Unum Group Q2 2023 Earnings Call Transcript

Presentation

[Operator]

Thank you for standing by. My name is Bailey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Unum Group Second Quarter 2023 Earnings Results and Conference Call. [Operator Instructions]

I would now like to turn the call over to Senior Vice President of Investor Relations, Matt Royal. You may begin.

[Matt Royal, Senior Vice President Investor Relations at Unum Group]

Great. Thank you, Bailey. Good morning, and welcome to the Second Quarter 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 to differ 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-K for the fiscal year ended December 31, 2022. Our SEC filings can be found in the Investors section of our website at www.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 can be found in our statistical supplement on our website in the Investors section.

Unless otherwise noted, all comparisons to historical results are based on recast financials for the long-duration targeted improvement accounting pronouncement, which can be found on the Investors section of our website. Further, all references to Unum International sales and premium results are presented on a constant currency basis unless otherwise noted. Yesterday afternoon, Unum reported second quarter 2023 net income of $392.9 million or $1.98 per diluted common share, an increase from $367.3 million or $1.81 per diluted common share in the second quarter of 2022. Net income for the second quarter of 2023 included the after-tax amortization of the cost of reinsurance of $8.7 million or $0.04 per diluted common share, the after-tax impact of noncontemporaneous reinsurance of $7.9 million or $0.04 per diluted common share and a net after-tax investment gain on the company's investment portfolio of approximately $700,000 or a de minimis amount per diluted common share.

Net income in the second quarter of 2022 included the after-tax amortization of the cost of reinsurance of $10.5 million or $0.05 per diluted common share, the after-tax impact of noncontemporaneous reinsurance of $7.9 million or $0.04 per diluted common share and a net after-tax investment loss on the company's investment portfolio of $3.1 million or $0.02 per diluted common share. Excluding these items, after-tax adjusted operating income in the second quarter of 2023 was $408.8 million or $2.06 per diluted common share, an increase from $388.8 million or $1.92 per diluted common share in the year-ago quarter. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; Chief Operating Officer, Mike Simonds; as well as Mark Till, who heads our Unum International business; and Tim Arnold, who heads our Colonial Life and Voluntary Benefit lines.

Rick, I'll now turn to you for your opening commentary.

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Great. Thank you, Matt. It's good to be with you this morning, and we appreciate you all joining us. Our second quarter results are headlined by a record level of quarterly operating earnings. And underlying these results are also some very strong trends of a growing top line, historic levels of profitability and a continuing favorable macroeconomic environment for our business. It is evident that the employers we work with and families we protect are increasingly realizing the value of our products and services. This quarter, we delivered nearly 20% sales growth across our core operations and earned premium growth that exceeded 4%. This ongoing growth trajectory is made possible by the investments and advancements we continue to make. Differentiating ourselves through digital capabilities is solidifying deep connections with both existing and new employers and their employees who value a high-quality experience and lasting relationships. Our sales results for the quarter illustrate that this approach continues to resonate with customers. Growth was strong in our group lines across the board. Unum International saw sales growth of over 70% as compared to last year, trending up from 47% growth last quarter. Unum U.S. saw a second straight quarter of at least 20% year-over-year increases. Persistency also remained within our expectations across most lines, which keeps our premiums on a solid growth path.

Turning to Colonial Life. The pace of growth accelerated from the first quarter. Premiums grew just under 1% in the second quarter, on track to meet our 1% to 3% expectation for the full year. Sales growth also picked up slightly and was 3.2% for the quarter. These are steady improvements off of a good year-ago quarter, and we're encouraged by some of the early successes in key initiatives at Colonial Life that we believe will drive growth as we move through 2023 and beyond. Overall, we're pleased with the growing top line momentum, especially when considering our healthy margins and ability to further grow our level of earnings. Our franchise is in a period where earnings power is stronger than ever, not only because our customers are increasingly valuing our offerings, but also because of our disciplined approach to our customers, which includes pricing and operational excellence and taking care of employees at time of need. This disciplined approach translates to our solid product returns as we continue to see attractive margins across our lines. Our track record of results for the past year stems from our ability to invest in our operations and deliver returns above our typical industry-leading levels. On a consolidated basis, ROE was a healthy 13.8%, and coupled with our strong top line results that I referenced earlier, before-tax operating earnings and return on equity across our core operations were well above the top end of our most recent outlook ranges.

After-tax operating earnings of $408 million -- $408.8 million increased 5.1% from the same time last year and represents one of the highest earnings levels on record. As discussed last quarter, we believe this environment will remain very positive for us as the macroeconomic factors and a receding pandemic environment favorably impact our business. This quarter's results see that playing out. Higher interest rates, wage inflation, low to no pandemic mortality and a continuing tight labor market are all positives for us. Also, when we look to our balance sheet, our investments continue to perform very well, with portfolio quality strengthening in the quarter and income in line with our long-term expectations. These results across the board have taken our strong capital position and made it stronger, providing us ongoing financial flexibility and options. We have cash north of $1 billion at the holding company, and our RBC level was 450%, which is 100 points above our target levels. This coming quarter, we will be paying a 10% higher dividend and increasing the run rate of our share repurchases by 50%. Concurrently, funding excess reserve margins within our Closed Block continues to be the 2023 priority. And year-to-date, we have contributed almost half of our full year expectations.

While the quarterly LTC loss ratio was slightly above our long-term expectations, we focus on the longer-term trends, and we remain steadfast with our plans to fully recognize the premium deficiency reserve by year-end. This allocation of capital eliminates the need for further LTC contributions in the near future. Wrapping up my overview, I continue to be proud of what the team has accomplished by extending the momentum we've seen at the halfway mark of 2023. The path we are on has us well positioned for earnings growth at the upper end of our expected range. It all comes back to our purpose that drives us to protect more people, meeting the needs and exceeding the expectations of our customers. We'll continue to achieve this by utilizing a digital-first and disciplined approach to capitalize on the favorable trends in the operating environment as we advance our market-leading positions.

Now let me turn it over to Steve for additional details on the quarter. Steve?

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Great. Thank you, Rick, and good morning, everyone. As Rick described, the second quarter was another very good quarter for the company as we benefited from strong operating performance in many parts of our business, particularly across all of our disability lines, where trends support the upper end of our most recent full year after-tax adjusted operating EPS outlook. Disability results in the second quarter were highlighted by strong sales and underwriting performance across the board, including benefit ratios of 59.4% for Unum US group disability, 42.1% for individual disability and 72.3% for Unum UK or in the mid-60s when removing inflationary impacts, all below our long-term expectations. Sales were strong across most areas of the company with our various disability products performing very well. Consolidated sales grew 19.5% across our core operations, highlighted by 20% growth in Unum U.S., including 53.5% in individual disability and 70.2% for Unum International. Core operations premium grew at a healthy rate of 4.6% in the second quarter. Persistency was generally improved from first quarter results and within our expectations. However, most lines were unfavorable relative to prior year. Let's review our quarterly operating results across the segment, beginning with Unum US.

Adjusted operating income in the Unum US segment increased 17.5% to $343.1 million in the second quarter of 2023 compared to $291.9 million in the second quarter of 2022. Results finished significantly above prior year, primarily due to favorable benefits experienced, partially offset by higher operating expenses. The group disability line reported another robust quarter with adjusted operating income of $159.8 million compared to $105.5 million in the second quarter of 2022, with the increase driven by improved incidents, a higher discount rate on new claims and higher earned premium. These drivers contributed to an exceptional benefit ratio of 59.4% for the second quarter. This now marks a full year of the benefit ratio being below our long-term expectations, driven primarily by improving recoveries and incidents. The trailing 12-month group disability benefit ratio is in the low 60s, and it has contributed to strong operating earnings. We continue to expect the full year benefit ratio to be in the low 60s, driven by strong recoveries and incidence levels. Results for Unum US Group Life and AD&D decreased compared to the second quarter of last year, with adjusted operating income of $51.6 million for the second quarter of 2023 compared to $64.7 million in the same period a year ago. The benefit ratio increased to 73% compared to 70.8% in the second quarter of 2022 due to higher underlying claims incident.

The benefit ratio was also at the low end of our expectation due to minimal COVID-related mortality in the current period. Adjusted operating earnings for the Unum US supplemental and voluntary lines in the second quarter were $131.7 million, an increase from $121.7 million in the second quarter of 2022. The increase is driven by strong underlying benefits experience in both the individual disability and voluntary benefits. The individual disability benefit ratio of 42.1% was driven by favorable mortality, while the voluntary benefits results of 39.2% was favorable to prior year, primarily due to favorable reserve development and lapses. Turning to premium trends and drivers. Natural growth, a tailwind for our group products, continued to contribute to strong year-over-year premium growth of 4.5% in Unum US. Sales trends for Unum US were also solid, with sales increasing 20% year-over-year in the second quarter. Persistency for total group at 89.8% remained generally stable in the second quarter with less favorable results within our supplemental and voluntary lines. Now moving to Unum International. The segment experienced exceptional overall earnings results, with adjusted operating income for the second quarter increasing to $43.5 million from $28.1 million in the second quarter of 2022. Adjusted operating income for the Unum UK business improved in the second quarter to GBP34.3 million compared to GBP21.5 million in the second quarter of 2022.

The reported benefit ratio for Unum UK decreased to 72.3% in the second quarter, which compares to 87.9% in the same period a year ago. You may recall, a portion of our policies in the U.K. have an inflation rider, which is backed by inflation-linked gilts. The inflation-linked benefits are capped, but the income we receive from the linked gilts is not, which does benefit earnings levels in periods of very high inflation. When you remove direct inflationary impacts, Unum U.K. adjusted operating income was in the GBP mid-20 million range, reflecting strong underlying claims performance. International premiums continue to show strong growth. Unum UK generated premium growth of 14.5% on a year-over-year basis in the second quarter, while our Poland operation grew 22%. Both businesses continued to generate positive levels of year-over-year sales growth, with Unum UK up 64.3% and Unum Poland up nearly double. Next, adjusted operating income for the Colonial Life segment was $115.5 million in the second quarter compared to $96.6 million in the second quarter of 2022, with the increase driven by favorable benefits, partially offset by higher operating expenses. The benefit ratio of 48.3% improved from 53.8% in the year-ago period and was within our expectations. Colonial premium income of $430.6 million finished slightly higher than prior year, primarily driven by sales momentum, partially offset by lower persistency.

Premium income was higher than our expectation. Expectations is on the full year growth trajectory of 1% to 3%, which we laid out in February. Sales in the second quarter of $122 million increased 3.2% from prior year, primarily driven by healthy agent recruiting and productive small case sales, partially offset by a decrease in new account sales across larger-sized segments. Now in the Closed Block segment, adjusted operating income, excluding adjustments related to the Closed Block individual disability reinsurance transaction, was $51.2 million compared to $86.9 million in the second quarter of 2022. This decline was primarily due to a year-over-year decrease in the segment's miscellaneous net investment income of $32.3 million. This was driven by less favorable income from our alternative asset portfolio year-over-year. For benefits experience, the LTC interest-adjusted loss ratio was 92.4% compared to 84.9% in the year-ago period, driven by higher claims incidents. Claims incidents remained at elevated levels, which also impacted first quarter results, but the favorable climate mortality in the first quarter did not persist in the second quarter. Notably, the monthly trend of new claims improved towards the end of the second quarter and has continued to improve early into the third quarter. The interest adjusted loss ratio on a rolling 12-month basis was 86.6%, which is within our range of expectations.

Wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the Corporate segment was $34.9 million compared to a $36.9 million loss in the second quarter of 2022, primarily driven by higher investment income on shorter-duration corporate-owned assets, a dynamic that should continue while short-term rates remain elevated. Moving now to investments. We continue to see a good environment for new money yields and risk management. Purchases made in the quarter were again at levels above our earned portfolio yield, which is 4.43% for the first six months of 2023. As expected, we experienced net upgrades of high yield to investment-grade fixed maturity securities of $107.5 million and an improvement in the overall portfolio credit quality. In addition, our interest rate hedge program for LTC is performing as expected. Since inception of the program last year, we've entered into nearly $1.9 billion of treasury forwards with more than $300 million closed out and applied to recent bond purchases. Miscellaneous investment income decreased in the second quarter to $21.2 million compared to $57.2 million a year ago, as both traditional bond call premiums and alternative investment income declined. Income from our alternative invested assets was $19.9 million, which is right at the lower end of our long-term expectation of $20 million to $25 million. We continue to be pleased with and benefit from the composition of the portfolio.

As of the end of the second quarter, our total alternative invested assets were valued at just under $1.3 billion, with 41% in private equity partnerships, 37% in real asset partnerships and 22% in private credit partnerships. As we discussed last quarter, our commercial real estate investment portfolio, which is substantially underweight office properties compared to industry averages, is thoughtfully constructed and well positioned to manage through cycles. Our rigorous origination process and multitiered approach to monitoring loan performance and valuations does not waver in volatile periods. Earlier this year, we began an accelerated revaluation process for our office CML portfolio and expect to complete reviews of 100% of our office holdings over the next several months. Currently, with just under half completed, our office LTV has modestly increased and has not meaningfully impacted overall CML LTVs, which remain around 60%. While not immune to secular pressure and rising cap rates, our office loan exposure profile consists of low levels of major metropolitan locations, healthy debt service coverage ratios and very few maturities through 2026. And as a reminder, our office portfolio accounts for just under 18% of our $2.4 billion commercial mortgage loan portfolio. So now I'll end my commentary with an update on our capital position. As expected, our capital levels remain well in excess of our targets and operational needs, offering tremendous protection and flexibility.

The weighted average risk-based capital ratio for our traditional U.S. insurance companies is approximately 450%, and holding company liquidity remains robust at $1.1 billion. We are comfortably on track to end the year at or above our expected levels of 400% RBC and $1.5 billion of holding company liquidity following execution of planned capital deployment. Capital metrics benefited in the second quarter from the strong statutory results, with statutory after-tax operating income of $313.7 million for the second quarter. This puts us on pace for generating well over $1 billion for the full year, which translates to strong free cash flow generation at the holding company in the coming year. Our strong cash generation model drives our ability to return capital to shareholders. And in the second quarter, we paid $65.2 million in common stock dividends and repurchased 1.1 million shares at a total cost of $47 million. We expect to increase the pace of share repurchases in the second half of the year. Other capital plans, such as fully recognizing the premium deficiency reserve by year-end, also remain on track. As planned, we contributed $200 million of capital into our Fairwind subsidiary in the second quarter, which brings the total for the year to $400 million.

As a reminder, we expect to contribute $800 million to $900 million of capital in the Fairwind over the course of the year and fully recognize the premium deficiency reserve. Full recognition of the PDR results in significant excess margin over our current best estimate and supports our plans of not contributing capital in the Fairwind, as we discussed at our outlook meeting. So to close, we're encouraged by the momentum that is built throughout the first half of the year and expect similar operating trends to persist in the second half, driving strong sales, premium and earnings growth across our corporate businesses. For the past 12 months, group disability results have been a focal point in driving higher earnings power, and we expect this to continue for the foreseeable future, supporting our expectation of being at the top end of our outlook for the full year for EPS growth.

Now I'll turn the call back to Rick for his closing comments, and I look forward to your questions.

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Great. Thank you, Steve. I'd wrap up our comments by reiterating that we're in a great position halfway through the year and the momentum it creates as we look to execute on our growth strategy. The team is here to respond to your questions. So I'll ask Bailey to begin the question-and-answer session. Bailey?

Questions and Answers

[Operator]

[Operator Instructions] And your first question will come from Ryan Krueger with KBW. Your line is open.

[Ryan Krueger, Analyst at KBW]

Hey, thanks. Good morning. I was hoping you could talk about pricing trends that you're seeing in the industry. I think you're continuing to see very favorable group disability results. Many of your peers are also seeing pretty favorable results. Have you seen any change in the competitive environment as a result of this? Or are things still pretty stable at this point?

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Good, Ryan, good morning. Thank you for your question. I'll turn it over to Mike to talk about what we're seeing in the markets. Mike?

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Yes, thanks. Good morning, Ryan. And yes, I mean, I would start by saying we're really pleased with sales results in the quarter. We have continued to be pleased with the renewal placement success that we've had. So those are sort of our best indicators of how we're meeting the market and feel good about that. It has been a good run from a group disability loss ratio point of view. And certainly, some of that experience over time will flow through into renewals. But where we sit right now, it seems like the external favorable risk trends have continued the performance of our underwriting and benefit teams remain really strong. So as Steve said in his comments, I think that the low-60s is still a really good spot for us. And our best guess at where the second half of the year will play out. And from a pricing point of view, it's always been a competitive market, but we feel like we're getting that chance to tell our story, and we feel like it's a differentiated one.

[Ryan Krueger, Analyst at KBW]

Thanks. And then a separate question. On the NAIC's negative IMR proposal, do you think that would potentially allow you to increase the amount of interest rate hedging you're doing on long-term care beyond what would qualify for hedge accounting treatments, given that there would be some ability to absorb a negative IMR?

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Hey, Ryan, it's Steve. Yes, I can take that one. It's an interesting question, one we think about a lot. And we have very little IMR -- negative IMR right now in our portfolio. So kind of the current period or the immediate impact would be pretty de minimis to us if that negative IMR would be admitted. But we do think about moving forward just around the stat accounting for hedges. And if we were able to, in essence, take the negative marks, the realized losses on those and put those in IMR and be able to admit that, that would be something we'd have to consider. That would be helpful to really ramp up the hedging program a little bit more. So on the -- on the margins, we're supportive of that. It really wouldn't have kind of an immediate impact on us though. So we continue to monitor that discussion at the NAIC.

[Ryan Krueger, Analyst at KBW]

Okay. Great. Thanks.

[Operator]

Your next question comes from Wes Carmichael with Wells Fargo.

[Wes Carmichael, Analyst at Wells Fargo & Company]

Hey, good morning. On group disability, very strong loss ratio performance, but I just want to get an insight on any kind of recovery trends in the quarter. Was that incrementally beneficial from the first quarter? Or was incidence really the driver there?

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Yes. Thanks, Wes. It's Mike. I think actually, directional pretty right, it's recovery trends have been strong, pretty consistent quarter-to-quarter. And again, we've continued to invest in the people in our organization and making sure that we're appropriately resourced our benefit specialists, the clinicians, our boat teams all kind of geared towards helping those claimants get back to work. And that has been at a high level and it's persisted at that high level. And then from an incidents point of view, we pretty much have seen a return all the way to pre-COVID incidents levels. So we talked a lot over the last couple of years about some of those environmentally sensitive-type claims and how they have become elevated. That's been running down and continue to do so here in the second quarter.

[Wes Carmichael, Analyst at Wells Fargo & Company]

Thanks, that's helpful. And then on the long-term care, the loss ratio did tick up. And you mentioned this in prepared remarks, but just -- any help on how that's trending? Is this just normal quarterly volatility? And I think you said it's getting better in terms of incidents, but just maybe any color there would be helpful.

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Yes, Wes, this is Steve. I'll just reiterate a couple of the remarks that I made in my prepared remarks and then maybe give a little bit more color. So we did see elevated incidents in the first quarter that did continue into the second quarter. What we also saw, though, in the first quarter was pretty elevated claimant mortality. We don't think that that was necessarily related to COVID. It was a tough flu season, I think, more broadly. And so mortality was a little bit above our expectations, I would say, in the first quarter. You roll that forward to the second quarter, claimant mortality came down closer to what we would view as our seasonal expectations, where incidents did remain elevated. Now we did talk about the trend, and that is a trend we saw, really the submission of claims peaked in the, I'd say, the end of the first quarter into the March period. And then we did see a gradual decline of the submission levels, March to April, April to May, May to June and then June even into July. And so I'd say although we're not completely back to our expected level of submissions, we're optimistic about the trend. We'll have to see where the third quarter plays out, and we'll continue to monitor it. But we are happy about that trend. I will just go back to and reiterate, on a 12-month trailing basis, the loss ratio is at 86.6%, which is at the lower end of our longer-term expectation. And we did see that loss ratio really experienced a lot of volatility over the last few years, and most of it favorable volatility this quarter, a little bit unfavorable. But we'll just track that in the third quarter and see how it progresses.

[Operator]

Your next question comes from Tom Gallagher with Evercore ISI.

[Tom Gallagher, Analyst at Evercore ISI]

Good morning. Just a follow-up on long-term care. So Steve, I heard what you said on the, I guess, the levels of paid claims. Now, I guess the level at which you saw toward the end of the quarter when you said it was returning towards normal, would that -- if it kind of continues at that level, would that be then back within the range of 85 to 90? Or would that be more on the upper end? Just want to get a sense for where you see really that trending. And is your -- when you kind of step back and say what's happening here, is your expectation that we might actually have a period of elevated long-term care claims following a period of three years worth of favorability? Or is that not necessarily what you're expecting?

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Thanks, Tom, I'm Steve. Let me break that apart a little bit. Just from a perspective of giving any kind of guidance for loss ratios in the third quarter. It's really -- I'd say too early to do that. But all things being equal, we did have an elevated loss ratio in the second quarter above our range. On claims experience, claims submission experience, that really so far is not recurring in the third quarter. And it's early, it's July, but we're optimistic about that. So -- but I'm not going to give guidance about what that loss ratio may look like yet in the third quarter. And then when I think about kind of longer-term expectations, we do take a very long view when we look at experience and just think about expectations going forward. And so yes, we take into consideration some of the experience that we saw during the pandemic, where claims submissions were low. We'll take into account what we've seen over the last six months. But we look at that all kind of together and look at what our longer-term expectations would be. So neither of those are going to completely drive our longer-term views, but we will incorporate that into our data set.

[Tom Gallagher, Analyst at Evercore ISI]

Okay, thanks. And then my follow-up is, let's say, if you take a more adverse case scenario and claims remain elevated in long-term care for a while here, we'll call it mean reversion, just considering the recency bias of that. If claims were to remain around current levels in the low 90s, what consequence would this have for Unum? Would it be a GAAP charge only? I presume, just given how strong your stat reserves are, it's probably unlikely to have much of an impact there. But can you talk about in the adverse case scenario, what impact you think it would have just for contingency planning purposes here. Thanks.

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Yes, Tom, I might just step back and just take the opportunity to just talk about our reserving process and how reserve adequacy really is going to work this year. It's a little bit different than what you may have seen historically. Historically, it was very focused on reserves efficiency with locked-in assumptions for the majority of our lines of business. And then you had LTC, which was in loss recognition. And again, we needed to look at our current best estimate and whether we felt reserves are adequate. Moving forward into LDTI, we're more on a best estimate reserve basis, which means that we're going to look across all of our product lines. We're going to look across all of our assumption sets and how those look to our experience over a longer-term period. And then we'll look to see if we need to make any adjustments to those best estimates. We anticipate that occurring here in the third quarter. So we'll be able to report out on that here in the next quarter. If you drill down, though, into specifically LTC, I just go back to the remarks that I made earlier, where we will look at all the experience that we have and not necessarily have a recency bias.

We'll look at it in aggregate. We'll look at what trends we're seeing. And it's probably too early to predict kind of the outcome of that review, just given the more recent elevated claims experience that we've seen. The other thing that I'd say is we won't just look at claims submissions. We'll look at the full performance and experience of that block when we go through that review of assumptions. So not able to really predict for you, Tom, necessarily. Now the other thing that I'd go to which you brought up is the difference between how we think about our GAAP assumption review, which again is on a best estimate basis, and how we think about our statutory reserve adequacy review. Our estimation is that by the end of this year, we'll probably have close to $3 billion of margin between our statutory reserve levels and what our best estimate -- our current best estimate would be for those reserves. And so we do feel like we have quite a bit of margin there. And so we'll go through the process here in the third quarter for GAAP and later in the year for our statutory reserve basis, just like we normally would do on an annual basis.

[Operator]

Your next question comes from Erik Bass with Autonomous Research.

[Erik Bass, Analyst at Autonomous Research]

Hi, thank you. Maybe if we could start on just the international businesses. You've had very strong sales growth the past few quarters, particularly in the U.K. So just curious for a little more color on what's driving that and how you see that translating into future premium growth.

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Great. Thanks, Erik. We'll turn it over to Mark Till in the U.K. Mark?

[Mark P. Till, Executive Vice President and Chief Executive Officer of Unum International at Unum Group]

Thank you very much, Erik. Yes, we've had good growth across all of the product sets. So we have historically been very strong in the long-term disability market. We've been seeing some slightly increased growth in the life market as pricing has rationalized. And generally, across the market, we've been performing strongly, such that we've actually had the highest sales in the group risk markets last year and expect to do so in the first half of this year. The trends remain positive. Although the economy is not growing quite as strongly, it's not affecting demand for the product set. Employers are still fighting a war for talent. The quality of the product that we've got is very high. And we've made some big investments in value-added services, in particular, the employee portal Help@hand, which is making a difference. And I think we feel confident about the future growth of sales in the business.

[Erik Bass, Analyst at Autonomous Research]

Thank you. And then if we could pivot a little bit to capital. You talked about the really strong stat earnings in the first half of the year. Credit impacts have been benign. It seems like you're trending towards the upper end of your range for both free cash flow and probably where you'd expect to end the year from an excess capital standpoint. And I know the priority for the remainder of this year is fully funding the PDR. But as we think about future capital return plans, should we really be focused on the plus in your kind of the $300 million-plus plan for buybacks as we think to 2024?

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Yes. Thanks, Erik. I think you actually, in your question, you can't really hit what we're talking about, which is the [Indecipherable] earnings have been really good for six months. But hopefully, it will stay the same. But regardless, we will be above our range if that holds from a capital generation perspective. When we think about putting back to work, we've been very consistent in talking about reinvesting in our lines. I think we're -- when we think about the returns that we're seeing, we want to make sure the investments are going right back into our core businesses, very clear strategy of how we're looking to grow, and that's where our capital will go first. I think M&A is another place back on strategy, making sure that we can put money behind anything that will add to that growth capability internal to our business. And then we think about returning capital to shareholders. I mentioned in my comments, we're increasing dividends, 10%, which will come out this quarter. Share repurchases going up by 50% to a run rate of $300 million. And you also articulated our priority 2023 is to fully fund the PDR. We're about halfway through that process to funding that. So we'll look to complete that over the course of the year. And then as you start to look out into 2024, I think we've also been clear that we're going to get all those things done this year. And then as we get later in the year towards the end of this year, beginning of next year, we'll talk about our capital redeployment plans that we have there. So we feel great. We all feel really good about where we are. We're doing the things that we've talked about, balancing, funding LTC with returning capital to shareholders, and we look to be -- communicate more as we get towards the end of the year.

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

The other thing that I'd add to that was kind of implied in my remarks is, the overperformance of statutory earnings this year is really going to be a driver for free cash flow next year, as we're a year in arrears as far as being able to take dividends out of the operating companies and really taking it up to the holding company and then making capital deployment decisions around that capital.

[Erik Bass, Analyst at Autonomous Research]

Got it. That all makes sense. And as you talk about investing in the business, I assume a lot of that in terms of the capital deployed and growing sales is getting reflected in the current statutory earnings. So is that what you're referring to? Or more investment on top of that?

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Yes. It's Mike. In addition to that, we talked a little bit about the outlook meeting. The investments in our technology, digital and analytics agenda has grown pretty substantially each year over the last 4, and we would continue to look to increase those investments. So that will be another place where we'll look to take what has been very good returns on the investments we're making in those capabilities and continue to double down there.

[Erik Bass, Analyst at Autonomous Research]

Got it. Thank you.

[Operator]

Your next question comes from Mike Ward with Citi.

[Mike Ward, Analyst at Smith Barney Citigroup]

Thanks, guys. Good morning. I was just wondering, you've gotten this question before, but these days of deals just incrementally important around long-term care and potential derisking avenues activity just continues to pick up in lines that we wouldn't have thought possible just a few years ago, or likely just a few years ago. So I was just wondering, any update on that landscape?

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Yes. Thanks, Mike. It's a good question. It's one that the team is focused on, making sure we're prepared for risk transfer opportunities as we think about our long-term care block. As we've said multiple times, kind of the demand in the market or the availability of capital coming into that line is from third parties. It increases and decreases, depending on what they're looking at, but we've been very consistent that we're looking to find the right partner to do either with risk transfer on the block and even thinking about different slices of that block. So we're continuing on that path, keeping active out there in parties. I think the people that have the ability to deploy that capital know that we're very interested. And so we'll take it from there. Your point is a good one, though, that I reiterate about blocks that have the ability to be risk transferred. We would be beneficiaries of one of those. To remind you three years ago, we did the same with our individual disability block. And so those markets will come to fruition. So nothing more, nothing new to relate around demand or process, just reiterate that we are actively looking to think about risk transfer opportunities.

[Mike Ward, Analyst at Smith Barney Citigroup]

Thanks, Rick. And then maybe you mentioned -- I think about capital deployment in out years. Uses of capital. If you were to turn acquisitive to any degree, any specific lines or regions that you think could make sense for Unum?

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Yes, we wouldn't want to get too specific on that. I think we've talked about capabilities. I think the most important thing to think about as we think about M&A, it's about being on strategy. When you think about the markets we participate in today, it would be about making ourselves stronger, as opposed to getting into something -- a new category. So -- so that's how I think about it. It's not necessarily geography or product line-dependent, but it will be on the strategy that we've articulated to you over the last several years.

[Mike Ward, Analyst at Smith Barney Citigroup]

Thank you, guys.

[Operator]

Your next question will come from Suneet Kamath with Jefferies.

[Suneet Kamath, Analyst at Jefferies Financial Group]

Thanks, morning. I want to go back to group disability for a second. I hear you on the low 60s loss ratio, I guess, for the balance of this year. But I guess, the question is how much line of sight do you have on that as we think about rolling into 2024, sort of what sort of glide path would you expect that that loss ratio would take?

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Thanks, Suneet. It's Mike. I appreciate the question. I think the first thing I'd say is just -- you know this, but just to reiterate it, is a lot in terms of any forecast, it's just going to be dependent on the external environment. So what does -- what has submitted incidents look like? How conducive an environment we have in labor markets, getting people back to work, those kinds of things that we've talked about for years. So really, I mean, I think if you sort of think about -- I don't have a crystal ball on those fronts, but if you were to assume pretty consistent macro risk trends, then we sort of look at our own pricing approaches and how that might impact the loss ratio over time. Currently, where we sit right now is lower than where we've been historically. And as those favorable experience patterns play through good rules of thumb or things like in our mid and large employer markets, about 1/3 of those clients will go through a renewal process each year. And importantly, we use experience, usually about three years of experience in those renewals. So a year of favorability would be weighted against two years per prior as well.

And then in the core market, it's actually a smaller percentage. So maybe 20% of those cases will go through. So I think it would be a pretty gradual change to a loss ratio driven by the favorable experience coming through. And again, I just finish where I started, which is all that also is dependent on what's happening externally. But certainly, right now, it's a really good time to be in the group disability market. And as Rick said in his comments, the disability success is moving beyond just that long-term disability line. We've seen really good growth in our short-term disability, in our total leave offering that's packaged with that short term and long term. We're starting to see really good growth in our recently issued individual disability book of business that's very often packaged with our LTVs, sales up 50%-plus. And Mark talked a little bit about the success we've had in LTD in the U.K. as well. So it's a pretty favorable outlook at this point.

[Suneet Kamath, Analyst at Jefferies Financial Group]

Okay. Makes sense. And then I guess just going back to long-term care, I hear you on the -- you don't get too weighted to sort of short-term fluctuations, and that makes sense. But maybe coming out at the other way, we had some pretty interesting developments on like Alzheimer's drugs earlier in the quarter. And just wanted to get a sense of how you think about those types of developments ultimately informing kind of your longer-term views of reserve adequacy and potentially even risk transfer.

[Steven A. Zabel, Executive Vice President, Chief Financial Officer at Unum Group]

Yes, I'd say the short answer is we will monitor it, but in the short term, it doesn't really influence our view of the future right now. We are optimistic about some of the trials that have taken place. They continue to progress, which just for society, is a very, very good thing. And so we'll continue to track those, but it takes a long time for those types of drugs to make its way through all the trials that it needs to be productionalized, actually get out there in the market and then be able to see the impact of what that may have on the types of claims that we receive around our long-term care blocks. So I would say right now, it doesn't really influence our view of the longer term, but we -- obviously, we're very happy that some of those drugs are progressing through trials. It's a very positive thing for the industry, but also just for society.

[Operator]

And your final question will come from Mark Hughes with Truist Securities.

[Mark Hughes, Analyst at Truist Securities]

Yes. Thank you. Good morning. Did you provide a specific number for natural growth in the quarter?

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Mark, it's Mike. Nothing specific, but we've talked about trending above that 5% level and we're continuing to see a good split between employment growth within the client base as well as wage inflation coming through.

[Mark Hughes, Analyst at Truist Securities]

Understood. And then on Colonial, the benefit ratio back down this quarter, should we anticipate that -- fairly good results there through the balance of the year? And then also sales, just kind of latest thoughts on the sales outlook.

[Michael Q. Simonds, Executive Vice President and Chief Operating Officer at Unum Group]

Yes, I appreciate the question. I'm glad you hit sales. We're encouraged by the trends at Colonial Life. You highlighted benefit ratio, but sales as well. And maybe I'll turn it over to Tim to speak to that.

[Timothy G. Arnold, Executive Vice President, Voluntary Benefits and President, Colonial Life at Unum Group]

Yes. Thanks, Mike. On the benefit ratio side, we do think the first quarter was a bit of an anomaly, and we would look for results that came about in the second quarter to be sustained throughout the balance of the year overall. On the sales side, as Mike mentioned, we are very encouraged by some of the trends we're seeing, some of the leading indicators. COVID was very challenging for our business from a lot of perspectives, certainly impacted recruiting in 2021 and the first half of 2022, as we shared with you all during those times. We're really encouraged for the first half of this year. New agent recruiting is up 34% and new agent sales were up 16%. We have grown our 1099 sales manager cohort by 10% net in the first half of the year. So we're encouraged by that. We are also very encouraged by the sales coming from those new sales manager teams.

A few years ago, we made a conscious decision to deemphasize some less profitable lines of business that have lower persistency and focus more on higher-quality industries, and public sector is one of those really high-quality industries for us. We saw sales up 18%. And public sector in the first half of the year, and that follows a really strong 2022 in public sector as well. Sales that are direct to employer were up 7%. We saw really strong growth in our dental vision products in the quarter. We had a little pressure, as Steve mentioned earlier in large case sales, and part of that is because we've been deemphasizing those lower persistency industries. And another part of it is just some more competitive in the large case market. So we're going to be pretty opportunistic as it relates to the opportunities and large case. So on balance, really encouraged by the momentum that we're seeing in the market and encouraged about what we think we'll be able to do in the second half.

[Mark Hughes, Analyst at Truist Securities]

Appreciate that detail. Thank you.

[Operator]

There are no further questions at this time. I will turn it back over to Mr. Rick to close.

[Richard P. McKenney, President and Chief Executive Officer at Unum Group]

Great. Thank you, Bailey. Thanks, everybody, for joining us today. We look forward to seeing a number of you over the course of the next quarter, but I appreciate your continued support, and we look forward to talking to you next quarter. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Matt Royal, Senior Vice President Investor Relations
• Richard P. McKenney, President and Chief Executive Officer
• Steven A. Zabel, Executive Vice President, Chief Financial Officer
• Michael Q. Simonds, Executive Vice President and Chief Operating Officer
• Mark P. Till, Executive Vice President and Chief Executive Officer of Unum International
• Timothy G. Arnold, Executive Vice President, Voluntary Benefits and President, Colonial Life

Analysts

• Ryan Krueger, KBW
• Wes Carmichael, Wells Fargo & Company
• Tom Gallagher, Evercore ISI
• Erik Bass, Autonomous Research
• Mike Ward, Smith Barney Citigroup
• Suneet Kamath, Jefferies Financial Group Inc.
• Mark Hughes, Truist Securities