Unum Group (UNM) Earnings Call Transcript & Summary

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Unum Group Outlook Meeting. [Operator Instructions] Tom White, Head of Investor Relations, you may begin your conference.

Great. Thank you, Rob. Good morning, everyone, and welcome to the 2022 Investor Outlook Call for Unum Group. We appreciate all of you joining us this morning. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2020, and our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of the website at unum.com. I'll remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in the appendix of the presentation materials and on our website. I'll also point out that in 2018, the Financial Accounting Standards Board issued accounting standard update 2018-12, Targeted Improvements to the Accounting for Long-duration Contracts. This update significantly amends the accounting and disclosure requirements for long-duration insurance contracts. We will adopt this guidance effective January 1, 2023, with changes applied as of January 1, 2021, also referred to as the transition date. Our outlook discussion this morning does not include consideration of these impacts of this accounting standard on projected future operating earnings. Moving now to our agenda. We will begin with opening remarks and an overview of the company from Rick McKenney, Unum's President and Chief Executive Officer. Mike Simonds, our Chief Operating Officer; and Steve Zabel, our Chief Financial Officer will discuss the strategies behind the key drivers of our anticipated operating earnings growth over the outlook horizon. Steve will cover 2 special topics, after which, he and Rick will outline our financial outlook. Following these prepared comments, Rick, Steve and Mike will conduct a question-and-answer session. And Rob, our operator this morning, will provide instructions for the Q&A process at the conclusion of our prepared comments. And now I'll turn the call over to Rick for his opening comments. Rick?

Thank you, Tom, and good morning, everyone. It's good to be with you all today to share our outlook for 2022 and the next several years as we navigate a challenging, yet improving environment. Through the pandemic, we have been challenged in multiple ways from the disruption to the workforce and to the clear impact to our population's health and, sadly, from loss of life. In the midst of these challenges, our teams continue to execute and adapt to the environment, staying true to our purpose of protecting others. Throughout the last 2 years, with the perseverance of our teams, we actually saw premiums grow, not at the growth which we are accustomed to, but by well-served customers, it led to some of our highest levels of persistency we've seen. Through this period, we also took actions including our Closed Block Individual Disability line to increase our capital and cash positions and get to this point with the best capital metrics and positioning we've had in years. And just as importantly, through this period of time, we invested in our infrastructure, notably in our digital asset to connect more seamlessly with our customers. This positioning is coupled with an environment that we have not seen in many years and that is the landscape of the Benefits business. The basis of what we do is taking care of the working population, and with wage inflation and increasing payrolls, there is more to take care of. There is also a greater awareness in the population on the value of our products to protect against financial fragility. There are too many situations during this time where a family was devastated by the loss of a loved one with little warning. This is where we come in. As we look forward, we have optimism that we are at the later stage of this pandemic. It will certainly impact the beginning of this year, but as we look to the second half and beyond, we look to return to our historical growth rates. This is supported by a capital plan that has balance across supporting growth and returning capital to shareholders through dividends and share repurchases. Also on the call today, we want to provide some early looks at LDTI and how that accounting change will flow through when implemented next year. We also have to remind that this is -- its impact is a noneconomic change that does not affect our cash flow and business strategy. Despite the challenges and pressures from the pandemic, we continue to execute and importantly live our purpose. We are here to help the working world thrive through life's moments. In the past 2 years, we have shined a bright light on that need. We believe our singular focus on workplace benefits is a competitive advantage as is our ability to adapt and change and meet the evolving needs of a dynamic workforce. When you think about what we do, our customer spans multiple brands and locations, both here in the U.S. and abroad in the U.K. and Poland, all solely focused on a unique distribution that capitalizes on the relationship between employers and their workers. While that relationship has traditionally been centered on a physical workplace, the rapid evolution of how people work places even greater emphasis on support and trust. And the knowledge we gained from our different segments help inform and strengthen each other. With the multiple channels of our distribution, we are able to effectively get to all employers, both large and small, that also had unique needs. We can do that with a completely digital interaction and also do a face-to-face advisory session. We have been known as a leader in the disability benefit space for decades, but in reality, we offer a broad range of products that provides financial protection for a variety of needs. In addition, one of our most important constituents are employers and increasingly stretched HR departments. Our solutions business helped manage the complexities of leave administration, productivity and other emerging compliance issues that our clients face. All of this comes together in a robust package of offerings that support the workforce. While our focus on employee benefits and what we do is clear, it's important to highlight the breadth and strength of our business model that has been built over time. We continue to lead in the employee benefit space with relentless focus on providing solutions for companies and their workers through our multiple brands. On Slide 8, we lay out the breadth of our reporting segments across the business, but it's also important to note that underlying protections delivered in these segments are products that are good for our customers and are also just good business. The majority of these products that can be repriced based on market dynamics and generate good cash flow. Given our focus on these markets and the breadth of our distributors, we have enjoyed leading market positions across these segments, #1 positions in disability insurance, but also top 5 and top 10 positions across all of our segments. We are well known in our markets by decision-makers, and we work hard every day to retain that confidence. The pandemic has shown their confidence is well placed. On Slide 9, I think it's important to highlight our resiliency through the pandemic. This is a testament to our people. I am proud of the way they have stepped up to serve our customers as volumes spiked and they dealt with uncertainty and disruption in their own lives. We have discussed the impact every quarter, but I think it's important to step back and see the overall impact from pre-pandemic levels. I talked earlier about the importance of our purpose and being there for people at their time of need and that's exactly what all of our brands have continued to do. We paid over $500 million in life insurance claims in the pandemic, and you can see the increase between 2019 and 2021. This is normally a very stable line of business, usually with maximum swings of plus or minus 3% in any given year. Seeing a 23% increase as a result of the pandemic is a stark reminder of the human toll that the virus has taken. You'll see a similar story play out when we think about volumes in our other lines of business, whether it's disability claims or leaves administered. And while this put pressure on our people and our expenses, it's the reason we are here, and we take pride in those that we've been able to serve during this period of time. As we think about operating the company, it is important to all of our constituents that we run a good company, and this includes our employees. The construct of ESG highlights something that we have always done. There is always a focus of our organization on our overall impact and how we operate. Our purpose guides us, and we are proud of the recognition we've had on that front. We were named a World's Most Ethical Company by Ethisphere, a best employer for diversity and many other recognitions that show that running a good company is at our core. This is not just good business, but it's also very important to our customers and how we serve them. When you think about who we serve, we need to ensure that our offerings and overall business practices support inclusive communities. Last year, we also made an important commitment by signing the Principles for Responsible Investing, ensuring that we are thoughtful as we invest the dollars that customers and shareholders have entrusted in us. Keeping all of these factors top of mind supports our approach to ongoing sustainability. Before I turn it over to Mike and Steve, let me leave you with a few thoughts on where we are today. Over the past 2 years, we have not just gotten through the pandemic, we've made tremendous progress to improve our position. This includes from a capital perspective and from investments in our business with a focus on digital tools and the rapidly evolving leave landscape. In the wake of the increased volumes and other disruptions, our franchise grew and generated positive returns. We have confidence that as the pandemic abates, we will see accelerated growth in the near term and then return to our long-term annual earnings growth run rate. We remain well positioned for the future, anchored in a strong purpose that has allowed us to emerge from this period of time stronger. So let me turn over the conversation to Mike Simonds, our Chief Operating Officer; and Steve Zabel, our Chief Financial Officer to talk about the actions that we are taking and the trajectory that that will put us on. Steve, over to you.

Great. Thanks, Rick, and thanks, everybody, for joining us this morning. The theme of this outlook is really that over the next several years, we will regain historical earnings power with both top and bottom line growth on an annual basis consistent with what we delivered pre-pandemic. There are certain key metrics that we plan to achieve over that period. And those are: first, premium growth that our core business is back in the 4% to 6% growth range; second, a company that shows operating expense ratio improvement from 2022 on consistently; third, predictable deployment of capital in the form of both increasing dividends and consistent share repurchase; and then along the way, we plan to fund our premium deficiency reserve at a faster pace than the permitted 7 years. So today's discussion is going to provide some markers on a longer-term basis through 2024 as well as our expectations for 2022. As noted on the page, we expect total growth in our adjusted operating EPS to be in the 45% to 55% range, with 2022 EPS growing 4% to 7%. And I want to note that 2022 and specifically the first quarter of 2022 will continue to be very challenging given the level of mortality that we and unfortunately the nation continue to see in the first part of the year. We expect a step change from 1Q to 2Q earnings, assuming that the Omicron variant mortality abates as quickly as new cases have. And I would expect our operating EPS in 1Q '22 to be slightly lower than fourth quarter of '21. This page lays out the path graphically. So as you can see, we expect 2024 EPS in the $6.30 range to $6.75. That's a slight improvement in 2022 and then a larger improvement in the following year. And as you can also see, as we get out of 2022 into 2023, our quarterly EPS will be consistent with the quarterly run rate we did experience back in 2019 before the pandemic. So what is the path to that EPS growth from $4.35 per share we experienced in 2021? Mike and I are going to take you through the drivers of this improvement. We have shown the relative contribution -- of each of these contributions in the pie chart on the right, which I'm going to quickly summarize now. So first, just coming out of the pandemic is the largest as COVID impacts diminish in our various businesses; second, we're going to have accelerated growth in product lines where we like our margins; third, our digital agenda and the related impact on expense levels; next, a targeted pricing strategy for both products and services we provide. We have certain investment strategies to optimize the portfolio, and then finally, the impact of share repurchases over this period. So now I'll turn it over to Mike.

Thanks, Steve. I appreciate it. So let's take a trip around the circle that Steve just illustrated. First driver I want to speak to is our forecast for normalizing risk trends in our Group Life and Disability segments. And as Steve was saying, while 1Q remains challenged due to Omicron, we're recently seeing significant declines in COVID cases across the U.S. and expect the declines to continue over the coming months. So for Group Life, we assumed COVID national deaths of 130,000 in 2022 with the vast majority of those being here in the first quarter. We assume the pandemic moving into an endemic phase with quarterly average national COVID deaths of 10,000 per quarter hereafter. We also assume that non-COVID-related deaths are slightly elevated over the forecast period, driven by lower level of medical testing and treatment sought during the pandemic and the stresses of the overall environment. Further supporting the decline in the Group Life loss ratio will be pricing increases, which I will speak to about in a bit more detail in just a minute. For Group Disability, we are assuming that short-term disability COVID claims will subside following the endemic pattern I just spoke to. Further, we assume that the current elevation of environmentally sensitive long-term disability new claims will persist over the next 1 to 2 years, tailing off towards the end of the period. These offsetting risk trends paired with thoughtful price actions, which again, I'll speak to you in just a minute, result in a steady improvement in the group disability loss ratio over the forecast period. Now understandably, I am guessing your attention is on the outlook portion of these loss ratio charts. But I would encourage you to look a little left at the pre-pandemic loss ratios also shown on the slide. The consistency of those pre-pandemic loss ratios is based on the fundamentals, the strong risk management processes we've long executed across our pricing, our underwriting, our field and claims areas. We fully expect to see that level of consistency reemerge as we move past the pandemic phase of COVID with loss ratios settling back into the 72% to 74% range. If we step back and think about the overall impact of moving from pandemic to endemic assumptions for COVID, we see these strong improvements in Group Life and Disability loss ratios being partially offset in our overall EPS by a more normalized earnings in long-term care as that loss ratio continues to return closer to our longer-term target of 85% to 90% and income from alternative assets, many of which sit behind the LTC line, normalized from very favorable levels recently. You can see that noted at the bottom of this slide. Next area of focus is pricing in our group lines of business. And I mentioned it earlier, we have seen those increases in life and short-term disability claim costs from COVID. We've also seen expenses in Group Disability pressured by growth and then the Leave Management volumes as well. And as I mentioned, we expect to see continued pressure in LTD in Life from an unsettled environment. It's worth pausing just for a second to say that those cost pressures are disproportionately felt in the mid- and larger employer market segments. And for these reasons, we actually started moving prices up on new and renewal group business and our fee businesses in 2021. We have and we will continue to do this in a very transparent and measured way with our clients. And I feel like we were an early mover in putting these increases in last year. However, given the industry-wide pressures that are being experienced, we do expect the market to harden somewhat in 2022, probably over the course of the year as other carriers implement similar increases. To kind of give you a sense for the actions that we're taking, the chart shows the size of our renewal program in terms of annual premium and fee increases for the large employer market. The 2022 program, which, keep in mind, was largely completed in 2021, was quite successful with one of the largest increases in recent years and strong levels of persistency. We expect the program will remain elevated for 2 more years as most rate guarantees are 3 years in length and therefore, takes us about 3 years at about 1/3 of our book per year to get through the business. With really strong relationships and a strong value proposition, we're confident our experienced sales and client management professionals will be able to place these required price increases with only modest impacts to persistency. A third area is targeted growth in our most attractive segments. While growth in the large group business will be a bit slower due to the pricing actions I was just going through, we expect our Colonial and Unum voluntary businesses, our smaller case group business and our international business to more rapidly recover. And overall, we expect to be back, if you look at the full active business at our long-term targeted annual 4% to 6% revenue growth by the end of the outlook period. The slide that's coming up here gives you a little bit more detail on the actions that we have underway that underpin our confidence in accelerating our top line. So starting with our 2 voluntary business lines. Colonial Life saw sales growth of 16% in 2021, with a really good balance across our direct and our broker and our public sector segments. Certainly, it can be a challenging recruiting environment, and we experienced that in 2021, but expect agent recruiting to pick up steam here in 2022. And I think importantly our technology and products are helping to not only attract agents but helping us get them to success more sustainably and more quickly. So despite recruiting challenges, new agent sales were up 13% in 2021, and we expect to see this productivity to continue going forward. Our Unum Voluntary sales that also sit under Tim Arnold's leadership started more slowly last year in terms of recovery, but momentum really built with 4Q sales up 40% year-over-year. We've realigned our reps to our most productive broker relationships, and we expect to better leverage our underwriting expertise and our HR Connect platforms to win a greater percentage of deals here in 2022. As those sales levels in our voluntary lines, both Colonial and Unum improve, we expect overall earned premium growth for these lines to reemerge in 2022 and then to build through the forecast period. In the small case market, our group lines maintained really solid profitability even through the full pandemic. We see job growth being driven by small employers. Looking forward, the small employer market remains underpenetrated. And these firms are increasingly looking to improve their benefits package to compete for talent with large companies in a tight labor market. Chris Pyne and team have got us really well positioned to take advantage of these favorable trends as we've only just recently completed the national rollout of our new small business center, and we've continued to make investments in our My Unum platform, which now services over 39,000 small to midsized businesses. And it puts us in a great spot to sell packages and benefits with enrollment and administrative ease. Finally, our international business under Mark Till saw really strong sales growth, 17% in 2021. And as we head into 2022, the exclusive broker mandates we won along with improvements to our service proposition give us a lot of confidence that our international business will continue to grow as a share of our overall portfolio. So the final focus area I want to highlight before handing the call back over to Steve is efficiency, and we are going to need to continue to work here as there are some significant headwinds we need to deal with in the short term. Wage inflation, lingering pandemic-related costs and the growth of our services businesses, the welcome return of more travel and in-person meetings that we're anticipating in 2022 mean an upward tick in our expense ratio in the short term. To help offset these pressures, our focus is going to be on driving, first and foremost, aggressive adoption of our digital assets, particularly for our claim and leave interactions. We are really excited about our first broad-based implementation of AI models for eligibility and liability determinations for many of our short-term disability claims. We continue to invest in our digital enrollment and administration platforms, which not only improve client satisfaction but they also help us run our business more efficiently. Finally, we continue to find ways to manage our real estate footprint, maintaining, and we are committed to maintaining a vibrant in-office experience, but also getting smart about efficient and flexible office space. So through these actions, we feel confident that expense ratios though elevated here in 2022 will get back to the slow and steady improvement that we consistently delivered pre-pandemic. So with that, let me turn it back to Steve to talk about investment actions.

Great. Mike, and I'm on Page 20 of the materials. So I'll start by acknowledging that there is not as much room and not as much opportunity to improve operating EPS over this projection period as the portfolio has really performed extremely well throughout the pandemic, thanks to our ability to assess and manage credit risk. During the pandemic, we have experienced low levels of impairments, which were really limited to only the first quarter of the pandemic, which was second quarter of '20. We've had manageable downgrades, which are now inflecting to a trend of upgrades, and we've had higher-than-expected performance in our alternative asset portfolio. We also spent some time over the last few years looking at our asset allocation, and we did make some subtle adjustments that have paid off. First, we have added some higher quality muni bonds to line up with our longer-duration liabilities and that we think we are getting paid for. Second, we saw high levels of bond calls and selectively sold out of our high-yield portfolio, while putting our new money into the alternative asset portfolio. Our collective targets for these 2 asset classes have remained fairly consistent, but we doubled our limit on the alternative asset portfolio. This allocation is still fairly low compared to peer group, and this asset class has performed extremely well in supporting our LTC liabilities. Additionally, we are looking to the future. We have begun to source some of our mortgage loan and private placement deals through third parties. This gives us better access to a broader set of deals while leveraging the credit capabilities of these larger investment management shops. It's still early days, but it should give us benefits over time. And finally, given the relatively limited amount of new money we put to work, we can be very selective and take advantage of market disruptions as we have already seen in 2022. Let's now move on to the impact of capital actions in our financial outlook. To start, this outlook reflects the continuation of the level of buybacks and accelerated recognition of the PDR that we executed in 4Q '21. Specifically, you can anticipate an annual rate of $200 million. Note that we may vary our quarterly pace based on our relative share price, so we can maximize the impact of this level of repurchases. With this level of share repurchases and alike dollar amount of PDR recognition, we should have capital contributions in the $550 million to $650 million range for the next 3 years. That should then drop dramatically post 2024 to levels more consistent with our historical rate of $100 million to $150 million range and should be at the low end of that range. Note that we do not expect further contributions to our New York company and our current capital plans. My second point is that we have seen depressed statutory earnings during the pandemic, but expect them to return to the $900 million to $1 billion level by the end of this planning horizon, which is consistent with pre-pandemic levels. And finally, we expect to remain above our RBC and holding company cash targets and well above our leverage target of -- sorry, and well below our leverage target of 30%. In addition, we have $400 million of our PCAP structure in place to hedge against any unforeseen capital needs. All right. And now let's move on to a couple of special topics. We will be filing our Form 10-K for 2021 after the close of market today and will include expanded disclosure regarding both the initial impact of LDTI on our GAAP equity as well as the progression of our calculated LTC premium deficiency reserve balance. We wanted to offer some perspective and context for those disclosures in advance, so we will cover these topics in the following slides. So we'll move on to Page 23 of the materials. And so let's start with the premium deficiency reserve. As grounding, we concluded an examination of our Unum America legal entity in 2020, whereby Maine required us to establish a PDR, which was in excess of our calculated statutory reserves. The areas where we believe this introduced excess margins were: assumptions around mortality at very old ages of policyholders and claimants, the length of time to reflect morbidity improvement and finally, interest rates. In addition, the calculated PDR will vary from year-to-year from several factors, which include the assumed reinvestment rate, which is based on a rolling trailing average rate for treasuries adjusted for our asset allocation and related credit spreads; our policyholder inventory; our actual rate increase approvals versus expectations on this block; and then the underlying growth in the locked-in statutory reserve basis. I want to note that our locked-in calculated reserve, it does grow at a faster rate than the calculated premium deficiency reserve. So those reserves do converge over the longer term. So where are we right now? We will -- as you will see in the 10 K disclosure, the calculated PDR at the end of 2021 is $3 billion and that we have recognized $667 million of that through the end of 2021. The increase from the original $2.1 billion calculated amount is due to the relative levels of treasuries in 2020 when the 10-year got down into the 50 to 60 basis point range. Due to the construct of the calculation, those rates are part of this trailing weighted average that form the basis of the future investment assumption as of 12/31/2021. The point to take from this is that those rates experienced in 2020 will cycle out of the reinvestment rate assumption in the next several years and will be replaced by more recent rates. We thought it would be helpful to provide a few scenarios to show what the calculated PDR balance would be at the end of the permitted practice term, which is 2026, under a variety of rate scenarios. The way to interpret these scenarios is as follows: from today forward, hold the prevailing 10-year rate at these amounts at a treasury spread for 20- to 30-year paper of 50 basis points and then apply our asset allocation and related credit spreads to the all-in yield, then run that out through the end of 2026. As you can see, it provides a range of outcomes of what the PDR will ultimately be recognized and funded through capital contributions. I want to make a few points on these outcomes. First, the calculated PDR of $3 billion at 12/31/2021 is outside the range of any of these scenarios. This implies that the reinvestment rate we use at 12/31/2021 was anchored on a 10-year treasury yield below 1.75%. Second, under a reasonable scenario of the 10-year at 2.25% with a 10 to 30 spread of 50 basis points, the PDR is back to the $2.1 billion that we had at inception. Under that scenario and after reflecting the $667 million of recognition that's already on the balance sheet at 12/31/2021, we would have the ability to recognize the remaining $1.4 billion and funded by the end of 2024 in our current capital plan. The final point to make is that this progression happens over time, and we will have the ability to flex our capital plan in the coming years to adapt to a variety of interest rate paths. So on to our next topic, the adoption of the new accounting standard long-duration targeted improvements. As you know, we will be implementing the standard 1/1/2023, and we'll recast '21 and '22 to conform. Today, we want to focus on the initial impact at 1/1/2021. This will adjust each year, but this will be the basis of the accounting. We will cover other topics like future earnings impacts and disclosures later in 2022 as we approach the implementation date. As we have discussed, the largest day 1 impact relates to using a single A discount rate for our liabilities versus our actual portfolio yield. This creates a disconnect between our asset and liability market values, which will create a large day 1 impact to OCI and some volatility going forward. Clearly, the most impacted products will be our long-duration portfolio and specifically long-term care. As I've said many times, we view this purely as a GAAP accounting requirement and does not change the economics or capital generation of our franchise. I'll summarize the chart on left side of the page quickly. We will remove the FAS 115 shadow adjustment for both DAC and reserves and the current accounting construct, which will increase OCI for us. We will then mark our liabilities to a single A rate as of 1/1/2021. I'll note that there is a provision for adjusting reserves for cohorts that have a net premium ratio greater than 100% directly through retained earnings. Now for us, that is de minimis as we only have a very small legacy block of voluntary benefits business that exceeds 100%. Note that it is not an issue for a blocks of business and loss recognition, which does include LTC, as the reserves for those blocks were reset on a policy level. The punchline here is that a transition once again at the 1/1/2021, our GAAP equity impact is expected to be between $6.5 billion and $7 billion, which is almost entirely going through OCI. This will differ at the date of implementation next January, however. To show the sensitivity of this amount in different interest rate environments, we have provided a range of impacts for the initial adoption if we use the rates as of 12/31/2021 instead of 1/1/2021. This scenario would reduce that initial after-tax impact by approximately $700 million. A couple of other items to note. First, LDTI does not take into account the reserve margin releases in certain of our product lines, so the adoption impact does not fully reflect the economics of those businesses. We believe the majority of our impact is attributed to our longer-duration product lines. And hence, Group and International businesses will have minimal impact while we will have greater impact on Voluntary Benefit lines. But I would note, that is where we have significant liability margins that will not be reflected in LDTI and adoption. So let's move on to an illustrative attribution of the day 1 impact for the LTC business. This is clearly where a significant part of the total impact will be felt. Let me walk through the components of the day 1 impact. So the walk on the right from our current GAAP balance to the LDTI balance is comprised of 3 major components. The first 40% of the impact relates to the fact that our current investment portfolio has a yield greater than the current single A yield due to our very successful investment strategies. Next, 25% of the impact relates to the fact that LDTI assumes you will invest in single A investments in the future. Again, this is inconsistent with our investment strategy, and we would expect to achieve a higher yield than a single A investment portfolio would. So if I just pause there, around 65% of our day 1 impact is attributable to the value we create by managing less liquid and higher-yielding assets against these long and illiquid liabilities. The new guidance does not give us credit for this. And that leaves us with a final 35%, which relates to LDTI using the current market curve versus our current GAAP assumption, which, as you know, uses a regression to a longer-term treasury and spread expectation. You might recall that we have historically used a regression assumption to a 3.25% 10-year treasury. As a recap, here are our expectations to the end of 2024 for Unum's financial performance. We look for operating EPS to grow by 4% to 7% in 2022, still impacted by COVID in the first quarter of 2022, which we expect to have a slightly lower operating EPS than fourth quarter '21. Absolute quarterly EPS in the first half of 2023 should be at 2019 levels, and the cumulative operating EPS growth from 2021 to 2024 in the 45% to 55% range. You should anticipate strong return of capital to shareholders with dividend growth and $200 million of share repurchases annually. This will be done in conjunction with getting the PDR recognition substantially behind us under reasonable interest rate scenarios and freeing up more discretionary capital deployment. Throughout, we expect our capital metrics to be in line with our targets. And now I'll turn it over to Rick to close this out, and I look forward to your questions.

Great. Thank you, Steve. Thank you, Mike, for those updates. I think what I'll leave you with here is to make sure that you understand that we've done a good job executing through this period and through the pandemic, and we are well positioned for growth. When you think about the employee benefit space, this is a good time to be in the benefits marketplace. There are tailwinds to this business today, but you need to make sure that you're executing well through this period of time. And that's why the active management of our book of business is so important as we think about growth and that's why you hear us talking about pricing in a nimble basis and making sure that we're there serving our customers with good digital tools through this period of time. We do expect a strong growth coming back of pandemic as you saw from Steve, and then we're going to be back on a growth trajectory, which we've experienced over time on a good measurable basis with strong ROEs. And then through that period of time, we will also make sure that we're returning capital to shareholders and taking care of the growth investments that we need to make for a period of time. And then when you look past 2024, given that the PDR under the scenarios, as Steve outlined will be fully funded, we'll have the ability for increased free cash flows that we'll then put to good work as we get through that period of time. So I'll leave with you with that. We are positioned for growth and that is what we were thinking about. We have the ability in the backstop to do so. We're taking the right actions to make sure that that's the case. So with that, I'll turn it over to the operator to take questions and answers.

[Operator Instructions] Your first question comes from the line of Ryan Krueger from KBW.

My first question was on the LTC PDR. Is the sensitivity to changes in -- I guess, is it ultimately more sensitive to 20- to 30-year treasuries than 10-year? And so I guess what I'm getting at is, if the spread between the 10-year and the 30-year is less than 50 basis points, should we kind of extrapolate the sensitivity you gave to the 10-year to that and that would be an impact to you? Or if you could go through that in more detail.

Ryan, it's Steve. And you are correct. Our portfolio back in LTC is a blend of 10-year, 20-year, 30-year paper. So it is a combination of those 3. So the 10 to 20, 10 to 30 spread is impactful to that. I'm not sure you can just extrapolate the sensitivity, but that is something that will factor into the calculation over time. And we have seen spreads out in that range historically. I know they're a little bit tighter now, but I think it's a pretty reasonable scenario.

Okay. And then after the PDR is fully funded, the $100 million annual contribution to Fairwind, how would you think about sensitivity of that, I guess, to interest rates on a longer-term basis?

Yes. The way to think about that, Ryan, is just kind of go back to how we were funding that business pre kind of the main examination of the permitted practice and the PDR itself. We funded the increase in required capital behind LTC as well as there were losses that that business generated on a statutory basis in Fairwind. And so really, you're kind of back to funding those types of capital requirements. And so it's probably less focused on interest rates, although that's something that we still have to take into account in our reserve adequacy work. But it's going to be driven by just the growth of that business and just the performance of it, the benefit ratio performance of that business. So there could be some volatility in that, but that's basically what we're funding in the longer term.

Your next question comes from the line of Suneet Kamath from Jefferies.

I wanted to go back to Slide 16 that shows the pricing strategy. You've not put any numbers in here, so it's a little hard to get a sense of what you're talking about, but I was hoping you could sort of frame this out a little bit just in terms of order of magnitude of the kind of price increases that you're looking for. And maybe some comments around how that varies across the different lines that you're talking about. And then maybe just lastly on this topic, are you expecting your competitors to sort of follow a similar pattern? Or what are you seeing in the market?

Suneet, it's Mike. I'll take that. And in order of the questions, I think of it in terms of kind of mid-single-digit type increases. And again, the charts just giving you sort of a proportional sense of how it's played out over the last few years and how we're sort of seeing it play out over the next couple in the large employer market, in particular. The product split, I would say, the most sizable increases are going into our services component of the business that's where we've seen. And Rick said it earlier, a 50% increase in the number of leads administered. So increases going there. And in the short-term Disability, Group Life, a bit less as we sort of have a prospective point of view that says there'll be some resident environmental impacts to Group Life insurance, but the Omicron variant coming down, hopefully. So a little bit more modest on life insurance. And then LTD, it's the smallest of all of them. And that's because while we do have some of those environmental claims, we also have a more favorable interest rate environment, and there's a little bit of an offset there.

[indiscernible] the competitors will follow?

Yes, competition. And again, we felt like we were out a little bit early starting to fold in some of these cost pressures in 2021 and feel really good about the persistency sustained through the program. We're anticipating that market's going to harden up a bit and that's based on what we're hearing from some of the distribution partners we're doing business with as well as we are avid listeners as other carriers were talking about their fourth quarter results that seemed to be a pretty consistent theme. I do sort of suspect that it probably will harden over the course of the year versus us kind of snapping to it here in the first quarter.

Okay. And then just on the expense ratio guide, the 1 25 to 1 75, that seems like a pretty big pickup. Can you just talk about the pace of improvement sort of thereafter? Given all the initiatives, I mean, how should we think about the glide path for that ratio?

Sure, yes. And we've talked a little bit about it, but we certainly have seen that growth in the services business, some necessary wage adjustments that we've made given market conditions, and we are going to get back to face-to-face interactions with clients and with distribution, and so travel and related costs are certainly going to pick up here in 2022. I would look at it like a trend down back towards pre-pandemic levels on a pretty gradual basis on the other side of 2022. So I don't see it as a step change in '23 or '24, if that helps.

Your next question comes from the line of Tom Gallagher from Evercore.

First question on the PDR. So I saw the sensitivity, which is helpful in thinking about this. What happens after -- just to give you another scenario, just curious how you think this will play out. What would happen if interest rates remain high, so you're able to pay it off, let's say, by 2024? But then in 2025, interest rates went back down to sub-1%. Would you -- are you closed out then and then you're fine? Or would you still have to come up with that extra $1 billion in 2025? I don't know if you've worked that part of the formula? Or is that a future conversation that you would have to have with the regulator?

Yes, Tom, this is Steve. I think you've kind of hit on it. We're looking at the medium term here through the end of PDR. Those rates would feather back in. What I'd tell you, though, is along the way, our calculated statutory reserve is growing at a higher rate. And so the kind of differential between the PDR and the trajectory that we're on anyway, which is funded in kind of our normal under the $150 million capital contribution of Fairwind, that would help us along the way. But I think you've hit on it. We talk to the regulator every year. We're working with them. We'll go through just our normal examinations. And that will be something that we'll just discuss with them over time.

Got you. Okay. The other question -- my follow-up was on Slide 9. I guess I was surprised to see that disability claims went up 40% from pre-pandemic to now, almost 2x more than the growth in Life insurance claims. Because when I look at the Group Disability loss ratio, it only increased around 7% or so from kind of the low to the high. Any sense for why there wasn't a bigger increase in the benefit ratio? Was that the mix of short-term versus long-term disability claims?

Yes, Tom, it's Mike. You got it. It's short-term disability growing there. Also a couple of other points, that would also show short-term disability claims coming through in our voluntary Colonial Life businesses as well. And so those books have grown a bit over the time period in the incidence and short-term disability. But that's why there's a disconnect between the number of claims and the benefit ratio. The other piece is, I mentioned that the mid and large employer market is where we've seen the most sensitivity around COVID and a lot of the short-term disability business in those mid and large case market is fee-based, so it's not fully insured, but administrative services only.

Got you. And if I could just sneak one more in. The hardening market, I thought that was an interesting point. Any sense from what you're seeing now to give you confidence that the trajectory is that it is a hardening market, just based on competitive conditions that you saw this renewal season and maybe some visibility into next year?

Yes. Great question, Tom. I've got Chris Pyne who runs our Group Benefits business right here. And maybe, Chris, you could give some insight into the market.

Yes. Thanks, Tom. I think you're exactly right. The first indicator we saw was, we did place significant rate increases for the 1/1 cycle. And they were really well received by our customers. Obviously, when you're utilized as much as we've been, you are supporting clients and their employees through the period. Partnerships are strong. You're out telling a story relative to the need for price increase, very well received and placed a lot persistency, it was quite good. And then we do get feedback from our brokers and consultants, and we do know that there have been elevated conversations with other carriers relative to what they've seen in the market and the likely need for adjustments going forward. It totally makes sense. Obviously, it will still be competitive. We don't expect it to be easy, but we're very confident that given the services we provide, given the investments we've made, we'll be in a good position to get the right price.

Our next question comes from the line of Jimmy Bhullar from JPMorgan.

Most of my questions were asked, but just a couple. First, can you talk about just wage inflation overall? And you mentioned its impact on expenses, but obviously, you should be a big beneficiary on the premium side. But how do you think about if wage inflation does in fact stay elevated? And how much of a drag it is to expenses? And does it -- is it offset to some extent or mostly by just better premium growth if this continues throughout this year and into next?

Yes, Jimmy, thanks. It's Mike. I'll take it. In general, I would say wage inflation nets out to be quite positive for us. So you hit on, and we talked a little bit about the offset and that's us making adjustments. We're very biased, but feel very, very good about the talent and expertise that we've built here at Unum and Colonial Life. And so we want to be very competitive in rewarding and recognizing those folks, and we'll stay on top of that. It doesn't net out quite positively though. A good portion of our Group Benefits business is indexed to covered payroll, and as our clients are adding new employees and increasing wages, that's flowing through an additional premium. We've talked a little bit about it, but we're sort of towards the high end of the range in that cycle, edging up into the mid-2% to 3% in natural growth. That growth comes through with very little incremental cost. We're already servicing those clients. It tends to be coming through in our in-force book, which is generally pretty well priced. So feel good about the margin on that incremental premium as it comes through. And you get wage inflation in the broader environment when you have a tighter labor market, obviously. And so we are definitely seeing employers looking to increase and enrich the benefits that they offer. And we were talking about it a little bit earlier, but particularly in the small to midsized businesses where traditionally you have a thinner benefits portfolio relative to larger companies, those smaller companies are increasingly needing to enrich their benefits package to compete. And that's where the group and in particular the Voluntary Benefits fit really well. So we do see it very much as a tailwind going forward.

Okay. And then in the past, there's been optimism about your ability to be able to do sort of a derisking transaction on long-term care especially when rates have gone up. But I think in reality, there's been more optimism in the market than was warranted, but because nothing has really happened. But has the environment changed in any way that would hit one sort of more confidence that something is on the horizon or is not ready?

Yes, Jimmy, it's Rick. I just going to say, I think we've been balanced in terms of looking at the market and what our optimism level is and the hard work that it takes to go through a transaction, derisking transaction. And so we've been doing the work to prepare for that. We talked about in the past about different structures that we might look at to do that, very successful in transacting on our individual disability Closed Block. But when you get into the long-term care business, there is a little bit more complexity to it, certainly, given its age and how our book of business looks. And so we're thinking about how do we tranche that up to meet the right customer on that front. Like you said, you haven't seen anything on that front. There's other books out there. We're not the only ones with long-term care and looking to transact. But it is a little bit more complex, and so we're taking the actions to get out there in front of people. Has the market changed much? I mean it ebbs and flows. I think there's a lot of interest, the types of buyers that might be interested in long-term care looking at different types of blocks. We've seen activity in other areas of the insurance market, but we're going to stay active to be prepared when the market comes our way and work with the right customer to get something done. But optimism is something when it comes to M&A, you can't be too optimistic in any environment, you go do the hard work and then prepare for the right moment when something could happen.

Okay. And just lastly, you mentioned COVID impacting Group Life disability. It's obviously been a positive for long-term care results. What are you seeing in terms of frequency severity in this incidence -- in the LTC business recently?

Yes, Jimmy, this is Steve. I'll just take everybody back to really how the pandemic has played through our LTC block. Early on, we saw very, very high claimant mortality in that block and very low incidence, if you go back to kind of the beginning of 2020. As 2020 played out, we've seen our incidence get back to more normal levels. And I'd say that that's our expectation going forward, that incidence is going to level back out to our longer-term expectation. From a mortality perspective, we've seen that gradually go back to more normalized. We had, at the beginning, about 30% higher accounts than what our expectation would have been. It came down to kind of in the 15% range. I'd say the latter part of last year, maybe down to 5%. And then fourth quarter of '21, we actually saw accounts that were pretty close to our expectations on a seasonally adjusted basis. And so right now, we think there'll continue to be a little bit of volatility, probably around climate mortality. And it kind of depends too on the age of policyholder or just the age of the population that's impacted by these different ways. And so we'll see how that plays out, but I think that will normalize fairly quickly as we get through 2022. We're really expecting to be back in our expected loss ratio as we go out of 2022.

Our next question comes from the line of Tracy Benguigui from Barclays.

Turning to your quantitative guidance on LDTI, what are your interest rate assumptions that will bridge your transition date impact of $6.5 billion to $7 billion equity decrease to your post-transition impact of $4 billion to $4.5 billion? I mean you did remind us of your long-term rate assumption of 3.25%, but I think that's graded over 10 years. So that would be past your post-transition date.

Yes. The way to think about it, so we originally graded to the 3.25% over 7 years, and that was a year or so ago that we set that. I would think about the LDTI, it doesn't grade to anything. It's just the spot rate as of the transition date, which is 1/1/2021. And it's just taking the single A -- basically the single A index and applying it to our liabilities. So there's really no regression built into that, it's purely what rates were as of that date. And then that's how we were going forward at each measurement date is just looking at the single A discount rate.

Okay. That's helpful. And while companies are saying that LDTI does not reflect the economics, I'm keenly watching that LDTI leads to a second order or strategic update. And I noticed part of your investment strategy update you're looking to reallocate assets to munis, which are typically in the AA range. Is that driven at all by LDTI given the rules you're using a single A spread and your portfolio has more of a BBB bias?

Yes. Tracy, I would say no. I'd say that was more of a play, just that's where we thought we could get paid for the risk better. And it was also a nice way to get into longer-duration assets that matches some of our liabilities very well. That was really not influenced at all by LDTI.

Okay. And if I could sneak one more in, things for laying out your buyback plan, but I don't have a good sense of how [ finance ] will shape up. You did say that you anticipate dividend increases annually, would that be any meaningful shift in the strategy of what you've done recently? Or do you have like a free cash flow conversion target that you could share?

Yes, I'd say a couple of things. Historically, we had increased our dividends in that kind of high single-digit range, say at the 10%. I would say going forward, our expectation would be to do something similar. But what we will be looking at is our total payout ratio. We do look at that and make sure that that looks good against our peers and is driving value for our shareholders. So we'll look at both of those things, but we do anticipate increasing dividends over time.

Your next question comes from the line of Erik Bass from Autonomous Research.

I had a question on the Group Life loss ratio and is getting back to the pre-pandemic loss ratio target range. Is that considering price increases that offset the higher level of excess mortality from COVID in an endemic that you talked about?

You got it exactly.

Got it. Okay. And then just to make sure I have it right. For 2022, is the 130,000 your assumption for population deaths for the full year? Or was that for the first quarter and then it moves to the 10,000 kind of per quarter endemic stage?

The 130,000 was for the full year. And so there is 10,000 for the remaining 3 quarters. What I will tell you is we do track to that, and we've given you statistics over time that we're a percentage of the national death. It does play into that a little bit, how we set up IBNR from period to period. So it's not kind of a direct correlation. But I would say that that was our planning assumption.

Got it. And then if I could ask one on LDTI, certainly I appreciate the impact flow mainly through AOCI. But can you talk a little bit about of the expected impacts to retained earnings from the reserve updates and give us some sense of how book value ex AOCI could move a transition?

Yes. I would just simply say that we have a very small legacy block of business in our voluntary benefits business. It's going to be de minimis. It won't move the needle at all on our book value.

Your next question comes from the line of Alex Scott from Goldman Sachs.

I wanted to follow up on the PDR scenarios on Page 23. Is this sensitivity only flexing the rate at the discount rate? Or are there other factors being flexed there, like rate increase activity like some of those things that are in the first bullet to the left? And if it's not, I mean, how impactful could something like rate increase activity be for this? I think the last one had a present value of $1.4 billion. So I was just interested if there's any other offsets we should be thinking about here.

Thanks for the question. It's Steve. I would -- what I'd say is the scenarios are just flexing interest rates. So a kind of full stop answering that question. And then what I'd tell you is these other items can influence it over time, I'd say they're probably not going to have as much of an influence, and they won't be as volatile. I'll hone in on the rate increase activity. The differential that could adjust the PDR is the difference between our actual approvals that we get over time versus the assumption that already is in that PDR. So with the PDR on Unum America, we do have an assumption in there that Maine agreed with during the examination for future rate increases. And as long as we track against those rate increase assumptions on a consistent basis, it should not have a material impact on what the PDR balance is period-to-period.

And what's assumed in the PDR, is that similar to like that [ $1.4 billion ] PV that you went through the last time? Or is there like a longer-term assumption maybe being used in this PDR?

Yes. So the $1.4 billion goes back, I think, to kind of GAAP reserve assumption reviews ago, that actually came down quite a bit the last time we unlocked our reserve, and we've gotten approval since then. So it's much smaller than that. And it is consistent, relatively consistent in the PDR, what we would have had in our best estimate GAAP assumption.

Got it. And then for a follow-up, I wanted to see if you could provide any color on just the potential LDTI impact for earnings, and I appreciate that that's probably something that you're not ready to quantify at all. But even if you could just talk qualitatively about what some of the different influences are there that we should think about.

Yes, Alex, we're in the process of doing the work. We feel very comfortable of our progress in being able to be ready to implement on 1/1 of next year. At this point, we're not really giving quantitative guidance at all on that. But just think about some of the things that are in the guidance just around differences in DAC amortization. I think one of the big ones that we talked about is we do have reserve margins on our books right now for some of our businesses, specifically voluntary benefits and that is, the guidance reads has to come off the balance sheet over time. So it's the things that you might anticipate with the blocks of business like we have and what the guidance reads, but that will be later in the year that we'll give a little bit more clarity on what that looks like going forward.

Your next question comes from the line of Mark Hughes from Truist.

Just sort of curious, the core operations of premium growth, when you think about 2023, I think you've talked about getting back to your normal, what, 4% to 6%. But if you're getting good pricing and there's some inflation out there and natural growth, is it a bit better? Should we be potentially above that range?

Yes, Mark, it's Mike. I'll take the question. Thank you for it. And I would think about 2021 being about a 1% premium growth for the core operation. And a big driver for us will be getting sales in our voluntary lines back proportionate to the in-force block. So it's coming through as earned premium. We'll flip the switch and get back into growing that voluntary, those Colonial Life and Unum voluntary benefits business in 2022. But it will take us a couple of years as that sales level continues to grow across our lines for it to flow all the way through into earned premium. And I'd say in our forecast, it puts us comfortably in that long-term range of 4% to 6% that we talked about. But maybe I'll flip over to Tim Arnold just to talk a little bit about what the outlook is on voluntary sales given how important that will be to top line overall.

Yes. Thanks, Mike. I appreciate the opportunity sitting here listening to all the questions about PDR. Voluntary business isn't quite as [ sexy ] as that. But we are very optimistic about the opportunity to grow our voluntary benefits business from both the Colonial Life brand and the Unum brand. Mike touched in his comments on a number of things that we are working on to drive growth on both brands. I would just amplify our optimism around distribution expansion and effectiveness at Colonial Life. I would amplify the Engage platform that we're currently building that will improve our ability to modernize our enrollments and also longer term improve our prospects on persistency. We're excited about the product work we're doing to refresh and meet customer needs and also fit on third-party platforms. On Unum side, really excited about the work we've done to align our team with brokers who are the most productive for us. A lot of good work on underwriting and pricing to be sure that we're putting forth our most competitive offer right up front and then also just updating that portfolio as well. So pretty bullish on 2022 and beyond for VB.

And we have a follow-up question from the line of Ryan Krueger from KBW.

I just had a quick follow-up on LDTI. I didn't quite understand what the difference was between the LDTI equity decrease at the transition date of $6.5 billion to $7 billion and the total equity impact of $4 billion to $4.5 billion. Can you just go over that?

$4 billion to $4.5 billion. Let me make sure that I know where you are, Ryan?

That was on Slide 25 in the first bullet.

That's a really good question, Ryan. We may have to check our editor on that one. Because our -- yes, because our equity impact is the $6.5 billion to $7 billion. Yes. No -- yes. Ryan, what it actually is, is after we decrease at the transition date, that's the equity that we're going to have left. That will be our GAAP equity after the transition.

That's just the pro forma amount. Got it.

Yes. Yes, yes, yes. Sorry about that.

And there are no further questions at this time. Mr. Rick McKenney. I turn the call back over to you for some closing remarks.

Okay. Thanks, Ryan, for bookending the questions and coming back in. I just appreciate everybody being on the call today. I think there's a lot of good things going on. We're going to be out there talking to a number of you as we go through different conferences here over the next couple of months. We feel good about where we are entering this year. We're hopeful in terms of -- we are in the final stages of the pandemic at the acute level that it's has been at. And we'll -- you'll hear from us as we execute over the course of the year. That ends our outlook meeting. I appreciate you joining us. Thanks.

This concludes today's conference call. You may now disconnect.