MetLife, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the MetLife first 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.

Thank you, Operator. Good morning, everyone. We appreciate you joining us for MetLife's first quarter 2023 earnings call. In addition to our earnings release, we also issued a press release last night announcing an increase to our share repurchase authorization. Before we begin... I 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 Michelle Halaf, 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 an expanded set of supplemental slides which address the quarter as well as provide an update on our investment portfolio. The slides are available on our website. John McCallion will speak to them in his prepared remarks if you wish to follow along. An appendix to the slides features disclosures, gap reconciliations, and other information which you should also similarly review. I would like to point out This is the initial quarter we are reporting our financial results based on the new long-duration targeted improvements accounting standard. Please note that prior comparative periods have been recast to conform with LDTI. As usual, after prepared remarks, we will have a Q&A session. In light of the very busy morning, Q&A will end promptly just before the top of the hour. In fairness to everyone, please limit yourself to one question and one follow-up. With that, over to Michel.

Thank you, John, and good morning, everyone. Throughout MetLife's 155-year history, with risk management at our foundation, we have emerged from times of uncertainty in a stronger position, and I expect now to be no different. We remain focused on managing risk across economic cycles and controlling the things we can control to deliver for our shareholders and our other stakeholders. Last night, we reported quarterly adjusted earnings of $1.2 billion, or $1.52 per share, which compares to $1.7 billion, or $2.04 per share, a year ago. The quarter's results illustrate MetLife's resilience and underscore our continued strong business momentum and our ability to execute across what we control. We posted strong sales numbers representing responsible growth for most of our key businesses and markets, including group benefits, Asia, and Latin America. We generated good underwriting results owing to our rigorous price discipline. We continued to manage our costs with vigilance and to beat our expense targets. And prudent risk selection helped push recurring investment income higher, while new money rates reached 5.8% for the quarter. Reflecting the market, variable investment income fell below our quarterly outlook expectation on the basis of returns on venture capital and real estate equity funds. In total, net income for the quarter was $14 million, driven by losses on opportunistic investment sales in Japan, which offset the tax impact on the gain generated by our recent Japanese ANH reinsurance transaction. Shifting to MetLife's business performance in the quarter, I will start with our U.S. group benefits results. Adjusted earnings totaled $307 million, up substantially from the prior year when COVID-19 claims were more elevated, with benefit ratios reverting to pre-pandemic seasonal norms. The momentum we've seen over the past several years for this franchise business continued in the quarter. We are strategically well positioned to grow in this attractive business given our scale, distribution reach, broad product portfolio, enrollment capabilities, and importantly, our thought leadership. Our differentiation in this space led to strong growth in sales and premium fees and other revenues in all market segments and across voluntary products. In total, sales were up 15 percent, while adjusted PFOs grew 5.4 percent toward the top end of our outlook expectation after adjusting for participating policies. For retirement and income solutions, or RIS, Adjusted earnings totaled $400 million, down from the prior year driven by lower variable investment income. Adjusted PFOs in the quarter benefited from our sustained efforts to grow our structured settlement and our longevity reinsurance businesses. While we did not book any pension risk transfer business in the first quarter, funding levels remained strong. And despite the market turmoil during the first quarter, our capital markets investment products business was able to issue $3.7 billion of funding for this spread business, demonstrating the value of MetLife Credit and the broader capital markets. In Asia, adjusted earnings of $280 million were below a year ago on lower variable investment income. Sales on a constant currency basis were up across the board in the region. Japan saw sales rise 17% on the strength of FX annuities, while India led the sales gains in other Asia up 45%, followed by Korea up 21%. Turning to Latin America, adjusted earnings totaled $215 million, up more than 50% from last year. We are the largest life insurer in Latin America, and our business continues to put up impressive growth numbers in our major markets, with sales jumping 36% and adjusted PFOs rising 26%, both on a constant currency basis. Taking a broader view of investments, rising interest rates are a long-term positive for MetLife. We have a long time horizon and invest with our liabilities in mind. Our liabilities are sticky and are generally not subject to demand. Asset liability management, matching the duration of our assets with that of our liabilities, reduces reinvestment risk and is critical to our risk management process. Our investment process has stood the test of time, successfully guiding us through the global financial crisis. However, we do not have the luxury to wait until a crisis hits. We look around corners and prepare in advance. Our investment portfolio de-risking began in 2019, and we remain up in quality. Our core investment strengths have fashioned us as one of the premier private investors in the world, particularly in private credit and in real estate debt and equity. We have leveraged those strengths to support our policyholders while building from a standing start MetLife Investment Management, a leading third-party institutional manager of public fixed income, private credit, and real estate. Moving to capital and cash, a tactical element of our business that we control, MetLife was active with capital management during the first quarter. We paid $389 million of common stock dividends to shareholders, and we repurchased $780 million of our common stock. Also, we repurchased another $223 million of our common stock during the month of April. On the strength of our balance sheet and our free cash flow, we announced last week a 4% increase in our common dividend per share. We think an increasing common dividend per share is the hallmark of a strong life insurer, and MetLife's common dividend per share has grown at a compound rate of 9% since 2011. With roughly $200 million left on our current buyback authorization, as you saw last night, our Board of Directors has authorized an incremental $3 billion increase to our buyback authorization. In the quarter, we announced and closed on the acquisition of Raven Capital Management, an alternative investment manager specializing in direct asset-based investments. Aided by MetLife's strategic M&A capabilities, we were able to add an important investment product adjacency that we expect MetLife Investment Management to scale over time. Taken together, these actions demonstrate our commitment to being a sound capital steward for our shareholders. In the absence of responsible organic growth or compelling M&A opportunities, we will return capital over time to our shareholders. At the end of the quarter, we held $4.2 billion of cash at our holding companies, which is above the top end of the $3 to $4 billion liquidity buffer we maintain. Our holding company cash fluctuates from quarter to quarter. The balance in the first quarter typically reflects lower seasonal operating subsidiary dividends and higher seasonal holding company expenses. Before I close, I would like to take a moment to welcome Jay Johnson to MetLife's Board of Directors. Jay joined at the end of April, and he brings unique perspective to our board, having served as Secretary of Homeland Security under President Obama. I am certain Jay's talents and experience will serve MetLife well. In closing, while 2023 is shaping up to be another year of uncertainty, the successful actions we've taken to focus, simplify, and differentiate our business can be seen in the quarter's strong underlying business fundamentals, particularly in sales, underwriting, and recurring investment margins. Raising the bar and demanding more from ourselves is part of the culture we've fostered here at MetLife. If we focus on what we can control, with relentless execution in mind, we can stay ahead of the curve, and I am confident we will continue to do so. Now I'll turn it over to John to cover our performance in greater detail.

Thank you, Michel, and good morning. I will start with the 1Q23 supplemental slides, which provide highlights of our financial performance and an update on our liquidity and capital positions. In addition, we've provided some supplemental detail of our investment portfolio, given the heightened focus recently. The appendix also includes slides which provide our full year 2021 and 2022 adjusted earnings recasted for the new LDTI accounting basis. Starting on page three, we provide a comparison of net income to adjusted earnings in the first quarter. Net investment losses were above trend, primarily driven by sales of fixed maturity securities in Japan. Management took the opportunity to reposition some of the U.S. dollar portfolio to help mitigate some cash tax relating to our recent A&H reinsurance transaction, enhance net investment income, and improve asset liability management within the Japan business. These sales were neutral to a net positive to Japan's solvency margin ratio, which is expected to be approximately 725%. at the end of March. In addition, net investment losses in the quarter included an increase in the current expected credit loss or CECL allowance, primarily in our commercial mortgage loan portfolio given the current environment. That said, the portfolio remains well positioned and I'll provide more details shortly. We have itemized a new reconciling item between net income and adjusted earnings as a result of LDTI called market risk benefit or MRB gains and losses. For certain products, such as variable annuities with market-related guarantees, the change in fair value, excluding changes attributable to non-performance risk, is recognized in net income each quarter. Similar to certain variable annuity guarantees previously classified outside of adjusted earnings, we'll also now identify MRB gains and losses as a reconciling item between net income and adjusted earnings. Lower interest rates in the quarter drove an MRB loss. This loss was partially offset by derivative gains relating to lower interest rates. However, we had net derivative losses in the quarter as these gains from lower interest rates were more than offset by derivative losses relating to the strong equity markets in Q1 of 23. On page 4, you can see the first quarter year-over-year comparison of adjusted earnings by segment, which did not have any notable items in either period. Adjusted earnings were $1.2 billion, down 30%, and down 29% on a constant currency basis. Lower variable investment income drove the year-over-year decline, while favorable underwriting and higher recurring interest margins were partial offsets. Adjusted earnings per share were $1.52, down 25% year-over-year on a reported and constant currency basis. Moving to the businesses, starting with the U.S., group benefits adjusted earnings were $307 million versus $117 million in the prior year period, primarily due to lower COVID-19 claims. The group life mortality ratio was 90.5 percent, slightly above the top end of our annual target range of 85 to 90 percent. As we have noted before, our group life mortality ratio tends to be seasonally highest in the first quarter. The drivers were excess mortality, due to claims resulting from the year-end flu spike and higher severity. Regarding non-medical health, the interest-adjusted benefit ratio was 72.9% in the quarter, slightly above the midpoint of its annual target range of 70 to 75%, but generally in line with higher seasonal dental utilization in the first quarter. Turning to the top line, group benefits-adjusted PFOs were up 1% year over year, As we discussed in prior quarters, excess mortality can result in higher premiums from participating life contracts in the period. The higher excess mortality in Q1 of 22 versus Q1 of 23 resulted in a year-over-year decline in premiums from participating contracts, which dampened growth by roughly four percentage points. Taking participating contracts into account, the underlying PFO increase of approximately 5% was primarily due to solid growth across most products, including continued strong momentum in voluntary and was within our 2023 target growth range of 4% to 6%. In addition, group benefit sales were up 15%, driven by strong growth across all markets. Retirement income solutions, or RIS, adjusted earnings, were down 27% year over year. The primary driver was lower variable investment income. This was partially offset by favorable recurring interest margins year over year. RAS investment spreads were 117 basis points and 137 basis points excluding VII, up 37 basis points versus Q1 of 22, and up 13 basis points sequentially, primarily due to higher interest rates and income from in-the-money interest rate caps. RAS liability exposures were up 1% year over year. but solid volume growth was masked due to certain accounting adjustments that do not impact fees or spread income. That said, general account liabilities, which comprise future policy benefits and policyholder account balances, collectively grew 5% year-over-year, and RAS-adjusted PFOs, excluding pension risk transfers, were up 43%, primarily driven by strong sales of structured settlement products and growth in U.K. longevity reinsurance. once again reflecting the power of our diversified set of market-leading products in RIS. Moving to Asia, adjusted earnings were down 53 percent and 52 percent on a constant currency basis, primarily due to lower variable investment income. Asia's key growth metrics remain solid as general account assets under management on an amortized cost basis grew 3 percent on a constant currency basis, and sales were up 18 percent year-over-year on a constant currency basis. primarily driven by strong growth across the region. In Japan, FX annuity sales continued its strong momentum with growth in our face-to-face and bank channels. Latin America adjusted earnings were $215 million, up 59% and up 51% on a constant currency basis. This strong performance was primarily driven by favorable underwriting and solid volume growth. Overall, COVID-19-related deaths in Mexico were down significantly year over year, The favorable Q1 underwriting benefited from seasonality as well as additional claims favorability in the quarter. In addition, higher recurring interest margins were mostly offset by lower variable investment income year over year. Latin America's top line continues to perform well as adjusted PFOs were up 26% year over year on a constant currency basis. And sales were up 36% on a constant currency basis, driven by growth across the region. EMEA adjusted earnings were $60 million, up 9% and up 30% on a constant currency basis, primarily driven by higher recurring interest margins and solid volume growth. EMEA adjusted PFOs were up 5% on a constant currency basis, and sales were up 27% on a constant currency basis, reflecting strong growth across the region. MetLife Holdings adjusted earnings were $158 million, down 55%. This decline was primarily driven by lower variable investment income. Corporate and other adjusted loss was $236 million versus an adjusted loss of $105 million in the prior year. Lower variable investment income was the primary driver. The company's effective tax rate on adjusted earnings in the quarter was approximately 22%, at the low end of our 2023 guidance range of 22% to 24%. On page 5, this chart reflects our pre-tax variable investment income for the prior five quarters, including a $44 million loss in Q1 of 23. Private equity portfolio, which makes up the majority of the VII asset balance and is reported on a one-quarter lag, had a positive 0.1% return in the quarter. Venture capital, which now comprises roughly 20% of the $14.2 billion P.E. portfolio, had a negative 6.6% return. The remainder of the P.E. portfolio had a positive 1.9% return. In addition, real estate equity funds, which comprise roughly $2.3 billion of V.I.I. assets and are also reported on a one-quarter lag, had a negative 5.9% return in Q1 of 23%. While VII underperformed this quarter and is approximately 4% of the portfolio, the 3, 5, and 10-year cumulative private equity annual returns through Q1 of 23 were 19.8%, 17.2%, and 16% respectively, demonstrating the long-term value of incorporating this asset class into our asset liability management. On page 6, we provide VII post-tax by segment for the four quarters of 2022, and Q1 of 23. As we have noted previously, each of the businesses hold its own discrete investment portfolios, which have been built to match its liabilities. Although not readily apparent in the chart, RAS, MetLife Holdings, and Asia continue to hold the largest proportion of VII assets given the long-dated liability profile. Also, Corporate & Other currently holds an outsized amount of VII assets. We expect to reduce this balance over time as part of our normal ALM process. 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 and Q1 of 22 versus Q1 of 23. While VII has shown lower than trend returns over the last few quarters, recurring investment income was up roughly $850 million year over year, reflecting higher interest rates and growth in asset balances. Shifting your attention to the chart on the right of the page, which shows our new money yield versus roll-off yield over the past three years, with new money yields continuing to outpace roll-off yields in recent quarters. In this quarter, our global new money yield reached its highest level in more than a decade at 5.82%, 123 basis points higher than the roll-off yield. We expect this favorable trend to continue, assuming interest rates remain near current levels. Now let's look at our global investment portfolio on page 8. As you can see in the chart, MetLife's general account AUM, shown at fair value as of March 31, 2023, is $424 billion. The portfolio is high quality and well diversified by asset class and geography. In constructing the portfolio, we used a disciplined approach to asset liability management, in-depth underwriting, and risk management. MetLife's global footprint, combined with the local market expertise of MetLife Investment Management, or MIM, allows us to source high-quality, attractive assets that fit the needs of our businesses. Overall, the portfolio is well-positioned and built for resilience through uncertain markets. And we have a strong track record of mitigating losses across all asset classes in the portfolio. From 2008 through Q1 of 23, our average annual impairment rate was 13 basis points for fixed maturity securities and only five basis points for commercial mortgage loans. Now let's discuss our commercial mortgage loan portfolio in more detail on page 9. As of March 31, the CML portfolio carrying value of approximately $54 billion is well diversified by geography and property type. The CML portfolio is concentrated in high-quality properties and in larger primary markets. These loans are typically to the larger and stronger institutional sponsors who are better positioned to effectively manage assets through periods of stress. In addition, almost all of our CML loans are in first lien positions with less than half of 1% in subordinated loans. The portfolio has a low average loan-to-value of 58%, with a high average debt service coverage ratio of 2.4 times. As shown on the table, only 0.4% of the CML portfolio has a higher than 80% average loan-to-value ratio and a below one times average debt service coverage ratio. The commercial mortgage loan allowance for credit loss stands at $319 million, including the roughly $100 million increase in Q1 of 23 years. and considers the current environment as well as the risk around the economic outlook. We estimate that our allowance for credit loss is sufficient to cover current expected credit losses in the CML portfolio. The delinquency rate on the portfolio is only five basis points and is related to one loan as of March 31, 2023. With regards to loan maturities, only 14% of the CML portfolio is scheduled to mature in 2023, with 36% of these loans already favorably resolved through extensions or payoffs. Of our remaining 2023 maturities, we expect most will be similarly resolved, with only 0% to 3% of our 2023 maturities potentially resulting in defaults. If the full 3% or approximately $200 million of loans were to default, this could result in an impairment of up to approximately $15 million. Continuing on page 10, let's drill down further on our office commercial mortgage portfolio. As of March 31, the office loan portfolio was approximately $21 billion, or 4.9% of our total general account AUM. The portfolio is high quality, with 89% collateralized by Class A properties, which have seen less market pressure. The portfolio also has an attractive average loan-to-value ratio of 57% and an average debt service coverage ratio of 2.4 times. As shown on the table, less than 1% of the office CML portfolio has a higher than 80% average loan-to-value and below one-time average debt service coverage ratio. The office CML portfolio is geographically diverse across Class A markets in the U.S. and internationally. While we remain confident in the office portfolio, given its high quality, we have been very selective on new office loan production in the current environment. In 2022, office loans represented only 8% of our total U.S. commercial mortgage loan production. And since 2016, we have reduced our overall office exposure from approximately 50% of the CML portfolio down to 39% today. Now let's switch gears to discuss expenses on page 11. This chart shows a comparison of our direct expense ratio over the prior five quarters, including 12% in Q1 of 23. 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. Our Q1 direct expense ratio benefited from solid top-line growth and ongoing expense discipline. We remain committed to achieving a full-year direct expense ratio of 12.6% or below in 2023, demonstrating our consistent execution and focus on an efficiency mindset. I will now discuss our cash and capital positions on page 12. Cash and liquid assets of the holding companies were approximately $4.2 billion at March 31st, which is above our target cash buffer of $3 to $4 billion and down from $5.4 billion at December 31st. The sequential decline in cash of the holding companies reflects the net effects of subsidiary dividends, payment of our common stock dividend, and share repurchases of roughly $800 million in the first quarter. as well as holding company expenses and other cash flows. Our first quarter tends to be lower in subsidiary dividends and higher in holding company expenses. As illustrated in the chart, you can see that this same seasonal pattern occurred from 4Q of 21 into Q1 of 22. Regarding our statutory capital, For our U.S. companies, our 2022 combined NEIC-RBC ratio was 367%, which is above our target ratio of 360%. For our U.S. companies, preliminary first quarter year-to-date 2023 statutory operating earnings were approximately $1 billion, while net income was approximately $700 million. Statutory operating earnings increase roughly $500 million year over year, primarily driven by favorable underwriting, partially offset by lower variable investment income and higher expenses. We estimate that our total U.S. statutory adjusted capital was approximately $17.7 billion as of March 31, 2023, down 3% compared to December 31, 2022, due to derivative losses from certain equity options and dividends paid, partially offset by higher operating earnings. Finally, as I referenced earlier, we expect the Japan solvency margin ratio to be approximately 725% as of March 31st, which will be based on statutory statements that will be filed in the next few weeks. Let me conclude by saying that MetLife's results reflect the strength of our business fundamentals, solid top-line growth, favorable underwriting, and ongoing expense discipline. While private equity and real estate funds underperformed this quarter, core spreads remain robust. In addition, results in our market-leading franchises, group benefits, and Latin America continue their strong top and bottom line growth. While market fluctuations are expected to continue, MetLife remains in a position of strength given our balance sheet, investment portfolio, free cash flow generation, and the diversification of our market-leading businesses. Finally, our commitment to deploying capital to achieve responsible growth positions MetLife to build 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 would like to ask a question, you may press 1, then 0 on your telephone keypad. You will hear acknowledgement that your line has been placed in queue. You may remove yourself from this queue by pressing the one zero key once again. And our first question is from the line of Tom Gallagher with Evercore ISI. Please go ahead.

Morning. Um, couple of investment questions. So John, the 19% of office CMLs that mature in 23, um, you guys said 36% of them have been resolved so far through the end of April. Can you just elaborate a bit on what's actually happening there? What does resolved mean? I think you mentioned either pay down or extended. As you're going through that process, are most of them actually paying off in maturity? I assume there's not a lot of liquidity out there, so you're probably extending more than you're seeing payment in principle at the end here. And then also, what kind of yields are you getting Assuming you are extending a lot of these or restructuring, are you getting yields commensurate with the higher risk in the market for that asset class right now, or are you having to subsidize them at all? Sorry for the rapid-fire questions, but wanted to just get a better sense for what's happening.

Good morning, Tom. It's Steve, and thanks for those questions. And talking about kind of what's happening, how we're managing the portfolio today, and John did give some high-level numbers. And when you look at how we're actually managing the portfolio, and there, of course, are a number of ways to resolve, most of what we're doing right now is on extending. But those are all extension options that are part of the original contract, where it's the borrower's option to extend or not. And when they do, they still have to meet all of the various restrictions and requirements of the contract, including financial status, terms and conditions, and the like. And there's usually a fee paid with it, too. And they're generally all at market. So that's where we do see a lot of the activity in resolving the portfolio. And in looking at the, you know, we have conversations with virtually every borrower who has a maturity coming up this year. And basically, I think most of the borrowers who have that extension option probably will exercise them. We actually are seeing payoffs, though, across the portfolio as well. So I think that, you know, that's a strong result, too. I think when we look at, you know, sort of numbers of loans, you know, probably on the order of a quarter of the loans are actually paying off, too. So, you know, we're actively managing the portfolio, as we always do, with obviously a heightened sense of attention today, but very confident, you know, and John gave numbers. We think that there will be a very, very small number of foreclosures likely when we're through this year.

Okay, thanks, Nick.

Your second question was, well, I could expand. I sort of answered your second question just saying the extensions are at market. But also what I'd say is, yeah, this is a market where we're very picky. And looking at all of the office, well, frankly, across all of the commercial loan space, we're getting kind of a minimum of 200 basis points over likely indices on floating rate loans or on treasury indices. And if If we were to do an office, it would probably be at least 100 basis point premium over that, too. So it's a market where, again, you have to be very cautious, but there are opportunities, as we've seen through other cycles in the past.

That's really helpful. And just a quick follow-up. Last year, at the end of 22, I think you had a big increase in CM3-rated loans. that had an adverse impact on RBC. Can you talk about what you expect for migration, positive or negative, for 23?

Yeah, and I think first we probably want to just address what happened with those numbers for the 2022 migration because it's a fairly unique circumstance. I mean, we do a reasonable amount of floating rate loans. About 30% of our portfolio are in floating rate loans. And just the way the mechanics of those LTV calculations work, there are lags involved. Net operating income is a three-year average. So when you think about something like caps, those basically kind of get delayed in how they work into the actual calculations. And so we do see that migration. But again, over time, that cap income will also get incorporated in, obviously depending on the overall interest rate environment. So when we look at it, we're not really concerned that that's a credit issue. It's really just more a mechanics of the formulation and the timing. So that's what really is driving it. We wouldn't expect, you know, significant negative deterioration across the portfolio other than just, you know, the mechanics.

Okay, thanks.

And next we move on to a question from Eric Base with Autonomous Research. Please go ahead.

Hi, thank you. Maybe, Steve, sticking with you for one and maybe just stepping back, I was hoping you could provide sort of an estimate as you think of kind of a more severe stress scenario for commercial real estate and office in particular. How do you think about what the potential capital impacts are in total if you add up impairments and ratings migration?

Thanks, Eric. That certainly is something that, you know, we spend a lot of time looking at. stress test the portfolio and we've just gone through another round of that testing no surprises just given what's happening in the market and What I say it summary is we're very comfortable with the portfolio The implications of a severe stress tests are really very modest and what we did in our most recent stress test scenario is we We assume that all valuations across the entire commercial mortgage loan portfolio declined by 30 to 35% from where they are today. So think about that, that's pretty severe. And then, you know, you work that through in terms of impact on net operating income, loan migrations, foreclosures, REO impacts. The net impact to us from a capital perspective we estimate would really only be about 10 to 15 RBC points over three years. So when you really put that in the context of what it means to capital, it's very, very modest impact. And I think that is a very severe stress case as well. So I think it just points to the overall strength of the portfolio and the overall strength of our capital.

Thank you. Very helpful perspective. I guess maybe turning to the business. For Latin America, you continue to see strong growth and it looks like you're running well ahead of what your guidance would imply for 2023 earnings, even with some of the headwinds from VII and in CAJE this quarter. So I guess, is there anything unusually strong in the underwriting results in 1Q or is 200 million plus of run rate earnings kind of a reasonable expectation?

Yes. Hi, Eric. This is Eric. So let me shed a little bit more color around LATAM first and then answer your question. So we have, as you know, a significant footprint in the three largest markets in the region. We are market leaders with a very strong brand in Mexico and Chile and a very fast-growing presence in Brazil. Our strategy around the region is really centered around three pillars. One is protecting the core. The other one is growth through diversification, and all that underpins through a transformation to meet our customers' and our partners' evolving needs. So I can give you a couple of examples of the execution of this strategy around the region. So in Mexico, which is our third largest market globally, we have a very unique worksite government franchise that continues to grow very nicely. But in parallel, we've been very successful in diversifying and expanding that distribution reach into the private sector, both in retail and group. In Chile, where we have a very strong face-to-face agency franchise, we're growing very fast our bank assurance and third-party distribution projects. distribution. And then in Brazil, which now represents roughly 20 percent of the region's sales, we're also growing very, very fast with, you know, 60 percent year-over-year this quarter alone. And there the focus is really on bank assurance and third-party distribution. So that continued momentum across the region really reflects the strength and diversity of our distribution channels and product offerings combined with the technology investments that allow us to continue to differentiate for our customers and our distribution channels. So overall, we believe we were really well positioned in the region to capture the growth opportunities that these markets that are still under-penetrated and underserved have to offer. Now, going back to this quarter's results and your question particularly, this was another strong quarter on the heels of a record year, but as mentioned by John, This quarter, strong results included that roughly 20 million of favorable underwriting, really driven by seasonality and overall favorable claims experience. But that being said, we believe that the guidance we provided is still a reasonable run rate for the remaining of the year for the region. So I hope this helps. I'll give you a little bit more context around LATAM.

Yes, thank you.

Next, we go to the line of Tracy Benjiji with Barclays. Please go ahead.

Good morning. I just want to touch upon VII. In today's environment, do you still feel like $500 million of quarterly alternative asset returns is still an appropriate run rate? And if you could also touch upon what you're seeing inter-quarter.

Hi, Tracy. It's Steve. You know, I guess I'd go back to how we talk about VII fairly consistently and recall, you know, we're not trying to predict quarterly, monthly, interim returns. I mean, we really set our projection based on our long-term performance track record in the classes. And that's how we've come to the 12% number, 3% a quarter. So that's always our standard projection. Certainly, as we go through the year, we do look, and given the lag, we can look and try and make some connections to what's happening in the markets. And I think that kind of relates to a little bit of what John talked about in our performance, although venture capital certainly was something that everyone was focused on for a while. So I think we did see those negative returns come through in the last quarter. So again, looking ahead, I'd still look at what the overall market has done in the previous quarter, just given the lag. That'll serve as some directional indicator for where we are. And I think our view is always that our portfolio should be less volatile and probably less extreme on returns than the overall market. So again, I think compared to last quarter, Venture capital took a big hit across the rest of the portfolio. We actually saw pretty decent returns in looking at the LBO portfolio and some of our specialty sector, like power, infrastructure, energy, and those sorts of portfolios. So there is performance, and I guess I'd just look at the overall market as an indicator.

Yeah, and I would just maybe add, Tracy, I mean, I think obviously Q1 is year-end marks We're moving into now Q1, Q2 being off of Q1, you know, results. So, you know, I think directionally we would be kind of optimistic that it would improve from Q1. Maybe we don't revert back to plan, but I think, you know, we're on kind of an upward trend.

Got it. You know, in the first quarter was an active FABN quarter. You raised $3.7 billion. And some of these coupons, not surprisingly, were much higher than what we've seen historically. So my question is, do you feel like this product is attractive in today's environment or you could still earn like a 200, 300 spread by reinvesting? Or was the first quarter activity more a function of refinancing maturing issues?

I'd say both. You know, it was elevated activity-wise just because of maturities that we wanted to refinance. But we manage the program very actively, and it still meets all of our target thresholds for returns and income on the portfolio. So we're very happy with the returns.

So what kind of assets are you reinvesting in in today's environment to make that return?

Yeah, and again, you have to go and look at the maturity because, again, it's still an overall matched portfolio. But what we're looking at are really mostly fixed maturities, structured finance, some private assets, not much in the way of real estate these days.

Got it. Thank you.

Our next question is from Jimmy Bueller with J.P. Morgan. Please go ahead. Mr Buehler, do you have your phone muted? We don't hear you. We will attempt to come back to him one moment, please. Next, we'll move on to the line of Ryan Krueger with KBW. Please go ahead.

Hi, thanks. Good morning. You addressed most of this, but I just had one more question on CM ratings. When you do extend commercial mortgage loans, does that trigger resetting LTV and all the metrics that go into the CM ratings, or does it kind of maintain the prior metrics that already existed?

really relate it more to just our overall valuation process. When loans get refinanced or extended, there's a valuation that's right in line with our normal valuation process. And like I said, most of the extensions we're doing are extensions that are at borrower's options who've met all the financial criteria required for the loan, so we wouldn't expect to see migration as a result of that.

Okay, got it. And then just one on retirement. that came in quite high on a base level, excluding VII. Is that a level that you think in the current rain environment can be maintained near term?

Good morning, Ryan. It's John. So, like you said, RIS spreads, I think overall 117, but ex-VII were very strong in the first quarter at 137. And just recall, our overall all-in range was 135 to 160. Again, if you kind of add back a normal contribution to VII, that would have been certainly high end of the range. And look, I think we highlighted this on the outlook call. We did think that the first half of 23, certainly based on the forward curve, would have, I'll say, the higher end of spreads, just given our in-the-money caps. We probably think Q2 has some kind of similarity to Q1 at this point for X VII spreads. And then we'll need to see how the forward curve and how rates progress through the rest of the year. Okay, great. Thank you.

And next we move to a question from John Barnage with Piper Sandler. Please go ahead.

Good morning. Thank you very much for the opportunity. Can you maybe talk about persistency of renewals in the group business? We've heard other participants talk about letting business walk that didn't match pricing objectives with this renewal season after a couple years of elevated experience. So curious your thoughts there. Thank you.

Thank you, John. It's Rami here. Maybe let me just give you the punchline in terms of the results we're seeing. Our persistency in terms of the Q1 renewals, was extremely strong, and it was higher than prior year across all of our major markets. So we're seeing very strong persistency alongside renewal actions that were very much in line with our expectations. So we're very pleased about the outcome as we go into the year. Maybe just to give you a bit of flavor on that, we've always talked about the group business as a business where price is important, but it's also a business where you can differentiate on many factors beyond price, right? And you certainly see that in our national accounts franchise. Our average customer has been with us for more than two decades. You see that in the very wide breadth of our products, which allow us to be much more consultative with our customers and meet their needs. And you also see that because of our scale. Our scale has continued to afford us the ability to invest in our capabilities across the business. and therefore drive greater persistency and stickiness with our customers. So all in all, a very strong persistency as well as a rate action story for us in the first quarter.

Great. Thank you. And the follow-up question on Raven Capital, I see you obviously announced another buyback authorization, but can you talk about market volatility and opportunities that may create to do other acquisition, either in products or geographic interest specifically. Thank you.

Hi, John. It's Michel. The first thing I would point to is really the consistency in terms of our capital deployment. And you can see that over, I would say, a number of years. And it was, again, evident in the first quarter. So if you just look at the first quarter, One, we saw sales growth across most of our key markets and businesses, so we're deploying capital to support responsible growth. We were active from an M&A perspective. We announced the acquisition of Raven Capital Management, which adds an attractive adjacency to our men business, which we think we can scale over time. You know, we deployed $389 million in dividends and we announced a 4% increase in our dividend. Again, if you look at the increase since 2011, 9% annual compound rate increase. And then we bought $780 million in our shares in Q1, another $223 million in April. And we have a new $3 billion authorization from our board. We're above our liquidity buffer of $3 to $4 billion at the holdco. So if you take all of these together, I think they signal confidence in terms of our financial strength and the free cash flow generation capabilities of our businesses. So, again, we're confident in terms of how we're positioned, and we'll continue to sort of explore M&A opportunities, provided those fit strategically, are accretive over time, you know, meet our minimum risk-adjusted hurdle rates and the like. And, you know, we'll remain also disciplined on that front as we always have been. So hopefully that gives you some color.

It does. Thank you very much.

Next we go to Sunit Kamath with Jefferies. Please go ahead.

Thanks. Good morning. Rami, I was hoping you could unpack the group disability result a little bit in terms of what you saw in the quarter. You know, we did have one company yesterday talk about, you know, sort of a pretty significant improvement in loss ratios and that actually persisting for the balance of the year. wondering how your business is doing and if there's any, um, you know, expectation for ongoing improvement as we, as we move through 22, sorry, 23. All right.

Good morning. And thank you for the question. So, um, inside our non-medical health ratio, you know, disability business is a contributor to that. And we've certainly, um, seen a favorability in our disability results, uh, this quarter. And that favorability came in through both lower incident rates as well as stronger recoveries. And when we think about that favorability, there's some external factors in the environment and there's some internal drivers as well. So externally, you could look at the low unemployment levels as well as the fact that we're now clearly out of the pandemic environment, which kind of decreased the pressure on the STD line. favorable environment in Q1. Internally, when you look at disability, this is a product where our customers have complex needs. And here again, I would point to scale and investment you need to make here to really differentiate yourself in the marketplace and particularly differentiate yourself in terms of outcomes. So in our case, that's come from investments in our human capital. We've built a world-class team of clinicians who diligently work on returning people to health. We deploy data and analytics in our pricing, underwriting, and our claims process. We have world-class capabilities in terms of leave and absence, which again, when packaged with LTD, drive greater customer value and persistence in our books. So certainly a favorable disability ratio. As we think about the rest of the year, you know, we continue to, from a pricing perspective, we continue to bake in a load for softness in the environment. I mean, it's so that from a pricing and renewal perspective, we continue to look at that and continue to bake in a pricing loan to make sure that our margins are resilient should we see softness from the claims side.

Okay, got it. And then maybe just pivoting to Steve on the CMO portfolio, I know that Class B is a pretty small percentage of the office book, but as we think about those scheduled maturities for, you know, 23 and 24, any sense of is it, like, what's the piece of it related to Class B? Have you resolved any of the Class B loans? Just some color on that would be helpful.

Hey, Samit. You know, we haven't broken out the maturities. Again, I think if you look at the overall resolution and the path we're down, it's very strong for the overall portfolio. Extension options where they're provided at market with fees, a good number of payoffs to – so I'm sorry, I don't have the specific breakdown, but I'm – I'm very pleased with the overall structure of our resolution right now.

Okay, thanks.

Next we go to a question from Elise Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question, I believe in your prepared remarks you guys mentioned that you might want to right-size the BII portfolio over time. Was that an overall comment on the portfolio? just related to the corporate segment.

Hey, Elise, it's John. Yeah, I made the comment. I mean, more because, as you've seen, we probably have a little bit of outside sensitivity in C&O for VII. It was a function of a number of things. Remember last year, a year ago, we were able to monetize about a billion dollars of our private equity portfolio. We also, just with some... asset liability management moved a bit more into corporate and other. I would call that a holding pattern for now. And that's really the comment I'm making. And so it does, I think, on the margin, cause us to probably, we're not stopping our investment. But relatively speaking, the new commitments are a bit slower. But we're still doing that. We want to always invest through the cycle. But that was the gist of the comment.

And then your direct expense ratio, 12%, was pretty stable year over year. And outside of group, it doesn't look like expenses moved much. How much active expense management is going on, and how much underlying pressure are you guys seeing from wage inflation or other drivers?

It's John again, Elise. As you said, it was a good result for the quarter. You know, look at how much, uh, a lot of active management, a lot. And, you know, inflation is, uh, has been, has been challenging. And I think we've seen that throughout the insurance industry, uh, in on both sides and, uh, it's a, it's a challenging environment. And as a result, it takes active management. Uh, and I think our, you know, the culture here has been really strong around efficiency mindset. You know, we continue to use that mentality to build capacity so that we can continue to invest. and through these cycles and not let things like inflation slow us down. And it gives us optionality, you know, should we see more stressful environments. So I think the team has done a really, really great job, but every day it's active management.

Thank you. And our next question will come from Alex Scott with Goldman Sachs. Please go ahead.

Hi, good morning. First one I had is for you in Asia. Can you talk about the organic growth there and particularly how U.S. rates and, I guess, JGB rates are impacting your annuities business there and, in particular, your ability to sell new product and have attractive product in the market?

Hi, Alex. It's Lyndon. Yes, look, we really are benefiting from the U.S. rate movement. It's really giving us an advantage as we compare to the Japanese rates. We've seen demand for the foreign currency products go up consistently over the year. If we look at fourth quarter sales, annuities were very strong, and that continues as we go into the first quarter. So as far as rates go, it really puts us at an advantage. as we're selling this product. But if you look at the fluctuation in the foreign currency, that really kind of makes the market tentative going into the product. So overall, I think rates have really benefited us in this environment.

And then, you know, along the same lines, in LATAM, I just wanted to kind of peel back the organic growth a little bit and see if you could tell us a little bit about what you're doing, whether it's on distribution or, you know, actions that you're taking that are, you know, allowing for, you know, such strong organic growth and, you know, seemingly market share taking.

Yes. Hi. This is Eric. So, yeah, as I mentioned earlier, really it's a combination of, you diversifying our distribution combined with the introduction of new digital tools and active distribution growth through different channels. And again, our breadth and depth of our franchises in the key largest markets across the region.

Thank you.

And ladies and gentlemen, we have no more time for questions. I will turn the call back to John Hall, Global Head of Investor Relations.

Thank you for joining us today, and we appreciate your patience with the technical difficulties at the beginning of our call. We look forward to seeing you over the course of the quarter, and have a nice day.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.