MetLife, Inc. (NYSE:MET) Q4 2023 Earnings Call Transcript

MetLife, Inc. (NYSE:MET) Q4 2023 Earnings Call Transcript February 1, 2024

MetLife, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the MetLife Fourth Quarter 2023 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. Before we get started, I refer you to the cautionary note about forward-looking statements in yesterday’s earnings release and to risk factors discussed in MetLife’s SEC filings. With that, I will turn the call over to John Hall, Global Head of Investor Relations.

John Hall: Thank you, operator. Good morning, everyone. We appreciate you joining us for MetLife’s fourth quarter 2023 earnings and near-term outlook call. Before we begin, I’d point you to the information on non-GAAP measures on the Investor Relations portion of metlife.com, in our earnings release and in our quarterly financial supplements, which you should review. On the call this morning are Michel Khalaf, President and Chief Executive Officer; and John McCallion, Chief Financial Officer. Also participating in the discussion are other members of senior management. Last night, we released a set of supplemental slides, which addressed the quarter as well as our near-term outlook. They are available on our website. John McCallion will speak to those supplemental slides in his prepared remarks.

An appendix to the slides features outlook sensitivities, disclosures, GAAP reconciliations and other information, which you should similarly review. After prepared remarks, we will have a Q&A session, which will end promptly at the top of the hour. As a reminder, please limit yourself to one question and one follow-up. With that, over to Michel.

Michel Khalaf: Thank you, John, and good morning, everyone. As we begin 2023, I shared our conviction that despite the uncertain times, MetLife would exit the year stronger than we entered it. We accomplished this by countering the challenging environment with the actions we’ve taken to focus, simplify, and differentiate our business. We maintained an accelerated momentum in MetLife’s diversified set of market-leading businesses, driving strong results for the year and the quarter. And we illustrated our financial strength and flexibility with sound transactions and well-timed capital management, ending the year with solid capital ratios and robust cash on hand. Clearly, our all-weather strategy stood up again in 2023. We remain steadfastly focused on what matters most in delivering for our customers and shareholders.

In 2023, we exited a pandemic and have yet to enter a widely expected U.S. recession. We managed through a bank liquidity crisis and the resulting credit concerns. And we adapted to an inverted yield curve that has persisted longer than any in history. Against this backdrop, the fundamentals of our businesses are as strong as I have ever seen. Our successful 2023 is a testament to the resilience and durability of our business model, a relentless focus on execution, concentrating on the factors we control, our risk management culture and processes, the discipline we apply to managing our assets and liabilities, and the prudence of our investment portfolio. On that last point, the strength and stability of our commercial real estate portfolio, which we detailed a year ago, has borne out, as we said, a modest increase in LTVs and stable debt service coverage ratios, and we expect that to remain true in 2024.

For the year, we delivered an adjusted return on equity, excluding notable items, of 13.8%, achieving our target for this all-important metric. We were unwavering in our expense discipline, employing efficiency and agility to post a full year direct expense ratio of 12.2%. We upheld our commitment to responsible growth, directing capital to its highest and best use, with high teen IRRs and mid single-digit payback periods on new business. We returned $4.7 billion to shareholders via common stock dividends and share repurchases, and we continued to generate strong, recurring free cash flow and remain financially flexible with significant liquidity at our holding companies. The resilience of our strategy and the clarity of our purpose remain powerful drivers of MetLife’s success.

Our diversified portfolio of market-leading businesses is well positioned to perform for years to come. Backed by a strong balance sheet and our demonstrated ability to generate cash flow, I am confident in MetLife’s ability to create value for shareholders and other stakeholders, and to deliver financial security to our customers as we have for over a century and a half. Now turning to our fourth quarter 2023 results, last night we reported quarterly adjusted earnings of $1.4 billion, or $1.83 per share. Excluding notable items, we reported $1.93 per share, up 21% compared to $1.59 per share a year ago. Again, this quarter, our businesses showed strong underlying momentum with excellent underwriting results. Also, our recurring investment income grew on higher balances and higher new money rates.

Shifting to the full year 2023, the differentiation and scale across our market-leading businesses were among the factors that helped to fuel our underlying business fundamentals. We generated adjusted earnings, excluding notable items, of $5.6 billion. On the strength of new money yields, our adjusted net investment income grew 9% year-over-year to almost $20 billion, despite variable investment income falling below expectations. Adjusted PFOs, excluding pension risk transfers climbed 6%, with healthy growth across most business segments. Group Benefits posted adjusted earnings, excluding notable items, of $1.6 billion, up 22% from the prior year. The scale and breadth of this franchise business continues to drive organic growth and represents a clear point of competitive advantage.

Sales gained 9%, while adjusted PFOs, excluding the impact of participating policies, rose roughly at 5%. We believe group PFO growth is sustainable at more than $1 billion per year. Higher interest rates serve as a tailwind to our leading Retirement and Income Solutions business, with new money yields exceeding roll-off rates for the past seven consecutive quarters. Volume growth in RIS away from PRT was very strong, with more than $5 billion of longevity, reinsurance sales and more than $3 billion of structured settlements. Pension risk transfers totaled $5.3 billion for the year, the third largest annual total in MetLife’s history. This followed an all-time record year in 2022, and we have a strong pipeline of new opportunities in 2024 and beyond.

Sales growth in Asia remained strong, propelled by market demand in Japan for FX denominated life insurance products and a new cash value life product in Korea. Finally, Latin America continues to be a growing and important region for MetLife. Adjusted earnings on a reported basis in 2023 grew 15% over the prior year, and we’ve expanded our distribution capabilities as well as our product portfolio. One of the ways we hold ourselves accountable is against the Next Horizon commitments we made in 2019. On that basis, we are ahead of schedule to meet all criteria. In fact, we have even moved the goalpost on ourselves and raised the bar on certain of our Next Horizon commitments. For instance, we initially committed to an adjusted return on equity of 12% to 14%, and last year we chose to push that target even higher, to 13% to 15%.

And as you’ve seen within our outlook disclosure, we’ve further tightened our expense ratio target from 12.6% to 12.3%. While we have the strongest conviction in our Next Horizon strategy, we do not view it as a ceiling on our aspirations. We constantly look to set higher standards and position MetLife for even greater success. When I spoke of emerging from 2023 stronger our capital and cash is another prime example. During a year marked by periods of financial and geopolitical turmoil, our balance sheet strength enabled us to repurchase $3.1 billion of our common stock and increase our common stock dividend per share, paying out roughly $1.6 billion in common stock dividends. Even still, we enter 2024 with robust levels of cash and higher capital ratios in our key markets.

Our capital management has carried into 2024, and we have repurchased roughly $0.5 billion of MET common shares in the month of January. We continue to have capacity for further action with approximately $1.6 billion remaining on our repurchase authorization. There is no doubt MetLife’s financial strength and financial flexibility was on full view during 2023, particularly with the execution of our $19 billion risk transfer transaction that closed in November. This will free up more than $3 billion of capital over time and illustrates the disciplined approach we apply to evaluating our portfolio of businesses. We ended the year with $5.2 billion of cash and liquid assets on our balance sheet, which is comfortably above our target cash buffer of $3 billion to $4 billion.

We have consistently said that when responsible growth is attractive and available, we will deploy capital organically or inorganically. If not, we will return capital to our shareholders. I am pleased our Next Horizon strategy continues to prove its metal amid uncertainty. Looking ahead, whether driven by Fed policy and changes to the yield curve, geopolitical events, or the unfolding U.S. election cycle, it is prudent to anticipate more uncertainty in 2024. The supplemental slides we published last night include some near-term targets and elements of guidance. It should be playing to see that we anticipate the underlying momentum building across our businesses to continue. This is evident in our flagship Group Benefits business, where off a large embedded base we’ve established a strong growth outlook for premiums, fees and other revenues.

And of further note, we’ve also increased our expectations for both group life and non-medical health margins. Importantly, the outlook that we’ve provided reflects the world as we see it, not as we wish it to be. In that context, we assume a more modest private equity return of high-single digits in the near term, down from the 12% assumption we have used in prior years. Private equity remains an important contributor to our well-tested asset-liability matching program. It is an asset class well suited to defeat long-term liabilities, and our historical track record has been very strong. In closing, when we launched our Next Horizon strategy in 2019, we could not have predicted the many challenges we would face in the markets where we operate.

But our unyielding execution against our strategy is serving us and our many stakeholders well, allowing us to positively impact our customers and live our purpose. Our 2023 results reflect our capacity to move ahead with urgency and deliver on our strategy. We saw very good underlying business performance supported by a strong capital base. We will continue to concentrate on controlling what we can control, balance sheet security, responsible growth, expense efficiency and capital deployment among others. In the final year of the Next Horizon strategy time frame, we believe our past progress positions us to reach for new heights not possible four years ago. I am energized for the future of MetLife driven by the continued momentum I see building in our businesses for 2024 and beyond.

Now I’ll turn it over to John to cover our performance and outlook in detail.

John McCallion: Thank you, Michel, and good morning. I will start with the 4Q 2023 supplemental slides, which provide highlights of our financial performance, an update of our liquidity and capital positions as well as our commercial mortgage loan portfolio. In addition, I will discuss our near-term outlook in more detail. Starting on Page 3, we provide a comparison of net income to adjusted earnings in the fourth quarter and full year 2023. Market risk benefit or MRB remeasurement losses in the fourth quarter was due to the decline in long-term interest rates. Net derivative gains were only a partial offset as the favorable impact from lower long-term interest rates were mitigated by changes in short-term interest rates and higher equity markets in the quarter.

For the full year, the variance between net income and adjusted earnings was mostly attributable to net derivative losses, primarily due to stronger equity markets, changes in foreign currencies and higher interest rates in 2023. In addition, net investment losses were largely the result of normal trading activity on the portfolio in a rising interest rate environment as well as the mark-to-market impact on securities that were transferred as part of the reinsurance transaction with Global Atlantic. Overall, the portfolio remains well positioned with modest levels of credit losses and the hedging program continues to perform as expected. On Page 4, you can see the fourth quarter year-over-year comparison of adjusted earnings by segment, excluding $76 million after tax, of an unfavorable notable item relating to asbestos litigation reserves in 4Q of 2023 that was accounted for in corporate and other.

There were no notable items in the prior year quarter. Regarding the asbestos reserve increase of $76 million, based on our latest review, while we continue to observe a declining claim count, the frequency of severe claims related to asbestos has not declined as expected. The total reserve is $364 million at the end of 2023. Adjusted earnings, excluding total notable items were $1.4 billion, up 14% and 12% on a constant currency basis. The primary drivers were strong recurring interest margins, higher variable investment income, or VII, volume growth and favorable underwriting margins. Adjusted earnings per share, excluding total notable items were $1.93, up 21% and 19% on a constant currency basis. Moving to the businesses. Group Benefits adjusted earnings were $466 million, up 19% versus the prior year period.

The key drivers were favorable life underwriting margins and solid volume growth. The Group Life mortality ratio was 83.5%, favorable to the prior year quarter of 87.3% and below the bottom end of our 2023 target range of 85% to 90%. Consistent with CDC U.S. mortality data, we saw a much lower number of life claims than typical in the fourth quarter. Regarding non-medical health, the interest-adjusted benefit ratio was 70.7% in the quarter, and at the low end of its annual target range of 70% to 75%. We expect both the life mortality ratio and the non-medical health ratio to be higher in Q1 given the seasonality of the business. Turning to the top line, Group Benefits adjusted PFOs on a full year basis were up 3% year-over-year. Taking participating contracts into account, which dampened growth by roughly 200 basis points.

The underlying PFOs were up approximately 5% year-over-year within our 2023 target growth range of 4% to 6%. In addition, Group Benefits 2023 sales were up 9% year-over-year. The continued strong growth is primarily due to solid growth across most products, including continued strong momentum in voluntary. RIS adjusted earnings were $421 million, up 10% year-over-year. The primary drivers were favorable investment margins due to higher recurring interest and variable investment income as well as favorable underwriting margins. RIS investment spreads were 121 basis points. Spreads, excluding VII were 134 basis points, up 10 points versus Q4 of 2022, primarily due to higher interest rates as well as income from in-the-money interest rate caps.

RIS adjusted PFOs, excluding pension risk transfers were up 75% year-over-year, primarily driven by strong sales of structured settlement products and post-retirement benefits as well as growth in UK longevity reinsurance. With regards to PRT, we added transactions worth approximately $1.9 billion in the fourth quarter, bringing our full year total to roughly $5.3 billion. This marks the third highest PRT sales year for MetLife, and we continue to see an active market. Moving to Asia. Adjusted earnings were $296 million, up 12% and 11% on a constant currency basis, primarily due to higher investment margins and lower taxes. For Asia’s key growth metrics, general account assets under management on an amortized cost basis were up 6% year-over-year on a constant currency basis, and sales were essentially flat versus the prior year quarter.

For the full year, Asia’s sales were up 13%, driven by strong growth across the region, exceeding its 2023 guidance range of mid to high-single digits. Latin America adjusted earnings were $207 million, up 13% and 4% on a constant currency basis, primarily due to solid volume growth partially offset by less favorable underwriting margins versus a strong Q4 2022. In addition, LatAm had favorable Chilean encaje returns of 7.9% in 4Q of 2023 versus 6.1% in the prior year quarter. Latin America’s top line continues to perform well as adjusted PFOs were up 29% and 19% on a constant currency basis, driven by strong sales and solid persistency across the region. For the full year, adjusted PFOs were also up 29% on a reported basis and 19% on a constant currency basis, exceeding LatAm’s 2023 guidance of low-double digit growth.

EMEA adjusted earnings were $47 million, down 27% on both a reported and constant currency basis, primarily driven by an unfavorable tax charge following a favorable tax benefit in the prior year period, as well as less favorable expense and underwriting margins. This was partially offset by higher recurring interest margins year-over-year. EMEA full year 2023 adjusted earnings of $265 million exceeded our outlook expectations of roughly $55 million per quarter. EMEA adjusted PFOs were up 5% on both a reported and constant currency basis and sales were up 18% on a constant currency basis, reflecting strong growth across the region. MetLife Holdings adjusted earnings were $156 million, down 15%, largely driven by foregone earnings as a result of the reinsurance transaction that closed in November.

Corporate and other adjusted loss was $156 million, excluding the unfavorable notable item of $76 million after-tax that I referenced earlier. This compares to an adjusted loss of $210 million in the prior year. Higher net investment income and favorable taxes were the primary drivers. The company’s effective tax rate on adjusted earnings in the quarter was approximately 19%, which includes favorable tax benefits primarily related to the true up of the federal tax return to provision. On Page 5, this chart reflects our pre-tax variable investment income for the four quarters and full year of 2023. VII was $63 million in the fourth quarter, primarily driven by positive returns in our corporate and mortgage loan funds. The private equity portfolio and real estate equity funds had a combined return of essentially zero in the quarter.

For the full year, VII was $419 million, well below our 2023 target of approximately $2 billion. That said, while mark-to-market returns were below expectation in 2023, the PE portfolio generated approximately $2 billion in cash distributions during the year. On Page 6, we provide VII post tax by segment for the prior four quarters and full year 2023. As reflected in the chart, RIS, Asia and MetLife Holdings continue to hold the largest proportion of VII assets, given their long dated liability profile. Now, turning to Page 7, the chart on the left of the page shows the split of our net investment income between recurring and VII for the past three years, as well as Q4 of 2022 versus Q4 of 2023. While VII has had lower than trend returns over the last couple of years, recurring income, which accounted for most of the net investment income in 2023 was up approximately $2.6 billion year-over-year, reflecting higher interest rates and growth in asset balances.

The expansion of recurring income in 2023 more than offset the lower VII year-over-year. Shifting your attention to the right of the page, which shows our new money yield versus roll-off yield since 4Q of 2020, new money yields continue to outpace roll-off yields over the past couple of years, consistent with rising rates. In this quarter, our global new money yield continued its upward trajectory coming in at 6.67%, 142 basis points higher than the roll-off yield. Turning to Page 8. I’ll provide a few updates on our commercial mortgage loans. Overall, the CML portfolio continues to perform consistent with expectations, where we expect higher quality assets to outperform the asset sector broadly. The average LTV on our CML portfolio now stands at 64% as of December 31, up slightly from 63% in the third quarter of 2023, and the average debt service coverage ratio remains steady at 2.3 times.

The modest increase in LTVs and stable debt service coverage ratio are further indicators of the disciplined approach we take to investing in this asset class. The quality of our CML portfolio remains strong with only 2.6% of loans having LTVs more than 80% and DSCRs less than one times. With regards to CML loan maturities, we resolved 100% of the loans that were scheduled to mature in 2023. Our expectation going forward remains for modest credit losses on the portfolio. Turning to Page 9. This chart shows a comparison of our direct expense ratio over the prior eight quarters and full year 2022 and 2023. Our direct expense ratio in 4Q of 2023 was up modestly at 12.4%, reflecting the impact from seasonal enrollment costs in group benefits as well as higher employee related costs.

That said, 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. For the full year of 2023, our direct expense ratio was 12.2% below our 2023 target of 12.6%. We believe this result once again demonstrates our consistent execution and focus on an efficiency mindset in a challenging inflationary environment, while continuing to make investments in our businesses. I will now discuss our cash and capital positions on Page 10. Cash and liquid assets at the holding companies were approximately $5.2 billion at December 31, which is above our target cash buffer of $3 billion to $4 billion. The cash at the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, share repurchases of roughly $900 million in the fourth quarter, as well as holding company expenses and other cash flows.

In addition, we repurchased shares totaling approximately $500 million in January. For the two-year period 2022 and 2023, our average free cash flow ratio, excluding notable items totaled 74% and was within our 65% to 75% target range. In terms of statutory capital, for our U.S. companies, our combined 2023 NAIC, RBC ratio is still preliminary but expected to be approximately 400% and above our 360% target. For our U.S. companies, preliminary 2023 statutory operating earnings were approximately $4.5 billion, while net income was approximately $3.9 billion. Statutory operating earnings increased by approximately $1.9 billion year-over-year, primarily driven by favorable underwriting and impacts from the reinsurance transaction. This was partially offset by higher expenses.

We estimate that our total U.S. statutory adjusted capital was approximately $19.5 billion as of December 31, 2023, up 10% for September 30, 2023, primarily due to operating earnings and the impacts of the reinsurance transaction. This was partially offset by dividends paid. Finally, we expect that Japan solvency margin ratio to be approximately 720% as of December 31, which will be based on statutory statements that will be filed in the next few weeks. Before I shift to our near-term outlook starting on Page 12, a few points on what we included in the appendix. The chart on Page 17 reflects new business value metrics for MetLife’s major segments from 2018 through 2022. This is the same chart that we showed as part of our 3Q 2023 supplemental slides, but we feel it’s worth including again for the sake of completeness.

Also, pages 18 through 21 provide interest rate assumptions and key outlook sensitivities by line of business. Now let’s turn to Page 12 for further details on our near-term outlook. Starting with the overview. We expect continued uncertainty to persist around inflation and unemployment in 2024. We expect the U.S. dollar to stabilize around current levels. Based on the 12/31/2023 forward curve, we assume long-term interest rates to be largely unchanged in 2024, and the yield curve will move from inverted to modestly upward sloping as short-term interest rates decline and we assume a 5% annual return for the S&P 500. For our near-term targets, we are maintaining our adjusted ROE range of 13% to 15%. We expect to maintain our two-year average free cash flow ratio of 65% to 75% of adjusted earnings.

Also, given continued focus on expense discipline, building capacity to reinvest in growth initiatives, and our overall efficiency mindset, we are lowering our direct expense ratio guidance for 2024 from 12.6% to 12.3%. Specifically, for 2024, VII expected to be approximately $1.5 billion. Our corporate and other adjusted loss target is expected to be $750 million to $850 million after tax in 2024. This represents an approximately $100 million increase from our prior adjusted loss guidance of $650 million to $750 million in 2023. The higher range reflects C&O’s current run rate given the impact of a higher rate environment on interest expense and pension costs, as well as the impact of lower expected benefits from VII. We are increasing our expected effective tax rate range by two points to 24% to 26% to reflect our expectation for higher earnings in foreign markets with higher tax rates and lower tax credits in the U.S. At the bottom of the page, you will see certain interest rate sensitivities relative to our base case, reflecting a relatively modest impact on adjusted earnings over the near-term.

On Page 13, the chart reflects our VII average asset balances from $18 billion in 2022 to $19.7 billion expected in 2024. Private equity investments will continue to represent the vast majority of our VII asset balances. We are reducing our near-term expected annual returns for private equity to be between 7% to 10% and we are also lowering our expected returns for real estate and other funds to be in the range of 5% to 7% over the near-term. We expect PE and real estate returns will remain pressured in the first quarter of 2024 before trending higher. Finally, as a reminder, we include prepayment fees on fixed maturities and mortgage loans in VII. So now, I will discuss our near-term outlook for our business segments. Let’s start with the U.S. on Page 14.

For group benefits, excluding the excess premium from participating group life contracts of approximately $300 million in 2023, adjusted PFOs are expected to grow at 4% to 6% annually over the near-term. And for 2024 we expect growth to be in the top half of that range. This reflects the strong momentum in the business, particularly in voluntary products, as well as exceptionally strong persistency in our national accounts. Regarding underwriting, we expect 2024 underwriting margins to be generally consistent with 2023. As such, we are reducing our near-term group life mortality ratio and non-medical health interest adjusted benefit ratio ranges by 1 percentage point to 84% to 89% and 69% to 74%, respectively. Finally, keep in mind these are annual ratios and both typically skew to the higher end of the ranges in the first quarter given the seasonality of the business.

For RAS, we are maintaining our 2% to 4% expected annual growth for total liability exposures across our general account spread and fee-based businesses. Regarding investment spread, full year 2023 was 125 basis points and is expected to be relatively flat for the full year of 2024. This incorporates both the impact of the roll off of our interest rate caps with maturities throughout 2024 and the offsetting benefit of VII re-emerging over the year as a more meaningful contributor. As such, we expect the investment spread range for 2024 is 115 to 140 basis points. We have also provided updated RAS sensitivities for interest rate movements in the appendix. Sensitivities reflect the anticipated impact from interest rate cap maturities throughout 2024.

As such, our sensitivity to SOFR declines throughout the year. For MetLife Holdings, we are expecting adjusted PFOs to decline by approximately 13% to 15% in 2024 and then declining 4% to 6% annually thereafter. And we are lowering the adjusted earnings guidance range to $700 million to $900 million in 2024 to reflect the foregone earnings from the reinsurance transaction as well as lower expected PE returns and natural runoff of the business. Now, let’s look at the near-term guidance of our businesses outside the U.S. on Page 15. For Asia, we expect the recent sales momentum to continue and generate mid-single digit growth over the near-term. In addition, we expect general account AUM to maintain mid-single digit growth. We are expecting adjusted earnings to grow roughly 20% in 2024 as we assume VII to have a greater impact throughout the year.

We are maintaining mid-single digit adjusted earnings growth expectation over the remainder of the near-term. For Latin America, we expect both adjusted PFOs and adjusted earnings to grow by high single digits over the near-term. Finally, for EMEA, we’re expecting sales to grow mid- to high-single digits and adjusted PFOs to grow mid-single digits over the near-term. The forward curve assumes a strengthening of the U.S. dollar relative to most currencies in EMEA. As such, we project EMEA’s adjusted earnings run rate to be roughly $60 million to $65 million per quarter in 2024 and then grow by mid-single digits in 2025 and 2026 based on the forward curve for these currencies. Let me conclude by saying that MetLife delivered a solid quarter to close out another strong year.

The underlying strength of our business fundamentals remains on display with strong top line growth coupled with disciplined underwriting and expense management. While VII remains below historical returns, core spreads remain robust and continue to benefit from the higher yield environment. While the current environment remains uncertain, we are excited about the outlook and growth prospects for our businesses over the near-term and beyond. MetLife continues to move forward from a position of strength with a strong balance sheet, recurring free cash flow generation and a diversified set of our market leading businesses. And we are committed to deploying capital to achieve responsible growth and build sustainable value for our customers and our shareholders.

And with that, I will turn the call back to the operator for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger: Hey, thanks. Good morning. My first question is on the ROE target. And I recognize that you just raised the target by 100 basis points a year ago to 13% to 15%. But it seems like your segment outlook would suggest something at least a bit above 15%, maybe something closer to 15.5%. So I guess I just wanted to hear your perspective on, am I thinking about that incorrectly or is there some potential upside to this ROE based on the current trends you’re seeing?

John McCallion: Good morning, Ryan, it’s John. I think we wouldn’t debate your model calculations there. I think it’s fair to say that we certainly are trending to the high end of that range, if not with a plus sign. But we just moved it a year ago and I think we’ll take a year here and take stock at that time. But I’d say – I think just maybe just to help you with that. One other thing is, like I said, we’ll take stock. We think over time, and we’ve been talking about this, that there has been kind of – as a result of higher rates, there has been a shift in volume and returns on our business. So it wouldn’t preclude us from doing it again. I think we want to take some time to take stock.

Ryan Krueger: Understood. Makes sense. And then I think you said you expected the RBC ratio to be around 400%. Would have thought it would have been maybe a little higher than that following the reinsurance transaction. Do you have any more color on if there were any offsets?

Michel Khalaf: Yes, I think when we announced the deal, we thought this would give us 50 points to 60 points. We still think it will. There’s a little bit of what happens immediately and then how things trend in over time. Also, there’s a lot of other things going on, fungibility, growth. We had some very sizable growth in RAS. So, we deployed some extra capital this year. So, I think a lot of those things. But in terms of the deal economics that we outlined at time of signing, everything came in as expected.

Ryan Krueger: Okay, great. Thank you.

Operator: Next we go to the line of Suneet Kamath with Jefferies. Please go ahead.

Suneet Kamath: Yes, thanks, and appreciate all the color on the guidance. But maybe if we could just circle back to consolidated recurring NII, I think you talked about a pretty big lift in 2023 relative to 2022, that $19.3 billion. Any help in terms of what you think that could look like given all of the moving pieces as we think about 2024?

John McCallion: Hey, Suneet, it’s John. It’s a good question. I mean, sometimes, NII, it’s a helpful metric, certainly from, I’d say mix and just to show that higher rates have more than offset or actually offset some of the depression and VII. And I think the point of that slide is to show that there’s more power there once things kind of re emerge on the VII front. Sometimes it’s a little hard with just translating NII to earnings. So, we’re a little cautious on necessarily given a target around that because, we have different products that perform well in different environments and ultimately to spread. So I think we’re a little hesitant to kind of forecast for you. I think the point of that slide was to indicate that it shows the growth in our business.

It shows that we’re well diversified. We can perform well in a variety of economic environments. And I think that’s really probably the theme to take away. So sorry, I didn’t get to maybe your exact question or answer, but that’s probably the best I can do.

Suneet Kamath: Okay. Got it. And then as we think about the benefit of the caps in 2023 and what that looks like in 2024 as they roll off? Should we think about the improvement in VII as essentially like those two kind of net as a wash? Or is one kind of greater than the other? I just want to get some additional color on that if we could.

John McCallion: Yes, it’s a great question. I think what you just said at the end around in terms of them being a wash is a pretty good way of thinking about it. So, we had 125 basis points last year, all-in for 2023. We gave a range of 115 basis points to 140 basis points for next year. I think the midpoint is a little above. It’s at 127 basis points, I guess if you did the math. And our view is the interest rate caps will roll off throughout the year and then VII will emerge throughout the year and essentially offset the decline there. And so we think the best way to think about the spreads for the year is relatively flat to what you saw for the full year of 2023. It will give and take here and there. As we point out on the slide, we think VII in the first quarter will continue to be pressured.

Obviously, the caps haven’t fully rolled off yet, so we’ll still have income from them. And then as VII merges, you’ll see the caps roll off and they’ll essentially offset.

Suneet Kamath: Okay, that’s helpful. Thanks.

Operator: Next, we have a question from Tom Gallagher with Evercore ISI. Please go ahead.

Tom Gallagher: Hi. So your assumed alternative returns are now around 7.5% for 2024. And I think the RBC risk charge, if I was to do a weighted average, would be 15% to 20% on most of that portfolio. Have you considered pivoting some of the portfolio into assets with comparable, let’s say, 7% yields, like private credit or just other fixed income, but much lower risk charges? I’m just thinking about it from the perspective of we’ve had two years of underperformance, your outlook for a third year is below those levels, and rates are higher. And if I think about both your cost of capital and ROE, I think it would be a fairly meaningful positive. Not recognizing you can’t do this overnight, but is that something you consider pivoting or shifting to? Thanks.

John McCallion: Hey good morning, Tom, it’s John. I think the last point you made around you can’t do this overnight is an important piece, but I think direction of travel, that’s probably fair point. And I think we’ve talked about the fact that we are in a different rate environment. So the relative value of investments are probably different than where they were when it was lower for longer. We pride ourselves in diversification. So it’s not that we would make an abrupt shift, but we do believe that making some tweaks to allocations is appropriate in different environments. And I think what you’re referencing is one that we would lean towards. It’s an asset class where you have prior commitments and those – then get deployed judiciously.

And actually there’s probably some really good opportunities right now that we’re leveraging. Having said that, we think distributions will likely outpace new contributions just given our revised level of new commitments. And I think over time you would see a moderate shift in allocation in that asset class versus others.

Tom Gallagher: Okay, thanks. And then just a question on Group Benefits, the 100 basis point improvement in the margin target, or at least the loss ratio targets. Can you comment on what’s driving that? Is that stable pricing, sustainably higher disability or lower disability loss ratios, and maybe a little bit on the Group Life side, what you’re thinking? Thanks.