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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press star one. Thank you. 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 investor section of the website at unum.com.
I 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 Standards Update 2018-12, targeted improvements to the accounting for long-duration insurance contracts, which 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. 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, 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 two special topics after which he and Rick will outline our financial outlook. Following these prepared comments, Rick, Steve, and Rob, our operator this morning, will provide instructions for the Q&A process at the conclusion. 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 in the next several years as we navigate a challenging, yet improving pandemic. We have been challenged in multiple ways, from the disruption to the workforce and to the clear impact to our population's health. In the midst of these challenges, our teams continue to execute and adapt to the purpose of protecting others. 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.
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 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, and the past two years 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 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. The knowledge we gain 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 have 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 benefits 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 teams to help businesses 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 distribution, we've enjoyed leading market positions across these segments, number one positions in disability insurance, but also top five 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 nine, 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've discussed the impacts 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 ±3% in any given year.
Seeing a 23 % increase 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. 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 is 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 Investment, 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 over to Mike and Steve, let me leave you with a few thoughts on where we are today. Over the past two 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.
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%-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. Along the way, we plan to fund our premium deficiency reserve at a faster pace than the permitted seven years.
Today's discussion is gonna 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%-55% range with 2022 EPS growing 4%-7%. I wanna 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. I would expect our operating EPS in 1Q 2022 to be slightly lower than fourth quarter of 2021.
This page lays out the path graphically. As you can see, we expect 2024 EPS in the $6.30-$6.75 range. That's a slight improvement, larger improvement in the following year. 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. What is the path to that EPS growth from $4.35 per share we experienced in 2021? Mike and I are gonna 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 gonna go first just coming out of the pandemic finish in our various businesses. Second, we're gonna have accelerated growth in product lines where we like our margins. Third, our digital agenda and the re-related. Next, a targeted pricing strategy for both products and services we provide. Customize the portfolio. Then finally, the impact of share repurchases over this period. Now I'll turn it over to Mike.
Take a trip around the circle that Steve just illustrated. First driver we wanna speak to is our forecast in our Group Life and Disability segments. As Steve was saying, while Q1 remains challenged given Omicron, declines in COVID cases across the U.S., we expect the decline to continue over the coming months. For Group Life, we assume COVID national deaths of 122, with the vast majority of those being here in the first quarter. We assume the pandemic's moving average national COVID deaths of 50 after. We also assume that non-COVID related deaths in the forecast period, you know, driven by lower level of medical testing and treatment sought during the pandemic and the stresses of...
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 claims will subside following. Further, we assume that the current elevation of environmentally sensitive long-term disability new over the next one to two years, tailing off towards the end of the period. These offsetting risk trends paired with thoughtful price actions, which again, I'll speak to 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 pre-pandemic loss ratios are based on the fundamentals, the strong risk management processes we've long executed across our pricing field and claims areas. We fully expect them to reemerge as we move past the pandemic phase of COVID with loss ratios settling back into the 72%-74% range. To step back and think about the overall impact 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%-90%, and anything which sits behind the LTC line normalized from very favorable levels recently. You can see that noted at the bottom of the slide. Next area of focus is pricing in our group lines.
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 in the leave management volumes as well. As I mentioned, we expect to see continued pressure in LTD and 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 entities. We actually started moving prices up on new and renewal group business and our fee businesses in 2021. We have and we'll continue to do this in a very transparent and measured way with our clients. You know, 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 in terms of annual premium and fee increases for the large employer 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 two more years as most rate guarantees are three years in length, and therefore takes us about three years at about a third 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, requiring only modest impacts to persistency. A third area is targeted 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 small case group business, and our international business to more rapidly recover. Overall, we expect to be back, if you look at the fully active business, at our long-term targeted annual 4%-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.
Starting with our two voluntary business lines, Colonial Life saw sales growth of 16% in 2021 with 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. 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. 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. You know, we see job growth being driven by small employers looking forward.
The small employer market remains under-penetrated, 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 MyUnum platform, which now services over 39,000 small to mid-sized businesses, and it puts us in a great spot to sell packages of benefits with enrollment and administrative ease. Finally, our International business under Mark Till saw really strong sales growth, 17% in 2021.
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. The final focus area I want to highlight before handing the call back over to Steve is efficiency, and we are gonna 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 gonna 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 while maintaining a vibrant in-office experience, but also getting smart about efficient and flexible office space. 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.
With that, let me turn it back to Steve to talk about investment actions.
Great. Thanks, Mike. I'm on page 20 of the materials. 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 2020, now inflecting to a trend of upgrades. 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 two 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 should give us benefits over time. 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 a continuation of the level of buybacks and accelerated recognition of the PDR that we executed in 4Q 2021. 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 a like dollar amount of PDR recognition, we should have capital contributions in the $550 million-$650 million range for the next three years. That should then drop dramatically post-2024 to levels more consistent with our historical rate of $100 million-$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 in 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 levels by the end of this planning horizon, which is consistent with pre-pandemic levels.
Finally, we expect to remain above our RBC and holding company cash targets and well below our leverage target of 30%. In addition, we have $400 million of our P-Caps structure in place to hedge against any unforeseen capital needs. All right, 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 we'll 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.
We'll move on to page 23 of the materials. 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. Where are we right now? We will see. 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 ten-year got down into the 50-60 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- 30 year paper of 50 basis points, and then apply our asset allocation and related credit spreads to the all-in yield. 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 at 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 ten-year treasury yield below 1.75%. Second, under a reasonable scenario of the ten-year at 2.25 with a 10-30 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 fund it 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. 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 2021 and 2022 to conform. Today, we want to focus on the initial. This will adjust each year, but this will be the
Impacts and disclosures later in 2022 as we approach the implementation date. As we have discussed, the largest day one impact relates to using a single A discount rate for our liabilities versus our actual portfolio yield. 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 the left side of the page quickly. We will remove the FAS 115 shadow adjustment for both DAC and reserves in 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 our blocks of business and loss recognition, which does include LTC, as the reserves for those blocks were reset on a policy level. The punch line here is that at 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 used 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 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. I would note that is where we have significant liability margins that will not be reflected in LDTI at adoption.
Let's move on to an illustrative attribution of the day one 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 one impact. The walk on the right from our current GAAP balance to the LDTI balance is comprised of three 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.
If I just pause there, around 65% of our day one 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. That leaves us with the 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 through the end of 2024 for Unum's financial performance.
We look for operating EPS to grow by 4%-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 2021. Absolute quarterly EPS in the first half of 2023 should be at 2019 levels and the cumulative operating EPS growth from 2021- 2024 in the 45%-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.
Now I'll turn it over to Rick to close us out, and I look forward to your questions.
Great. Thank you, Steve. Thank you, Mike, for those updates. I think what I'd leave you with here is to make sure that you understand that we've done a good job executing through this period, through the pandemic, and we are well positioned for growth. When you think about the employee benefits 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. That's why you hear us talking about pricing on 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 strong growth coming back off the pandemic, as you saw from Steve, and then we're gonna be back on a growth trajectory, which we've experienced over time on a good measurable basis with strong ROEs. 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 through a period of time. 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. While we do that, we are positioned for growth, and that is what we were thinking about.
We have the ability and the backstop to do so. We're taking the right actions to make sure that that's the case. With that, I'll turn it over to the operator to take questions and answers.
At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from the line of Ryan Krueger from KBW. Your line is open.
Hi. Good morning, everyone. My first question was on the LTC PDR. Is the sensitivity to changes in, I guess it's, is it ultimately more sensitive to 20- 30 year Treasuries than 10-year? 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 for the 10-year to that and that would be an impact to you? Or if you could go through that in more detail. Thanks.
Yeah, Ryan, it's Steve. You are correct. You know, our portfolio back in LTC is a blend of, you know, 10-year, 20-year, 30-year paper. It is a combination of those three. The 10-20, 10-30 spread is impactful to that. I'm not sure you can just extrapolate the sensitivity, but that is something that we'll factor into the calculation over time. You know, 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. After the PDR is fully funded, the $100 million annual contributions of FairWind, how would you think about the sensitivity of that, I guess, to interest rates on a longer-term basis?
Yeah. 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 and 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. Really you're kind of back to funding those types of capital requirements. 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. It's gonna be driven by just the, you know, the growth of that business and just the performance of it, the benefit ratio performance of that business.
There could be some volatility in that, but that's basically what we're funding in the longer term.
Okay, great. Thank you.
Thanks, Ryan.
Your next question comes from the line of Suneet Kamath from Jefferies. Your line is open.
Thanks. Good morning. 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. 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. 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?
Good morning, Suneet, it's Mike. I'll take that. In order of the questions, I'd think of it in terms of kind of mid-single digit type increases. Again, the chart's just giving you a sort of a proportional sense of how it's played out over the last few years and how he's 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 had it earlier, a 50% increase in the number of lives administered.
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 residual environmental impacts to group life insurance, but that the Omicron variant's coming down, hopefully. A little bit more modest on life insurance. 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.
I'll switch right to you, Mike, on, yeah, tell me about it. The competitors will follow.
Yeah, competition. 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. You know, we're anticipating that market's gonna 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, you know, 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. Then just on the expense ratio guide, the 125-175, it seems like a pretty big pickup. Can you just talk about the pace of improvement sort of thereafter, you know, given all the initiatives? I mean, how should we think about the glide path for that ratio?
Sure. Yeah, 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. We are gonna get back to face-to-face interactions with clients and with distribution. Travel and related costs are certainly gonna 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. I don't see it as a step change in 2023 or 2024, if that helps.
It does. Thanks.
Your next question comes from the line of Tom Gallagher from Evercore. Your line is open.
Good morning. First question on the PDR. 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 would 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%? Are you closed out 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?
Yeah, Tom, this is Steve. I think you kind of hit on it. You know, we're looking at the medium term here through the end of the PDR. Those rates would, you know, feather back in. What I'd tell you, though, is along the way, our calculated statutory reserve is growing at a higher rate. So the kind of differential between the PDR and the trajectory that we're on anyway, which is funded in kind of our normal $100 million-$150 million capital contribution to Fairwind, that would help us along the way. 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'll be something that we'll just discuss with them over time.
Gotcha. Okay. The other question my follow-up was on slide nine. I guess I was surprised to see that disability claims went up 40% from pre-pandemic to now. You know, almost 2x more than the growth in life insurance claims. 'Cause 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?
Yeah, Tom, it's Mike. You got it. It's short-term disability growing there. Also a couple other points. That would also show short-term disability claims coming through in our voluntary Colonial Life businesses as well. Those books have grown a bit over the time period, and then the incidence in 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. A lot of the short-term disability business in those mid and large case market is fee-based, so not fully insured, but administrative services only.
Gotcha. Thanks. 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 you know, maybe some visibility into next year?
Yeah, 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.
Yeah. Thanks, Tom. I think you're exactly right. The first indicator we saw was, we, you know, we did place significant rate increases for the one one cycle. And, you know, they were really well received by our customers. Obviously, when you're utilized as much as we've been, you know, supporting clients and then their employees through the period, partnerships are strong. You're out telling a story, you know, relative to, you know, the need for price increase, very well received. We placed a lot, persistency was quite good. And then, you know, we do get feedback from our brokers and consultants, and we do know that, there have been, you know, elevated conversations with other carriers relative to what they've seen in the market and the likely need for, you know, adjustments, going forward.
It totally makes sense. You know, obviously it will still be competitive. We don't expect it to be easy, but we're very confident, you know, that given the services we provide, given the investments we've made, we'll be in a good position to get the right price.
Okay. Thanks, guys.
Thanks, Tom.
Your next question comes from the line of Jimmy Bhullar from JP Morgan. Your line is open.
Hi, good morning. Most of my questions were asked, but just a couple. First, can you talk about just wage inflation overall? You mentioned its impact on expenses, but obviously you should be a big beneficiary on the premium side. How do you think about if wage inflation does in fact stay elevated, how much of a drag it is to expenses? Is it offset to some extent or mostly by just better premium growth if this continues throughout this year and into next?
Yeah, Jimmy, thanks. It's Mike. I'll take it. In general, I would say wage inflation nets out to be quite positive for us. 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 good about the talent and expertise that we've built here at Unum and Colonial Life. We want to be very competitive in rewarding and recognizing those folks, and we'll stay on top of that. It does net out quite positively, though. A good portion of our Group Benefits business is indexed to covered payroll. As our clients are adding new employees and increasing wages, that's flowing through in 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%- 3% in natural growth. That growth comes through with very little incremental cost. We're already servicing those clients. It tends to be, you know, coming through in our in-force book, which is generally pretty well priced. Feel good about the margin on that incremental premium as it comes through. You get wage inflation in the broader environment when you have a tighter labor market, obviously. We are definitely seeing employers looking to increase and enrich the benefits that they offer.
We were talking about it a little bit earlier, but particularly in the small to mid-sized 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. That's where the group, and in particular the voluntary benefits, fit really well. We do see it very much as a tailwind going forward.
Okay. Then in the past, there's been optimism about your ability to be able to do sort of a de-risking transaction on long-term care, especially when rates have gone up. I think in reality, there's been more optimism in the market than was warranted, but because nothing's really happened. Has the environment changed in any way that would give one sort of more confidence that something is on the horizon or not really?
Yeah, Jimmy, it's Rick. I was just gonna 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 transition, transaction, de-risking transaction. 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. We were 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. We're thinking about, you know, 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. 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 gonna stay active to be prepared when the market comes our way and work with the right customer to get something done. You know, optimism is something when it comes to M&A, you can't be too optimistic in any environment.
You got to do the hard work and then prepare for the right moment when something can happen.
Okay. Just lastly, you mentioned COVID impacting group life, group disability. It's obviously been a positive for long-term care results. What are you seeing in terms of f requency, severity, and just incidents in the LTC business recently.
Yeah, 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. I'd say that, you know, that's our expectation going forward, that incidence has kind of leveled back out to our longer-term expectation. From a mortality perspective, we've seen that gradually go back to more normalized. You know, we had at the beginning about 30% higher counts than what our expectation would have been, came down to kind of in the 15% range. I'd say the latter part of last year, maybe down to 5%.
Fourth quarter of 2021, we actually saw counts that were pretty close to our expectations on a seasonally adjusted basis. You know, right now we think there'll continue to be a little bit of volatility, probably around claimant mortality. It kind of depends, too, on the age, you know, of policyholder or just the age of the population that's impacted by these different waves. We'll see how that plays out. I think that'll normalize fairly quickly as we get through 2022.
Thank you.
We're really expecting to be back in our expected loss ratio as we, you know, go out of 2022.
Okay. Thank you.
Yep. Thank you.
Your next question comes from the line of Tracy Benguigui from Barclays. Your line is open.
Thank you. Good morning. Turning to your quantitative guidance on LDTI, what are your interest rate assumptions that will bridge your transition date impact of $6.5 billion-$7 billion equity decrease to your post-transition impact of $4 billion-$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.
Yeah. The way to think about it. We originally graded it to the 3.25, I believe it was over seven years, and that was, you know, a year or so ago that we set that. I would think about the LDTI, it doesn't grade to anything. It's just a 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, you know, to our liabilities. There's really no regression built into that. It's purely, you know, what rates were as of that date, and then that's how it will work going forward at each measurement date is just looking at the single A discount rate.
Okay. That's helpful. You know, while companies are saying that LDTI does not reflect the economics, you know, I'm keenly watching if LDTI leads to a second order or strategic update. I noticed part of your investment strategy update, you're looking to reallocate assets to munis, which are typically in the double A range. Is that driven at all by LDTI, given the rules are using a single A spread and your portfolio has more of a triple B bias?
Yeah. 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. It was also a nice way to get into longer duration assets that, you know, matches some of our liabilities very well. That was really not influenced at all by LDTI.
Okay. If I could sneak one more in. You know, thanks for laying out your buyback plan, but I don't have a good sense of how dividends 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?
Yeah, I'd say a couple things. You know, historically, we had increased our dividends in that kind of high single-digit range, you know, 6%-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. You know, we do look at that and make sure that that looks good against our peers and is driving value, you know, for our shareholders. We'll look at both of those things. We do anticipate, you know, increasing dividends over time.
Thank you.
Thanks, Tracy.
Your next question comes from the line of Erik Bass from Autonomous Research. Your line is open.
Hi. Thank you. I had a question on the group life loss ratio. In 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 state that you talked about?
You got it. Exactly.
Got it. Okay. For 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 state?
Yeah. That 130 was for the full year. There's you know 10,000 for the remaining three quarters. What I will tell you is, you know, we do track to that, and we've given you statistics over time that we're a percentage of the national deaths. It does play into that a little bit, how we set up IBNR from period to period. It's not kind of a direct correlation. I will say that, you know, that was our planning assumption.
Got it. Thank you. If I could ask one on LDTI. I certainly appreciate the impacts flow mainly through AOCI. Can you talk a little bit about the expected impacts to retained earnings from the reserve updates and give us some sense of how book value ex AOCI could move at transition?
Yeah. 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.
Got it. Thank you.
Thanks, Erik.
Your next question comes from the line of Alex Scott from Goldman Sachs. Your line is open.
Hey, thanks for taking the question. I wanted to follow up on the PDR scenarios on page 23. Is this sensitivity only flexing the rate, like 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. I was just interested if there's any other offsets we should be thinking about here.
Yeah, Alex, thanks for the question. It's Steve. What I'd say is the scenarios are just flexing interest rates. Okay, 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 gonna 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. With the PDR on Unum America, we do have an assumption in there, that Maine agreed with during the examination for future rate increases.
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.
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?
Yeah. The 1.4 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. 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. For a follow-up, I wanted to see if you could provide any color on just the potential LDTI impacts for earnings. You know, 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, you know, what some of the different influences are there that we should think about.
Yeah. Alex, you know, we're in the process of doing the work. We feel very comfortable of our progress in being able to, you know, be ready to implement 1/1 of next year. You know, at this point, we're not really giving quantitative guidance at all on that. You know, 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. You know, that, as the guidance reads, has to come off the balance sheet over time. It's the things that you might anticipate with the blocks of business like we have and what the guidance reads.
That'll be later in the year that we'll give a little bit, you know, more clarity on what that looks like going forward.
Okay. Thanks for the answers.
Thanks, Alex.
Your next question comes from the line of Mark Hughes from Truist. Your line is open.
Yeah. Thanks. Good morning. Just sort of curious, the core operations of premium growth, when you think about 2023, I think you talked about getting back to your normal, what, 4%-6%. If you're getting good pricing, and there's some inflation out there and natural growth is a bit better, could we be potentially above that range?
Yeah. Mark, it's Mike. I'll take the question. Thank you for it. You know, I would think about 2021 being about a 1% premium growth for the core operations. 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 sort of flip the switch and get back into growing that voluntary, those Colonial Life and Unum Voluntary Benefits business in 2022. It'll 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. I'd say, in our forecast, it puts us comfortably in that long-term range of 4%-6% that we talked about.
Maybe I'll flip over to Tim Arnold to just talk a little bit about what the outlook is on voluntary sales, given how important that will be to top line overall.
Yeah. Thanks, Mike. I appreciate the opportunity sitting here listening to all the questions about PDR. I know the voluntary business isn't quite as sexy as that. We are very optimistic about the opportunity to grow our voluntary benefits businesses for 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 engaged 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's 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. Pretty bullish on 2022 and beyond for VB.
Thank you for that.
Thanks, Mark.
We have a follow-up question from the line of Ryan Krueger from KBW. Your line is open.
Thanks. 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-$7 billion and the total equity impact of $4 billion-$4.5 billion. Can you just go over that?
$4 billion-$4.5 billion. Let me make sure that I know where you are, Ryan.
That was on slide 25, in the first bullet.
Transition impact. Yeah, that's a really good question, Ryan. We may have to check our editor on that one.
Okay.
Because our equity impact is the $6.5 billion-$7 billion.
Okay. Got it.
Yeah.
That makes sense.
No. Hey, Ryan. What it actually is after we decrease at the transition date, that's the equity that we're gonna have left. That will be our GAAP equity after the transition.
Oh, that's just the pro forma amount. Got it.
Yeah.
Okay.
Yeah, yeah. Sorry about that.
No, no worries. Thank you.
There are no further questions at this time. Mr. Rick McKenney, I turn the call back over to you for some closing remarks.
Okay. I thank Ryan for bookending the questions and coming back in. Yeah, I just appreciate everybody being on the call today. I think there's a lot of good things going on. We're gonna 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 been at, and we'll hear, 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.