Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2021 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 conference is being recorded. 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.

Thank you, operator. Good morning, everyone. Welcome to MetLife's second quarter 2021 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. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussions are other members of senior management. Last night, we released a set of supplemental slides, which address second quarter results. 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 additional disclosures, GAAP reconciliations and other information, which you should also review. After prepared remarks, we will have a Q&A session that will extend to the top of the hour. In fairness to all participants, please limit yourself to one question and one follow-up. With that, over to Michel.

Thank you, John, and good morning, everyone. MetLife's outstanding financial results in the second quarter provide further evidence of the tremendous progress we're making on the pillars of our Next Horizon strategy. We're continuing to focus with the right capital allocation and investment decisions. We're continuing to simplify with exceptional expense discipline. And we're continuing to differentiate with enhancements to our platform that are helping to drive record sales. When it comes to our strategy, we've transitioned from a period of execution risk to one of additional opportunity. Net income in the second quarter was $3.4 billion, up from $68 million a year ago. The primary drivers were growth in adjusted earnings, the gain we booked on the sale of our Auto & Home business and derivative gains in the current quarter relative to derivative losses a year ago. Strong net income drove book value per share, excluding AOCI, other than FCTA growth of 8%. Adjusted earnings in the second quarter were $2.1 billion or $2.37 per share, up 186% from $0.83 per share a year ago. As in the first quarter, our investment portfolio generated exceptionally strong variable investment income. Private equity remains the key driver of VII. As you know, private equity returns are reported on a one-quarter lag, so the strong Q2 performance reflected gains from Q1. We reported private equity gains of 9. 7% in the second quarter compared with a negative 8.2% a year ago. Equity markets continued to perform well from April through June, which we anticipate being reflected in our Q3 earnings. When we unveiled our Next Horizon strategy at Investor Day in December 2019, we pointed to the scale and expertise that we have in investments as a competitive advantage for MetLife. The strategic approach we have taken on private equity is…

Thank you, Michel, and good morning. I will start with the 2Q 2021 supplemental slides, which provide highlights of our financial performance and an update on our cash and capital positions. Please note in the appendix, we have also provided an, updated 25 basis point sensitivity for our U.S. long-term interest rate assumption. Starting on page three, we provide a comparison of net income to adjusted earnings in the second quarter. Net income in the quarter was $3.4 billion, or approximately $1.3 billion higher than adjusted earnings. This variance was primarily due to net investment gains of $1.3 billion, of which $1.1 billion relates to the sale of our Property and Casualty business to Farmers Insurance. Our investment portfolio and our hedging program continued to perform as expected. Additionally, adjusted earnings include one notable item of $66 million related to a legal reserve release. On page 4, you can see the year-over-year comparison of adjusted earnings by segment, excluding notable items. As I previously noted, there was one notable item of $66 million in 2Q of 2021 and no notable items for the prior year period. Adjusted earnings per share, excluding the notable item was $2.30, benefiting from strong returns in our private equity portfolio, which drove most of the year-over-year variance. Moving to the businesses, starting with the U.S. Group Benefits adjusted earnings were flat year-over-year as volume growth and the Versant Health acquisition largely offset unfavorable underwriting margins. Group Life mortality improved sequentially but remains elevated in the quarter. I will discuss in more detail, shortly. Regarding non-medical health, the interest-adjusted benefit ratio was 73.8% in 2Q of 2021, within its annual target range of 70% to 75% but higher than the prior year quarter of 58.5%, which benefited from extremely low dental utilization and favorable disability incidents.…

[Operator Instructions] And our first question comes from Erik Bass with Autonomous Research. Please go ahead.

Hi, thank you. I was hoping you could provide some more details on your expense ratio outlook and the drivers of the improved guidance there? And how are you thinking about expenses in the second half of 2021 and the longer term target level for the expense ratio?

Good morning Eric. So, I'll just start out by saying we're very pleased with the result and the execution by everyone in the firm. And I think as Michel said in his opening remarks, this has really become part of our culture and it's a cultural shift that we've made, our efficiency mindset is built into our strategy. It's built into our everyday activities, and I think the results are -- kind of speak for themselves. As I mentioned, in this quarter, there's a few timing-related items. So, we do see an uptick in expenses in the second half of the year relative to the first half. We did have some benefit from some employee-related costs, particularly as they relate to the impact of how markets move. And so that came -- that was a benefit this quarter. And then there's seasonality with regards to preferred stock dividends. So, the second and the fourth quarter typically are low quarters for those dividends. As we look to the second half of this year, directionally speaking, we would see -- just typically do see seasonally higher expenses in the second half. Some of that's related, obviously, to our group business and the enrollment activities we go through. And oftentimes, too, there's been some delays just as a result of a number of activities going on in some of the investments. So, we do see kind of an uptick. Having said that, one of the things that we both pointed out is our expectation, which is different than where we were on our outlook call in February, is to now be under our 12.3% guidance despite the removal of our Property & Casualty business, which had a lower expense ratio. So, all-in-all, I think our efficiency mindset just built into the culture, it's all working. And we expect that to continue as we look forward. I think I would probably stop there on your last question and probably leave that for another day.

Got it. Appreciate that. And then secondly, can you expand a bit on the Group Life mortality results given vaccination trends? Are you seeing more of the COVID impact shifting to group? I think as you mentioned, the benefits ratio, even taking out the $75 million was still at the high end of the target range. So, do you think these other excess claims relate directly to the pandemic, but just more recorded as COVID deaths? Or are you seeing any increase in non-COVID mortality?

Very good morning Erik, it's Ramy here. So let me just start by giving you a bit more color on the results. And I'll essentially just give you a bit of a walk from the headline number of 94.3% in terms of the major drivers of that. So the first is COVID-related – COVID deaths in the quarter. That's the $50,000 population -- 50,000 population death number impacting our portfolio. And that's worth about 4.5 points, as John pointed out. There's another piece in the quarter, which is that from time to time, we do experience higher volume of claims with larger face amounts, which does impact our mortality ratio. This is non-COVID related, and that was about – worth about a 0.1 to our loss ratio in this quarter. And then the third piece of this is when we look at our claims data, we did see an increase in certain death codes, which are highly correlated to COVID. So, while the cause of death for those claims is not explicitly stated as COVID, the excess mortality does appear to be COVID related, and that was worth another 1.7% on our ratio. So, if I think about the quarter and looking forward, there are probably 2 headlines I'd leave you with. One is that, if you strip out those 3 factors, our loss ratio is very close to the midpoint of our range. And the second headline is that, we have seen significant declines in deaths in Q2 versus Q1. We've also seen sequential declines in deaths month-on-month continuing into July. So, despite the current uncertainty with the Delta variant, we're also encouraged by the increase in the pace of vaccination. We're encouraged by the actions undertaken by many large employers, which are impacting the vaccination rates for that insured population. So, sitting here in August on a go-forward basis, we do think that the impact of the pandemic will gradually subside and you should expect from a run rate perspective, our loss ratio to return back to pre-pandemic levels.

Great. Thank you. Appreciate the color.

And our next question is from Tom Gallagher with Evercore ISI. Please go ahead.

Thanks. John, just a question on the comment you made on base spreads in RIS, which came back nicely this quarter. You highlighted the mortgage prepays. How should we think about that from a timing standpoint? Because tell me, if I'm thinking about this right. It definitely creates near-term gains. And I presume with rates remaining low, that's going to remain strong. So probably the base spread in that business will remain strong, assuming mortgage prepaid remain high. But then there's sort of the back-end question, which is as we kind of go -- as this levels off and diminishes then there's the reinvestment pressure that kind of emerges. So would you ultimately expect this to be a negative for base spreads? And if so, when would we likely see that?

Good morning, Tom. So, as you said, we have had a uptick there in the spreads ex-VII. And as I mentioned in my remarks, a plus 13% year-over-year and then you see a plus 10 sequentially. So, it's a number of factors, right? We got lower LIBOR year-over-year. You have a partial recovery in real estate equity returns we saw -- we've had very good, strong new business spreads as particularly -- or I should say, in RIS there. And then as you said, the last thing is we've seen elevated levels of the residential mortgage paydown activity. I would use the word paydown just to not confuse that with prepayment fees that we categorize in VII. And so what that really is, is that that acceleration of the recognition of income on those securities that were purchased at a discount previously. So we do think this will stay elevated. I think it's a combination of low rates coupled with the home price appreciation that we've seen in a lot of markets. So that has spurred others. And I think also, if you think of it in combination with more remote work opportunities, there's been probably some movement in terms of the residential housing market. So we do see that continuing particularly although they've probably peaked, the time between when action occurs and when it hits our securities or mortgage loans is usually a two to five month lag. So we think the second half of the year, we'll still see an elevated level, maybe not to this level that we saw in the second quarter. We expect it to probably be somewhat less than that. But -- so that's kind of our expectation. As you look forward, look, this is all just part of our broader portfolio. And I wouldn't say this in and of itself is going to change the trajectory. I think what it's done is it's changed the trajectory upwards. We don't consider that to be a long-term trend, probably remains a trend for the remainder of this year but probably goes back to more baseline run rate in 2022.

That makes sense. Thanks. And then just a follow-up. Non-Japan Asia sales declined a lot sequentially. Any color on what regions drove that and what happened there?

Yeah, Tom. So certainly, we have to think about sequential in the context of overall sales environment in which we're in. So if I take a step back, if you don't mind me and think about this in the overall Asia context, Overall, Asia, we did well this quarter, 42% up year-over-year, 71% in Japan, 11% in Asia ex-Japan, still positive in Asia ex-Japan as well. And this is despite COVID spurts in many of our markets. And if you take the first half, all in total, we have a 25% year-over-year collectively for the first half. And so there are a number of reasons which certainly drove that strong performance. On a sequential basis -- and if you look at Japan, and I'll come to other Asia very quickly. And if you look at the sequentially both on the life side and as well as the A&H sales, we were up, right? And that speaks to the resilience of our face-to-face channels in our markets in Japan, in particular. And the pressure on a sequential basis came in from the annuities because the banker channel is certainly -- they have a March end. And so therefore, they're much stronger on the banker side and that's what the annuity shows drop sequentially. On other Asia, if you think about it, this is -- COVID is playing out significantly in South Asia and Southeast Asia. There's a fair amount of pressure in all these markets. And we're very much a face-to-face sales business, and that certainly is weighing in despite, by the way, all our efforts in terms of strong execution, our success of our new products and certainly, our digitization efforts are paying off as well. Now as I said, this COVID uncertainty is continuing on. And a vast majority of our market significantly lagged the US, say, for example, in terms of vaccination rate. And right now, because of the resurgence of COVID in some of our markets, social distancing measures are being reintroduced, right? So while we did well year-over-year in other Asia, sequentially, we've been impacted. And both in Japan and other Asia, we expect to see Q3 sales to be sequentially flat to Q2 as well. But considering everything at this point, if you think about our guidance for the full year, we expect to be on track to meet the double-digit guidance that we provided in February. I hope that helps.

That does. Thank you.

And next, we go to the line of Jimmy Bhullar with JPMorgan. Please go ahead.

Hi. Good morning. First, I just had a question on MetLife Holdings. If you look at earnings in the business, they've been pretty high the last couple of quarters. And I think this quarter you had alternative investment income that helped and also lower life mortality. But I'm wondering to what extent long-term care was a tailwind and just what you're seeing in terms of claim submission in the LTC business. Has that gotten back to normal as the – versus what it was last year?

Good morning, Jimmy, it's John. Yes. So I'll just break it up. In the Life side, as you saw in our interest-adjusted benefit ratio, we had a strong result really for this block of business, minimal, actually de minimis COVID impact this quarter. So it actually, I would say, declined faster. The impact declined faster than we had probably expected. But I think a number of factors that you can probably come to probably makes that – makes sense, whether it's the average age, and the percent of vaccinations at the older age, things like that. On the LTC side metrics, there was – it was really – there was no material positive from LTC. It was in line with expectations. What we're seeing is that – and I'd say, in line with, I'll say, pre-pandemic expectations. And so what we're seeing is metrics and results really trending back towards those pre-COVID levels. New claims are, I'd say, marginally below trend, but all indications are showing that we'll be back to trend very soon. The only metric that's lagging – but again, I will say, trending back to pre-pandemic is the relationship of home care versus nursing home claims. So it's still probably a little elevated in the home care side, but that's – it's trending down. It's trending back to the pre-pandemic ratios.

Okay. And then on Group Life, how are you thinking – it doesn't seem like anybody sort of assumed COVID in their pricing this year and obviously, not all of the business prices – re-prices each year. But how are you thinking about renewals in the Group Life side? If we still -- if the pandemic is still ongoing, do you think you'll try to get higher prices in part of the book? Or would you just have to -- would the market not bear that given that most companies are not really making many adjustments? And should we assume margins will remain weak until the pandemic is done?

Hi, Jimmy. Look, when we price our business, be it new business and/or renewals, we take a whole number of factors into account. Many of them are case specific factors. But clearly, the outlook, both near-term and medium-term for mortality is a component of that. So as the pandemic unfolded, we certainly did take into account with respect to near-term mortality in our pricing. And again, it does vary by case, and it depends on the length of the guarantee period and the size of the case and a number of other factors. But certainly, that has been taken into account as we look to renew business or price for new business. The other point I would just point you to here as you think about our business in particular and our SKU towards the larger end of the market, is we have a very consistent track record over many, many years of taking appropriate renewal actions, while maintaining very high persistency on that book to -- from the mid to the high 90s. So that's another factor that I would point you to as well.

Okay. Thanks.

And our next question is from Ryan Krueger with KBW. Please go ahead.

Hi, good morning. Could you provide some additional detail on non-medical health trends you saw in the quarter, I guess, particularly on dental utilization and severity and how you'd expect that to trend towards -- throughout the rest of the year?

Hi, Ryan, it's Ramy here again. I think the -- overhead line that I'll leave you with for both dental and disability is that we are seeing our results normalize back to pre-pandemic levels. And so specifically to your question on dental, if you look at the entirety of the first half, the overall results certainly reflects that return to pre-pandemic utilization levels, albeit there was some, if you will, Q1 versus Q2 dynamics with respect to the utilization of certain services that others have spoken about, and we've seen that to be pretty consistent with our book. But in aggregate, the first half is trending towards the pre-pandemic utilization level. And we're certainly seeing that normalization continue into July as we look at it. So in aggregate, if you want to take a really big step back and look at our non-medical health ratio, we expect that for the full year to be close to the midpoint of our guidance. And that's inclusive clearly of the various products that we have in there.

Thanks. And then for LATAM COVID impact, can you give us a sense of how those trended throughout the quarter? And did they continue to decline -- did they decline throughout the quarter and into July?

Yes. Ryan, this is Eric. So with regards to COVID, we noticed a significant sequential improvement this quarter with month-to-month positive trend. But as you know, the delta variant and the slow pace of vaccination, obviously, creates some uncertainty moving forward. Nevertheless, overall, we expect the second half of the year to be better than the first half. Now as John referenced, this quarter has also highlighted again the strength of our business fundamentals and our franchise across the region. And we expect overall revenues to continue to grow, supported by a strong persistency and recovery in sales. We've had good momentum in sales we created since the beginning of this year. We reported $222 million for the quarter, back in line with the levels of pre-pandemic. And this really demonstrates the strength, diversity and resiliency of our distribution channel and product mix. Our persistency, as I mentioned earlier, has been also very resilient and above expectations, and that's true across the region. So, in summary, from an outlook perspective, for the year remains unchanged, and we expect 2022 earnings to return to the normal run rate levels once the pandemic recedes.

Thank you.

And our next question is from Mike Ward with UBS. Please go ahead.

Thanks. Good morning. So I think the buybacks in the quarter and the new authorization are pretty well received. I'm just curious, should we go forward with the assumption, absent any other opportunities for deployment? Should we expect to continue at this $1 billion or $1 billion-plus buyback rate quarterly?

Yes. Hi, Mike. Thank you for the question. So let me start by saying that we continue to be comfortable with the $3 billion to $4 billion buffer and over time, we expect to return to these levels. We're very deliberate and disciplined in how we deploy capital. One of our highest priorities on how we use capital is to fund responsible growth. And we continue to deploy capital in support of organic growth and attractive IRRs and payback periods. We're also opportunistic when it comes to M&A. Any M&A transaction must be supported strategically. We look forward add to the top line, clearly a number of important financial metrics, including accretion. So -- but if we're not able to deploy excess capital to fund business growth, then we have a commitment to return it to shareholders. And I think that our recent buyback activity should give you a sense of our pacing and the fact that our Board has just issued a new authorization, should also provide you a sense of its sustainability. So I hope this helps.

It does. Thanks. And then, I was just wondering if you might be able to comment on the bid-ask spread in terms of any further derisking, perhaps, in areas like Holdings or RIS. And I don't want to downplay the efforts and success you've had so far, but it just seems like M&A in this industry continues to pick up, specifically in some capital intensive areas. And it feels like that's going to continue. Just trying to gauge your willingness or ability to further derisk anywhere. And given your excess capital position, is it sort of within the realm of possibility that you could utilize any of that within anything for further derisking?

Hey. Good morning, Mike, it's John. So, look, I think the trend that you're referencing, our belief is the trend is going to continue. It's not going anywhere. I don't think that changes what -- how we're addressing and focusing on MetLife Holdings. It, as you said, has performed very well. Our focus is on optimization, whether a diversified block with a number of natural offsets, the team has done a great job managing it. But at the same time, as I said, the team's mandate is to kind of take a third-party view, an external view and make sure that we're continuing to look at different ways to be prepared for the opportunity in what I'd say is a new market within the industry, which is this kind of block acquisition or transfer or risk transfer. So nothing's changed on our end. In terms of bid ask, I don't know if I've seen any, I'll say, clear signs that it's changed at this point. But this is a dynamic, I'd say, area right now, and our focus is to be ready, if it does change. So

Thank you.

And our next question is from Tracy Benguigui with Barclays. Please go ahead.

Thank you. Good morning. Some of my questions were already asked, so I only have one. When looking at your group benefit since you operate in a larger segment, I'm wondering if you could contextualize the life cycle of sales. Would it take longer as we anticipate a rebound when the economy reopens?

Yes. I think there are a few things I'd point you to. We have seen -- from a life cycle perspective, we've seen less of an impact on the large employers during the pandemic. You see we're on track for a record year in terms of sales in 2021. And a lot of that activity happened in 2020, if you think about this in terms of when these cases came to market and our dialogue with the employers. So from that perspective, we have not seen a real disruption, and we're very, very pleased with our sales results the year. And as John and Michel referenced, we're on track for a record year in group sales and our national account segment is an important driver of that. And so is our momentum in voluntary, where we're less reliant on face-to-face distribution given the digital capabilities that we have and that has continued to drive our sales momentum there. The last thing I would just say is if you just really take a big step back, think about the impact that COVID had on the environment. We've seen a significant increase in awareness on the part of employees for needs of protection for obvious reasons. But we've also seen employers be really, really focused on benefits as a key lever in terms of engaging with their talent. So we're seeing very high receptivity and more strategic dialogue, I would say, with some of the large employers on how to utilize those benefits to attract, retain and motivate talent.

Yes, I fully recognize that. I was just thinking about further upside. And I've heard you speak at another event, where you were saying basically that folks working from home care a little bit more about some of these voluntary offerings as they're thinking about their families. So fully recognized where you were in the pandemic and just thinking about the possibility of future sales and when that would flow through.

Yes. I mean those were -- the fundamental trends is the employers kind of perspective on the benefit, as you just described. And they're more keen to engage with their employees -- the employees' awareness of the need for protection. So, those two trends, I think, have clearly kind of emerged in the pandemic and they're going to drive momentum going forward. With respect to the sales numbers, I would also just remind you that the sales in the jumbo market can be lumpy from year to year. So, you saw a dip in 2020. You saw a spike in 2021. So, some of those can be lumpy year-over-year from a jumbo perspective. But the secular trends on employer and employee I think we're seeing and we're seeing providing overall tailwinds for our business here.

Excellent. Thank you.

And our next question is from Suneet Kamath with Citi. Please go ahead.

Thanks. Good morning. Just in terms of EMEA, can you give us a sense, are there other countries that may not be kind of at scale kind of like, I think, Greece and Poland? And can you give us some color in terms of like the M&A environment in EMEA as it relates to interest from third parties and just consolidating the European insurance market?

Yes. Hi Suneet, this is Michel. So, we're -- first of all, I would say we're happy with our EMEA business. As I sort of referenced before, it's predominantly a protection business with high free cash flow generation. So, it plays a role in terms of -- and how it contributes to the enterprise. Since the -- acquisition, we've reduced our footprint globally in terms of the markets that we're in. We were in 66 markets, we're now in 40. And so this sort of -- the process that we are committed to, which is to continue to look at our businesses through the lens of strategic fit in terms of whether they clear our risk-adjusted hurdle rate. Whether we see a path to them achieving that and achieving scale, I think that applies sort of across the board, and I expect us to continue to look at our portfolio through that lens. But nothing in particular that I would point to in terms of EMEA. I think if you think about Poland and Greece, those were two businesses that sat outside of our European super carrier. As you know, we have an efficient operating model in EMEA, especially in Europe, where we -- all of our businesses are branches of our Irish entity. Poland and Greece were both subsidiaries that sat outside of that. So, in a way, this transaction helps us simplify the region and the business operationally. But I think in terms of the market environment, I mean we continue to see sort of -- we were not the first company to divest from Poland. There was -- Aviva was -- had a transaction prior to that. So, there continues to be interest by mainly European players in terms of opportunities in those markets. That's what I would sort of point to there.

Okay, got it. And then just last one for John, on free cash flow. It seems based on the commentary in the buyback press release that maybe free cash flow in 2020 was below your 65% to 75% target. So, just wanted to see, if that was a fair characterization. And then are we still thinking about 65% to 75% as kind of the range that you guys would like to be in kind of going forward?

Yes. I mean the quick answer is no. It was -- I don't think -- that wasn't our intention, if that was the takeaway, but it was definitely within the 65% to 75%, if not higher. And yes, I think the go-forward is the range is intact.

Okay. Thanks.

And ladies and gentlemen, thank you very much. We will now turn the conference, back over to Chairman, Michel Khalaf for final comments. Please go ahead.

Thank you, operator. As many of you prepared to spend time with family and loved ones this summer, I want to wish everyone well. I also want to express my thanks to our employees who have done so much to help MetLife live our purpose, to our customers who trust us to safeguard their financial future and to our shareholders who provide us with the capital to keep this great company forging ahead. Thank you again, and have a great day.

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