Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter 2019 Earnings Release Conference Call. [Operator Instructions]. As a reminder, this conference 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.

Thank you, Operator. Good morning, everyone, and welcome to MetLife's Fourth 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 to participate in the discussions are other members of senior management. Last night, we released a 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. An appendix to these slides features a number of disclosures and GAAP reconciliations, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. [Operator Instructions] With that, I will turn the call over to Michel.

Thank you, John, and good morning, everyone. The headline from our financial results is that MetLife had a solid underlying fourth quarter and a very strong year. Our track record of consistent execution continues, and this leadership team is committed to being a top-performing company. In the fourth quarter of 2019, we delivered adjusted earnings of $1.8 billion compared to $1.3 billion in the fourth quarter of 2018. On a per share basis, adjusted earnings rose to $1.98 from $1.35 a year earlier. Net income in the quarter was $536 million, driven by mark-to-market losses on interest rate-related derivatives that we hold to protect our balance sheet. Backing out the impact of notable items, adjusted earnings per share came in at $1.53, up 21% year-over-year. The positive drivers included market factors, volume growth and capital management, offset in part by higher seasonal expenses as we indicated would be the case. Adjusted return on equity in the quarter, excluding AOCI, other than FCTA and notables, was 12.6% compared with 11.7% in the prior year quarter. For the full year 2019, MetLife delivered very strong results. Net income was $5.7 billion, while adjusted earnings were $5.8 billion. We've spoken before about our efforts to bring net income and adjusted earnings into closer alignment, efforts that succeeded in 2019. On a per share basis, adjusted earnings rose 13% to $6.11, up from $5.39. Excluding notable items, adjusted earnings per share were $6.06, 10% higher than the prior year. The drivers were capital management and volume growth that more than offset the impact of lower recurring interest margins. Across our businesses, 2019 was a year of significant achievements. Our flagship U.S. group benefits business generated adjusted earnings of $1.3 billion, nearly double the earnings from this business just 3 years earlier. In retirement and…

Thank you, Michel, and good morning. I will begin by discussing the 4Q '19 supplemental slides that we released last evening, which highlight information in our earnings release and quarterly financial supplement. Starting on Page 3. The schedule provides a comparison of net income and adjusted earnings in the fourth quarter and full year of 2019. Net income in the fourth quarter was $536 million or $1.3 billion lower than adjusted earnings of $1.8 billion. This variance is primarily due to net derivative losses resulting from the increase in interest rates during the quarter. For the full year, net income of $5.7 billion largely mirrored adjusted earnings of $5.8 billion. The results in the investment portfolio and hedging program continued to perform as expected. Notable items are shown on Page 4, and highlighted in our earnings release and quarterly financial supplement. First, favorable tax items in the fourth quarter increased adjusted earnings by $475 million after tax or $0.51 per share. I'll provide more details on these tax items shortly. Second, as a result of the favorable tax items, there was a related release of interest on tax reserves of $64 million after tax or $0.07 per share, which is a reduction in and recorded through direct expenses as opposed to income taxes. Finally, expenses related to our unit cost initiative decreased adjusted earnings in the quarter by $119 million after tax or $0.13 per share. For the full year, these costs were $332 million or $0.35 per share. As a reminder, fourth quarter of 2019 is the last quarter for this incremental spend, and therefore, there will be no UCI-related costs in 2020. Excluding notable items in the quarter, adjusted earnings were $1.4 billion or $1.53 per share. Page 5 provides further detail on the notable tax items in…

[Operator Instructions]. Your first question comes from the line of Andrew Kligerman from Crédit Suisse.

My first question is around the group benefits. So you mentioned that PFO, up 6%; sales, up 11%; the life benefits ratio was 85.4% against guidance of 85% to 90% and the Non-Med was 71.4% under the 72% to 77%, so it's clearly phenomenal. And it seems like quarter in, quarter out, you're doing this. So I want to get a sense of what's the pricing environment like right now? And when is it going to get a little uglier or get ugly at some point because it always does in insurance?

Andrew, it's Ramy here. Phenomenal, I think we would say, it's a very strong quarter for us, and we're extremely pleased with those results. To give you some context around your question, if you think about this into 2020 and beyond, I would say a few things. One is that we are very confident in our fundamentals here. This is an attractive market. It has structural characteristics that make it attractive that we talked about. And we are a market leader here, and we do have sustainable competitive advantages that we continue to press. If you think about the specific results on the underwriting ratio, like you said, remember, this is an insurance business. So you do expect these ratios to fluctuate quarter-to-quarter, they do have some seasonality to them, with first quarter typically being a bit elevated. The other thing you should think of as an insurance business is that the results that we're seeing are entirely within our expected range of outcomes in the context of our business. So if you look at 2020, our view of those ranges have not changed from the ones we've given you in December and our expectations for the full year remain the same and are in the mid -- towards the middle of that range. From a competitive environment, it is competitive. It's not irrational. We seek to differentiate on a lot of factors beyond price. And the other thing I would say, there's a lot of white space in this business, and we talked about the voluntary opportunity in particular, where we see white space for further growth.

Great. And then just on RIS. I guess, spreads were within the guided range of 90 to 115 at 106, as you said earlier, John. And I guess, could you share with us what the annual portfolio turnover is on that business? And what kind of new money yields you're getting as you move forward against the portfolio yield?

Good morning, Andrew. It's John. Yes, I would just -- maybe I'll start with the beginning part there and just say, this is consistent with what we expected, and we mentioned previously on the third quarter call, we started to see a bottoming of spreads, partly due to the anticipation of the benefit of 2 fed rate cuts and that's kind of starting to get fully absorbed in the market. And so that was one. And also, we saw the dislocation and the repo markets subside. So we've seen some bottoming of the kind of spread decline happen over the last couple of quarters. And as we said, we think that's a pretty good run rate for the near term. In terms of -- in terms of turnover in this particular RIS book, I don't think we have that handy here. But again, you can talk to IR off-line. It's -- we talk about overall this -- the roll-off reinvest with regards to rate for the firm. A lot of that, obviously, mix matters there, and it's hard to read into that specifically. But I think just -- I would go back to what we've said, which is that the spreads here have started to bottom. You see the benefit of 2 full rate cuts. You can see that in our crediting rate. It's kind of dropped faster than our investment yield in this business, and that's because we have a lot of floating rate liabilities in that business. And it does take some time for that to fully get recognized because 3-month LIBOR does -- it has to take a little -- a few months before it's fully recognized there. So I'll let Steve add some color.

I'll just add a little bit of color, Steve Goulart, Andrew. But just reminding you of our capital markets business, which I think is where you're going with that question. In general, it is a shorter duration business, and there isn't a lot of mismatch. So even when there's rollover on the asset side, we're also managing rollover on the liability side. So it's a reasonably matched business, and that protects us.

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

My first question, it seems like there were some good PRT momentum to end the year. If you could just give us a little bit of an update on the sales pipeline? And what you're seeing with that business? And I guess, interest rates went up in the fourth quarter, and then they've been down this year. Is that -- have you seen any impact from interest rates on the pipeline there?

Good morning, Elyse. It's Ramy here. We're clearly very pleased with our PRT results, both for the quarter and for the year. The quarter was a $2.5 billion quarter, and as Michel mentioned, it's a $4.3 billion a year for us. Remember, we're focusing -- from a pipeline perspective, we are focusing on the larger end of the market. So these are big pension plans, mid-single digits, but sometimes even higher with respect to the size of these plans. That's the part of the market where we have a competitive advantage with respect to our rating, our investment capability and our scale of the balance sheet. And when you think about those plans, they are on a derisking journey, right? So this is not something that's a trade that they make overnight. And that -- this derisking journey ends up taking a number of years. And therefore, for any one of them, the current rate position is only an input because it depends on their overall ALM position and it depends on their equity allocation. So having said all of that and given the market we're focused on, we're still seeing a very robust 2020 in that segment that we're looking at.

Okay. And then my next question, within your P&C business, you guys called out higher BI severity trends in the quarter, impacting both current accident year as well as prior accident years. If you could just give a little bit more color on what you're seeing? And as you think of 2020, does getting within your guide assume that the severity trends might remain elevated at least for part of this year?

Sure. So clearly, it's been a challenging quarter for the P&C business. And the headline here, as you've mentioned, is a bodily injury severity. And as you know, it's a trend that we're seeing in the marketplace. We saw some initial indication of deterioration in the third quarter, and we took some reserve strengthening then. And those indications worsened in the fourth quarter, which warranted additional strengthening. And that's a combination of PYDs as well as out-of-period strengthening for '19. As we look forward, I can tell you, we're looking at these trends very closely. We're pulling a range of levers, which are at our disposal, beginning with rate actions where we've accelerated some of the rate actions into early 2020, but we're also looking at underwriting and claims practices. So we're on top of this. I could say with respect to the auto line, in particular, where we stand today, our expectations are that we would remain within our overall guidance range for auto, albeit towards the upper end of that range. So if you recall, that's a 93% to 98% for the auto business.

Okay. And John, one just quick numbers question. The derivative loss in the quarter, you said that, that was driven off of the move in interest rates. Given that interest rates have been down to start 2020, should we think about that reversing in the first quarter this year?

Yes, directionally correct. Yes.

Your next question comes from the line of Tom Gallagher from ISI.

Just one follow-up on property casualty. The current accident year auto loss ratio was 82%. And I guess, the question is, is that a just 4Q pick? Or is that a current accident year catch-up for the prior quarters as well? Like what would a better trend loss ratio be? Because I assume it's not a 107 combined as the way we should think about normalized heading into 2020?

Yes. I mean, if you look at the fourth quarter, if you exclude the PYDs in the quarter, I would say, remember, that the fourth quarter is typically seasonally higher for auto for us. So if you think about that fourth quarter results, excluding PYD, it's 98.9%. And again, there's some elevation because of seasonality here.

Got you. And then just a question on capital management. So buybacks were lighter this quarter and your buildup of cash at the holding company is now $4.2 billion. So that's slightly above your target for the first time in a while. Any reason why you dialed it back this quarter despite having the excess cash to use?

Yes, Tom, it's Michel. As we mentioned, we are comfortable with the $3 billion to $4 billion buffer at the HoldCo, slightly above this -- for the fourth quarter. Mostly, I would say, timing related in terms of dividends to the HoldCo. I would look at our sort of cash buyback activity in the fourth quarter in tandem with the third quarter. We had mentioned then that we had pulled forward some of the share repurchases. We tend to be opportunistic in that respect. So nothing more to read into that, I would say.

And Michel, just as a follow-up, are you -- how are you thinking right now in terms of the balance or trade-off between M&A and buybacks?

No change also in terms of our capital management philosophy. I think we talked before about M&A opportunities, how we view those strategic fit accretive. And we sort of also consider alternative uses of capital. So I would say no change in terms of our capital management philosophy. Excess capital belongs to the shareholders, and absent M&A activity, we'll return it in the form of dividends and share repurchases.

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

I just had a question first on what you're seeing in terms of the operating environment in the Latin America business, and specifically, in Chile, where your sales were weak this quarter. There's also a lot of talk about political uncertainty and potential changes in the pension business.

Yes, Jimmy, this is Oscar. So let me start with the social situation. As I said in December, the magnitude of the profits was a surprise to everybody. But I have to say it's getting better. And remember that, in summer, in Chile, the flow activity, January and February, we'll need to see what happens in March when the year really starts there. But so far, the social environment has been much better. In terms of the business, to-date, we have not seen a significant impact on our business through January from the situation there. But facts and circumstances may change, of course, as the situation evolves. So let me talk about the reform, which, I think, is your other question. The government finally managed to present a project in the Congress for pension reform, and they were able to make it to be approved in the house, in the lower chamber. Now it has to go to the Senate. February is -- there's no Congress activity. So we need to wait until March to see what happens in the Senate. I have to say, it's too early to say in the legislative process to -- what's going to happen. It's possible that there will be more changes, right, to be introduced before the project ends up enacted as a law. But we cannot say what is the final impact. But based on the facts, not today, which is the version of the project that is being discussed, we don't anticipate material financial impact to the region. It's -- I would say, it's a good step forward for the people of Chile in terms of the kind of pension improvements that introduces, and hopefully, will help to ease the social situation there if the project is approved. So we really support the government pension reform efforts. I hope that answers your question?

And the potential impact on your business as of the proposal as you see it currently?

As it stands today, it's not big, right? Now I have to say we've got to be prudent because we don't know how it's going to end. It still has to go through senate and the executive power has to approve it, but the version that is being discussed today, we think it's good for people, and the impact on our business is not that big.

Okay. And then if I could ask one more of John McCallion. Just on the changes in accounting that are coming through in 2022 on long duration contracts, you haven't disclosed any sort of potential impact on your business either as anybody else. Are you expecting to start quantifying more of the impact in the next few quarters? Or would you wait until your even closer to the rules being implemented, so maybe next year?

Yes, hard to tell in terms of time line at this point. We're still working through it. So we don't really have a projected or estimated time line in terms of when we would share that information.

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

[Technical Difficulty]. Just from reinsurers on pieces of MetLife Holdings at the December Investor Day. Can you give an update on that? And are you still seeing the same amount of interest following the decline in interest rates this year?

Ryan, at the beginning of your question, you cut off, but I think it had to do with just any updates on just activity from reinsurers with regards to holdings, is that right?

That's right. And have you seen any impact from lower interest rates as well?

Yes. I would actually maybe refer to the way that Ramy described PRTs. It's not something that they can turn on, turn off. This is like -- given the size and the complexity, sometimes it just requires people to spend time on these things for some time. So I don't think they react to movements in interest rates as much. So I would say it's no change at this point. It's -- there's still kind of a good supply of capital out there, but I'd say the bid-ask spread is still fairly wide, but there's a number of folks that have entered the space over the last few years, and we're seeing that.

And then on the expenses, there was a lot of seasonality, I guess, in 2019. Can you give us any sense of, I guess, how to think about normal seasonality with the direct expense ratio?

Yes, I will try. And I make that point only because we have talked about that there is seasonality from quarter-to-quarter, which is why we focus on the annual direct expense ratio. Having said that, let me just kind of recall a few things. So we did say that -- and we've called out previously that the third and fourth quarter tend to be -- tend to be elevated due to the cost, as I mentioned, in my opening remarks for the enrollment of group customers, and we don't get those premiums in until the following year, so this tends to be an elevated. And even this year, if you recall, we didn't see that come through in the third quarter. So there was even some slippage into 4Q. On top of that seasonality, there were some additional onetime costs in the quarter that we would not expect to recur. We had some elevated employee benefit costs. Remember in the earlier 3 quarters, we had employee benefit costs going the other way. So they've kind of washed or kind of neutralized each other out. And then we also had some additional corporate initiatives spend in the quarter, in 4Q, that was elevated. So we estimate 50 to 60 basis points above what normal trend would be for kind of the fourth quarter. And so you can kind of think of that as what we had expected in the quarter and the additional onetime costs that came through.

Your next question comes from the line of Humphrey Lee from Dowling & Partners.

Just want to follow up on that expense. So -- but looking back specifically in group benefits, just looking back, I don't really see there's a seasonality that you talked about in 3Q and 4Q. And then, obviously, this year, we see the bonds of it in the fourth quarter. So I was just wondering, is there anything constructionally different this year compared to years past?

Well, remember also, I mean, we've been growing a lot, right, in the last few years. So you're seeing there is kind of a pickup as a result of just sheer growth, but I would say that's the case. We can -- we'll look again, but it's there. And there's other things that go into this, right? I mean, there's other investments being made. So sometimes, it's hard. But as we've said -- and I think, last year, there might have been employee benefit costs that offset that. So the volatility and some of the market impacts from unemployed benefit costs can impact the segments as well. So you might see a little offset, but you can be assured, it's in there.

Okay. Got it. And then just a follow-up question on the tax rate. So I think in your prepared remarks, you talked about the effective tax rate was 18.5%. I'm a little bit struggling to get to that number based on the tax items that you called out. I think you may have some additional tax items, too, but maybe if you can help me to think about like the tax rate, what contributed to the reported number and then versus your effective tax rate?

Yes. I think if you -- so if you adjust the notable items, you come to something closer in the 13s in terms of effective tax rate. So we did have some additional positive items that were not called out as notable just because of the size and, call it, our kind of approach to notables of anything over a $50 million impact. So it's a series of a few items. One is there were some revision to the rules on the GILTI tax in the fourth quarter, and I think it was early December, maybe late November, which ultimately provided a company's ability to use some additional foreign tax credits. So that came through in the fourth quarter. And then the remaining amount is effectively just some return to provision true-ups and some other year-end tax estimate refinements. So if you exclude those items, it's, call it, $65 million impact, you get to 18.5%. And so that's how you reconcile the quarter ETR.

Your next question comes from the line of John Barnidge from Piper Sandler.

Sorry. I was muted. Have you seen any change in the operating environment in EMEA following the favorable U.K. election and subsequent Brexit certainty?

Yes, John, I would say not much. I mean, our business in the U.K. as mostly employee benefits and individual protection. So I wouldn't say that we've seen a major -- there's an improvement in the overall sentiment, I would say, post-elections and now with Brexit sort of not necessarily behind the U.K. but at least decided. But no impact to our business that I would call out, no.

Okay. And then kind of back to the auto adverse development, were there specific states this came from? And what levels of rate are you going to push to correct this, specifically within auto?

Yes. I mean, we -- there are clearly some skew there, and there are some states where we see -- where we saw higher severity than others. So there is that skew there, and we're clearly focusing on the states where we're writing the most amount of business. In terms of rate taking, so if you look at over 2019, we took 2% in rate across the book on average. Over the last 90 days, we've accelerated the rate actions for 2020. So we've taken under 2% in rate, just for Q1 of 2020, and we're clearly going to be watching this carefully. We expect to take additional rate as warranted.

And I'd now like to turn the call back to Michel Khalaf for any closing comments.

So let me close this meeting by thanking everyone for joining us. We're pleased with our strong 2019 results and our growing track record of consistent performance. Having said that, rest assured that this leadership team is motivated by a strong sense of urgency to create greater shareholder value. Thank you again, and talk to you soon.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T teleconferencing. You may now disconnect.