Q4 2020 MetLife Inc Earnings and Outlook Conference Call
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Ladies and gentlemen, thank you for standing by welcome to the Metlife fourth quarter 2020 earnings release and outlook Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time as a reminder of this conference is being recorded bill.
For 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 SEC filings with that I will turn the call over to John Hall Global head of Investor Relations.
Thank you operator, good morning, everyone. We appreciate you joining us from Metlife fourth quarter 2020 earnings of near term outlook call.
Before we begin I refer you to the information on non-GAAP measures on the Investor Relations portion of Metlife Dot com in our earnings release and in our quarterly financial supplements, which you should review.
On the call. This morning are Michel <unk>, 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 the set of supplemental slides, which address the quarter as well as our near term outlook.
They were 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 the slides features outlook sensitivities disclosures GAAP reconciliations and other information, which you should also review.
After prepared remarks.
We will have a Q&A session and.
In light of the busy morning, Q&A will extend no further than 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.
No matter, which lunch for us to look at Metlife the performance the fourth quarter.
Full year 2020, or the progress we've made toward our next horizon strategy. The portrait that emerge as one of the resilient company with consistent execution that delivers four at the stakeholders.
The year 'twenty 'twenty wasn't of specialty unforgiving environment for life insurers marked by the worst pandemic in a century.
The record low interest rates and extreme market volatility.
And yet up net life by reducing on diversifying our risk controlling expenses staying true to our investment principles.
And executing on our capital deployment philosophy, we overcame these challenges to produce strong earnings cash and book value per share growth.
Let's begin with our fourth quarter 2020 of results.
As you saw last night, we delivered quarterly adjusted earnings of $1 $8 billion or $2 <unk> per share.
One of the primary drivers was the exceptionally strong returns we earned on our private equity portfolio, which has long been unimportant source of value creation for my life.
Overall adjusted earnings excluding notables rose, 30% year over year, just as noteworthy during the quarter was the resilience of our business in the face of COVID-19.
Life's balanced risk of exposure across the spectrum of mortality morbidity and longevity was clearly evident in the quarter and the year.
Certain parts of our business experienced significant adverse mortality such as group life and Mexico.
But those effects were more than offset by lower utilization in group and EMEA and favorable underwriting and Metlife holdings.
We believe the strong diversification of our businesses represents a meaningful differentiator for Metlife and the current crisis and beyond.
If we look at 'twenty 'twenty as a whole from additional attributes of my life's culture strategy and performance come into view.
I must begin by commending the way of Metlife the people stepped up for each other and our customers during the pandemic.
It is a very purpose as a company to provide financial protection and support for people during life's most destabilizing moments.
The pandemic was one of those moments for so many people who rely on Metlife and we were pleased to go above and beyond for them and for our broader communities.
Between premium credits and contributions from the Metlife Foundation, we provided more than a quarter billion dollars of relief to help people cope with COVID-19.
What's enabled us to preserve our financial strength through the crisis.
Having the right strategy and an unwavering commitment to execution.
We are of less interest sensitive company than we used to be in a year, where the 10 year Treasury spent nine months below 1%. We delivered an adjusted return on equity excluding notables of 12, 3% and the positive earnings impact from volume growth significantly outweighed the drag from lower recurring investment income.
That volume growth showed up in a number of ways.
We reported our second highest year of pension risk transfer of sales ever.
Our stable value of sales jumped significantly, helping our reported liability balances within retirement and income solutions to grow by a very strong 14 per cent.
And we successfully entered the U K longevity reinsurance market, what do we see the potential for additional deals are.
Our expense discipline, which is one of the most critical levers we control was exceptional we promised to deliver of 'twenty 'twenty direct expense ratio of 12, 3%.
Despite the challenges we faced during the year, our actual direct expense ratio came in at 12% or 30 basis points lower.
Year over year. This represents an enterprise wide direct expense reduction of roughly $300 million.
All while continuing to make critical technology investments to improve the customer experience our cash generation. The ultimate measure of value creation was strong we ended the year with $4 $5 billion of cash and liquid assets at the holding company.
This is well above the top end of our targeted buffer and comes during a year when we deployed approximately $4 $5 billion toward common stock dividends share repurchases and accretive M&A. In addition to continuing to invest in new business growth.
M&A remains a strategic asset for Metlife and a key tool as we evolve our portfolio to win the future.
For example, we have long had the Premier group benefits of platform in the life insurance space and continue to deepen our competitive advantage in this highly profitable business.
In 2019, we announced the suite of attractive new voluntary benefits the.
Digital wells health savings accounts and pet insurance.
In 2020, we grew group benefits adjusted P. F. O is the by five per cent and positioned the business for double digit adjusted P. F will growth in 'twenty and 'twenty, one with the acquisition of <unk> health.
And in the second quarter of this year, we expect to close on the sale of Metlife auto and home to farmers insurance.
This transaction includes the 10 year strategic partnership that allows each company to do what it does best.
Farmers to manufacturer of high quality of P&C products, and Metlife to distribute those products through the 3800 employers and our U S group benefits network.
At Metlife the process of planting and pruning to ensure we have the optimal business mix. There's nothing new in 2020, we closed on the sale of our Hong Kong business.
Sold our Argentina annuity business and agreed to sell our Russia business, which closed last month.
I am so proud of what the team of Metlife has been able to accomplish during an atmosphere of disruption and chaos.
I have heard 2020 referred to as the last year.
For Metlife it was anything but.
We seized on the opportunities in front of us and we will use our momentum as the springboard to emerge from the crisis and even stronger shape.
Consider our P N C divestiture we.
We expect the accretion benefits will start to materialize in 'twenty 'twenty, one and will drive double digit earnings per share growth in 2022.
If we pull back further and look at Metlife the performance relative to our next horizon strategy and to the commitments. We made at our Investor Day in December 2019.
We remain firmly on track.
This was far from of given in light of the unprecedented challenges we faced in 'twenty 'twenty.
As a reminder, three of our anchoring commitments were.
First maintain a two year average free cash flow ratio of 65 to 75 per cent.
Second preserve of three to 4 billion cash buffer.
And third generate the approximately $20 billion of free cash flow over five years.
We are confident in our ability to achieve each of these commitments.
As you know based on market conditions at the end of March we discussed the scenario in which our free cash flow ratio could fall below our two year average target range of 65 to 75 per cent.
As John will discuss later this is not a scenario. We currently contemplate and we are affirming of 65 to 75 per cent target range for our near term outlook.
As I mentioned earlier, the cash balance at the holding companies at the end of the year totaled $4 $5 billion.
Keep in mind that we expect to receive $3 $5 billion in net cash as soon as L. P. N C divestiture closes.
And perhaps most impressive given the economic backdrop, we remain on course to generate approximately $20 billion of free cash flow over the five year period from 'twenty 'twenty through 'twenty 'twenty, four and the amount equal to more than 40 per cent of our current market cap.
We believe that no matter, which lunch you use the evidence of Metlife transformation is clear.
It begins with our purpose of building of more comfort in the future for all buying.
By inspiring and enabling our people to deliver for our customers, we create value of that extends to our shareholders and communities.
Our commitment to preserving my life's financial strength is really just another way of saying that we will always keep our promises and manage this company sustainably for the long run.
This requires discipline, the termination and dedication to consistent performance.
More than ever we are convinced that we have the right the ingredients to generate strong value creation at <unk>.
Sound strategy and attractive set of businesses and the management team with a relentless focus on execution.
With that I will turn the call over to John Mccallion to cover our financial results in greater detail and to discuss our 'twenty 'twenty one outlook.
Thank you Michel and good morning, I'll start with the <unk>, 20th supplemental slides, which provide highlights of our financial performance and update on our cash and capital positions in more detail on our near term outlook.
Starting on page three we provide a comparison of net income to adjusted earnings in the fourth quarter and full year.
Net income in the quarter was $124 million of one $7 billion lower than adjusted earnings.
This variance is primarily due to net derivative losses from higher long term interest rates and stronger equity markets.
For the full year net income of $5 $2 billion, which included net derivative gains of $1 $1 billion. It was more in line with adjusted earnings.
Our investment portfolio and our hedging program continued to perform as expected.
On page four you can see the year over year comparison of adjusted earnings by segment.
This comparison excludes net favorable notable items of $420 million in the fourth quarter of 19.
Which were accounted for in corporate and other.
Excluding such items adjusted earnings per share were up 33 per cent and 34% on a constant currency basis.
Moving to the segments, starting with the U S.
Group benefits adjusted earnings were up 16% year over year.
Driven by expense margins underwriting and volume growth.
The group life mortality ratio was 96, 3%, which is above the top end of our annual target range of 85 to 90 per cent.
And included roughly nine percentage points related to COVID-19 claims.
For group non medical health the interest adjusted benefit ratio was 61 seven per cent.
The lower annual target range of 72% to 77% due to favorable dental and disability results.
The higher dental utilization at the end of the third quarter did not continue in for Q as we had anticipated.
Most likely due to the resurgence in COVID-19 cases.
Turning to the top line group benefits adjusted P. F. Those were up 10% year over year on solid product growth.
As well as the release of approximately $200 million of the remaining unearned dental premium reserve established in to queue.
Excluding this reserve release group benefits P. F O growth fell within our annual target range of four to six per cent.
Retirement, and income solutions or R. I S. Adjusted earnings were up 64% year over year.
The primary drivers were strong investment margins, mostly due to higher variable investment income and volume growth.
RIS investment spreads were 177 basis points up 71 basis points year over year.
Primarily due to higher variable investment income.
Spreads excluding VII were 104 basis points up 21 basis points year over year, primarily due to the decline in LIBOR rates.
RIS liability exposures, excluding U K longevity reinsurance grew 14, 3% year over year due to strong volume growth across the product portfolio as well as separate account investment performance.
We completed five pension risk transfer deals totaling $4 $2 billion in the fourth quarter, a very strong result.
For the full year of 2020, PRT sales were $4 $7 billion.
As Michel noted that was our second highest year ever.
And we see a good pipeline going forward in 'twenty 'twenty one.
Property and casualty or P&C adjusted earnings of $112 million were up $87 million as fewer miles driven led to favorable auto underwriting margins.
As previously announced we expect to close the sale of the auto and home business to farmers insurance in the second quarter.
The purchase price is not subject to any adjustment for changes to the business performance or economic conditions from the deal announcement through closing.
And starting with the first quarter of 2021 <unk>.
Pretty in casualty results will be reflected as the divested business and our financial statements and excluded from adjusted earnings for all of 'twenty 'twenty one.
Moving to Asia adjusted earnings were up 45 per cent and 42% on a constant currency basis, primarily due to higher variable investment income as.
As well as favorable underwriting volume growth and expense margins.
Asia is solid volume growth was driven by higher general account assets under management on an amortized cost basis, which were up 5% on a constant currency basis.
Latin America adjusted earnings were down $139 million unconstitutionally basis, primarily.
Primarily driven by unfavorable underwriting.
Elevated COVID-19 related claims primarily in Mexico.
Impacted Latin America's adjusted earnings by approximately $160 million after tax.
EMEA adjusted earnings were up 23 per cent and 27% on a constant currency basis, primarily driven by favorable expense and underwriting margins.
Metlife Holdings adjusted earnings were up 58 per cent.
This increase was primarily driven by higher private equity returns.
As well as favorable long term care underwriting and expense margins.
The life interest adjusted benefit ratio was $59, 6% higher than the prior year quarter of 55.5 per cent and your annual target range of $52 55 per cent.
Well life claims were elevated due to COVID-19, this was more than offset by favorable long term care results, which benefited from both lower claim incidents and higher policy termination rates.
Corporate and other adjusted loss was $198 million. This result is consistent with the expectation that we laid out for the second half of 2020.
The company's effective tax rate on adjusted earnings in the quarter was 20 per cent.
At the bottom of our 2020 guidance range of 20% to 22%.
On page five of this chart reflects our pretax variable investment income for the four quarters and full year of 2020.
The I I was $778 million in the fourth quarter.
The strong result was mostly attributable to the private equity portfolio, which had an $8 four per cent returned in the quarter.
For the full year of 2020.
VII was $1 $2 billion.
And above our 'twenty 'twenty target range of $900 million to $1 $1 billion.
This outperformance was primarily attributable to exceptional private equity returns in the second half of the year.
On page six we.
We provide VII post tax by segment for the fourth quarter and full year of 2020.
The attribution of VII by business segment is based on the quarterly returns for each segment's individual portfolio.
As a general rule of thumb.
Metlife Holdings, RIS and Asia will account for approximately 90 per cent or more of the total VII and are split around one third each.
Turning to page seven this chart shows our direct expense ratio from 2015 through 2020 in each quarter of 2020.
And for Q.
Our direct expense ratio of 12, 3%.
More significantly our full year of 2020 direct expense ratio was 12%.
And better than our annual target of 12, 3%.
Our five year goal was to realize at least $800 million of pre tax profit margin improvement by 2020.
Which represents an approximate 200 basis point decline from the 2015 baseline year.
We exceeded that goal and reduced our direct expense ratio by 230 basis points.
Clearly demonstrating our consistent execution.
And focus on an efficiency mindset.
I will now discuss our cash and capital position on page eight.
Cash and liquid assets at the holding companies were approximately $4 $5 billion at December 31.
Which is down from $7 8 billion at September 30th, but still above our target cash buffer of.
$3 billion to $4 billion.
The sequential decrease in cash at the holding companies was primarily due to the completion of the version health acquisition.
And the previously discussed redemption of preferred stock.
Further.
Cash at the holding companies reflects the net effects of subsidiary dividends payment.
Payment of our common stock dividend.
Share repurchases of $571 million in the fourth quarter.
As well as holding company expenses and other cash flows.
In 2020, we returned $2 $8 billion to shareholders through common stock dividends and share repurchases.
So far in 'twenty 'twenty, one we have repurchased another $434 million of shares.
With roughly $2 4 billion remaining on our current authorization.
For the two year period, 2019, and 2020, our free cash flow ratio. Excluding notable items totaled 78 per cent.
Which was above the high end of our 65% to 75% target range.
In terms of statutory capital.
For our U S companies, we expect our combined 2020, NTIC RBC ratio will be above our 360 per cent target.
Preliminary 2020 statutory operating earnings for our U S companies were approximately $4 $3 billion.
While net income was approximately $3 6 billion.
We estimate that our total U S statutory adjusted capital was $19 $3 billion as of December 31, 2020.
An increase of 4% year over year.
Operating earnings more than offset dividends paid to the holding company.
Finally, the Japan solvency margin ratio was 906% as of September 30th which is the latest public data.
Before I shift to our near term outlook on page 10 of.
A few points on what we included in the appendix.
The chart on page 14 reflects new business value metrics for Metlife, the major segments updated for 2019.
We continue to have a relentless focus on deploying capital and resources to the highest value opportunities.
Metlife invested $3 $8 billion of capital in 2019 to support new business.
Which was deployed in an average unlevered IRR of approximately 15% of the payback period of seven years.
Also pages 15 through 18 provide interest rate assumptions and key sensitivities by line of business.
Turning back to slide 10, the macro environment remains uncertain and we expect COVID-19 impacts to remain with us through the first half of 'twenty 'twenty one of.
Also we expect pent up demand in certain utilization products to emerge in 2021 of.
Albeit more noticeably post first quarter.
While we expect interest rates will remain low the ste.
Opening of the yield curve has helped support our investment spreads.
Finally based on the forward curve the U S dollar is expected to weaken.
Moving to near term targets.
We are maintaining our adjusted ROA range of 12% to 14%.
Despite the headwinds associated with the lower interest rates and the realized gain from the sale of our P&C business we.
We expect to migrate back to the range over the near term period.
We also expect to maintain our two year.
Average free cash flow ratio of 65% to 75% of adjusted earnings.
And the early part of 2020, we presented the scenario based on economic conditions as of March 31st indicating that such conditions for an extended period of time could pressure our free cash flow ratio. However.
However, since then macroeconomic conditions credit markets.
As well as the company's business mix and performance have been resilient and support our current outlook.
In addition, we remain committed to maintaining of direct expense ratio of below 12, 3%.
While the sale of the P&C operation will put pressure on this target in 'twenty and 'twenty, one due to its lower expense ratio.
We expect to be back below the target starting in 2022 as a result of our commitment to an efficiency mindset.
We are raising our VII guidance range in 2021 to one two to $1 4 billion.
We project private equity to remain strong in 2021, our plan assumes the 12% annual return on an average balance of approximately $9 billion.
In addition of portion of our real estate exposure has been shifting from direct ownership to indirect ownership through certain real estate months the.
The net result will be a migration of around $100 million of recurring net investment income to VII in 'twenty 'twenty, one and beyond.
Our corporate and other adjusted loss is expected to remain at $650 million to $750 million after tax.
And we are maintaining our effective tax rate of 20 to 22 per cent.
At the bottom of the page you will see expected key interest rate sensitivities relative to our base case.
Which incorporates the forward curve as of December 31st.
The takeaway is that the changes in interest rates are expected to have a relatively modest impact on adjusted earnings over the near term.
So now I will discuss our near term outlook for our business segments.
Our comments will be anchored off full year 2020 reported results in our Q F S unless otherwise noted.
Let's start with the U S on page 11.
For group benefits, we are expecting adjusted P. F o's to have low double digit growth in 'twenty and 'twenty one aided by the version health acquisition.
Following 'twenty 'twenty, one we expect topline growth to revert to our historical target range of 4% to 6% annually.
Regarding underwriting.
We expect the annual group life mortality ratio to be between 85 to 90 per cent how.
However, we do expect the first quarter of 2021 group life mortality ratio to be above the range as COVID-19 related mortality remained elevated.
The group non medical health interest adjusted benefit ratio of 65, 3% in 2020 was extremely favorable driven by unusually low utilization in dental and lower incidents in disability.
Although we do not believe the 'twenty 'twenty ratio of sustainable.
Dental utilization remains low so far in 'twenty one.
In addition, we are lowering our expected annual group non medical health interest adjusted benefit ratio to 70% to 75 per cent from 72 to 77 per cent.
The reduction reflects our continued shift in business mix towards products with lower benefit ratios, including voluntary products and the addition of version of health.
For our S. We are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread business and fee based businesses.
We are also maintaining our expected annual R. S investment spread of 90 to 115 basis points in 2021.
From Metlife Holdings, we are expecting adjusted P F o's to decline between 5% to 7% annually.
Roughly consistent with the natural run off of this legacy business.
While the top line continues to decline we are widening our adjusted earnings guidance of $1 billion to $1 2 billion in 2021.
Finally, we are also maintaining the life interest adjusted benefit ratio of 50 to 55 per cent in 'twenty and 'twenty one.
While COVID-19 related life claims are expected to remain elevated in the first half of 'twenty 'twenty one.
This will be more than offset by the benefit from a lower approved policyholder dividend scale.
Now, let's look at our non U S businesses near term guidance on page 12, which is presented on a reported basis for adjusted earnings and P. F O's and on a constant currency basis for sales and AUM.
For Asia.
We expect the recent sales momentum to continue and generate double digit growth in 'twenty 'twenty one.
Followed by mid to high single digit growth in 'twenty, two and 'twenty three.
In addition, we expect general account AUM to maintain mid single digit growth, we are expecting adjusted earnings to be essentially flat in 2021.
Increase in the mid single digit growth in 'twenty, two and 'twenty three.
All of Latin America business has been the most negatively impacted by COVID-19, and the environment remains less certain as the vaccine protocols are still emerging.
Given this backdrop, we expect adjusted <unk> to have high single to low double digit annual growth over the near term.
We expect 2021 of adjusted earnings to grow high teens aided by favorable FX impacts of approximately $25 million.
For the first quarter adjusted earnings are expected to be comparable to the fourth quarter of 2020 with gradual improvement, particularly in the second half of the year.
Looking ahead to 2022, we expect Latin Americas adjusted earnings to return to 2019 levels.
In contrast to Latin America, EMEA had a very strong 2020.
Benefiting from lower utilization in group medical and accident in the health businesses due to COVID-19 related lockdowns.
Regarding the top line, we expect EMEA sales and adjusted <unk> to grow mid to high single digits over the near term.
Given the unsustainable benefit ratio in 2020.
We expect of me is adjusted earnings to grow low to mid single digits against the more appropriate baseline year of 2019.
Let me conclude by saying Metlife delivered another strong quarter to close out a very strong year.
Fulfilling our financial commitments to shareholders and keeping our promises to customers.
Our capital liquidity and investment portfolio are strong resilient and well positioned to manage through this challenging environment and come out stronger.
We are confident that the actions were taken to be a simpler 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 non 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 of a question. Please press one of them zero at this time and one moment. Please for your first.
John.
Your first question comes from the line of Eric Bass from Autonomous Research. Please go ahead.
Hi, Thank you can you talk about your preferred uses for the proceeds from the PMC business and do you have of timeframe over which you expect to fully deploy the excess capital of both point of closing the transaction.
Yeah, Hi, Eric It's Michel.
So let me start by.
Just reiterating on the you've heard me say this many times the.
No, we believe excess capital above and beyond what's required to fund organic growth belongs to our shareholders.
And we would use it for share repurchases of common dividends and strategic acquisitions that clear of risk adjusted hurdle rates. So no change there.
And that's why we are we also announced in December that our board had approved a new 3 billion buyback authorization.
We repurchased 571 million of my five shares in the fourth quarter.
In total for the year, we repurchased approximately $1 2 billion.
And so far in 'twenty, one 'twenty, one we've repurchased another 434 million shares.
So we still have roughly $2 4 billion remaining on our current authorization.
We would expect the complete the new 3 billion authorization in 2021.
I look I think we've also built a.
The track record here of being deliberate in how we manage capital of.
So you now expect that to once we complete the current authorization.
We will you know.
The review assess the environment and then we would have a discussion with our board of about a you know potentially in your authorization. So you know I hope I hope that gives you a bit of color in terms of how we would sort of a use of proceeds.
Oh, yes. Thank you Rob and then secondly can you talk about the outlook for RIS spread.
Why doesn't the spread range for 2021 increase given the benefits that we've seen from the steeper yield curve as well as the higher outlook for VII in 'twenty and 'twenty one.
Good morning, Eric It's John.
Look I think that we've had some strong performance in 2022, and we should recognize the VII. Obviously came in very strong. We've had also had we've.
We've had some kind of one time.
The Pops, I'll say and we talked about this in the third quarter from things like we had some higher prepayment activity on some RMB of securities that were purchased at a discount several years ago, we actually saw that continue into the.
The fourth quarter. So all in all of the way we see it as a.
We're able to maintain spreads despite the low rate environment.
I think it's we're not immune to low range, but I think we have a number of diverse set of products and businesses that you know were some performed well and low rates and the others quite honestly you know there is some roll off reinvest risk.
So all in all we're very pleased.
To be able to maintain the spread guidance that we gave a year ago and.
I think where we're happy with the the outlook.
Got it thank you.
Your next question comes from the line of Andrew <unk> from Credit Suisse. Please go ahead.
Hey, good morning, everyone just a follow up on on the last question.
With regard to the environment for M&A is.
Or.
Are there more of a science out there that it might be of interest to you.
What are you seeing out there that the.
Okay.
That might be of interest and is there a lot of activity going on in and on the flip side with regard to Metlife holdings.
Is there a heightened interest in your in annuity blocks in the life blocks in the L. T. C. What are you seeing in that environment with out necessarily specifically commenting on the bed.
Yeah, Hi, Andrew It's it's Michel let me start and then John will we'll talk to you about of holdings.
You know what.
Let me start by saying that.
We're quite happy pleased with our portfolio of businesses, we don't see I don't see any major gaps there.
We look at M&A as a sort of a strategic capability here, but we also have a you know an approach of global a consistent approach in how we look at M&A opportunities from a strategic fit perspective.
You know what day, you know those opportunities would need to earn more than their cost of capital.
We are we also you know look at the potential M&A in terms of it being more attractive than share repurchases.
And you know, we also seek to sort of achieve a healthy balance between the returning cash to our shareholders and investing in and attractive future growth through M&A. So that's really the approach here of.
But you know if you were to ask me what sort of any gaps that we see I would say, we don't see any major gaps in terms of our portfolio of businesses, Let me turn it over to John.
Good morning, Andrew.
Yeah, I would say that there's not a lot to update on relative to what I said back in the third quarter. Obviously as I mentioned then we are we do see that there's a you know kind of the supply of capital out there is starting to pick up I think that's a good thing obviously right.
Rising as the good thing and as I said before a part of our process. In holdings is we take of third party external perspective of this business, we're working through different.
Combinations ideas are to think about how do we optimize and optimization can be how do we do things better internally to manage this business as well as look for ways that there might be you know kind of a value enhancing transaction for us and for someone else but.
No no one transaction can be replicated I think that's that's certainly one thing we've all learned I think everyone has a unique situation and so we're working through we worked through our own and see if we can find an optimal solution, but we don't have to do anything and I think that's important where we are.
We have some pretty.
I would say best in class capabilities to manage the runoff.
But nonetheless, we continue to take of third party of an external perspective.
Got it. Thanks, Thanks for that and then just the follow up would be you know theres a lot of talk now.
We're pretty deep into the Covid that theres kind of a pull forward on claims and so forth. So we've seen of.
A financial benefit to the LTC line and of course in Metlife Holdings also the.
The negative impacts on mortality, so could you talk a little bit about.
How you see that affecting your mortality and your.
Long term care claims respectively going forward maybe into the later 'twenty, one or 'twenty two do you think there'll be any.
Any differences that we see going forward.
Yeah, it's tough Andrew to really handicap that at this point I mean, it's certainly we saw across I'd say all key trends there was some favorability in LTC this quarter and that's probably the first quarter, where we've had all of you know kind of of all drivers clay.
Jim incidence was down higher claim of policy termination rates average claim size was a little lower so.
Yes, we did see that we still believe at this juncture and in our long term view is that this is an aberration.
In the short term aberration that will revert back to trend.
But I think it's something that we'll need to monitor closely and continue to evaluate as more data.
It comes available.
Thanks, John.
Your next question comes from the line of Tom Gallagher from Evercore. Please go ahead.
Good morning.
One question I had is John I think you've mentioned your LTC block is hedged on the interest rate side for about five years if.
If the long end of the curve keeps moving higher and we get a bit of of reflation move here for the next couple of years would you guys plan on extending the the rate protection back in that block to further protect.
Protected immunize that that business is that is that something you're contemplating right now.
I would say we always contemplate.
Updating our a L M and hedging across all portfolios not just LTC. It's a it's proved proven to be a very valuable tool. The constantly evaluate look of different opportunities developed of playbooks be ready when things change not not reactive or proactive.
So you know we would obviously consider that.
As you said, we're well hedged from an interest rate perspective, and the LTC also theres just some inherent natural offsets in long term care. So it does depend what drives rates up right. So you talked about inflation, you've got to be careful about inflation. When it comes to long term care because that can have an offsetting effect that also helps mitigate some times when <unk>.
It's got low so so all of those things have to be considered.
Gotcha and then my follow up is just on Asia I.
I took the the guidance there was was pretty constructive mid single digits. In 2022 23, that's certainly compares very favorably to the big Japanese competitors.
Is there is there something that's different about your Japanese business or would you say, it's your non Japanese Asian businesses. Your cash growing a lot faster that are offsetting 18 you provide.
A little color for what's what's allowing that to hold up better than others.
Well. This is kishore. Thank you very much for that question.
Certainly one of the and the referenced this before a few strength for our Japanese business. The number one is the diversified channel mix that we have we play across multiple channels.
We're strong in bank App, we've got 120, plus bank of the relationships that Ron floor.
The extended period.
A lot of depth there.
We also are very strong player in the IAA channel.
Where our relationships with some of our Federated agents run many many many many years.
And and similar to the large agencies as well. In addition, we have a fantastic resilient our career agency channel, which we've been investing in and you know for the past couple of years, we've actually made significant investments in that channel.
Our growth as well and similarly on the product side. We are also well diversified with the focused on the annuities and as well as the A&H and as well as life and so we play in all segments of all of that too so that's a pretty different.
All of our orientation with regards to that now certainly the other Asia also helps to that story.
Because we are in the number of markets, where the growth is pretty aggressive and and you saw that play out.
Over the last couple of years, and that's and we expect that to play out.
Down the road as well.
Thank you.
Thanks, Thanks Kishore.
Your next question comes from the line of Jimmy Bueller from J P. Morgan. Please go ahead.
Hi, Good morning. So the first just had a question on labor trends in the group business.
You mentioned dental utilization as favorable I'm, assuming it's not as good as it was or as low as it was early last year, but if you could talk about that what also what youre seeing for disability claims and none of them how much of an offset do you think diesel a beef to elevated group life claims in this year.
Oh sure Jimmy it's it's Rami here. So let me just first of kind of described the fourth quarter for you and maybe 2020 in general so for dental we did see a significant dip as COVID-19 hit and the of the dental offices were closed and as you recall at the time.
Because of lack of availability of services, we did set up an unearned premium reserve back in the second quarter.
From a utilization perspective, we did expect some sort of catch up effect of pent up demand.
And we did see some of that in the third quarter, but in the fourth quarter.
That kind of pulled back and in particular, it's pulled back for preventative services. So think a regular checkups cleanings et cetera.
And as we go into Q1 for dental or we're still seeing some softness in debt utilization. So it is coming in below below expectations again, driven by those a preventative.
The services. So that's kind of the dental picture last year I'm coming into this quarter in terms of what we have visibility into.
For disability just Dimensionalize the book for you so disabilities about 12% of our P. F O.
A third of that book is short term disability and two thirds is long term disability.
So for the S. T D book, it's not really a macro unemployment story, it's really all about injuries and minor of surgeries et cetera, and what we've seen in the book last year and what we continue to see this year. So far is the rising COVID-19 claims have been basically off.
Sets by a decrease in some of the other claims with respect to injuries and surgeries. So it's basically flat on the STD portion of the book.
The L. T D portion of the book is continues to be favorable now if past recessions are any guide you would expect to see some impact in terms of frequency of recoveries on the L. T. D book, you typically see those impacts coming in with a lag.
We continue to monitor this very carefully, but we're not yet seeing any.
Any unfavorable 80 quite the all we're seeing a favorite ability of rather in terms of frequency for the L. T. T book, Oh TD book So far.
Okay. Thanks, and then just a question on the obviously your operating income was very strong, but net income was not as much and you had the large derivative loss I think you've mentioned that a majority of these derivatives are or the losses uneconomic or its hedging loss, but as the portion of it.
The economic and how do you think about sort of from below the line versus above the line just the difference between the operating versus net.
Okay.
Good morning, Jimmy So first yes, that's that's the case for the fourth quarter I mean, if you look full year I think they are much more aligned and that's been the case now for some time. So we're gonna see volatility on a quarterly basis and that should not be a surprise.
But oh, yes. It is part of our hedging program, obviously, we put some of that mark to market non cash.
Hum.
Horizon below the line just because of the the the what we're hedging doesn't move in the same direction. So it could be confusing otherwise.
Yeah, I think as as markets rise and you saw equity markets rise significantly you can think that's where you know predominant number of level of our losses came also interest rates rose. So that's another place. So I would say as expected would be the would be the punch line for us and.
We're very pleased with how it's performed so far.
Okay. Thanks.
Your next question comes from the line of Ryan Krueger from K B W. Please go ahead.
Hi, Good morning, I'm can you comment on the key drivers of the expected upside to your ROE of getting back to the 12% 14% target over the next few years.
Yeah.
Hey, Ryan it's John So as you mentioned, we said in our outlook that we're comfortable with the migrating back to the target of 12% to 14%.
Mentioned in my opening remarks, a few things you know for certainly next year and to some degree into 2022.
The low interest rate environment, and the impact from the sale of the of the P&C and the related realized gain that will put pressure on our way.
But what we do see an upward trajectory.
Given our current business mix our growth outlook, our diverse set of invasive investment capabilities. You know the returns that we've been generating on new business in the current environment and then lastly, you know the deployment of some excess capital I think all of those things gets you to migrate up in and suggest that you know kind of based on the current macro.
So outlook for us achieving you know probably the lower end of that range, but nonetheless in the range.
Got it thanks, and then I just had a follow up on non medical health.
Given your comments on favorable dental utilization in the first quarter. So far would you anticipate setting up of a.
And unearned premium reserve again in 2021.
Or is that more of a about kind of one off practice due to the volatility we saw in 2020.
Yeah, I would just remind you Ryan the reason.
That we were able to do that is because the services were not available you know dentist offices were closed we don't forecast that that will be the case in 2021. So we would not expect the you know the need or the requirement to set up an unearned premium reserve for that.
Got it thank you.
Okay.
Your next question comes from the line of Nigel Dally from Morgan Stanley. Please go ahead.
Great. Thanks, and good morning, with your free cash flow ratio of giving you guidance I'm, assuming that you expect total play benign credit conditions gets hoping to get clarification as to whether that's accurate or are you still looking at Opportunistically de risking your portfolio or is that net all goodness there.
So Nigel as John maybe I'll start and if Steve wants to dive in on the you know kind of the credit outlook I'll, let him do that so.
Just as you said on our free cash flow outlook, and just to help reconcile and reiterate some of the things I just instead of my opening remarks.
We gave a scenario back in Q1 debt assumed and extension really.
The March 31st macroeconomic conditions, and then as you know.
Steve articulated in that call.
Some of assumptions around credit losses, and downgrades, so what's what's different right Mara as we said market conditions have improved interest rates are higher equity and credit markets are resilient.
And as a result, we've seen limited credit losses, with the portfolio and its but notwithstanding the fact that environment remains uncertain here.
So so that's kind of one of the other thing is we have gone through as a result of those macro factors and kind of completing our year end cash flow testing requirements in the final update for our V. A principal based reserving in New York and you know as a result, we expect our combined NTIC RBC ratio to remain above our target.
And again I would just say that the you know a real testament to the team's approach and proactive approach to a L M and and hedging. So so therefore, you know we our outlook for our cash flow guidance stays intact. So maybe Steve can give some color on credit outlook.
Sure. Thanks, Thanks, Nigel it's true.
I think John set the stage for that two of just thinking back you know March 31st was the very different time periods and we are in today and we certainly did look at you know how of how bad could the downside be since then.
We've seen obviously the fed is really playing an active role in the markets we've seen the fiscal stimulus.
And so the markets continue the trundle, along however, what I can say on all of that is our watchword continues to be one of caution in these markets against some of the fundamentals are positive.
The economic recovery continue seems to be continuing although a lot of it is going to be based on the vaccine rollout now and what happens there I look at some of the actions we made over the over the past nine months or so continuing to really manage the portfolio, particularly in those sectors that that we felt.
We're more exposed in this economic environment and we're very pleased with how we are positioned today, but again, we're cautious and we look at spreads in the market today spreads are very tight and it's not clear that you know the.
The return, we're getting particularly from the public fixed income markets really matches the risk of their so so we are cautious we really continue to.
The favor high quality names in the public markets and most importantly, we continue to move to private assets in the private markets, which are of strength of ours.
And really do continue to show relative value and better risk reward trade offs and we're seeing in a number of the private markets and that's where we're continuing to put the majority of our new investment flows.
That's very helpful. Thank you.
The results in the back half of 'twenty 'twenty, one, but you also mentioned vaccine distribution is an area of uncertainty. So I just wanted to get some clarity as to what youre, assuming with the gods of the vaccine distribution you just trying to understand whats.
The potential area of bone the ability of whether you think of it will be cautious with the guts of assumptions that you're building into that guidance.
Neither of you broke out of it broke up a little bit but I think the question was around just our you know what are we assuming in terms of vaccine rollout is that right.
Yes, the vaccine rollout, especially for Latam.
Four of Latam, Okay, Yeah, maybe I'll start and yeah.
Have a regular fan who took over as head of lot of time effective January one with us. So he can provide some color yeah and I'll just say you know as I said broadly speaking I think you know how that rolls out across the U S and in Latin America.
TBD, but so there still remains quite of bit of uncertainty, but maybe I'll turn it over to Eric.
Sure. Thanks, John So as you might recall compared to the U S. A lot of America was really roughly on the quarter lagged from the onset of the pandemic and dislike continues to hold of.
Regarding the.
So looking ahead of the the rollout of the vaccine.
We expect the delays are and especially in Mexico. However, we are very pleased with the fundamentals and the financial strength of all of our business in the region and that remains strong and our leading franchise in the region remains intact. Our we.
We expect our revenues to grow also Oh really supported by strong persistency, which we've seen across the region.
And a good example is our flagship product in Mexico are 99 product and this will support growth are in the in 'twenty 'twenty. One. So you know just to close as you've seen in the on John's comments in the in the Rois look we expect the 22 earnings.
To really come back and enrichment towards sort of a historical levels.
By then.
That's great. Thank you.
Your next question comes from the line of Sunni come off from Citi. Please go ahead.
Thanks, Good morning, I wanted to take out of the group benefits.
<unk>, particularly of the the the longer term outlook.
After a big lift in P. F. O is next year of universe, and I think you are providing back to 4% to 6% growth, which is consistent with your outlook for last year from last year I would've thought maybe there could be some upside to that just given the opportunity to cross sell some of the diversity of product to your existing client. So it's.
The four to six conservative or is there an opportunity to maybe.
The high end or exceed that based on cross selling of of the of the versant product.
Yeah.
Hey, its needed its rami here. So just the the headline of member number remember here of the four to six comes on top of the double digit next year. So we are applying of four to six to a bigger peer flow number.
But if you were just the step back and look at the franchise and look at the 2020 results. We're seeing very strong momentum here are our value proposition is resonating with our customers and intermediaries and you know of 'twenty 'twenty results full year or the 5% P of full growth and I would remind you that inc.
Clues about the point of headwind from the dental premium discounts that we provided in the second quarter. So this is a the results we're really pleased with especially in the context of the.
The challenging external environment.
But you know looking forward in terms of our confidence in the outlook, we talked about versant and and we the strategic fit is there we continue to see a very good reaction from our customers and intermediaries about versions and the integration is well underway.
We continue to see very strong persistency across our book and rate actions that have been consistent with our expectations.
In the jumbo market, which was light in 2020. The activity has returned in 'twenty 'twenty, one and we are kind of winning our fair share. So we are expecting to see strong sales figures coming into Q1.
And then you know finally, if you think about our outlook I would say what's coming into sharp focus here is the increasing importance of the investments we have been making and continue to make an hour of capabilities broadly and specifically our digital capabilities to kind of meet changing needs of our customers.
And this is where our scale and the ability to invest is paying off dividends. So to give you just a sense of that and voluntary P of foods, we saw a 20% growth in our <unk> in 2020 over 19, and we're expecting similar growth in 'twenty one.
Those numbers compounds, so our 2020 pupils and voluntary were more than double our 2017 numbers, but this is a big ship to move and enhance kind of the guidance is we think is the right one beyond 'twenty one.
Yeah.
Okay I'll stop there given the time thanks.
And at this time there are no further questions I'd now like to turn the call back to John Hall Gray.
Great. Thank you very much everyone for joining us and have a good day.
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