today to participate in the discussions are other members of senior management. Last night, we released an expanded set of supplemental slides. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks if you wish to follow along. The content for the slides begins following the romanette pages that feature a number of GAAP reconciliations. After prepared remarks, we will have a Q&A session that, given the busy earnings call scheduled this morning will extend no longer than the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up. After Q&A, Michel will conclude with some closing remarks. With that, I'll turn the call over to Michel.

Thank you, John. Good morning, everyone. During my first 90 days as President and CEO of MetLife, we have worked to reinforce the connection between our purpose and our strategy while strengthening our focus on consistent execution. For more than 150 years, this company has been helping people protect their families and their finances so that they can realize their full potential. We are committed to strong financial performance so that we can continue fulfilling this noble purpose for decades to come. MetLife had an excellent start to 2019 and last night, we reported strong second quarter results as well. Quarterly adjusted earnings totaled $1.3 billion or $1.38 per share, up from $1.30 per share in the second quarter of 2018. Excluding notable items, we reported quarterly adjusted earnings of $1.46 per share compared with $1.36 per share a year ago. Net income of $1.7 billion exceeded adjusted earnings, primarily due to interest rate-driven gains in our derivative portfolio. Net income totaled $845 million a year ago. Market conditions were mixed overall. Strong equity markets fueled the rebound in variable investment income. These gains were offset by the impact of falling interest rates on recurring investment margins and by the strengthening of the U.S. dollar. Although, the interest rate environment remains challenging, our results demonstrate that we have become a less market-sensitive company. John McCallion will discuss the interest rate environment in greater detail. MetLife's direct expense ratio benefited from solid revenue growth, favorable items and continued expense discipline. Excluding notable items and pension risk transfers, our direct expense ratio was 12.3% compared with 13% a year ago. Notable items in the quarter included the expenses associated with our unit cost initiative, which reduced adjusted earnings by $70 million. This initiative remains on track to deliver $800 million of annual…

Thank you, Michel, and good morning. I will begin by discussing the 2Q 2019 supplemental slides that we released last evening, along with our earnings release and quarterly financial supplement. Starting on page 5, the schedule provides a comparison of net income and adjusted earnings in the second quarter of 2019. In the quarter, net income was $1.7 billion or $365 million higher than adjusted earnings of $1.3 billion. This variance is primarily due to higher net derivative gains resulting from the decline in interest rates in the quarter. Overall, the results in the investment portfolio and hedging program continue to perform as expected. We had one notable item in the quarter as shown on page 6 and highlighted in our earnings release and quarterly financial supplement. Expenses related to our unit cost initiative decreased adjusted earnings by $70 million after-tax or $0.07 per share. Adjusted earnings excluding the notable item were $1.4 billion or $1.46 per share. On page 7, you can see the year-over-year adjusted earnings excluding notable items by segment. Excluding all notable items in both periods, adjusted earnings were essentially flat year-over-year and up 2% on a constant currency basis. On a per share basis, adjusted earnings, excluding notable items, were up 7% and 10% on a constant currency basis. The better results on an EPS basis reflect the cumulative impact from share repurchases. Overall, positive year-over-year drivers included solid volume growth, the impact from strong equity markets, favorable underwriting and better expense margins. Investment margins were modestly higher, as a strong rebound in variable investment income was mostly offset by lower recurring interest margins. In addition, the strengthening of the U.S. dollar against major currencies and higher taxes relative to a favorable 2Q 2018 were partial offsets. With regards to business performance, Group Benefits adjusted…

[Operator Instructions] Your first question comes from the line of Erik Bass from Autonomous. Please go ahead.

Hi. Good morning. Thank you. Can you talk about the outlook for expenses as we move into the second half of the year? You mentioned some favorable items in the first half, so should we expect the expense ratio to move a little bit higher given timing and seasonal factors? And if that's the case, are there any businesses where they should be more evident?

Hey, good morning, Erik. I would definitely reiterate that. That was kind of our commentary last year that we had some seasonality in expenses in the second half of the year. We tend to see those expenses rise in places like group in terms of as we go through the enrollment process. And as we mentioned in the script, the first quarter, we saw some benefits that we didn't expect to recur similar to the second quarter so we want to normalize for those things anyway in addition to just the seasonality point.

Got it. Thank you. And then you mentioned that there haven't been any material changes to your low interest scenario guidance that you've given in the 10-K. Can you talk about any potential actions that you can take to mute the impact particularly as we look out to 2020 or 2021?

Yes. Look, I think we've been spending quite a bit of time over the last several years. I think if you go back to, let's start with, why is the impact muted, first, I think we've been trying to shift our risk profile for some time now, and that's starting to take effect. Obviously, when you think about those results, we have some good ALM discipline and I think that's coming through in sensitivities that we have. In terms of further actions, I think, yeah, look we're always considering, we're constantly reevaluating our ALM practices, looking at outlook in terms of interest rates and where the forward curve may be and things like that. So there are actions we can take, but everything is kind of on the margin. The most important thing we have is, price the business appropriately. And I think that's starting to come through and you can see that in that page.

Got it. Thank you.

Your next question comes from the line of Andrew Kligerman from Credit Suisse. Please go ahead.

Hey, good morning. I'd like to talk a bit about the favorable - well, maybe low end of guidance, benefit ratios. So you came in at 85.3 on Group Life. And then, with the non-medical and you're guiding to 72 to 77. You came in at 75.4. That's after 72.9 last quarter and then 72.6 in 2018, so both of them are pretty much in the more favorable end of the guidance ranges. Can you talk a bit about the competitive environment out there and the ability to kind of stay in that kind of lower quadrant of your guidance?

Good morning, Andrew. It's Ramy here. As you know, we do operate in a competitive environment, but the group business is a business that we've been investing in, in a disciplined way over time and we're seeing that strategy materialize. And I would say, in general, we look to differentiate beyond price. We look at the product set and the right product set that we have, our service capabilities our distribution reach. So having said all of that, this is still insurance and you'd expect to see quarter-on-quarter volatility. So the mortality loss ratio, we did come in at the lower end of our range, but I would guide you for the full year number that's going to revert back somewhere to the middle of that range from a mortality perspective. The Non-Medical Health benefit for this quarter was slightly above the midpoint, but if you actually look at it from a year-to-date basis, it was slightly below. So, again, on both of those ratios I would guide you towards the middle of our guidance and we feel confident that we're able to get there.

And no competitive pressures out there to kind of lower your prices?

We do some - we do see competitive pressures, but we're able to hold our own and we're able to, in some cases, we walk away from business, but -- where we think pricing is irrational, but you could see from a top line perspective, you look at our persistency in our rate actions. Our PFO number is 5% year-on-year, which is smack in the middle of our range. So we have a number of levers at our disposal that we pull to hold our own and maintain both top line and bottom line here.

Excellent. And then just a follow-up question. In the Asian operations, so some weakness in Korea and then also some weakness in the FX-denominated sales in Japan. Again, I'm just kind of curious what happened in Korea? What's the competitive landscape like there? And same question with respect to Japan.

This is Kishore. Let me take the Korea question first. Year-on-year sales in Korea declined 14%. I want to give you a little bit of context in Korea. We have three channels in Korea. Our Korea agency channel that has held really well. Our general agency channel, which is a significant channel and our MFS channel which is a relatively smaller portion of our sales. In the GA channel, we sell mostly savings in retirement products, and that channel from a market perspective took a hit in the second quarter. The overall market for savings in retirement products dropped by about 25%, and we believe that's because of the equity market volatility in Korea. So we got that our proportionate share there, but I want to shift to a positive note with regards to Korea is because we have a number of in-market actions. We've actually increased the manpower in our Korea agency. We launched a couple of products, which are actually getting very good traction. So because of that, second half, we expect Korea sales to come back pretty strong. With regards to -- sorry, go ahead.

No, no, I was saying in Japan, yes.

So, in Japan, if you think quarter-on-quarter, we're down 32% in the annuity sales, right? So let me give you a little bit of context on annuity sales. The vast majority of our annuity sales come through our banker channel. It's a little bit volatile channel, right? If you look at 2018 second quarter sales, we almost had $200 million of sales. And relative to 2017, that was 136% increase year-on-year come off, reinforce the volatility point. So against that high watermark, this year, we're down 32%. And there are two drivers for that, right? Number one driver is the volumes through the banker channel for foreign denominated products actually came down. So year-on-year, the volume fell 9%. So what's the reason for that? We believe it's U.S. dollar interest rate softening, and that means the value proposition for customers is a little weaker relative as a result of that. Now that's only a 9% decline, okay? There's a second factor. The second factor is that given that there's a strong interest in this particular segment, there have been some new entrants into the space, and some of them have been very aggressive with their crediting rates. We've been in this business for a long time, and we're very disciplined player, and we refuse to change volume, and so we're going to be leaning on our strength here. We have strong banker relationship, got 120-plus bank relationships. We believe we have advantages on investment management side on the dollar-denominated products that others may or may not have, and so we're going to leverage this. So we're going to see some softness here for the next couple of quarters, as Michel and John referenced, but we believe that the market will come back through the banker channel. And on top of that, we'll get our fair share. I hope that helps.

Excellent. Thank you.

Your next question comes from the line of Jimmy Bhullar from JPMorgan. Please go ahead.

Hi. Good morning. I had a couple of questions. First, on just Michel your priorities for deploying capital, different stories about you potentially selling your Central European business, the Hong Kong business, and I realize you can't comment on deals. But if you were -- like, what are your priorities in terms of cash that might be generated either through the business or from potential sales between acquisitions, investing in the business and possibly buying back stock?

Yeah. Hi, Jimmy. Well, first of all, let me sort of reiterate, in terms of our capital management philosophy, we believe that excess capital, beyond what we need to fund organic growth and for strategic acquisitions that clear risk-adjusted hurdle rate, belongs to our shareholders in the form of dividends and share repurchases. As you know, we are conducting a strategic review and I would say that that work is moving along nicely. Without getting into too much detail, strategy is about choices and paramount among them is how we deploy capital, as well as other scarce resources. Our commitment to value creation requires us to exercise discipline across all capital, including capital supporting new business, as well as in-force business, not just excess capital. This means that pricing new product at appropriate internal rates of return with appropriate payback periods. It also means optimizing of our portfolio when and if necessary. Let me point out that since the MetLife acquired Alico, we've divested more than 20 businesses, some large like our U.S. Retail business and other smaller such as the Hong Kong business. In all cases, we've been careful and deliberate. As the business is not meeting our return hurdles and we do not see a clear runway to doing so within a reasonable time frame, we have to consider alternatives, including divestitures, to free up capital for greater value creation over time. So that's our approach. I think it's consistent with how we've done things to-date. And as I've noted, since the Alico acquisition we've had a number of divestitures, but I would certainly not comment on any particular rumors that have been out there.

Okay. And then on -- just for John maybe, on the accounting changes, obviously they were delayed by a year. But do you have any insights on how MetLife would be affected, that you're able to share? And I'm assuming that MetLife Holdings is the most susceptible business to the changes in long-duration accounting contracts. So if you could just comment on, like, if you've got better insights on what the impact of the changes would be on MetLife's balance sheet and/or earnings going forward?

Good morning, Jimmy. Yes we are supportive of the proposed delay, still needs to be voted on, but we are supportive of that. I don't think it changes anything in terms of impact to us in terms of the timing, other than it gives us and the industry a chance to work together on implementation. In terms of which segments are most -- holdings would be one of them. I think wherever we have FAS 60 business, which would be holdings, there're some in RIS or some in Asia, those would also be impacted.

And are you planning on sharing the expected impacts anytime in the next few quarters, or is it going to be as we get further - as we get closer to the actual standards going into effect?

Yeah. No, no. I think we - nothing soon. This is a lot of work. It's a complex standard, which is why we support the additional year, and I think it's appropriate for us in the industry to kind of work through this so that we can present these new information in the most effective and efficient way.

Okay, thank you.

Our next question comes from the line of Tom Gallagher from Evercore. Please go ahead.

Good morning. First question is just some on the interest rate sensitivity disclosure you put out there. So the U.S. sensitivity looks pretty low to changes in interest rates for U.S. GAAP. John, is it fair to say that if you also considered the sensitivity to both Japan and EMEA, it would also be modest, or -- and also are those predominantly about the FAS 60 products there, do you have a decent amount of 97 in those regions?

Yes. So just to be clear crystal clear, that sensitivity that's provided there is for changing the U.S. 10-year Treasury rate long-term assumption, right, which is our reversion to, at this point, 4.25%, and as you comment or references, it impacts our U.S. segments. In EMEA, I would say the mix of business doesn't really cause kind of a material number to arrive one way or another. And rates have been pretty low, and we assume that's the case anyway. In Japan, like when we test loss recognition -- for loss recognition there, we use current rates and just assume they don't revert anywhere. They just stay state level. So...

Got it. So the Japanese interest rate assumption is at current spot rate, like that’s your…

When we do loss recognition testing in Japan, we assume spot and then level from there.

Got it. That's for loss recognition testing?

Yes.

Okay. And then my follow-up is just on the new disclosure in the supplement about the Japan assets shows there's been pretty strong asset growth there, and I know you mentioned annuity sales declining. How -- if we're going to be in this lower level of annuity sales, is that -- how did net flows look? Like would you -- because I think it was double-digit growth in assets there based on current sales volumes. Would you still have positive flows there? And would you still get a decent amount of asset growth if we remain around current levels?

Tom, this is Kishore. So at the last outlook call at the Investor Day and also at the outlook call, we said high single-digit asset growth for Asia, as a segment. We're sticking to that, and there's no change at this point. If the question is in regards to a slowdown with regards to annuities, certainly I want to remind you that there are other lines which have actually gone the other way. A&H, Michel talked about the 12% increase in A&H. That's the advantage of a multiproduct multi-distribution business. In addition, earlier, I talked about some year-over-year decline for the second quarter with annuities from the bank segment. We expect that to change and obviously moderate over time. And, certainly, we expect to get our fair share back. So this is a quarter or two, but over the medium term we expect to get back to our fair share.

Okay.

I would just add, Tom, to Kishore's comments, also in the foreign-denominated annuity products and other products that we sell, there's a very high persistency there. So just from a net perspective, it's a good statistic to think about.

Got it. Yeah. That's what I was trying to get at. The -- I presume there're still strong positive flows, even after the decline in annuity sales, but I can circle back for more detail.

So the one extra thing to John is also, Tom, a bulk of these annuity sales are single premium. And so, because they're single premium, the full impact of these sales are not necessarily reflected in the A&P and they show up on assets.

Got you. Thanks.

Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.

Hi. Thanks. Good morning. I have a follow-up question on the strategic review. I know that it includes potential dispositions. I'm curious, I guess as you're doing the strategic review, does it also contemplate the need for potential M&A and other businesses where you feel like you needed additional capabilities or scale?

Yes, absolutely, Ryan. We are -- part of our review is looking for also ways to accelerate revenue growth, especially in markets and businesses where -- that we feel are attractive and where we have a competitive advantage. We're always looking at M&A opportunities as a way to further enhance our growth. Clearly, we look for opportunities that are a good fit with our strategy and that are accretive and we have also a consistent way of evaluating many opportunities globally. We look at value and cash generation. Clearly, those deals need to earn more than their cost of capital. We also evaluate M&A against alternative uses of capital. We consider capital markets the cost of raising capital in our assessments, but we continue to look at M& A as an opportunity for us to drive growth or enhance efficiency in certain businesses and markets.

Thanks. And then on the interest rate scenario to earnings in the 10-K, there's a very minimal impact on 2019, steps up some in 2020 though, though not all that large. I guess, just the delta between, I guess, the reason it's so minimal in 2019 and then steps up in 2020. Does that really to things like interest rate for us, or is there something else going on there?

Yeah. Hey, Ryan. So -- and remember that was 100 basis point parallel shift, right, that we gave you. And I think the punch line, as we said, was that largely intact. It wasn't quite -- it hasn't been quite parallel. Right. The long end has dropped further than the short end, so there's a - that non-parallel shift and we talked about this before, it does have, call it, a negative impact on sec lending. The reason to your question, the reason why it's smaller in the first year is, it's mainly derivative. It's not necessarily floors, although we have those too, but it's just even the pay lag on our receivers swap, right? So as LIBOR drops, your pay lag and your expense goes down.

Got it. Thank you.

Your next question comes from the line of Suneet Kamath from Citi. Please go ahead.

Thanks. I just wanted to follow up on interest rate question related to the hedges. Can you just quantify what that benefit is that you're getting today and how that should track over the next couple of years?

Yes. We don't have that specifically, Suneet, broken out. I would just again, I think, we would revert back to the kind of the overall. There's a lot of different items going on in there that some things that benefit for from just the drop in LIBOR. There's others that have more of an impact on the longer end, and so that's the part of our, I think, diversified portfolio that benefit here. We do get some offsets from having the short end of the curve drop as well in a positive way, but we haven't broken out each individual component. We just kind of revert back to kind of the aggregate change.

Got it. And the reason I ask is, I am looking at, I think the last time you gave the slide that showed the trajectory of the derivative income was years ago, but it did look like somewhere around 2020, 2021, there was sort of a leg down in terms of the benefit that you get and I know this was pretty bright house I just want to get a sense is that still roughly the picture that we should be expecting going forward?

Yes, I think you're referencing -- I mean it’s probably more than a few years ago, right, the trajectory of the floors. Is that what you're talking about?

Yes, I think it was from your 2016 outlook call but I think that’s the last time we got it. So…

It’s probably pre-John Hall. But, no, I think, certainly, we certainly at one point, those were one major benefit to lower rates, those have probably declined over time in terms of the amount of floors we have. But we've continued at different times to take up -- look, when the risk of rates rising, which was not too long ago was the major risk, we actually took the opportunity to add some floors. And so in our RIS segment, you know, we have talked about spreads and actually if LIBOR continues to drop, that sensitivity to LIBOR is going to start to flip. And that's partly due to the fact that we were opportunistic to buy some additional floors there that have a strike starting at 2%. So it's kind of it evolves over time, and it's not so static.

Maybe an update at some point would be helpful. Thanks.

Your next question comes from the line of Elyse Greenspan from Wells Fargo. Please go ahead.

Hi. Good morning. My first question goes back to slide 10 as well. I was wondering if you could -- with the low interest rate sensitivity if you could just give us a sense of what scenario would actually drive a GAAP loss recognition charge. I know you haven't laid it out in any of these assumptions that you have on the slide, probably seems like would have to be a pretty big impact.

Yes, I think that's the punch line. It would need to be a pretty big impact. I mean even beyond. We showed 25, 50 and 75 even beyond that. We have quite a bit of healthy loss recognition testing margins in the U.S. in our FAS 60 business. So to get kind of a full unlocking our loss recognitions impact, it would take quite a bit of a drop in that long-term rate assumption.

And then I noticed in footnote three that it says, this includes MetLife Holdings. So does this interest rate scenario assumption, does that includes - incorporate in your LTC block?

Yes it does.

Okay. And then, lastly on the PRT side of things, that business is typically been more second half heavy in terms of deals. I know we're obviously dealing with a lower interest rate environment. Have you guys seeing any change in the pipeline of no potential transactions that you might see towards the later stages of this year?

Yeah. We actually are still seeing a very robust pipeline in the PRT space. And in particular, we're seeing a pretty robust pipeline on some of the jumbo deals. Clearly, over time, as rates come down, that would impact volumes in this market, but it really depends on the ALM posture of the pension plan. Some of those plans are already better matched and therefore are more insulated to falling grades and are getting the benefit from rising equity markets. So having said all of that, I think, over time lower rates will be headwind to volumes, but for now we're still seeing a very robust second half pipeline.

Okay. Thank you very much.

Your next question comes from the line of Humphrey Lee from Dowling and Partners. Please go ahead.

Good morning and thank you for taking my questions. Just a question about the expenses, which have been a very good story, especially in the life holdings. I was just wondering can you take our more expenses from holdings now, or do you see kind of the current level as good as it gets, given some of the favorable expenses that you see in the first half of this year?

Yeah. I think as we go through this unit cost initiatives, a good portion of those initiatives help reduce some of the expenses there in holdings. In addition to just like, I call, BAU and the efforts that we're taking. Obviously, this is a business that will gradually run off. So I think the relationship there in expenses is a pretty good kind of way to think about it. In terms -- over time as the business runs off, we'd also expect the expenses to run down as well.

Got it. And then, in terms of the recurring interest margin, you've talked about expecting more towards the lower end of the guidance range, given where rates are. I recall last quarter you talked about your holding a little bit more cash and short-term investments. Have you redeployed those? Are you trying to hold on to those and kind of maybe be more opportunistic down the road?

Yeah, sure. So just to reiterate and this is what I said in my opening remarks, we still expect full year to be within our -- this is for RIS, our 2019 guidance of 100 to 125, albeit at the bottom end of that range. Also, in addition to VII, as you mentioned the sequential improvement was helped by the fact that we did deploy some of that excess cash one hand that we referenced in the first quarter. So even though interest rates fell, there was -- and there was a further inversion of LIBOR. We were able to improve our spreads sequentially. And I think the last thing I'd point out and it's timely, we had the Fed -- the latest fed rate cut yesterday, the forward curves projecting a steepening from here and so we're starting to see a light at the end of the tunnel for, I'd say, spread compression in that business. So any improvement won't happen immediately and at these projected levels any benefit would be probably modest, but it starts to put us near or at the bottom of spread compression for this segment for some time.

Appreciate the color. Thank you.

And at this time, there are no further questions. I'd now like to turn the call back to Michel.

Thank you. Let me close by saying how pleased I am with our second quarter results especially in light of a challenging capital market environment. Overall, we delivered another very good quarter in which our diversified set of businesses demonstrated their fundamental strength. I want to thank everyone for joining us today on a busy morning, and I look forward to speaking with you again soon. Have a great day.

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