Unum Group (NYSE:UNM) Q1 2024 Earnings Call Transcript

Unum Group (NYSE:UNM) Q1 2024 Earnings Call Transcript May 1, 2024

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Operator: Thank you for standing by. My name is Christa and I will be your conference operator today. At this time, I would like to welcome everyone to the Unum Group First Quarter 2024 Earnings Conference Call. All line have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Matt Royal, Head of Investor Relations. Matt, you may begin your conference.

Matt Royal: Thank you, Christa and good morning to everyone. Welcome to Unum Group’s first quarter 2024 earnings call. Please note that today’s call may include forward-looking statements and actual results, which are subject to risk and uncertainties, may differ materially, and we are not obligated to update any of these statements. Please refer to our earnings release and our periodic filings with the SEC for a description of factors that could cause actual results to differ from expected results. Yesterday afternoon, Unum released our first quarter earnings press release, financial supplement. Those materials may also be found on the Investors section of our website, along with a presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today’s presentation.

References made to — today to core operations sales and premium results including Unum International are presented on a constant currency basis. Participating in this morning’s call are Unum’s President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; Tim Arnold, who heads our Colonial Life and Voluntary Benefits lines; Chris Pyne for Group Benefits; and Mark Till, CEO of Unum International. Now, I’ll turn the call over to Rick.

Rick McKenney: Thank you, Matt. Good morning everyone and thank you for joining us today. We’re excited to discuss our exceptional first quarter results with you, which reflect a strong start to the year and a continuation of the success achieved over the past several years. At our outlook meeting in January, we laid out our expectations and plans to continue our momentum through 2024, including our ability to maintain industry-leading margins, grow our top line at a higher rate, and build further capital flexibility, including eliminating needs for our Closed Block. Our first quarter results show our ability to execute on these plans with a 13.6% growth in EPS to $2.12 per share, a record level of earnings for the company. $350 million of statutory earnings, 6.6% increase in core operations premium growth, and capital metrics well in excess of our targets.

Coupled with our team’s strong performance, the market backdrop and economic environment continues to be favorable and supportive of our business. The first quarter concluded on a positive note for the economy with job growth surpassing expectations in March and a steady rise in wages. This was evident in our existing client base, as we observe sustained natural growth that played an ongoing role in our success, although at more typical levels. Our offerings, which are a part of an employer’s holistic employment package in attracting and retaining talent also have the important role of providing critical protections for their employees. Our connection with these employers has been amplified through our digital interactions with clients and our unparalleled ability to provide quality services, including lead administration, which is playing an important role for them.

In addition to the labor market, interest rates have been in our favor and consensus has shifted towards the higher for longer scenario. With treasury yields up approximately 70 basis points so far this year, current rate levels are beneficial to both our core lines of business as we continue to invest new money above our portfolio yield, but also for long-term care. We continue to find ways to derisk the block through our hedging strategy and repositioning, two levers we further utilized in the first quarter. Together, this macro backdrop aids us in steadily and consistently building on our solid foundation and delivering profitable growth and strong returns across all of our businesses. Looking across the franchise, there were numerous bright spots to highlight in the first quarter.

First, our group products in Unum U.S., our deeply integrated solutions such as HR Connect and Total Leave continue to improve the operations of our employer clients. We continue to see attractive margins across our product sets based on the consistency of our pricing discipline and our aligned goals of helping employees get back to work. Our products and services are resonating with our customers, as shown by total group product persistency exceeding 90% with long-term disability at 93%, a level we haven’t seen in over 10 years. Group sales where we see the most price competition performed better than expectations in the quarter and are expected to meet our expectations for the year. These results underscore the value our employers, employees and their families find in our products and services.

Also within our U.S. business, our supplementary and voluntary lines, including voluntary benefits, multi-life individual disability, and dental and vision continue to produce very strong levels of both top line and bottom-line growth at 7.6% and 11.8%, respectively. While these lines of business receive less attention, they generate high levels of cash and complement our group offering well as employers look to expand their benefit offerings and attract and retain talent in a highly competitive market. Shifting to Colonial Life. Margins continue to be excellent with an ROE of nearly 20%. Since the pandemic, which impacted Colonial’s distribution model, growth has been the main focus for this segment and in the quarter, we saw premiums increase by just over 4%.

While we’re encouraged by the premium growth, sales in the first quarter did not meet our expectations. Despite this, we maintain optimism regarding our ongoing differentiation through services like gather as well as the productivity of our agents. These factors support our plans to reach the 5% to 10% sales growth range at our outlook meeting. Rounding out our core segments, our international business is operating at full strength with robust premium growth of nearly 17%, coming off an excellent sales year last year. And U.K. underlying earnings in the mid to upper £20 million range. We continue to see excellent growth momentum in our growing Poland business. And in the U.K., we continue to redefine the broker experience. setting a market-leading standard that is distinctly Unum and enhancing our relationship management model.

Across the company, our commitment to innovation, prudent capital management, and shareholder returns remains unwavering. With the Closed Block fully funded, our capital generation model is at full strength as this is expected to be the first year in many years that we do not contribute capital to long-term care. Let me remind you that we do not plan to contribute capital to support the long-term care block going forward, given our assumptions and approximately $2.8 billion of protection that we outlined at our outlook meeting. In the first quarter, the strong GAAP margins I mentioned earlier, highlighted by disability and life translated directly to statutory earnings of $350 million. This supports cash flow available for deployment at a run rate greater than we have seen before.

This consistent cash flow generation is supported by our disciplined and long-term focused underwriting approach as well as our sole focus on employee benefits. With these good results, we ended the quarter with holding company liquidity of $1.4 billion and RBC of 440%. This provides additional flexibility as we explore opportunities to grow our core businesses and reduce our Closed Block exposure. At the same time, we have steadily increased the pace at which we return capital to shareholders. This quarter, we increased the pace of share repurchases to approximately $500 million per year, double from a year ago. In addition, consistent annual dividend increases are another important part of our capital management. And we’re pleased to announce that in recognition of our strong capital position and projections, we will be increasing our shareholder dividend by 15%, starting with a third quarter dividend payment in 2024, and placing our dividend payout ratio right around 20%.

All-in-all, the first quarter was a very strong start for our company. We’re encouraged by the trends we are seeing in our operations as well as the support we’re receiving from the macro environment. All this positions us well to be able to execute on our strategy and reach our financial aspirations throughout 2024 and beyond. Many thanks to our teams that work hard to serve our customers each and every day. I’d like to now hand it over to Steve to provide further insights into our financial strategy and outlook as well as provide insight into the Closed Block. Thank you once again for your attention. Let me turn it over to Steve.

Steve Zabel: Great. Thanks, Rick, and good morning, everyone. As Rick described, the first quarter was a very strong start to the year. Before getting into the details, I would like to highlight a few of the key trends that are driving the impressive results across our businesses. First, from the top line perspective, we’re seeing high levels of growth in our core operations with premium growth of 6.6%, bolstered by record levels of persistency in our group lines and nearly 17% premium growth for Unum International. In addition to growth, our margins continue to be robust with group disability maintaining the exceptional benefit ratio levels produced in 2023. Group Life and AD&D earnings at levels not seen since pre-pandemic, and long-term care benefits continuing to normalize as expected.

Putting it all together, these trends allow us to grow the company’s earnings power and further our financial flexibility. In the quarter, we grew adjusted operating earnings 9.6% to $514.5 million leading to after-tax adjusted operating earnings per share of $2.12, representing growth of 13.4%. On the statutory side, after-tax operating income was up 26.9% to $350.5 million, driving further capital strength with RBC and a holding company liquidity well in excess of our targets. While we are only one quarter into the year, all of these factors reinforce our confidence in executing against our targets for 2024. Considering that backdrop, I’ll now move to the segment financial results. Starting with Unum U.S., adjusted operating income increased 23.3% to $385.2 million in the first quarter of 2024 compared to $312.5 million in the first quarter of 2023.

Results for all product lines improved year-over-year with our Group Life and AD&D line seeing the greatest improvement driven by favorable mortality trends, leading to a 68.2% benefit ratio. Natural growth of lives and wages returned to more normal levels of approximately 2% and along with total group persistency of 92.1% supported premium growth of 6.1% in Unum U.S. Overall Unum U.S. sales were lower in the first quarter of 2024 by $2.5 million or approximately 1% year-over-year. Group sales increased 2.5% compared to the first quarter of 2023, while sales and supplemental and voluntary lines did not meet our expectations and were down 4%. As Rick mentioned, group sales performed better than expectations in the quarter and are expected to meet our expectations for the year.

The group disability line reported another robust quarter with adjusted operating income of $164.8 million compared to $145.7 million in the first quarter of 2023, with the increase driven by favorable paid incidents. Along with consistently strong performance in recoveries, the group disability benefit ratio was 57.5% in the first quarter compared to 60% in the first quarter of 2023. We Results for Unum U.S. Group Life and AD&D also improved compared to the year ago period with adjusted operating income of $78.8 million for the first quarter of 2024 compared to $40.1 million in the same period a year ago. As mentioned, the benefit ratio decreased to 68.2% and compared to 75% in the first quarter of 2023, driven by lower incidents. The favorability experienced in the quarter does not change our expectations of low to mid-70% benefit ratios in the coming few quarters.

Adjusted operating earnings for the Unum U.S. supplemental and voluntary lines in the first quarter of 2024 increased to $141.6 million of $126.7 million, an increase of 11.8%. The increase is driven by improved underlying benefits experienced year-over-year across all lines. Then moving to Unum International, adjusted operating income in the first quarter decreased to $37.4 million from $38.4 million in the first quarter of 2023 due to a lower benefit due to lower benefit from inflation. Adjusted operating income for the Unum U.K. business decreased in the first quarter to £28.2 million compared to £31 million in the first quarter of 2023. The Unum U.K. earnings grew over 10% after removing the direct inflationary benefits, which were still positive in the first quarter of 2024 at significantly lower year-over-year.

Unum U.K.’s underlying earnings strength has continued to grow, and we now expect the business to earn in the mid- to upper £20 million range per quarter as inflation subside. Premium income for our Unum International business segment increased by 16.8% year-over-year, including 15% growth in Unum U.K.. Similar to other segments, strong persistency in excess of 90% in both Unum U.K. and Poland helped to offset decreased sales in the quarter. Next, adjusted operating income for the Colonial Life segment increased to $113.7 million in the first quarter compared to $93.9 million in the first quarter of 2023. Premium income of $446.9 million grew at a healthy rate of 4.1% compared to a full year 2023 growth rate of 1.4%. Premium growth was driven by higher prior period sales and persistency of 78.4% or 110 basis points greater than the year ago period.

Sales in the first quarter of $103 million decreased 3.6% from prior year. In the Closed Block segment, adjusted operating income of $24.3 million was higher than last quarter’s results of $21.3 million with relatively consistent LTC claims experience. Earnings were below our expectations due to alternative assets yielding 6.3% in the first quarter on an annualized basis compared to our long-term expectations of 8% to 10%. Since inception, our diversified alternative portfolio has achieved returns that match our long-term projections, but can be volatile period to period. As we discussed in January, we expect LTC incidents to remain elevated in 2024 as the claim inventory normalizes. While LTC incidents experienced in the first quarter was elevated compared to our long-term expectations, we believe the recent trend continues to indicate a pattern of returning to normal inventory levels.

The LTC net premium ratio was 93.8% in the first quarter of 2024, higher than the 85.3% result in the same year ago period, due primarily to the assumption update in the third quarter of 2023. Sequentially, the NPR increased 30 basis points compared to the fourth quarter of 2023 due primarily to the impact of a large case termination in the first quarter. Finally, we continue to execute on our Closed Block strategy, focusing on creating value, reducing the footprint, and increasing predictability of outcomes. As we discussed in January, this includes seeking actuarially justified rate increases. Since the program refresh in the third quarter of 2023, we have achieved approximately 20% of our target including approximately 5% in the first quarter of 2024.

So, then wrapping up my commentary on the segment’s financial results, the adjusted operating loss in the corporate segment was $46.1 million compared to a $33.5 million loss in the first quarter of 2023, primarily driven by lower allocated net investment income and higher retirement plan expenses. Our expectation for the remainder of the year is that losses in the corporate segment will stay relatively consistent in the mid-$40 million range. And then lastly, the effective tax rate of 20.3% in the first quarter was favorable to our expectation of 21.5% to 22%, driven by one-time amended filings of prior year returns. Moving now to investments, we continue to see a good environment for new money yields and risk management. Purchases made in the quarter were again at levels above our earned portfolio yield, which was 4.35% in the first quarter.

Total net investment income was $513.5 million in the first quarter compared to $508.8 million in the prior year, driven primarily by higher asset levels and higher miscellaneous investment income. Miscellaneous investment income increased in the first quarter to $20.8 million compared to $15.8 million a year ago, with income from our alternative assets totaling $20.3 million. In addition, we continued to manage our interest rate risk by expanding our hedge and repositioning programs. Since inception of the program last year, we’ve entered into $2.7 billion of treasury forwards and repositioned $765 million of assets including $165 million and $65 million, respectively, in the first quarter of 2024. I’ll end my commentary this morning with an update on our capital position.

As laid out in our outlook call, we project this year to be an inflection point in the free cash flow generation profile of the company. Our outlook for strong statutory earnings with no contributions to LTC is expected to drive significant capital strength and financial flexibility in 2024. Through the first quarter, we’re off to a great start. With the strong margins discussed in our GAAP results leading to statutory after-tax operating income of $350.5 million in the quarter and repositioning — and positioning us well for our $1.2 billion to $1.4 billion expectation for the year. With these strong statutory earnings, the weighted average risk-based capital ratio for our traditional U.S. insurance companies strengthened further to approximately 440% and holding company liquidity remained robust at $1.4 billion.

While both of these metrics are expected to fluctuate throughout the year, we do expect year-end RBC of 415% to 430% and holding company liquidity of greater than $2 billion, both well in excess of our long-term targets, providing us with capital optionality. This optionality already considers our plans to increase shareholder capital return by doubling our share repurchase run rate over 2023 levels to $500 million and increasing our shareholder dividend by 15% effective in the third quarter. So, then looking ahead, as we progress throughout the year, we will continue to evaluate the best use of our excess capital in line with our priorities. Overall, we are very pleased with our first quarter results. The strong start to the year sets us up well to execute on our strategy and deliver against our financial targets.

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

Rick McKenney: Great. Thank you, Steve. You can certainly hear in our comments the excitement as we wrap the first quarter. business performance, combined with our robust capital strength to set us on a promising trajectory for the year ahead. There are plenty of topics to discuss today. So, with that, let me turn the call over to the questions and turn it over to you, Christa, to facilitate the session.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Ryan Krueger with KBW. Please go ahead.

Ryan Krueger: Hey thanks. Good morning. My first question is on the pricing environment in group. It seems like there’s some maybe debate within the industry on kind of the competitive environment at this point. And I guess for you specifically, you saw a really favorable persistency. So, it seems like that would indicate, I guess, less competition. But I guess, just hoping to get some more perspective on what the competitive environment is like and kind of the debate on the need to give back some level of the outperformance in group disability.

Rick McKenney: Hey, thank you Ryan, it’s Rick. We’re happy to enter into that debate. I think when you think of the competitive environment out there, it is always a competitive market and so I think I’d start with that. So, we’ve been very consistent on that front. And when we think about competition, we expect on a case-by-case basis, we’re going to look at it and look at the fundamentals of it and make our decisions around what our pricing looks like. The discipline that we show has been consistent. I think that’s unwavering. I think when you look at our results overall, we’re very happy with our sales results that we have coming in on the group side as well as persistency levels, and you bring that together with the pricing and the profitability, it’s a pretty powerful mix. But let me turn it over to Chris to talk about maybe some more details on what we’re seeing in that competitive space.

Chris Pyne: Yes. Thanks Rick and thanks for the question, Ryan. No question. Competitive environment is here to stay. We’re used to that and have a lot of respect to the marketplace in that regard. One of the big things that we continue to see is as we address serious challenges that our employer customers are facing, the conversation does move away from price. Price is always important. But as we talk about capabilities like addressing leads to our Total Leave platform and connecting into the HR ecosystem of choice, you heard Rick mention HR Connect. These topics take the conversation away from pure price, and we’re able to talk about ways we could help enhance their business. That’s happening. And again, the market continues to move in that direction, which is very good for our business.

Couple that with the tradition of strong disciplined underwriting. And we do that both on new business and reacquisition through renewals. That’s kind of DNA that we’ve had deepened in our company. That will continue. And I will give a call out to our claims organization that continues to perform exceptionally well, that put us in this position to have strong returns, so we can have conversations with our customers about how to help them enhance their business rather than just pure price.

Ryan Krueger: Thank you. And then on long-term care, Steve, you mentioned that there’s a I guess, the trend in incidents suggests that there’s a — you’re on the path towards returning to normal incidents. Can you give some more color on what you’re seeing there?

Steve Zabel: Yes, Ryan, it’s Steve. Yes, I would just really reiterate the messages that we’ve really been given over the last few quarters where we have been seeing elevated instance for the last year plus. We did see that start to abate the latter half of last year, although still at elevated levels. And we really messaged — we thought that would continue into 2024 and then abate as we work our way through 2024. And that is really what we saw. Normally, in the first quarter, you’ll see a little bit higher instance, a little bit higher claim mortality than maybe the other quarters. That is what we saw. Those pretty much netted down to get us to an underwriting margin that we would have expected. Ryan, I’ve also talked a little bit about this concept of our overall claim inventory and how that has trended over time and the fact that our claim inventory really trended below that regression line during COVID as we saw lower claim incidents during that time.

I would say the regression back to that line continues. The trend is pretty consistent with what we’ve seen in prior quarters. So, our message is pretty much the same. We think it will still stay elevated for some time in 2024. But I would say we are happy with kind of the trends that we saw in the first quarter. Again, we’ll just have to see how it plays out through the remainder of the year.

Ryan Krueger: Got it. Thank you.

Steve Zabel: Thanks Ryan.

Operator: Your next question comes from the line of Elyse Greenspan with Wells Fargo. Please go ahead.

Elyse Greenspan: Hi, thanks. Good morning. My first question, maybe a quick 1 on the Closed Block. When you guys affirm the full year earnings target for that business, are you assuming your alternative investment income will get back to normal expectations for the other three quarters of the year?

Steve Zabel: Yes, Elyse, this is Steve. Good question. And yes, the simplest answer to that is when we set our planning expectations, we said it at that 8% to 10% yield that alternative asset portfolio, we are right around 6.5% in the first quarter, but we do have that incorporated in our thinking around the guidance for the year.

Elyse Greenspan: Thanks. And then you affirm the 5% to 10% Unum U.S. sales growth target. And you guys did point out that supplementary and voluntary sales did it meet expectations in the first quarter? How do you see sales trending there over the balance of the three quarters when you look to hit the full year target?

Rick McKenney: Yes. Let me talk a little bit about just with our expectations. And we did talk about, although some of the areas in our business were a little bit slower than we would have expected coming out of the gates. We are looking to make up that over the course of the year. And so we still feel good about where our sales targets are. It’s going to take some work to get there. But I wouldn’t actually highlight anything in particular underlying that around the voluntary benefits side. I think that’s 1 we kind of work on quarter-by-quarter and getting back to that target is really important to us.

Elyse Greenspan: Thank you.

Operator: Your next question comes from Suneet Kamath with Jefferies. Please go ahead.

Suneet Kamath: Thanks. Good morning. I wanted to start with the group disability benefit ratio. I mean it continues to beat expectations. Can you talk a little bit about the glide path in that ratio to normal? And have the underlying drivers of the better-than-expected benefit ratio sort of changed over the past year? Or is it kind of a continuation of what you saw last year?