Unum Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 17 speakers on the call.

Operator

Good morning. My name is Brianna, and I will be your conference operator today. I'd like to welcome you to the Unum Group Third Quarter 2023 Earnings Results and Conference Call. Please note that this call is being recorded. All participants are in listen only mode at this time.

Operator

After the speakers' remarks, there will be a question and answer session. Thank you. I will now turn the call over to Matt Royal, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Brianna. Good morning, and welcome to the Q3 2023 earnings call for Unum Group. Our remarks today will include forward looking statements, which are statements that are not of current or historical fact. As a result, Actual results may differ materially from results suggested by these forward looking statements. Information concerning factors that could cause results Sudipher appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward Looking Statements and Risk Factors in our Annual Report on Form 10 ks for the fiscal year ended December 31, 2022.

Speaker 1

Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non GAAP financial measures, Included in today's presentation, including recast financials for the long duration targeted improvements accounting pronouncement can be found in our Q3 statistical supplement on our website in the Investors section. Further, all references 2 or which include Unum International's sales and premium results are presented on a constant currency basis. Yesterday afternoon, Unum reported Q3 2023 net income of $202,000,000 or $1.02 per diluted common share, a decrease from $510,300,000 or $2.53 per diluted common share in the Q3 of 2022.

Speaker 1

Net income for the Q3 of 2023 included the after tax amortization of the cost of reinsurance of $8,700,000 or $0.04 per diluted common share, The after tax impact of non contemporaneous reinsurance of $7,300,000 or $0.04 per diluted common share, A net after tax investment loss on the company's investment portfolio of approximately $24,400,000 or $0.13 per diluted common share and a net after tax reserve increase related to assumption updates of $139,300,000 or $0.71 per diluted common share. Net income for the Q3 of 2022 included the after tax amortization of the cost of reinsurance of $9,300,000 or $0.04 per diluted common share the after tax impact of non contemporaneous reinsurance of $1,400,000 or $0.01 per diluted common share a net after tax investment loss on the company's Investment portfolio of $3,400,000 or $0.02 per diluted common share and an after tax Net reserve decrease related to the assumption updates of $192,100,000 or $0.95 per diluted common share. Excluding these items, after tax adjusted operating income in the Q3 of 2023 was 381,700,000 or $1.94 per diluted common share, an increase from 332,300,000 or $1.65 per diluted common share in the year ago quarter. Participating in this morning's conference Call are Unum's President and CEO, Rick McKinney Chief Financial Officer, Steve Zabel Chief Operating Officer, Mike Simons as well as Tim Arnold, who heads our Colonial Life and Voluntary Benefit Lines and Mark Till, who heads our Unum International Business.

Speaker 1

Now, I'll turn to Rick for his comments.

Speaker 2

Thank you, Matt. It's good to be here with all of you this morning and we appreciate you joining us. Three quarters of the way through 2023, our year has shaped up to be a good one, and we have a number of favorable trends that set up for a continuation of positivity. Specifically for our business, the macro picture remains favorable. A strong employment atmosphere, higher interest rates and a benign credit environment are all positives.

Speaker 2

In this environment, it is also clear that our teams continue to execute against our plans to protect more people and deliver on our core business results. They are highlighted by exceptional core premium growth, Strong sales levels, solid margins and consistent performance from our investment portfolio, all resulting in record levels of capital. The Q3 was also a milestone quarter and that we expect the premium deficiency reserve has been fully funded with our current quarter contribution. As we said at our Investor Day, completing this in 2023 will mean that we don't expect contributions required to back our long term care business for the next 5 years. With ongoing strong capital generation from statutory earnings, this provides a capital picture going forward that provides ample flexibility.

Speaker 2

It is with that confidence that we have increased our share repurchase authorization to $500,000,000 for 2024. The Q3 was also our 1st reserve assumption update filed under long duration target improvements. While net impacts are muted, Given that we cannot incorporate sharp the sharp increase in interest rates, this new accounting guidance introduces dynamics that will impact go forward quarterly GAAP earnings, most notably in the Closed Block. We'll get into the GAAP assumption review further throughout our discussion, but the steps we have taken and continue to take to derisk and strength in the Closed Block have improved its position. And as we have reiterated, the GAAP accounting does not impact views on our capital and Capital Deployment Plans.

Speaker 2

In addition, we expect around $3,000,000,000 in statutory reserves over our best estimate at year end. As we look to the details of the Q3 for our business, we had another very strong quarter of performance. From the top line to the bottom line to capital generation, Starting with the top line, in the 3rd quarter earned premium growth exceeded 6%. This is a level we have not seen in several years And included growth across all core operation products from solid sales as well as generally stable persistency that remained within our expectations. We are pleased with the premium growth across the core segments, including 6.5% in Unum U.

Speaker 2

S, over 12% in International and nearly 2% in Colonial Life. Colony Life continued to see momentum building in sales and premium growth aided by success in agent recruiting and the positive customer reception we're seeing for our Gather platform. All in all, we expect to meet our Colonial Life premium target in 2023 and continue to be optimistic for higher growth rates in the future. Current and future premium growth is fueled by sales, which continued to grow on top of strong prior year results. Core operation sales grew nearly 2%, highlighted by 8.5% in Unum U.

Speaker 2

S. And close to 5% at Colonial Life. Underlying U. K. Results were also good absent very high sales comparable in the year ago quarter.

Speaker 2

We are also pleased with the robust year to date levels of growth the U. K. Business has brought to the franchise. The grossing in our top line is amplified by the success we've seen in key technology initiatives such as HR Connect and Total Leave where we continue to differentiate, creating and maintaining deep connections with both existing and new employers and their employees, to value a high quality digital experience backed up by the knowledge of our team and the AI tools we are equipping them with. Our success is also a result of the breadth of our team's strong execution, providing operational excellence and taking care of employees at time of need.

Speaker 2

Employers are putting increasing value on our service and offerings. Our discipline in pricing and customer engagement combined with our consistent Our consolidated ROE was a very healthy 12.7 percent and our before tax operating earnings and return on equity in our core operations We're well above the top end of our most recent outlook ranges. In total, after tax operating earnings of 381,700,000 increased 15% from the same time last year. Looking to our balance sheet, our investments continue to perform very well. We have de risked our balance sheet, increased the credit quality profile of our portfolio and are well positioned for future market cycles.

Speaker 2

In addition, we continue to build out our interest rate hedging program and sold a portion of our shorter duration bonds in the LTC portfolio, extending duration for cash flow matching purposes. The results across the board continue to support and strengthen our already robust capital position. With statutory earnings over $500,000,000 our holding company liquidity ended at $1,200,000,000 and our RBC was 4 70%, both at levels well north of our targets. The capital generation provides tremendous flexibility to pursue our strategy and continue to return capital to shareholders through dividends and share repurchase. The new Board authorized share repurchase program I mentioned supports our greatly accelerated capital deployment strategy heading into next year.

Speaker 2

Beginning in the Q1 of 2024, we expect to begin repurchasing shares at a rate that we have not seen in many years. The path we are on has us well positioned for earnings per share growth towards the upper end of our outlook and capital metrics well in excess of our targets. Underpinning strong financial results It is our purpose that drives us to protect more people, meeting the needs and exceeding the expectations of our customers. Our digital first and disciplined approach is capitalizing on the favorable trends in the operating environment as we advance our market leading positions. Our formula for creating shareholder value is straightforward.

Speaker 2

Grow our high margin businesses at an accelerated pace, drive greater certainty around our close block and effectively return capital to shareholders. We have made excellent progress on all three of these areas through the 1st 9 months of 2023. Now let me turn it over to Steve for details of the quarter. Steve? Great.

Speaker 3

Thank you, Rick, and good morning, everyone. The Q3 was another very good quarter for the company as we saw the continuation of our strong first half operating performance, particularly across all of our disability product lines. Disability results in the Q3 were highlighted by strong sales and underwriting performance across the board, including benefit ratios of 57.5 percent for Unum U. S. Group Disability, 45.4 percent for Unum U.

Speaker 3

S. Individual Disability and 67.4 percent for Unum U. K, all below our long term expectations. Sales were strong across most areas of the company, specifically with our various disability products performing very well. Consolidated sales grew 1.8% across our core operations, highlighted by 8.5% growth in Unum U.

Speaker 3

S. And 4.7% Growth in Colonial Life. While the 3rd quarter is a relatively small quarter for sales, we are pleased with the growth path that we are on and our positioning for our biggest sales quarter, the 4th quarter. Core operations premium grew at a healthy rate of 0.1% in the Q3 as we continue to see tailwinds from natural growth. Natural growth continued to exceed our historic levels, but fell below the 5% mark that we experienced for the past few quarters.

Speaker 3

Persistency was generally improved from 2Q results and within our expectations. Year to date, core operations earned premium grew 4.9%, just below the top end of our full year outlook of 3% to 5%, which we now expect to exceed. As I review our results by segment, I will describe our adjusted operating income results and benefit ratios excluding the impacts from the annual GAAP reserve assumption updates in the Q3 of 20232022. Starting with Unum US, adjusted operating income increased 27.4 percent to $357,800,000 in the 3rd quarter of 2023 compared to $280,800,000 in the Q3 of 2022. Results finished above prior year primarily due to favorable benefits experienced in long term disability and higher premium income, partially offset by higher operating expenses.

Speaker 3

The group disability line reported another robust quarter with adjusted operating income of 170,100,000 compared to $130,700,000 in the Q3 of 2022, with the increase driven by higher earned premium and a strong benefit ratio of 57.5%. The improvement from 2nd quarter was driven by lower average claim size, coupled with continued strength in both recoveries and incidents. Looking ahead to the Q4, we expect the benefit ratio in the low 60% range. Results for Unum US Group Life and AD and D increased compared to the Q3 of last year with adjusted operating $52,000,000 for the Q3 of 2023 compared to $28,200,000 in the same period a year ago. The benefit ratio decreased to 73.3% compared to 78% in the Q3 of 2022 due to lower COVID related mortality and lower average claim size.

Speaker 3

Adjusted operating income for the Unum US supplemental and voluntary lines in the 3rd quarter was $135,700,000 an increase from $121,900,000 in the Q3 of 2022. The increase was driven predominantly by improved voluntary benefits results. The voluntary benefits loss ratio of 39.1% was favorable to the prior year, primarily due to lower benefits in both the disability and life product lines. The individual disability benefit ratio of 45.4% was unfavorable to the prior year, mainly driven by higher average size of submitted claims, but still favorable to our expectations. Turning to premium trends, Unum US results included strong year over year premium Growth of 6.5 percent supported by a declining rate of natural growth.

Speaker 3

Sales trends for Unum US were also solid with sales increasing 8.5% year over year in the Q3. Persistency for total group of 89.8% remained stable in the 3rd quarter with similar stable results within most of our supplemental and voluntary lines. Now moving to Unum International, the segment continued to show strong trends and its underlying earnings power with adjusted operating income for the Q3 increasing to $36,800,000 from $24,900,000 in the Q3 of 2022. Adjusted operating income for the Unum UK business improved in the 3rd quarter to £28,400,000 compared to £23,300,000 in the Q3 of 2022. The reported benefit ratio for Unum UK decreased to 67.4% in the 3rd quarter compared to 78.7% in the same period a year ago.

Speaker 3

As you may recall, a portion of our policies in the U. K. Have an inflation rider, which are backed by inflation linked gilts. The inflation linked benefits are capped, but the income we receive from linked gilts is not, which does increase earnings levels in periods of very high inflation. This inflation benefit has dissipated from recent highs.

Speaker 3

Without this impact, in the Q3, Unum UK adjusted operating income was in the mid-twenty million pound range, reflecting another quarter of strong underlying claims performance.

Speaker 4

So then looking ahead to

Speaker 3

the Q4, we expect underlying earnings at a similar level with the inflation benefit at or maybe slightly below 3rd quarter levels. International premiums continue to show strong growth. Unum UK generated premium growth of 9.9% on a year over year basis in the Q3, while our Poland operation grew 27.3%. UK sales in the Q3 were £18,200,000 down from Q3 2022 sales of £30,900,000 which did include a higher than normal amount of large case sales. Unum Poland sales in the Q3 were nearly twice the year ago period.

Speaker 3

So then moving to Colonial Life. Adjusted operating income for this segment was $102,900,000 in the 3rd quarter compared to $117,900,000 in the Q3 of 2022. The decrease was driven primarily by higher DAC amortization due to increased lapses. The benefit ratio of 49.1 percent increased from 48.7% in the year ago period, but did remain within our expectations. Colonial premium income of $431,200,000 finished 1.9% higher than the prior year, primarily driven by higher sales, partially offset by lower persistency compared to the year ago period.

Speaker 3

Momentum has been building for Colonial top line growth throughout the year and with year to date premium growth just under 1%, We are positioned to meet our growth outlook for the segment of 1% to 3% for the full year. Sales in the 3rd quarter of $121,300,000 increased 4.7% from the prior year with sales across all product lines. So then in the Closed Block segment, adjusted operating income, excluding adjustments related to the Closed Block individual disability reinsurance transaction was $34,200,000 compared to $42,100,000 in the Q3 of 2022. The decline was driven primarily by higher long term care benefits experience and a lower long term care earnings trajectory post assumption update, which I will describe in more detail in a moment. So quickly wrapping up my commentary on the quarter's financial results, The adjusted operating loss in the corporate segment was $41,500,000 compared to a $49,500,000 loss in the Q3 of 2022, primarily driven by higher net investment income and lower expenses.

Speaker 3

For the 4th Quarter, we expect the segment's operating loss to remain generally consistent with this level. So reflecting on these results, as well as those from the first and second quarter, The 1st 9 months of the year have been very strong and we continue to have confidence in our ability to grow our full year operating earnings per share Towards the upper end of our expected range of 20% to 25% over historically reported results. Now let me dive into the assumption update and provide additional details on updates made to LTC, including the LDTI dynamics that Rick did mention earlier. We completed our annual review assumption in the Q3 with a generally modest impact on financial results. This resulted in a net increase in reserves of $177,200,000 or approximately 139 $300,000 after tax.

Speaker 3

While most product lines saw changes, this year's assumption updates were highlighted by favorable adjustments in our group disability line and for Colonial Life. For group disability, since last year's GAAP reserve review, continued high levels of performance and investment in our operations give us confidence that current recovery trends are sustainable, leading to $121,000,000 favorable adjustment before tax. For Colonial Life, favorable claims experience as well as lapse trends drove reserve releases of $80,700,000 before tax. In addition, with 2 prior updates to our group disability GAAP recovery assumption in both 2021 2022 And the continued favorability we are seeing, we made an update to our statutory reserve recovery assumption, which led to a statutory reserve release of $205,000,000 pretax, an incremental source of capital that further boosts our strong financial position. Moving to LTC, the GAAP assumption updates resulted in an increase in reserves of $368,100,000 before tax, reflecting strengthening of lapse in mortality assumption in the older age population within the active life reserve, which was partially offset by a refresh of our premium rate increase program.

Speaker 3

It is important to note that under current GAAP, Our LTC reserve update reflects locked in interest rate assumptions as of year end 2020. As such, The LTC assumption updates do not reflect changes in interest rate margins since the LVTI adoption date of January 1, 2021. Thus, unlike prior years, changes in interest margins cannot offset changes in liability assumptions for financial reporting purposes. As an example, using a 4.5 percent 30 year treasury yield as our long term expectation for new money in setting reserving levels, It would have nearly offset the entire LTC assumption update impact. Furthermore, consideration of today's long term rates would indicate additional margins.

Speaker 3

While interest margin is no longer reflected in our GAAP reserve analysis, we will still see the benefit of higher earned portfolio yields compared to the locked in discount rates as interest margins in earnings over the life of the block. The assumption updates also impacted both the future lifetime loss ratio expectation or net premium ratio and the buffering effects of periodic experience volatility. The new reserve basis includes an increase of future expected benefits. As a result, the net premium ratio or NPR for the block is now in the low to mid-90s. In addition, we will experience less Quarterly buffering driving increased quarterly volatility.

Speaker 3

These dynamics can be seen in our 3rd quarter results. The quarterly LTC interest adjusted loss ratio was 105.3% compared to the new net Premium ratio in the low to mid-90s. This elevated interest adjusted loss ratio was due to claims incidents remaining at higher level higher than expected levels, but were favorable compared to the Q2. While the overall claims experience in this period was improved from the 2nd quarter, Less of the unfavorable impact was buffered in the Q3. Given the increase in NPR to the low to mid-90s, We expect GAAP earnings in the Closed Block to be in the $30,000,000 to $40,000,000 range per quarter going forward compared to prior expectations of $45,000,000 to $55,000,000 To be clear, this assumption update does not impact our plan for capital deployment or lower our expectations of significant margins between our statutory reserves and best estimate of approximately $3,000,000,000 at year end.

Speaker 3

We remain on track to fully recognize the premium deficiency reserve by year end without contributing additional capital into Fairwind in the 4th quarter as we have benefited from actions taken to derisk the block in today's higher rate environment. And from a subsidiary perspective, First Unum holds a greater proportion of reserves impacted by the underlying assumption updates. As a result, we do expect an increase to our asset adequacy reserve in that entity in the 4th quarter. Therefore, we expect to reallocate $200,000,000 to $300,000,000 of expected capital contributions from Fairwind to First Unum for the full year 2023. Importantly, while this changes with the geography of our planned capital contributions, It does not impact our overall capital deployment plans of contributing $800,000,000 to $900,000,000 to LTC for the full year, followed by no further contributions as we detailed at our outlook meeting in February.

Speaker 3

Moving now to investments, We continue to see a good environment for new money yields and risk management. Purchases made in the quarter were yet again at levels above our earned portfolio yield, which was 4.45 percent for the 1st 9 months of 2023. In addition, our interest rate hedge program for LTC is performing as expected. Since inception of the program last year, we've now entered into nearly $2,600,000,000 of treasury forwards, including hedges entered into since quarter end. Given favorable market conditions, we have expanded the horizon of the hedged cash flows from 5 to 7 years.

Speaker 3

In addition, we took the opportunity to further de risk the balance sheet by selling over 700,000,000 of shorter duration bonds in our LTC portfolio and reinvesting these proceeds in higher credit quality, higher yielding and longer duration bonds that better match our liability profile. While this was capital neutral, it did generate after tax GAAP realized losses of $35,000,000 in the quarter. While these are prudent risk management and economic decisions, the benefits are not reflected in the current GAAP treatment of interest margins. So to round out the investment discussion, miscellaneous investment income increased in the Q3 to $24,000,000 compared to $18,000,000 a year ago as alternative investment income increased. Income from our alternative invested assets was $22,600,000 within our longer term expectation of $20,000,000 to $25,000,000 So I'll wrap up my commentary with an update of our capital position, which remains very strong.

Speaker 3

The weighted average risk based capital ratio for our traditional U. S. Insurance companies is approximately 4 70 percent and holding company liquidity remains robust at $1,200,000,000 Capital metrics again benefited in the 3rd quarter from the strong statutory results with statutory after tax operating income of 530 $2,700,000 which includes the impact from the LTD statutory reserve release described earlier. This brings year to date statutory after tax operating income to $1,100,000,000 which will enhance dividend capacity in 2024. Our strong cash generation model drives our ability to return capital to shareholders.

Speaker 3

And in the Q3, we paid $71,400,000 in common stock dividends and repurchased 1,500,000 shares at a total cost of $74,800,000 an increase to the pace of as our Board recently authorized a new share repurchase program of $500,000,000 beginning on January 1, 2024. As planned, we contributed $200,000,000 of capital in the Fairwind in the 3rd quarter, bringing the full year total to $600,000,000 Our expectation is that this amount is sufficient to fully recognize the premium deficiency reserve in 2023 without additional capital contributions. Given the impact of our LTC best estimate assumption changes on the 1st Unum block as described earlier, We plan to contribute $200,000,000 to $300,000,000 of capital to First Unum. In total, our 2023 capital contributions to support LTC will total $800,000,000 to $900,000,000 consistent with our expectations coming into the year. Full recognition of the premium deficiency Sea Reserve is expected to result in significant excess margin of approximately $3,000,000,000 over our updated best estimate for the entire block and supports our plans of not contributing capital for LTC in the coming years.

Speaker 3

Our focus in 2023 has been completing The accelerated recognition of the PDR as outlined at our February outlook meeting. Considering our position today With a strong year to date earnings, robust capital position and clarity on our premium deficiency reserve balance, We're pleased with our ability to put the PDR funding behind us and to increase free cash flow available for deployment in 2024 and beyond. Now I'll turn the call back to Rick for his closing comments and I look forward to your questions.

Speaker 2

Thank you, Steve. So there's plenty to discuss this quarter, but I would like to reiterate before we get to In total, the strength of the franchise, the strength of the balance sheet and the strength of the capital generation provides tremendous opportunity as we look to the last quarter and into 2024. So the team is here to respond to your questions, so I'll ask Brianna to begin the Q and A session.

Speaker 5

Thank you.

Operator

Our first question comes from Suneet Kamath with Jefferies. Your line is open.

Speaker 6

Thanks. Good morning. Just wanted to start on LTC. Can you just talk a little bit more about what changed in terms of the assumptions and How your new assumptions compare to what you're using on a statutory basis?

Speaker 3

Yes, this is Steve. I can take that question. So as I said in my comments, really the vast majority of the financial impact of those changes, it was related to the strengthening of the assumption for both mortality And last, specifically for the older age population, it also was more focused too on those policies with richer benefits. And so what we've seen over the past few years is that that experience set for those older age Policyholders, we practically doubled the data that we have over the past several years. The other thing that we had to work through obviously was the impact of COVID.

Speaker 3

And as you'll recall, we had a lot of volatility in our experience during the COVID years, Both in claimant mortality as well as in incidence. But what we did see were trends in what we saw in our Active Life Terminations. We wanted to really wait till we got to stability over that period of volatility. And then we also looked at some outside And between really those three dynamics, we thought that this was the right time to go ahead and adjust those assumptions. So Those are really the major kind of benefit assumptions that were changed.

Speaker 3

And then we also updated our rate increase program as part of this assumption and change.

Speaker 6

And then how do those compare to what you have on what you're using under stat?

Speaker 3

Yes. It's kind of hard to compare, but I think a good indicator of that Is our view of the premium deficiency reserve and really the needs of the recognition there really did not change as we went through The GAAP assumption review. Got it. And then

Speaker 6

I guess, as we think about First Unum in that $200,000,000 to $300,000,000 contribution, I I guess I was a little surprised it was going into AAT because you guys have done so much hedging there. So can you just kind of maybe

Speaker 3

Yes. Probably the way to think about it is our first Unimblock tends to be mostly individual policyholders. They are higher richer benefits. And so when we looked at our assumption review and we had to overlay that across the different blocks, it did have a little bit of an outsized impact On those policyholders within First Unum, we do continue to be very pleased with our hedge program within the First Unum block. It provides a really good protection against downside We've seen that play out as we've gone through our asset adequacy review.

Speaker 3

But given these new assumptions, we do think we're going to need to strengthen the asset adequacy reserve Going into year end and so we are going to put a little bit more capital down into that legal entity.

Speaker 6

Okay, got it. Thanks.

Speaker 3

Thanks, Suneet. Thanks, Suneet.

Operator

Our next question comes from Tom Gallagher with Evercore ISI. Your line is open.

Speaker 7

Thanks. A couple more on Long Term Care. Steve, how much was the offset on Increased future rate assumptions that you just referenced?

Speaker 3

Yes. The offset was we made an adjustment to our rate increase assumption of about $900,000,000 And just to kind of put that into context, We've achieved over $4,000,000,000 of rate increase approvals over the years. So we think that's a very reasonable amount. We clearly have great relationships with regulators and we've had quite a bit of success over the years. So feel very confident about our ability to execute on that going forward.

Speaker 7

So you're assuming an incremental $900,000,000 of future rate increases versus your prior? Okay. Got you. And the next question is just the portion of your long term care block That gets recognized immediately versus the higher in terms of higher loss Ratio cohort versus the better part of the block that gets smooth. What does that mix look like?

Speaker 3

Yes. The way to think about it is that You go through the liability assumption review and kind of reset your thinking about the needed economic reserve there. And then you do need to let it go through the mechanics of LVTI. And so what's going to happen there There's going to be a portion of it that really gets buffered away into the reserve amount. There's going to be a portion that you're going to recognize in the current period.

Speaker 3

Now that portion that gets buffered is going to impact your net premium ratio, which is an indicator of your go forward loss ratio. And so If you kind of break that down to the numbers, we had about $900,000,000 net of liability change or some impact of assumption change. We buffered about $500,000,000 of that into the reserve. That resulted in about a 7% increase In the net premium ratio, which that's going to impact our go forward earnings and that's why we've kind of reforecast what the margins are going to look like on LTC. And then about $400,000,000 or the exact number is $368,000,000 fell through to the bottom line and was reported in 3rd quarter I think the other thing that's important about the dynamics here is we implement these GAAP assumption changes as of the beginning of the quarter.

Speaker 3

So it was really effective 7.1. And so that go forward expectation of the loss ratio was really in effect during the Q3. So when you think about what our reported loss ratio was in the Q3, the starting point was really that new net premium ratio, which was in the low to mid-90s.

Speaker 7

Got you. That's really helpful. If I can sneak in one more. Just if rates were to stay where they are now into 2025 at the long end of the curve, How much and I think now you have a $1,600,000,000 PDR, if I'm keeping score correctly. Of the 1,600,000,000 Of the $1,600,000,000 how much would become redundant?

Speaker 7

Would that be all of it or most of it? And is it fair to assume that even if it technically is redundant That you'd probably leave it in Fairwind, considering your ultimate goal of risk transfer. Thanks.

Speaker 8

Yes, Tom,

Speaker 2

it's Rick. Let me address that. When you talked about where interest rates are today and take you back around the PBR and the dynamics around interest rates As we've talked before and it's a 3 year look back rolling average. And so spot rates today are clearly have moved up even more throughout the year. So the money that we've put in there today is predicated on that 3 month or 3 year rolling average.

Speaker 2

As it rolls 2 spot rates, if interest rates stay where they are, A significant amount of those reserves become redundant over time. So it's not going to happen. It's going to happen on that same 3 year trajectory. Those reserves would, in that scenario, turn into capital. We've got that capital down.

Speaker 2

And we think that although we have the ability to move it around To other parts of the entity for other purposes, we would like to keep a lot of it there to make sure that we can live up to our 5 year, no more capital going into our Fairwind entity. And I think that's the clear message there. So although we have the ability Giving Shorty to investors around not needing to put more money behind long term care, we think has shareholder value. So that's our intent going forward.

Speaker 7

That's helpful. Thanks, Rick.

Operator

Our next question comes from Joel Herrwitz with Dowling and Partners. Your line is open.

Speaker 9

Hey, good morning. Another one on LTC. Can you just talk about the opportunities for further portfolio duration extension And any way to quantify the benefit from that and the rate hedges that you put on?

Speaker 3

Yes, this is Steve. Yes. Probably the point that I would make around that is just we're really happy about both the hedge program that we've put in place. We're up to about 2.6 $1,000,000,000 of notional amount on that hedge program. We've already seen the benefit, but it also just protects us from some of those downside scenarios.

Speaker 3

We took the opportunity to reposition part of the LTC portfolio selling out of some short duration bonds and being able to increase both duration credit quality And frankly, the annual earnings coming off of that block. We'll continue to roll that program forward from a hedging As I mentioned before, it's really ladders in based on quarterly cash flows. So we will continue As those hedges mature quarter by quarter, we'll continue to extend that. So we think that will be really good protection in the future. I also mentioned in my script that we've kind of that time horizon for those cash flows from 5 to 7 years and so we took the opportunity to extend.

Speaker 3

As far as scenarios and that sort of thing, we'll have a guidance call coming up here in the next several months to talk about 2024. In our Investor Day last year, we gave some scenarios, which really gave you an idea of what the downside protection is. I think that's the best way to articulate it. And so we'll probably just wait until we refresh that going into next year and give you a little bit more guidance just how much protection we do have against the PDR given the actions that we've taken.

Speaker 2

And Joel, I think you're asking a little bit about the repositioning trade that we did as well. And so the team did a really nice job looking at Cash flows throughout the cycle and thinking about how we put those cash flows in the right space, that's what that trade was as well that we did in the quarter. And so Is there more opportunity to do that? We're feeling pretty good about the cash flow match, not just in general as we're talking about the hedging, but also as we look at specific durations Throughout the curve. And so Martha Leeper, Steve and the team did a really nice job positioning us for that.

Speaker 9

Okay. That's helpful. And then shifting to group disability, can you just provide an update on expectations moving forward? And in terms of pricing for 11, how is it being affected by the continued favorable experience that you're seeing?

Speaker 10

Mike? Yes. Thanks and good morning, Joel. You're right, we continue to feel good about The group disability benefit ratio of 57.5% this quarter continues to benefit I think from a favorable macro environment like Rick Highlighted, paid incidents has been favorable, recoveries both in count and average size continue to be Strong for us and I do think that the actuarial underwriting teams, the renewal delivery over the last couple of years through sales and client management And ultimately, our benefits team is a big contributor to that. And as you said, certainly that favorable experience Will and has begun to flow into renewal conversation as we sit here having worked through the large employer inventory for January 1 Effective and kind of working down into the middle and smaller end of the market, we feel really actually quite good about the persistency levels that we're achieving.

Speaker 10

Like we've talked about, over time, we would expect a gradual increase back towards longer term targets for our group disability loss ratio. But again, the dynamics are such that we would see that happening pretty gradually over the coming 6, 8, 10 quarters and feel like this high 50%, low 60% is a pretty good target here for the short to mid term.

Speaker 9

Okay. Thank you.

Speaker 4

Thanks, Sean. Thanks, Sean.

Operator

Our next question comes from Ryan Krueger with KBW. Your line is open.

Speaker 11

Hey, good morning. Unfortunately, one more question on long term care. I guess, in terms of the capital contribution still being the same for the year, But doing the $200,000,000 to $300,000,000 in 1st year, what was the what was caused or what drove the offset In terms of lower capital contributions to Periwen, is that just the grade in of higher rates or is there something else there?

Speaker 3

Yes. Basically, Ryan, it is the grading of higher rates. That's the main thing driving. And it's really the combination of that, But also the hedging program and some of the de risking that we did in the portfolio that gives us downside protection in the future, but it also does give us a little bit of benefit In the current calculation, so I'd say it's a combination of those two things, the higher rates of bleeding in to the new money assumption we're able to use and also the de risking.

Speaker 11

Okay. Makes sense. Thanks. And then, in terms of the 4Q sales Pipeline, can you give any color on early read on how that's shaping up so far?

Speaker 10

Good morning, Ryan. It's Mike. Thanks for the question. And I'd say we talked a little bit about for the Unum U. S.

Speaker 10

Group business, The January 1 renewal is coming in at or favorable to expectations, which is really good. I'd say the same thing about the new sales Pipeline, Rick had a few things in his opening comments, but the investments that we have continued to make over the last couple of years, particularly around Our leave management offering and our HR Connect into leading HRIS platforms are really paying off. We're seeing Really good sales growth, very high attachment rates of our group insurance premium to those services. I mentioned last quarter, it is a good time to be in group disability and I think that's both because of risk dynamics, but also Lead management has presented a real opportunity for us to differentiate ourselves in the market. It's a top concern for HR teams And having a really strong digital solution backed by great people, has allowed us to kind of move off the spreadsheet in a lot of instances and How's this feeling?

Speaker 10

Good about the January 1 implementations that are already beginning to occur. And maybe we'll just take a minute And check-in on January 1st and sales growth in our voluntary and international businesses.

Speaker 12

Sure, Joe. This is Tim. Thanks, Mike. So we'll start with the Unum brand. Mike mentioned attachment rates for group insurance to our HRC and leave Solutions and we see opportunity to continue to drive BB adoption there as well.

Speaker 12

We're seeing good sales growth And the Unum VP business in 2023 through the Q3, and we expect to continue to build momentum in that As we look to continue to benefit from those solutions Mike mentioned around HRC at leave and also just cross selling into our Existing group business on the Unibrand. For the Colonial Life brand, this year's not worked out as we had expected at Investor Day from a sales But we do see a number of very encouraging trends. One is we see building momentum. Each quarter of 2023 has seen progressive sales Growth over the prior year quarter. In addition, there are a lot of encouraging signs in our business.

Speaker 12

Public Sector business is the most profitable business for Colonial Life And that's grown 13% through the 1st 3 quarters. Certainly new agents are the future pipeline for Cloning Life sales. New agents are up 28% through the Q3. Sales from those new agents up 15%. Through the Q3, we have 12% more 10.99 sales managers than we did a year ago.

Speaker 12

And in addition, we're really excited about the progress Seeing with our Gather platform, which is a Memphis administration enrollment platform primarily for small employers, Well ahead of expectations there. We're seeing very good traction with Colonial Life selling Unum Group Insurance through our cross brand sales initiative And that's also helping with cloning live sales as well. And the sales from our new districts are up very significantly this year. So Those things are encouraging. We're still seeing a good bit of headwind in the large case market on the Colonial Life brand and we have plans to begin addressing that in 2024.

Speaker 10

Mark, can you

Speaker 8

want to get a sense for international?

Speaker 13

Yes. I mean, we're feeling positive about the look forward based on the strong So I think sales in the international business this year up about 24%. The UK accounts were at 15% of that. The trends are looking positive. We've had some market data that shows our share of new business This has been rising slightly and we've been the largest writer of business in the first half of the year.

Speaker 13

So I think we feel good about the momentum going into 2024, the tailwinds still look favorable. So yes, we're feeling pretty confident at the moment of the growth.

Speaker 10

So there you have it. I'd say in general, pretty much across products and segments, we've got not only good results year to date, but feeling pretty good actually about

Operator

Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Speaker 14

Hey, apologies. I'm going to go back to Long Term Care for 1 and then I have 1 on the core business. First on Long Term Care, I was just interested To what extent these changes had to do with individual versus group? And just with group being less seasoned, interested in like How the actual expected trends are coming in? Yes.

Speaker 14

I mean that's the gist of it. I was just interested in sort of geography and seasoning in group.

Speaker 3

Yes. Probably Just a couple of foundational things. First, for a lot of kind of our claims assumptions and as we think about that, we don't necessarily think about individual and group Separately, they do have different kind of richness of benefits, which will just cause differences in severity. But by and large, we look at those claims consistently. Probably by and large the same with mortality.

Speaker 3

LAPS assumptions are going to be a little bit different. But what I'd say is this reserve assumption was pretty focused on older ages. And so I would say our data set would be predominantly individual just because of the relative age of the block of business. And I mentioned earlier, We're talking about very old age, 90 plus kind of in that range. Our data set has doubled in the last 5 years In those cells and that's going to be predominantly individual policyholders that reach that age.

Speaker 14

Got it. But I guess some of those changes you made, your comments sort of suggested that you made those adjustments To both individual and group because the assumptions are more or less the same?

Speaker 3

That's right. Yes. As appropriate, we'd make them across the whole block.

Speaker 14

Got it. All right. That's helpful. And then in the core business, can you talk about net investment income, the benefits you're seeing from higher rates, maybe reminding us of The trajectory that that can have and also interested if you're doing anything around reallocation that could accelerate some of the benefits?

Speaker 3

Yes. I would say generally speaking, we've had a pretty consistent asset allocation over time and we've talked about this a little bit in the past. Over the 3 or 4 years, we probably reallocated a little bit of our new money away from high yield investments more into your investment grade The bonds behind LTC put it behind alternative asset portfolio a bit more than maybe historically speaking. We feel good about our trends. I mean our portfolio Rate basically has increased over the last 2 or 3 quarters as we're able to invest at rates higher than what's in the current portfolio.

Speaker 3

The other thing I guess that I would think about is when we think about products like long term disability, We are able to look at the types of rates that we're getting in the market and that's going to have an influence on how we think about pricing. Under LDTI, the accounting regime is a little bit different than what we maybe did in the past where we looked at our portfolio and Kind of created this interest margin that we wanted to be consistent between discount rates and what we were earning on the portfolio. That's changed A little bit with LDTI where it's a little bit more prescribed what the discount rate is. But I'd say overall, we still feel really good about the margins that we're earning there. Obviously, feel really good about the yields.

Speaker 3

We're putting money to work behind the LTC portfolio. And so we're pretty optimistic going forward.

Speaker 14

Got it. Thank you.

Speaker 3

Thanks, Alex.

Operator

Our next question comes from Joshua Shanker with Bank of America. Your line is

Speaker 15

open. Yes. At the risk of being repetitive, my question is about long term care. Apologies. Look, we're still far, far away from the large, claiming period for the book.

Speaker 15

Matt helped us a little bit, but I'd love more information. As we go into the future, we're going to have more information. And the amount you Now is much less than what you're going to know in the future. Is there a reason to believe, especially given post LDTI, That you would be making more adjustments could go either direction to the lapsed assumptions and mortality in the future And the volatility around accurately marking that book will get greater as you get better information about claim habits?

Speaker 3

Yes. I think I'd go back to some of the comments I made before. We really did not make Significant adjustments around kind of our younger age population, whether it be claim counts, incidents, mortality. We feel pretty good about those assumptions. We have very robust data sets.

Speaker 3

This last change was really around where there was a little bit of Yes, certainly just because of the level of data that we had in the population. And it will age into having better data in those cells. And We just got to the point this year as we're going through our experience study where we thought we had credible data to say that we needed to make the adjustment. It was validated by other industry information that I'd say had more robust information in those older age populations. And so the thing that I'd probably leave it with is your point about positive or negative adjustments going forward.

Speaker 3

LDTI does require you to look at really every assumption individually. And when you think it's Appropriate adjust those assumptions individually. The former construct was more of looking at overall reserve adequacy and having to only make adjustments When you felt like your aggregate reserve was no longer appropriate. And you really saw that in Colonial This quarter as we went through and we looked at those assumptions, we did see some assumptions where our experience was running favorable to the assumption built in our Active life reserve. So we made those adjustments for the assumption, even though in aggregate that we would view that reserve as being more than sufficient.

Speaker 3

We actually chose to go ahead and release reserves based on the current accounting guidance. So yes, I would say it could go both ways, but I would also say We've compiled a lot more data than we had several years ago and we'll just continue to monitor that as we go forward.

Speaker 15

And how many years into the future would we need to go before we can make some comments with confidence about the role COVID mortality might have on the LTC book?

Speaker 3

Yes, it's a good question. I think As we think about claimant mortality, we have pretty good confidence that we've probably kind of run our course as far as How COVID might have impacted that because we're seeing claimant mortality back to pretty much expected levels. I would say The adjustments that we made this quarter around policyholder mortality and lapses in the older age It wasn't necessarily based on any volatility that we maybe saw during COVID. It was just building a better data set, a more robust data set And then being able to with confidence make an adjustment there. But as you know, I mean this is a very, very long tailed business.

Speaker 3

And so we'll just have to continue To monitor experiences as it comes in over time.

Speaker 15

Thank you for the answers.

Speaker 2

Yes. Thanks, Jeff.

Operator

Our next question comes from Mike Ward with Citigroup. Your line is open.

Speaker 8

Hey, guys. Thanks for squeezing me in. I was just kind of wondering if you could discuss the landscape for risk transfer And I have to imagine that actions between the PDR first unit contributions and then the credit sort of repositioning, I don't know, at the margin, does that change the profile at all? If any update there?

Speaker 2

Yes, happy When you think about risk transfer options, we talked about the market has been consistent. So there's no news there. But I think when you talked about the dynamics, So it really is about how a potential buyer, a reinsurer might look at the different dynamics we see. So Many of the things you talked about, many of the changes are going to be more from our side of the equation. When they look at it from the other side, I think that's going to be very consistent.

Speaker 2

So Many things we talked about in terms of funding levels, PDR, that would just change how we recognize such a transaction. It doesn't change The ability of somebody else to come in or the ability for us to be able to do the transaction. So I think that world is pretty consistent as it would have been prior to the Q3.

Operator

Our next question comes from Wilma Burdiss with Raymond James. Your line is open.

Speaker 5

Hey, good morning. Could you talk about the lapse rate assumption on the LTC block? Should we assume that it's pretty close to 0 on the older block with richer benefits?

Speaker 3

Yes. We haven't disclosed that and probably won't. We already had a fairly low lapse rate On those, so it's a reasonable assumption to assume we're getting pretty close to 0.

Speaker 5

Okay. Just trying to see if there's any potential for future lapse rate assumption decreases there. And then, should we maybe this is a very obvious question, but should we assume the $500,000,000 of share repurchase Authorization to represent a run rate in 2024 and beyond? And if so Yes, I think that

Speaker 4

Go ahead. Yes.

Speaker 2

Well, Just to give you a little bit of history. So last year we came into the year at a run rate of $200,000,000 We upped it to $300,000,000 kind of halfway through the year. And you can look at this as we're upping that run rate again. So the authorization goes in 1onetwenty 4, but I think it's a reasonable assumption that we'll complete that throughout the course of the year.

Speaker 5

Okay. And just if I could get one follow-up on that, just could you talk about what gives you the confidence to move that up to 500? I think it was around 400 Kind of pre pandemic, pre PDR, so pretty meaningful bump up there.

Speaker 2

Yes. I think it really goes back to Full capital generation model that we have and a big move that we talked about this quarter is the PDR being fully funded. So there's not capital that's going to be going behind Long term care, when you think of our statutory generation, also the robust positions that we have both RBC and cash levels, we feel very good about moving that up to 500. And we think even with that, we're going to still have good flexibility to execute on our strategy. So a lot of confidence about moving that up And also the other opportunities that we have out there to deploy that capital.

Speaker 5

Okay. Thank you.

Operator

Our next question comes from Wes Carmichael with Wells Fargo. Your line is open.

Speaker 16

Hey, good morning. I just had one follow-up on Closed Block. And I guess just curious, I think with the assumption review, you reset the net premium ratio to the low mid-90s, But the LTC loss ratio was 105 around there in the quarter. So just curious if you expect the same level of earnings roughly in the 4th quarter, should we Expect that loss ratio to be in that near 105% range or I just curious if that comes down towards the NPR?

Speaker 3

Yes. This is Steve. I can take that. The guidance that I gave as far as setting different expectations for go forward earnings In Long Term Care, that would be more resetting the loss ratio from the previously expected 85 up To that level where the new net premium ratio is in the low to mid-90s, what I would say is we did continue to See elevated claims incidents in Q3 and so we need to see how that plays out in the Q4. But short of those types of variations, we would expect That low to mid-90s to be our loss ratio going forward and the guidance that I gave around earnings would have been based on that in long term care For the total closed block.

Speaker 3

Got it. Thanks, Steve.

Speaker 5

Yes. Our

Operator

next question comes from Jimmy Bhullar with JPMorgan. Your line is open.

Speaker 4

I had a couple of questions along the lines of what's already been discussed on the call. But on Long Term Care, what were the specific assumptions that you changed that led to the The reserve increase and I'm assuming there's some puts and takes, but what were the main ones?

Speaker 3

Yes, I would say, just kind of reiterate the comments that I've made. It was very focused on lapse and mortality assumptions for our active life policyholders, so those policyholders that are still in force and not on claim. It was very focused on older age policyholders where we've built a lot of more data over the last 3, 4 to 5 years. And then it was also focused on those with richer benefits. So those that would have policyholder benefits that were A lot of lifetime benefits or higher inflation, so just richer benefits within the policies.

Speaker 3

So that would be one major And then as I mentioned, the other would be we did modify then our rate increase program assumption and the value that we do think we're going to get From that because we're basically going to incorporate these other liability assumption changes into how we think about actuarially justified rate increases with the regulators. So those would be the 2 big areas.

Speaker 4

And on lapse assumptions and some of the other key assumptions, how are those On a statutory basis versus where you've gone on GAAP? Because I realize your overall reserves in stat are higher, but are those assumptions more conservative as well, the ones you changed

Speaker 3

Yes. So I think the key thing there is for the premium deficiency reserve for the Fairwind block, This change to assumptions did not change our view of the level of reserves statutory reserves needed related to the premium deficiency reserve. For First Unum, it did change our

Speaker 2

view a little bit

Speaker 3

and that's why we're going to need to strengthen our asset adequacy reserve and why we are going to put a little bit more money down in the first unit entity. So I think that's the way to think about it.

Speaker 4

And would that have any implications on a go forward basis as well in terms of Earnings generation or cash flow generation from the block or lack thereof?

Speaker 3

No, because really these two blocks are ones that have not been cash generating. Historically, we've had to contribute capital To support them and as we've stated, we believe coming out of 2023, we're not going to have to do that over the next 5 years. So I would say just from a capital needs position, nothing has changed in our view based on these assumption changes.

Speaker 4

Yes. What I meant was this is sort of a one time injection that you're viewing or at least in the next few years as opposed to ongoing Yes,

Speaker 3

just think about it as a one time injection.

Speaker 4

Okay. And then just lastly on disability, your margins have been Very good. Everybody else's have been good as well. Why isn't that resulting in more of a reduction in pricing as companies are doing their renewals? And Ignite is not all the entire block doesn't get repriced every year, but the stuff that is getting repriced, is it being repriced a lot lower or not really?

Speaker 10

That's Mike. I'll take it, Tim. Yes, I would say in general, what you're seeing is that good experience coming through. And like you said, it's coming through on the portion Of the book that is being renewed and for most of that book that's About a third every year that it's coming through. I'd also say one of the things that mutes it a little bit as well Jimmy is you're typically using 2 to 3 years of experience.

Speaker 10

So what we've encountered, for instance, here in the last four quarters would just be part of what goes into that Renewal and it would extend back a year or 2. And so that is going to slow a little bit of the experience coming True as well. In general, it is a good time to be in group benefits and group disability in particular. To the extent You know that a client is up for renewal. We're going to pass along good experience.

Speaker 10

We still will have sales. We're frankly, we're seeking rate increases And the balance of the 2, we think puts that group disability loss ratio kind of in that low 60s as we look forward here in the short to midterm.

Speaker 4

All right. Thank you.

Operator

Our final question comes from Maxwell Fritchard with Truist Securities. Your line is

Speaker 2

open. Good morning. I'm calling in today for Mark Hughes. So you mentioned the pressure in large case sales at Colonial Life. Can you expand on that and maybe the steps that you pointed to that you plan to take in 2024?

Speaker 12

Yes, Maxwell, thanks. This is Tim Arnold. Over the past couple of years, we've seen some pressure in large case and we've been pretty consistent in saying that Colonial Line, we're going to be opportunistic in that segment. 75% of our customers have fewer than 100 employees and we feel really good about our value We've seen nice growth this year in the $509.99 segment. It's that $1,000 plus segment where we're feeling the most pressure.

Speaker 12

There are a couple of capabilities that we're developing in the second half of twenty twenty three and early twenty twenty four that we think will position us more effectively for sales in twenty twenty four and twenty twenty five.

Operator

This concludes our Q and A session. I will now turn the call back to Rick McKenney for any closing remarks.

Speaker 2

Thank you, Brianna. I appreciate everybody staying over a few extra minutes. There's a few things to get through this quarter, but I'd just reiterate that as we wrap up this year and head into 2024, Lots of confidence across the company in terms of what we're going to be able to execute on. We're here for follow-up questions. I'd also say we'll be out at a couple of And hope to see you around through the rest of this year and early into 2024.

Speaker 2

And I think that concludes our call today. Thanks for joining.

Operator

Thank you, everyone. This concludes today's conference. You may now disconnect.

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Earnings Conference Call
Unum Group Q3 2023
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