Unum Group (UNM)
November 16, 2011 9:30 am ET
Peter O'Donnell - Chief Financial Officer and Director
Kevin P. McCarthy - Executive Vice President, Chief Executive Officer of Unum US and President of Unum US
Roger L. Martin - Former Chief Financial Officer and Senior Vice President
Randall C. Horn - Executive Vice President, Chief Executive Officer of Colonial Life and President of Colonial Life
David Parker - Senior Vice President of Finance and Risk Management
Richard McKenney - Chief Financial Officer, Principal Accounting Officer and Executive Vice President
Thomas A. H. White - Senior Vice President of Investor Relations
Breege A. Farrell - Chief Investment Officer and Senior Vice President
John F. McGarry - Executive Vice President, Chief Executive Officer of Unum UK and President of Unum UK
Thomas Watjen - Chief Executive Officer, President and Director
Colin W. Devine - Citigroup Inc, Research Division
Donna Halverstadt - Goldman Sachs Group Inc., Research Division
Ryan Krueger - Dowling & Partners Securities, LLC
A. Mark Finkelstein - Evercore Partners Inc., Research Division
Randy Binner - FBR Capital Markets & Co., Research Division
Robert Glasspiegel - Langen McAlenney
Edward A. Spehar - BofA Merrill Lynch, Research Division
Christopher Giovanni - Goldman Sachs Group Inc., Research Division
Steven D. Schwartz - Raymond James & Associates, Inc., Research Division
Thomas A. H. White
Previous Statements by UNM
» Unum Group's CEO Discusses Q3 2011 Results - Earnings Call Transcript
» Unum Group's CEO Discusses Q2 2011 Results - Earnings Call Transcript
» Unum Group's CEO Discusses Q1 2011 Results - Earnings Call Transcript
I will dispense with the reading of the Safe Harbor statement, but I will ask you to note that and take a quick look at the agenda.
We'll run our meeting as similarly to how we have in the past. We'll start out with a corporate overview from our President and Chief Executive Officer, Tom Watjen. We'll take a brief Q&A after that, then we'll move to the operating segment reviews. We'll run that a little differently than we have in the past. We'll focus first on the growth opportunities for our 3 businesses, and each of those presidents of those operations will cover the growth opportunities. And then we'll move to the risk management, and the CFOs of the 3 businesses will cover some of the risk issues, some of the claims trends and talk about some of the influences on our business in the last few quarters here. Then we'll do a Q&A after that session. I'd ask you to kind of keep your questions focused on the business operations at that point because we will conclude with a financial overview with our CFO, Rick McKenney. And also, Breege Farrell, who is our Chief Investment Officer, will talk about the investment portfolio. And then we'll have plenty of time at the end for a Q&A for the whole management team.
So we'll try to conclude around noon, and we will have lunch down on the third floor. No formal presentations at lunch, but we will -- our management team will be available. And we have some other members of the management team here who will not be presenting, but they will be available to you at lunch.
So with that, why don't I turn the program over the Tom Watjen? Tom?
Well, thank you, Tom, and good morning, everybody. Let me add my welcome. It's certainly a pleasure to have everybody here. There's obviously a lot going on in this environment and, obviously, some important things going on with our company. So it's good that you took the time to spend this morning with us to have us put things in perspective.
As you can imagine, I still feel very good about our business mix, our business strategy and our financial foundation, and I think that sets up for, from my point of view and I think our team's point of view, a pretty good outlook for 2012. Don't get me wrong, the headwinds we face with the economy and low interest rates continue to be a challenge. But I think as we look ahead, we feel that we're pretty well positioned for 2012 and beyond to continue to build up -- off the momentum that we've actually built up over the last several years.
As Tom said, I want to talk -- really start with talking about our business actually. And as you know, really our focus has been, and will continue to be, working with employers to provide benefits to their employees in the workplace. We think that's a good business and, as you'll hear me talk about, actually, we think, is even -- has some really interesting long-term growth potential trends attached to it, actually. And really, again, we think it's a business that actually has a great deal of connection with some of the political developments that are happening in this country right now.
So that's the focus. It's been the focus for quite some time and will continue to be the focus, is the workplace and providing very basic protection products in the market. As you know, we do that through 3 platforms, each 3 of which has -- continues to have a leadership position in their markets. And even though we don't set market share goals for the company, it's nice that our disciplined approach to the market has still allowed us to be a leader in most -- many of the products and services that we sell in the marketplace. And again, we think that leadership position truly is an asset as we think forward.
I mentioned the growth and discipline. Sometimes, as you look at our history the last several years, it's hard to see we're -- that we actually are a growth company. And I want to take a moment just to sort of share with you a few perspectives that I have on why I think we are a growth company. We're not trying to grow across all businesses and all products, but, as you know, we've been very targeted about certain growth aspects of the business that we think actually present both good growth but also good profit margins that are manageable in these more challenging economic times.
And just look very briefly, you'll hear more about this actually as we go to the operating reviews. But just look at the Unum U.S. results. And this shows the growth rates going back to 2007, to the 12 months ending at the end of the third quarter. And you can see, I think one of the things we've talked to you about very consistently is the fact that we think there's great growth in selling group products to small employers. That's up -- should -- that's actually up 29%-ish result. And also good growth in selling Voluntary Benefits in the marketplace. That's the 41% growth rate.
We've -- we continually have a large case practice. But again, that's very opportunistic. And as you can see, actually over that time frame, actually the sales in that particular segment of the business is actually down. So we're proud of this. And so this shows that the commitment we made, the disciplined growth is working. The places where he actually see growth that could be -- and where we can write that business on a profitable basis, we are -- you can see we're very active. The places where we have to be very opportunistic, we're very much taking that opportunistic approach to the marketplace.
If you look to the U.K., it's a little -- the U.K. is a little more in transition. And you'll hear from our U.K. team here in just a few moments that much of the focus in the U.K. is getting the LTD business and the Group Disability business growing again in part by actually expanding the marketplace. And so there's been a little less of an obvious pattern as you look at the growth characteristics in the U.K.
But if you split quickly to Colonial, again a very consistent theme to what you saw in U.S. Again, the commitment we had in Colonial was to grow our basic small employer marketplace, which again was up about 11% over this period of time. Also, we saw some good growth opportunities selectively in the public sector, which is also up, but again being very careful about growing the large case business. And again, this, I think, portrays a very -- this strategy that we follow is working for us. Again, it's getting us to the pockets of the market which we think have good growth prospects. But as you hear some of the operating reviews, that's also having a positive impact on our profitability and our margins and why again we think we're well positioned as we look at a more challenging 2012 and beyond.
Now interestingly enough, when you look through the morass of some of the difficult economic and financial and political issues right now, I still firmly believe there's a tremendous need for the sorts of things that we do. So I want to digress for a couple of slides actually just to talk about my long-term views of this marketplace because I truly believe that the benefits being provided in the workplace is a growth business. And again, we're going to take -- probably take a couple of years until the economy begins to turn for us to see even more clear evidence of that, but I strongly believe this is a growth business. And it starts with the fact, whether you're talking about the U.S. or the U.K., frankly, and whatever measure you look at, let's face it, most consumers are in very fragile positions as a result of financial crises we've just been through. So they don't have the savings, they don't have the equity values in their homes, they don't have the pension funds to the fall back on. So many consumers are sitting in very fragile positions right now.
If you flip over in terms of the insurance often can be a source of protection for those who have those kinds of exposures, you look at the fact that whether you talk about the U.S. or the U.K., many consumers don't have basic disability and life insurance protection. Again, that's both -- that's true both in the U.S. as well as the U.K. And so again, there's an underinsurance issue that's being dealt with here right now.
The third piece of this puzzle, too, is the market -- the employer. And from our point of view, the employer is the best, most efficient way to get information and low-cost product to many consumers. And so -- and the statistics bear that out. If you look at the number of the disability contracts and life insurance contracts that are being purchased in the workplace, it's a significant percentage. Almost 90% of the disability insurance is purchased in the workplace in the U.S., and almost 40% of life insurance is purchased in the workplace. And so again, the workplace has proven in the U.S. to be a very viable source of a sales distribution outlet for people that are well positioned in those marketplaces.
The same, by the way, is true in the U.K. If you look at the U.K., 56% of the disability insurance is purchased in the workplace, and 37% of life insurance is purchased in the workplace. And I would add that even though we've been through the financial crisis, even though we had the economic travails, even though the discussions about health care, we in our business see no indication that the employer does not want to continue to play a valuable role in providing access to benefits in the workplace. And obviously, those -- sometimes, those benefits, as we know, are paid for by the employer. Sometimes, those benefits are paid for by the employee. Sometimes, it's a little bit of both. But there's no evidence the employer wants to step away from that commitment to provide benefits in the workplace, which again, we think, is a very encouraging sign as we think beyond some of the challenges we face economically in the next couple of years.
And last but not least, as we all know, every government we work with, whether it's the U.S. or the U.K., is facing some interesting deficit challenges. And just as a point of reference, the Social Security disability plan in the U.S. actually has grown from paying out $18 billion in 1970 to $124 billion here in 2009. So tough for the government to step into that role, providing a very basic protection for consumers when they're facing those same -- those kind of deficit issues. The same issues, by the way, exist in the U.K., where in fact the working benefits, as they're called in the U.K., budget has actually grown from GBP 63 billion to upwards of GBP 87 billion right now.
So kind of picture, I guess, I'm trying to paint here is one where you've got a consumer who's in a very fragile state where many don't have the basic insurance protections that they need, but the workplace continues to be a very viable way to sell and market and distribute product. And frankly, there's no evidence that governments are going to step in and provide that service right now. And that's a good thing for us as an industry and for our business.
And so again, if you look beyond next couple of years where, again, we recognize there's tough economic challenges, there's tough interest rate challenges, these are the kinds of things that I think are driving us and, I guess, giving us great confidence that the strategies that we've laid out for ourselves are in fact good strategies.
Now the other part of this is, how does this all get caught up in some of the political dialogue? Excuse me. And that's hard, obviously, to predict. But I must say we're very actively engaged in political dialogue both here in the U.S. and in the U.K. And if you just look at the very simple message that we would be saying and delivering, for example, in the political world today, it's around the 3 points you see right here of a large portion of Americans, frankly, don't have the ability to sustain their households if in fact they lose their ability to work. That's an important point. Second point is only 1 in 3 consumers actually have disability insurance. And the last piece is based on a study that we had done by Charles River, the fact that people actually have private disability insurance. Probably last year, about 0.5 million families were prevented from going into poverty because they had their disability product to draw from. That saves the government about $5 billion a year. So again, a very, very strong connection between what our industry and our company does and some of the political debate that's happening in Washington right now, which again gives us great comfort that despite a lot of political uncertainty out there, we feel pretty good that this industry and this business actually is frankly positioned pretty well to navigate pretty well and maybe advance a little bit in the course of some of the political dialogue that's happening right now.
And again, the same -- it's -- exactly the same issue in -- is -- exists in the U.K. as well, where, again, most consumers are living paycheck to paycheck. In fact, it's even a little more dramatic in the U.K. where, as you can see from the statistic, the average employee in the U.K. can actually live for a couple of months on their savings. As we've said before, the U.K. market is actually more underpenetrated for disability insurance than it is in the U.S. Only 1 in 10 actually have disability insurance. And again, if you look at the value of that disability insurance in terms of what it does for protecting people from drawing from poverty programs or, as it’s called in the U.K., means tested benefits, there's a pretty substantial savings to the government by more private activity in this particular marketplace.
And so again, I know that near term presents some interesting economic and financial challenges for all of us. But if you look beyond that, these things are things that we think are very much ones to pick up and build from. I think you'll hear that in the course of some of the operating discussions that we'll talk about after my discussion.
Now the second piece of the story, obviously the financial foundation. So I said before, I think we feel very good about the fact that our business mix is truly an asset. It goes without saying I also think our financial foundation actually is an asset as well. I think you know the trends well. If you look at just the earnings per share pattern that we've seen in here over the last 5 or 6 years, including the year-to-date results this year, again we're seeing good earnings per share growth, relatively consistent earnings per share growth. What's interesting, though, of course, and you know it well, those that follow our company, is the composition of that growth is obviously shifting a little bit. In the early part of this period of time, much of it came from operational improvements that we're making in the business. More recently, much of that earnings per share growth is coming because we have excess capital that we can deploy in share repurchase programs.