MetLife, Inc. (MET) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014
Edward A. Spehar - Head-Investor Relations, MetLife, Inc.
Steven A. Kandarian - Chairman, President & Chief Executive Officer, MetLife, Inc.John C. R. Hele - Chief Financial Officer & Executive Vice President, MetLife, Inc. William J. Wheeler - Executive Vice-President & Chief Financial Officer, MetLife, Inc. Christopher G. Townsend - President-Asia Region, MetLife, Inc. Other Participants Tom G. Gallagher - Analyst, Credit Suisse Securities (USA) LLC (Broker) John M. Nadel - Analyst, Sterne, Agee & Leach, Inc. Erik J. Bass - Analyst, Citigroup Global Markets Inc. (Broker) Alan Mark Finkelstein - Analyst, Evercore Partners (Securities) Christopher A. Giovanni - Analyst, Goldman Sachs & Co. Eric N. Berg - Analyst, RBC Capital Markets LLC Jay H. Gelb - Analyst, Barclays Capital, Inc. MANAGEMENT DISCUSSION SECTION Operator: Ladies and gentlemen, we'd like to thank you for standing by and welcome to the MetLife first quarter 2014 earnings release conference call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference call is being recorded. Before we get started, I would like to read the following statement on behalf of MetLife. Except with respect to historical information, statements made in this conference call constitute forward-looking statements within the meaning of the federal securities laws, including statements relating to the trends in the company's operations and financial results and the business and the products of the company and its subsidiaries. MetLife actual results may differ materially from the results anticipated in the forward-looking statements as a result of risks and uncertainties, including those described from time to time in MetLife's filings with the U.S. Securities and Exchange Commission, including the Risk Factors section of those filings. MetLife specifically disclaims any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise. With that, I would like to turn the call over to Mr. Ed Spehar, Head of Investor Relations. Sir, the floor is yours. Edward A. Spehar, Head-Investor Relations Thank you, Steve, and good morning, everyone. Welcome to MetLife's first quarter 2014 earnings call. We will be discussing certain financial measures not based on generally accepted accounting principles, so called non-GAAP measures. Reconciliation of these non-GAAP measures and related definitions to the most directly comparable GAAP measures may be found on the Investors Relations portion of MetLife.com in our earnings press release and our quarterly financial supplements. A reconciliation of forward-looking financial information to the most directly comparable GAAP measure is not accessible because MetLife believes it's not possible to provide a reliable forecast of net investment income and net derivative gains and losses, which can fluctuate from period to period and may have a significant impact on GAAP net income. Joining me this morning on the call are Steve Kandarian, Chairman, President and Chief Executive Officer; and John Hele, Chief Financial Officer. After their prepared remarks, we will take your questions. Also here with us today to participate in the discussions are other members of management, including Bill Wheeler, President of the Americas, Chris Townsend, President of Asia, and Michel Khalaf, President of EMEA, and Steve Goulart, Chief Investment Officer. With that, I'd like to turn the call over to Steve. Steven A. Kandarian, Chairman, President & Chief Executive Officer Thank you, Ed, and good morning, everyone. We are pleased to report solid first quarter results with operating earnings of $1.6 billion, which exceeded our plan. Favorable investment margins and well-controlled expenses more than offset fluctuations in underwriting and a $57 million after-tax charge to settle a licensing matter in New York. We anticipate that underwriting margins will improve and consider the New York settlement to be an unusual item. While operating earnings were better than our expectations, results were down 4% from our strong first quarter last year. Operating earnings in the prior year quarter benefited from a weaker dollar and stronger equity market returns. Operating earnings per share were $1.37, a 7% decrease from the prior-year period. Performance on a per-share basis was dampened by the conversion of equity units issued in 2010 to fund the acquisition of Alico. The final $1 billion tranche of equity units will convert in October of this year. Operating return on equity was 11.4% in the quarter. First quarter operating earnings benefited from strong variable investment income driven by returns in private equity. The operating earnings impact from variable investment income was $63 million above the top end of our expected range or $0.06 per share. Investment margins had been resilient despite a prolonged period of low interest rates. Our margins continue to benefit from effective asset liability management, good variable investment income and income from derivatives, many of which were purchased in the mid-2000s to protect earnings in a low interest rate environment. Lower operating expenses had a positive impact on earnings in the quarter, driven by expense control in all three geographic regions: the Americas, Asia and Europe, Middle East and Africa. We feel good that our cost saving initiatives are translating into improved bottom-line results. Underwriting margins were lower than expected in Retail Life and Group, Voluntary and Worksite Benefits largely because of adverse mortality. We believe underwriting margins will improve for two reasons: first, our analysis suggests that most of the adverse experience in the first quarter was the result of normal volatility. Second, there is seasonality in our business with underwriting margins typically weakest in the first quarter of the year. Given the underwriting performance this quarter, it is worth reviewing how we think about risk associated with protection-oriented products. Our strategy to shift the sales mix away from market-sensitive products to protection-oriented products should translate to a more balanced risk profile and a reduction in so-called fat-tail risk. For protection products, we think the primary risk factor is earnings volatility as policyholder claims will sometimes exceed pricing assumptions. We view the balance sheet risk associated with protection products as relatively modest. This is true in group insurance where we have the ability to reprice the in-force book of business in the near term. Overall, protection-oriented product lines have a favorable risk profile and relatively low cost of equity capital. Although it may seem counterintuitive, in this case, lower risk does not mean lower returns. For example, Group, Voluntary and Worksite Benefits remains a high-return segment, even with the less favorable underwriting results experienced in recent periods, largely because of relatively low capital requirements.