Unum Group (UNM) Earnings Call Transcript & Summary

Okay. We'll get going finishing up the day with Unum. Before we get going. Please refer to the research disclosures at morganstanley.com/board/research disclosures, also the use of any recording [indiscernible] is not allowed. So why don't we start off with just some opening comments, very strong quarter, raised the outlook. Key factors behind that, and we'll get you the conference looking forward.

Yes. I appreciate it, Nigel. It's good to be here at the Morgan Stanley conference. Yes, I think you highlighted it well. So, we actually had a very strong set of first quarter results coming off of really good results at the back half of 2022. Those results range from good top line growth that we're seeing, as we continue to grow the sales and the persistency remains high in our business our customers certainly benefiting from what we bring to them. And we're benefiting also from a good environment where we see inflation, which actually raises the level of those benefits that people have to protect themselves. And we as a company with a very strong purpose of protecting the working world and our focus solely on being at the workplace, has really played out well over the last year. You mentioned about raising the outlook. We sit on a very strong capital position, but we also did raise our outlook for the full year. The primary of that is what we saw in our group disability business. And so, we had a very strong first quarter. And differently, we expect that to persist throughout the year. And so, I think that's a driver of that. But across the board, really feel good about where the business is positioned the capital we have backing up and the outlook we have for the rest of 2023.

I guess, just looking at disability, as you said, that's been one of the key drivers, there's significant upside you've been able to achieve, haven't necessarily seen as much upside in some of your peers. What's different at Unum versus some of your peer group that's allowing you to put up such good results.

Yes, great. I can take that one. I'm not going to speak really to the performance of our peers. I know others have had some favorable results. But for us, it's really a combination of incidents that during COVID, was inflated for a period of time. We've seen that now come down the last couple of quarters to pre-pandemic types of levels. So more in line with our expectation. And then, during that period, we've also seen our recoveries improve over time. And we have a history of that. We have a really good team back at the home offices. They look at our inventory. They apply tools, techniques, deep advanced analytics to understand how we can get more people back to work. And so we've seen our recovery rates continue to increase over time. And that really has come together now in the last couple of quarters. And you see that result in the benefit ratio that we've had, really concluded in the first quarter, where we had a 60% loss ratio for the quarter. As we look forward, the guidance that we did give was something in the low 60s, and that's really what's incorporated into the guidance that we gave, which was increasing our EPS growth, year-over-year to 20% to 25% over historical GAAP accounting. So feel good about it. That's a planning assumption. This is a business that can change over time, and we'll just have to see how it performs over time, but that's our expectations for the remainder of the year.

I guess, just on that one of the points that people quite often asks me is, why aren't these kind of returned to things competed away over time, would you see some pricing pressure come in, if you consistently had such good results. So at some point that you need to pass it back to consumers?

Yes. I think that you actually mentioned, Nigel, at the beginning, not all of our competitors are seeing the same type of results. And so, we agree that it is thoughtful to think about that this could get competed away over time because when you think about where we price our business today, we historically have priced it more in the 70% range. So you could see that over time. But I think, given our good claims management that we have, all the things that Steve just mentioned, it's not something that we will readily do, but it's something that you can think about over the next couple of years. You could see that. But we've seen other factors that you think over time could get competed in the way that we've been able to hold on to. And so, we're going to be as competitive as we need to be to grow this business at a rate that we think is commensurate with the type of returns that we see, and we'll have to see how that plays out.

How about the impact of the economy. I think we've seen, obviously, a lot of headline layoffs that doesn't seem to be impacting your business. But, if we do see a recessionary environment unfold, is that potentially a risk? I know historically, there's been a bit of a correlation between the claims incidence trends and the unemployment rate haven't necessarily seen [indiscernible] to think about as well.

Yes. I think you had the two things that we look at. One is, if there is a recessionary environment or a slowdown and what employers are doing. A lot of the headlines you see around layoffs, those are headlines, I think, across the board, the employment picture is still remains very good. So, it's good for us to have more employees at work that we're able to help cover those benefits. The second piece that you talked about is particular to what we were talking about on the group disability and the incidence levels that you might see in a recessionary environment. What we generally see is through the last 2 recessions is you'll see incidence rates tick up, and that's submitted it, so it's people that will submit a claim, they may not be valid claims. They may not be truly disabled. And so, we may not see that paid incidents go up at the same level. And so, although you might see some of that, it's something that we'll have to watch and we're not overly concerned about that. Given at least the history we've seen over the last couple of recessions.

Right. How about the -- we've come out of a pandemic, and I think a lot of people were concerned in the midst of the pandemic that long COVID could be an issue that could impact some of your claim recovery rates. It doesn't seem to be everything result that, that if you now formally gone and...

Yes. From our perspective, it is -- we really did not see that in our claim book. What we did see is a certain percentage of short-term disability claims driven by COVID. They do convert into long-term disability claims, but they really converted, at the same rate as we might see with other diagnoses. And so, we really didn't see a major uptick specifically to long COVID. And yes, for us, it's a bit of a nonevent now, as far as what we're seeing in the claim book.

Another point relates to the economy, wage inflation has obviously been quite an important driver of some of the growth. You see that moderating now. It seems like the inflation data to come down. Is that still a nice tailwind? Or is that moderating?

Yes. It has been a tremendous tailwind. When we think of the wage inflation and you go back to the type of products that we have. So people are getting covered benefits. You can think about their disability cover their life cover usually as a percentage of their overall wages. And so, as we saw that increase in our premium levels we've seen as a result increase as well, and it has been something behind us, as we've seen natural growth, particularly in our group lines. We don't see it as much in the voluntary benefit lines. But in our group lines, we have seen a certain tailwind coming out of that inflationary environment that we've seen with wage inflation. So as that meters, we'll expect that to come down some in terms of that tailwind, but certainly won't expect it to be the headwind that we saw in previous periods of time. So, still a very strong employment picture, good wage inflation we see is good for our business.

Yes. And just as an anchor, historically, that would have been maybe 2% annual growth in our premium levels in group benefits. We've seen that be elevated above that in the first quarter. It was 5.5%. But, I think longer term, it probably grades down more to that 2%, which is great. It's a great enabler for the business itself.

Aside of the natural organic growth that you're getting, you've also achieved some very strong sales growth with new accounts or coming in. Any flavor as to where they're coming from and your confidence in continue to achieve that going forward.

We had a very strong first quarter. And so, you saw that particularly in our Unum U.S. business, we'd say also first quarter is a smaller quarter for us. And so the comparators are not quite as meaningful, but we're very happy about the competitiveness that we see across our product set, how we weave together good connectivity with our customers with something we talk about as our HR Connect platform that we have, bringing us together with them. Our lead management business, also something that shines. And then as Steve mentioned, our group disability business, our teams that manage that business do a very good job, have so for multiple decades. And so, we see all that coming together. That's going to help our sales growth overall. And clearly, we have a great distribution team that's out there working with our brokers and directly with customers to make sure that, that growth continues on a good sales trajectory.

Right. Switching topics to long-term care. Rising interest rates is clearly a positive factor, helping alleviate some of the concerns with regards to your block. Does that -- how does that run into how much of that can you hedge, you can lock in some of those rates? Where do you stand now? What do you plan to do going forward? So, perhaps if we can start there, and then I've got a...

We're really happy about how we've expanded our hedging program. And really, what we're doing there is we're hedging in the risk-free rate, that we will be able to achieve on future new money that we're going to put to work. And so, we use treasury locks to do that. We've disclosed -- we're up to a notional amount of about $1.4 billion. And so, think about that as $1.4 billion of future cash that we need to put to work in our investment portfolio, the risk-free part of that yield that we'll achieve. We've locked in -- we do think we can expand that program, and we'll continue to look to do that in the future. We've given some information about just what the ramifications of that is and the sensitivities for our long-term care premium deficiency reserve. We did that at Investor Day to really show the benefit that has. It doesn't give us much of a day 1 or day 0 benefit, but it does help protect against the scenarios where rates come back down. And that gave us about $150 million of protection under the real down scenario of the 30-year treasury going down to 2.5%. And staying at that level. So feel good about the program. We do have a little bit of a challenge around hedge accounting and we want to make sure we stay within the guidance to get hedge accounting, but we're very focused on the next 5 years and feel good about, where we are today.

How about the block transactions for long-term care? I think there've been -- long-term care has always been viewed as one of the more difficult areas to get something done. But, with the higher interest rate environment, certainly, it's an improved environment from where it has been. Can we look forward to something out there? Or is that still feel very wide?

Yes. No. Well, we do look forward to that. I think there's a couple of factors. One, you mentioned higher interest rates, certainly, that helps overall. But it comes down to liability assumptions, and I think seeing carriers out there that are now working with reinsurance partners around liabilities are a little bit more complex over time. So we've seen fixed annuities and variable annuities. Now we're seeing some of the life products also be hedged. And there is capital out there available to this box. We're optimistic we'll get something done at some point, but we cannot predict what that time would be. And so, working with counterparties, thinking about how we structure a deal or all things that we're actively working on, and we'll look forward to the day when we can actually transact because ultimately, our long-term care business is not one that we want to continue to manage, similar to an individual disability business, which we actually reinsured a couple of years ago, we'd like to see the same for long-term care. And so, we'll be actively working on it, but predicting when that outcome will happen is difficult to do.

Right. Would it likely be a series of carve-outs of certain parts of the pie or..

We are willing to do that. And so, I think we would want to work with counterparties to figure out what types and what parts of the transaction they want, what areas of the book they feel more comfortable with. And so, we would be flexible on that front to make a transaction happen.

Different topic, international. It's been a nice area of growth for you, but it's still relatively small. That's an update as to key strategic priorities there and what you've got any aspirations to make additional acquisitions to make it even larger.

Yes, it's a good question. So the -- if you think about our international operations, it's comprised of 2 pieces. Our U.K. business, which we've been in for many, many years. It looks very similar to what we do here in the U.S., and so we've been able to avail ourselves of that. We've seen some really good growth. The team is doing a good job of growing the business today at really good returns. Our U.K. business went through a couple of items over the last, let's say, 5 years, first Brexit, then going through COVID, they've had some real headwinds that they faced. As we come out of that, our team over there is doing a great job to grow that business at a good rate. As you say, it's a little bit smaller than we would like as part of the franchise. And so that is a place that we would think about acquisitions to expand the scale of what we see there, both in the U.K. as well as in Poland because we see them as good businesses for us.

Are the markets outside of those two areas.

I think right there are, but I think that we would want to be focused on building out those positions before we expand to other ones. But longer term, I think that is an opportunity to think about other geographies we'd want to go into.

Colonial, performing well, perhaps a little slower growth hasn't necessarily bounced back as quickly. Any update there as to keeping these things on?

Yes. So at Colonial Life, actually, where we still think about it very positively coming out of the pandemic is the spot in the franchise, which was hardest hit in the pandemic. It's a business that enrolls insurance on a face-to-face basis, working with customers. It was really a challenging time. They showed incredible resilience with the business model. And then, as you look to how they've come out of the pandemic, they're in a good spot to be back out there working with customers, growing the business. And I think the challenge there is how do you just continue to get that premium level up. So we're happy with the business. We think the model is intact. As a result of the pandemic, they brought in a lot of digital capabilities that were existed before, but now I think because there was such a need out there in the market has changed. And so, we really look at it. The thing to remember about Colonial Life is this is a business that is -- has always been a good franchise, generating high returns. That's still the case. We just wanted to grow faster, and the team is focused on that by recruiting more agents, getting more feet on the street to be out there, talking to customers and grow the premium line back to the levels which we became accustomed to, which is kind of that mid- to high single digits.

Is there any additional things that you need to do on the product side? Product introductions? Or do you feel like your existing product suite is enough to get [indiscernible]

You think about it across the board?

More for Colonial.

For Colonial. So the Colonial Life and the voluntary benefits they have today. It's a -- they have a good suite of products, always have I think one of the things that we're doing is we're bringing to them some of the Unum products as well to build out that suite and give our agents the ability to sell more things that we have out there today. Our dental acquisition that we did several years ago also avails itself to Colonial Life, so they can sell dental product as well. And those are the kind of things that we'll always make sure that they have as many products as they need in a quality way in the portfolio. So I think that's an area we feel very good about.

Different topic, investment portfolio. One of those topics that you can't have a life insurance discussion without checking of that bulk side of the balance sheet. Just update us to where you currently stand. Any areas of concern, what is currently on your watch list what's kind of baked into your expectations, as you think about the capital plans?

Yes, I would say no areas of concern right now. Obviously, there are some watch areas that are out there in the headlines. We're very much underweighted to commercial mortgage loans, commercial real estate, we feel good about that, have a good monitoring process that we employ for that. We're underweight, when it comes to office space. And so, we will continue to monitor that. From a banking perspective, very underweighted there. The banking exposure we do have is more to the larger banks. And so, feel good about that. And we're a shop that can really choose and that's what sets us apart a little bit is that we don't need to buy all asset classes all the time. And so during the pandemic, we did take the opportunity to, I'd say, reduce our concentration to high yield, we went from about 9% to 6% as far as our allocation to high yield, and we redeploy that in a couple of places. One was with our alternative asset portfolio, which that backs our long-term care liability. We think that's a good asset class for that liability. And then we also, I'd say, went up in credit quality during that time and extended the duration of our portfolio. But we did that on a more tactical basis as we were seeing the opportunities. But we step back and just look at any point in time, where are we getting paid the right yield for the risk that we're taking. And so, we think we're positioned pretty well. So I'd say there's no one area that we're really concerned about, but we'll continue to manage portfolio.

All right. Then just on the capital side, the premium deficiency reserve that's been funded likely are done now. Where does that put you with regards to the buffer between statutory and GAAP reserves for long-term care? And how does that feed into your confidence in not being having to put additional capital into.

I'm glad to say largely done because we actually think that over the course of this year, we're going to still fund $800 million to $900 million. So we're not done yet in terms of funding the PDR and then recognizing that. But I think that, Steve, you can talk about the -- where are those different things stand. But we have still in 2023, a lot of work to do, more capital to put behind that line to fully fund the PDR, which we think will be overall very positive in the market.

Yes. The way to think about it is that the premium deficiency reserve that we're utilizing right now, the assumption set behind that. Some of those are our best estimates. Some of those are prescribed by our regulator. And so, our best estimate is to really equivalent to our GAAP reserve and our GAAP reserve mirrored really the premium deficiency reserve, we used to employ when we looked at statutory reserve adequacy. So really, the size of that premium deficiency reserve is pretty reflective of the level of differential between stat and GAAP reserves that we have on the balance sheet. And so, that will play out over time. And as interest rates change a little bit, that may fluctuate a little bit of time. But fair to say, we think we have several billions of dollars of differential between those -- the best estimate of our statutory reserve right now.

So I guess with the long-term care, no longer the issue that it was, how should we think about free cash flow generation on a sustainable basis going forward?

Yes. So maybe I'll just take the cash generation model and cash deployment model, and then, Rick can talk a little bit about the flexibility we have going forward and how we might prioritize. We talked at Investor Day that we really have sources of capital from a variety of sources. The biggest is our U.S. operating companies and the dividends that we pull off of those. They generate a little over $1 billion of statutory annual earnings. And so, that's been pretty consistent. If you take out the COVID years, where it's a little bit depressed because of the impact of COVID, we're on track to exceed $1 billion this year. You add in some of the dividends from our international operations, which we talked about. And then, we have some management fees. And it adds up to around $1.2 billion of cash generation for the organization on an annual basis which we think will then grow as the earnings of the company grow over time. And then, really from a capital deployment perspective, when we look at fixed costs, it's really the dividends that we've declared going forward to our shareholders as well as debt service. That's about $450 million on an annual basis. And then, we would look at the remainder as discretionary for capital deployment.

Yes. No, and I would just say that when you think about deployment, first and foremost, we want to invest in our core operations, grow our business. I talked about the premium growth, that we'd see. Across the board, we have very high returning lines of business, good consumer value that we put out there, and we just want to grow those lines as quickly as we can. So first and foremost, organically, thinking about how we can do that, just working with our partners, our distribution partners we have out there today to get a bigger and bigger footprint across the employee benefit space. And then, we'll look at inorganic or acquisitions to help enhance that over time. We talked a little bit about the international markets. I think domestically, we think about capabilities we can acquire to continue to establish a greater flow-through from the employer, the employee to the employer and then ultimately to us. So investing in that is really important to us. So, we have good means to do that. Steve mentioned about our uses on the dividend side. So we've grown our dividend pretty steadily over time. We just announced a few weeks back, a 10% increase in our dividend rate. So, we think that's important as we grow the enterprise to increase the level of dividends that we pay out and then share repurchase, where we have actually been acquiring $200 million per year as a -- on a run rate over the last 18 months. We'll look to increase that in the second half of the year to a $300 million run rate, and then we'll look to future years to think about what might that look like given the cash flow generation. And given the other opportunities on items 1 and 2 that we talked about from a growth perspective and return that to shareholders. So that's -- so ongoing, I think the most important thing, as Steve said, is the generation side of the franchise is tremendous. The work that the team does to make sure we have a good business that returns good cash flow and good returns across the operations has been something that has been built up over many years and continues to operate very well.

Yes. And I guess the other headline around capital deployment that we talked a lot about at Investor Day, is this year, we do expect to put right around $900 million down into our captive to fund the premium deficiency reserve for Fairwind. But then, as we look forward, we would expect prevailing interest rates where they are right now that we would not have to put capital down into that. So I mean that's the biggest change in our generation and deployment picture that's going to take place here over the next couple of years.

I guess, just looking at your current balance sheet, you've got an RBC level that's somewhat above your target, your liquidity at the whole curve looks to be in very good shape. Are we just going to continue to ride with the somewhat higher level of capital split?

It's not a goal. And I think that when you think about what we've done in the model, we talked about in capital deployment, we are in a very good spot. Like I said, the RBC levels as well as the holding company cash flow as some of the highest we've seen our leverage is actually at a lower level than, what we've seen. And so, we want to put that to work. And so we'll do so in a responsible way. And you can see how that will play out here, over the next couple of years. But as Steve said, this year, the priority is fund the PDR, and so make sure we put that behind us and then we'll have opportunities as we look out into future years.

Okay. I suppose to hear any questions from the audience. Let me throw one more in, you've had meetings all day. Anything that you think investors that you haven't covered that you'd like to cover or anything that investors are not asking about, which you think is important in understanding the story?

Well, I think we would actually raise it in those meetings if we thought there was something important. I think the -- the good news is they're looking into the dynamics of the business and the great returns we've seen, the growth rates that we've talked about and looking at the sustainability of that. And that's our goal. Our goal is to make sure that the good results we've seen, over the last year really coming out of COVID sustain and then, we continue to grow the company in a very responsible way, high returns, good capital generation and then, ultimately deploy that capital in a very effective way. So they've been great meetings. We appreciate you having us here and giving us the opportunity to talk to multiple investors over the course of the day.

Sounds good. One last go for questions. I think we're done.

Thank you all for joining. Yes. Thanks, everybody.