Q1 2022 Unum Group Earnings Call
Hello, and welcome to the Unum Group first quarter 2022 earnings Conference call. My name is Elliot and I'll be COVID-19 your call today if.
If you would like to register a question during the presentation you may do so by pressing star followed by one on your telephone keypad.
I would now like to hand over to our host Tom White Senior Vice President of Investor Relations. Please go ahead.
Great. Thank you Elliot and good morning, everyone and welcome to the first quarter 2022 earnings conference call for Unum.
Our remarks today will include forward looking statements, which are statements that are not of current or historical fact, as a result actual results might 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 2021.
Our SEC filings can be found in the investors section of our website at <unk> Dot 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 also in the investors section.
Yesterday afternoon, Unum reported first quarter 2022, net income of $253 $5 million or $1.25 per diluted common share an increase from the 153 million or <unk> 75 cents per diluted common share in the first quarter of 2021.
Net income for the first quarter of 2022 included the after tax amortization of the cost of reinsurance of $13 $2 million or <unk> <unk> per diluted common share and an after tax investment loss on the company's investment portfolio of $10 $6 million or <unk>.
<unk> per diluted common share.
Net income in the first quarter of 2021 included.
The net after tax loss from the second phase of the closed block individual disability reinsurance transaction of $56 $7 million or 27 cents per diluted common share.
Also the after tax amortization of the cost of reinsurance of $15 $8 million or eight cents per diluted common share and a net after tax investment gain on the company's investment portfolio. Excluding the net realized investment gain associated with the reinsurance transaction of <unk>.
$14 $5 million or six cents per diluted common share.
So excluding these items after tax adjusted operating income in the first quarter of 2022.
Was $277 $3 million or $1 36 per diluted common share an increase from the $212 million.
Or $1 <unk> per diluted common share in the year ago quarter.
Participating in this mornings conference call are <unk>, President and CEO , Rick Mckenney Chief.
Chief Financial Officer, Steve Zabel.
Chief operating officer, Mike Simonds, as well as Mark <unk>, who heads our Unum International business, Tim Arnold the head of our colonial life and voluntary benefits business is a way with this family attending his son's graduation from law School. This morning, which is a very exciting and proud moment for the Arnold family.
So now I'll call turn the call over to Rick for his opening comments, great. Thank you Tom and good morning, everyone.
And we do appreciate you joining us this morning, and let me start by saying our first quarter results were an outstanding start to the year, we saw dramatic shifts in the environment throughout the quarter, which have been very favorable to our business.
Since we've last talked to you we are seeing COVID-19 mortality levels come down consistently of.
While the estimated 153000 COVID-19 deaths in the U S population in the first quarter fewer than 30000 were reported in March.
And there was also a notable change in the demographic impacts by the AUM cranberry relative to what we saw last year.
Additionally, we have seen positive impacts from the current inflationary environment seeing the 10 year Treasury move up nearly 140 basis points since the start of the year.
These are welcome developments and helped our recovery accelerated faster than we anticipated.
As a result, we saw first quarter after tax operating earnings at $1 36 per share, which was up 31% over the previous year.
It was broad based solid performance on both the top and bottom line.
And taking that into account, we now look to unexpected operating EPS growth rate for the year of 15% to 20% up from the 4% to 7% previously expected.
Does that the broader context of how we stand in the current environment. The three elements most being discussed in the financial markets are all on a positive trend for us.
First is how COVID-19 has lessened and shifting shifted its age demographic it.
It is not making the same headlines, but COVID-19 driven mortality is still one we need to monitor as our lifelines look to get back to pre COVID-19 claim levels. The.
The second is the full employment in inflationary environment, we're operating in for employers there is pressure to increase wages as they look to find workers in a very unique time.
This creates top line growth for us as these workers look to protect their higher levels of income.
And third our interest rates, which play very positively for our new investments backing our product lines. Both in our ongoing core business lines and new cash flows coming into our closed block.
Before getting further into the results I do want to take a moment to reflect on how our purpose of helping the working world thrive throughout life's moments continues to guide all that we do.
As the effects of Covid continue to lessen our employees have stepped up in new ways and I would like to highlight our colleagues in Poland, who have shown uncommon resilience as they continue to demonstrate compassion outreach and support to the growing Ukrainian refugee crisis.
The situation remains heartbreaking, but we take the utmost pride in our teams caring spirit in this time of need.
So turning to our operating trends of the quarter. There are a few areas I'd like to highlight.
First we're pleased with the growth in premium income that is emerging in our core business segments in the first quarter, we recorded one 7% growth year over year in premium income from our core business segments combined.
This compares to a growth of one 2% for all of 2021.
For the rest of 2022, we are anticipating growth to accelerate so that we are at just over 2% for the full year and we are well on track to accomplish that.
Adding to our confidence as a solid start to the year for new sales with year over year increases of 7% in Unum U S. In total and 15% for colonial life as well as 55% for Unum, UK and 35% for unum, Poland in their local currencies.
Persistency levels were solid across the company and we are making good progress with our renewal plans as we look to continue to prudently implement targeted rate increases.
Second benefits experience was generally positive as we look at our benefit ratios for the first quarter compared to the fourth quarter of 2021.
The Unum U S group disability line showed substantial improvement at 73, 8% for the first quarter as our claim recoveries in long term disability were very strong in short term disability results improved sequentially.
Unum U S group life and <unk> line showed significant improvement as well declining approximately 10 points from the prior quarter as the age demographic shifted lessening the mortality impact for working age individuals.
And also related to that aid shipped with COVID-19 related mortality impacting the elderly population more significantly this quarter. We saw the LTC interest adjusted loss ratio declined by 12 points to 70% in the first quarter and.
And finally I'd highlight the improved benefits experienced in colonial life was generated its lowest benefit ratio in some time at 49% in the first quarter.
A third operating trend I'd highlight is from the first quarter was unexpected.
At our outlook meeting earlier this year, we indicated that we expected to see increased pressure on expenses. This year as we manage through increased people costs pandemic related cost in a normalized environment.
We still see this emerging later in the year. The reality is our teams have done an excellent job of managing through these pressures. So far in 2022 as we have been working hard to fill open positions.
Each of our core business segments reported an improved operating expense ratio in the first quarter compared to the fourth.
We don't believe that these pressures have gone away as we will continue to invest in several major initiatives to connect with customers to improve our efficiencies as a catch up on staffing, but I am pleased with the discipline, we have shown in managing expenses in this inflationary environment.
In addition to these strong operating trends the current business environment remains very favorable for us rising interest rates and widening corporate credit spreads. So far this year have been very beneficial and new money yields. In addition is particularly beneficial to the LTC line.
To the extent rates remain at current levels. It would strengthen our ability to fully fund the premium deficiency reserve for long term care ahead of the original schedule.
Rising wages and strong levels of employment across the economy also provide a tailwind for us the topline growth as the natural growth created by these forces helps drive growth in the premium income for many of our business lines.
And looking at our capital position just as we showed strong GAAP earnings this quarter. Our statutory results were also quite favorable increasing by over $60 million on a year over year basis $200 million.
For the first quarter of 2022.
This helped drive the risk based capital ratio for our traditional U S based insurance companies to approximately 400%.
With holding company liquidity at approximately $1 3 billion leverage at 25%, which is the lowest level, we've seen since 2014 and with our contingent capital structure in place we are in great shape with our capital position to execute the deployment priorities, we outlined at our recent investor meeting.
Including the ability to fund the LTC premium deficiency reserve by the end of 2024 repurchasing $200 million of our shares annually as well as increasing shareholder dividends, which we will discuss with our board meets later this month for our annual shareholders meeting.
In summary, I am very pleased with our performance in the first quarter and the optimism. It creates as we move forward now let Steve to cover the details of the first quarter results Dave Great. Thank you Rick and good morning, everyone as Rick outlined for you. The first quarter was a very strong quarter for the company as we benefited from both a favorable shift in the COVID-19 related trends. This.
<unk> and strong operating performance in many parts of our business as I cover our fourth quarter results I will primarily focus on a discussion of our first quarter results relative to the fourth quarter of 2021, which will allow us to demonstrate how the companys business lines have been progressing through the pandemic.
Dart and to provide some broader context on the quarter. There were two significant shifts in the COVID-19 trends this quarter that had important impact on our first quarter results.
First COVID-19 related mortality increased in the U S. In the first quarter of 2022 compared to the fourth quarter of 2021 and was also higher than our estimated coming into the year. Additionally, the shift in the age demographics of the mortality back to a greater relative impact on the elderly population and lessen the working age population.
<unk> had important implications on our business. If you recall for most of 2020 and the early months of 2021 Covid related mortality impacted the elderly population more so than the working age population.
In the second half of 2021, the age demographic shifted in Covid related mortality showed an increased level of impact amongst amongst the working age population and less so among the elderly population in the first quarter of 2022, the age demographic shifted back and was more consistent with what the U S experienced in 2020 that is.
Less impact among working age population in more in the elderly population. This shift is significant to our business and it drove the drove lower mortality experience in our group life block, which primarily covers working aged individuals'.
This is evident both in terms of the percentage of the national Covid related mortality that we see in our book and the average benefit size. In addition, the higher mortality among the elderly population resulted in higher mortality in the claim of block four long term care business, which drove a lower interest adjusted loss ratio in the first quarter of 2020.
Two.
The second trend, we saw was a rapid decline in COVID-19 infection rates and hospitalization rates through the first quarter. This had a favorable impact on our short term disability results, which helped drive the improvement we saw in our Unum U S group disability benefit ratio this quarter.
I'll dig into these two trends more deeply as I discuss the performance of these lines, but the age demographics of our mortality and the declining infection rates were important factors in our first quarter results.
I'll begin my review of our operating performance with the Unum U S segment. Adjusted operating income showed a sharp increase to $171 $6 million in the first quarter of 2022 compared to $81 4 million in the fourth quarter of 2021, primarily driven by strong sequential quarter improvement in.
The group disability and group life, and <unk> lines as well as continued high levels of operating income from the supplemental and voluntary lines.
So within the Unum U S segment. The group disability line reported a strong rebound in adjusted operating income to $62 6 million in the first quarter from $34 $1 million in the fourth quarter. The biggest driver of the earnings improvement was the benefit ratio for group disability, which improved in the first quarter to 73.
8%.
Compared to 78, 3% for the fourth quarter of 2021.
This improvement was driven in large part by strong performance in the long term disability line as claim recoveries were very favorable. Additionally, new claim incidents for LTV declined on a sequential quarter basis, though this was offset somewhat by higher average claim size.
As I mentioned previously results in the short term disability line also improved relative to the fourth quarter.
So looking forward, we expect the group disability benefit ratio to average in the mid 70% area consistent with the range, we provided at our outlook meeting.
Adjusted operating income for Unum U S group life and <unk> also showed strong improvement with an operating loss of $9 $4 million in the first quarter compared to a loss of $71 $7 million in the fourth quarter. This quarter to quarter improvement was primarily the result of an improvement in the benefit ratio mostly drew.
And by the shift in the age demographics of the Covid related mortality, which I described earlier.
In the fourth quarter of 2021, Covid related mortality in the U S population with an estimated 127000 with approximately 35% of those deaths among the working age population.
In the first quarter of 2022, while the mortality count increased to approximately 153000 the impacts the working age population decline to approximately 24% for.
For our group life block, we estimate the Covid related mortality claims declined from an estimated 1725 claims in the fourth quarter to an estimated 4500 claims in the first quarter.
Accordingly, our results reflect a lessening of our exposure to the national mortality count to slightly less than 1% of the reported national figures in the first quarter compared to approximately one 4% in the fourth quarter and 2% in the third quarter of last year.
Looking back to 2020, we saw similar exposure to national mortality count of about 1% when the age demographics were generally similar.
In addition, we also saw a lower average benefit size, which declined slightly less than 55000 in the first quarter compared to around 65000 in the fourth quarter of last year.
Finally, non COVID-19 related mortality did not materially impact results in the first quarter relative to the experience of the fourth quarter.
Over the course of the pandemic the account and age demographics of Covid related mortality of heavily influenced our group life results in our plans, we have assumed that national mortality related to Covid will decline significantly in the second quarter and remain at lower levels for the balance of 2022.
For the second quarter, we can see the group life and <unk> benefit ratio declined further to around 80%.
However, these measures have historically been very difficult to predict so we suggest that you follow international trends as a basis for your projections and estimates.
Now looking at the Unum us supplemental and voluntary lines earnings remain at very healthy levels with adjusted operating income of $118 $4 million in the first quarter compared to $119 million in the fourth quarter looking at the three primary business lines first we remain very pleased with the performance of the individual.
Disability recently issued block of business, which has generated strong results throughout the pandemic.
<unk> ratio was slightly higher on a sequential quarter basis, but remained well within the experience we have seen over the past two years.
Likewise, the voluntary benefits line reported a strong level of income as well with a benefit ratio declining slightly on a sequential quarter basis, primarily reflecting strong performance across the anh and disability products.
Finally utilization in the dental and vision line increase relative to the fourth quarter and the average cost per procedure was also somewhat higher leading to an increase in the benefit ratio for that line on a sequential quarter basis.
All in all though the supplemental and voluntary lines continued to perform very well and remain a strong income generator for us.
Then looking at premium trends and drivers we were pleased to see additional momentum building for Unum U S with growth in premium income of one 3% in the first quarter on a year over year basis for full year 2021 premium income for Unum U S increased by 1% compared to 2020.
Looking at the group disability line growth in premium income is closely tracking our outlook, increasing one 9% on a year over year basis with increasing levels of natural growth as we benefit from high employment levels and rising wages solid sales and persistency trends and careful management of our renewal programs sales growth for Unum U S.
Encouraging with growth of six 8% year over year as growth in the group lines and individual disability offset softer sales in voluntary benefits.
Overall, we are pleased with persistency trends this quarter, which showed some variation by line of business, but our total group block was stable at 89, 6% in the first quarter natural growth continues to develop as a tailwind for us increasing three 5% to 4% year over year as we continued to benefit from strong employment levels in the U.
The us as well as higher wage levels, particularly in our core market segment.
And finally, we have been encouraged by the progress we're seeing with our pricing strategy, particularly in the large employer group disability group life and services market, where pricing action is appropriate.
Then moving to the International International segment, we had another very good quarter with adjusted operating income for the first quarter of $27 2 million in line with the $27 $1 million reported in the fourth quarter.
The primary driver of our international segment results is our Unum UK business, which generated adjusted operating income of $19 2 million pounds in the first quarter compared to $18 7 million pounds in the fourth quarter. The reported benefit ratio for Unum UK was 87% in the first quarter compared to 81, 4% in the fourth quarter.
As we have outlined in the past inflationary trends in the UK will impact our reported benefit ratio and can mask. The underlying claims experience we are seeing for.
For the first quarter, excluding the impact of inflation, our overall benefits experience was slightly unfavorable compared to the fourth quarter with favorable experience in group wide offset by unfavorable experience in the group disability line. All in all we are pleased to see the unum UK results continuing to improve towards the 20 million pound per quarter goal.
Similarly benefits experienced in unum, Poland trended slightly higher on a sequential quarter basis. The adjusted operating income was generally consistent.
For the quarter.
So the year over year premium growth in our international business segment was very strong this quarter, increasing seven 7% on a year over year basis in dollars.
Local currency basis to neutralize the impact from changes in exchange rates Unum UK generated growth of 11% year over year, the strongest rate of growth in EMEA and the U K in several years driven by strong persistency improving sales trends and the continued successful placement of rate increases on our in force block sale.
Sales in Unum UK were very strong in the first quarter, increasing 55% over the year ago quarter Unum, Poland generated sales growth of 35% in local currency a continuation of the strong growth trends in this business has been producing.
Next results for colonial life were also very strong with adjusted operating income of $90 $1 million in the first quarter compared to $80 million in the fourth quarter. One of the primary drivers of these results was an improvement in the benefit ratio in the first quarter to 49, 3% compared to 52, 5% in the fourth quarter.
This was largely driven by very favorable experience in the cancer and critical illness line as well as improved performance in the accident sickness and disability lines.
We are pleased to see a continuation in the improving trend in premium growth for colonial life, which increased 1% on a year over year basis after declining one 3% and full year 2021.
Driving this improving trend in premium is the rebound we have seen in new sales over the past four quarters and generally stable persistency.
For the first quarter sales for colonial life increased 15, 3% compared to the year ago first quarter. Following an increase of 16, 1% for the full year 2021.
Persistency for colonial life was 78, 7% for the first quarter compared to 78, 4% for the year ago quarter. It will take a couple of years to return to pre pandemic levels of premium growth in the colonial life segment, but we are encouraged that the level of absolute quarterly premium income has.
For colonial to pre pandemic levels.
In our closed block segment adjusted operating income, excluding the amortization of cost of reinsurance related to the closed block individual disability reinsurance transaction was $94 $1 million in the first quarter compared to $76 $7 million in the fourth quarter. The increase in this segment earnings was largely driven by higher earnings in the law.
Long term care line as a result of favorable benefits experience.
Yes, the interest adjusted loss ratio for LTC declined to 72% in the first quarter from 82, 2% in the fourth quarter, primarily driven by a higher claim in mortality, which was approximately 10% higher than we expected on a seasonally adjusted basis by claim count and by favorable new claim incidents.
For the closed block individual disability line the interest adjusted loss ratio increased to 78, 7% in the first quarter compared to 75, 4% in the fourth quarter, but remain within our long term expectations.
Okay.
Healthy level, the miscellaneous investment income continued to contribute to the strong adjusted operating income we have seen in the closed block segment over the past several quarters in the past two quarters. However, we have seen some moderation in the contribution compared to the recent peak levels, we were experiencing in 2021 more.
More specifically total miscellaneous investment income in the closed block declined by approximately $4 million in the first quarter compared to the fourth quarter.
As a reminder, we saw a reduction of approximately $10 million in total miscellaneous investment income from the third quarter to the fourth quarter, driven primarily by a lower level of bond calls.
Current level of miscellaneous investment income remains well above what we expect to generate on an ongoing basis as the returns from our alternative investment portfolio continued to outperform our long term expectations.
Wrapping up my commentary on the quarter's financial results. The adjusted operating loss in the corporate segment was $44 million in the first quarter and $45 1 million in the fourth quarter going forward, we anticipate quarterly losses in this segment to be consistent with this quarters results.
Moving now to the two investments in net investment income we are seeing a much better environment for new money yield opportunities given the rise in interest rates and widening in corporate bond spreads so far this year.
In the first quarter, our new money purchases exceeded our fourth quarter purchases by 110 basis points.
While current new money yields remain below our portfolio yields the gap has narrowed significantly so far in 2022.
Miscellaneous investment income in the first quarter for the company overall totaled $41 million and this compares to approximately $58 million in the fourth quarter and was below what we saw in 2021.
Miscellaneous investment income from bond call decline by about $10 million on a sequential quarter basis with most of the decline impacting net investment income in our core business lines.
We expect income from bond calls to remain below the elevated levels, we experienced in 2020 and 2021 as higher interest rates reduces the economic incentive for many companies to refinance our outstanding debt. While this will likely have a negative impact on current net investment income it will help support the current portfolio yield.
<unk> is really as we retain the higher yielding securities in the portfolio.
Income from our alternative investments portfolio remained well above our long term expectations, but declined to $32 4 million in the first quarter compared to $39 4 million in the fourth quarter. Our current run rate expectation for quarterly income from alternatives is in the low $20 million range. So our current reserve.
<unk> showed continued strong outperformance from the portfolio.
The closed block segment continues to be the primary beneficiary of the favorable performance in our alternatives portfolio.
For full year 2022, we expect total miscellaneous income to run below the very strong results generated in 2021.
So then moving now to capital the financial position of the company continues to be in excellent shape, providing us significant financial flexibility.
The weighted average risk based capital ratio for our traditional U S insurance companies improved to approximately 400% and holding company liquidity was $1 3 billion at the end of the first quarter, both well above our targeted levels.
In addition, leverages again trended lower it and ended the quarter at 25, 1% statutory after tax operating income was $205 million for the first quarter, which is a sharp improvement from the first quarter of 2021, which was $136 7 million.
Similar to our strong GAAP performance statutory results benefited from improved results in group life group disability colonial life and LTC.
So then looking at capital deployment in the first quarter, we executed a $50 million accelerated share agreement and continued to anticipate repurchasing approximately $200 million of our shares for the full year.
Capital contributions in the <unk> subsidiary were $215 million in the quarter 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 fair when a $550 million to $650 million that we guided to at our Investor meeting.
So then wrapping up with a comment on our outlook for the year. We initially set our expectation for growth and after tax adjusted operating income per share in a range of 4% to 7% for 2022, we are raising our outlook to an expectation for growth in the range of 15% to 20%. This improvement reflects our strong performance in the <unk>.
First quarter and our expectation for additional upside to our original outlook for the balance of the year, which will be really focused in the second quarter of 2022.
Recall that our at our Investor meeting in February . We also provided an outlook for after tax adjusted operating income per share to increase within a range of 45% to 55% by 2024 or 2021 earnings per share of $4 35 per share. We are not at this time changing that outlook.
Now I will turn the call back to Rick for his closing comments and I look forward to your questions.
Great. Thanks, Dave.
I'll just wrap up by reiterating we were very pleased with the performance of the company as we continue to deliver for our customers throughout the pandemic.
We believe we are very well positioned in today's business environment and remain very encouraged with our outlook going forward.
<unk> respond to your questions. So I'll ask the operator to begin the question and answer session.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two.
When asking a question. Please ensure your phone is on mute locally and we ask you. Please limit yourself to one question and one follow up.
Our first question today comes from Erik bass from Autonomous Research. Your line is open.
Hi, Thank you so since the time of your outlook call interest rates are up significantly and based on your disclosure that should materially reduce the outstanding long term care PDR balance.
This changed your thinking at all about the cadence at which you plan to fund the remaining deficiency and would you consider hedging interest rates to lock in some or all of the benefit.
Eric This is Steve I can take that one I think theres a couple of things to think about it I go back to the Investor day conversation that we had about the premium deficiency reserve I think theres two things to keep in mind. One is just how the interest rate assumption works for the premium deficiency reserve is based on a trailing three year average.
And so although we're really encouraged with where rates have gone early in this year, we do still have a little bit.
Past interest rates that we need to work through and just the construct of that calculation as we saw the 'twenty one 'twenty prevailing rates in there. So so that's one dimension of it. The other is we do amortize that and over a period of time.
Originally it was a seven year period of time, and so that amortization will decrease a little bit the current period impact of any reduction in the overall PDR. So as we sit here today, we're very encouraged about where rates go. We obviously want those to continue and even potentially go up I'll say the contribution or the impact on our <unk>.
22 capital deployment plan, we'll be somewhat modest because of those two dimensions.
And so we'll just see how this plays out over the year, where we ended up at our yearend calculation will calibrate our ferro and contributions at that point and then we'll think about go forward capital deployment opportunities on the hedging front that is definitely something that we look at <unk>.
Continue to evaluate our hedging strategy I do agree with you that we.
Our rates are now it makes us look more attractive we have not executed on anything to date. This year, but it is something that we are looking at.
Yeah.
Great. Thank you.
If you could just provide maybe a little bit more detail on what assumptions are embedded in your EPS guidance range for both additional COVID-19 deaths and variable investment income over the course of the year.
Yes, let me start with the variable.
Alternative investment income, probably where I would start there is we have a little bit over $1 billion portfolio and our expected yield on that is between eight and 10%. So you kind of do the math on that Thats 80 million to $100 million annually of income, which breaks down to about $20 million to $25 million per quarter that is what we would expect for the remainder of the year.
Somewhere in that range in the low $20 million range, but as we've seen that that can be fairly volatile. So after see how that plays out quarter by quarter.
And then when you just think about the general pattern for 2022, we've obviously locked in the first quarter results that we've seen.
We believe that second quarter is going to be an improvement from what we originally had in our expectations. So probably the simple math for you for the remaining three quarters of somewhere in the $1 25 per quarter range I think that's pretty consistent with what our expectations previously were for the third and fourth quarter, but it would be an inquiry.
As to what we had originally thought the second quarter might be so that that's probably a pretty good range to calibrate too.
Great. Thank you.
Thanks R J.
Our next question comes from Alex Scott from Goldman Sachs. Please go ahead.
Yes.
Hi, good morning.
I just wanted to follow up on.
The response on the hedging consideration.
You mentioned, the backward looking sort of enrolling aspect of the way the rates work in the actual premium deficiency calculation I mean is that a issuer hurdle with potentially putting on a hedge or do you think.
The powers that be might might be receptive to the idea that this.
This would be a pretty significant risk management.
Action and I think we would be very beneficial would they work with you to maybe change that practice to to help you align something with with the economics.
Allow us.
Significantly change our view of the cost of equity of your company.
Yes, I would say, it's not a hurdle, it's obviously something that we'll work through with our regulator I do agree with you that they will view that as a very positive from a risk management perspective, and I think there'll be very willing to work with us and incorporate that sort of risk management and how we think about <unk>.
Looking interest rates.
That is part of those were going through and evaluating how we might approach a hedging strategy that we will work through with our regulator.
Yes, I think the important ounces.
It is important to look at the premium deficiency reserve. This is about how we manage the book of business right. So the construct of how it gets measured is not something we hedge where we will look at hedging and risk management for the overall book of business. The construct will take care of itself over a period of time. So any hedges that we look at are about an overall risk management of interest rate risk around our long term care.
Business.
Got it.
And then maybe just high level as we think through some of the group benefits businesses.
Any update on thinking and just just in terms of premium then you got some tailwind between the labor market inflation. Some of the rate you are taking.
Any any update now that we've gotten through the first quarter on just what you.
You know what the combined impact of those things will look like as we progress through the year.
Yes, Alex it's Mike Thanks for the question.
Really pleased with the start that we've gotten off to here in the first quarter sales up for Unum U S. As Rick was highlighting by 7% colonial.
15% International and maybe I'll flip it to Mark in just a second to talk about the market over there, where we've seen the market grow and our position in that market improve.
Which is a good story overall, so as we continue to see those sales improve and come up in relation to the block paired with strong persistency and as you said some tailwind of natural growth, we would expect to see our overall topline in earned premium.
<unk> continued to move up sequentially as we work through 2022, we talked a little bit about it last quarter and the outlook meeting we do see.
I need to gradually increase rates as we've talked about probably most pronounced in the fee based businesses those are where we've seen that increasing complexity and serving our clients.
With state municipal corporate and federal level leaves integrated with disability. That's also.
Given the nature of fee based business, where wage pressures are most acute so we wanted to be a little bit ahead of that.
Placement of rates for that all important January one date were right in line with expectations. We are in the midst of another again sort of moderate single digit type program on the insurance side, a little bit higher on the fee based side for one one.
2023, and it's too early to say, but.
At this point feeling.
The client relationships, we've got in the strength of our distributions kind of allow us to deliver that renewal program pretty successfully so as I look across the brands and the products in this segment in the U S.
We've certainly got a long way to go here in 2022, but encouraged by the start that we've got on the US side, maybe Mark you've got a couple of thoughts on international yes.
Yes, Mike Thanks.
I think Poland and U K are both good markets, Poland has been a double digit growth markets with some little while actually the U K market has definitely been improving I think you can see each reflecting increased demand for employee benefits. After the value through the pandemic has been proven that quite clearly.
I think we have been working hard to improve our value proposition to the approaches for the employers and for the employees and we are therefore very pleased with the sales results.
47% constitute businesses. We have also been actively seeking selective price management opportunities that renewal and it is therefore pleasing to see that even with those price management opportunities, we've seen an improving persistency rates in the U K and remained at about 98% in Poland.
I think if I looked at the quarter on quarter growth, we saw in the U K. It was high reflecting a good quarter on although we continue to have good quarters at the moment, we are fundamentally resetting our expectations here.
Thanks for the responses.
Thanks, Alex.
Our next question comes from Tracy <unk> from Barclays. Your line is open.
Good morning.
Thank you for referring to that PDR ounces at your February outlook.
23.
Just based on my understanding I think you shared the 10 year Treasury illustration Carsten.
But really it's LTC risk it so long Jerry did Youre also using your formula.
And 30 year Treasury.
And you footnoted in the assumption of a 50 basis point spread between the time into 'twenty clash there that.
So with the yield curve flattening, even inverting any thoughts on this.
Of those 2030 years.
Yeah. Tracy this is Stephen sorry, I sold your Thunder I got that in your write up addressing the dynamics of how the PDR works and I think thats a really good call out yes, we are heavily weighted.
To the 20 and 30 year in that portfolio. So you are right. We use the 10 year of the guideline, but it is very important where the 30 year ends up so I think thats a good comparison to make to where we are kind of in the current market. The other thing that I would say is we do have allocations to alternative asset.
Class of investments that also backs LTC, but I think a good indicators were the 2030 years and although obviously the 10 30 spread isn't at the 50 basis points I would say, we feel good about where the 30 actually is on an absolute basis.
Right because the way the company appointed P J.
Yes.
Even if the shape brand currently.
EBIT, what you would have liked okay.
Exactly.
Right and on your updated 2022 our guidance.
To be sure you are simply accelerating a timeframe youre seeing normalization of pre pandemic trends based on the first quarter at all and what Youre seeing so far in the second quarter.
You basically state yourself youre going to sell land at that 45% to 55% EPS growth from 2024, just to get their might look while level.
Versus what you were thinking back in February it might've been a steeper increase in 2023 I just wanted to make sure I'm thinking about that the right way also it doesn't sound like you updated.
2022 outlook.
Contemplation of higher interest rate. So is it fair to say the higher interest rates, it's more of that capital consideration for you name. It really will take a little time to impact earnings.
Yes. This is Steve a lot in there. So let me kind of address each individually you are right on how we're thinking about the 2022 forecast.
It is really just an acceleration if you go back to our Investor day, we had several contributions to the longer term EPS growth for the company and one of the largest was just recovery from the pandemic. So for that component I would say, yes, it's an acceleration back to kind of a normalized core benefit ratio than many of our alliance.
We also though had other contributors to that whether it's expense efficiencies it's growth, it's renewal and rate increases or its capital management that also factored in to that longer term 2024 expectation.
Those still hold we still feel very good about those other contributing factors. So I think thats the right way to think about it and then as far as rates go Youre right I would say, we have not really incorporated much upside into our outlook right now for our rates are I think theres two places that that.
Could show up one would be around capital management and the implications for the premium deficiency reserves as I mentioned earlier, though the 2022 impact probably is not going to be all that significant it will set us up though as we move through subsequent years if rates stay where they are for maybe more.
More oversized implications to our capital deployment plan.
The other thing that I would say is just on closed block because we do put so much money to work within the year that could be potential upside to the closed block earnings, but again, we just wanted to see how that plays out.
Over the year I wouldn't say in a lot of our other lines any upside to interest rates would be something that we would just probably incorporate into our thinking about pricing and really how that might play out versus actual upside to earnings.
Got it thank you.
Thanks Tracy.
Our next question comes from Tom Gallagher from Evercore. Please go ahead.
Good morning, just.
Few questions on on long term care.
If you if you do wind up.
Locking in some interest rate hedges would you see that.
Having a material influence on the pricing that you might get on a potential risk transfer deal.
And is that is that part of the reason that you'd be contemplating it.
Okay.
Yes, I would say that there is some potential there.
Depending on the buyer and how the buyer views their own investment strategy versus our investment strategy and that's something we just have to work through how we settled the initial.
The initial transaction.
I do think though obviously higher interest rates are favorable to a deal overall and Thats, obviously something that we're looking at but it would kind of depend on the buyer and how they would view that as a risk management versus just their own investment strategy.
And I guess.
A follow up is when you think about and I realized.
You've indicated that a potential deal would take a while just given given how much actuarial work and the like as required but given what's happened in interest rates any any sense a bid ask spread.
Whether you think the pricing would would've improved meaningfully just given how much higher interest rates are today and if so if.
It has narrowed I would imagine then putting on more putting on rate hedges would make sense or would you feel like you would still need rates to go higher to see it.
<unk> narrowing where it would become attractive from a pricing standpoint.
Yeah, Tom I would say, we have a lot of work still to do on any type of transaction. There's really nothing eminent again rising rates are going to be a positive from a buyer's perspective, what theyre able to get it in the market, but that's something that we'd have to just work through the actual construct of a transaction.
To just see.
How meaningfully that would impact the buyers view of the block.
Got you and then just one final question when.
When you.
If you were to strip out the favorable mortality experience from the LTC benefit ratio, where would you say you're trending right now it sounds like there is still favorable claims trends but.
Very close to normal as it still somewhat favorable relative to historic averages.
And then I guess relatedly, if we get through a favorable 2022, it's going to be three years of favorable.
LTC results and the related.
Good question is any sense that the regulators are changing the way, they're thinking about approving rate increases following three years of potential favorability here.
Yeah.
I would say in the quarter, we as we mentioned had higher appointment mortality.
We also had pretty favorable claims incidents.
We do still think that during a pandemic, even if it's light pandemic for the remainder of the year somewhere in that 80% to low 80% loss ratio, probably makes sense, but over time, when we get back to a more.
I guess stable COVID-19 environment, and even abates more we do think we'll be back up in that 85% to 90% range, but we'll just have to see how it plays out and whether there is any longer term behavioral changes within the block now when it comes to how we think about long term assumptions and also how a regulator thinks about long term assumptions.
Covid is viewed as an anomaly and so far we really haven't had much debate on either side, whether we should take a more favorable view when we look at things like the premium deficiency reserve itself or on the other side, how regulators might view our rate increase requests.
We havent really incorporated some of them more acute claim of mortality that we've seen into either of those analyses and I think the regulators are very supportive of that approach.
Okay, great. Thanks.
Thanks, Tom.
Our next question comes from Ryan Krueger from K B W. Please go ahead.
Hey, good morning.
Can you touch on the level of new money rate that you are getting at this point and how that compares to your portfolio yield.
Yeah, Ryan, we Havent really disclosed a lot around what our new money rate is on a quarter to quarter basis and try to stay away from that I'll tell you. We are really encouraged if you just look at where prevailing rates are they've gone up about 140 basis points from the beginning of the year. So clearly we're closing the gap.
GAAP between new money yields in our portfolio right, but they are still below the portfolio rate.
So feel good about it very encouraged about it.
But we don't we don't disclose that on a quarter to quarter basis.
Got it and then.
And in the outlook call you talked about some pressure on premium growth in the large employer market I saw that your sales are actually pretty good there this quarter.
Hoping for an update there and if the pressure on premium was more related to some potential persistency impacts or you had also expected lower sales than you kind of achieved in the first quarter there.
Yes, Brian its Mike.
Encouraging first quarter I would say.
In fact, nearly all of the growth in the first quarter was sales with existing clients and it's not typically our biggest sales quarter in the year in that large case market. So we're right now in the middle of that large case selling season and that will do for the next 90 days.
So what we were talking about the outlook meeting was.
That's the part of the group insurance market in the U S that we are seeing as most competitive and as we kind of lean into those rate increases we were talking about earlier, particularly around the fee base in short term disability businesses.
We had a bit more of a cautious outlook there.
We'll see how the year plays out I do feel good about the fact that.
Both disability risks and interest rates.
Have been better here in the first quarter than our expectations that may give us a little bit more.
Flexibility there but.
We've come to expect from US, we're going to be pretty long term in terms of our outlook around pricing growth.
Tradeoffs.
Yeah.
Looking forward to updating you in the quarters to come on how this this year is materializing.
Feel very very good about the value proposition, we've got in the market our ability to connect into our clients' HR platforms, what we've been able to do on the lead front.
So yes.
How it plays out.
Alright, thank you.
That's right.
Our next question comes from Sean needs come off from Jefferies. Your line is open.
Great. Thank you.
Overall at a high level on group sales I mean, we're seeing strength.
Pretty much across the board for all the companies that have reported so far.
And my sense is it's not.
A lot of competition in that a lot of it is.
Sales to existing customers and so the thought is that most of the players are behaving.
Enacting rationally just wanted to make sure that that's consistent with what you guys are seeing in terms of the competitive environment.
<unk>, it's Mike I think that is broadly pretty consistent.
That large case ended the market is where we see it most acutely competitive I think your read actually is right.
We've seen.
Pretty much across the board.
Other carriers looking to retain their client first and foremost and so that's certainly our lean and orientation as well.
So the degree of rate underwriting competitiveness kind of oscillated debt.
Year to year I would say we're in a period right now which is to resolve we average in terms of what we're seeing on pricing.
Okay got it and then the other thing that struck me was colonial Unfortunately Thompson out there to brag about the quarter, but.
The persistency improved and I note that one of your large competitors is seeing the opposite impact where the.
The more mobile job market is leading to lower persistency. So just curious if that dynamic is affecting you guys as well and it's just being offset by something or where the improvement is coming from.
Really pleased to see persistency that is our primary focus is making sure we're doing a good job for clients and so.
So it's that.
A great spot at 79% and that's a really solid foundation for premium growth and then you layer in the 15% growth.
And that new sales is that sales level continues to move up sequentially.
And gets to the right spot relative to the enforced block. The overall earned premium will start to kick in and it's good to be back in the black from that point of view pretty broad based success for colonial life and the new business markets in the direct small end of the market really good growth great growth with existing.
Sting clients good growth in the public sector. So all the places that we're trying to hit with our colonial life brand and distribution, it's clicking for us.
Okay, and then you can rest assure it Jim.
You can rest assure it Tim is pretty happy about it as well.
Yeah, I would imagine.
Yeah.
Our next question comes from Jimmy <unk> from J P. Morgan Your line is open.
Hi, good morning. So most of my questions were answered, but I just wanted to see if you could discuss a little bit more detail.
On what's going on what's been going on in the long term care segment in terms of strong results over the last few quarters.
And maybe if you could be a little bit more specific on this quarter in terms of how much of a benefit you saw from lower incidence and then.
On mortality versus what you would have seen maybe pre pandemic and I'm, assuming obviously mortality trends whatever happens with Covid, but do you think then Saturn might have changed given the pandemic and maybe people's reluctance to visit nursing homes or other factors.
Yeah. Jimmy this is Steve Yes, I'll, just kind of go back and just lay out the trends that we've seen through the pandemic and long term care and then just how that might project forward a little bit.
You call it very early on 2022nd quarter, where everything hit.
More acutely we saw climate mortality.
Up to like 30% by count above what our seasonal expectations are and as I mentioned about our life experience group life experience is early on in the pandemic very focused on the elderly population and therefore very focused on those people that we ensure would've with long term care.
Saw that kind of come down in the 50, 15%, 10% range down to five and then really through the Delta Varian kind of in the fall. He started claimant mortality almost get back to our expectations on a seasonally adjusted basis, what we have seen in the first quarter is that tick back up whereby count kind of mortality is about 10% above.
What our expectations would have been.
On an incident front, we saw very low incidents early on in the pandemic. The first quarter for sure maybe the first couple of quarters, we saw that moderate fairly quickly where people that were eligible for claim.
Move forward and request, claiming to be put on claim.
And you saw that pretty consistently through the pandemic and I would say on a run rate basis, we believe that will be pretty consistent with pre pandemic activity I think the first quarter is just a bit of anomaly, where we saw some very very good performance, but as you know this block can be pretty volatile so I'm not anticipating that to continue.
I would say for the first quarter, we were probably about 10.
10 percentage points better on the loss ratio than maybe what we would have expected and again I would say that as a.
Driven by both just normal volatility in claims incidents as well as the higher climate mortality that were attributed to Covid. So again, I think going forward probably for the remainder of the year, the 80% feels about right.
Beyond that we would expect to get back to kind of a more normal normalized expected loss ratio.
Okay.
And then if I think about your guidance, obviously, theres a lot of uncertainty and lots of moving parts, but.
Given the results in the first quarter it would seem like youre going to hit the top end of the guidance even without any changes in expectations that the street had in terms of future earnings. So it seems like the guidance is overly conservative.
But deal agreed.
With that or are there other things that.
Might be headwinds.
In future quarters that people might not be seeing.
Yes, Jimmy it's Rick I would just say when you look at our first quarter performance very happy with that.
And then we look out over the course of the year, we increased our outlook just just given what we're seeing in the first quarter, we expect second quarter to be a little bit better and normalize over the over the second half of the year. If you go back to our outlook in the second half of the year, we were expecting that to be pretty consistent with what we thought going into the year.
We put out a range to give you are kind of best view is going to be volatile, we'll have to see how it plays out but we still think that's a that's a pretty good range.
Okay. Thank you.
Our next question comes from Mark Hughes from <unk>. Your line is open.
Yes, Thank you and good morning.
On the topline in Unum U S. You've got a lot of tailwind it seems like the natural growth pricing. Good sales you talked about 2% growth for the full year as you exit the year and get into 2023.
Any.
Since you can give us of what.
The topline might shape up to be with these kind of a tailwind.
Yeah, Mark it's Mike.
I guess I'd answer it in two ways one is <unk>.
Pre pandemic for those businesses, we really like that sort of afford a six or 7% growth and I don't see any reason to expect that we can get back to that the exact timing for when the current through 2% run rate and all the way back up into that range.
I can't tell you with a great deal of certainty but.
A lot of like you said a lot of reasons for optimism really strong persistency effectively placing rate increases seem new sales growth.
Another good jobs report this morning, all kind of pointing towards continued.
Continued.
The momentum on the top line over the coming quarters.
Thank you.
Yep.
Our next question comes from Josh <unk> from Bank of America. Your line is open.
Yes. Thank you for fitting me in.
I'll just talk about you have a lot of protections against inflation in long term care book with.
Caps.
And caps on the K drove the benefit can you talk about the percentage of claimants were maximizing the JV benefit and does that change from where it was at the beginning of the pandemic.
Yes. This is Steve.
Probably the best way to answer that just to kind of ground back on the.
<unk>.
What what our block of business looks like from the standpoint of indemnity versus reimbursement.
Our block is about 98% indemnity.
And so and just as a refresher on that so if someone is claim eligible and receive services on a daily basis. It's a contractual benefit that is hardwired into the contract that we pay them. So.
Very small 2% of our block as reimbursement, where we're actually.
Reimbursing for actual expenses I'd say that variable is really just de minimis on our blocks and is not something that we really need to worry about inflation within the services provided themselves because of the benefit amount insulates a whatever the contractual oriented.
And that does not vary.
Yes, yes.
And then how.
Face to face interactions in colonial life, comparing with where you were in February of 2020.
So <unk> redistribution based it basically love, yes, yes, yes.
Yes, I got it I appreciate it so.
And it varies a bit.
<unk> has had but in general I would say is a really good balance point, where it is the continued bulk prospecting at the employer level and delivery of enrollment services on a face to face business increasingly augmented by the digital capabilities that we've invested in the colonial life brand and think of that.
Is everything from being able to.
100% digitally enrolled through chat through video.
Really meeting the consumer where their preferences are from an education and communication point of view, we're actually really encouraged about the acceleration towards digital that occurred through the pandemic in terms of the ability for us.
Increased agent productivity, we saw really strong delivery on a productivity basis out of our new agents also our reach into the market and getting to places that geographically otherwise might be quite challenging.
Challenging for us.
Thank you very much.
Thanks, Okay. Thanks, guys.
Our final question comes from Josh <unk> from Credit Suisse. Your line is open.
Hello, Good morning, Thanks for taking the time I just wanted to follow up on the PDR funding question from from a few minutes ago to make sure my head is in the right place.
I'm cognizant of the look back period, but by using the PDR funding, but hypothetically if rates were to stay the same or at least they don't decline over the next year or two and that you do ultimately make that $550 million to $650 million contribution of Berwyn that you previously guided to then than at the end of the day that does that mean is somewhere less than roughly.
$500 million in total PDR funding that you would need to do by the end of 2026 or 2024 or whatever are numbered cadence your timeline.
Yes.
Yes. This is Steve I'll take that the math becomes a little complicated and we need to make sure we're talking about.
Apples to apples. So when you think about the PDR itself.
And the sensitivities that we've given that's on a before tax basis. So when you look at capital contributions those are going to be more driven by an after tax.
Recognition of the PDR.
The other thing to think about there is we do also have ongoing funding requirements outside of the PDR for fair wind. If you go back and you look historically that was about $150 million a year give or take in any one year.
We will continue at some level over time, regardless of the timing of recognizing the PDR. So I would just step back and say, we still feel very good about the $5 50 to $6 50 for this year as I mentioned rates arent really going to impact all that much the requirement for this year, but if it.
If rates do continue at the level. They are specifically the 20 and the 30 year you can kind of see on the sensitivities that we provided what ultimately as we work through the next two to three or four years ultimately that PDR could be under those scenarios and obviously that would impact how we think about capital deployment and the speed at <unk>.
Which we can recognize the entire PDR.
It's still a little too early to call that but we're very very encouraged by where rates have gone over the last.
60, 90 120 days.
Understood I appreciate the color. Thank you very much.
Thanks, Jeff Thank you.
We have no further questions I'll now hand back to Rick Mckenney for closing remarks.
Great I want to thank everybody for taking the time to join US This morning.
Complete our call for first quarter 2022, we do look forward to seeing many of you in upcoming conferences and investor events and also welcome shareholders to join US for our annual meeting in three weeks so with that we'll end the call. Thank you very much.
Today's call is now concluded. Thank you for your participation you may now disconnect your lines.
Yeah.
Yeah.
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