Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Second Quarter 2022 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 about forward-looking statements in yesterday's earnings release and to the risk factors discussed in MetLife's SEC filings. With that, I will now turn the call over to John Hall, Global Head of Investor Relations.

Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife's Second Quarter 2022 Earnings Call. Before we begin, I'd 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. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides, which address the quarter. 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 feature incremental disclosures, GAAP reconciliations and other information which you should also review. After prepared remarks, we will have a Q&A session, which will end no later than the top of the hour. In fairness to all, please limit yourself to one question and one follow-up. Now over to Michel.

Thank you, John, and good morning, everyone. Over time, I have referred to our Next Horizon strategy as being all weather designed to guide MetLife through a variety of economic environments. And the environment has shifted with equity markets falling from historic highs, interest rates trending up from historic lows, further strengthening of the dollar and the odds of a U.S. recession on the rise. The resilience of Next Horizon, combined with our clarity of purpose, positioned MetLife to meet these challenges in the second quarter of 2022. While certain things may be outside our control, we continue to execute with urgency across those things we do control. Let's turn to some numbers. MetLife reported strong financial results for the second quarter. Adjusted earnings were $1.6 billion or $2 per share compared to $2.37 per share a year ago. Excluding one notable item, adjusted earnings were $1.90 per share. The combination of strong underwriting margins and good volume growth drove solid adjusted earnings results while variable investment income fell below our quarterly outlook expectations. Net income in the second quarter was $103 million compared to $3.4 billion a year ago. Current period net income was driven by adjusted earnings, offset by interest rate and foreign currency derivative losses from securities held to protect our balance sheet. Also, standard investment activity resulted in realized losses as interest rates rose during the quarter. Year ago net income includes the gain we booked on the successful sale of our Auto & Home business. Now moving to variable investment income, which returned to a more typical level following 7 consecutive quarters of truly outstanding results. During the 7-quarter period, MetLife generated more than $8 billion of cumulative pretax variable investment income. This type of investment performance serves to validate MetLife's long-term prudent exposure to…

Thank you, Michel, and good morning. I will start with the 2Q '22 supplemental slides, which provide highlights of our financial performance, an update on our cash and capital positions as well as commentary on the new U.S. GAAP accounting known as Long Duration Targeted Improvements or LDTI, effective 1/1/23. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the second quarter. Higher interest rates and the strengthening of the U.S. dollar in the quarter drove net derivative losses. As a reminder, MetLife uses derivatives as part of our broader asset liability management strategy to hedge certain risks. This hedging activity often generates derivative gains or losses and creates fluctuations in net income because the risk being hedged may not have the same GAAP accounting treatment. In addition, we had net investment losses from our normal trading activity in the portfolio given the rising interest rate environment. We had one favorable notable item this quarter of $77 million or $0.09 per share related to a reinsurance settlement, which was accounted for in MetLife Holdings. On Page 4, you can see the second quarter year-over-year comparison of adjusted earnings by segment, which excludes notable items in both periods. Adjusted earnings in the second quarter of 2022, excluding the notable item were $1.5 billion, down 23% and down 21% on a constant currency basis. Lower variable investment income drove the year-over-year decline, while favorable underwriting and solid volume growth were partial offsets. Adjusted earnings per share, excluding the notable item, was $1.90, down 17% year-over-year on a reported basis and down 15% on a constant currency basis. Moving to the businesses, starting with the U.S. business. Group Benefits adjusted earnings were up 61% year-over-year, primarily due to significant improvement in underwriting margins aided by lower COVID-19…

[Operator Instructions]. And our first question is from Ryan Krueger with KBW.

First question was, thanks for the LDTI disclosure on the balance sheet. I guess, at this point, are you able to give any sense, I guess, directionally on the potential impact to ongoing earnings?

Ryan, it's John. We're still working through that. And I think our plan would be to discuss more details at a later date. But I think the general point, I would probably leave you with is that we don't expect major differences in the core underlying earnings, but there are sources of differences when actuals emerge, right? So how actual experience may deviate from expectation, gets treated one way in current GAAP versus under LDTI, and then there's a number of different aspects. But I think all in all, we would expect kind of core earnings. Maybe I'll just give you a little color, too. I think this is probably a good perspective as to why that would be the case. So it does not affect all of our segments, right? If you think about group minimal impact, vast majority, not subject to it given it's a short duration product. We go through RIS and it's mainly a spread business. We would expect spread calcs to look similar. As you move into MLH, not all products are impacted, right? We have a number of [indiscernible] FAS 97 products, universal life fixed annuities. Also the participating business is not subject to LDTI. And if we took kind of an early look at that and kind of assume that we would implement this the beginning of this year, we probably would have given you the same range of guidance that we would have otherwise given back in February. And then Asia is probably the other one that's somewhat sizable. Again, there's a lot of FAS 97 products there. Japan, if you think about our flagship products in FX, they're all under FAS 97 versus FAS 60. And then EMEA and LatAm are much more modest. So hopefully, that kind of just gives you color as to why kind of give you that general statement.

Yes. No, that's very helpful. And then on VII, obviously, acknowledging how strong it's been over the last couple of years. But can you give any sense of what it could look like in the third quarter?

Ryan, it's Steve Goulart. I think -- I guess I'd start with just reminding everybody sort of the slide that John used, which is what's our guidance. Our guidance is really just a generic assumption of 12% a year, 3% a quarter. We all know, of course, there's a one quarter lag in it too. And when we look at broad market returns in the second quarter, we know that they were basically negative in the teens. But I think what we've proven over time through the diversification in our portfolio across strategies and geographies is we would expect that directionally but likely not to the same degree as a market overall. So I think that's probably all we'd really say at this point.

And our next question is from Jimmy Bhullar with JPMorgan.

So first, I had a question on the retirement business in terms of spreads. I think they expanded about 14 basis points sequentially. And I think you had been cautioning that they might actually decline or certainly weren't expecting much of an improvement. So wondering how much of the improvement has to do with interest rate caps or other types of sort of hedging activities? And do you expect this to be a good base for spread going forward? Or should we think about the 1Q level and adjust off of that looking forward?

Jimmy, it's John. As you point out, we had a pretty resilient level of spreads this quarter, up 14 basis points sequentially. And as you point out, we did not quite expect that back in the Q1 call. But that was -- we were basing our commentary based on forward rate curve, right? And if you think about what has happened since the 10-year treasury ends up about 65 basis points above that. And the other thing that happened is spreads widened. So our reinvestments were strong. And then the third thing is 3-month LIBOR jumped to a much greater level than we had expected and actually the forward curve expected ended the quarter at roughly 2.3%. If I think about just during the course of the quarter, it was kind of hovering around 150 and then all of a sudden, there was a huge spike kind of at the end of May into June. And bypassing that [indiscernible], I referenced this 2% marker. As LIBOR started to grow, get towards that 2% and then beyond, it could create a little bit of a tailwind. We have a number of caps that start to become in the money. That we have in place today. And so that was really the main driver moving us from a headwind of LIBOR rising to a, if you call it, I guess, a benefit of having the caps be in the money. So that was the real driver. The other thing I'd point out is real estate equity outperformed. So within our core investment income, real estate equity was stronger than expected. We'd expect that to moderate. But if we look forward, and I guess, assuming today's current forward rates, which we know can be different, we'd expect ex-VII spreads to remain pretty close to where we are today, I mean, give or take, plus or minus, and even assuming some moderation of the real estate returns.

And then sales...

Sorry, Jimmy just let me just add. I would just tell you that, that's probably for the next couple of quarters, right? I mean we'll give guidance for next year when we get towards the latter part of the year.

And then obviously, the changes in new money yields and those affect that as well, obviously, modestly, but they do have a an effect.

Yes, you're right. Yes.

And on sales in the Asia business outside of Japan were down. And I think you had mentioned previously that in Korea, it was because of a lot of your salespeople getting COVID and COVID cases still being high. And then I think in China, with the mobility restrictions, that's hurting sales, is it more -- are the sales down more because of those types of factors in 2Q as well? Or is there anything else going on in the underlying market that could sustain even beyond COVID.

Jimmy, it's Lindon here. So let me give you the color on total Asia sales, and then I'll get into the other markets as well. we have good diversification across all the markets, products and channels, and that really drives very consistent execution through this market conditions. So overall, we've had positive growth in the second quarter, led by strong performance in Japan. If we look a little bit at Japan sales, we're up 5%. And that's actually driven by 3 factors. First, the execution on the ground of the team has been very strong. We have a very diversified distribution channels, and the products and capabilities we've launched in the past year has really helped us drive the growth over there. But as you pointed out in Other Asia, we've faced a couple of headwinds. We've got COVID restrictions going on in China right now, and the stronger U.S. dollar has really impacted sales for the FX products in Korea. But despite these channels, we actually have other markets that are compensating for these and help offset some of these headwinds. Looking forward, we expect strong momentum going into the third quarter. We're introducing new products in Korea. And also, we expect some relief in the lockdown conditions in China. So full year basis, we are comfortable with the guidance of mid-single year digit growth that we gave at the outlook call.

And next, we go to Tom Gallagher with Evercore ISI.

I had two capital questions. The first is the new C2 factor change that's coming year-end for mortality, morbidity. My understanding is it positively impacts Group Life, negatively affects Individual Life. If so, is that a positive for Met? And if so, could you quantify it?

Tom, it's Ramy here. I would say it's overall neutral. I mean we have been looking at our business and pricing it in anticipation of changes to the C2 factors, and there's a fair bit of diversification calculation in that number. So I would say very small and neutral in terms of its impact.

Okay. And the SMR change in Japan dropped a lot in March, I assume that's going to go down a lot more in June just based on where rates went. How are you thinking about managing through that? Or are you contemplating hedging this at all? And also, is there a risk that, that can impact the dividend remittances out of Japan.

Tom, it's John. As you point out, the higher U.S. rates really for us is what's driving that decline. And as you point out, they've continued to rise throughout 2Q. Just a couple of reminders. One, rising rates is a improvement proving economic value situation for that business. But the reality is, right now, we have a solvency regime that has some asymmetrical accounting, so it creates some unintuitive results, if you will. So so that's kind of one. Two, I'd say, remember in a few years, it's likely this moves to this new economic solvency regime, which would kind of better align the solvency accounting with the economic reality. And so we really -- we don't have concerns over dividends or dividend capacity at this time. The reality is that this is a good economic situation, and we have plenty of tools to be able to manage the overall situation. So at this time, we're fine.

And next, we move to Elyse Greenspan with Wells Fargo.

You guys had strong results in LatAm in the quarter, and I know you called out around $40 million from favorable mortality. Can you just expand on the other underlying drivers of the results this quarter and just with the sustainability of results there?

Elyse, this is Eric. So yes, as you pointed out. So overall, this was a strong quarter for the region, supported by solid business fundamentals and several positive items that we really put into 2 buckets, right, the market factors and underwriting. So starting with market factors, we had very strong net investment margins this quarter, which include the net positive impact of inflation in Chile as well as the above-average encaje results. And the quarter also benefited from strong variable investment income. So these items combined contributed to roughly $60 million in adjusted earnings. Then the second bucket, underwriting, and John mentioned that earlier, this quarter was really recorded a 40 million after-tax benefit from a favorable prior year developments related mainly to COVID mortality experience. So these are the 2 main items. Now putting these items aside, we're also very pleased to see our business continues to deliver. As you may recall, last quarter, I mentioned that our earnings growth continued to be supported by strong and resilient business fundamentals, which are driving solid top line growth. And that sales momentum that began last year has continued this quarter as well. And this reflects really the strengths, the resiliency and the diversity of our distribution franchise across the region, combined with a noticeable flight to quality. And then this emphasis on quality is also evidenced by a very solid persistency across the region, which, combined with the strong sales momentum that I mentioned has resulted in a 26% growth year-over-year in PFOs on a constant rate basis. Now about half of that growth came from the SPIA business in Chile, where our market share has increased, but the market as well has grown over the past over the past quarter. So that's in a nutshell, the story for LatAm this quarter. I hope this helps.

Yes. And then my second question, you guys bought back $1.1 billion in the quarter, a pretty strong number. Was there any acceleration in buybacks, just given the market weakness and an opportunity to buy your shares at a more attractive price? And can you just give us a sense of the outlook for future levels of share repurchase for the balance of the year?

This is Michel. So yes, as I noted in my opening comments, we had our foot on the gas pedal a little bit in the second quarter, in particular. So expect a modestly slower pace, I would say, in the second half. Our overall view has not changed. Our philosophy, our approach have not changed. We're still comfortable with the $3 billion to $4 billion cash buffer over time. We'll get back to that. So no change in approach here. It's just that we had an acceleration in the first half. So it will be modestly slower in the second.

And our next question is from Erik Bass with Autonomous Research.

Can you provide some more color on the expected adjustment to retained earnings from adopting LDTI. And is this all being driven by the impact of bringing market risk benefits to fair value? Or are there any meaningful reserve adjustments? And I guess given the rise in interest rates since year-end '20, should we expect the adjustment to be smaller today than what you're showing on the slide?

Eric, it's John. So the impact to retained earnings, it affects both market risk benefits and a function of disaggregation. Disaggregation's about, I'd say, 20% to 25% of the number. So it's mainly a function of the fact that our -- under our -- for VAs and primarily the GMIBs, also, by the way, GMDBs get now mark to market, which is a different debate. But GMIBs, they're all kind of accrual accounting, if you will, and now they're moving to mark-to-market. So that's the biggest driver. As we think about relative to initial impact that we disclosed, it's a little better as you get into kind of year-end '21 in terms of less of a change. I think interest rates moved maybe 60 basis points on the 10-year. And then it will continue to decline, if you will, as you move into 2022, just given the -- a function of the rising rate environment. So that's the -- those are the main drivers.

Perfect. And then maybe if you could touch on your U.S. mortality experience this quarter across both Group and Holdings. And it looks like even ex COVID margins were favorable versus your targets. So have you seen some of the elevated non-COVID mortality that have been a factor in recent quarters? Has that started to come down as well?

Eric. It's Ramy here. I'll start off with group and Michel and John will comment on Holdings. So for the quarter, if you look at our ratio sequentially, I would say the decline can be broken down into 4 pieces. So the first one is just the lower frequency in terms of overall population death. The second piece is the material decrease in the percentage of deaths under 65, which clearly reduced the impact on the working age population. The third piece is the Q1 reserves, which competed favorably, which John spoke about, and that was less than a point or so. And then the final piece is we did see little by way of non-COVID excess mortality in the quarter. And as Michel pointed out, the second quarter tends to be a bit lighter in general in terms of mortality. As we look at the rest of the year, on the Group business side, we're cautiously optimistic given the results here. But clearly, you know the trajectory of the pandemic is uncertain. At this point, I would say, if you exclude COVID, we anticipate that our mortality ratio to be comfortably inside our range for the second half of the year for the group business.

Yes. And just on -- just touching on Holdings. I mean we certainly saw kind of a reduction in claims in the quarter. We didn't really see a big impact at all for COVID. And then on the -- if you just look at the life interest adjusted benefit ratio, you have to adjust for the reinsurance settlement. But excluding that, it comes in at 43.8. And that's -- we just saw a favorable non-COVID claim experience in the quarter.

And our next question is from Suneet Kamath with Jefferies.

Maybe just for Steve to start out with. Can you just maybe talk a little bit about your outlook for credit and the potential for credit losses if we move into a recession? Is there any asset classes or sectors that you're paying particular attention to these days?

Sure. Thanks, Suneet. I think obviously, there's still a lot of uncertainty and clearly, volatility in the markets about where we're headed from a macro perspective. What I do is really sort of rewind the clock a little bit. And remember, in a way, we sound like a broken record, but we go back to really even pre-COVID where we were actually starting to get concerned about a recession occurring sometime in 2020 and started preparing the portfolio then. Our derisking efforts started in a pretty big way. And I think then, of course, was accelerated during COVID, and we went through over $8 billion of derisking in that time period. And that really sort of set the portfolio in a position that we're very comfortable with. Obviously, we continue to watch as we go through this period now, expectations of recessions, again, of course, depend how one defines a recession, I guess, these days are clearly picking up. But we're very comfortable with the derisking we've done over the last couple of years and think the portfolio is in very good shape. Obviously, we continue to have a cautious attitude, but opportunistic at the same time because we do see some attractive investments and we have the opportunity to do that. one metric that might be of interest to is just in looking at the portfolio, during the course of this year, we've actually had twice as many upgrades as downgrades. And I think that says a lot about how we've been positioning the portfolio and our overall outlook. So we're very comfortable with where we are today.

Okay. And then I guess for Ramy, on the Group Benefit side, I know Q2 is a low quarter for sales. But just curious on any color from the conversations you're having with your clients around pricing just given -- I'm assuming most of them are facing pressures across the board on cost from inflation. So just any color on how those conversations are going as we think about 1/1 next year?

Sure. Just with respect to your comment on sales, as we've kind of discussed earlier, the year-to-date drop in sales is very much a function of the record year we had last year where we had a record number of jumbos. And as you know, these jumbos can be pretty lumpy. So this is something we expected in terms of the sales coming down. And I would just also point you to the fact that really the better measure to think about the overall growth of this business is the PFO number and we're certainly very pleased with the PFO growth number that we're seeing this quarter. In terms of the pricing environment, I would say, the market is competitive, but remains rational. In aggregate, we have put in place price increases, both on the life and the disability side to reflect our expectation of the coming environment to reflect also a load with respect to the COVID deaths. And in aggregate, we are getting our target price increases, and we're also continuing to see very strong persistency in the book.

And our next question is from Alex Scott with Goldman Sachs.

First one I had for you was just to get your latest thoughts on MetLife Holdings and the potential for risk transfer. And also any commentary you have around if doing something -- taking action on something in holdings could influence the way that these impacts look from LDTI?

Alex, it's John. I think overall, on risk transfer, I'd say nothing new really to update. I mean we've probably given a consistent message every quarter for quite some time now. And I think it's the same, and I think we're being very transparent. Our goal here is continuously optimize. And we're trying to do that both in the form of internal actions but also looking at opportunities to leverage the growing risk transfer market. And as a result, we continue to converse with third parties. Our philosophy is there's no burning platform. We're happy to maintain our approach and continue to optimize internally, but we want the optionality to see if we can accelerate the appropriate release of capital and reserves. I think the one thing that we continue to just look at here, this is a reinsurance transaction for us if we were to do something. So as we think about our philosophy, when we look at this is, we view this as a long-term relationship. So it's -- this is one of those things that would take time. It takes time to make sure that we feel grounded with a strong counterparty and structure and kind of the approach. But I think we're continuing to evaluate that and that's been the case now for some time. In terms of the impact to LDTI, I don't know how to exactly answer that. I think one thing we have to be careful about is under LDTI, one of the things that probably did not come out as perfect was just the -- there is some asymmetrical counting when you do enter into reinsurance. So you have to be mindful of that under GAAP. So it doesn't perfectly line up. So I don't know how to perfectly answer your question that way because it would -- I guess the answer is it depends. So I'm sure that...

It's helpful color. And then the follow-up I had was maybe just a question on sort of the broader economy. I mean, you guys get such an interesting look at the labor market, given your presence in the Group Benefits. I mean anything that you can give us color on, even maybe thinking through like beyond the end of the quarter that you're seeing in labor markets and potential implications just more broadly for your business?

Alex, I would say, the numbers we're continuing to track clearly is just overall eligibility in our book, and we have a highly diversified book of business. And with the low unemployment levels, clearly, those numbers continue to kind of increase and remain very solid. And we're seeing some kind of form of wage inflation come through as well, and both of these have been kind of tailwinds to the business. So we're kind of seeing in the book, what you're seeing probably in the broader economy. And maybe that's kind of as much color as I can give you in terms of what we're seeing.

And our next question is from John Barnidge with Piper Sandler.

So you had an IBNR reserve release in both group and Latin America. Is there any tail that we should be thinking about for subsequent quarters from that?

John, it's John. Just when you say tail, you're referencing just more releases. Is that what you mean?

Yes, correct.

Yes. Look, I think our -- this is a reserve. It's -- the reserve was put up at the point in time based on best estimates. I think in both cases, the facts are that actuals have emerged different than expected. And so that's just kind of the simple answer to why there was a release. I wouldn't assume there is a tail because if we had a -- if we assume there was more, we would have taken it. So right now, our best estimates are what we have up on our balance sheet. But I think just like we do every quarter, we'll continue to evaluate and review the emergence of actuals. And if there are refinements needed, we'll make them.

Okay. And then my follow-up to that, if we're talking about emergence versus expected, the LDTI disclosure, can you maybe talk about is there any unrealized insurance margin that's something we've seen from other companies that have large operations in Japan?

Yes. Sure, John. It's John again. Look, I think the reality on that one is it's really a function of mix of business. And I think that's -- if you listened to my earlier response to earnings and how some things are in scope and others are not, that's a major driver to kind of that outcome. Many of our segments are not materially impacted by LDTI and many of the products we sell are not as well. And that includes like Asia, where some of those products are out there that show that unrealized in Asia. You think about in Japan, our flagship products are not subject to this. If you think about some of the, I wouldn't say all products, but some of the FX products that we sell, they're all under FAS 97. So it's a little bit of a different probably situation for us. And so I -- like I said, it really depends on mix of business to answer that question.

Next, we go to Andrew Kligerman with Credit Suisse.

A lot of most of the questions have been asked. But I'm wondering, as we look at another excellent quarter at MetLife, if there's anything transformative that you need to do from an M&A perspective, anything that you think in your business lines that could change kind of or improve MetLife?

Andrew. So I don't think -- if we look at our portfolio, I think we don't see any major gaps when it comes to that portfolio. We're really well pleased. As you know, we've gone through a major transformation that got us to this point. We believe we have the right strategy. Having said that, M&A is a strategic capability and if we see opportunities to accelerate revenue growth in certain businesses that we -- where we believe, potentially doing something organically might make sense or bring in a capability that can help drive our competitive advantage, we'd certainly be open to doing so. And look at a lot of deals and the -- maybe the sort of lack of deal should not suggest to you that there's a lack of activity here. We increased our shareholding in our India JV in the first quarter to 47%. So we continue to be active, but we're also very disciplined and whatever we do has to make strategic sense for us as well.

And then with regard to pension risk transfer, I think you said you did 3 deals of $2-plus billion. Maybe a little color around the pipeline. It seems like there are a lot of new players in pension risk transfer that we didn't see 3 years ago. So do you think that pipeline will continue to be robust and that we'll have quarters like this one.

Andrew, it's Ramy here. I mean, as you know, the activity in the first half of the year was pretty substantial in the PRT space. Year-to-date, we've written $3.8 billion worth of deals, and that comes after a successful fourth quarter where we roll $3.6 billion worth of deals. So that's cumulatively about $7.5 billion year-over-year. The pipeline continues to be pretty active and pretty robust, as Michel mentioned. And we are focused on a specific part of that pipeline where we enjoy our own kind of set of competitive advantages, namely the jumbo end of the plans, and there are fewer competitors there. When you go down size, clearly, there are more competition and more providers, but where we play, it's another set of competitors because of the size of the transactions that we bid for.

And ladies and gentlemen, we will now turn the conference back to the CEO, Michel Khalaf.

Thank you all for joining us this morning. I know it's a busy morning. Our second quarter results add to MetLife's track record of consistent, strong performance and provide further evidence of the strength and momentum of our well-diversified, market-leading businesses. With our clarity of purpose, a compelling all-weather strategy and a relentless focus on execution, we are well positioned to deliver superior value to all our stakeholders. Thank you, and have a great day.

Ladies and gentlemen, this conference is available for digitized replay after 11:00 a.m. Eastern Time today through August 12 at midnight. You may access the replay service at any time by dialing 866-207-1041 and enter the access code of 2495088. And that does conclude your conference for today. Thank you for your participation. You may now disconnect.