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Text: We appreciate you joining us for MetLife's first quarter 2021 earnings call.
Last night, we released a set of supplemental slides, which addressed the quarter.
They are available on our website.
John McCallion is under the weather today.
We are going to let him rest his voice, and I will speak to the supplemental slides following Michel's remarks.
An appendix to the supplemental slides features outlook sensitivities, disclosures, GAAP reconciliations and other information, all of which you should also review.
In fairness to all participants, please limit yourself to one question and one follow-up.
With that, over to Michel.
As we reported last evening, MetLife delivered very strong financial results for the first quarter of 2021.
Our diverse business mix, sound investment strategy and strong expense discipline combined to generate earnings well above consensus expectations.
By the numbers, we reported first quarter 2021 adjusted earnings of $2 billion or $2.20 per share, up 39% from $1.58 a year ago.
The primary driver was exceptionally strong variable investment income or VII, partially offset by elevated COVID-19 related claims.
Net income for the quarter was $290 million, down from $4.4 billion a year ago, primarily due to losses on derivatives that protect our balance sheet from declines in equity markets and interest rates.
Such gains and losses are the result of GAAP accounting rules that require us to mark certain of our derivative hedges to market through net income without similar treatment for the assets and liabilities being hedged.
We believe the economics and the free cash flow of our business are captured than adjusted earnings.
Regarding variable investment income, the key driver of gains in the first quarter was our private equity portfolio, which delivered returns of 13.3%.
Recall that private equity returns are reported on a one quarter lag.
The strong performance in the fourth quarter was driven primarily by three private equity sectors, domestic leveraged buyout funds, European LBOs, and venture capital.
In the second half of 2020, IPOs from US-based LBOs and venture capital firms more than doubled over the prior year and the market rewarded many entrants with strong valuations.
Venture capital was our best performer across the three sub sectors, largely due to the market's appetite for tech companies.
We see deal volumes hit a record in 2020 and the increase in digital activity spurred by the pandemic drove attractive valuations for early stage tech firms positioned to capitalize on that trend.
While our private equity portfolio return in the quarter was robust, it was in line with industry benchmarks, most notably, Cambridge Associates private equity index.
We are confident this asset class will continue to be a significant source of alpha for MetLife in the future.
Turning to the performance of our business segments, I'll begin with our US Group Benefits results.
Adjusted earnings were down 70% year-over-year on elevated COVID-19 life claims.
In the US, overall COVID-19-related deaths were 40% higher in the first quarter of 2021, than they were in the fourth quarter of 2020.
For MetLife, our Group Life mortality ratio was 106.3%, well above the high end of our target range of 85% to 90% with approximately 17 percentage points attributable to COVID -19 claims.
The top line performance of the Group Benefits business was strong with sales up 46% year-over-year.
We are doing especially well with national accounts and if trends hold, we expect the group business to deliver a record sales year.
Adjusted PFO growth was also solid at 16% with the addition of Versant Health being a large contributor.
In retirement and Income Solutions or RIS, adjusted earnings were up 92% year-over-year, driven by higher VII.
Beyond VII, adjusted earnings were still strong on favorable underwriting and volume growth.
Looking ahead, we continued to see a robust pension risk transfer pipeline.
Rising equity markets and interest rates have improved pension plan funding levels and lowered the cost for plan sponsors to transact with an insurer.
Within Asia, we saw a similar earnings pattern to RIS.
Adjusted earnings were up 70% year-over-year on a constant currency basis, driven by higher VII.
However, even allowing for VII, adjusted earnings were strong, driven by favorable foreign exchange rates, volume growth, and underwriting.
Sales in the region were up 12% on a constant currency basis, even with the COVID resurgence in certain markets.
In Latin America, adjusted earnings were down 57% year-over-year on a constant currency basis, primarily due to the pandemic.
COVID-related claims in the quarter totaled approximately $150 million, mainly in Mexico.
In EMEA, adjusted earnings of $71 million were down 11% on a constant currency basis on higher COVID-related claims as well as higher expenses compared to the favorable prior-year quarter.
Sales were up 4% on a constant currency basis with strong momentum in the UK employee benefits space.
To finish my business segment discussion, I think a theme is clear.
If you look past higher VII and mortality in the quarter, the underlying performance of the business was very solid.
On the fundamentals, we continue to demonstrate consistent execution with strong earnings power across a range of different economic scenarios.
Turning to cash and capital management, MetLife ended the first quarter with cash at the holding company of $3.8 billion near the top end of our $3 billion to $4 billion target buffer.
Our two-year average free cash flow ratio remains within our guidance range of 65% to 75%.
Currently, our cash balances are much higher following the receipt of $3.94 billion of proceeds on the sale of our US P&C business.
During the quarter, we were pleased to return $1.4 billion of capital to shareholders, $1 billion in share repurchases, and approximately $400 million in common stock dividends.
So far in Q2, we have bought back an additional $210 million of common shares, and we have roughly $1.6 billion remaining under our current repurchase authorization.
Last week, our Board of Directors approved a second quarter 2021 common stock dividend of $0.48 per share, up 4.3% from the first quarter.
Over the last decade, we have increased our common dividend at a 10% compound annual growth rate.
Our consistent execution continues to generate strong free cash flow that allows us to invest in growth and return capital to our shareholders, all with the goal of driving long-term value creation.
As we look ahead, we see a path to a brighter future from both an economic and health perspective.
In the United States conditions look promising for a period of employment growth, which is always good for our group business.
On the pandemic front, we believe the worst of the underwriting effects on our Company are behind us as the vaccine rollout continues to advance.
The progress is not yet uniform across the world, and certain areas are still struggling, but the trend line is clear, a slow but steady return to something we can call normalcy.
For our customers, we continue to accelerate our digital transformation to meet their evolving needs.
In Japan, for example, 95% of our policy submissions are now done digitally.
For our employees, we will be implementing a more flexible workplace model in Q3, which for most will be a hybrid approach.
While our people have performed exceptionally well working from home during the pandemic, we believe the office will continue to play a critical role in fostering collaboration, innovation, and career development.
We are equally confident that by incorporating more virtual work into our model, we will enhance productivity, gain access to a broader talent pool, and strengthen employee engagement.
As I said in my annual letter to shareholders, consistent execution is our new baseline.
Continuous improvement is our new aspiration and expectation.
I will start with the 1Q 2021 supplemental slides, which provide highlights of our financial performance and an update on our cash and capital positions.
Starting on page 3, we provide a comparison of net income to adjusted earnings in the first quarter.
Net income in the quarter was $290 million or approximately $1.7 billion lower than adjusted earnings.
This variance was primarily due to net derivative losses as a result of the significant rise in long-term interest rates as well as stronger equity markets in 1Q 2021.
Our investment portfolio and our hedging program continued to perform as expected.
On page 4, you can see the year-over-year comparison of adjusted earnings by segment.
There were no notable items for either period.
Adjusted earnings per share benefited from exceptionally strong returns in our private equity portfolio and were up 39% and 38% on a constant currency basis.
Moving to the businesses, starting with the US group benefits, adjusted earnings were down 70% year-over-year, largely driven by unfavorable group life mortality due to elevated COVID-19-related life claims.
Favorable non-medical health underwriting and volume growth were partial offsets.
Overall, results for Group Benefits were mixed.
Adjusted earnings were down, but underlying fundamentals including top line growth and persistency were strong.
Group Benefits sales were up 45% year-over-year primarily due to higher jumbo case activity.
We believe that we are on track to deliver a record sales year in 2021.
Adjusted PFOs were $5.6 billion, up 16% year-over-year due to solid volume growth across most products, the addition of Versant Health and roughly five percentage points related to higher premiums from participating contracts, which can fluctuate with claims experience.
I will discuss Group Benefits underwriting in more detail shortly.
Retirement and Income Solutions or RIS adjusted earnings were up 92% year-over-year.
The primary driver was higher variable investment income, largely due to strong private equity returns.
In addition, elevated COVID-19 mortality and volume growth were positive contributors.
RIS investment spreads were 234 basis points up 120 basis points year-over-year primarily due to higher variable investment income.
Spreads excluding VII were 88 basis points, up 5 basis points year-over-year primarily due to the decline in LIBOR rates.
RIS liability exposures including UK longevity reinsurance grew 12% year-over-year due to strong volume growth across the product portfolio, as well as separate account investment performance.
With regard to UK longevity reinsurance, we have continued to see strong growth since completing our initial transaction in 2Q 2020.
The notional balance stands at $8.8 billion at March 31, up nearly $5 billion from year end 2020.
As previously announced, first quarter results for property and casualty are reflected as a divested business in our quarterly financial statements.
The sale of the Auto and Home Business to Farmers Insurance closed on April 7, and we expect to record an after-tax gain of approximately $1 billion in 2Q 2021.
Moving to Asia, adjusted earnings were up 78% and 70% on a constant currency basis, primarily due to higher variable investment income as well as volume growth and favorable underwriting margins.
Asia's solid volume growth was driven by higher general account assets under management on an amortized cost basis, which were up 6% and 4% on a constant currency basis.
Asia sales were up 12% year-over-year on a constant currency basis with growth across most markets.
Latin America, adjusted earnings were down 58% and 57% on a constant currency basis, primarily driven by unfavorable underwriting, partially offset by the improvement in equity markets.
Elevated COVID-19-related claims primarily in Mexico impacted Latin America's adjusted earnings by approximately $150 million after tax.
Looking ahead, we expect COVID-19 claims to decrease throughout the year more significantly in the second half and adjusted earnings to return to 2019 levels in 2022, which is consistent with our outlook.
Latin America adjusted PFOs were down 6% year-over-year on a constant currency basis due to lower single premium immediate annuity sales in Chile.
EMEA adjusted earnings were down 9% and 11% on a constant currency basis, primarily driven by higher COVID-19-related claims as well as higher expenses compared to the favorable prior-year quarter.
EMEA adjusted PFOs were down 5% on a constant currency basis, but sales were up 4% on a constant currency basis due to strong growth in UK employee benefits.
MetLife Holdings adjusted earnings were up 123%.
This increase was primarily driven by higher variable investment income, largely due to private equity returns.
Also favorable equity markets and long-term care underwriting were positive drivers.
Long-term care benefited from higher policy and claim terminations as well as lower claim incidences.
The life interest adjusted benefit ratio was 54.8%, higher than the prior year quarter of 51% and at the top end of our annual target range of 50% to 55% due to elevated COVID-19 mortality.
Corporate and other adjusted loss was $171 million.
This result is consistent with our 2021 adjusted loss guidance range of $650 million to $750 million.
The Company's effective tax rate on adjusted earnings in the quarter was 20.8% and within our 2021 guidance range of 20% to 22%.
Now, I will provide more detail on Group Benefits 1Q 2021 underwriting performance on page 5.
There were approximately 200,000 COVID-19-related deaths in the US in the first quarter, the highest single quarter since the pandemic began and up nearly 40% versus the fourth quarter of 2020.
In addition to the higher number of claims, there were more deaths at younger ages below 65, which resulted in increased claims severity.
Apart from COVID-19, the number of life insurance claims of greater than $2 million nearly doubled versus a typical quarter.
The Group Life mortality ratio was 106.3% in the first quarter, which included roughly 17 percentage points related to COVID-19 life claims.
This reduced Group Benefits adjusted earnings by approximately $280 million after tax.
For group non-medical health, the interest adjusted benefit ratio was 71.1% in the first quarter with favorable experience across most products.
The 1Q 2021 ratio was below the prior year quarter of 71.7% and at the low end of our annual target range of 70% to 75%.
Now let's turn to VII in the quarter on page 6.
This chart reflects our pre-tax variable investment income over the last five quarters, including approximately $1.4 billion in the first quarter of 2021.
This very strong result was mostly attributable to the private equity portfolio, which had a 13.3% return in the quarter.
As we have previously discussed, private equities are generally accounted for on a one-quarter lag.
Our first quarter results were essentially in line with private equity industry benchmarks.
While all private equity classes performed well in the quarter, our venture capital funds, which account for roughly 20% of our PE account balance of $10.3 billion were the strongest performer across subsectors with roughly 25% quarterly return due to a broad increase in tech company valuations.
On page 7, first quarter VII of $1.1 billion post-tax is shown by segment.
The attribution of VII by business is based on the quarterly returns for each segment's individual portfolio.
As noted previously, RIS, MetLife Holdings and Asia generally accounted for approximately 90% or more of the total VII and are split roughly one-third each, although it can vary from quarter to quarter.
VII results in 1Q 2021, were more heavily weighted toward RIS, and MetLife Holdings as Asia's portfolio has a smaller proportion of the venture capital funds that I referenced earlier.
Turning to page 8, this chart shows our direct expense ratio over the prior five quarters and full year 2020 including 11% in the first quarter of 2021.
As we have highlighted previously, we believe our full year direct expense ratio is the best way to measure performance due to fluctuations in quarterly results.
In 1Q 2021, our favorable direct expense ratio benefited from solid top line growth and ongoing expense discipline as well as delayed investment spending in the quarter.
We expect the direct expense ratio for the remainder of 2021 to be consistent with our full year outlook.
Now, I will discuss our cash and capital position on page 9.
Cash and liquid assets at the holding companies were approximately $3.8 billion at March 31, which is down from $4.5 billion at December 31, but well within our target cash buffer of $3 billion to $4 billion.
The sequential decrease in cash at the holding companies was primarily due to the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of approximately $1 billion in the first quarter as well as holding company expenses and other cash flows.
Looking ahead, we expect HoldCo cash will be significantly higher in the second quarter as a result of the sale of our Auto and Home Business to Farmers Insurance.
Next, I would like to provide you with an update on our capital position.
For our US companies, our combined NAIC RBC ratio was 392% at year end 2020 and comfortably above our 360% target.
For our US companies.
excluding our property and casualty business, preliminary first quarter 2021 statutory operating earnings were approximately $1.5 billion while statutory net income was approximately $570 million.
Statutory operating earnings increased by roughly $2.3 billion year-over-year driven by lower VA rider reserves and increase in interest margins, higher net investment income, and lower operating expenses.
Statutory net income excluding our P&C business increased by roughly $430 million year-over-year, driven by higher operating earnings, partially offset by an increase in after tax derivative losses.
We estimate that our total US statutory adjusted capital excluding P&C was approximately $16.7 billion as of March 31, down 2% compared to December 31.
Favorable operating earnings were more than offset by after tax derivative losses and dividends paid to the holding company.
Finally, the Japan solvency margin ratio was 967% as of December 31, which is the latest public data.
In summary, MetLife delivered another strong quarter, which benefited from exceptional private equity returns, solid business fundamentals and ongoing expense discipline.
While higher mortality in the US and Mexico dampened adjusted earnings in Group Benefits and Latin America, our financial performance demonstrates the benefits of our diverse set of market-leading businesses and capabilities.
In addition, our capital, liquidity, and investment portfolio are strong, resilient, and position us for success.
We are confident that the actions we are taking to be a simpler, more focused company will continue to create long-term sustainable value for our customers and our shareholders.

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quarterly adjusted earnings per share $2.20.
quarter-end book value of $70.08 per share, down 3% from $72.62 per share at march 31, 2020.

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