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MetLife, Inc. (NYSE:MET)

RBC Capital Markets Financial Institutions Conference Call

September 18, 2013 11:00 ET

Executives

Todd Katz - Executive Vice President, Americas, Global Voluntary & Worksite Benefits

Analysts

Eric Berg - RBC Capital Markets

Eric Berg - RBC Capital Markets

Yesterday I had my asset management hat on, mostly with the exception of Unum, and today I am going to put my – I will be wearing both hats, but for now we are going to talk about the life insurance business again. The first thing I want to do is to say thanks to you, Ed Spehar, the Head of IR at MetLife and his colleague, Charlie Douglas. They make the decisions as to which conferences their executives attend. So, I appreciate the confidence that you had in us to put together something that will be helpful to everyone.

We are going to do a conversation for the next 25 minutes with Todd Katz. Let me tell you basically briefly what Todd does. You can read his bio. He is one of the most senior executives in the company. He runs, what I think is it’s not the largest earner, but it’s one of the largest businesses from an earnings point of view. For those who follow Met closely, you will know that the annuity business has been terribly important to Met, but that fact is the business that Todd runs which is group insurance and voluntary benefits and worksite benefits, really is the heritage of the company. This is how Met grew up as a group insurance company so far, I think it is along with individual insurance, of course. So, as long as there has been a MetLife which is decades over 100 years I suppose now, the group insurance and related businesses have been at the center of what Met does. Todd is part of the larger Americas operation, which includes, as well as, I mentioned the individual life insurance business and the very large annuity business, but we are not going to talk about them today. Today, we are going to talk about this big business called group insurance and related areas.

What we did to prepare is again, not to script anything, so the answers will be hopefully extemporaneous and therefore helpful, very helpful to you, but we did prepare subject areas. So my program, my plan is for Todd and I to chat for about 15 to 20 minutes and then we’ll leave maybe 5 minutes for conversation.

Question number one, for sometime Todd, Met has said – Met has taken the position that its group insurance businesses are very high ROE, group life, group disability, group dental. Now, even the people who were not full-time followers of this business like myself, I would think that this would seem surprising, because after all they are intensely competitive businesses, group life, group disability. They are commoditized, most large employers already have them in place. I don’t expect you to give away the secret sauce, but I would like you to the extent that you can, talk about how you run these businesses to get the high ROEs that you do?

Todd Katz

Sure. Thank you, Eric and good morning everyone. I think that’s a great question and it is one that we do get asked periodically, and I will cover it from a couple of angles. I think this first angle I will cover it from is not every group insurance carrier and not every employer is the same. And so, if you look at our mix of business and products and markets, it’s different than some of the other companies that we do business with. A great example is if you look at the whole business, it’s about a $16 billion business, about three quarters of it with large company and a big chunk of that for example are in products like group life and group dental. So you might say well group life isn’t that commoditized. And yes, price is important. So for example, a big chunk of our business is with large employers who we have risk-sharing arrangements yet. And so, we have developed really long-term arrangements with those customers, participating types of deals for both the employer and us to take risk.

Eric Berg - RBC Capital Markets

Now, how does that just is it – I want you to continue your answer.

Todd Katz

Sure.

Eric Berg - RBC Capital Markets

But just, if I could just interject for a minute, how does that work? Employer pays a premium, claims come in, walk us through sort of the basic arithmetic of these risk-sharing deals?

Todd Katz

Sure. And I will juxtapose it. First to say, traditional what people might view as a commodity is give us the lowest price and we pay the client and hope sometimes you win, sometimes you lose.

Eric Berg - RBC Capital Markets

Right.

Todd Katz

In a participating risk-sharing deal, the employer and us sharing the risk. So, for larger customers, generally speaking, the claim experience is fairly predictable. We maybe willing to take a little bit lower margin, but we deploy far less capital. So, it’s a higher ROE in that situation.

Eric Berg - RBC Capital Markets

Got it.

Todd Katz

So that’s one example. Another great example that we’d love to talk about is our dental business. Our dental business is roughly 25% of our group business. That’s a pretty big business for us. It’s a business that experience is very predictable, one where we have really solid competitive advantage, good deals with dentists, and good scale. We pay over 25 million dental claims a year. So, what we are able to do is to take the deals we have with the dentist, take the scale we have, and interpret that into a lower price for the employer and the employees and still have good margins. And so, those are two examples, two of our largest businesses where we are able to provide very competitive offerings in the market, have good earnings and a good ROE.

Eric Berg - RBC Capital Markets

Let me – before going on to the next question, let me talk about the dental insurance business, because as you pointed out, it’s a big business for Met, it’s an important one. There are millions of families across millions – hundreds of thousands, maybe – how many people do you insure, would your estimate, how many…?

Todd Katz

Yes, about 22 million.

Eric Berg - RBC Capital Markets

Okay. So tens and millions of people are protected by MetLife from the dental insurance point of view. Now, one would think this would be the easiest business in the world, you collect the premium, somebody gets a cavity, somebody has a root canal, you pay the claim, and you are done by 3 o’clock. But frankly, my sense of things is that even Met as big as it is has had some ups and downs over the years in the business. So maybe you could explain to the group some of the nuances, some of the subtleties, why this is not free money in short, what can go wrong if you don’t pay attention?

Todd Katz

Yes. So I think it’s a great point, because one of the things that may run through everything I talk about are two of the things are discipline and focus. So from a dental perspective, we think to get it right, we have to focus on it, which means it’s more than just a development product, they put out a rate, it’s what makes dentist want to be in your plan. By what – how do you provide value to them, right? How do you position yourself with customers who want to stay with you for the long haul, because one of the drivers in dental and we’ve seen it is dental patient moves around, right? So you want to do business with customers that understand that, that see the value, and in the years where price is a little higher they are willing to pay the price increase, and when they are lower, they understand that they should be lower, you don’t need to pass through (inaudible) along to them. Important underneath that is you got to understand the market so you can price it right, so you can make it easier for those customers.

Eric Berg - RBC Capital Markets

Right. I mean one of the things that I have seen, I won’t name the company because they had a bad experience, but it’s my sense that it’s in fact that there is a lot of skill involved in this. But if in fact you don’t pay attention to the details, you can get yourself in a bad way very fast. In this particular case, it was a company that was deeply into the dental business, and they had the idea that they would sort of stick it to the dentist. They were going to pay them $15 for a cleaning or something like that or $25 for an examination, which is obviously insufficient in today’s environment where doctors have to pay – public dentists had to pay for all sorts of equipment. Well, what do you think happened? Dentists started shortchanging the patients in terms of the time that the dentist was spending with the patient, the patients got upset and suddenly there was massive attrition of customers and they were writing off all their debt, and that was how I learned how the dental business is not free money, you’ve got to focus, what I think --.

Todd Katz

20 years ago, about 20 years ago we started our Dental Advisory Council. You might say, they have had a marketing spend, by the way it’s buyback of dental spending, each practicing dentist, key group customers, we group together three times a year, and we really talk about this business and what’s going on. If the dentists don’t feel they have…

Eric Berg - RBC Capital Markets

A fair deal.

Todd Katz

(inaudible) they’re going to loose. I think you have got to really have that value for them. But the key is, the value isn’t just too much to payout, how fast do you pay them, how well you have given them tools, so that patients accept treatment plans. Because when a patient goes to see a dentist, a lot of times the dentist simply say they need to that and the patients doesn’t want to do that. So, I don't want to give you kind of all the gory details of it, but if you really get the mindset of the dental office, you can position yourself very different than somebody who says this just gives money.

Eric Berg - RBC Capital Markets

Right, okay, let’s move on and talk about this broad subject called voluntary insurance which is getting a lot of attention and will transition as well into this item that the Wall Street Journal – will transition into this, this item that led the Wall Street Journal publish this morning by Walgreens. So Met and others have said – and I asked the same question yesterday to Unum, and I am now going to pose the same question to you. Met, Unum and others have said that one of their areas of focus in the future will be voluntary benefit, which is, quite frankly, let’s just be frank with each other, it’s a polite way of saying cost sharing, have the employee pay more.

Now here to my sense is that this is not a path to gold without any impediments or challenges that once again you have to pay attention, because if you say to people who want it, if you say to employees who wants to buy the stuff, you are going to get anti-selection. Moreover, you are going to get people sign up for voluntary benefits who may know more about their health than you do and the turnover or attrition is probably going to be higher. So, my question is with that as a preamble, I’d like you to contrast running successfully an employer pay difference. What has to happen for a voluntary business to be successful, and please contrast that to what is necessary to succeed in traditional employer pay? How does the two differ in important ways?

Todd Katz

So, I think every carrier, if you ask them what’s their top three or four strategies, voluntary is on the list. There is no doubt about it. So it is – it’s skill and an expertise and it is different, right. Employer pay, I would say the value chain goes from insurance company to a broker/consultant to employer. You can do a good job navigating that value chain. You can be competitive if you could show these values to the employer, and the consultant/broker recognizes that value, you have a good opportunity to win, and I would say we did that for years. I would also say, voluntary, while we are talking a lot about it for us and the industry as a whole, it isn’t a new thing. And the biggest difference is extending that competency through the value chain all the way to that employee or a consumer. And that means you have to do things differently. That means you have to have a deeper understanding of the risk and selection around consumers. That means you need to know how to price your product in a way that makes consumers want to buy them whether they are sick or healthy, and by the way that may mean underwriting. So a lot of our products have individual underwriting associated with them.

Eric Berg - RBC Capital Markets

Right.

Todd Katz

It also really gets us this issue of having the tools and capability to enroll people in a way that makes sense for broker, employer, and employee. And then lastly, a big piece, and this is a big differentiator for us is we think brand is a big deal in this space.

Eric Berg - RBC Capital Markets

Right.

Todd Katz

So we think when people are trying to make a decision in the voluntary space, that employer endorsement is a big deal, we know that. We think the fact that it’s payroll deduction and easy to buy is a big thing, and we think maybe it carries some weight, and our brand has helped it. So that’s sort of a piece of it, but you have got to understand that risk. You really have to understand that and use that understanding in how you develop products and how you sell those products.

Eric Berg - RBC Capital Markets

Why, I mean, there are lot of big companies, I mean let’s think about the mutual companies as well who are your competitors in group insurance, right? I am thinking about New York Life, Guardian Life, Mass Mutual Life, Northwestern Mutual Life, four major successful players in group insurance. I would think, haven’t studied it, but I would think their abilities to sign people up on the internet probably approximates as good as this. I have no reason to think that they are any better or worse than you, but I’ll start from that premise. They have strong actuarial talent as well. They are quite extremely well-run company. Northwestern Mutual highly regarded by producers and companies, great reputation. Try to be as objective as you can be what is Met’s competitive advantage in this voluntary area?

Todd Katz

Well, I would….

Eric Berg - RBC Capital Markets

Because the competition is tough.

Todd Katz

I would agree that if you look at the market, there are number of very reputable players who have many of the skills you described. We believe there are four things that drive either unique competitive advantage or maybe one of the more combined unique competitive advantage, but…

Eric Berg - RBC Capital Markets

Okay.

Todd Katz

The first one I already talked about that is our brand and we think that play, but before this, plenty of companies that have brands.

Eric Berg - RBC Capital Markets

Yes.

Todd Katz

The second is customer relationship. So we play in market with our voluntary benefits strategy that maybe different than some of our competitors. So we have often talked about doing business with mainly the Fortune 100 or perhaps with the Fortune 500. For employers is more than 3,000 employees, we are far and away from market leader and those employers operate a lot of those space a little bit differently and we had relationships with them. So the second one I would say is relationships implacable and competency. The third one I’d look at is product. So we are not just a life and disability carrier, we have 18 different products, so we can develop a value proposition for the client and design a benefits offering for them that’s much richer and more robust. It’s not as if or whatever the problem is, the answer is this one product, it’s what are you trying to accomplish.

Eric Berg - RBC Capital Markets

Give us a couple of examples of some of the more off the beaten track products that you could come to market with that one of your competitors may or may not be able to, both the examples?

Todd Katz

So some of the best examples are our payroll deducted group, auto and home products. You can buy your auto insurance and your home owners insurance at work. You can get a pretty significant discount, you can get payroll deduction and it’s really easy and the renewal process is just low. That’s over $1 billion business for us and it’s in our portfolio and it’s in virtually no one else’s portfolio. Another one is group legal benefit. Group legal, where people need attorneys, we have a fantastic business, where we give people access to attorneys for cover legal services as an employee benefit and it’s under $20 a month.

Eric Berg - RBC Capital Markets

What do you get for that $20?

Todd Katz

You get consultations, you get free services – not free services, everything is covered, there is no claim. So the one thing you cannot do is sue your employer, but as you got…

Eric Berg - RBC Capital Markets

But nobody is going to close your house for $20, right? I mean…

Todd Katz

House closings are included, real estate, rising fraction (inaudible).

Eric Berg - RBC Capital Markets

But you pay, the idea is you pay $250 a year, and if you need to buy the ticket, you could get a lawyer?

Todd Katz

You got it.

Eric Berg - RBC Capital Markets

Okay.

Todd Katz

But it’s really a fact. So those are just two examples. I could talk about a critical illness product. I can talk about our accident product. Its how do you link it together and then how do you stick with an employer and this is the fourth leg, which is capability and makes it really easy for them to buy it. How do you make it really easy? Because they will tell you what the customers have told us is that, yes, I guess that I need this stuff, but boy, you cannot allow me to go to a website and make it easy for me to buy, give me access to skilled telephonic support and in some situations for some products with some companies, put people face to face with us, make it easy for me, and we think we do that well.

Eric Berg - RBC Capital Markets

I am surprised that it would not be easy. I would think the way it works is you get it screened, it says dental insurance. If you want it, $17 a month, right? I will take it through the – it’s hard to imagine sort of getting that wrong?

Todd Katz

Sure. So think about – I am talking about all four of those together, so let’s say you are a company and you want to offer five or six products…

Eric Berg - RBC Capital Markets

Right.

Todd Katz

From five or six different companies.

Eric Berg - RBC Capital Markets

Right.

Todd Katz

And so I got to get it integrated and put together and so what our view is it’s the combination. Its brand situation fits its products, its capabilities, if you put it together and we don’t think there are many people who can do all that.

Eric Berg - RBC Capital Markets

Okay, that’s a comprehensive answer and a good one. I am going to be mindful of time. I am going to ask you one more question before we open the floor to the audience for questions. But I want to talk to you about this item that has appeared in the paper this morning, so people will have another chance to study it yet. The Wall Street Journal latest edition put an article about Walgreens doing something that I think is quite important, and Todd will explain it, but in a nutshell they have decided to give their employees budget for their benefit in the United States, and they basically said you be Walgreen U.S. employee, you are going to get a budget for yourself and your family. Go to it, it’s up to you to decide how you want to spend your money. So maybe you could go build on that by explaining further what Walgreens has decided to do. Answer the question, is this important, do you see this spreading and what are the implications for all of the group insurers not just yourself like Unum and Prudential and Lincoln and everybody else who is important in the group insurance area?

Todd Katz

So this one could be a really long answer, so I am going to try to condense it as quick as I can…

Eric Berg - RBC Capital Markets

Thank you.

Todd Katz

Because I am one on the other one, we have got a couple of trends going on here. We have got voluntary. We have got defined contributions. We are going to give you full bucket of money. We have got healthcare reforms all coming into play. And I have read the same article as you guys did on Walgreens, and that’s kind of where my knowledge goes, but I would say the trend is employers are not going to be able to manage the amount of cost increases in healthcare that they have managed over the last decade. And so some of this solution is going to lead to the defined contribution program give the employees bucket of money and give them choices. And then what are they going to do? And what we think is a great opportunity for us not commenting on the healthcare place, they will fix their healthcare, but on many of these, whether we are going to call, private exchanges, that’s what Walgreens did, they will have the opportunity to buy other...

Eric Berg - RBC Capital Markets

Ancillary benefits.

Todd Katz

Dental, vision, and in some cases a full array of voluntary benefits. And so we think we are well positioned and we think this industry is well positioned for all the same reasons I talked about our sense on voluntary to win in that defined contribution model, because you are out there and again we make it easy to brand products successfully.

Eric Berg - RBC Capital Markets

Okay. And so we are talking about here allowances basically just like giving your kid an allowance, we are talking about giving employees allowances for the full pallet of benefits, not just major medical?

Todd Katz

So that’s one of the concepts. And that is sort of I think the way it was described, may include dental, it may include vision, but yes, you have a fixed amount. The main thing is you use it to take the medical option that works for you.

Eric Berg - RBC Capital Markets

Right.

Todd Katz

But on these exchanges, you also could use some of the benefits for your ancillary or if making that ancillary selection like more promising for you as opposed to sending a letter to your house for doing something like that. So we think it’s going to be a driver of growth in MetLife.

Eric Berg - RBC Capital Markets

Interesting, okay. I have more questions, but I would rather leave the remaining five minutes for the audience to ask question. So who has one? I will continue if people don’t, but if people have questions I’d like to leave the remainder of the time for people in the audience. Please.

Question-and-Answer Session

Unidentified Analyst

(Question Inaudible)

Todd Katz

Yes. I will repeat the question just because I think we are recording. The question was how affordable are these products? And let me make clarifications, these aren’t new products, so we have been in these businesses for a dozen plus years. The answer is the products are affordable. Clearly, when the person leaves, they would need to go to a direct bill mode and they will be treated more like a retail first may leave some of the discount associated with payroll deductions, but we have actually had a pretty good strategy associated with letting them know what’s going on and positioning it for them that they can stay, but here is how your billing mode. So think about it, you have now left employment. We know, so does your credit card. Give us your bank account number and we’ll kind of move forward with you in that way. Clearly, it’s not as good for us as when they are at work, but it’s a strategy that works and we see a number of people continue their coverage after they leave work.

Eric Berg - RBC Capital Markets

Even though the premium increases significantly once the employee is paying fully himself?

Todd Katz

It does increase. It may not be significant, but they – it’s still going to be a competitive offering.

Eric Berg - RBC Capital Markets

Okay.

Todd Katz

We are not going to get that, for example, sale deduction discount somewhere else. Now, if they go to their next employer…

Eric Berg - RBC Capital Markets

Right.

Todd Katz

Which we hope, and by the way, we are really one of only two or three players in this market, we may have a chance to have them recur at the next report.

Eric Berg - RBC Capital Markets

As a discount.

Todd Katz

Yes.

Eric Berg - RBC Capital Markets

Yes, please sir.

Unidentified Analyst

(Question Inaudible)

Todd Katz

Yes, I think generally speaking, more employer dollars and the pie is good, because employers are more inclined to buy once the employer is paying some of the money. I think that’s the reality. However, what we are finding is that, if you are able to replace that with a broader set of offerings that people can customize, you can recapture a lot of that, that employee dollar. I would also say from our perspective when we think about growth, certainly voluntary is one of our strategy. We got a number of other strategies that we think will well position us for growth, even just the fact that we take a look at our market share, which is so large that market. And you have, for example, under 3,000 employees, we got a pretty good business, $3 billion, $4 billion, but that’s a $60 billion market. So we’ve got a number of different kind of irons in the fire for growth.

Eric Berg - RBC Capital Markets

Are there any other question? We are seeing none and given that we are out of time, we should end at this point. Todd thanks.

Todd Katz

You are welcome.

Eric Berg - RBC Capital Markets

It was very productive. Thanks very much.

Todd Katz

Thank you.

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