Okay, we'll get going. Finishing up the day with Unum. Before we get going, please refer to the research disclosures at morganstanley.com/researchdisclosures. Also, the use of any recording vehicles is not allowed. Why don't we start off with just some opening comments? Very strong quarter, raised the outlook. You know, the key factors behind it, and we'll get you the confidence to look forward.
Yes, I appreciate it, Nigel. It's good to be here at the Morgan Stanley conference. Yeah, I think you highlighted it well. We actually had a very strong set of first quarter results coming off of really good results at the back half of 2022. Those results range from good top-line growth that we're seeing as we continue to grow the sales. The persistency remains high in our business. Our customers certainly benefiting from what we bring to them, and we're benefiting also from a good environment where we see inflation, which actually raises the level of those benefits that people have to protect themselves.
We, as a company with a very strong purpose of protecting the working world and our focus solely on being at the workplace, has really played out well over the last year. You mentioned about raising the outlook. We sit on a very strong capital position, but we also did raise our outlook for the full year. The primary of that is what we saw in our Group Disability business, we had a very strong first quarter, and differently, we expect that to persist throughout the year. I think that's a driver of that. Across the board, really feel good about where the business is positioned, the capital we have backing it up, and the outlook we have for the rest of 2023.
I guess, just looking at disability, as you said, as being one of the key drivers, this is the significant upside you've been able to achieve. Haven't necessarily seen as much upside in some of your peers. What's different at Unum versus some of your peer groups that's allowing you to put up such good results?
Yeah, great. I can take that one. I'm not going to speak really to the performance of our peers. I know others have had some favorable results, but for us, it's really a combination of incidents that, during COVID, was inflated for a period of time. We've seen that now come down the last couple of quarters to pre-pandemic types of levels, so more in line with our expectations. During that period, we've also seen our recoveries improve over time, and we have a history of that. We have a really good team back at the home offices. They look at our inventory, they apply tools, techniques, deep advanced analytics to understand how we can get more people back to work.
We've seen our recovery rates continue to increase over time, and that really has come together now in the last couple of quarters. You see that result in the benefit ratios that we've had really concluding the first quarter, where we had a 60% loss ratio for the quarter. As we look forward, the guidance that we did give was something in the low 60s, and that's really what's incorporated into the guidance that we gave, which was increasing our EPS growth year-over-year to 20%-25% over historical historical GAAP accounting. Feel good about it. That's a planning assumption. You know, this is a business that can change over time, and we'll just have to see how it performs over time, but that's our expectations for the remainder of the year.
I guess, just on that, one of the points that people quite often ask me is, why aren't these kind of returns being competed away? Over time, wouldn't you see some pricing pressure come in if you consistently had such good results? At some point, do you need to pass them back to consumers?
Yeah, I think that, you actually mentioned, Nigel, at the beginning, not all of our competitors are seeing the same type of results. We agree that it is thoughtful to think about that this could get competed away over time. When you think about where we price our business today, we historically have priced it more in the 70% range. You could see that over time. I think given our good claims management that we have, all the things that Steve just mentioned, you know, it's not something that we will readily do, but it's something that you can think about over the next couple of years.
You could see that, but we've seen other factors that you'd think over time would get competed away that we've been able to hold on to. We're going to be as competitive as we need to be to grow this business at a rate that we think is commensurate with the type of returns that we see, and we'll have to see how that plays out.
How about the impact of the economy? I think we've seen obviously a lot of headline layoffs. It doesn't seem to be impacting your business, but if we do see a recessionary environment unfold, is that potentially a risk? I know historically there's been a bit of a correlation between the claims incidence trends and the unemployment rate. Haven't necessarily seen anything thus far, but is that something to think about as well?
Yeah, I think you highlighted the two things that we look at. One is, if there is a recessionary environment or a slowdown, and what employers are doing. A lot of the headlines that you're seeing around layoffs, those are headlines. I think across the board, the employment picture still remains very good, so it's good for us to have more employees at work, that we're able to help cover those benefits. The second piece that you talked about is particular to what we were talking about on the Group Disability and the incidence levels that you might see in a recessionary environment. What we generally see is, through the last two recessions, is you'll see incidence rates tick up, and that's submitted incidents.
People that will submit a claim, they may not be valid claims, they may not be truly disabled. We may not see that paid incidents go up at the same level. Although you might see some of that, it's something that we'll have to watch, and we're not overly concerned about that, given at least the history we've seen over the last couple of recessions.
How about the, you know, we've come out of a pandemic. I think a lot of people were concerned in the midst of the pandemic that long COVID could be an issue that could impact some of your claims recovery rates. It doesn't seem to be evident in your results. Is that issue now firmly gone and behind?
Yeah, from our perspective, it is. We really did not see that in our claim book. What we did see is a certain percentage of short-term disability claims driven by COVID. They do convert into long-term disability claims, but they really converted at the same rate as we might see with other diagnoses. We really didn't see a major uptick specifically to Long COVID. Yeah, for us, it's a bit of a non-event now, as far as what we're seeing in the claim book.
Another point related to the economy. Wage inflation has obviously been quite an important driver of some of the growth. Do you see that moderating now? It seems like, you know, the inflation data is beginning to come down. Is that still a nice tailwind, or is that moderating?
Yeah, it has been a tremendous tailwind. We think of the wage inflation, and you go back to the type of products that we have. People are getting covered benefits. You can think about their disability cover, their life cover, usually as a percentage of their overall wages. As we saw that increase in our premium levels, we've seen as a result, increase as well, and it has been something behind us, you know, as we've seen natural growth, particularly in our group lines. We don't see it so as much in the voluntary benefit lines, but in our group lines, we have seen a certain tailwind coming out of that inflationary environment that we've seen with wage inflation.
As that meters, we'll expect that to come down, some in terms of that tailwind, but certainly won't expect it to be the headwind that we saw, you know, in previous periods of time. Still a very strong employment picture. Good wage inflation that we see is good for our business.
Just as an anchor, historically, that would have been maybe 2% annual growth in our premium levels in group benefits. We've seen that be elevated above that. In the first quarter, it was 5.5%, but I think longer term, it probably grades down more to that 2%, which is great. It's a great enabler for the business itself.
As out of the natural organic growth that you're getting, you've also achieved some very strong sales growth with new accounts coming in. Any flavor as to where they're coming from and your confidence in being able to continue to receive that going forward?
We had a very strong first quarter. You saw that particularly in our Unum U.S. business. We'd say also, first quarter is a smaller quarter for us. The comparators are not quite as meaningful, but we're very happy about the competitiveness that we see across our product set. How we weave together good connectivity with our customers, with something we talk about as our HR Connect platform that we have, bringing us together with them. Our leave management business, also something that shines. As Steve mentioned, our Group Disability business, our teams that manage that business do a very good job, have so for multiple decades. We see all that coming together. That's gonna help our sales growth overall.
Clearly, we have a great distribution team that's out there, working with our brokers, and directly with customers to make sure that that growth continues on a good sales trajectory.
Great. Switching topics to long-term care. Rising interest rates, clearly a positive factor, helping alleviate some of the concerns with regards to your block. How does that run into how much of that can you hedge? You can lock in some of those rates. Where do you stand now? What do you plan to do going forward? Perhaps if we can start there, and then I've got a-.
Yeah, that's great. We're really happy about how we've expanded our hedging program. Really, what we're doing there is we're hedging in the risk-free rate that we will be able to achieve on future new money that we're gonna put to work. We use treasury locks to do that. We've disclosed we're up to a notional amount of about $1.4 billion. Think about that as $1.4 billion of future cash that we need to put to work in our investment portfolio. The risk-free part of that yield that we'll achieve, we've locked in. We do think we can expand that program, and we'll continue to look to do that in the future. We've given some information about just what the ramifications of that is and the sensitivities for our long-term care premium deficiency reserve.
We did that in Investor Day to really show the benefit that has. It doesn't give us much of a day one or a day zero benefit, but it does help protect against scenarios where rates come back down, and that gave us about $150 million of protection under the real down scenario of the 30-year Treasury going down to 2.5% and staying at that level. Feel good about the program. We do have a little bit of challenge around hedge accounting, and we want to make sure we stay within the guidance to get hedge accounting, but we're very focused on the next five years and feel good about where we are today.
How about the block transactions for long-term care? Long-term care has always been viewed as one of the more difficult areas to get something done. With the higher interest rate environment, certainly it's an improved environment from where it has been. Can we look forward to something out there, or is that s till very wide?
Yeah, no, well, we do look forward to that. I think there's a couple of factors. One, you mentioned higher interest rates. Certainly, that helps overall, but it comes down to liability assumptions. I think seeing carriers out there that are now working with reinsurance partners around liabilities that are a little bit more complex over time. We've seen fixed annuities and variable annuities, now we're seeing some of the life products also get hedged. There is capital out there available to these blocks. We're optimistic we'll get something done at some point, but we cannot predict what that time would be. Working with counterparties, thinking about how we structure a deal, are all things that we're actively working on, and we'll look forward to the day when we can actually transact.
Ultimately, our long-term care business is not one that we want to continue to manage. Similar to an individual disability business, which we actually reinsured a couple of years ago, we'd like to see the same for long-term care. We'll be actively working on it, but predicting when that outcome will happen is difficult to do.
Right. Would it likely be a series of carve-outs of certain parts of the pie, or?
We are willing to do that. I think we would want to work with counterparties to figure out what types and what parts of the transaction they want, what areas of the book they feel more comfortable with, and so we would be flexible on that front to make a transaction happen.
Great. Different, topic, international. It's been a nice area of growth for you, but it's still relatively small. That's an update as to strategic priorities there, and whether you've got any aspirations to make additional acquisitions to make it even larger?
Yeah, that's a good question. If you think about our international operations, it's comprised of two pieces: our U.K. business, which we've been in for many, many years. It looks very similar to what we do here in the U.S. We've been able to avail ourselves of that. We've seen some really good growth. The team is doing a good job of growing the business today at really good returns. Our U.K. business went through a couple of items over the last, let's say, five years. First, Brexit, then going through COVID. They've had some real headwinds that they've faced. As we come out of that, our team over there is doing a great job to grow that business at a good rate.
As you say, it's a little bit smaller, than we would like as part of the franchise. That is a place that we would think about acquisitions to expand the scale of what we see there, both in the U.K. as well as in Poland, because we see them as good businesses for us.
Are there markets outside of those two areas of?
I think right now there are, but I think that, we would want to be focused on building out those positions, before we expand to other ones.
Right.
Longer term, I think that is an opportunity to think about other geographies we'd want to go into.
Yep. Colonial performing well, perhaps a little slower growth, hasn't necessarily bounced back as quickly. An update there as to key things going on.
At Colonial Life, actually, what we still think about it very positively coming out of the pandemic, it is the spot in the franchise, which was hardest hit in the pandemic. It's a business that enrolls insurance on a face-to-face basis, working with customers. It was really a challenging time. They showed incredible resilience with the business model, as you look to how they've come out of the pandemic, they're in a good spot to be back out there working with customers, growing the business. I think the challenge there is: How do you just continue to get that premium level up? We're happy with the business. We think the model is intact.
As a result of the pandemic, they've brought in a lot of digital capabilities that existed before. Now I think, because it was such a need out there in the market, it's changed. We really look at it. The thing to remember about Colonial Life is this is a has always been a good franchise, generating high returns. That's still the case. We just want it to grow faster. The team is focused on that by recruiting more agents, getting more feet on the street to be out there talking to customers and grow the premium line back to the levels which we became accustomed to, which is kind of that mid-to-high single digits.
Is there any additional things that you need to do on the product side, product introductions, or you feel like your existing product suite is enough to get to there?
You're thinking about it across the board?
More for Colonial.
For Colonial. Colonial Life and the voluntary benefits they have today, they have a good suite of products, always have. I think one of the things that we're doing is we're bringing to them some of the Unum products as well to build out that suite and give our agents the ability to sell more things that we have out there today. Our dental acquisition that we did several years ago, also avails itself to Colonial Life, so they can sell dental product as well. Those are the kind of things that we'll always make sure that they have as many products as they need in a quality way in the portfolio. I think that's an area we feel very good about.
Different topic, investment portfolio. One of those topics that you can't have a life insurance discussion without ticking, checking off that box.
Part of the balance sheet.
Just, yeah, updates to where you currently stand? Any areas of concern? What is currently on your watchlist? What's kind of baked into your expectations as you think about the capital plans?
Yeah, I would say no areas of concern right now. Obviously, there's some watch areas that are out there in the headlines. We're very much underweighted to commercial mortgage loans, commercial real estate. We feel good about that, have a good monitoring process that we employ for that. We're underweight when it comes to office space. We will continue to monitor that. From a banking perspective, very underweighted there. The banking exposure we do have is more to the larger banks. Feel good about that. We're a shop that can really choose, and that's what's, you know, that sets us apart a little bit, is that we don't need to buy all asset classes all the time.
During the pandemic, we did take the opportunity to, I'd say, reduce our concentration to high yield. We went from about 9% to 6% as far as our allocation to high yield, and we redeployed that in a couple places. One was with our alternative asset portfolio, which that backs our long-term care liability. We think that's a good asset class for that liability, and then we also, I'd say, went up in credit quality during that time and extended the duration of our portfolio. We did that on a more tactical basis as we were seeing the opportunities. We step back and just look at any point in time, where are we getting paid the right yield for the risk that we're taking? We think we're positioned pretty well.
I'd say there's no one area that we're real concerned about, but we'll continue to manage the portfolio.
All right. Just on the capital side, the premium deficiency reserve, you know, that's been funded, largely done now. Where does that put you with regards to the buffer between STAT and GAAP reserves for long-term care, and how does that feed into your confidence in not having to put additional capital into?
Well, I'm glad you said, "Largely done," because we actually think that over the course of this year, we're going to still fund $800 million-$900 million. We're not done yet in terms of funding the PDR and then recognizing that. I think that, you know, Steve, you can talk about where those different things stand. We have a still, in 2023, a lot of work to do, more capital to put behind that line to fully fund the PDR, which we think will be overall very positive in the market.
The way to think about it is that the premium deficiency reserve that we're utilizing right now, the assumption set behind that, some of those are our best estimate, some of those are prescribed by our regulator. Our best estimate is still really equivalent to our GAAP reserve, and our GAAP reserve mirrored really the premium deficiency reserve we used to employ when we looked at statutory reserve adequacy. Really, the size of that premium deficiency reserve is pretty reflective of the level of differential between STAT and GAAP reserves that we have on the balance sheet. That'll play out over time, and as interest rates change a little bit, that may fluctuate a little bit of time.
Fair to say, we think we have several billions of dollars of differential between those, the best estimate and our statutory reserve right now.
I guess with the long-term care no longer the issue that it was, how should we think about free cash flow generation on a sustainable basis now going forward?
Maybe I'll just take the cash generation model and cash deployment model, and then Rick can talk a little bit about the flexibility we have going forward and how we might prioritize. We talked at Investor Day that we really have sources of capital from a variety of sources. The biggest is our U.S. operating companies and the dividends that we pull off of those. They generate a little over $1 billion of statutory annual earnings, that's been pretty consistent. If you take out the COVID years, where it was a little bit depressed because of the impact of COVID, we're on track to exceed $1 billion this year.
You add in some of the dividends from our international operations, which we talked about, and then we have some management fees, and it adds up to around $1 billion of cash generation for the organization on an annual basis, which we think will then grow as the earnings of the company grow over time. Really, from a capital deployment perspective, when we look at fixed costs, it's really the dividends that we've declared going forward to our shareholders, as well as debt service. That's about $450 million on an annual basis. We would look at the remainder as discretionary for capital deployment.
No, I would just say that when you think about deployment, first and foremost, we want to invest in our core operations, grow our business. I talked about the premium growth that we'd see. Across the board, we have very high returning lines of business, good consumer, value that we put out there, and we just wanna grow those lines as quickly as we can. First and foremost, organically, thinking about how we can do that, just working with our partners, our distribution partners we have out there today to get a bigger and bigger footprint across the employee benefit space. Then we'll look at inorganic or acquisitions to help enhance that, over time. We talked a little bit about the international markets.
I think domestically, we think about capabilities we can acquire to continue to establish a greater flow-through from the employer, the employee to the employer and then ultimately to us. Investing in that is really important to us. We have good means to do that. Steve mentioned about our uses, on the dividend side. We've grown our dividend pretty steadily over time. We just announced a few weeks back a 10% increase in our dividend rate. We think that's important as we grow the enterprise to increase the level of dividends that we pay out. Share repurchase, where we have actually, been acquiring, $200 million per year as a on a run rate over the last 18 months.
We'll look to increase that in the second half of the year to a $300 million run rate, and then we'll look to future years to think about what, what might that look like given the cash flow generation and given the other opportunities on items one and two that we talked about from a growth perspective and return that to shareholders. That's, i t's ongoing. I think the most important thing, as Steve said, is the generation side of the franchise is tremendous. The work that the team does to make sure we have a good business that returns good cash flow, and good returns across the operations has been something that has been built up over many years and continues to operate very well.
Yeah, I guess the other headline around capital deployment that we talked a lot about at Investor Day is this year we do expect to put right around $900 million down into our captive to fund the premium deficiency reserve for Fairwind. As we look forward, we would expect that prevailing interest rates, where they are right now, that we would not have to put capital down into that. I mean, that's the biggest change in our generation and deployment picture that's going to take place here over the next couple of years.
I guess, get to looking at your current balance sheet. You've got a RBC level that's somewhat above your target. Your liquidity at the holdco looks to be in very good shape. Are we just gonna continue to ride with that somewhat higher level of capital for the vehicle?
It's not a goal. I think that when you think about what we've done in the model, we talked about in capital deployment, we are in a very good spot. Like you said, the RBC levels, as well as the holding company cash flows, are some of the highest we've seen. Our leverage is actually a lower level than what we've seen. We want to put that to work, and so we'll do so in a responsible way. You can see how that will play out here over the next couple of years. As Steve said, this year, the priority is fund the PDR, and so, make sure we put that behind us, and then we'll have opportunities as we look out into future years.
Yep. I suppose here, any questions from the audience? Let me throw one more in. You've had meetings all day. Anything that you think investors that you haven't covered, that you'd like to cover, or anything that investors are not asking you about, which you think is important in understanding the story?
Well, I think if we would have actually raised it if we're in those meetings, if we thought there was something important. The good news is they're looking into the dynamics of the business and the great returns we've seen, the growth rates that we've talked about, and looking at the sustainability of that, and that's our goal. Our goal is to make sure that the good results we've seen over the last last year, really coming out of COVID, sustain, and that we continue to grow the company in a very responsible way, high returns, good capital generation, and then ultimately deploy that capital in a very effective way. They've been great meetings. We appreciate you having us here and giving us the opportunity to talk to multiple investors over the course of the day.
Cool. Sounds good. One last call for questions. Good. I think we're done.
Thank you all for joining.
Thank you, everybody.