Raymond James 44th Annual Institutional Investors Conference

Mar 7, 2023

Hello, welcome to the Unum Group meeting. You want to introduce yourselves and then kick off? Yeah. Rick McKenney, I'm the CEO of Unum Group. I'm Steve Zabel, CFO of Unum Group. Great to be here today. Great. Did you want to start with the plan? Yeah, sure. Let me take it here. Well, thank you for having us, first of all, at the Raymond James Conference. Always happy to talk about Unum and where we are and where we're going. Thought it would be helpful today, as some of you may be less familiar with the name, to give you a quick snapshot of the company, where we're going, and Steve will take you through some of the financial trajectory that we've had. To start out, we're a company at scale that operates in the employee benefits space. We are solely focused on working at the employer to help them and their employees to provide benefits for protection from needs that range all the way from simple products to disability, to leave management, and across the board. The company is $12 billion in revenue, a Fortune 250-ish type company. We have a very strong return on equity, close to 12%. On top of that, our book value, it's just over $60 per share. When you think about the company overall, our premium of $10 billion breaks down on a couple of fronts. First is our group businesses, and these are at the employer. They're broker-driven businesses that we supply group disability, group life insurance, accidental death, as well as supplemental and voluntary benefits. Our group business is roughly 50% of the company today. Voluntary benefits, close to 20%. Two of our other brands, Colonial Life, which is an agency-driven business, a good returning, reaching customers of all sizes, focusing on those smaller customers, meaning companies of roughly 100 lives, a very good franchise we have. Our international operations focus primarily in the U.K., where we have market-leading positions, and also an operating position that we have in Poland in the insurance market today. You go around the horn as well, we also have a closed block, which is, today, our long-term care business for the most part. We had a closed individual disability block that we sold back in 2020. Across the board, this $10 billion company at the workplace today, very focused on employee needs and certainly one of scale and heft and the knowledge to be able to serve our customers in a very good way. It would be helpful to put those statistics in a couple of different fronts. When you think of the companies that we work with today, we have just over 180,000 companies across the U.S. Unum may not be a household brand. Certainly, if you talk to an HR department, somebody that's out there enlisting benefits for their employees, we are very well known. In that, providing about 45 million customers across the U.S. and the U.K. with benefits behind the scenes. If you think about your employment experience, you'll go through and choose a health carrier for a company. You'll choose something on the savings side. Then there's the other pieces, which is the life business, the group disability, dental and vision, voluntary benefits, leave management. We want to be doing everything else. A source of pride is the fact that we have been the leader in disability administration over the last 30 plus years. Last year alone, we got about 350,000 people back to work. When we think about disability insurance, it's those that encounter disability and getting them back to work, and it's certainly a source of pride. But we have a much broader portfolio that we use to serve our customers across the board. When you think about what we do and the need that we have, a lot of these are macro trends, but they're certainly true at the work site today. You know the financial fragility of people across the U.S. and the U.K., about 63% working paycheck to paycheck. And one of the facts that most people don't know is that in your working lifetime, one in four people will become disabled for greater than six months in their working lifetime. When you know that stat, certainly the representation of having people protected at the workplace is critical. When you think about the workplace, about 90% of all disability insurance is obtained at the workplace. About 70% of all life insurance is actually obtained at the workplace as well. You also take the dynamic where you have high deductible plans have certainly become a larger percentage. You think of someone with a larger deductible having a simple, basic product. We talk about those as voluntary benefits to infill an accident that might happen, critical illness. Those are the things that can fill in those deductible plans. And the last thing I note, the need is around leave management. Over the last several years, leave management has become a critical need of employers as they think about how they protect their employees. Leave management is one of them. One in 10 people out on leave at any given time. There's been a real proliferation of leaves that have been out there, leave types by state. It differs a lot. We are behind the scenes creating simplicity for HR departments to administer those leaves. And we think that's a real source of connection that we'll have with employers. Lastly, I've mentioned to you, we think about our overall leadership position. Number one in the group and individual disability space, number one in the U.K. in a similar position. A number two position that we have in our voluntary benefits business. This is both through brokers as well as through our agency force of Colonial Life and being number two out there to provide these benefits. And then on the life insurance front, number four across the markets. Once again, the industry continues to change. We feel very good about our position in that industry. Consolidation has been helpful to us in terms of keeping us in front of those customers. As we look at that, both here in the U.S. as well as in the U.K., we have very strong market positions. We leverage those with knowledge, investment, and making sure we're able to continue to grow. Let me turn it over to Steve Zabel to talk a little bit about our financial picture. Steve? Great. Thanks, Rick, and it's great to be here. The story on the page here is steady growth, and that's what we're known for. We've been known as a very disciplined operator in this insurance space, and if you go back a decade, you can really see that in the growth of both our core operations premium, which are the businesses that Rick was talking about, single-digit growth over that period of time. You also look at book value. We've also grown the book value very steadily over time. One of the things that you do see, and we're almost as proud of over the last 2-3 years, although at a slower pace, we have been able to continue to grow the business. In a very challenging environment at the workplace, we've been able to get out to employers, talk about the value of our products, and continue to grow both premiums and book value of the company. I'll hit on capital, and that's what we talk to investors a lot about. A good story around Unum is we generate a lot of capital on an annual basis. We have very good conversion of our GAAP earnings into statutory earnings, which creates cash flow, and that cash flow can be deployed in a number of ways. You can see up here we're expecting next year to generate just over $1 billion of free cash flow that is available for deployment. If you look at where we're putting it, one of the things we talked about at our Investor Day a couple of years ago, we do have a legacy block of long-term care business. One of the questions out there in the market is just how much capital needs to go behind that business. We made the decision in 2023 that we're going to put a significant amount of capital to the balance sheet of that business. But what it allows us to do is explain to the market that going forward, our expectation is we will now be putting more capital into that business over the next 5 years. And why that's important is that capital will be free to deploy in other ways, whether it's through M&A or whether it's capital deployment to our organic growth of our business or deploying capital back to our shareholders. From a dividends perspective, we've been a very steady payer of dividends, even through the challenges of COVID. We expect to grow that 10% a year. That was really our historical trend, and that's a great value back to shareholders. Share repurchases. We did suspend share repurchases for a period of time through COVID. About 18 months ago, we started to buy shares back again at a pace of about $200 million a year. Again, at our Investor Day, we talked about ramping that up to a higher level in the back half of 2023. We expect to buy back $250 million of shares this year, but then we would grow into something $300 million or more in 2024. Again, giving some of that free capital back to shareholders. And then finally, paying our fixed debt cost is another thing that we deploy capital. When you add all that up, in addition to this, it creates a lot of financial flexibility on an annual basis. There's a lot of discretionary cash flow that we have that we can spend for M&A or further capital deployment back to our shareholders. The other thing that I would note on top of this, we don't give our point-in-time capital statistics, but from a risk-based capital perspective, from a holdco cash perspective, as well as from a leverage perspective, we are well in excess of all of our targets. Not only do we believe we're going to be creating excess capital going forward, but as we go into 2023, we're stronger than we've ever been from a capital perspective. Then our outlook, we talked a little bit about earnings and our expectations for earnings in 2023. We gave a little bit of an anchor to what our outlook was back in 2020, which would have been delivered in 2019 right before COVID. This is an indicator of traditionally what our growth expectations were. You can see premium growing right around that 4%-6% top-line growth, earnings growing in that really flat to 2% up, and then you add in capital deployment through share buybacks and our EPS expectations were 4%-7%. We actually feel like we have a stronger franchise now going forward, and so the guidance that we've given in 2023 is core premiums, although not at the pace that maybe we saw historically. Some of our businesses were a little bit slower to start growth again, specifically our voluntary benefits businesses. But as you look longer term, we'll be back in that 4%-7% from a premium growth perspective. If you look at earnings, we believe we'll grow earnings about 6%-9%, tack on some capital management through share buybacks and EPS at that 8%-12% going into 2023, and then our longer-term view. Again, feel like we've come out of the challenge of COVID in a stronger position than when we went back in. We continue to grow both top line and bottom line, and I think we've proven that we're a very steady grower over the years and also a very steady deployer of capital over the years. We're excited to be here and talk about our business in a little bit more depth. Yeah. Thank you very much. Maybe first you could talk a little bit about Unum's sensitivity to interest rates. Sure. Let me start on that, and I'll turn it over to Steve for pieces. When you think about the company overall, we do have a significant investment portfolio, so roughly $40 billion that we invest today. When you think about it, you have to think about it in two parts. One are the areas that we invest in to back our liabilities where we can reprice, and that's the majority of our group businesses. As we invest that today, if we see interest rates up or down, we can reprice and adjust for that. That's not really a big concern for our overall interest rate sensitivity. We certainly benefit from being in this higher interest rate environment. In fact, if interest rates continue to move up, that's a very positive thing for our company. Like I said, we can actually price for that. Over the last several years, when interest rates went down, we had to take a little bit more price in the market to back some of our liabilities. As we see interest rates go up, that pressure lessens. That's good for us, good for our customers, because we have to charge a little bit less price. Another place across the portfolio is our long-term care block, which does have interest rate sensitivity that we're working on. Steve, maybe you can say a few things on that. Yeah, great. That's a point that gets a lot of discussion when we meet with investors and analysts, is just how we feel about interest rate environments and how that impacts our long-term care business. Those are very, very long dated liabilities. We have a lot of positive cash flows coming through that business, which needs to be invested in the future. So it is sensitive to prevailing interest rates and where we can invest. So we feel great about where interest rates are today. We have taken the portfolio and taken more of a bifurcated approach, where some of the cash flows beyond 30 years that you can't really match up against traditional investments that are available in the market. We've taken an approach of putting alternative asset types of investments behind that, more private equity types of investments, and almost those are, you can invest there in perpetuity and just keep rolling those. What we like about those are you're getting paid for an illiquidity premium, which matches up very well with the liability, which is very illiquid. Then if you look in the next 30 years, we have a traditional investment portfolio, a lot of corporate credit, commercial mortgage loans in that portfolio, although pretty limited, private placement bonds, and so we feel really good about our ability to match duration. The other thing that we've talked a lot about in the market about is a hedging program. Obviously with lower interest rates over the last several years, we have not been very active in hedging. We've, over the last six to nine months, have really stepped up our program and have been able to put quite a few hedges in place. Even most recently, last week, we executed on another $200 million of notional hedges against those future cash flows. So now our total program is just shy of $1 billion, and that's a really good protection for us to protect against downside risk should rates begin to come down again. I guess what you hear in the news today, though, it may be a while before that happens, and we feel really good about where rates are today. Great. It's great to hear that you're adding more hedging protection as well. Just talk a little bit about the premium growth, 4%-7%. That's really strong compared to many competitors. What drives that and makes it sustainable? Yeah, it's a good question, and we actually think that 4% range is a good level of premium growth in our business. As I showed earlier, this is off a $10 billion premium base, so that's adding a lot of new customers every year to grow at that pace. Historically, we've grown, this is pre-pandemic, growing at about 5% a year. That's been a traditional kind of pace. We can price well for that. We can serve our customers well, outpace inflation and wage growth that we see out there today by growing our premiums at those levels. We've invested a lot over the last couple of years, so we actually see that ticking up a bit as we look to the longer term, and that would denote our 4%-7% growth. Those investments that we've made have been about connectivity with our customers, making sure that we can get more feet on the street to actually talk to people about the benefit opportunities that we have to provide for them. Even some of the services that we've been providing over the last several years create stickier business for us, more glue with our customers, and we think that's really important. We feel good about that rate. We're coming out of 2022 with strong investments, strong trends, and we're looking to 2023 with good premium growth off of good sales numbers. Just as importantly, we have very high retention. People, once they have our benefit protections, they tend to stick with us. That's equally as important to the new sales that we're bringing into the market today. Do you think any of the segments are going to grow faster from a premium perspective than others? We'd like them all to grow faster. There's a little internal competition on that front. I think they're all good. When you think of each of our business lines, and I'll put it in a couple of segments. One is our group businesses. Certainly think that that can grow right in that 4%-7% range. That's actually the biggest part of our business, so watching that continue to grow is really important. Colonial Life, which has been a great franchise and has seemed to grow at a little bit faster rate, we want to get back to that. That's an area where sales growth is going to be really important to having that grow a little bit faster. Our U.K. business has actually seen really good growth over the last 18 months. The market there in the U.K. is growing around protection. We're taking our relative market share and even a little bit more, and that's a good place to grow. I think the balance, the mix will stay pretty consistent, although some of them may move a percent or two around the edges. The whole enterprise is going to continue to grow at a very good rate. You cite 8%-12% sales growth in 2023 in both Unum US and in Colonial Life. That's pretty solid sales growth. Maybe just talk a little bit about what's supporting that. I think you touched on it a little bit, but also just is that a good level for the longer term? Yeah. The 8%-10%, high single-digit growth, sales growth is excellent. It's what we'd like to see. A little bit of this coming out of the pandemic level, particularly for our group business, so making sure that continues to grow at a good rate from the top line. Colonial Life has been one that has seen growth in the high single digits over time. Last year was around 7% growth, and we see that actually getting a little bit better as we get into this year. With the investments that we've made, with the quality of our team, the offerings that we have, we think that 8%-10% growth is a good place to be. We're going to be smart about it, though. You have the sales goals, but it is also making sure our sales are done so in a good, disciplined way from a profitability perspective. But we think that still 8%-10% makes sense. Good, profitable business and growing with our customers as we continue to invest and grow that protection footprint. Thank you. In Unum International, for 2023, you are citing 2%-5% sales growth. What is a good long-term expectation, and maybe just talk about some of the trends there? Yeah. It is coming off of a year of very strong sales growth. I think very particular to 2023, they had a couple of very large jumbo cases over there. So we saw really good sales growth in 2022. We do not expect those to repeat, although we would be happy that they do. So that is why we brought down those numbers. But longer term, it is going to be in that high single digit type sales growth range. 2023 is just a little bit of anomaly because of the success we saw in 2022. Thank you. Then how do you rank the capital return priority? So between organic growth, potential acquisition, share repurchases, dividends, just help us think through it. Yeah, that's great. I can take that one. It stayed very consistent. I think we've been very consistent over the last decade of what our priorities are. First and foremost, we really like our core businesses. Anything that we can do to grow those businesses, whether it's investing in our workforce, whether it's investing in digital tools, whether it's investing in distribution, that's the first priority. We have very good margins on that business, and that's the major driver of earnings growth for the company is just top line growth. That's number one and always number one. I'd say number two is M&A. When we think about M&A, it's usually focused on capabilities, not going out and buying in force blocks and trying to just buy scale. We feel really good about the products we have, the distribution we have, and don't really see there being a need to spend funds on large blocks like that. We're looking for tuck-in capabilities that make the customer experience better and allows us to, again, go back and grow our core operations. I'd say third is strength of balance sheets, specifically around long-term care. We want to make sure that we have the appropriate capital behind long-term care. One of the things we did talk about at our Investor Day was we are accelerating some of that capitalization into 2023 in order to give more clarity to capital deployment priorities going 2024 forward. I'd say next is then we just think about returning capital to shareholders, and we've had a very steady dividend deployment historically, growing that at 10%. We plan on continuing that, and then it's returning capital to shareholders through share buybacks. Again, we're starting to ramp that up as we go into 2023 and then into 2024. Priorities stay the same. They may ebb and flow a little bit just as far as opportunistically where it makes the most sense period to period, but I think we've stayed pretty consistent with our priorities there. You touched on M&A a little bit, but maybe talk about, is international a good area for M&A? Just talk about the availability of deals that fit your profile. Yeah. I think that we've been very active in terms of looking at the types of capabilities. Our team is connected in the markets today to think about the capabilities that we want to have to build out the company. Good examples would be if you went back six years ago, we bought a dental company. That was a part of the portfolio we needed to fill in. You also bought one in the U.K. We bought a dental company in the U.K. Then you mentioned international expansion. So we saw an acquisition of a Polish company back a few years ago. But I would tell you that our desires internationally from an M&A perspective is to grow the U.K., grow Poland, and then longer term, we think about other expansion opportunities internationally. Great. Then you talked a little bit about how you increased the share repurchase program to a run rate of $300 million, which is going to happen in the second half of the year. Is this a good level for the foreseeable future, or could you look to increase the buybacks more toward the pre-pandemic run rate of around $400 million per year? Yeah, we were pretty excited to announce that we were increasing them going into the back half of 2023, a 50% increase, basically on a run rate basis. So we think that's the right level, but we will evaluate that as we get to the back half of the year. You'll notice that on the slide that we had, we said 300-plus in 2024 going forward. Definitely something that we'll evaluate at the end of the year. But we have work to do still this year to go ahead and put capital behind our LTC business, just see how the year plays out and see how we look going into 2024. So we feel comfortable putting that out as a kind of a planning assumption, but that's something that we'll evaluate. Sounds good. I like the plus there. Yeah. And then just talk a little bit about the cash generation. So $1.1 billion to $1.3 billion of capital generation this year, which is very strong. Is that a good run rate, or should we see some growth as the premiums grow? Yeah. It's probably good to give a little bit of history for those that haven't tracked Unum. If you go back pre-pandemic, that was about the level that we set out as the benchmark. We earned, from a statutory earnings perspective, about $1 billion a year. And just how our legal entity structure works is that statutory earnings down in our operating company then comes up to the holdco company and is available for deployment from the holding company. During COVID, that was pressured a little bit, and it really followed what we saw from a GAAP earnings perspective. We talked about it a little bit, but we did pay out a lot of claims through COVID, and we met the commitments that we made to our policyholders and employees within our employer groups. And so that did pressure statutory earnings. The dividends weren't quite that level coming through COVID, but we finished last year with just pretty near $1 billion of statutory earnings that we're going to be able to bring up. Then we do think going forward, that $1.1 billion to $1.3 billion is a good starting point for 2023. We do expect GAAP earnings to grow beyond that at levels that we showed on the slide, and our conversion rate is pretty consistent, where that will convert to statutory earnings. So we would think statutory earnings would grow at a certain pace as well beyond 2023. In group disability, you're expecting a favorable benefit ratio in the mid-60s in 2023. Part of that's on operational improvements. Could you just talk about the potential for that to persist into 2024 and beyond? Yeah, it's a good question. We had very good results on our group disability line. We saw loss ratios in the mid-60s in that line of business. What that really came from was people getting back to work faster than our original assumption. Our recoveries that we talk about, people recovering from disability, getting back into the workplace, happened at a faster pace than we were expecting going into the year. What we've said is that will persist. A lot of those are dynamics that we expect to persist going into 2023. We also have said longer term, we expect that to creep up over time, not because those dynamics have changed, but because our market, as we said, will reprice every couple of years. We expect that that might get priced back into the market, which will elevate those loss ratios back into the low 70s. That's not a given. I think that we'll continue to work hard, but we think it's a reasonable expectation that the market will price in some of that favorability if our peers are seeing similar things as we're seeing in our book of business. Yeah. I just add to that, historically, we did run in the low 70s pretty consistently from a loss ratio perspective, and that equates to very solid mid to high teen return on equity for our disability business. So we feel like that's a pretty good place to be from a loss ratio perspective over time. Part of it is we are the industry leader in disability and have been for decades, and so we have the knowledge. I have to give some credit to our teams. They're very good at getting people back to work, helping them, educating them, understanding them, and our block is big enough that we actually have good scale in terms of helping to return people back to work through the program. Great. Maybe touch on credit a little bit. In your recent 2023 outlook, you talked about not really anticipating a material credit impact under a moderate recession scenario. Maybe just tell us a little bit what gives you comfort with the portfolio. Yeah, I'll step back a little bit about how we just think about recessionary pressures. For our baseline view, which would support the outlook that we gave, we do think there's going to be mild recessionary pressures, and we built that in. Higher unemployment, slow GDP growth, almost stagnant GDP growth, and we still feel like the top-line growth assumptions that we've made are realistic and that we can meet those. When we look at our credit portfolio, we did an additional stress, a more moderately averse type of recession, and we really haircut any kind of earnings that come off of those portfolio credits. We ran them, and our CIO talked about this at Investor Day. We really stress those up to 50% of EBITDA pressure, and we really don't see any cracks in the investment portfolio. We're a corporate credit shop by and large. We underwrite and research all of our credits individually in-house. We have a very active management of those. We stress test them frequently. One thing that you can do is you go back and you look at history, and you look at how the portfolio has performed, and we gave some information in our Investor Day materials where we outperform the benchmarks in any kind of recessionary cycle, and not by a small amount. It's pretty dramatic. We feel great about the portfolio, how we can evaluate credit. We do have some alternative asset sectors that we invest in. It's a good asset allocation for us. Those have performed very well, and the portfolio has just performed well historically, and so we feel pretty good about it going forward, going into 2023. Great. Any potential recession impacts on top-line premium growth, or how should we think about that? Yeah. That's really gets to wage inflation and what we've seen. We've really felt some benefits in this inflationary environment. It's good for our business because as we see those wages grow, there's more need to protect those wages. Some of our products automatically will increase the benefits provided to them as a result of that. As we see the top line, as we talk about as natural growth, that's growth in both employment picture as well as wages. As that comes down, which we've seen over periods of time, that tailwind that we've felt over the last couple of years might recede a little bit, but certainly, if you look over the last several years, even in more difficult environments, the top line continues to grow. We are positively disposed to an inflationary environment, a tight labor market, but we don't need that to continue to grow the business. I think a good example of that is through COVID. That natural growth that Rick described was basically zero during that period of time. There really wasn't wage growth to drive that or employment growth to drive premium growth, and we still grew the company. So I think we've proven the resilience of the company. Great. Is there anything else we missed that you wanted to highlight? No, I think it's good to be able to talk to a number of people today about our business. Like I said, it's not a household name, but when you look at the fundamentals of the company, the purpose behind which we serve individuals in time of need, it's a pretty phenomenal company, and to be able to do that with a workforce that does a really good job protecting others and at the same time having a good profit picture, I think it's certainly a company to look at, and we're proud to be part of it, and we'd like to educate more people around the strength of Unum. Great. Thank you very much. Great. Thank you. Thanks, everybody. Thank you.