All right, we're going to get going. Thanks to Unum, who is up with me, for attending again this year. Two in the middle, to my right, we have Rick McKenney, the CEO, and to the far right, Tom White from investor relations. Wanted to start out, you had a very strong first half operating results. You raised your 2017 guidance to 5%-8% EPS growth from 3%-5%. I was hoping you could review some of the overall trends you've seen at the company that led to this.
Great. Thanks, Ryan. Good afternoon, everybody. Certainly happy to have you here. Just to start out, the year has been a good one. 2017 did start off well. You highlighted the fact that we came into the year expecting an outlook of growth in the 3%-6% range, or 3%-5% range. As we got into the year, through the first half, actually raised that outlook to 5%-8% given the outperformance we've seen. Through the first half of the year, we saw earnings growth right around 8% on the year. Although we're very happy with the depth of that across all of our businesses, we're looking at the second half and looking for still continued good results. We decided to up our outlook, and we still feel very good about that.
I think one of the key drivers we saw, it's like I said, it's good broad-based performance in the company. One of the key drivers is in our Unum US business, where our long-term disability business performed very well. We saw some of that actually coming out of last year. As we came into the year, we weren't sure exactly how that would repeat. What we've seen through the first six months of the year is that based on a lot of the hard work of the team over the last several years of doing a very good job on risk selection, taking price in the marketplace, working with our customers in a high retention rate, we've seen very good results coming out of that line of business. We look for that to sustain.
It's one that probably did outpace our expectations that we had coming into the year. Overall, the company doing very well. That's one area of highlight, but I would say there are many that we saw some very good performances across the board, both from Unum US. Our Colonial Life business saw both good premium growth and good solid earnings. Our U.K. business seeing some good sales growth. It's been a little bit tougher in the U.K. given some of the Brexit noise and unknowns we've had there. We've had a little bit more of an uneven performance on our earnings side, those are areas that are smaller and not as meaningful. Overall, very good. Very happy with first half of the year and look for that to continue through the second half of 2017.
Great. I want to dig in a little bit more to U.S. group disability. That was highly one of the key areas for the strong first half performance. You've had a pretty long period now of improving benefit ratios there, and you improved your guidance come into the year to 76%-79%, and you're kind of trending towards the favorable end of that range. I was hoping you could delve a little bit more into some of the key drivers that has really led to this strong performance, and then maybe how the current margins compare to where you priced the business and where you'd expect it to be over time.
Sure. I think it's best coming off of year-end, as you said. We came into the year where we did lower our discount rate, reflecting the interest rate environment that we were seeing at the time or continuing to see now as we look at it. As a result of that, really going back a period, we've been raising price. I think that's one of the key determinants is as we've raised prices in that business, as a result of that, we've seen good risk selection. As companies come in and choose to pay that higher price, we've seen very good persistency levels. I think all those things come together into a good package to see the profitability we've seen. We did have a range of 76%-79% loss ratio coming into the year.
First half, we were closer to the second quarter per se. We were closer to the 76%. We still see that as being a good range, you mentioned how are you pricing for this business in today's current interest rate environment. It's going to be right in that range.
Okay. I guess it seems like within the group insurance industry, almost all the companies, at least that are public, recently have had pretty strong results. I'm wondering if you have any sense for what's leading to what seems to be an overall period of pretty good overall industry results. If you have any concerns that could lead to more competition over time.
I'll take that in two parts. One is the industry has seen some pretty good results. I think that we've been pretty consistent in seeing improved performance. I think a number of our peers who were very public about what they did in rehabilitating some of their blocks of business have kind of got through that cycle, so they're also seeing better results. I think that's part of it. I don't think there's anything secular going on across the industry from an incident rate perspective. I think we're also looking very good in terms of recoveries. We're getting people back to work. Our benefits team is doing a great job of they're working with clients to get them back to work is a big benefit that we've seen overall. Competition, it's an area that's a competitive business.
It's a good business, and as a result, many of our peers, many of the multi-line insurers that have one of these businesses have been competitive. I wouldn't say that there's that many outliers, and this can be a business that is competitive where everybody can maintain a certain level of discipline, and I think everybody can have a good business in the group benefit space.
I guess probably about one year ago or so, you had started mentioning a little bit more worsening competitive conditions in the market. Seems like maybe things have been a little bit better since then, hoping for an update on how things are trending in that regard.
It's interesting when it comes up, and I'm sure our sales team that's out there today would tell me it's highly competitive, and they will tell me it's highly competitive, I got to be careful too much. I think at the macro level, there is plenty of competition because there are plenty of entrants that are good players that have good relationships in this space of business. It gets back to there's not as many outliers at the moment. Usually, when we talk about a competitive environment, it's usually about the hyper-competitive environment that has a number of outliers in the business, and we just don't have that many of those today. Although it is a very competitive business day in and day out, and there will be cases that are tough day in and day out.
I think we're not seeing as many outliers in the business today. We keep a good ear to the ground in terms of what the industry is trending like.
Just a quick update on what you're seeing from an organic growth standpoint in terms of underlying growth, natural growth in your block.
Yeah. When we think about organic, I was going to start out with the overall growth.
Yeah.
The overall growth that we've seen over the last year is we're seeing good 5%, 6% type premium growth rates. To get away from sales, because sales can be a little bit more episodic, but premium growth rates in a 5%-6% range have been excellent. We're very happy with that result. One of the things that you would expect to.
All right. We're going to get going. Thanks to Unum, who is up with me, for attending again this year. Two in the middle to my right, we have Rick McKenney, the CEO, and to the far right, Tom White from investor relations. Wanted to start out, you had very strong first half operating results. You raised your 2017 guidance to 5%-8% EPS growth from 3%-5%. I was hoping you could review some of the overall trends you've seen at the company that led to this.
Great. Thanks, Ryan. Good afternoon, everybody. Certainly happy to have you here. Just to start out, the year has been a good one. 2017 did start off well. You highlighted the fact that we came into the year expecting an outlook of growth in the 3%-6% range or 3%-5% range. As we got into the year, through the first half, actually raised that outlook to 5%-8% given the outperformance we've seen. Through the first half of the year, we saw earnings growth right around 8% on the year. Although we're very happy with the depth of that across all of our businesses, we're looking at the second half and looking for still continued good results. We decided to up our outlook, and we still feel very good about that.
I think one of the key drivers we saw, it's like I said, it's good broad-based performance in the company. One of the key drivers is in our Unum US business, where our long-term disability business performed very well. We saw some of that actually coming out of last year. As we came into the year, we weren't sure exactly how that would repeat. What we've seen through the first six months of the year is that based on a lot of the hard work of the team over the last several years of doing a very good job on risk selection, taking price in the marketplace, working with our customers in a high retention rate, we've seen very good results coming out of that line of business. We look for that to sustain.
It's one that probably did outpace our expectations that we had coming into the year. Overall, the company doing very well. That's one area of highlight, I would say there are many that we saw some very good performances across the board, both from Unum US. Our Colonial Life business saw both good premium growth and good solid earnings. Our U.K. business seen some good sales growth. It's been a little bit tougher in the U.K. given some of the Brexit noise and unknowns we've had there. We've had a little bit more of an uneven performance on our earnings side, those are areas that are smaller and not as meaningful. Overall, very good, very happy with first half of the year and look for that to continue through the second half of 2017.
Great. I want to dig in a little bit more to U.S. group disability. That was highly one of the key areas for the strong first half performance. You've had a pretty long period now of improving benefit ratios there and you improved your guidance come into the year to 76%-79%, and you're kind of trending towards the favorable end of that range. I was hoping you could delve a little bit more into some of the key drivers that has really led to this strong performance, and then maybe how do kind of the current margins compare to where you priced the business and where you'd expect it to be over time?
Sure. I think it's best coming off of year-end, as you said. We came into the year where we did lower our discount rate, reflecting the interest rate environment that we were seeing at the time or continuing to see now as we look at it. As a result of that, really going back a period, so we've been raising price. I think that's one of the key things, those premium growth rates, especially at those levels, is a certain level of organic growth, or we talk about it as natural growth. That is in a normal economy where you actually have employment picking up. You'll have more people at work that are being covered by the benefits per case. You'll have wage inflation that's also coming in in a normal course.
That just lifts the premium levels without really having to do more work, if you will, getting a case out there. We've seen the employment growth, so we actually have seen that come in over the last several years, and you can think about it adding maybe 1% to those premium levels. We have not seen, particularly in our blocks of business, wage inflation. So part of that is you don't see a lot of wage inflation in the country today. Also true of the types of employers that we're out there covering aren't seeing the wage inflation. Sometimes those wage inflation numbers skew more towards part-time workers and areas where we do not have as much of a presence.
Let's move a little bit to technology. Wanted to talk about kind of the increasing importance of technology in the employee benefits space, and then specifically how Unum is positioned for that and how you're adapting for it.
Sure. I know that KBW is doing a lot on technology at this conference, which I think is great because it is a big part of what's going on in the insurance space, coming a little bit more slowly, perhaps, to some of the employee benefits space. Let me talk about how we're thinking about it, and I'd really put it on three fronts. One is starting out with kind of how our consumers are feeling it, the end consumer. Bringing to them the tools that will allow them to get to a good decision on how to protect themselves and their families. That's working, for the most part, through brokers and through our Colonial Life agents to get that to the end consumer so that they can be making an informed decision to protect themselves and their families.
That can come in the forms of ease, simplicity, mobile applications, and things like that. We're investing a lot there to make that a very easy process, a very seamless process. The second is how we connect with those employers. This isn't at the consumer level, it's much more at the employer level, working with brokers and others to make sure that they are able to connect with our sales data interchange, bringing that through our benefit admin platforms that are out there to take that directly to consumer. That's an area we probably have put the most dollars to work to actually draw those connections to make sure it's a very well-served market, that our brokers that work with us, that the employers see us as leading edge there from an overall connectivity perspective.
The last piece is kind of how do we use technology to run our operations better, more the core operations. How do we actually use more in the way of tools to help on that front? To give you the example there is, we have a mobile eClaims application that you can get on your phone now, check your claim status online, be able to see that on a real-time basis. Takes away some of the operational inefficiencies you have where people are calling in for claim status, you can now get that online. Fairly basic stuff.
Yeah.
All of these are very important to ultimately get to the consumer and make sure it's a very streamlined process.
When Unum is connecting using technology to get the data from the employers, do you own the technology that is making that connection, or do you use a third party?
There's actually multiple ways to connect to them. Some of them we own, some of them we leverage our benefit admin partners that are out there. It's really to serve the customer, the employer, and the broker the way they want to be served. We have multiple avenues to bring that data through to our account. Key determinants is, as we've raised prices in that business, as a result of that, we've seen good risk selection. As companies come in and choose to pay that higher price, we've seen very good persistency levels. I think all those things come together into a good package to see the profitability we've seen. We did have a range of 76%-79% loss ratio coming into the year. First half, we were closer to the second quarter per se, we were closer to the 76%.
We still see that as being a good range. You mentioned, how are you pricing for this business? In today's current interest rate environment, it's going to be right in that range.
Okay. I guess it seems like within the group insurance industry, almost all of the companies at least that are public, recently have had pretty strong results. I'm wondering if you have any sense for kind of what's leading to what seems to be an overall period of pretty good overall industry results. If you have any concerns that that could lead to more competition over time.
Well, I'll take that in two parts. One is the industry has seen some pretty good results. I think that we've been pretty consistent in seeing improved performance. I think a number of our peers who were very public about what they did in rehabilitating some of their blocks of business have kind of got through that cycle, so they're also seeing better results. I think that's part of it. I don't think there's anything secular going on across the industry from an incident rate perspective. I think we're also looking very good in terms of recoveries. We're getting people back to work. Our benefits team is doing a great job of they're working with clients to get them back to work, is a big benefit that we've seen overall. Competition, it's an area that's a competitive business.
It's a good business, and as a result, many of our peers, many of the multi-line insurers that have one of these businesses, have been competitive, but I wouldn't say that there's that many outliers. This can be a business that is competitive where everybody can maintain a certain level of discipline, and I think everybody can have a good business in the group benefit space.
I guess probably about one year ago or so, you had started mentioning a little bit more worsening competitive conditions in the market. Seems like maybe things have gotten a little bit better since then, hoping for an update on how things are trending in that regard.
It's interesting when it comes up, and I'm sure our sales team that's out there today would tell me it's highly competitive, I got to be careful too much. I think at the macro level, there is plenty of competition because there are plenty of entrants that are good players, that have good relationships in this space of business. It gets back to there's not as many outliers at the moment. Usually when we talk about a competitive environment, it's usually about the hyper-competitive environment that has a number of outliers in the business, and we just don't have that many of those today.
Although it is a very competitive business day in and day out, there will be cases that are tough day in and day out, I think we're not seeing as many outliers in the business today. We keep a good ear to the ground in terms of what the industry is trending like.
Just a quick update on what you're seeing from an organic growth standpoint in terms of underlying growth, natural growth in your block.
Yeah. I was going to start out with the overall growth.
Yeah.
The overall growth that we've seen over the last year is we're seeing good 5%, 6% type premium growth rates. To get away from sales, because sales can be a little bit more episodic, but premium growth rates in a 5%-6% range have been excellent. We're very happy with that result. One of the things that you would expect as a company, and then ultimately bring it back to the employer.
Okay. To what extent are you seeing technology-focused companies trying to enter the employee benefits space? I guess, are they having any kind of disruptive impact so far?
Yeah. There's a number of companies out there that are working with the employer today and the technology to help serve the employer. I would tell you that a number of our lines of business have a little bit more complexity to them, and a little bit more of a regulatory environment that a lot of these companies just don't want to be part of. That's what we do very well. In fact, we use some of our technology and some of our services to the large employers to help them deal with that regulatory framework they're having to deal with, whether it's absence management, whether it's what they're dealing with from an FMLA perspective, all those things, we want to help them be a service provider to help them through that process.
Moving more specifically to the voluntary benefits space, can you talk about what you see as the market opportunity in voluntary benefits overall for Unum, how you access that with brokers and individual agents?
Sure. The voluntary benefits space, I think, is going to be a continued growing market. I think we've seen growth in that market outpacing some of the other employee benefits, but not by a lot. I think you may actually start to see that change. It's becoming much more of a mainstream offering that are at employers and that brokers are bringing to the marketplace today to serve employees with simple, lower-cost products out there that protect them for specific needs. I think it's been actually a big uptake. Part of that also has been growing as a result of some of the Affordable Care Act and even more broadly than that, not even Affordable Care Act related, high deductible plans that have come in where people have bigger gaps now that they need to protect themselves in the event of an unfortunate event in their household.
I think we're seeing more of the benefits coming through that way. We serve that both ways. We'll serve that with the brokerage market in a larger case type setting with Unum US and our Colonial Life agents that are out there today will deal with cases that may run a lot smaller to make sure that people have that direct access to an individual. They also use brokers as a means to get to those customers as well. We really feel like we've covered the spectrum of what voluntary benefits can be, and we do see it as a very important market going forward.
In terms of Colonial, you've had really good growth in sales and premium results for a while now, and it's been outpacing the industry. Can you go into a little bit about what you think is driving Colonial's outperformance? Then just want to touch a little bit on kind of the potential for territory expansion as well there.
Sure. Sure, I think that's a great outcome. Our team has done an excellent job at Colonial Life. We're executing our sales teams, our distribution force that's out there, actually accessing more individuals, and it is a feet on the street kind of game as they get to some of these smaller companies, making sure that they provide to them the best options possible in a technology-enabled way. I think those are all things that have helped to grow our footprint. We've seen actually the size of our agency grow on that front, but also equally as important is they're helping to work with brokers more and more to make sure we're getting more and more access that then we can ultimately, the Colonial Life team, can ultimately fulfill on the back end of that process. I think that has gone very well.
I think you mentioned the one area which we're continuing on is it's once again, getting more feet on the street. We have areas of the country where we are less penetrated, where there are actually dynamics in the industry which are perfect for us, given the demographics, given the size of the companies, type of industries, and we're making a concerted push to get offices established in those areas and do what we do very well in Colonial Life, and that's serve the small to medium sized employer.
What's your view of the importance of a brand when it comes to this market? We hear different opinions. Curious how you approach that.
I think that the people know. Maybe we can take our two brands. The Unum brand is not a household name, but the reality is we are not distributing at the household. If you talk to human resources professionals, CFOs, people that are the decision makers, benefits counselors, et cetera, they know Unum as a standard out there. We've been out there a long time. We do a very good job, and I think if you talk to those people in that sphere, we are considered a leader in that space. I think that's important. They know our brand. You're not going to get there through general market advertising. You're going to get there through concerted focus with our distribution, with our brokers, and making sure that we represent the brand every day.
The Colonial Life brand is another one where we invest locally in terms of the teams that know that. The reputation is very strong from an overall Colonial Life perspective, and that brand is represented by the agents that we have out there in the field force today. Once again, not a general advertisement, although we have had sponsorships of some things in a more general market. It's going to be less of an investment there because we think the people are what represent the brand today as opposed to a general market perception.
You entered the, more significantly, the dental space through the Starmount acquisition. Can you give us an update on how that integration is going so far, and then the opportunity you see dental providing?
We think it's very exciting as an entry for us a year ago in the U.S., and actually about a year before that in the U.K. We acquired a company there. The business in the U.K. is doing very well on the growth trajectory we talked about. Our Starmount business, we see great potential for that as a part of the overall franchise. It just makes sense from what we do. These are conversations we're having with employee benefits teams today. To bring to them a Dental offering rounds out the package of what we were able to deliver with the same scale, quality, and customer focus that we have across all of our products. Very excited about that.
Tomorrow, actually headed to our team in Baton Rouge at Starmount, where it's been one year since the acquisition, and they've done a tremendous job of integrating a great cultural fit. I can tell you that the numbers that are coming in, the flow of applications coming in the door has been tremendous, outpacing our expectations when we did the deal. That's really leveraging the size and scale of our Unum US distribution force, which once again, back to our brand, has a great reputation, and now we're able to deliver a product which makes absolute sense. It's been a great transaction for us. I'm really excited what this can become over the next three to five years.
You also announced your entry into the Medical Stop Loss space organically. Probably a little bit of a slower build-out, what type of opportunity do you see in that market going forward and what's the kind of time frame?
It's a great question. That business is a little bit different than kind of our core consumer-driven business.
Yeah.
This is really a service to provide to employers to help them start a company and then ultimately bring it back to the employer.
Okay. To what extent are you seeing technology-focused companies trying to enter the employee benefits space, and I guess, are they having any kind of disruptive impact so far?
Yeah. There's a number of companies out there that are working with the employer today and the technology to help serve the employer. I would tell you that a number of our lines of business have a little bit more complexity to them, and a little bit more of a regulatory environment-
Yeah
that a lot of these companies just don't want to be part of. That's what we do very well, and in fact, we use some of our technology and some of our services to the large employers to help them deal with that regulatory framework they're having to deal with, whether it's absence management, whether it's what they're dealing with from an FMLA perspective, all those things, we want to help them be a service provider to help them through that process.
Moving more specifically to the voluntary benefits space, can you talk about what you see as the market opportunity in voluntary benefits overall for Unum, how you access that with brokers and individual agents?
Sure. The voluntary benefits space, I think is going to be a continued growing market. I think we've seen growth in that market outpacing some of the other employee benefits, not by a lot. I think you may actually start to see that change. It's becoming much more of a mainstream offering that are at employers and that brokers are bringing to the marketplace today to serve employees with simple, lower cost products out there that protect them for specific needs. I think it's been actually a big uptake. Part of that also has been growing as a result of some of the Affordable Care Act and even more broadly than that, not even Affordable Care Act related, high deductible plans that have come in, where people have bigger gaps now that they need to protect themselves in the event of an unfortunate event in their household.
I think we're seeing more of the benefits coming through that way. We serve that both ways, we'll serve that with the brokerage market in a larger case type setting with Unum US, our Colonial Life agents that are out there today will deal with cases that may run a lot smaller to make sure that people have that direct access to an individual. They may also use brokers as a means to get to those customers as well. We really feel like we've covered the spectrum of what voluntary benefits can be, and we do see it as a very important market going forward.
In terms of Colonial, you've had really good growth in sales and premium results for a while now. It's been outpacing the industry. Can you go into a little bit about what you think is driving Colonial's outperformance, just want to touch a little bit on kind of the potential for territory expansion as well there.
Sure. Sure, I think that's a great outcome. Our team has done an excellent job at Colonial Life. We're executing our sales teams, our distribution force that's out there, actually accessing more individuals, it is a feet on the street kind of game as they get to some of these smaller companies, making sure that they provide to them the best options possible in a technology-enabled way. I think those are all things have helped to grow our footprint. We've seen actually the size of our agency grow on that front, but also equally as important is they're helping to work with brokers more and more to make sure we're getting more and more access that then we can ultimately, the Colonial Life team, can ultimately fulfill on the back end of that process. I think that has gone very well.
I think you mentioned the one area which we're continuing on is it's once again, getting more feet on the street, up in stop loss, on the medical space. We're going to get into that in a very reasoned way. We think it makes a lot of sense because our distribution forces out there are talking to the decision-makers, we think we can bring great advice as part of that process. We're going to use some third parties to help us. We're going to use some reinsurance to help us so that this is one that we'll learn our way into, over the next several years and actually make sure we're bringing the Unum brand and the strength that we have to that. Because all of the things that are true of the stop loss business are things we're very good at. That's about being disciplined.
It's having good underwriting. It's having good relationships and being focused on serving employers at every step of the way. Once again, a slower build, but we think that helps us to round out the portfolio.
The stop loss, I think industries tend to get pretty good results over time. It's not that capital intensive. I guess what are the barriers, like why have you just now decided to get into that market and what are some of the hurdles that you need to get over as you learn the business?
Yeah. No, I think we've cleared the hurdles. I think that one of the things why we weren't in that business is exactly what I went back to. It's not at the consumer level. We're used to dealing with consumers and how do we serve them very well, and this is an addition to that at the workplace. As we've gotten into that, we see this market as being one that we can do a good job at. We'll build that out to make sure we're doing a very good job relative to what the market bears. I think it's going to be a good business for us, but it's not one that we think is going to be a major part of the franchise, but it'll be just part of our core offering that we bring to employers across the board.
Shifting to the U.K., you'd cited some pressures following Brexit and challenges with employment conditions there. Can you review what's going on in that business and should we think of the headwind from Brexit as more of a headwind to premium growth, or is it also something that potentially can impact the underwriting too?
Sure. Yeah. Well, actually going into it, I'd take you actually a few months before Brexit last year, even before the vote was cast, we were starting to see some of the slowdown in the market. When we say slowdown, these are people that are not increasing their employment roles. It was pretty stagnant as people were waiting for the vote. As the vote happened and the results, I think that the growth in that market has been very tough from an employment picture. Certainly no wage inflation, and those are flats of potentially negative from the premium growth. We kind of went into the end of the year saying, "Hey, this is going to be a premium challenge for us." We recognize that. Now, this is a reminder you, our U.K. business is a tremendous business. High returns, has been growing well, well-managed.
This isn't going to be a detriment. This is just not going to fulfill on what we had hoped from a growth perspective. We were managing our way through it. What we saw in the first half of the year is we did see a little bit of pressure around some of our returns that we saw there. Some of that you can look at, and we haven't seen the correlation to anything going on with Brexit, but it's hard not to correlate a little bit of the two that are going on there. We're going to keep a good watch on what's going on in our U.K. business. At the same time, I'd say we are very invested in it. We think it's a great business. It's generating good capital, good returns, and it will stay that way.
This is a question of how can we grow that business in this challenging environment. Which is a challenging environment. A lot of unknowns over there. We certainly have areas of the country where we are less penetrated, where there are actually dynamics in the industry which are perfect for us, given the demographics, given the size of the companies, type of industries. We're making a concerted push to get offices established in those areas and do what we do very well in Colonial Life, and that's serve the small to medium-sized employer.
What's your view of the importance of brand when it comes to this market? We hear different opinions. Curious how you approach that.
I think that the people to know. Maybe we can take our two brands. The Unum brand is not a household name, but the reality is we are not distributing at the household. We are at the workplace. If you talk to human resources professionals, CFOs, people that are the decision makers, benefits counselors, et cetera, they know Unum as a standard out there. We've been out there a long time. We do a very good job, and I think if you talk to those people in that sphere, we are considered a leader in that space. I think that's important. They know our brand. You're not going to get there through general market advertising. You're going to get there through concerted focus with our distribution, with our brokers, and making sure that we represent the brand every day.
The Colonial Life brand is another one where we invest locally in terms of the teams that know that. The reputation is very strong from an overall Colonial Life perspective, and that brand is represented by the agents that we have out there in the field force today. Once again, not a general advertisement, although we have had sponsorships of some things in a more general market. It's going to be less of an investment there because we think the people are what represent the brand today, as opposed to a general market perception.
You entered the, more significantly, the dental space through the Starmount acquisition. Can you give us an update on how that integration is going so far, and then the opportunity you see dental providing?
We think it's very exciting as an entry for us a year ago in the U.S., and actually about a year before that in the U.K. We acquired a company there. The business in the U.K. is doing very well on the growth trajectory we talked about. Our Starmount business, we see great potential for that as a part of the overall franchise. It just makes sense from what we do. These are conversations we're having with employee benefits teams today. To bring to them a dental offering rounds out the package of what we were able to deliver with the same scale, quality, and customer focus that we have across all of our products. Very excited about that. Tomorrow, actually headed to our team in Baton Rouge at Starmount, where it's been one year since the acquisition.
They've done a tremendous job of integrating a great cultural fit. I can tell you that the numbers that are coming in, the flow of applications coming in the door has been tremendous, outpacing our expectations when we did the deal. That's really leveraging the size and scale of our Unum US distribution force, which once again, back to our brand, has a great reputation. Now we're able to deliver a product which makes absolute sense. It's been a great transaction for us. I'm really excited what this can become over the next three to five years.
You also announced your entry into the medical stop loss space organically. Probably a little bit of a slower build-out, but what type of opportunity do you see in that market going forward and what's the time frame?
Yeah, it's a great question. That business is a little bit different than kind of our core consumer-driven business.
Yeah.
This is really a service to provide to employers to help them commit to the path.
Is it having an impact on your outlook for sales as well? I think you've had better sales results. Do you view that as a separate issue, or is it also?
Yeah, sales are a little bit different because a lot of those sales are coming from customers. It's two different issues there.
Yeah.
Sales have been good. We brought on new business. Once again, I mentioned the dental business there. We're adding. Dental sales are growing quite nicely in the U.K. We've added the new product line over there around Critical Illness Insurance. That's done very well. All those sales things have been positive. It's more about the premium, getting that kind of natural growth in the employer, where they're adding employees, where they're adding wages. We're just not seeing that anymore. It's been more of a suppressant to our growth.
Okay
As opposed to a negative at the moment.
On expenses, that's been a good story for Unum. Can you review what you've done to manage expenses while also investing in the company? Do you see room for further operating leverage at the company or is it more of a balancing act when you're thinking about investing versus holding back expenses?
It's always a balancing act. If you look at our teams out there today, expense management is something we do every day, so you won't see any big expense announcements coming out. This is something that as a result of having a tightly managed expense ratio, people are focused on a quarter in, quarter out, and how that trend looks. I would tell you that our expense ratio has come down, particularly in our Unum US business here over the last couple of years. Part of that's the operating leverage that we're getting because premiums are growing. We're keeping similar infrastructure we have today. We're feeling some of that operating leverage. We think there's probably still continues to be room there. It's not going to be anything outside, but there's room there.
We're also doing all of that at the same time investing a tremendous amount in our business, which we will continue the pace. We talked a little bit earlier about the technology investments we're making. That will continue. I wouldn't expect expenses to be a big part of our story.
Okay.
We're going to continue to be efficient. We're going to save money, and we're going to reinvest that into the growth of our business and the serving of our customers.
On long-term care, can you give an update on how the claims have developed relative to the assumptions, as well as the rate increases you've achieved relative to the assumptions when you took the charge in 2014?
Yeah. We reset all our assumptions back in 2014 relative to our expectations. One of the things we put out there is watching the loss ratio of 85%-90%. It's been tracking in that range. Although we've had quarters below, quarters above, it's still kind of generally there. I'd say that's tracking reasonably well. We've highlighted the pressures there from an interest rate perspective. I think that we've outperformed our early assumptions we have around that. It's still a challenge to the business, to the line of business. The last piece is the rate increases. We went into that, and we've worked very hard with our regulators to take appropriate rate increases. We've achieved what we expected. It's not everything we've asked for, but we achieved what we expected as part of that.
We'd like to see more, and we'd like to make sure that where appropriate, we're taking rate increases where we can, and it's something our team works very hard on. To date, since the last time we looked at it, we feel pretty good about where we are from a rate increases. By the way, I should say it's not just rate increases like more premium, it can also be in reduced benefits. We talk about that as a landing spot for our consumers, good for the customer, good for us, and we think that that's something we'd like to continue to do.
When it comes to the landing spot, are you seeing a better reception from regulators when it comes to that option being offered, and is that leading to or could that lead to a higher acceptance rate on what you're asking for, do you think, going forward?
Well, I think we've had good receptivity to it as we put that in. If you think about it from anyone's perspective, whether it's a regulator customer or even ours, it's choice. It's choice to the consumer where we're happy if they pay the higher premium or they can reduce the benefits. Depending on the individual, in some cases, it's a much better idea for them to reduce the benefits because they've become over-insured over the course of many years, and now is the time where they can ratchet that down a little bit because it is just a look forward. This isn't reducing benefits that have accrued in the past. This is just reducing the rate of inflation of those benefits in the future.
You touched on this, but can you just review how interest rates have, and new money rates, I guess, for long-term care have come through relative to your assumption? Then, I guess how long do you think the GAAP reserves can remain adequate if rates don't rise?
When we went through the structure of looking at that, which at the time seemed like a pretty reasonable view, and I still think it's a very reasonable view. We said that rates would stay relatively flat for the next 5 years in the assumption and would grade up to a longer-term average over the next 5. We're about three years, two and a half, three years past that point in time. We've exceeded kind of that rate, which was flat at that point, back when we established it.
We have to always look out to the future in terms of what our expectations are about what does the grading look like, how we're able to achieve that. I think we've been giving good indications as we've talked to investors in our earnings call to say, feel pretty good about how we've achieved so far. Our investment team has done a great job of finding assets that achieve our thresholds. We'll just have to keep looking to the future. There's not really a timeline in terms of when it goes one way because this is all about our assumptions for the future, and we still feel good about where our assumptions are today. We look at it continually, but we take a hard look at it every year.
Are you making any sort of changes to the investment allocations? For example, I've heard some long-term care companies mention maybe it would make sense to carve out a sleeve for alternatives within that portfolio, given the long duration of the liabilities. Have you-
We-
ever considered anything like that?
We do some of that.
Okay.
It's a very, you say small sleeve, it's a tiny sleeve.
Yeah
in terms of what that looks like, we're still very much a corporate bond buyer. Our challenge is how do you get the length? There's not as much 30-year issuance at the credit we would like, at the price we would like. We have all other allocations to it in both high yield alternatives. Once again, we'd rather be out there buying 30-year corporate bonds, infrastructure, different industries, things that we like that fit very well with our portfolio.
Statutory earnings have been strong for a while. You've built up holding company cash to over $750 million now. How should we think about an appropriate view of the long-term holding company cash target net for Unum?
When we look at it's pretty simplistic, where we just take a year's worth of dividends and interest requirements on our debt and make sure we're holding that. For us, that number is around $325, $350, somewhere in that range. Our $750 you talked about, we're sitting well in excess of that. I think our CFO, Jack McGarry, mentioned on the call that we're going to take a stop loss on the medical space. We're going to get into that in a very reasoned way. We think it makes a lot of sense because our distribution force that's out there are talking to the decision-makers, and we think we can bring great advice as part of that process. We're going to use some third parties to help us.
We're going to use some reinsurance to help us so that this is one that we'll learn our way into, over the next several years and actually make sure we're bringing the Unum brand and the strength that we have to that. Because all of the things that are true of the stop-loss business are things we're very good at, and that's about being disciplined, it's having good underwriting, it's having good relationships, and being focused on serving employers at every step of the way. Once again, a slower build, but we think that it helps us to round out the portfolio.
The stop-loss, I think industry tend to have pretty good results over time. It's not that capital intensive. I guess what are the barriers, like why have you just now decided to get into that market, and what are some of the hurdles that you need to get over as you learn the business?
I think we've cleared the hurdles.
Yeah.
I think that one of the things that why we weren't in that business is exactly what I went back to. It's not at the consumer level. We're used to dealing with consumers and how do we serve them very well, this is an addition to that at the workplace. As we've gotten into that, we see this market as being one that we can do a good job at. We'll build that out to make sure we're doing a very good job relative to what the market bears. I think it's going to be a good business for us, but it's not one that we think is going to be a major part of the franchise, but it'll be just part of our core offering that we bring to employers across the board.
Shifting to the U.K., you've cited some pressures following Brexit and challenges with employment conditions there. Can you review what's going on in that business, and should we think of the headwind from Brexit as more of a headwind to premium growth, or is it also something that potentially can impact the underwriting too?
Sure. Yeah. Well, actually going into it, I take you actually a few months before Brexit last year, even before the vote was cast, we were starting to see some of the slowdown in the market.
Yeah.
This is, when we say slowdown, these are people that are not increasing their employment roles. It was pretty stagnant as people were waiting for the vote. As the vote happened and the results, I think that the growth in that market has been very tough from an employment picture. Certainly no wage inflation, those are flats of potentially negative, from the premium growth. We kind of went into the end of the year saying, "Hey, this is going to be a premium challenge for us. We recognize that." Now, this is, remind you, our U.K. business is a tremendous business, high returns, has been growing well, well-managed. This isn't going to be a detriment. This is just going to be not going to fulfill what we had hoped from a growth perspective. We were managing our way through it.
What we saw in the first half of the year is we did see a little bit of pressure, around some of our returns that we saw there. Some of that you can look at, and we haven't seen the correlation to anything going on with Brexit, but it's hard not to correlate a little bit of the two that are going on there. We're going to keep a good watch on what's going on in our U.K. business. At the same time, I'd say we are very invested in it. We think it's a great business. It's generating good capital, good returns, and it will stay that way. This is a question of how can we grow that business, in this challenging environment. Which is a challenging environment. A lot of unknowns over there. We're certainly a deeper look at that.
We've been continuing to deploy our capital both in dividends, where we raised our dividend 15% this year, as well as share repurchase. We bought back, we're on a track to buy back somewhere around $400 million this year. We'll have to look at that because that capital is building up faster than when we've been redeploying it at its current pace.
I guess along those lines, I guess when I think about uses of capital other than the dividend, buyback has been the primary source, and you've done a little bit of bolt-on M&A. Another thing you've mentioned, I think, is the idea of trying to isolate long-term care liabilities into a single legal entity.
Is that the type of thing that could also be a use of capital, or is that something completely separate and we should really just think about buyback and potential M&A?
Yeah. No, I think that's out there.
Okay
in terms of using that. I'd start in the other direction from buyback.
Okay.
We really start at put as much into our core business as we can.
Yeah.
Grow it with good returns, grow that business as fast as we can. M&A, we'll look at both, in the strategic realm, which are the two deals that we did here in the last couple of years, as well as what would bolt-on acquisitions look like, consolidating type financial transactions. How would that look for us? Dividends increasing at a steady rate has been important to us, important to our shareholders. Buying back shares. Now we've done all of those over the last several years, still we're building up capital faster than that. We're going to have to choose what we do with that. The question you asked around long-term care and structuring and would that be a use as well?
Hard to say right now because there are different things, but we'd like to think that we have other capacity to use to deal with that when that time comes, as opposed to just going straight to holding company cash.
Got it. On M&A, you've done a couple smaller, very strategically focused bolt-on deals in dental. Are there any other areas, either from a product or geography standpoint, that would make sense for Unum at this point? Have you kind of rounded out the portfolio that you want?
Yeah. I think we're in the employee benefit space. When you think we're not going to be getting into the healthcare side, we're not going to be getting into the savings side, whether it's defined contribution 401(k). When we think of the employee benefits space, we've pretty well filled that out. I think that the areas that we look at today are other geographies that we can go to, things that we can bring to different countries what we know very well. Making sure that we also have the services within our core business. I mentioned earlier being able to serve employers and their employees with good capabilities. None of those are of significant scale to be able to do that. Consolidating acquisitions could be more of scale.
Once again, that's going to be a very disciplined thing because it's not going to really bring us strategic value. We've got the portfolio we need, distribution we need, we'll continue to go on that front.
Are there any questions from the audience? One other thing I wanted to touch on was we've seen, and you've talked about a lot too, is increasing the amount of products customers buy through Unum within the suite of employee benefits.
Yes.
How have you gone about that, and where are you in terms of upside, in terms of the ability to still get more products bought?
I think it's, well, one, the dental business is a new product to everybody for us, ours is committed to the path.
Is it having an impact on your outlook for sales as well? I think you've had better sales results. Did you view that as a separate issue?
Yeah, sales are a little bit different because a lot of those sales are coming from customers that. It's two different issues there.
Yeah.
You've got sales have been good. We brought on new business. Once again, I mentioned the dental business there. We're adding dental. Sales are growing quite nicely in the U.K. You bring on that, we've added the new product line over there around Critical Illness. That's done very well. All those sales things have been positive. It's more about the premium, getting that kind of natural growth in the employer, where they're adding employees, where they're adding wages. We're just not seeing that anymore. It's been more of a suppressant to our growth-
Okay
as opposed to a negative at the moment.
I guess on expenses, that's been a good story for Unum. Can you review, I guess, what you've done to manage expenses while also investing in the company? Do you see room for further operating leverage at the company, or is it more of a balancing act when you're thinking about investing versus holding back expenses?
It's always a balancing act. I think if you look at our teams out there today, expense management is something we do every day. You won't see any big expense announcements coming out as it's something that, as a result of having a tightly managed expense ratio, people are focused on a quarter in, quarter out and how that trend looks. I would tell you that our expense ratio has come down, particularly in our Unum US business here over the last couple of years. Part of that's the operating leverage that we're getting because premiums are growing. We're keeping similar infrastructure we have today. We're feeling some of that operating leverage. We think there's probably still continues to be room there. It's not going to be anything outside, but there's room there.
We're also doing all of that at the same time investing a tremendous amount in our business, which we will continue the pace. We talked a little bit earlier about the technology investments we're making. That will continue. I wouldn't expect expenses to be a big part of our story.
Okay.
We're going to continue to be efficient. We're going to save money, and we're going to reinvest that into the growth of our business and the serving of our customers.
On long-term care, can you give an update on how the claims have developed relative to the assumptions as well as the rate increases you've achieved relative to the assumptions when you took the charge in 2014?
Yeah. We reset all our assumptions back in 2014 relative to our expectations. One of the things we put out there is watching the loss ratio of 85%-90%. It's been tracking in that range. Although we've had quarters below, quarters above, it's still kind of generally there. I'd say that's tracking reasonably well. We've highlighted the pressures there from an interest rate perspective. I think that we've outperformed our early assumptions we have around that. It's still a challenge to the line of business. The last piece is the rate increases. We went into that, and we've worked very hard with our regulators to take appropriate rate increases, and we've achieved what we expected. It's not everything we've asked for, but we achieved what we expected as part of that.
We'd like to see more, and we'd like to make sure that where appropriate, we're taking rate increases where we can, and it's something our team works very hard on. To date, since the last time we looked at it, we feel pretty good about where we are from a rate increases. By the way, I should say it's not just rate increases like more premium, it can also be in reduced benefits. We talk about that as a landing spot for our consumers, good for the customer, good for us, and we think that that's something we'd like to continue to do.
When it comes to the landing spot, are you-
More about how do we get the reach of the scale and quality that Unum customers come to depend on. That's what we're doing there. It's true of our other products as well because we have. Because disability is such a core strength of ours, how do we bring in other capabilities to employers that will give them the same type of benefits? We've done that very well over the last several years with voluntary benefits. We'll keep doing that. There's still a lot of opportunity to bring voluntary benefits to a broader set of customers that we have today. I think our broker partners are actually helping on that front as they look at this as a good way to help round out their portfolios as well. There's a number of those.
We talk about voluntary benefits like it's one product.
Yeah.
There's actually a whole suite of different things or different solutions we can bring to customers.
Is it typically a decision by the employer to have more Unum products, or is there an aspect where you're just also you're on the shelf, but you just need to convince the customer to buy the product?
No, this is Well, there's two aspects though. First and foremost, you got to be on the shelf, right?
Yeah.
It's about convincing the employer that these are good products to bring, that we will do a good job serving them, and that it's in their interest to bring these products to their employees. The second step is how do you, once you have them on the shelf, because they are voluntary, there's self-selection, a number of these voluntary products, how do you get people to that point of buying? That's what we work a lot with our broker partners, as well as working with the ultimate employer. It's help people with the right educational tools so they can make the right decisions to help protect themselves and their families.
All right. I think we'll wrap it up there.
Excellent.
Thank you very much.
Thank you, Ryan.
We appreciate it.
Thanks for having us in. We appreciate it. Thanks, everybody, for coming.
Is that leading to, or could that lead to a higher acceptance rate on what you're asking for, do you think going forward?
I think we've had good receptivity to it as we put that in. If you think about it from anyone's perspective, whether it's a regulator, customer or even ours, it's choice. It's choice to the consumer, where we're happy if they pay the higher premium or they can reduce the benefits. Depending on the individual, in some cases, it's a much better idea for them to reduce the benefits because they've become over-insured over the course of many years, and now is the time where they can ratchet that down a little bit because it is just a look forward.
Yeah.
This isn't reducing benefits that have accrued in the past. This is just reducing the rate of inflation of those benefits in the future.
You touched on this. Can you just review how interest rates have, and new money rates, I guess, for long-term care, have come through relative to your assumption? I guess how long do you think the GAAP reserves can remain adequate if rates don't rise?
When we went through the structure of looking at that, which at the time seemed like a pretty reasonable view, and I still think it's a very reasonable view, we said that rates would stay relatively flat for the next five years in the assumption, and would grade up to a longer-term average over the next five. We're about three years, two and a half, three years past that point in time. We've exceeded that rate, which was flat at that point, back when we established it. We have to always look out to the future in terms of what our expectations are about what does the grading look like, how we're able to achieve that.
I think we've been giving good indications as we've talked to investors in our earnings calls and say, "Feel pretty good about how we've achieved so far." Our investment team has done a great job of finding assets that achieve our thresholds. We'll just have to keep looking to the future. There's not really a timeline.
Yeah
in terms of when it goes one way, because this is all about our assumptions for the future, and we still feel good about where our assumptions are today. We look at it continually, but we take a hard look at it every year.
Are you making any sort of changes to the investment allocations? For example, I've heard some long-term care companies mention maybe it would make sense to carve out a sleeve for alternatives within that portfolio, given the long duration of the liabilities. Have you-
We-
Considered anything like that?
We do some of that.
Okay.
It's a very, you say small sleeve, it's a tiny sleeve.
Yeah
In terms of what that looks like. We're still very much a corporate bond buyer. Our challenge is how do you get the length? There's not as much 30-year issuance at the credit we would like, at the price we would like. We have all other allocations to it in both high yield alternatives. Once again, we'd rather be out there buying 30-year corporate bonds, infrastructure, different industries, things that we like that fit very well with our portfolio.
The statutory earnings have been strong for a while. You've built up holding company cash to over $750 million now. How should we think about an appropriate view of the long-term holding company cash target net for Unum?
Yeah. When we look at it's pretty simplistic, where we just take a year's worth of dividends and interest requirement on our debt and make sure we're holding that. For us, that number is around $325, $350, somewhere in that range. Our $750 you talked about, we're sitting well in excess of that. I think our CFO, Jack McGarry, mentioned on the call that we're going to take a deeper look at that. We've been continuing to deploy our capital, both in dividends, where we raised our dividend 15% this year, as well as share repurchase. We're on a track to buy back somewhere around $400 million this year. We'll have to look at that because that capital is building up faster than when we've been redeploying it at its current pace.
I guess along those lines. When I think about uses of capital, other than the dividend, buyback has been the primary source, and you've done a little bit of bolt-on M&A. Another thing you've mentioned, I think, is the idea of trying to isolate long-term care liabilities into a single legal entity.
Is that the type of thing that could also be a use of capital, or is that something completely separate and we should really just think about buyback and potential M&A?
Yeah, no, I think that's out there.
Okay.
In terms of using that. I'd start in the other direction from buyback.
Okay.
We really start at put as much into our core business as we can.
Yeah.
Grow it with good returns, grow that business as fast as we can. M&A, we'll look at both in the strategic realm, which are the two deals that we did here in the last couple of years, as well as what would bolt-on acquisitions look like, consolidating type financial transactions. How would that look for us? Dividends increasing at a steady rate has been important to us, important to our shareholders, and then buying back shares. Now, we've done all of those over the last several years, and still we're building up capital faster than that. We're going to have to choose what we do with that. The question you asked around long-term care and structuring and would that be a use as well?
Hard to say right now because there are different things, we'd like to think that we have other capacity to use to deal with that when that time comes, as opposed to just going straight to holding company cash.
Got it. On M&A, you've done a couple smaller, very strategically focused bolt-on deals in dental. Are there any other areas, either from a product or geography standpoint, that would make sense for Unum at this point? Have you kind of rounded out the portfolio that you want?
Yeah. I think we're in the employee benefits space, when you think we're not going to be getting into the healthcare side, we're not going to be getting into the savings side, whether it's-
Yeah
defined contribution 401(k). When we think of the employee benefits space, we've pretty well filled that out. I think that the areas that we look at today are other geographies that we can go to, things that we can bring to different countries what we know very well, and making sure that we also have the services within our core business. I mentioned earlier, being able to serve employers and their employees with good capabilities. None of those are of significant scale-
Okay
to be able to do that. Consolidating acquisitions could be more of scale. Once again, that's going to be a very disciplined thing because it's not going to really bring us strategic value. We've got the portfolio we need, distribution we need, and we'll continue to go on that front.
Are there any questions from the audience? One other thing I wanted to touch on was we've seen, and you've talked about a lot too, is increasing the amount of products customers buy through Unum, within the suite of-
Yes
employee benefits. How have you gone about that, and where are you in terms of upside, in terms of the ability to still get more products bought?
I think it's Well, one, the dental business is new product to everybody for us.
Yeah
Ours is more about how do we get the reach and of the scale and quality that Unum customers come to depend on. That's what we're doing there. It's true of our other products as well, because we have, Because disability is such a core strength of ours, how do we bring in other capabilities to employers that will give them the same type of benefits? We've done that very well over the last several years with voluntary benefits, We'll keep doing that. There's still a lot of opportunity to bring voluntary benefits to a broader set of customers that we have today. I think our broker partners are actually helping on that front as they look at this as a good way to help round out their portfolios as well.
I think that's There's a number of those. We talk about voluntary benefits like it's one product.
Yeah.
There's actually a whole suite of different things or different solutions we can bring to customers.
Is it typically a decision by the employer to have more Unum products, or is there an aspect where you're on the shelf, but you just need to convince the customer to buy the product?
No, this is actually Well, there's two aspects, though. First and foremost, you got to be on the shelf, right?
Yeah.
It's about convincing the employer that these are good products to bring, that we will do a good job serving them, and that it's in their interest to bring these products to their employees. The second step is then how do you, once you have them on the shelf, because they are voluntary, they're self-selection, a number of these voluntary products, how do you get people to that point of buying? That's what we work a lot with our broker partners, as well as working with the ultimate employer, to help people with the right educational tools so they can make the right decisions to help protect themselves and their families.
All right. I think we'll wrap it up there.
Excellent.
Thank you very much.
Thank you, Ryan.
I appreciate your time.
Thanks for having us in. We appreciate it. Thanks, everybody, for coming.