Q2 2022 Unum Group Earnings Call
Hello, everyone and welcome to the Unum group second quarter 2022 earnings conference call.
My name is Stacey and I'll be coordinating today's call.
You will have the opportunity to ask a question at the end of the presentation, if you'd like to register a question. Please press star followed by one on your telephone keypad. Please calling me any ask one question and one follow up to allow others the charm.
I would now like time mcaulay, but your highest Tom White senior Vice President of Investor Relations at Unum group to begin so Tom. Please go ahead.
Great. Thank you, Dave Good morning, everyone and welcome to the second quarter 2022 earnings call.
For unit.
But one last time 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 and our subsequently filed Form 10-Q or 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 in the investors section so.
Yesterday afternoon, Unum reported second quarter 2022, net income of $374 million.
Or $1.83 per diluted common share an increase from $182 9 million or.
Or <unk> 89 cents per diluted common share in the second quarter of 2021.
Net income for the second quarter of 2022 included the after tax amortization of the cost of reinsurance of $13 $1 million or six cents per diluted common share and a net after tax investment loss on the company's investment portfolio of $3 $1 million or two cents per diluted common share.
Net income in the second quarter of 2021 <unk>.
Included the after tax costs related to the early retirement of debt of $53 $2 million.26 per diluted common share.
And after tax impairment loss on the right of use asset related to one of our operating leases for office space that we are no longer using of $11 million or five cents per diluted common share.
The net tax expense related to a U K tax rate increase of $24 $2 million or <unk> 12 cents per diluted common share.
The after tax amortization of the cost of reinsurance of $15 $5 million or eight cents per diluted common share and a net after tax investment gain on the company's investment portfolio of $600000 or one cent per diluted common share. So excluding these items after tax adjusted operating income in the.
Quarter of 2022 was $386.6 million.
Our $1.91 per diluted common share an increase from $286 $2 million or $1.39 per diluted common share in the year ago quarter.
Participating in this mornings conference call are <unk>, 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 benefits line and now I'll turn the call to Rick for his own.
Turning comments.
Thank you Tom and good morning, everyone.
The second quarter was an outstanding one for unum highlighted by accelerating growth in premium income favorable benefits experience across many of our business lines and strong capital levels. They give us great flexibility to carry out our strategic initiatives and invest in growth.
Pulling it together our after tax adjusted operating income per share increased 37% from the year ago quarter to $1 91 per diluted common share this quarter.
The highest quarterly earnings levels, we have seen.
Reflecting on the first half of the year our earnings have been on an accelerated realization of our expectations coming into the year. We now expect our adjusted operating earnings growth rate to be in the 40% to 45% range much better than expected in the beginning of the year and also double the growth we expected coming out of the first quarter.
Over the last several years, we've remained disciplined in how we price and then good stewards of our capital with an engaged workforce, we weathered a challenging period in the external environment. The fortitude of our team combined with consistency and our strategic focus has allowed us to accelerate our growth path in 2022.
This is an inflection point for our company and as we unpack. The results you will see the multiple factors that enabled the recovery ahead of what we had ambition coming into the year.
To start a return to higher profitability. This quarter was driven by the lessening of Covid related mortality across the U S population, which declined to approximately 35000 lives in the second quarter compared to an estimated 155000 lives in the first quarter.
There was also a lower percentage impact and the age of the population that we cover.
This improvement in mortality levels led to a significant increase in adjusted operating income in our Unum U S group life and <unk> business with return to pre pandemic levels.
Falling operating losses, and five of the last six quarters.
We are in a much better place today, but it bears watching it has not gone away completely.
In addition, the current business environment has proven to be beneficial to many aspects of our business.
High employment levels and rising wages have continued to generate higher levels of what we term natural growth.
That is the incremental premium we realized from rising payrolls at our insured customers, which is now running at almost 5%.
This rate is nearly double that of the benefit we are realizing prior to the onset of the pandemic.
With this tailwind, which primarily impacts our group lines, we realized year over year growth in premium income of three 5% and our core business segments on a constant currency basis.
The second quarter performance compares to growth of one 9% in the first quarter also measured on a year over year basis.
In addition to this lift from favorable employment conditions, we were quite pleased with the level of new sales were recorded in the second quarter with increases of 26% for Unum U S, 6% for colonial life and 20% for U M U K on a local currency basis.
In addition to favorable employment and wage growth today's higher interest rates are also benefiting the company in multiple ways.
New money yields continued to rise in the second quarter and we are now seeing the yields on many of our investment portfolios that back our product lines begin to stabilize after many years of persistent declines.
Also in the second quarter, we raised the discount rate for new long term disability claim and curls for the first time in many years.
As a result of higher new money yields and healthy interest margins in that block.
This change was a contributor to the strong financial performance for group disability. This quarter it will be a modest mitigate to our pricing actions for LTV going forward.
And finally higher interest rates and the projection of continued higher interest rates are helpful to the long term funding needs for the long term care closed block.
In addition to the significant improvement we saw in our Unum U S group life business benefits experienced in several other lines also showed good improvement most notably in is the improvement we saw in the Unum U S group disability line that what had one of its lowest benefit ratio on record at 66, 4% in the second quarter.
This was due primarily to very favorable new claims incidents and claims recoveries. In addition to the benefit from the discount rate that I just referenced.
Colonial life also record one of its lowest benefit ratios at 47, 6% this quarter with favorable claim experience across all product lines.
And finally unit Unum us supplemental and voluntary lines continued to produce very strong levels of operating income as it has throughout the pandemic, it's worth noting that the unum us supplemental and voluntary lines and colonial life, two guys with strong margins solid growth and stable experience over long periods of time continue to represent almost.
Half of our before tax adjusted operating income this quarter.
These many positive operating trends that help drive our GAAP earnings improvement also helped drive strong after tax adjusted statutory income, which for the second quarter increased by almost 60% over the year ago quarter.
This further improves our cash flow and capital position as risk based capital for the U S. Traditional insurance companies increased to approximately 415% at the end of the second quarter <unk> highest ever.
Holding company liquidity remains well above our targeted levels at $1 2 billion and leverage dropped below 25%.
This capital strength gives us increased flexibility as we look to grow our high margin core businesses returned capital to shareholders through dividends and share repurchases and funding needs over the long term care block.
In summary, I'm very pleased with our performance in the second quarter and the flexibility it creates for us as we move forward.
From the pandemic are still very real and there is growing concern over the direction of economic growth.
I believe it's a testament to the strength of our business that we are in such a favorable position today from an earnings and capital perspective after navigating through past the pandemic over the last two years now I'll ask Steve to cover the details of the second quarter results, Steve Great. Thank you Rick and good morning, everyone as Rick outlined for you. The second quarter was an exceptionally good one for the.
<unk> as we benefited from both a significant decline in the COVID-19 related impacts on our business this quarter and strong operating performance in many parts of our operation as I cover our second quarter results I will primarily focus on an analysis of our second quarter results compared to the first quarter of 2022, allowing me to this.
Scribe, how our business lines had been progressing through the pandemic.
For items, such as premium growth and sales growth I will tend to focus more on year over year comparisons.
To start I'd like to provide some broader context on the quarter and frame up for you. The primary drivers of the strong performance. We saw this quarter first as you are aware there was a significant decline in COVID-19 related mortality in the U S. In the second quarter relative to the first quarter declining to an estimated 35000 national debt this quarter.
According to Johns Hopkins compared to approximately 155000 deaths in the first quarter. This absolute decline coupled with the continued shift in the age demographics of the mortality away from working age people to the more elderly population helped drive a significant improvement in our Unum U S group life results, which.
Our policy is that primarily cover employees in their working years.
The decline in mortality also produced a more normal result for our long term care block as benefits experienced more closely aligned with pre pandemic levels of experience, especially for claim of mortality.
Second we saw exceptionally favorable performance in our Unum US group disability line with a strong acceleration in premium growth and historically low benefit ratio I'll dig into those details in just a moment, but the benefit ratio for the group disability line was favorable for both the short term disability and long term disability lines leading to AUM.
<unk> excellent performance for this business line.
Third we continued to see very favorable performance for our alternative investment portfolio. Our alternatives portfolio generated returns of approximately $54 million, which are higher than our expected average quarterly returns exceeding both the first quarter income of $32 million in the year ago second quarter.
A $52 million again, I'll dig into the drivers of the results in more detail in a moment.
And one final trend to highlight is the favorable operating performance, we experienced in our colonial life and supplemental and voluntary lines of business. These lines saw stable margins through the pandemic and continued to produce good top line growth very strong earnings contribution and excellent adjusted operating returns on equity exceeding 18%.
With that high level setting I'll begin my review of our operating performance starting with Unum U S segment, adjusted operating income increased sharply to $295 $4 million in the second quarter of 2022 compared to $171 $6 million in the first quarter, primarily driven by strong.
<unk> sequential quarter improvement in the group disability and group life and <unk> lines as well as continued strong levels of operating income from the supplemental and voluntary lines.
Within the Unum U S segment, the group disability line reported an excellent quarter with adjusted operating income increasing to $107 $5 million in the second quarter of 2022 compared to $62 6 million in the first quarter. The biggest driver of the earnings improvement was favorable benefits experience, which produce.
Further improvement in the benefit ratio in the second quarter to 66, 4% from 73, 8% in the first quarter.
This improvement was driven in large part by strong performance in the long term disability line as claim recoveries and new claim incidents were both favorable benefits experience in the short term disability line was also favorable in the second quarter as compared to our experience in the first quarter. The benefit ratio was also helped by an increase of 25 basis points.
In the discount rate for new LTV, claiming hurdles are reflection of the significant increase we are seeing in new money yields now looking forward. We expect the group disability benefit ratio to average in the low to mid 70% range for the second half of 2022.
<unk> will likely remain volatile given the environment we're in.
Results for Unum U S group life and <unk> also showed strong improvement with adjusted operating income of $67 3 million for the second quarter of 2022 compared to an adjusted operating loss of $9 4 million in the first quarter. This quarter to quarter improvement was also primarily the result of it.
Improvement in benefits experience, mostly driven by the significant decline in national Covid related mortality to an estimated 35000 in the second quarter from 155000 in the first quarter.
Additionally, the age demographics for mortality continue to shift away from the working age population that was more significantly impacted in the second half of 2021 to the more elderly population.
In the second quarter, 16% of the deaths were in the working age population compared to 24% in the first quarter and 35% in the fourth quarter last year for our group life block, we estimate that Covid related mortality claims declined from an estimated 1400 claims in the first quarter to approximately 200 clay.
Ames in the second quarter.
In addition, we also saw lower average benefit size of just over $40000 per claim this quarter compared to slightly less than 55000 in the first quarter as more of the impact we saw was in the retiree population.
We also saw favorable prior period run off of <unk>, which reflects the faster than predicted improvement in our Covid claims experience.
Finally, non COVID-19 related mortality improved in the second quarter relative to the first quarter and the a D and D line performed more favorably as well, adding to the strong improvement this quarter.
Now looking ahead, assuming national Covid related mortality continues at its current levels and we see some moderation in the favorable volatility from non COVID-19 mortality in the a D and D line, we would expect the benefit ratio for this line to run in the low to mid 70% area for the second half of 2022.
Moving on adjusted operating income in the Unum us supplemental and voluntary lines continue to be very strong in the second quarter at $126 million compared.
Compared to a $118 $4 million in the first quarter.
For the first half of 2022 these business lines generated an adjusted operating return on equity of over 18%.
So looking at the three primary business lines first the individual disability recently issue block of business continued to produce excellent results with a benefit ratio slightly lower at 41, 3% in the second quarter compared to 42, 5% in the first quarter.
Likewise, the bulk the voluntary benefits line again reported a strong level of income with the benefit ratio stable at 48% for the second quarter compared to 44% in the first quarter, primarily reflecting continued strong performance in the life product line.
And then finally benefits experienced in the dental and vision line was generally consistent in the second quarter relative to the first quarter with a benefit ratio of 72, 9% compared to 73, 4%.
The supplemental and voluntary lines continued to perform very well and are generating strong levels of operating income for the company, which we do anticipate to moderate slightly in the second half of the year.
Looking now at premium trends and drivers we are very pleased to see momentum for Unum U S. Accelerate further with growth in premium income of three 3% in the second quarter on a year over year basis compared to the one 3% increase we saw in the first quarter.
Growth was especially strong in the group disability line with the year over year growth of five 1% in the second quarter compared to growth of one 9% in the first quarter.
Sales growth from Unum U S was very encouraging with growth of 25, 6% year over year in the second quarter and 16, 2% for the first half of 2022.
Sales growth trends in the second quarter were broad based with strong results in the employee benefits lines individual disability and voluntary benefits and also by market size with favorable results in both the core and large case markets.
Overall, we remain pleased with persistency trends this quarter, which showed some variation by line of business, but for our total group block was slightly higher at 89, 9% for the first half of 2022.
The contribution from natural growth continues to accelerate for us and was approximately 5% year over year as we benefit from strong employment levels in the U S as well as higher wage levels.
So taken together with all these factors combined Unum U S premium income for the second quarter of 2022 as recover to pre pandemic levels and it is now actually three 3% higher than it was in the second quarter of 2020.
Then moving to the Unum International segment adjusted operating income for the second quarter declined slightly to $24 $9 million compared to $27 2 million in the first quarter. The weaker dollar to pound exchange rate was the primary driver of the decline.
Adjusted operating income for the Unum UK business was steady in the second quarter at $19 3 million pounds compared to $19 2 million pounds in the first quarter.
The reported benefit ratio for Unum UK was 89, 7% in the second quarter, which compares to 87% in the first quarter.
The high levels of inflation in the U K during the second quarter did distort the reported benefit ratio, but adjusting for this impact the underlying benefits experience in the quarter was somewhat mixed benefits experience in the group disability line was impacted by unfavorable mortality in the claim at work and experience was unfavorable in the critical.
This line <unk>.
Experience in the group life business was also unfavorable in the second quarter compared to the first quarter.
For Unum, Poland adjusted operating income was slightly lower though overall results remain consistent with our expectations for this business.
Premium income for our international business segment declined on a year over year basis in dollars, but continuing to show strong growth in local currency.
Unum U K generated premium growth of eight 6% on a year over year basis in the second quarter and our pulling operations produced growth of 15, 4%.
<unk> businesses continued to generate strong year over year sales growth in the second quarter with the Unum, UK up 23% and Unum, Poland up 19, 8% in local currency and persistency remains steady.
Next results for colonial life. This quarter were among the best on record with adjusted operating income of $101 1 million compared to $90 1 million in the first quarter. We continue to see favorable experience in the A&H product lines, namely the cancer and critical illness products as well as improved experience.
And our lifeline, which together produced an improvement in the benefits ratio to 47, 6% in the second quarter compared to 49, 3% in the first quarter, we anticipate the benefit ratio will trend in the 48% to 50% range for the remainder of 2022.
We were pleased to see a continuation in the improving trend in premium growth for colonial life, which increased one 9% on a year over year basis compared to a 1% year over year increase recognized in the first quarter.
Driving this improving trend is the rebound we have seen in new sales over the past several quarters as well as generally stable to higher persistency.
For the second quarter sales for colonial life increased six 4% compared to the year ago second quarter and have increased 10, 4% for the first half of the year.
Persistency for colonial life was 78, 6% for the first half compared to 78, 3% for the first half of 2021.
As we have indicated previously it will take a couple of years to return to pre pandemic levels of premium growth in the colonial life segment.
However, we do feel very good with the progress we are making to build back premium income to pre pandemic levels for this business, which this quarter are only 2.5% below the second quarter of 2020.
In the closed block segment adjusted operating income excluding the amortization of cost of reinsurance related to closed block individual disability reinsurance transaction was $79 $3 million in the second quarter compared to $94 1 million in the first quarter.
This decline in larger largely reflects the more normal benefits experience. We saw in the long term care block has the effect of higher climate mortality was diminished in line with broader COVID-19 trends.
The adjusted operating loss ratio for LTC was 85, 9% in the second quarter compared to 72% in the first quarter as there was no excess claim at mortality this quarter after running about 10% higher than our seasonally adjusted expectations in the first quarter.
This level of performance for LTC is consistent with our long term expectations.
For the closed block individual disability line the interest adjusted loss ratio increased slightly to 79, 5% in the second quarter compared to 78, 7% in the first quarter, but remain within our long term expectations.
Miscellaneous investment income in the closed block increased in the second quarter compared to the first quarter by approximately $17 million with higher returns on the alternative investment portfolio more than offsetting a reduction in bond call premiums.
So then wrapping up my commentary on the quarter's financial results. The adjusted operating loss in the corporate segment was $36 9 million for the second quarter compared to $44 million in the first quarter with higher net investment income and more favorable operating expenses.
Going forward, we anticipate quarterly losses in this segment to be more consistent with our first quarter results.
Moving now to investments net investment income, we continue to see a much better environment for new money yields given the rise in interest rates and the widening in corporate bond spreads. So far this year, the new money yield for the second quarter was approximately four 8% compared to three 2% in the year ago quarter.
While there are many factors that impact these new money yields for our various product portfolios, we're starting to see portfolio yields for most of our product lines begin to stabilize after many years of decline.
As new money yields are currently exceeding the portfolio yields.
Miscellaneous investment income increased in the second quarter to $57 million compared to $41 million in the first quarter. We continued to see strong above average returns from our alternative investments portfolio, which produced returns of $54 million in the second quarter and $32 million in the first.
Quarter. It is worth highlighting that second quarter returns benefited from about $17 million from year end 2021 statements due to a lag in reporting final audited financial statements from those partnerships.
Looking at this quarter's performance returns from the real asset category performed very well in the second quarter as did our credit funds with floating rate investments benefiting from rising rates this quarter.
The portion of our miscellaneous investment income from traditional bond calls did decline in the quarter relative to the first quarter and thus far in 2022 is running well below the unusually high volume of bond calls we experienced in 2021. This.
This is consistent with our expectations and while it does pressure net investment income in the short run maintaining those higher yielding securities for longer periods of time is beneficial to our portfolio yields our current run rate expectation for quarterly income from alternatives is in the 20% to $25 million range.
And our current estimate is that the third and the fourth quarter returns will be slightly below that expected to average run rate.
Moving now to capital the financial strength of the company continues to build and remains in excellent shape, giving us significant financial flexibility the weighted average risk based capital ratio for our traditional U S insurance companies improved to approximately 415% and holding company liquidity was one.
$2 billion at the end of the second quarter. Both of these metrics are well above our targeted levels in.
In addition, leveraged trended lower and ended the quarter at 24, 7%. These strong capital metrics are driven by the strong improvement we're seeing in our statutory earnings results. Thus far this year.
Statutory after tax operating income was 200 and any $1.3 million for the second quarter, a sharp increase from the second quarter of 2021 of $177.5 million for the first half of 2022, our statutory earnings totaled $481 8 million.
And have exceeded first half 2021 by $168 million.
Looking at capital deployment in the second quarter, we repurchased $45 million of our shares this quarter and $95 million for the first half of the year and we do continue to anticipate repurchasing approximately $200 million for the full year.
Capital contributions in the <unk> subsidiary were $135 million in the second quarter and for the first half of 2022 now totaled $350 million.
With favorable performance in the LTC block and the rise in interest rates. This quarter, we are trending favorably within the range of full year capital contributions to fair wind a $550 million to $650 million that we guided to at our Investor meeting.
One final comment to make regarding capital is to highlight the announcement that we made yesterday afternoon that we have issued a redemption notice for the $350 million notes due to mature in 2024.
We intend to fund that redemption with the proceeds of a new five year Bank term loan facility, which we also signed yesterday afternoon. The pricing on the loan facility is very attractive relative to current market spreads.
And we are able to effectively extend the maturity by three years.
I'll, then wrap up with a comment on our outlook for the year as a reminder, at our outlook meeting in February we initially set our expectation for growth in after tax adjusted operating income per share in a range of 4% to 7% for 2022, we raised our outlook to an expectation for growth in the range of <unk>.
<unk> to 20% following our first quarter earnings report with our strong performance in the second quarter and our improved outlook for the second half of 2022 relative to our original expectations. We are again, increasing our outlook for growth in 2022 to a range of 40% to 45%.
Off of our adjusted after tax operating income per share in 2021 of $4.35.
At our Investor meeting in February we also provided a longer term outlook for after tax adjusted operating income per share to increase within a range of 45% to 55% in 2024 off of our 2021 earnings per share of $4 35.
Since we will be moving to the new <unk> accounting basis, beginning with the first quarter of 2023, we will not be updating this three year view under the current GAAP reporting standards. However, we believe that upside to our original growth expectation has developed given our strong performance so far in 2022, including <unk>.
Higher premium growth and faster improvement in benefits experienced in many of our business lines as well as the benefits to our business from higher interest rates rising wages and strong employment conditions.
We intend to provide 2021 and 2020 to recast of resolved on the new <unk> basis in the first quarter of 2023 and transition our outlook expectations to the new accounting basis also in the first quarter.
Now I'll turn the call back to Rick for his closing comments and look forward to your questions.
Thank you Steve for that summary of our second quarter results. The quarter was an outstanding one and we're very pleased with the performance of the company as we continue to deliver on our promises to our customers throughout the pandemic.
We believe we're very well positioned in today's business environment with a strong balance sheet strong earnings momentum and remain very encouraged with our outlook going forward.
Before I open up the call to questions I want to take a moment to acknowledge and thank Tom way.
After more than 40 years of service with the company Tom will be retiring in the next month and this will be his last earnings call.
Tom has been a stable external voice of Unum for all these years and I know that he's built exceptional relationships with all of you.
We will miss him greatly as he will now have more time to work on his golf game spend time with us growing family, including grandchildren.
Matt Royal our current Chief risk officer will be our new head of Investor Relations. Matt is unique combination of financial strategy and risk experience makes him an ideal person for this role you will all begin to meet Matt as he and Tom worked together over the next month. It is fitting that we have record results for Tom last call.
The team is here to respond to your questions. So I'll ask David <unk> to begin the Q&A session.
Thank you very much as a reminder, if anyone would like to ask a question. Please press star followed by one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by to hang to ask you. A question. Please ensure you Amit it lightly.
<unk> only ask one question and one follow up to allow others the charm.
Our first question is from Alex Scott from Goldman Sachs. Alex. Your line is open. Please go ahead.
Hi, how are you guys.
First one I had is just on the favorable trends youre seeing.
I assume some of that has to do with the strong labor market.
At the moment.
And it would just be interested in your perspective on.
Sort of the run rate you gave us what that assumes about.
How the labor market will be sustained in the near term.
And what kind of sensitivity would have if things do get a little choppy or here.
Yes, Thanks, Alex I'll just hit on an overall like we've mentioned in our results. They have moved a little bit faster given a very strong labor market rising wages and so I think we've outpaced as part of that I don't think we count on that when you think about how we think about our business and natural growth, we think of that 2% two 5% range of what that looks like so the.
Levels that we're seeing now we just we just don't count on and we really don't factor those in as we look out over the next several years. If you mentioned if it gets a little bit choppy or it's worth mentioning how the people think about the company and how we think about the company and a slowing period I think first of all I'd say its a top line question in terms of growing our premium levels.
We've been very happy with the recovery, we have seen a premium growing three 5% we want to see that get back up into the 4% to 7% premium growth range, we've gotten accustomed to prior to the pandemic, we might see that slow a little bit or not maybe not accelerate as fast as we want if the environment gets a little bit slower.
Couple of other places.
As the world does get choppy, but and by the way.
We don't have any particular insight on that so we don't run our business that way and I think our business model is quite resilient.
So even if.
Things get a little bit less robust in the Arab currently we don't get too concerned about that the two other places you might see it is in our investment portfolio. So the team's done a really good job of going through the portfolio, taking a look at where things can get impacted you know just not so long ago. They were looking at what happens in a rapidly rising interest rate.
Now, they're looking at what if things slow down and what is the impact of our credits feel very good about that and where the portfolio is positioned even I would say in the pandemic, we actually decreased our exposure to some of the high yields a couple of percentage points of the portfolio came down.
And then the other place when things go a charter I think we get the question often about what happens in long term disability World. Mike you have some comments on that we've seen recessions in the past and maybe some thoughts on that yes. Thanks Rick.
We managed through multiple times and back to the last.
Recession should we be in a similar spot again.
What we saw was a little bit of a lag that's kind of the first point as you see it coming it's generally two to four.
Four quarters before that Ensign has started to come through and I haven't seen that gives us opportunity in Gabon on into the business through our pricing and underwriting point of view and then most importantly, just to make sure that we're prepared from a claims management have you made sure that his clinical vocational and disability specialists.
Our parents.
In general not up and that we're looking.
Looking to see happen, but should that occur we are really well okay.
Although I'd summarize it Alex.
The discussion is more what happens on a recessionary front I think we feel good about it we showed that we got through a very difficult time of the pandemic and are in good shape, we like the environment that we're in today, we hope it persists.
It's hard to predict.
We feel good about where we are.
Got it.
Second one I had views on expenses and maybe more broadly on expenses I think in certain areas of your business. You know there is a lot of need to ramp up staff associated with handling claims and so forth during COVID-19.
Hopefully the same level won't necessarily be needed.
Going forward, we shall see I guess, but how do you how do you think about that.
Is that.
I guess this is also obviously inflation is a pressure point.
How does all of that sort of go into to where expenses should go from here for you guys.
That's a good question, Alex and I think in this environment, where the labor market is tight as we look at it we think about expenses more broadly we always have.
In terms of managing a good productivity in the company as we grow I think we were challenged a little bit going through the pandemic and how expenses went up this to meet the needs of our customers and something we needed to do and I think we responded to that and then I think the second piece you asked about just an inflationary environment and our expenses will be commensurate with making sure. We're.
Taking a.
A good actions to be competitive in our market our talent. It means a lot to us and making sure that we're competitive on that front is equally as important maybe Steve you could talk a little bit about we talked a little bit of Investor day, but how we see this coming over the next couple of years I think that might be helpful to quantify some of them yeah, Alex It's Steve. Thanks for the question so back in Investor Day, we did.
Talk about some pressures through our operating expense level in the short term that we would be able to work through over time with just growth of the business as well as pricing actions. We had mentioned that we thought that our overall operating expense ratio would go up by somewhere between 125 875 basis points to do those things that Rick talked about take care of our employees in <unk>.
Beth back in the business I would say, we're probably tracking for 2022 to be at the lower end of that range, but we did expect that our levels would go up during the year.
Maybe a lot of those expenses are concentrated in our group disability line.
Very labor intensive.
That line and so Mike maybe talk a little bit about what we're doing to invest specifically in group disability.
You feel most acutely in that group disability line because it is where we're most intently serving client as Rick mentioned.
Alex to your point as Covid volumes have come down here and we've seen more favorable incidents that should put a little bit of a tail wind for us in terms of operating expenses at the same time I would tell you.
Pretty much fully staffed for the first time in six to nine months. It is a tight labor market with weight and selective in terms of the agreement.
And on the team and we've arrived at a good spot there and then the second piece is technology and we continue to invest in technology I think again that will represent a tailwind for us as we get into 2023 is technology, particularly around short term disability and leave comes online, but those are expenses we're incurring.
From an investment point of view so in a reasonable spot we want to make sure. We take care of our people. They are the ones that are taking care of our customers, but I would expect a downward trend in some of those.
Our investments come online and hopefully sustain that.
Thank you.
Thanks, Alex.
Thank you. Our next question is from Ryan Krueger from <unk>. Your line is open. Please go ahead.
Hi, Thanks, good morning, and congrats to Tom.
I guess first question is on the second half guidance I guess would you characterize that as pretty much back to normal fully or is there any headwind embedded in that is still related to the environment.
Yes, Brian This is Steve I can take that one and I'll take the question up a little bit and just make sure everybody is clear on the guidance that we did put out there.
We are looking for the second half of the year quarterly run rate on EPS to obviously dropped below what we saw in the second quarter Theres really probably three main areas that we think that that will go back to a normal run rate. One is just in our group disability benefits experience.
<unk> messaged in my comments, we think that'll be more in the low to mid 70% range going forward.
Also with our life insurance business group life insurance business in the U S.
Mentioned in my comments as well, we did have some favorable impact of the.
The run out of our IV and are at the end of the first quarter. We do think we will have some ongoing impact from just COVID-19 claims coming through maybe $10 million a quarter. So so that will be coming through the latter half of the year and then with our alternative investment portfolio. We obviously had a very good quarter of $54 million in the second quarter, that's probably going to be in the high teens.
<unk> per quarter for the remainder of the year, a little bit lower than our longer term expectations of the mid Twenty's. So you take that all in you put that in there. We do think we're going to have more of regrets into a norm.
It comes out to about a buck 40 to about 45, a quarter probably for the remainder of the year. If you take that back to pre pandemic, that's about where a jumping point our jumping off point was in 2019 2020. So we feel like we're back to pretty much the earnings power that we have there and then we're able to grow off of that I did mentioned in my comments, we are going.
Different accounting basis going into next year, so not really given any guidance beyond 'twenty, two but obviously feel really good about how we think we're going to end the year and be able to go in into the future.
Great. Thanks, that's helpful and then on.
Long term care did you give an update on any more thoughts you've had on potential.
As you could hedge interest rates.
Been evaluating that.
Yeah. Thanks for the question I would I would take it in two pieces because we really have two blocks that we manage somewhat differently just from an interest rate perspective, because of the reserving construct we're on we have our Unum America block about 80% of the block seeded into fair. When we are on a premium deficiency reserve.
Construct there and then we have our first unum block, which is more on a traditional.
Asset adequacy reserve testing and I am happy to announce we actually did make a move in the second quarter on that block, we did execute on $164 million of notional hedge in our first unum LTC portfolio, what that does is it effectively locks in the risk free rate on about 50%.
Our positive cash flows for the next five years and we locked it in a different rates, but on average it's about 335% for the 30 year. So we really feel good about being able to take that first step.
It also allows us to get a little bit more certainty around our asset adequacy reserve in the New York entity, we think that will support being able to release a bit more of our cash flow testing reserve by the end of the year and also be able to take a dividend out of our New York Company. This year, what we'll have to let the year end process play out.
We feel like that's a pretty positive outcome.
If you go back to the Unum America block. It is more complex just the interaction with the PDR.
Funds withheld portfolio. So we basically have the assets in Unum America and the liability been fair when we have to work through that and just the collateral requirements on that block are going to be much greater so I would say that's still work in process, Ryan, but we're obviously evaluating to see how best we can derisk the balance sheet, which is obviously a big part of our <unk>.
Strategy behind our long term care block.
Great. Thanks, a lot.
Thanks Ryan.
Thank you. Our next question is from Erik bass from Autonomous Research. Your line is open. Please go ahead.
Hi, Thank you so sales and premium growth had been trending much stronger than assumed in your original 2022 outlook can you just talk about what's changed since then what's driving the upside and how we should think about the premium growth trajectory going forward.
Yes, sure maybe I can jump in and take that one Eric its Mike.
Like Rick highlighted I think it's a combination of factors that are fueling that premium growth coming in it really across segments above what our expectations were coming into the year and first I would just start with sales results overall, 20% plus growth for the Unum brand here in the U S colonial life.
Up nicely international up very nicely on local currency basis, we're finding our value proposition.
Is winning in terms of new client and adding benefits into existing clients and maybe in a minute I'll flip it over to Tim to talk a little bit about what's happening in voluntary on your life and then market International.
Circling back to the group business, you take that kind of sales growth combined with good strong persistency, the natural growth coming through probably a tick or two higher than we might have expected and then we talked about it at the outlook meeting.
Continued sort of balanced rate increases through the renewal programs and those continue to track well.
That's our expectation.
And everything showing a little bit of upside for us in the combination.
Finding ourselves in a over 3% growth in the topline probably six months quicker than we thought and it bodes well for getting back into that 4% to 7% range. So we like how we're positioned here in the U S market.
And Tim maybe you'll comment on offering.
Yeah, Thanks, Mike you hit it.
<unk>.
No.
The biggest surprises maybe maintain and persistency for them and then they can away. That's helpful. Just had premium levels I'm really held up well.
During the pandemic, we have also seen improvements in agent productivity over the last couple of years.
It's along the colonial life side, we're making we're continuing to make nice investments across the <unk> businesses both.
<unk> life and you know them that are spurring some additional growth.
Recently, we were very encouraged by the momentum we're beginning to see building on the BD.
Syed and small.
Small mid and large case market.
I appreciate the question.
Pleased with the progress, we're making and we think that there's still plenty of opportunity out there.
Alright.
Yes. Thank you so.
Sales growth in both Poland, and the UK, 20% premium growth in these candidates in our house.
And in Poland at 15% and persistency slightly higher I would point to a few things in.
In the U K I would say that we've addressed some of the house service levels. So the customer satisfaction is rising makes the proposition more attractive I think we've obviously had some wage inflation in the country and.
And that obviously helps premium income and I think we were generally good employment levels.
We have not dissimilar story in Poland as well, so those things together contributing to.
Good for you one on sales persistency and premium growth overtime.
So hopefully that gives you a sense across markets.
A lot of things going well some good optimism in the team I'll just round it out by saying and I mentioned it in just a second ago when youre talking about expenses.
Fully staffed in our claims area. We're also fully staffed in our onboarding enrollment implementation and client service areas and we are in.
Anticipating continued success from our new sales point of view so as we worked through the second half and get to the important January effect as we are ready to onboard.
Substantial number of new clients.
Great. Thanks, Mike.
I guess the second question I had is your RBC ratio as you mentioned is the highest its ever been and that's even after factoring in the impact of new C. One charges.
It seems like free cash flow is also normalizing more quickly than you would expected. So does this change your view at all kind of about the level of annual capital deployment, you can support near term.
And any differences in how you think about the priorities.
Why not.
Yes, Thanks, Eric for the question I mean, the capital deployment picture its getting clear. It you mentioned the strong capital generation has been tremendous statutory earnings we saw as we mentioned in the first.
First half of the year are returning to levels that we experienced prior to the pandemic. So it puts us in a very good spot we want to make sure that we're doing good job of thinking about how we deploy that you would've seen in the second quarter, we increased our dividend by 10%. It's one of those pieces that we look at but I'd take you back to we really want to put it into the core business in <unk>.
Row, the way that Mike talked about on the premium side. So we're going to continue to invest very strongly in the business today, and then think about how we can grow both on the organic front think about acquisitions not too large, but certainly a place that we can help to enhance the overall offerings that we've got out there and then the continued deployment of <unk>.
C across our buybacks and Steve you mentioned, a little bit above what was changed because there are other uses we can use now as well and thinking about where we put that money to work yeah, Yeah I think.
We still are pretty consistent in our view of wanting to balance our stakeholders between getting the premium deficiency reserve kind of behind us from a recognition perspective as well as starting to deploy buybacks.
To our shareholders.
Kind of take you back to the Investor day discussion and bring in the whole PDR discussion into this a bit.
I think important points.
First of all as you know the the discount rate that we use there comes into the calculation over a trailing three year period. So, although we're really happy with where the 20 and 30 year Treasury rates are right now we would like to give that a little bit more time to actually work its way into the calculation that does amortize in over time and so 2022.
Contributed <unk> four that are going to be pretty consistent with what we thought coming into the year. We did give a scenario that provided 3% 30 year.
Treasury and that would reduce the PDR to about $1 $8 billion and we would love if that's where we end up but we need to play this out a little bit longer. We do think that scenario would imply that we could fully recognize the PDR in 2024, but we also think that right now it makes sense to balance the two the stakeholders.
That are out there as far as moving forward with getting the PDR permitted practice behind us and also having I would say a moderate level of capital deployed back to our shareholders.
Got it. Thank you and you said PDR in 2024, I think that was the original plan.
Yes.
Did anything change there.
Yeah, I mean, the original permitted practice or the permitted practice allows us to take until 2026.
What we did discuss in our Investor day is under certain interest rate pads and interest rate scenarios, we would have the ability to probably recognize that in the 2024 period.
That would be something that if if rates stay at the levels that they are that would be something that we definitely want to contemplate doing.
Got it thank you.
Thank you. Our next question is from Jimmy <unk> from Jpmorgan, Jamie. Your line is open. Please go ahead.
Hey, good morning.
Just a question on your margins overall, especially in the disability business.
They've been better than.
Expected better than I think most of their peers have had so wondering how much of the improvement is just because of improving core trends versus maybe any.
Reserve releases or anything else that might not sustain into the second half and into next year.
Yes, Jimmy it's Mike I can take that question and I would just start by kind of agreeing with the premise that.
It is a very favorable loss ratio I'd say underpinning that is really solid fundamentals and I think that is a testament to the folks that are doing the pricing underwriting our field organization.
As well as our claims organization kind of really.
Working together quite effectively there are some things that showed up in the quarter to your question that we would.
Not see repeating in sort of mitigating overtime and coming back into that group disability loss ratio that Steve was talking about in sort of the low.
To mid Seventy's that the thing that I would point to and they're sort of in order of impact if you recall back to the first quarter.
Non COVID-19 related short term disability incidence was quite favorable for us and we talked a little bit on the call about an all likelihood the omicron varian in the surge there in the early part of the year pushing out some of the.
Scheduled surgeries and non Kobe FTE type claims.
That favorable STD incidence, if you think about the flow through timing into LTV really came through in quite favorable LTE incidence here in the second quarter, we would see that normalizing in line with our expectations as we work through the rest of this year and into next year. So that's one piece of it.
You talked a little bit about it but again, a one timer in the quarter around debt paid family leave premium return based on risk experience of last year that that was a little bit of a tailwind and then LTV recoveries in the segment were quite favorable I do expect favorability going to persist and so.
That is something that is built into our outlook not quite to the rate that we had here in second quarter. So you kind of take all those together and say over the next few quarters it seems likely.
There's always uncertainty that seems likely will be reverting back to the low 70% range.
Okay.
And then on the changes in taxes in the U K.
And the business.
How should we think about your overall expected tax rates for 2023.
This is Steve let me I'll take that one.
So I'll kind of take back to last year in the U K the government enacted a new tax rate, taking the tax rate from 19% to 25%. The tax rate was not effective though until next year I believe that the first quarter next year or maybe early second quarter of next year when they enacted at the GAAP accounting would have you.
Revalue your balance sheet in essence, your deferred tax assets and liabilities to that new effective rate. So we did that we revalue those to 25% what we saw in the current period was that on a tax basis, we've kind of outperformed what our normal expectations would be that the U K taxpayer.
As for income has a market value component to it so with the rising interest rates in the UK that generated a lot of taxable income and what happens is that as tax currently at 19%, but we're releasing.
Our deferred balances on the balance sheet of 25% and so in essence, it creates a tax net tax benefit for GAAP.
That dynamic could continue until we're on the same current basis with where the deferred basis next year, but what that did is it drove our overall tax rate down to that 16, 6%. We don't believe that will continue we think that 20% to 21% overall effective tax rate is the right place to be.
But but that dynamic caused a little bit of volatility just in the quarter.
And then going forward do you think the tax rate overall for the company will go up a little bit higher than 20%.
Based on the continent.
Commensurate to the contribution of the UK business to the overall results.
It might it might be a tick, but it won't be much just the relative taxable income in the UK versus our U S operations.
Yes.
Okay.
Alright, and the other way to think about it is the other way to think about it is from a timing timing difference perspective, we've already valued our balance sheet at 25%. So as those turn they'll turn at the same rate as is.
What the deferred or about right now.
Got it okay.
Yes.
Thanks, Jamie.
Thank you. Our next question is from Tom Gallagher from Evercore. Tom Your line is open. Please go ahead.
Best of luck to Tom White.
For me as well.
The just a quick one on <unk>.
Capital management potential risk transfer for LTC is that that's still a ways off I think you guys had sort of indicated.
Youre pursuing paths, but it might take as long as two years for anything to come to fruition is that still the expectation or is the timing on that changed at all.
Yeah, It's Amit.
It's hard to predict to predict M&A and timing is difficult it's about making sure that we can have our buyers and sellers getting together I think we're doing the work to make sure that we're prepared for the right environment and interacting with the right counterparties, but very hard to predict timing around when something can come into fruition. So I really can't give you a better timeframe.
A couple of years when they take because we'd like it to be earlier, but could it be later, it's one of those things M&A is just unpredictable on that product, but we're doing the work and we'll be prepared if the market opens up and we think it would be a good thing for the company overall.
Okay, Thanks, and just back on disability for a minute.
Do you have any sense for what's really driving this good submitted incidence and claim recoveries just what.
What are the.
What are the main drivers behind the scenes if you've done any analysis on that.
Yeah. Thanks, Tom It's Mike I mean, I think on the incidence front for L. T D.
A good chunk of that was what I was talking about and this is specific to the quarter and that's.
Very favorable STD incidence last quarter.
Elimination periods kind of 90 180 days coming through here.
In the second quarter said that.
That's what's driving the incidence favorability on the recovery front.
And we've sort of seen an improving recovery trend and while I think jumped a bit ahead sort of attribute that to just some favorable volatility here in the quarter, but as we sort of looked at our guidance for the second half. We're like I said I expect that recoveries will remain elevated just not at the current level.
Really put that to the strength of the benefits team. The return to work on the success that we've had some investments on the clinical front. The percentage of claims that are going and getting touched by a clinician is up and it's been going up over the last several quarters, a combination of things kind of give us some confidence on that front.
Okay. Thanks, and then just finally any.
Anything on as we think about pricing for 2023 for renewals.
I mean on one hand, you've had enough volatility on the mortality and even the disability side.
Just a couple of quarters ago, where the results were were pretty bad so.
I think you've got a little bit of rate last year, but now now that you are seeing all this favorability do you think that'll start to play into pricing here and maybe flatten out if not lead to some pricing declines or any any initial indication of what you think all of this means for pricing.
Sure Yeah, it's a great question Tom.
Capsid characterized it reasonably well think about most of our clients.
Have multiple benefits and so we're going to think about the aggregate level of price action that we've taken across product lines.
The interest rate environment, some favorability from an LTV risk and recovery point of view those things are certainly favorable noodle mitigate some increases that we need to put through when you think about like you were citing some of the life insurance experience that we've had and just staying ahead of the curve there.
<unk> pressure on expenses to make sure as we increased wages and benefits for our people to make sure that we keep them from center with our customers we need to make sure we're accurately reflecting that our fee based businesses. That's been something we've talked about pretty consistently and needing to make sure that expenses, we're incurring take care of.
Leave claims and so STD claims are reflecting pricing so as always we.
To make it a pretty balanced approach, but we will need to continue to put a bit of rate into the market. It will be soften just a bit on the LTV on as part of that package and given what we've seen in terms of renewal plan to date, the persistency tracking with expectations pretty optimistic.
Okay. Thanks.
Thank you.
Our next question is from Sydney from Jefferies. Please go ahead. Your line is open.
Thanks, Good morning, and thanks to Tom for all the help over the many years.
My question is again back on group disability, if I go back to the outlook presentation, I think you guys guided to.
Mid to low 70% range for 23% and 24, it feels like youre going to get their second half.
As we think about kind of the longer term.
Is there reason to be confident that we could push kind of lower than that as we move into 'twenty three 'twenty four if the current trends that youre seeing persist or do you think youll have to give up some of that in terms of pricing.
Yes, it is Mike.
As we've just talked about reverting into those most 70% you think about kind of where we were pre pandemic.
Coming down pretty consistently into that low 70 range, we thought that's a good spot to be in because.
Recall with that kind of a loss ratio. We're looking at an ROE that's sort of mid to high teens. We think that's a really really good return on our business and we want to make sure that.
We're balancing pricing thats generating good strong returns with pricing that's going to enable us to grow that business and we started to see that group disability segment really start to grow again in terms of the top line. We're encouraged with the pipeline. We are encouraged with the investments that we've made.
In.
New total leave our platform in new connections into winning HCM platforms. I think we just have a really good story to tell there we want to make sure we've got fair and competitive pricing in Chile, a loss ratio in the low seventies.
Bob for us to be in.
Got it and then I guess for Steve.
On <unk> I know youre, not going to give us any details, but some companies have talked about a sort of earnings benefit.
Kind of going forward, just kind of Directionally is there any color that you can give us on that front.
Yeah, I'm not going to give you the directions, but I'll give you the dimensions. So.
When we file our Form 10-Q later today, we're going to give a little bit more disclosure than we've historically given.
Really on two fronts, one is a little bit on just qualitative disclosure around major drivers of what we're seeing in the recast for.
For earnings, there's there's probably three or four major things and you might be able to read across you know some of the other disclosures definitely different amortization periods and that's going to vary a little bit by our different product lines. Some some longer some shorter.
The runoff of some margins that we have on our reserves on the balance sheet I think that's consistent with what maybe you've heard and then just establishing a new claims at a different rate will be at a single a rate as we establish so those are some things we're starting to see emerge from the run off in some of those are positive some of those are a little negative.
And then the other thing is we're going to update the disclosure on the initial impact if you go back to our original disclosure on the 121 impact of adoption that was in that six 5% to $7 billion range. If we take 630 rates and push them back to 121 and recast that that number is more than the $2.
$2 $5 billion range and so as you might imagine both the movement in the risk free rate as well as the movement in credit spreads on our single play that's really brought that initial impact down quite a bit and I'll just kind of in that conversation with I think that just proves the point that we view this accounting guidance.
Accounting and not economics of the business given the volatility that you see around that Mark just period to period and so we still feel great about the cash generation from from the firm and just how we feel about growth for the business.
Makes sense just one last quick numbers. One can you just give us the split in LTC reserves between sort of first Unum and then the piece that's been fair wind.
Yeah, just rough numbers.
This is.
Kind of by reserve, probably first Unum is about 80% of the business New York's about 15% and then.
And did I get that.
Sorry, 80%, then Unum America Fair wind, 15% in first Unum and then we have a small 5% block, it's our old reimbursement business in MPLA, Our Tennessee company.
Got it thanks for the answers.
Yep. Thanks, Thank you.
Thank you. Our last question today is from Tracy been give me grief from Barclays. Tracy. Your line is open. Please go ahead.
Thank you good morning based on your New York asset adequacy testing could you be able to take a dividend out of first Ian could.
Could you size up what that May look like and I also believe first unum is a sister company.
Now can I assume that will go up to the Holdco.
Yeah. Tracy this is Steve you're correct. Its sister company. So it doesn't have to pass through holding company that will go to direct to group and then it'll be.
Obviously, we need to get the work done at year end, and see where rates end up but we anticipate a dividend pretty consistent with what we saw last year I think it was in the $40 million range. So I would anticipate something pretty pretty similar to that and as you know.
Now the dividend rules work around extraordinary dividends ordinary dividends and where you can take take those out you have to kind of run the math and we think probably $40 million is about the right place for this year, but we'll see how year end plays out.
Okay got it off I wanted to follow up on the earlier discussion on Germany hygiene I get that youre collateral needs into consideration if rates go up substantially higher from here.
But what about hedging just a portion of Irwin.
Yeah, we're looking we're evaluating a lot of different alternatives whether it's.
Matching the cash flow specific to the entire business specific to parts of the business. But also is there more of a macro hedge we'd want to put in place that economically hedges that.
Without being kind of specifically hedging cash flows so what we're looking at all of those are alternatives.
I think they all have their pros and cons and so we'll continue to look at that as you know is the summer and fall plays out.
Got it thank you.
Thanks Tracy.
Thank you. This is all the questions. We have today, so I'll hand back over for any closing remarks.
Great. Thanks, just want to thank everybody for joining us. This morning, good quarter, certainly want to get out there and talk to all of you in the coming weeks, we'll see you at upcoming conferences and investor events and I do want to wrap the call today with thanking Tom White for his years of service and very appreciative make sure to send him a noted congratulation.
He's going to do some different things and with that we'll wrap up the call. Thanks, everyone.
Thank you everyone for joining today's call you may now disconnect your lines and have a lovely day.
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