Q2 2020 MetLife Inc Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Metlife second quarter 2020 earnings release Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session instructions will be given at that time as reminder, this conference is.
Being recorded before we get started I refer you to the cautionary note about forward looking statements in Yesterdays earnings release and to risk factors discussed in Metlifes FCC filings with that I will turn the call over to Don Hall head of Investor Relations.
Thank you operator.
Good morning, everyone. We appreciate you joining us for Metlifes second quarter 2020 earnings call. We hope you and your families are both safe and healthy.
Before we begin I refer you to the information on non-GAAP measures on the Investor Relations portion of Metlife Dotcom in our earnings release and in our quarterly financial supplements, which you should review.
On the call. This morning, our Michel Khalaf, President and Chief Executive Officer, John Mccallion, Chief Financial Officer.
Also participating in the discussion or other members of senior management.
Last night, we released to set a 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 disclosures and GAAP reconciliations, which you should also review.
After prepared remarks, we'll have a QNX 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.
Over to Michelle.
Thank you John and welcome everyone.
My focus this morning would it be on how much license successfully managing through the current crisis.
Financially operationally and culturally.
I'll begin with our financial performance in the second quarter, which demonstrates threeq you fundamentals about our business.
First we have become a simpler and more predictable company.
On our last earnings call, we said the major pandemic related impact into second quarter would be the loss on our private equity portfolio.
The negative 8.2% return, we reported squarely within the range provided.
Second our businesses are well diversified by both geography and product providing meaningful offsets to increased claims from covered 19.
In aggregate the second quarter was not an underwriting event.
And third we remain a company that has committed to generate strong free cash flow, providing us with significant liquidity and flexibility.
In the quarter, we reported adjusted earnings of $758 million or 83 cents per share compared to $1.38 cents per share a year ago net income of $68 million fell below adjusted earnings primarily due to losses on derivatives help to protect our balance sheet against declining equity more.
Kits.
On a 2020 year to date basis, Metlife has generated $4.4 billion off net income.
As you know our private equity portfolio is reported on a one quarter lag.
All results reflect extremely difficult first quarter equity market.
The percentage decline in our private equity portfolio was much smaller than the 20% drop in the S&P 500, but still generated an after tax quarterly loss of 48 cents per share.
Consistent with expectations, we shared with you.
Given the substantial rebound and the equity market, we expect a significant recovery in our private equity portfolio. When we next report our quarterly results.
Oh, roughly 500 billion dollar investment portfolio remains a key strength for Metlife.
We believe the diversity quality and liquidity of our portfolio as one of our early actions to reduce risk.
Position us well for a variety of market outcomes year to date, we have seen only modest realized investment losses.
Our underwriting results in the quarter reflect a broad diversity of our businesses. For example, higher claims frequency is in the U.S. were largely balanced by fewer auto insurance claims offsetting longevity and box and lower claims and integration of other protection products globally.
Our group benefits business is instructive <unk>.
Higher mortality drove our group life benefit ratio beyond our annual target range, but this was offset in part by a decrease in dental utilization.
Looking ahead, we expect group life mortality to improve but remain elevated in the third quarter and while dental utilization should increase as we move through the year.
We've deferred recognition of dental premium given the significant decrease and the availability of dental services.
This has the effect of limiting outsized results in any one quarter.
Overall, we continue to expect that the diversity of our business mix will mitigate the global underwriting impact of cool had 19.
Turning to free cash flow, we have long spoken over life insurers capacity to generate cash as one of the most critical measures of the strength and sustainability of its business model and the second quarter, we were able to grow total cash and liquid assets that are holding companies to $6.6 billion.
This is up from $5.3 billion sequentially, and well above our cash buffer target of $3 billion to $4 billion.
Our strong cash reserves provide us with significant financial flexibility to navigate and uncertain and changing economic landscape, including taking advantage of opportunities as well as managing potential impacts to our investment portfolio.
Beyond our financial results I would like to spend a few minutes on other ways. We are managing the challenges presented by the pandemic.
Operationally, our people continue to show grit and determination and not only stepping up to respond effectively to a challenging environment.
But in accelerating some of the trends that will be critical to our long term success.
Enterprise wide, 75% of our employees continue to work remotely.
Throughout the crisis, we have been able to deliver for our customers without interruption in our U.S. group business. For example, we continue to meet or exceed our service level agreements. The crisis is also causing us to fast forward the digitization of our company, which would produce lasting benefits.
Turning to the U.S. group business again, we have expedited and now completed the rollout of an enhanced digital platform that makes it easier for customers to get benefit and formation make payments and slightly.
Since the start of the or the number of people eligible to access the platform has grown by more than 30 million in.
In addition to continuing to invest to improve the customer experience. We also provided our customers with significant premium relief in the second quarter.
While this created some topline pressure we remain committed to strong expense discipline, we moved quickly to find savings as part of our efficiency mindset on are still on track to achieve our full year direct expense ratio target of 12.3%.
Through the first six months of the year the ratio is 12.2%.
An essential part of being a high performing company as having a strong culture and here too we are seeing improvements one of the biggest concerns about the shift to working from home was that employee engagement would suffer.
We have been experiencing the opposite effect.
In all three of our priority areas.
Collaboration across the enterprise.
Strong focus on the customer and a spirit of experimentation employee engagement has actually strengthened.
Part of this is the deep sense of purpose that our employees feel at a time when what we do matters more than ever.
Another factor is our commitment as leadership team the communicating at unprecedented levels. For example, we had been holding interactive global town halls for all of our employees every other week.
Our commitment to building momentum for our next horizon strategy has an urgency as was more than 25000 employees have participated in immersive virtual sessions to build the strong sense of ownership.
The pillars of our strategy remain more relevant than ever focus on deploying scarce capital to its highest use.
Simplify metlife by driving operational efficiency and improving the customer experience.
And differentiate the device competitive advantage in the marketplace.
Far from slowing us down the current crisis is accelerating our efforts to find attractive opportunities.
In June we closed our first ever deal in the UK longevity reinsurance market.
Longevity risk as a business that allows us to top several competitive advantages.
Including our World class actuarial talent.
In addition, the underwriting on capital dynamics of this business fit well with our internal rate of return and payback period requirements.
Another growth opportunity is the new suite of products, we are adding to our market leading employee benefits platform in January we closed on the acquisition of but for us to give us access to the fast growing but insurance market.
Even though we will not launch the product on our platform on the later this year.
25, large employers with approximately 250000 eligible employees have already signed up to offer pet insurance as a voluntary benefit.
Before I close I would like to say word about metlifes commitment to diversity and inclusion a topic that has taken on greater importance in light of recent protest across the United States.
Metlife has taken a number of steps to contribute more just an equitable society.
We have spoken out in the face of in Justice, we have committed to improving diversity within our own workforce.
And we have contributed financially organizations that advance racial equity.
Well, we know there is more work to do both as a company and as a society or purpose is motivating us to help make forward progress.
What I hope you will take away from today's call is that Metlife feels a tremendous sense of urgency about the future.
Everyone has heard the expression don't let a crisis go to waste.
Life, we are taking that too hard and doing the work now to position ourselves for long term success.
We are becoming more efficient, we're getting new customer insights with strengthening our culture and we remain laser focused on consistent execution.
With that I will turn the call over to John Mccallion to discuss our second quarter results in greater detail.
Thank you Michelle and good morning, I'll start with a two to 20 supplemental slides that we released last evening, which highlight information in our earnings release in quarterly financial supplement.
In addition, this slide provides more detail on our outlook for the third quarter as well as an update on our cash and capital positions.
Starting on page three the schedule provides a comparison of net income and adjusted earnings in the second quarter.
Net income in the second quarter was $68 million or $690 million lower than adjusted earnings of $758 million.
This variance is primarily due to net derivative losses, resulting from the stronger equity markets as well as higher long term interest rates in the quarter.
On a year to date basis net income was $4.4 billion compared to net income of $3 billion in the first half of 2019.
The investment portfolio and hedging program continued to perform as expected.
Also as highlighted on page three adjusted earnings included a 438 million dollar after tax loss in variable investment income or VI.
I will provide more details on this shortly.
On page four.
You can see the year over year comparison of adjusted earnings by segment, excluding total notable items.
This quarter's results did not include any notable items, while the prior year quarter had $70 million associated with our recently completed unit cost initiative, which was accounted for in corporate and other.
Excluding the you see I cost in the second quarter of 19, adjusted earnings were down, 45% and down 44% on a constant currency basis.
On a per share basis, adjusted earnings were down, 43% and down 41% on a constant currency basis.
Overall variable investment income was lower than second quarter of 19 by $702 million after tax.
This decline in VI was more than the decline in total adjusted earnings year over year.
Positive year over year drivers included solid volume growth.
Favorable expense margins and equity market strength in the quarter.
This was partially offset by the lower recurring interest margins and less favorable taxes compared to Twoq 19.
Turning to the performance of our businesses.
Benefits adjusted earnings were down 20% year over year.
The group life mortality ratio was 95.9% due to elevated claims related to covert 19.
This is above our annual target range of 85% to 90% and less favorable to the prior year quarter of 85.3%.
Interest adjusted benefit ratio of a group Nonmedical health was 58.5%.
Which is well below our annual target range of 72% to 77% and.
And also favorable to the prior year quarter ratio of 75.4%.
The primary driver was extremely low dental utilization, which I will discuss in more detail shortly.
In regard to the topline group benefits adjusted PFS were down 5% year over year, primarily due to lower dental premiums from the deferral of revenues given a significant decrease in the availability of dental services.
And to account for 25% premium credit to all fully insured customers in April in May.
Excluding these dental premium adjustments, which totaled approximately $500 million in the quarter.
Group benefits peer photos would have been within its annual target range due to solid growth across all markets.
Retirement income solutions or or I guess adjusted earnings were down 45% year over year due to unfavorable investment margins related to the decline in variable investment income.
Which was partially offset by favorable underwriting margins.
Our S investment spreads for the quarter were 25 basis points down 94 basis points year over year.
Spreads excluding VI were 85 basis points in the quarter up one basis point year over year due to a decline in LIBOR rates.
Our asset liability exposure is grew 11% year over year, driven by strong volume across all products.
And separate account investment performance in the quarter.
While liability exposure is grew our asked adjusted foes, excluding pension risk transfer is were down 22% year over year due to lower structured settlement and institutional income annuity sales.
Property and casualty or PNC adjusted earnings were up 19% versus the prior year period, driven by favorable underwriting margins, partially offset by unfavorable investment margins related to variable investment income.
The overall combined ratio was 91.1%.
Which was more favorable than our annual target range of 90% to 97%.
And the prior year quarter ratio of 96.1%.
I can see results benefited from lower auto claim frequencies due to a decline in miles driven in the quarter.
This was partially offset by higher catastrophe losses of $89 million after tax compared to $62 million.
After tax in Twoq of 19.
Moving to Asia, adjusted earnings were down, 29% and 27% on a constant currency basis due to lower investment margins, resulting primarily from the decline in variable investment income in the quarter.
This was partially offset by solid volume growth, which was driven by a 5% increase in general account assets under management on an amortized cost basis.
As well as favorable expense margins.
Latin America adjusted earnings were down 17% as foreign exchange rates across the region dampened year over year results. If today's FX rates hold we would expect the year over year impact to Latin America's third quarter earnings to be similar to the second quarter.
On a constant currency basis, adjusted earnings were up 3% driven by higher equity markets favorably impacting our children in CPI returns.
Which were up 14% in the quarter.
As well as favorable underwriting margins.
This was partially offset by unfavorable investment margins.
EMEA adjusted earnings were up 51% and 59% on a constant currency basis.
This was a record adjusted earnings quarter for EMEA, primarily due to favorable underwriting margins as a result of lower claims in group medical and accident and health policies in the region as well as better expense margins.
We would expect to me is underwriting results to be closer to historical levels in the third quarter.
Metlife Holdings adjusted earnings were down $279 million year over year.
This decline was primarily driven by lower variable investment income of $250 million after tax compared to the prior year.
As well as lower recurring interest margins and unfavorable underwriting due to cobot 19 related claims.
The life interest adjusted benefit ratio was 59.1%, which was above the prior year quarter of 53.9% and above our annual target range of 50% to 55%.
Higher equity markets in the quarter, where a partial offset to the year over year decline in adjusted earnings.
The separate account return in the quarter was 14.8%, which resulted in a positive $13 million initial impact, which compares to a positive $5 million initial impact in Twoq 19.
Corporate and other adjusted loss was $289 million.
This result was less favorable to the prior year quarter, which had an adjusted loss of $237 million, excluding $70 million of you see I costs.
The decline in variable investment income was the primary driver for the higher loss in the quarter.
Looking ahead, we would expect corporate and other losses to be between $325 million to $375 million in the second half of the year.
The company's effective tax rate on adjusted earnings in the quarter was 19.2%.
Modestly below our 2020 guidance range of 20% to 22%.
Now, let's turn to page five this chart reflects our pre tax variable investment income over the prior five quarters, including a loss of $555 million in the second quarter of 2020.
The loss was entirely attributable to the private equity portfolio, which had a negative 8.2% return in the quarter.
As we have previously discussed private equities are generally kind of for on a one quarter lag.
The negative marks included in our Twoq 2000 financial results are inline with our disclosures from the last earnings call.
With regards to recurring investment income, our new money rate was 3.41% versus a roll off rate of 3.72% in the quarter.
This compares to a new money rate of 4.01% and a roll off rate of 4.34% in two to 19.
We have added a table on page six that breaks out the second quarter negative VI of $438 million after tax by segment.
The largest VI impacts to adjusted earnings in the quarter, where Metlife holdings and retirement income solutions, followed by Asia in corporate and other.
In the quarter certain timing adjustments have shifted the relative VI impact between Asia and corporate another.
Going forward these timing adjustments will be eliminated and as such we would expect Asia's adjusted earnings to have a larger contribution from the <unk>.
And corporate and other to have less as compared to the second quarter.
Now, let's turn to page seven this chart provides one approach to illustrate the impact of below trend VI on our reported earnings the box in Red reflects the adjusted EPS impact of 48 cents related to the negative VI experienced in the quarter.
This was the first quarterly loss for VI since 2009.
The 22 cents highlighted in the Green box illustrates the adjusted EPS impact assuming VI at the quarterly midpoint of our 2020 annual target range of 900 million to $1.1 billion.
To be clear this chart should not be viewed as quarterly guidance, but rather as one approach to illustrate the below trend VI impact on the second quarter results.
Moving to page eight this walk provides more detail in the group Nonmedical health interest adjusted benefit ratio.
As I noted earlier the reported ratio of 58.5% was very favorable driven by low dental utilization.
However, two adjustments are needed for comparability to our annual target guidance of 72% to 77% and the sensitivities. We provided on our outlook call last December 1st the ratio should be adjusted by 3.9 points.
For the 25% dental premium credit referenced earlier second the ratio should also be adjusted by 7.1 points related to the establishment of an unearned premium reserve.
We established in unearned premium reserve to appropriately aligned dental revenue recognition with the availability of dental services.
As dental offices have begun to open across the U.S., we have seen utilization pickup in July for more involved treatments in procedures, which represent less than 20% of our typical overall dental claims however, incidence remains low for more routine visits.
We expect dental utilization to pick up in the second half of the year pushing the ratio closer to the low end over 72% to 77% target range.
Turning to page nine this chart shows our direct expense ratio from 2015 through 2019.
And the first two quarters of 2020.
In 2020, our year to date direct expense ratio was 12.2% while the ratio was elevated in Twoq you at 12.4% due to topline pressure from premium credits in our dental and auto businesses as well as the establishment of a dental premium reserve.
We remain on track and committed to achieving our full year target of approximately 12.3% as we continue to deploy inefficiency mindset to increased capacity for reinvestment and to protect the margins of the firm.
Now I'd like to spend some time reviewing several key considerations for the third quarter given the continued uncertainty of the current environment.
These considerations are summarized on page 10.
Starting with investments, we expect a strong recovery and variable investment income in the third quarter with our best estimate for private equity returns to be positive mid single digits.
Which is based on a $7.2 billion PE balance at June Thirtyth.
Regarding recurring investment income, we continue to experience downward pressure from lower rates. However, reinvestment rates have held up reasonably well during the first half of the year, given our diverse market leading asset origination capabilities.
Finally, we expect the short end of the yield curve to remain favorable supporting investment spreads.
Moving on to underwriting margins, we continue to anticipate modest underwriting impacts from cobot 19 on a combined basis, assuming desks rise in the U.S. to approximately 200000 through the third quarter.
We expect life insurance claims frequency in the U.S. to moderate.
With life insurance benefit ratios in group benefits and Metlife holdings, moving closer to the respective annual target ranges.
However, we do expect claims activity significantly increase in Latin America in the third quarter as the region is behind other parts of the world in Cobot 19 emergence. Additionally, we would expect some level of offsets from businesses with longevity risks.
Most notably in retirement income solutions.
So currently we expect a limited overall impact underwriting margins on a combined basis for Threeq you.
Turning to topline metrics, we would expect global face to face sales to remain challenged negatively impacting most of our segments.
However, we do anticipate modest sequential sales improvement in Japan.
We expect lower adjusted PFS and most segments with the exception of group benefits, which we expect to have mid single digit growth year over year.
While we expect to encounter volume and topline growth pressures, our efficiency mindset as a core tenet of our strategy to manage margin pressures across our business.
As I noted earlier, we remain on track to meet our direct expense ratio of full year target of approximately 12.3%. Despite the challenges of the current environment.
Now, let's turn to page 11, given the persistent low interest rate environment, we decided to add this page on estimated impacts to our income statement and balance sheet.
If we were to lower our long term actuarial U.S. interest rate assumption, a 3.75% by 25 5100 or 150 basis points.
For each hypothetical scenario GAAP loss recognition is not triggered and there will be a relatively modest impact to net income.
Specifically with respect to the 150 basis point down scenario, which would bring our long term mean reversion rate assumption to 2.25%.
I would highlight two points first the approximately $425 million net income impact is consistent with the guidance range disclosed on our one Q 20 earnings call.
And second.
We would continue to have a significant margin for purposes with GAAP loss recognition.
Overall I believe these sensitivities to test to Metlife significantly reduced risk profile.
I will now discuss our cash and capital position on page 12.
Cash and liquid assets at the holding companies were approximately $6.6 billion at June Thirtyth.
Which is up from $5.3 billion at March 30, Onest, and well above our target cash buffer of $3 billion to $4 billion.
The $1.3 billion, increasing cash in the quarter reflects the net effects of subsidiary dividends payment of our common stock dividend as well as holding company expenses and other cash flows.
Next I'd like to provide you an update on our capital position.
As a reminder, for our US companies are combined any I see RBC ratio was 395% at year end 2019, and comfortably above our 360% target.
For our us companies preliminary second quarter year to date 2020 statutory operating earnings were approximately $1.8 billion.
While net income was approximately $2.1 billion.
Statutory operating earnings decreased by approximately $600 million from the first half of 2019, primarily due to higher VA rider reserves and the impact of a prior year dividend from an investment in subsidiary.
This was partially offset by lower operating expenses.
Year to date net income was driven by derivative gains partially offset by lower operating earnings.
Our expected total us statutory adjusted capital was approximately $21.1 billion as of June Thirtyth.
Up 13% compared to December 31, 2019.
Derivative gains and operating income more than offset dividends paid and other investment losses.
Finally, the Japan solvency margin ratio was 799% as of March 30, Onest, which is the latest public data.
In summary, this quarter's adjusted earnings were dampened by the negative private equity returns, which are based on a one quarter accounting lab.
However, the underlying business fundamentals from my diverse market, leading businesses were evident in our results despite the challenging environment.
Looking ahead, we expect our third quarter adjusted earnings to benefit from a strong recovery in private equity returns, while continuing to absorb modest underwriting impacts from cobot 19.
In addition, we believe our capital liquidity and investment portfolio, our strong resilient and well positioned to manage through this unprecedented environment.
Finally, we are confident that the actions we are taken to be a simpler and more focused company will continue to create long term sustainable value for our customers and our shareholders.
And with that I will turn the call back to the operator for your questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press. One then zero on your telephone keypad you may withdraw your question at any time by repeating the one zero command if you're using a speakerphone. Please pick up the handset before pressing the numbers. Once again, if you have a question. Please press one then zero at this time than one moment. Please for your first question.
Your first question comes from the line of Erik bass from Autonomous. Please go ahead.
Hi, good morning, Thank you.
First question that with 6.6 billion of holding company liquidity and credit impaired.
This is that something thats potentially on the table for the third quarter or do you want to wait longer to see how the environment evolves.
Eric We lost true there in the Middle could you do you mind repeating the question Oh. It certainly has been lay on the outlook for capital return and with the 6.6 billion of Holdco liquidity and I'm credit impacts trending a bit below fair. So far. This how are you thinking about the timing of resuming share repurchases and is that something that spots.
So I on the table for three Q.
Sure so.
As you know last quarter, we put our share repurchase program on pause.
And we felt there was prudent to build our cash uncomfortable onto maintained in order to maintain financial flexibility.
Our view of the remains substantial uncertainty in the economy.
As well as would depend on that which is going to take more time to clear.
Yes, I think conduct over the past three months, we've seen a resilient equity market and tighter credit spreads as you referenced.
Both beneficiaries of government and a reserve follow suit.
And our cash position has grown to 6.6 billion, which gives us greater financial flexibility and optionality.
So I should take all of these factors together.
We would not ruled on capital management in the latter part of 2020.
But we remain on pause for the time being so I hope that answers to your question.
Yes. That's helpful. Thank you and then just a follow up for John The Army grew just wanted to clarify kind of is the idea of the unearned premium reserve to essentially better align the timing of revenues and expenses. So should we think of this is essentially taking some excess earnings from the second quarter and allocating them to future period.
Just when you expect claims and incidents to be higher.
Good morning, Eric Yes, it's it's very much about about the available.
In the second quarter dental offices were closed for the for quite a bit of time.
Ill remind in part of that.
We gave back 25% premium credit to fully insured customers.
And a and then as you said, we also then said we needed to defer some.
Revenue so that it would be recognized when those services are available and so those are that is a timing timing items.
Got it so it is essentially the earnings if you hadn't book that would have that higher in the second quarter, but you will recoup that at some point in the future.
That's correct. Thank you.
Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Good morning, the reduction that you gave on free cash flow guide for 2021 last quarter.
Take a piece of that was driven by elevated credit loss assumptions.
My question is if interest rates stay low credit remains fairly benign.
Where do you think that would land you in terms of the ER the free cash flow conversion.
Heading into 2021.
Good morning, Tom [laughter] I would just remind you that was a scenario not a guide.
It was the you know there's a lot of different factors, we had a one to two year assumption on how this may play out.
It was based on macro factors as of March 31 when.
Brad you were wider equity markets were worse I will say interest rates are modestly down if you look at the 10 year since then.
So you know things as Michelle said, there has been a somewhat resilient equity and credit market for the last three months I'd still say, we're in the the mode of caution.
At this point in terms of what the outlook it will be and how this will play out.
I also talked about last time that that factors in some level of us cash flow testing and so what it's a range of outcomes in that you know some the estimates we provided where based on.
New York Special consideration later that we receive every year last when we got was a year ago is based on a certain macroeconomic environment, we'll work through hopefully constructively with them. This time, but we wanted to just give a I'll say us the stress set of scenarios for what's a possible outcome.
But it's I wouldn't call. It a guide I just say the that's those are kind of possible outcomes based on where but it depends on where macro factors are at the end of the year.
Gotcha and then my follow up is any any update on Metlife holdings in the potential for risk transfer.
Our interest rates than the current level of interest rates to low.
Making the bid ask spread too wide or where do you think something could still happen there even if rates remain kind of where they are.
Yeah, I think we're in the same.
Mode that we've been in for the last few quarters, we are preparing for the opportunity for something to occur.
Although macro factors are creating a a wider bid ask spread having said that.
There are still kind of a a bias push to supply being greater.
And so that could narrow narrow the bid ask overtime. So I'd say, we continue to maintain readiness.
But interest rates, yeah, I would say do present a headwind.
Okay. Thanks.
Your next question comes from the line of Ryan Krueger from KBW. Please go ahead.
Hi, good morning.
Holding company cash were there any meaningful timing considerations that.
The increase in the quarter or would you expect.
Further build and asked for visiting the second half of the year.
On your usage.
Yes.
Good morning, Ryan, Yes, we did have some lower outflows in the in the second quarter.
And.
We did receive some proceeds from the sale of Hong Kong. So it was another item, which we did not disclose as you know.
And so on the looking at the remainder of the year I would say I would not expect the same rate of increase that you're seeing here.
Got it and then could you provide.
Some updates on what you're seeing in the commercial mortgage loan portfolio in terms with things like forbearance request.
And grant than any other statistics that you could provide on.
Going out there.
Sure Ryan its two grew our.
Let's step back and start with an overview of the portfolio again.
It's nearly $51 billion now in commercial mortgages and again, we continue to believe it's very conservatively positioned the average loan to value is 57% the average debt service coverage ratio and the portfolios 2.4 times.
It's very well diversified geographically and by property type.
And and we also feel it's concentrated in high quality assets that are typically located in larger primary markets. So again backdrop of a very strong fundamentally.
Bill diversified portfolio that said you know there clearly are signs of stress in sectors like hotel in retail.
For us that's no less than 25% of the total and not surprisingly as I talked about on the previous earnings call. You know we have received requests for temporary debt service payments deferrals on the portfolio.
We've reached a point, where we're really not seeing much in the way of new requests, but weve granted about 9% on a principal balance outstanding.
Those and again there are heavily concentrated in hotel in retail.
But again.
These are these are.
Payment deferrals, we don't expect losses, and we're not projecting losses from any of those today. It's just that are going to be delayed and receiving the principal and interest and Im just and in addition to adjust those that we ran a deferrals on we actually have received 100% of all other expected payments and.
So so this is.
Something we'll deal with and this crisis, but again, given our long term history or performance in commercial mortgages and I'll remind you know from 2009 to nine team, we have less than $120 million in cumulative losses. The portfolio. We believe is well positioned and we'll manage through this time period.
Thank you.
Your next question comes from the line of Elise Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks. Good morning. My first question on is on the side of thing.
Obviously see on track to hit that target at 12.3 for the full year.
Michelle I know.
Since you took over your volumes kind of put out the message that expense management at the core part of what's going on it Matt even beyond this year. So as we've been in that Colgate environment, and you've heard companies talk about becoming more efficient on.
I've learned anything or if anything within your expense base that perhaps could lead to more sustainable savings on beyond 2020, well into 2021 and beyond.
Yes, hi loose.
So you're not as you mentioned, we do believe does Oh, driving inefficiency mindset and then.
Just keep in mind coming off our you see a high initiative.
Where we've exceeded our target.
It's very important under management team here is highly committed to this and if anything we're seeing an acceleration of this during this the spend Dominic.
You know if you consider that we do have some incremental costs related to the pandemic conducts we're managing to offset.
If you take into account the fact that this quarter, we have about 500 million.
You know our topline as suppressed by about 500 million due to the done four credits and the.
You'll see our between the tweeted discussed earlier, we're seeing also some thoughts on pressure just from the pandemic and general Yes. We are is continually continues to be committed to our 12.3 a expense ratio I think that gives you a sense of just the urgency and the momentum that we're seeing.
Thank you.
Turns off the adoption of this efficiency mindset and clearly.
As we see a further adoption of some of our digital tools Oh, we think those trends are going to persist even coming out of this crisis as we continue to find ways off further simplifying the company.
We feel good about sort of what we discussed.
During Investor Day about you know our embedded ability to create additional capacity. That's also going to help us continue to invest in growth and innovation.
So.
Again, I cannot stress on off.
In terms of crisis, it's about the things that you control and Thats one area that we feel we do control and no as I said, we're very committed to a two maintaining the 12.3.
Hi, so despite all the other things that I mentioned earlier.
Okay. Thanks, and then my second question on the investment spreads within R&D work, who called in the quarter, but that was really due to the.
Because away from that actually held up pretty.
Pretty well.
You know given your outlook can you give us a sense of where Brad down within.
The year I guess could come in on relative to your 2020 guide.
Good morning lease, yes, so Q2 spreads were certainly on an overall basis depressed.
Driven by the negative returns on our private equity portfolio and as just as a reminder, we had said that Rs typically takes about.
Called a third of the results from VI.
And then excluding spreads were 85 basis points up slightly from Q1.
Most of that is driven by the drop in LIBOR. This has helped us.
Maybe a little be resilient when it comes to our spreads the shape of the curve.
Again, some headwinds you a lower lower rates do hurt ultimately, but the shape of the curve matters a lot as we've said before we also seeing some headwinds in real estate equity.
In particular on hotels.
So, but nonetheless, I think the fact that as you said spreads its been resilient, we expect them to be resilient for the rest of the year ex VI.
Where a the shape of the curve would help offset some of those other other headwinds.
Your next question comes from the line of Jimmy Mueller from JP Morgan. Please go ahead.
Hi, Good morning, first to I had a question for Steve Goulart on.
If you think about the credit environment, obviously things haven't.
Ended up being as bad as it goes feared but theres still uncertainty, so where do you see well go to value and what are some of the areas that you might be and avoiding and then related Lee can you talk about what your new money yields are that you're earning right now horses and the gap between that and the portfolio yield. So we get a better idea or your core spreads are headed.
Sure Good morning, Jamie.
Let's let's step back and just talk about the current environment, though and John made some comments on this too and then I'll pick up but Oh, we're still dealing with essentially an unprecedented crisis in the markets.
And in our mind, that's presented a fair amount of uncertainty around what the shape of the recovery would look like and what long term impacts could be now we all know the fed came to the rescue and through really unprecedented intervention.
Has called the markets and in general you have the market tones have certainly improved.
Where we were a quarter ago.
And when you look at things like you know a lot of the downgrade projections that were in the market just about all those participants have reduced their projections. However, we are still seeing defaults and bankruptcies and that trends going to continue.
You know everything back to our first quarter call, we talked about how we're looking at different scenarios and analyses we've made.
And and what the potential impact would be on our portfolio and on our risk based capital and what we said was.
Through all the analysis, we've done we think that all the risks are manageable so put that in the context of today no things have improved.
And and therefore, you know the risk that we saw a quarter ago have also modestly improved and therefore I guess I'd describe it is continuing to be very manageable, but all that said, we're still very cautious about the market. Because there is a disconnect. We think between kind of technicals and fundamentals. So we continue to be.
Cautious.
We've continued to repositioning the portfolio when we see price and spread action like we've seen in some sectors and names that we are still cautious about we're going to continue and have continued to reduce our exposure at the same time, though there are attractive opportunities and we're going to take advantage of them and when can.
Particularly you know we've seen over the last quarter continued opportunities in private assets.
And.
So we'll continue to invest there.
So again, it's really one of balance about continuing to take advantage of where the market will give us to lighten up the portfolio in those sectors and names that we are still cautious about but taking advantage of of opportunities that we see which again right now seem to be more heavily concentrated again, no surprise in private assets, which which again given our you know.
Strong origination networks, our reputation of commitment to those sectors in our conservative underwriting really serve us well and and I think that's when you just look at our commitment to sound underwriting too or asset liability management and most importantly to diversification across the portfolio that allows us to really.
Continue to put up a long term positive successful investing track record even in markets like this.
Are you able to quantify just your new money yield and here. This then relative to the gap between that and yeah.
So our new money yield for the quarter was 3.41% our roll off was 3.7 true.
And yeah.
That reflects I think that's down a little bit from last quarter, but it does reflect still being able to take advantage of opportunities that we do see in the market.
And.
And we're we're obviously in a prolonged low interest rate and for now anyway tighter spread environment.
So that trend is likely to continue in the near term, but again good diversification that we have available for us from an investment perspective, we'll continue to serve us well.
Okay, and then if I could I just ask one more for John Mccallion on your annual actuarial review in the past you have brought your rate assumption down, but the adjustments have been fairly modest.
Are you following a similar brought us a the are looking at your rate assumption or.
Could we are you looking at a different lead to where youre.
Adjustments would be closer to what actual rates are right, though.
Good morning, Jimmy Yeah, we we have a process we will follow across this as we typically have and and we'll go through that during the course, the third quarter and provide an update.
And next next quarter's earnings call I don't think Theres.
There's reasons to change I don't think.
[music].
I would call the in the environment.
Would require a change in process process should dictate and drive drive. The result, so I think we have a very healthy process objective process and and we will kind of managed to that over the course of the next several weeks.
Your next question comes from the line of Humphrey Lee from Darwinian Partners. Please go ahead.
Good morning, Thanks for taking my questions on let's just have a.
Follow up question on group benefits and how should we should think about the CFO transalta for the balance of the year. Clearly this quarter. You mentioned you had the 500 million impacts related to that until.
Do you anticipate any of the unearned premium reserves on all of behind you and things should go back to normal or do you anticipate are there could still be a little bit of the headwind because not the entire country steel so the open.
Hey, I'm free so Rami tubs books here, so as John mentioned, we are expecting.
The utilization of some of the services for dental to be elevated at or more than a above our normal expectations for the rest of the year. So think of that costs. Our customers are making up services that were not provided in the second quarter, So theres that catch up effect.
This additional catch up effect will be offset by the release of the unearned premium reserve into subsequent quarters. So we will get we will see the U.P.R. If you will release into premiums as we see that catch up effect happen with respect to utilization.
More broadly with respect to be a full growth in the third quarter.
We did talk about employment levels being one of the key drivers that drives people here for the for the group benefits business. If you recall, we talked about a number of attributes.
On the loss coal, which somewhat mitigate that employment level impact in terms of the the diversification of our book and the focus towards more larger accounts national accounts.
So in aggregate if you think about the third quarter, we're still looking at Pia full growth in the solid mid digits.
Group benefits.
Got it.
Along all channels.
Our remarks, we talk about the expecting some longevity benefit.
At quarter to offset some of the continued coker related underwriting impact.
Is there any way to help us to think about the the potential benefits from alright, and long term care and a couple of quarters.
Good morning Humphrey.
Yeah look I would probably put this in the context of just overall view of underwriting. So just as a reminder, as to what Michelle mentioned overall for Twoq, we saw a modest impact in underwriting on a combined basis.
We had higher claims in the U.S. and they were largely offset by auto claims auto frequency claims also we had some longevity impacts in the quarter and then we had other claims and utilization benefits outside the U.S., particularly EMEA.
As we look into the Q3.
We think the overall trend of.
I have a neutral impact on underwriting on a combined basis to still be the case, even with deaths rising to 200000 in the U.S. So a couple things to highlight.
We expect we.
We expect the mortality as I said before on my opening remarks for group life, and Metlife holdings to still be elevated, albeit migrating closer to the up top end of our range. So so not as severe as to Q.
I'd also highlight in Latam again, just particularly in Mexico, we expect cobot impact a rise in Q3 so.
No. We're forecasting about 40000 deaths in Q3 from Mexico at and at this point, we'd estimate that would have roughly maybe high single to low double digit impact on the segment benefit ratio.
And then go into your point around offsetting impacts.
Yes, so offsetting these elevated losses, we do expect longevity offsets to increase in both Rs and long term care. As these typically are delayed by a quarter or or or are slower to emerge.
From a reporting perspective, and then as I said my in my remarks, we we also expect EMEA would migrate back to normal trend. So so in summary, we think the net underwriting result would generally offset and therefore cobot impacts would remain modest in Q3.
Great. Thank us all the moving pizza.
Hello.
Your next question comes from the line of Andrew Klingerman from Credit Suisse. Please go ahead.
Hey, good morning.
Maybe just kind of following up on the capital management question.
Taking more of the M&A clock.
Do you think that.
Many opportunities works will rise in this environment.
That you'd be able to.
The act pretty quick clean do you have a desired so and then finally you mentioned.
Insurance acquisition I've been hearing, but that's just a very tough lying to underwrite as opposed to age it becomes quite.
Problematic in terms of the loss ratio. So I was wondering what this thinking was when you made that acquisition so two questions.
Hi, Hi, Andrew I'll take the first part on capital management than on and on Rami When would address your about insurance question. So as I've said before Oh, we view M&A as a strategic capability.
And that's an important tool, but one off the tools in our toolbox.
We're very disciplined in our approach to M&A and just remind us we always look at strategic fit.
As a.
Potential transaction going to help us core revenues are there synergies involved.
I would have to be accretive.
It's clear that minimum risk adjusted return hurdle rate or return.
And we always also compared to other potential uses of capital. So I would say that's nothing changes here in terms of our approach.
No. We are open for business and Oh, you know, but you know the disciplines that I've. Just described a you know we Oh you know as how we view these types of opportunities.
So any areas, though because I would like to add to the net price point wholesale in terms of M&A is.
Yeah, I mean, just sticking your back onto to what we discussed during Investor Day, I think we talked about sort of oh certain lines of business markets, where given the right opportunity.
We'd certainly be open to oil.
You know to doing something.
And Oh, you know I think if you just sort of took two ought to adopt if you consider sort of deposit insurance acquisition.
You know a smaller acquisition that we made and digital wells would complement our legal plans offering you know again, adding or enhancing our no group benefits offering for example group obviously is a business, though we like here into you us. So those are the types of.
Things that a you know I would point you to in terms of going back to what we discussed during investor day on the businesses under markets that we where we.
We like and where we see opportunities to to further grow revenues.
Hi, Thanks.
Andrew its its rami here just building on a michelle's comment the.
The first acquisition was your small but important it very much is aligned to our investor day strategy in and we're entering into a capital light business, where we've identified the clear opportunity, where we can bring value to customers employers and employees.
The pet insurance market. If you look at it more broadly two thirds of Americans have a path they spend collectively $18 billion every year on that care.
But the penetration in the market is in the insurance market is just 2% I'm seeing 20% CAGR year on year end. It clearly look the we have will purchase the company with immense data in history, we have our best Actuaries working on this and we're very much confident in our under.
Writing in this line of business going forward.
Awesome. Thank you.
And at this time I'd like to turn the call back to Michael Hello for final comments.
Let me. Thank you all for participating in today's call.
And I want to close today by reiterating how committed this leadership team as to controlling what is in our power to control, we know what that capital and liquidity consistent execution and expense management are vital during times of uncertainty.
Please stay safe and have a great day.
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