Steven Andrew Zabel
Executive Vice President, Interim Principal Accounting Officer & Chief Financial Officer at Unum Group
Great. Thank you, Rick, and good morning, everyone. As Rick outlined for you, the second quarter was an exceptionally good one for the company, as we benefited from both a significant decline in the COVID-related impacts on our business this quarter and strong operating performance in many parts of our operation. As I cover our second quarter results, I will primarily focus on an analysis of our second quarter results compared to the first quarter of 2022, allowing me to describe how our business lines have been progressing through the pandemic. For items such as premium growth and sales growth, I will tend to focus more on the over year comparisons. To start, I'd like to provide some broader context on the quarter and frame up for you the primary drivers of the strong performance we saw this quarter. First, as you are aware, there was a significant decline in COVID-related mortality in the U.S. in the second quarter relative to the first quarter declining to an estimated 35,000 national deaths this quarter according to Johns Hopkins compared to approximately 155,000 deaths in the first quarter. This absolute decline, coupled with the continued shift in the age demographics of the mortality away from working-age people to the more elderly population, helped drive a significant improvement in our Unum US Group Life results. which are policies that primarily cover employees in their working years. The decline in mortality also produced a more normal result for long-term care block as benefits experience more closely aligned with pre-pandemic levels of experience, especially for claimant mortality. Second, we saw exceptionally favorable performance in our Unum US group disability line with a strong acceleration in premium growth and historically low benefit ratio. I'll dig into those details in just a moment, but the benefit ratio for the group disability line was favorable for both the short-term disability and long-term disability lines, leading to overall excellent performance for this business line. Third, we continue to see very favorable performance for our alternative investment portfolio. Our alternatives portfolio generated returns of approximately $54 million, which are higher than our expected average quarterly return exceeding both the first quarter income of $32 million and the year ago second quarter of $52 million.
Again, I'll dig into the drivers of the results in more detail in a moment. And one final trend to highlight is the favorable operating performance we experienced in our Colonial Life and supplemental and voluntary lines of business. These lines saw stable margins through the pandemic and continue to produce good top line growth very strong earnings contribution and excellent adjusted operating returns on equity exceeding 18%. With that high-level setting, I'll begin my review of our operating performance, starting with the Unum US segment. Adjusted operating income increased sharply to $295.4 million in the second quarter of 2022 compared to $171.6 million in the first quarter primarily driven by strong sequential quarter improvement in the group disability and group life and AD&D lines as well as continued strong levels of operating income from the supplemental and lines. Within the Unum US segment, the group disability line reported an excellent quarter with adjusted operating income increasing to $107.5 million in the second quarter of 2022 compared to $62.6 million in the first quarter. The biggest driver of the earnings improvement was favorable benefits experience, which produced further improvement in the benefit ratio in the second quarter to 66.4% from 73.8% in the first quarter. This improvement was driven in large part by strong performance in the long-term disability line as claim recoveries and new claim incidents were both favorable. Benefits experienced in the short-term disability line was also favorable in the second quarter as compared to our experience in the first quarter. The benefit ratio was also helped by an increase of 25 basis points in the discount rate for new LTD claim incurrals, a reflection of the significant increase we are seeing in new money yields. Now looking forward, we expect the group disability benefit ratio to average in the low to mid-70% range for the second half of 2022, though will likely remain volatile given the environment we are in. Results for Unum US Group Life and AD&D also showed strong improvement with adjusted operating income of $67.3 million for the second quarter of 2022 and compared to an adjusted operating loss of $9.4 million in the first quarter. This quarter-to-quarter improvement was also primarily the result of an improvement in benefits experience mostly driven by the significant decline in national COVID-related mortality to an estimated 35,000 in the second quarter from 155,000 in the first quarter. Additionally, the age demographics for mortality continue to shift away from the working-age population that was more significantly impacted in the second half of 2021 to the more elderly population. In the second quarter, 16% of the deaths were in the working-age population compared to 24% in the first quarter and 35% in the fourth quarter last year. For our group life block, we estimate that COVID-related mortality claims declined from an estimated 1,400 claims in the first quarter to approximately 200 claims in the second quarter.
In addition, we also saw a lower average benefit size of just over $40,000 per claim this quarter compared to slightly less than $55,000 in the first quarter as more of the impact we saw was in the retiree population. We also saw favorable prior period one-off of IBNR, which reflects the faster than predicted improvement in our COVID claims experience. Finally, non-COVID-related mortality improved in the second quarter relative to the first quarter and the AD&D line perform more favorably as well, adding to the strong improvement this quarter. Now looking ahead, assuming national fiber-related mortality continues at its current levels and we see some moderation in the favorable volatility from non-COVID mortality in the AD&D line, we would expect the benefit ratio for this line to run in the low to mid-70% area for the second half of 2022. Moving on. Adjusted operating income in the Unum US supplemental and voluntary lines continue to be very strong in the second quarter at $120.6 million compared to $118.4 million in the first quarter. For the first half of 2022, these business lines generated an adjusted operating return on equity of over 18%. So looking at the three primary business lines, First, the individual disability recently issued block of business continued to produce excellent results with the benefit ratio slightly lower at 41.3% in the second quarter compared to 42.5% in the first quarter. Likewise, the voluntary benefits line again reported a strong level of income with the benefit ratio stable at 40.8% for the second quarter compared to 40.4% in the first quarter, primarily reflecting continued strong performance in the life product line. And then finally, benefits experienced in the dental and vision line was generally consistent in the second quarter relative to the first quarter with a benefit ratio of 72.9% compared to 73.4%. Again, the supplemental and voluntary lines continue to perform very well and are generating strong levels of operating income for the company which we do anticipate to moderate slightly in the second half of the year. Looking out premium trends and drivers, we are very pleased to see momentum for Unum US accelerates further with growth in premium income of 3.3% in the second quarter on a year-over-year basis compared to the 1.3% increase we saw in the first quarter. Growth was especially strong in the group disability line with year-over-year growth of 5.1% in the second quarter compared to growth of 1.9% in the first quarter. Sales growth from Unum US was very encouraging with growth of 25.6% year-over-year in the second quarter and 16.2% for the first half of 2022. Sales growth trends in the second quarter were broad-based with strong results in the employee benefits lines, individual disability and voluntary benefits, and also by market size with favorable results in both the core and large case markets.
Overall, we remain pleased with persistency trends this quarter, which showed some variation by line of business, but for our total group block was slightly higher at 89.9% for the first half of 2022. The contribution from natural growth continues to accelerate for us and was approximately 5% year-over-year as we benefit from strong employment levels in the U.S. as well as higher wage levels. So taken together with all these factors combined, Unum US premium income for the second quarter of 2022 has recovered to pre-pandemic levels and is now actually 3.3% higher than it was in the second quarter of 2020. And moving to the Unum International segment, adjusted operating income for the second quarter declined slightly to $24.9 million compared to $27.2 million in the first quarter. The weaker dollar to pound exchange rate was the primary driver of the decline. Adjusted operating income for the Unum UK's business was steady in the second quarter at GBP19.3 million compared to GBP19.2 million in the first quarter. The reported benefit ratio for Unum UK was 89.7% in the second quarter, which compares to 80.7% in the first quarter. The high levels of inflation in the U.K. during the second quarter did distort the reported benefit ratio, but adjusting for this impact, the underlying benefits experienced in the quarter was somewhat mixed. The benefits experienced in the group disability line was impacted by unfavorable mortality in the claimant block and experience was unfavorable in the critical illness line. Experience in the group life business was also unfavorable in the second quarter compared to the first quarter. For Unum Poland, adjusted operating income was slightly lower, though overall results remain consistent with our expectations for this business. Premium income for our International business segment declined on a year-over-year basis in dollars, but continued to show strong growth in local currency. Unum UK generated premium growth of 8.6% year-over-year basis in the second quarter, and our Poland operations produced growth of 15.4%. Both businesses continue to generate strong year-over-year sales growth in the second quarter with Unum UK up 20.3% and Unum Poland up 19.8% in local currency, and persistency remains steady. Next, results for Colonial Life this quarter were among the best on record with adjusted operating income of $101.1 million compared to $90.1 million in the first quarter. We continue to see favorable experience in the [A&H] product line, namely the cancer and critical illness products as well as improved experience in the lifeline, which together produced an improvement in the benefits ratio to 47.6% in the second quarter compared to 49.3% in the first quarter. We anticipate the benefit ratio will trend in the 48% to 50% range for the remainder of 2022. We are pleased to see a continuation in the improving trend in premium growth for Colonial Life, which increased 1.9% on a year-over-year basis compared to 1% year-over-year increase recognized in the first quarter. Driving this improving trend is the rebound we have seen in new sales over the past several quarters as well as generally stable to higher persistency.
For the second quarter, sales for Colonial Life increased 6.4% compared to the year ago second quarter and have increased 10.4% for the first half of the year. Persistency for Colonial Life was 78.6% for the first half compared to 78.3% for the first half of 2021. As we have indicated previously, it will take a couple of years to return to pre-pandemic levels of premium growth in the Colonial Life segment. However, we do feel very good with the progress we are making to build back premium income to pre-pandemic levels for this business, which this quarter are only 2.5% below the second quarter of 2020. In the Closed Block segment, adjusted operating income, excluding the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction was $79.3 million in the second quarter compared to $94.1 million in the first quarter. This decline largely reflects the more normal benefits experience we saw in the long-term care block as the effect of higher claim of mortality was diminished. In with broader COVID trends the adjusted operating income The adjusted operating loss ratio for LTC was 85.9% in the second quarter compared to 70.2% in the first quarter as there was no excess claimant mortality this quarter after running about 10% higher than our seasonally adjusted expectations in the first quarter. This level of performance for LTC is consistent with Our long-term expectations. For the Closed Block individual disability line, the interest adjusted loss ratio increased slightly to 79.5% in the second quarter compared to 78.7% in the first quarter, but remain within our long-term expectations. Miscellaneous investment income in -- the Closed Block increased in the second quarter compared to the first quarter by approximately $17 million with higher returns on the alternative investment portfolio, more than offsetting a reduction in bond call premiums. So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $36.9 million for the second quarter compared to $40.4 million in the first quarter with higher net investment income and more favorable operating expenses. Going forward, we anticipate quarterly losses in this segment to be more consistent with our first quarter results. Moving now to investments and net investment income. We continue to see a much better environment for new money yields given the rise in interest rates and the widening in corporate bond spreads so far this year. The new money yield for the second quarter was approximately 4.8% compared to 3.2% in the year ago quarter. While there are many factors that impact these new money yields for our various product portfolios, we're starting to see portfolio yields for most of our product lines begin to stabilize after many years of decline as new money yields are currently exceeding the portfolio yields. Miscellaneous investment income increased in the second quarter to $57 million compared to $41 million in the first quarter.
We continue to see strong above-average returns from our alternative investments portfolio, which produced returns of $54 million in the second quarter and $32 million in the first quarter. It is worth highlighting that second quarter returns benefited from about $17 million. From year end 2021 statements due to a lag in reporting final audited financial statements from those partnerships. Looking at this quarter's performance, returns from the real asset category performed very well in the second quarter, as did our credit funds with floating rate investments, benefiting from rising rates this quarter. The portion of our miscellaneous investment income from traditional bond calls did decline in the quarter relative to the first quarter and, thus far in 2022, is running well below the unusually high volume of bond calls we experienced in 2021. This is consistent with our expectations and while it does pressure net investment income in the short run, maintaining those higher-yielding securities for longer periods of time is beneficial to our portfolio yields. Our current run rate expectation for quarterly income from alternatives is in the $20 million to $25 million range. And our current estimate is that the third and the fourth quarter returns will be slightly below that expected average run rate. Moving now to capital. The financial strength of the company continues to build and remains in excellent shape, giving us significant financial flexibility. The weighted average risk-based capital ratio for our traditional U.S. insurance companies improved to approximately 415% and holding company liquidity was $1.2 billion at the end of the second quarter. Both of these metrics are well above our targeted levels. In addition, leverage trended lower and ended the quarter at 24.7%. These strong capital metrics are driven by the strong improvement we are seeing in our statutory earnings results thus far this year. Statutory after-tax operating income was $281.3 million for the second quarter, a sharp increase from the second quarter of 2021 of $177.5 million. For the first half of 2022, our statutory earnings totaled $481.8 million and have exceeded first half 2021 by $168 million. Looking at capital deployment in the second quarter, we repurchased $45 million of our shares this quarter and $95 million for the first half of the year. And we do continue to anticipate repurchasing approximately $200 million for the full year. Capital contributions in the Fairwind subsidiary were $135 million in the second quarter and for the first half of 2022 now totaled $350 million. With favorable performance in the LTC block and the rise in interest rates this quarter, we are trending favorably within the range of full year capital contributions to Fairwind of $550 million to $650 million that we guided to at our investor meeting. One final comment to make regarding capital is to highlight the announcement that we made yesterday afternoon that we have issued a redemption notice for the $350 million notes due to mature in 2024. We intend to fund that redemption with the proceeds of a new 5-year bank term loan facility, which we also signed yesterday afternoon. The pricing on the loan facility is very attractive relative to current market spreads, and we are able to effectively extend the maturity by three years.
I'll then wrap up with a comment on our outlook for the year. As a reminder, at our outlook meeting in February, we initially set our expectation for growth in after-tax adjusted operating income per share in a range of 4% to 7% for 2022. We raised our outlook to an expectation for growth in the range of 15% to 20% following our first quarter earnings report. With our strong performance in the second quarter and our improved outlook for the second half of 2022 relative to our original expectations, we are again increasing our outlook for growth in 2022 to a range of 40% to 45% off of our adjusted after-tax operating income per share in 2021 of $4.35. At our investor meeting in February, we also provided a longer-term outlook for after-tax adjusted operating income per share to increase within a range of 45% to 55% in 2024, off of our 2021 earnings per share of $4.35. Since we will be moving to the new LDTI accounting basis, beginning with the first quarter of 2023, we will not be updating this 3-year view under the current GAAP reporting standards. However, we believe that upside to our original growth expectations has developed, given our strong performance so far in 2022, including higher premium growth and faster improvement in benefits experienced in many of our business lines as well as the benefits to our business from higher interest rates, rising wages and strong employment conditions. We intend to provide 2021 and 2022 recasted results on the new LDTI basis in the first quarter of 2023 and transition our outlook expectations to the new accounting basis also in the first quarter. Now I'll turn the call back to Rick for his closing comments and look forward to your questions.