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

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

Unum Group isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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?

Steve Zabel: Yes, this is Steve. I’ll start with the answer there and then turn it over to Chris to talk a little bit about pricing in the environment. So, how we’ve addressed group disability is just around — there’s really two drivers. One is the underlying claims performance whether it’s claims incidence or claims recovery. And then the other piece is pricing and what possible or potential pricing actions you take down the line to reflect that performance. So, I’ll start with performance. We’ve continued to see really good recovery patterns. That’s our claims department working well with both our customers as well as the employers to really get people back to work. That’s the shared objective of really what we do as a company.

So, the recovery trends have been pretty consistent in the first quarter. I’ll say incidence was a little favorable from what our expectations might have been in the first quarter. We guided to a benefit ratio that would have been in the low 60s for the year. This quarter was a little bit below that. And I would say that was because of favorable claims incidents. So, do we think that’s sustainable? We do. We’re seeing sustained trends in both of those areas. I would say we can kind of see backlogs around short-term disability and feel comfortable with the performance of long-term disability block for the remainder of the year. So, from just an operating performance perspective, feel good about sticking with the guidance that would be in the low 60s.

Then the other piece of that equation, though, is pricing. And would we do anything with pricing to incorporate that level of performance? And maybe Chris, just talk a little bit about how we think about group disability pricing.

Chris Pyne: Yes. Thanks, Steve, and Suneet, for the question. Again, it does get back to capabilities where we’re able to talk about — first, we have a strong disability portfolio, short-term long-term visibility as part of our bundle, the insurance coverage, we can extend to our employer customers is phenomenal, and that gives us a lot of flexibility. Couple that with Leave and you start — and those almost generally almost always go together, you’re starting to talk about being a critical partner to that employer and their employees that enables us to have conversations for the long-term about how we’re really going to be part of the solution to solve this challenging Leave topic while giving their employees great cover. Pricing-wise, people like long-term stability in their price.

So, you start to talk about how you can maintain this excellent experience through effective claim management and a renewal strategy that keeps prices kind of in check over time. That seems to resonate very well. So, it’s a combination of bundled portfolio with Leave management and long-term stability in pricing that fits very well with our underwriting DNA.

Suneet Kamath: Okay, that makes sense. Thanks for that. And then I guess the second one for Rick on long-term care. One of the things that we have observed in the market is just the combination of different types of insurance risks, particularly on the asset-intensive side in order to get risk transfer done. And post your individual IDI risk transfer solution a couple of years ago, I wouldn’t think that you would have a ton of that asset-intensive stuff, but just curious if that’s the right read or how you think about sort of combining different blocks of business, if you were to do something? Thanks.

Rick McKenney: Yes. So, you talked about asset intensity in terms of our blocks of business. So, the IDI was one that had some of that, we’re happy to go through that transaction. Long-term care is clearly our other asset-intensive business, and that’s why we made the comments about the current rate environment being good for us. Our team is doing a great job of putting money to work behind that block of business. And then the asset intensity kind of goes down throughout the course of the business. And you think about our group lines of business a little bit on the group disability, although that portfolio has shrunk as the claim inventory has shrunk there as well. And then on the voluntary benefits side, really very little in terms of asset intensity.

So, I think if your question is getting at kind of where we look at where that asset — it is in long-term care when we think about what we’re trying to do today. And making sure that we’re hedging what we’re doing there and the overall mix. But we’re happy about how it looks between our insurance risks, our asset mix that we have today and then the overall. Steve, do you want to add to that?

Steve Zabel: Yes, I mean, I think you might have been getting at a little bit is just around potential transactions and just different businesses that maybe you could pair up with a long-term care transaction. And I wouldn’t put that — I wouldn’t bucket that just in asset-intensive businesses to go with that. I think counterparties are looking at just risk diversification generally. And so we do have blocks that I think would match that criteria with different counterparties.

Suneet Kamath: Got it. Yes, that was the thrust of my question. so, thanks for that.

Operator: Your next question comes from the line of Tom Gallagher with Evercore ISI. Please go ahead.

Tom Gallagher: Good morning. A few follow-ups on long-term care. First one is, so I heard, Steve, your comment about long-term care claim trends. If they do remain elevated somewhat throughout the course of the year, is it likely you’d have to strengthen GAAP reserves again in the third quarter review or not necessarily, does that really just depend on a long-term assumption? And I assume statutory should be pretty bulletproof though, even if there was something adjusted for GAAP? That’s my first question.

Steve Zabel: Yes, Tom, I think there are two questions in there, but I’ll count it as one. Yes, from a GAAP perspective, I think you’re thinking about it right. We look at all of our assumption set on an annual basis that’s required under LDTI, and we will do that in the third quarter like we normally do. We look at a pretty long experience set when we set those assumptions and think more long-term about them. So, we’ll take into account the recent elevated claims experience that we’ve seen, but we will also take into account all the experience that we’ve seen over the last year. And we did do a pretty comprehensive review last year, but we’ll go through that process in the third quarter on a GAAP basis. And then on the statutory side, I would just refer back to some of the discussion that we had as part of our outlook meeting where we do feel like we have quite a bit of margin or a buffer for adverse deviation in our assumption set on a best estimate basis, we talked about the $2.8 billion of protection, which is really the difference between our recorded statutory reserves and kind of our economic view of best estimate along with the excess capital that we have behind the LTC line.

So, we continue to feel pretty good that we got the right buffers there for any deviation in our actual experience or even any deviation in our best estimate. I’d just refer you back to some of the sensitivities that we gave as part of that presentation back in January.

Tom Gallagher: Got you. And then just for a follow-up. The large case group lapse for long-term care that you had in the quarter that impacted the benefit ratio. Did you lose the group life and disability along with that? Or did the employer just discontinue the LTC coverage?

Steve Zabel: Yes. And just one clarification. It impacted our net premium ratio then that was a large group LTC case that terminated, you’d have margin in it. We released that margin basically, and it was buffered into the benefit ratio itself. We did not lose the other coverages. That was specific to the LTC coverage.

Tom Gallagher: Is there — just out of curiosity, I mean, to me, that probably is more positive than negative if you have at the group level, employers lapsing LTC coverage, all things considered. Is that kind of — is that — was that just voluntary? Or is there an effort to do that at Unum?

Steve Zabel: Yes, I mean I wouldn’t comment on whether it’s voluntary or not. We’re always talking to our groups about providing value to them through our various products and services. What I would say is it’s a reduction of risk in the LTC book, which I think is always a positive thing.

Tom Gallagher: Okay. Thanks.

Steve Zabel: Thanks Tom.

Operator: Your next question comes from Joel Hurwitz with Dowling & Partners. Please go ahead.

Joel Hurwitz: Hey good morning. I wanted to follow-up on Ryan’s earlier question on persistency. Chris, I heard your commentary on capability is a major driver now with retaining business or getting new business. I guess can you just talk about the persistency of your business with some of those capabilities like HR Connector, the total lead product?

Rick McKenney: Yes. Thanks for the question, Joel. No question capabilities, again, it changes the conversation in the prospect stage of engaging with an employer. It also changes the relationship over time. So, it talking to customers about what we need for appropriate price up or down. But when done in context of lead management or the HR Connect, ecosystem that we’re participating in, you can just tell there’s a lean to drive toward long-term partnerships. So, persistency does increase when you’re tied to a capability like HR Connect, that’s a very a mature offering at this point. We’ve been partnering with Workday for over five years in terms of customers who choose that platform. and other platforms like Workforce Now, multiple years in.

So, we are seeing that favorable retention. And again, we get excited about the discussion that focuses on what other products can we add to that bundle as well as long-term price stability. So, I think the theme of your question is spot on without getting into too much detail on specific numbers.

Steve Zabel: I would just add that, Joe, I think it’s Chris is getting. It’s multifaceted. So, that relationship on all those pieces, pricing, connections, the relationship management, all those things come into play. We’re really happy with where the presidency was, like we said, it’s the highest levels that we’ve seen, but it does come back to that ongoing relationship management.

Joel Hurwitz: Okay, makes sense. And then switching over to Colonial Life. Can you talk about what you’re seeing from a recruit and productivity standpoint? And maybe provide some more color on the GATHER technology and what gives you the confidence that you can achieve that 5% to 10% sales growth target this year?

Timothy Arnold: Yes. Thanks Joel. This is Tim Arnold. I appreciate the question. So, Rick mentioned this, I’d like to just reiterate that overall premium growth in the quarter was 4.1% versus 1.4% last year. So, we’re pleased with that. You mentioned GATHER, just for those who may not be aware of what it is, it’s a benefits administration and human capital management platform that we can make available in the small end of the market, especially at no cost to an employer. And we’ve seen independent third-party data that suggests that about 90% of employers with fewer than 100 employees do not have a benefits enabled technology platform. So, our technology-enabled benefits administration platform. So, we’re excited about our proprietary offering there.

We saw very strong growth in adoption rates of GATHER in the first quarter, continuing the great growth that we saw in 2023. Another capability that we have that’s resonating in the marketplace currently is our cross-brand solutions. So, we’re partnering with our peers at Unum U.S. and Colonial Life agents have access to those group employer paid products now. In the quarter, we saw premium from those products grow at 44%, and we saw a 43% increase in the agents at Colonial Life who are selling Unum Group products. So, where we saw the softness in the quarter was on reenrollments of our existing clients. And we think that that’s something that’s — that can be addressed and will enable us to get back into the sort of the lower end of that range that we gave at Investor Day.

Joel Hurwitz: Okay. Thank you.

Operator: Your next question comes from the line of Jimmy Bhullar with JPMorgan. Please go ahead.

Jimmy Bhullar: Hey, good morning. So, first, just a question on long-term care along the lines of what’s been asked previously as well. But you mentioned elevated incidents, and you had assumed that, but are your reserves right now predicated on an improvement in incidents? Or is the variability and incidence not enough to cause the charge even if it stays around recent levels?

Steve Zabel: Yes. Jimmy, I’d just go back to the statements and made before. We’ll go through our normal process, our annual process in the third quarter. We’ll look at all of our assumption sets and we’ll look at that over the long-term. So, I wouldn’t comment on kind of any individual trends that we’re seeing in a certain quarter. We’ll take a long-term view of that when we go through and we did just go through a pretty comprehensive review back in the third quarter of last year. So, we’ll take into account what we’ve been seeing more recently, but I think it’s premature to really discuss that.

Jimmy Bhullar: Okay. And then on buybacks, I realize you’ve increased the amount a decent amount this year. You’re raising the dividend as well. But if we look at your stat income generation, and then Holdco liquidity RBC levels, it suggests that you have the flexibility to do more than what you’re doing. So, is the $500 million sort of the number that you’ll do this year, and it sort of set in stone and you review it next year? Or is there a possibility that if your results continue to surprise on the upside that you might revisit that later this year?

Rick McKenney: Yes, it’s a good question, Jimmy. And so when you think about the overall capital generation, I think both Steve and I reiterated, very happy with how we started the year, both from a generation perspective. And I think important different than it’s been in previous years is there’s not a use that will be going towards long-term care. So, what we generate is for us to be using. Right now, we’re seeing, as we talked about in our outlook meeting, we’re going to see the capital levels grow, particularly in terms of holding company cash, I saw that in the first quarter, and so that’s a trend we put out there. We’ve increased the pace of redeployment of capital to shareholders, and so we’re happy about the $500 million.

You asked, is that locked in stone. I think capital is something that needs to be managed on a daily basis. And so we’ll keep obviously looking at that. But we’re very happy with the plans that we have in place and what the execution on the first quarter looks like towards those plans. I’d go back to our uses, we still want to grow. So, in terms of growing the business at the rates we have, with the returns we have, that’s first and foremost, both from an organic perspective. And then on the M&A side, we’ve talked about the types of capabilities that we’d like to bring on to continue to grow that core business. So, that probably gives you some sense. We’re tracking as we had not a lot of different message than we had in the first quarter, but we think about capital, we think about its uses frequently in terms of what it can be.

So, nothing locked in stone. We’re very happy with where we are today.

Jimmy Bhullar: Okay. And then fair to assume that the lapse of the LTC case is a slight headwind for earnings going forward for that division?

Steve Zabel: Yes, it’s immaterial for earnings. It was kind of a large impact in the period, but really not material for ongoing earnings.

Jimmy Bhullar: Okay. Thanks.

Operator: Your next question comes from the line of Wilma Burdis with Raymond James. Please go ahead.

Wilma Burdis: Hey good morning. RBC and stat earnings were strong in the quarter. Could you just talk about the capital generation deployment trajectory for the remainder of the year?

Steve Zabel: Yes, Wilma, this is Steve. I can take that one. I would say very consistent with the ranges that we would have given at Investor Day. We’re not really changing our view of that. We are happy that we started off — and I would say first quarter results were a little bit above what our expectations would have been. But at this point, don’t feel like the need to really change any of the guidance for either GAAP earnings trajectories or statutory earnings trajectories or the relevant capital metrics.

Wilma Burdis: Okay. Thank you. And is $37 million of earnings in international, a good run rate. And talk a little bit about how much that figure was boosted by U.K. inflation benefits and what you’re seeing there. Thank you.

Rick McKenney: Mark, do you want to talk about that?

Mark Till: Yes, I’ll take that. I mean if we look at local currency, then the earnings we produced this year put us in a range of £25 million to £30 million for the quarter, and we think that we can continue to produce in that sort of range. And in terms of the inflation impact, we’ve seen a reduction of about $5 million or $6 million in the quarter, and it’s now largely disappeared. So, there’s a small amount of inflation that will continue through the year, but largely, it’s out of the way now.

Steve Zabel: Probably the other way to think about that, Wilma, is the performance for the current quarter is probably something that’s sustainable because the impact of inflation was pretty minimal.

Wilma Burdis: Thank you.

Operator: Your next question comes from the line of Mike Ward with Citi. Please go ahead.

Mike Ward: Thanks. Good morning. Maybe more for Chris, but just curious about what you’re seeing across the key benefits product lines. Trying to think if you have any sense of pricing between different employer sizes?

Rick McKenney: Yes. Thanks Mike. Good question. I think that the small end of the market price is probably a little less sensitive. When you get into mid and large, there’s probably a little bit more of a sharp eye on how price plays. That said, we do feel it across all angles on the market. Everybody is trying to make a good decision. It gets back to we do a specific offering and strategy for market segments, small, medium and large. When we bring that to the conversation. It helps us get a fair price. It helps us renew at a fair price. That’s consistent across. We just get there in different ways. So, again, up market, you’re talking heavily about lead management, you’re talking heavily about HR Connect. Down market, it’s some of the things that Tim talked about in terms of a GATHER type offering where our group insurance shows up.

that gets a little bit less price sensitive because you’re solving a different problem. And we can do that in a couple — a couple of different ways with our MyUnum platform, GATHER or connecting with [Indiscernible] of choice in that small of market.

Mike Ward: Thanks Chris. And then one last one just on the Closed Block termination just because it is a little bit unique. But Steve, your tone sort of suggests that it was one-off. But I guess if you could you confirm that? Or should we think about it may be as like a risk management tool that we hadn’t really thought of before for LTC? Thanks.

Steve Zabel: Yes, Mike, I would consider it one-off. Again, we’re always talking to our customers across all product lines about the value we can provide to them. And in some of those conversations, the customer just decides they want to move a different way. And so that’s what happened with this group.

Operator: Your next question comes from the line of Wes Carmichael with Autonomous Research. Please go ahead.

Wes Carmichael: Hey good morning. Just wanted to follow up on this group LTC case lots. It sounds like your commentary is positive, but I think it was the driver of the increase in the net premium ratio in the quarter, which I guess implies that it was profitable relative to the overall block. I just want to make sure that I’m thinking about that correctly, Steve, is this a good thing in reducing risk exposure? Or is it a bad thing? Is it the overall block is a little bit worse or off overall?

Steve Zabel: Yes, I would say you’re right. It’s positive for risk reduction perspective, that there was margin in the case. And so that’s why it drove the MPR up to 30 basis points. It does not have a material impact on our go-forward earnings. And I would say we just feel like it’s a one-off thing. A lot of these group cases are 1/1 effective dates. So, HR departments are reassessing of their wallet share and so I’d consider it just a one-off thing.

Wes Carmichael: All right. And just one more on LTC, but you talked about not contributing capital to the closed block going forward, and there’s $2.8 billion of protection here. But I’m trying to square this away with what’s disclosed in new rate increase filings for 2024. And I know last year, you previewed that you were going to take some more rate increases, but it looks like you’re basically going after doubling the individual LTC policyholders rate for Unum America. So, your comments to state regulators said that the experience review that you did last year is kind of driving the need for this additional rate increase. And I’m just trying to square that away with the idea that statutory reserves are significantly redundant.

Steve Zabel: Yes, what I’d say it’s a totally different, I guess, construct as far as how those rate increase requests are capital are calculated. You look at really the lifetime benefit ratio to get to the actuarial justified amount that you can ask for. That’s much different than our current statutory reserve construct, which has quite a bit of margin in it. When you look at those rate increases, you’re not really able to incorporate what I would say would be the same levels of margin into your assumption set. It is more of the best estimate. I’m not going to really comment on that specific filing, but we’re not doubling individual rates right now as part of the current program. The focus right now is mostly on the group block of business where we’ve got the most opportunity there. So, I won’t comment on that specific filing.

Operator: Your next question comes from the line of Mark Hughes with Truist Securities. Please go ahead.

Mark Hughes: Yes, thank you. good morning. Any themes to mention in the group life mortality. It sounds like it was better. Is that a multi-quarter trend or just this quarter?

Steve Zabel: Yes. No, it is interesting what we’ve seen over the last couple of quarters in Group Life and AD&D and in the fourth quarter last year, our loss ratio is just below 70% this quarter, it was just a little bit above 68%. So, both very good quarters and quite a bit below what our expectation would be. I reiterated in my comments, our expectation continues to be in the low 70s. What we saw in the fourth quarter last year was more around favorable performance in our waiver premium part of that business. We consider that more of just kind of a one-off thing that we saw in the fourth quarter and volatility. And that played out in the first quarter where the waiver of premium performance was right at expectations. I’ll say then, if you just look at kind of core mortality, the actual incidence of mortality in the fourth quarter, it was pretty close to our expectations, I would say, and then when we got into the first quarter, it was very favorable to what our expectations would have been.

And so that’s what’s really driving the 68.2% benefit ratio in the first quarter. We, again, think that’s just volatility around mortality, and that’s why we’re giving guidance if you look for the remainder of 2024, we think the loss ratio will be back up in the low 70s. And then that’s how we price for it.

Mark Hughes: Yes. Was this an easier flu season? I hadn’t looked at that data.

Steve Zabel: It’s interesting. You have to kind of look across age categories. I’d say what we saw was probably in the older age think LTC claimants, it was probably a fairly regular flu season, just the mortality that we saw there, but the group life block is more in kind of the working age group and just what we saw there was lower mortality. It’s a relatively small book as well. So, you can have a bit of volatility there.

Mark Hughes: Appreciate it.

Steve Zabel: Thanks Mark.

Operator: Your next question comes from the line of Joshua Shanker with Bank of America. Please go ahead.

Joshua Shanker: Yes, hi there. Thank you for taking my question this morning. I hope you’re all well. A question about long-term history and after periods of notable wage inflation and full employment. Is there an outlook for what happens to volumes and price in this macro backdrop as we look out a few years?

Rick McKenney: So, that’s a good one, Josh. I appreciate that to wrap-up. I think we’re in that period of wage inflation and good employment numbers, I think there’s been a lot of discussion here over the last couple of years of that abating, which we have not seen. I think those two are still looking very good. It’s been a long time since we’ve actually seen that. And so when you go back in history and how we come out of that period can be very, very different. I think probably the latest example that we’ve seen some of that inflationary type — at least on the wage side, it would be over a decade that we’ve seen. But we think the employment picture actually looks good. how benefits are structured today are good for people in that time. And Chris, I don’t know if you’d add anything to that. It’s an interesting question. I think we’re focused probably a little bit nearer term in terms of what the environment looks like today. But it’s a good hypothetical.

Chris Pyne: Yes. And I think we see continued interest in the whole kind of talent topic where we need good benefits packages to attract and retain good talent. And as long as that persists, our ability to be creative in terms of what we bring, how we present it and how we can enable the employee population to utilize it. That’s good for us and our employers as we look forward. So, in addition to what Rick was saying, we like the fact that tractor retain is still a major topic.

Joshua Shanker: I don’t belabor the point, but just trying to learn more. Is there anything that might be learned on a local level that you’ve seen in different geographies that have had a period of boom or whatnot about what happens to your offer or what happens to the disability opportunity post a period of significant growth?

Rick McKenney: I think the thing I would say is we think about it in terms of what our employers offering and that will kind of flow a little bit with what their attractive retained needs are. And then on the back end, it’s claims management and having a superior team who can manage through cycles where there are different kind of economic factors at play in terms of bringing people back to work which is good for everyone. We do a phenomenal job operationally as experts in that space as we add lead management, we become more important. So, I think we’re going to continue to have our ability to kind of find the right type of customers to partner with and help them enhance their business through different cycles.

Chris Pyne: I’d just add to that, Josh. I mean if you look at — go back within the last 10 years, what we’ve seen. So, we have been in that wage inflation. That’s a pretty short-lived type thing. If you go back to just before that, where we saw the exact opposite with what happened as a result of the pandemic, our business model held up very well through that period of time. And so what you’re asking and thinking about is when you get into a much more difficult economic situations coming off a good times, will you see higher claims levels where you see different premium growth. And I think through the last 10 years, we’ve been able to grow very well through both, which is a very difficult time, one of the worst we’ve seen in terms of the pandemic and then coming out of that a very good inflationary period.

That’s where we sit today. And I think where we sit today is in a really strong position. The processes are in place. Our product set is really good. The overall structure of the company is good as well. And so I’d leave you on that very optimistic point in terms of what we look to the future, we remain very optimistic.

Joshua Shanker: Thank you for indulging me. Have a wonderful morning.

Chris Pyne: Thank you, Josh.

Operator: This does conclude our question-and-answer session. I will now turn the call back over to Rick McKenney for closing comments.

Rick McKenney: Great. Thank you. That was a great question to wrap on. I appreciate that, Josh. We want to thank everybody for joining us this morning and your continued interest in Unum. We are very delighted with our first quarter results and optimistic about the outlook for 2024 and beyond. And so with that, let’s conclude today’s call. We’ll look forward to connecting with you all again in the very near future. Please have a wonderful day.

Operator: This concludes today’s conference call. Thank you for your participation and you may now disconnect.