Unum Group (NYSE:UNM) Q3 2023 Earnings Call Transcript

Unum Group (NYSE:UNM) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good morning. My name is Brianna and I will be your conference operator today. I’d like to welcome you to the Unum Group Third Quarter 2023 Earnings Results and Conference Call. Please note that this call is being recorded. All participants are in listen-only mode at this time. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the call over to Matt Royal, Senior Vice President of Investor Relations. Please go ahead.

Matt Royal: Thank you, Brianna. Good morning and welcome to the Third Quarter 2023 Earnings Call for Unum Group. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results may differ materially from the 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 31st, 2022. Our SEC filings can be found in the Investors section of our website at unum.com.

An elderly customer discussing her retirement options with a smiling life insurance agent.

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, including recast financials for the long duration targeted improvement accounting pronouncement can be found in our third quarter statistical supplement on our website in the Investors section. Further, all references to or which include Unum International sales and premium results are presented on a constant currency basis. Yesterday afternoon, Unum reported third quarter 2023 net income of $202 million or $1.02 per diluted common share, a decrease from $510.3 million or $2.53 per diluted common share in the third quarter of 2022.

Net income for the third quarter of 2023 included the after-tax amortization of the cost of reinsurance of $8.7 million or $0.04 per diluted common share. The after-tax impact of non-contemporaneous reinsurance of $7.3 million or $0.04 per diluted common share, a net after-tax investment loss on the company’s investment portfolio of approximately $24.4 million or $0.13 per diluted common share and a net after-tax reserve increase related to assumption updates of $139.3 million or $0.71 per diluted common share. Net income for the third quarter of 2022 included the after-tax amortization of the cost of reinsurance of $9.3 million or $0.04 per diluted common share. The after-tax impact of non-contemporaneous reinsurance of $1.4 million or $0.01 per diluted common share.

A net after-tax investment loss on the company’s investment portfolio of $3.4 million or $0.02 per diluted common share and an after-tax net reserve decrease related to the assumption updates of $192.1 million or $0.95 per diluted common share. Excluding these items, after-tax adjusted operating income in the third quarter of 2023 was $381.7 million or $1.94 per diluted common share, an increase from $332.3 million or $1.65 per diluted common share in the year ago quarter. Participating in this morning’s conference call are Unum’s President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; Chief Operating Officer, Mike Simonds; as well as Tim Arnold, who heads our Colonial Life and Voluntary Benefit Lines; and Mark Till, who heads our Unum International Business.

Now I’ll turn to Rick for his comments.

Richard McKenney: Thank you, Matt. It’s good to be here with all of you this morning, and we appreciate you joining us. Three quarters of the way through 2023, our year has shaped up to be a good one, and we have a number of favorable trends that set up for a continuation of positivity. Specifically for our business, the macro picture remains favorable. A strong employment atmosphere, higher interest rates, and a benign credit environment are all positives. In this environment, it is also clear that our teams continue to execute against our plans to protect more people and deliver on our core business results. They are highlighted by exceptional core premium growth, strong sales levels, solid margins and consistent performance from our investment portfolio, all resulting in record levels of capital.

The third quarter was also a milestone quarter in that we expect the premium deficiency reserve has been fully funded with our current quarter contribution. As we said at our Investor Day, completing this in 2023 will mean that we don’t expect contributions required to back our long-term care business for the next five years. With ongoing strong capital generation from statutory earnings, this provides a capital picture going forward that provides ample flexibility. It is with that confidence that we have increased our share repurchase authorization to $500 million for 2024. The third quarter was also our first reserve assumption update filed under long duration targeted improvements. While net impacts are muted, especially given that we cannot incorporate the sharp increase in interest rates, this new accounting guidance introduces dynamics that will impact go-forward quarterly GAAP earnings, most notably in the Closed Block.

We’ll get into the GAAP assumption review further throughout our discussion, but the steps we have taken and continue to take to de-risk and strengthen the Closed Block have improved its position. And as we have reiterated, the GAAP accounting does not impact views on our capital and capital deployment plans. In addition, we expect around $3 billion in statutory reserves over our best estimate at year-end. As we look to the details of the third quarter for our business, we had another very strong quarter of performance. From the top line to the bottom line to capital generation, we continue to deliver on very strong trends of growing a growing customer base and profitability. Starting with the top line. In the third quarter, earned premium growth exceeded 6%.

This is a level we have not seen in several years and included growth across all core operation products from solid sales as well as generally stable persistency that remained within our expectations. We are pleased with the premium growth across the core segments, including 6.5% in Unum US, over 12% in International and nearly 2% in Colonial Life. Colonial Life continued to see momentum building in sales and premium growth aided by success in agent recruiting and the positive customer reception we’re seeing for our gathered platform. All-in-all, we expect to meet our Colonial Life premium target in 2023 and continue to be optimistic for higher growth rates in the future. Current and future premium growth is fueled by sales, which continued to grow on top of strong prior year results.

Core operations sales grew nearly 2%, highlighted by 8.5% in Unum US and close to 5% at Colonial Life. Underlying UK results were also good, absent very high sales comparable in the year ago quarter. We are also pleased with the robust year-to-date levels of growth the UK business has brought to the franchise. The growth scene in our top line is amplified by the success we’ve seen in key technology initiatives, such as HR Connect and Total Leave, where we continue to differentiate creating and maintaining deep connections with both existing and new employers and their employees, who evaluate high-quality digital experience backed up by the knowledge of our team and the AI tools we are equipping them with. Our success is also a result of the breadth of our team’s strong execution, providing operational excellence and taking care of employees at time of need.

Employers are putting increasing value on our service and offerings. Our discipline in pricing and customer engagement, combined with our consistent execution translates to solid product returns as we continue to see attractive margins across our lines. Consolidated ROE was a very healthy 12.7%, and our before tax operating earnings and return on equity in our core operations were well above the top end of our most recent outlook ranges. In total, after-tax operating earnings of $381.7 million increased 15% from the same time last year. Looking to our balance sheet, our investments continue to perform very well. We have de-risked our balance sheet, increased the credit quality profile of our portfolio and are well positioned for future market cycles.

In addition, we continue to build out our interest rate hedging program and sold a portion of our shorter duration bonds in the LTC portfolio, extending duration for cash flow matching purposes. The results across the board continue to support and strengthen our already robust capital position, with statutory earnings over $500 million, our holding company liquidity ended at $1.2 billion and our RBC was 470%, both at levels well north of our targets. The capital generation provides tremendous flexibility to pursue our strategy and continue to return capital to shareholders through dividends and share repurchase. The new Board authorized share repurchase program I mentioned supports our greatly accelerated capital deployment strategy heading into next year.

Beginning in the first quarter of 2024, we expect to begin repurchasing shares at a rate that we have not seen in many years. The path we are on has us well positioned for earnings per share growth towards the upper end of our outlook and capital metrics well in excess of our targets. Underpinning strong financial results is our — is in our purpose that drives us to protect more people, meeting the needs and exceeding the expectations of our customers. Our digital first and disciplined approach is capitalizing on the favorable trends in the operating environment as we advance our market-leading positions. Our formula for creating shareholder value is straightforward, grow our high-margin businesses at an accelerated pace, drive greater certainty around our Closed Block and effectively return capital to shareholders.

We have made excellent progress on all three of these areas through the first nine months of 2023. Now let me turn it over to Steve for details of the quarter. Steve?

Steven Zabel: Great. Thank you, Rick, and good morning, everyone. The third quarter was another very good quarter for the company, as we saw the continuation of our strong first half operating performance, particularly across all of our disability product lines. Disability results in the third quarter were highlighted by strong sales and underwriting performance across the board, including benefit ratios of 57.5% for Unum US Group disability, 45.4% for Unum US individual disability and 67.4% for Unum UK, all below our long-term expectations. Sales were strong across most areas of the company, specifically with our various disability products performing very well. Consolidated sales grew 1.8% across our core operations, highlighted by 8.5% growth in Unum US and 4.7% growth in Colonial Life.

While the third quarter is a relatively small quarter for sales, we are pleased with the growth path that we are on, and are positioning for our biggest sales quarter in the fourth quarter. Core operations premium grew at a healthy rate of 6.1% in the third quarter, as we continue to see tailwinds from natural growth. Natural growth continued to exceed our historic levels, but fell below the 5% mark that we experienced for the past few quarters. Persistency was generally improved from 2Q results and within our expectations. Year-to-date, core operations earned premium grew 4.9%, just below the top end of our full year outlook of 3% to 5%, which we now expect to exceed. As I review our results by segment, I will describe our adjusted operating income results and benefit ratios, excluding the impacts from the annual GAAP reserve assumption updates in the third quarter of 2023 and 2022.

Starting with Unum US, adjusted operating income increased 27.4%to $357.8 million in the third quarter of 2023 compared to $280.8 million in the third quarter of 2022. Results finished above prior year, primarily due to favorable benefits experience and long-term disability and higher premium income, partially offset by higher operating expenses. The group disability line reported another robust quarter, with adjusted operating income of $170.1 million compared to $130.7 million in the third quarter of 2022, with the increase driven by higher earned premium and a strong benefit ratio of 57.5%. The improvement from second quarter was driven by lower average claim size, coupled with continued strength in both recoveries and incidents. Looking ahead to the fourth quarter, we expect the benefit ratio in the low 60% range.

Results for Unum US Group Life and AD&D increased compared to the third quarter of last year, with adjusted operating income of $52 million for the third quarter of 2023 compared to $28.2 million in the same period a year ago. The benefit ratio decreased to 73.3% compared to 78% in the third quarter of 2022, due to lower COVID-related mortality and lower average claim size. Adjusted operating income for the Unum US supplemental and voluntary lines in the third quarter was $135.7 million, an increase from $121.9 million in the third quarter of 2022. The increase was driven predominantly by improved voluntary benefits results. The voluntary benefits loss ratio of 39.1% was favorable to the prior year, primarily due to lower benefits in both the disability and life product lines.

The individual disability benefit ratio of 45.4% was unfavourable to the prior year, mainly driven by higher average size of submitted claims, but still favorable to our expectations. Turning to premium trends, Unum US results included strong year-over-year premium growth of 6.5%, supported by a declining rate of natural growth. Sales trends for Unum US were also solid, with sales increasing 8.5% year-over-year in the third quarter. Persistency for total group of 89.8% remained stable in the third quarter, with similar stable results within most of our supplemental and voluntary lines. Now moving to Unum International. The segment continued to show strong trends in its underlying earnings power, with adjusted operating income for the third quarter increasing to $36.8 million from $24.9 million in the third quarter of 2022.

Adjusted operating income for the Unum UK business improved in the third quarter to GBP28.4 million compared to GBP23.3 million in the third quarter of 2022. The reported benefit ratio for Unum UK decreased to 67.4% in the third quarter compared to 78.7% in the same period a year ago. As you may recall, a portion of our policies in the UK have an inflation rider, which are backed by inflation-linked gilts. The inflation-linked benefits are capped, but the income we receive from linked gilt is not, which does increase earnings levels in periods of very high inflation. This inflation benefit has dissipated from recent highs. Without this impact, in the third quarter, Unum UK adjusted operating income was in the mid-20 million pound range, reflecting another quarter of strong underlying claims performance.

So then looking ahead to the fourth quarter, we expect underlying earnings at a similar level, with the inflation benefit at or maybe slightly below third quarter levels. International premiums continue to show strong growth. Unum UK generated premium growth of 9.9% on a year-over-year basis in the third quarter, while our Poland operation grew 27.3%. UK sales in the third quarter were GBP18.2 million, down from third quarter 2022 sales of GBP 30.9 million, which did include a higher-than-normal amount of large case sales. Unum Poland sales in the third quarter were nearly twice the year ago period. So then moving to Colonial Life. Adjusted operating income for this segment was $102.9 million in the third quarter compared to $117.9 million in the third quarter of 2022.

The decrease was driven primarily by higher DAC amortization due to increased lapses. The benefit ratio of 49.1% increased from 48.7% in the year-ago period, but did remain within our expectations. Colonial premium income of $431.2 million finished 1.9% higher than the prior year, primarily driven by higher sales, partially offset by lower persistency compared to the year ago period. Momentum has been building for Colonial top line growth throughout the year and with the year-to-date premium growth just under 1%, we are positioned to meet our growth outlook for the segment of 1% to 3% for the full year. Sales in the third quarter of $121.3 million increased 4.7% from the prior year, with sales across all product lines. So then in the Closed Block segment, adjusted operating income, excluding adjustments related to the Closed Block individual disability reinsurance transaction was $34.2 million compared to $42.1 million in the third quarter of 2022.

The decline was driven primarily by higher long-term care benefits experience and a lower long-term care earnings trajectory post assumption update, which I will describe in more detail in a moment. So quickly wrapping up my commentary on the quarter’s financial results, the adjusted operating loss in the corporate segment was $41.5 million compared to a $49.5 million loss in the third quarter of 2022, primarily driven by higher net investment income and lower expenses. For the fourth quarter, we expect the segment’s operating loss to remain generally consistent with this level. So reflecting on these results as well as those from the first and second quarter, the first nine months of the year have been very strong and we continue to have confidence in our ability to grow our full year operating earnings per share towards the upper end of our expected range of 20% to 25% over historically reported results.

Now let me dive into the assumption update and provide additional details on updates made to LTC, including the LDTI dynamics that Rick did mention earlier. We completed our annual review assumption in the third quarter with a generally modest impact on financial results. This resulted in a net increase in reserves of $177.2 million or approximately $139.3 million after tax. While most product lines saw changes, this year’s assumption updates were highlighted by favorable adjustments in our group disability line and for Colonial Life. For group disability, since last year’s GAAP reserve review continued high levels of performance and investment in our operations give us confidence that current recovery trends are sustainable, leading to $121 million favorable adjustment before tax.

For Colonial Life, favorable claims experience as well as lapse trends drove reserve releases of $80.7 million before tax. In addition, with two prior updates to our group disability GAAP recovery assumption in both 2021 and 2022, and the continued favourability we are seeing, we made an update to our statutory reserve recovery assumption, which led to a statutory reserve release of $205 million pre-tax, an incremental source of capital that further boosts our strong financial position. Moving to LTC. The GAAP assumption updates resulted in an increase in reserves of $368.1 million before tax, reflecting strengthening of lapse and mortality assumption in the older age population within the active life reserve, which was partially offset by a refresh of our premium rate increase program.

It is important to note that under current GAAP, our LTC reserve update reflects locked-in interest rate assumptions as of year-end 2020. As such, the LTC assumption updates do not reflect changes in interest rate margins since the LDTI adoption date of January 1, 2021. Thus, unlike prior years, changes in interest margins cannot offset changes in liability assumptions for reporting — financial reporting purposes. As an example, using a 4.5% 30th year treasury yield as our long-term expectation for new money in setting reserving levels, it would have nearly offset the entire LTC assumption update impact. Furthermore, consideration of today’s long-term rates would indicate additional margins. While interest margin is no longer reflected in our GAAP reserve analysis, we will still see the benefit of higher earned portfolio yields compared to the locked-in discount rates as interest margins in earnings over the life of the block.

The assumption updates also impacted both the future lifetime loss ratio expectation or net premium ratio and the buffering effects of periodic experience volatility. The new reserve basis includes an increase of future expected benefits. As a result, the net premium ratio or NPR for the block is now in the low to mid-90s. In addition, we will experience less quarterly buffering, driving increased quarterly volatility. These dynamics can be seen in our third quarter results. The quarterly LTC interest-adjusted loss ratio was 105.3% compared to the new net premium ratio in the low to mid-90s. This elevated interest adjusted loss ratio was due to claims incidents remaining at a higher level, higher than expected levels, but were favorable compared to the second quarter.

While the overall claims experience in this period was improved from the second quarter, less of the unfavourable impact was buffered in the third quarter. Given the increase in NPR to the low to mid-90s, we expect GAAP earnings in the Closed Block to be in the $30 million to $40 million range per quarter going forward compared to prior expectations of $45 million to $55 million. To be clear, this assumption update does not impact our plan for capital deployment or lower our expectations of significant margins between our statutory reserves and best estimate of approximately $3 billion at year-end. We remain on track to fully recognize the premium deficiency reserve by year-end without contributing additional capital into Fairwind in the fourth quarter, as we have benefited from actions taken to de-risk the block in today’s higher rate environment.

And from a subsidiary perspective, First Unum holds a greater proportion of reserves impacted by the underlying assumption updates. As a result, we do expect an increase to our asset adequacy reserve in that entity in the fourth quarter. Therefore, we expect to reallocate $200 million to $300 million of expected capital contributions from Fairwind to First Unum for the full year 2023. Importantly, while this changes the geography of our planned capital contributions, it does not impact our overall capital deployment plans of contributing $800 million to $900 million to LTC for the full year, followed by no further contributions as we detailed at our outlook meeting in February. Moving now to investments. We continue to see a good environment for new money yields and risk management.

Purchases made in the quarter were yet again at levels above our earned portfolio yield, which was 4.45% for the first nine months of 2023. In addition, our interest rate hedge program for LTC is performing as expected. Since inception of the program last year, we’ve now entered into nearly $2.6 billion of treasury forwards, including hedges entered into since quarter-end. Given favorable market conditions, we have expanded the horizon of the hedged cash flows from five to seven years. In addition, we took the opportunity to further de-risk the balance sheet by selling over $700 million of shorter duration bonds in our LTC portfolio and reinvesting these proceeds in higher credit quality, higher yielding and longer-duration bonds that better match our liability profile.

While this was capital neutral, it did generate after-tax GAAP realized losses of $35 million in the quarter. While these are prudent risk management and economic decisions, the benefits are not reflected in the current GAAP treatment of interest margins. So to round out the investment discussion, miscellaneous investment income increased in the third quarter to $24 million compared to $18 million a year ago as alternative investment income increased. Income from our alternative invested assets was $22.6 million within our longer-term expectation of $20 million to $25 million. So I’ll wrap up my commentary with an update of our capital position, which remains very strong. The weighted average risk-based capital ratio for our traditional US insurance companies is approximately 470%, and holding company liquidity remains robust at $1.2 billion.

Capital metrics again benefited in the third quarter from the strong statutory results, with statutory after-tax operating income of $532.7 million, which includes the impact from the LTD statutory reserve release described earlier. This brings year-to-date statutory after-tax operating income to $1.1 billion, which will enhance dividend capacity in 2024. Our strong cash generation model drives our ability to return capital to shareholders and in the third quarter we paid $71.4 million in common stock dividends and repurchased 1.5 million shares at a total cost of $74.8 million, an increase to the pace of share repurchase from the first half of the year. As Rick mentioned, the pace will increase again in 2024, as our Board recently authorized a new share repurchase program of $500 million beginning on January 1, 2024.

As planned, we contributed $200 million of capital in the Fairwind in the third quarter, bringing the full year total to $600 million. Our expectation is that this amount is sufficient to fully recognize the premium deficiency reserve in 2023 without additional capital contributions. Given the impact of our LTC best estimate assumption changes on the First Unum block, as described earlier, we plan to contribute $200 million to $300 million of capital to First Unum. In total, our 2023 capital contributions to support LTC will total $800 million to $900 million, consistent with our expectations coming into the year. Full recognition of the premium deficiency reserve is expected to result in significant excess margin of approximately $3 billion over our updated estimate for the entire block and supports our plans of not contributing capital for LTC in the coming years.

Our focus in 2023 has been completing the accelerated recognition of the PDR as outlined in our February outlook meeting. Considering our position today with a strong year-to-date earnings, robust capital position and clarity on our premium deficiency reserve balance, we’re pleased with our ability to put the PDR funding behind us and to increase free cash flow available for deployment in 2024 and beyond. Now I’ll turn the call back to Rick for his closing comments and I look forward to your questions.

Richard McKenney: Thank you, Steve. So there’s plenty to discuss this quarter, but I would like to reiterate before we get to questions that in total, the strength of the franchise, the strength of the balance sheet and the strength of the capital generation provides tremendous opportunity as we look to the last quarter and into 2024. So the team is here to respond to your questions. So I’ll ask Brianna to begin the Q&A session.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Suneet Kamath with Jefferies. Your line is open.

Suneet Kamath: Thanks. Good morning. Just wanted to start on LTC. Can you just talk a little bit more about what changed in terms of the assumptions and how your new assumptions compare to what you’re using on a statutory basis?

Steven Zabel: Yes, this is Steve. I can take that question. So as I said in my comments, really the vast majority of the financial impact of those changes. It was related to the strengthening of the assumption for both mortality and lapse, specifically for the older age population. It also was more focused too on those policies with richer benefits. And so what we’ve seen over the past few years is that, that experience set for those older age policyholders. We practically doubled the data that we have over the past several years. The other thing that we had to work through, obviously, was the impact of COVID. And as you’ll recall, we had a lot of volatility in our experience during the COVID years, both in claimant mortality as well as incidents, but what we did see were trends in what we saw in our active life terminations.

We wanted to really wait until we got the stability over that period of volatility. And then we also looked at some outside industry information. And between really those three dynamics, we thought that this was the right time to go ahead and adjust those assumptions. So those are really the major kind of benefit assumptions that were changed. And then we also updated our rate increase program as part of this assumption can change.

Suneet Kamath: And then how do those compare to what you have on — what you’re using under stat?

Steven Zabel: Yes. It’s kind of hard to compare. But I think a good indicator of that is our view of the premium deficiency reserve and really the needs of the recognition there really did not change as we went through the GAAP assumption review.

Suneet Kamath: Got it. And then I guess as we think about First Unum and that $200 million to $300 million contribution, I guess I was a little surprised it was going into AAT, because you guys have done so much hedging there. So can you just kind of maybe explain that a little bit more what’s causing that increase within First Unum?

Steven Zabel: Yes. Probably the way to think about it is our First Unum block tends to be mostly individual policyholders. They are higher, richer benefits. And so when we looked at our assumption review and we had to overlay that across the different blocks, it did have a little bit of an outsized impact on those policyholders within First Unum. We do continue to be very pleased with our hedge program within the First Unum block. It provides a really good protection against downside scenarios. We’ve seen that play out as we’ve gone through our asset adequacy review. But given these new assumptions, we do think we’re going to need to strengthen the asset adequacy reserve going into year-end, and so we are going to put a little bit more capital down into that legal entity.

Suneet Kamath: Okay. Got it. Thanks.

Richard McKenney: Thanks, Suneet.

Steven Zabel: Thanks, Suneet.

Operator: Our next question comes from Tom Gallagher with Evercore ISI. Your line is open.

Thomas Gallagher: Thanks. A couple more on long-term care. Steve, how much was the offset on increased future rate assumptions that you just referenced? That was my first question.

Steven Zabel: Yes. The offset was we made an adjustment to our rate increase assumption of about $900 million. And just to kind of put that into context, we’ve achieved over $4 billion of rate increase approvals over the years. So we think that’s a very reasonable amount. We clearly have great relationships with regulators, and we’ve had quite a bit of success over the years. So I feel very confident about our ability to execute on that going forward.

Thomas Gallagher: So you’re assuming an incremental $900 million of future rate increases versus your prior. Okay. Got you. And the next question is just the portion of your long-term care block that gets recognized immediately versus the higher — in terms of higher loss ratio cohort versus the better part of the block that gets smooth. What does that mix look like?

Steven Zabel: Yes. The way to think about it is that you go through the liability assumption review, and kind of reset your thinking about the needed economic reserve there. And then you do need to let it go through the mechanics of LDTI. And so what’s going to happen there is there’s going to be a portion of it that really gets buffered away into the reserve amount. There’s going to be a portion that you’re going to recognize in the current period. Now that portion that gets buffered is going to impact your net premium ratio, which is an indicator of your go-forward loss ratio. And so if you kind of break that down to the numbers, we had about $900 million net of liability change or some impact of assumption change. We buffered about $500 million of that into the reserve.

That resulted in about a 7% increase in the net premium ratio, which that’s going to impact our go-forward earnings. And that’s why we’ve kind of reforecast what the margins are going to look like on LTC and then about $400 million or the exact number is $368 million fell through to the bottom line and was reported in third quarter earnings. I think the other thing that’s important about the dynamics here is we implement these GAAP assumption changes as of the beginning of the quarter. So it was really effective 7/1, and so that go-forward expectation of the loss ratio was really in effect during the third quarter. So when you think about what our reported loss ratio was in the third quarter, the starting point was really that new net premium ratio, which was in the low to mid-90s.

Thomas Gallagher: Got you. That’s really helpful. If I can sneak in one more. Just if rates were to stay where they are now into 2025 at the long end of the curve, how much — and I think now you have $1.6 billion PDR, if I’m keeping score correctly, of the $1.6 billion, how much would become redundant? Would that be all of it or most of it? And is it fair to assume that even if it technically is redundant, that you’d probably leave it in Fairwind, considering your ultimate goal of risk transfer? Thanks.

Richard McKenney: Yes, Tom, it’s Rick. Let me address that. When you talked about where interest rates are today and take you back around the PDR and the dynamics around interest rates, as we’ve talked before and it’s a three-year look back rolling average. And so spot rates today are clearly have moved up even more throughout the year. So the money that we’ve put in there today is predicated on that three-month or three-year rolling average. As it rolls two spot rates, if interest rates stay where they are, a significant amount of those reserves become redundant over time. So it’s not going to happen. It’s going to happen on that same three-year trajectory. That those reserves would, in that scenario, turn into capital. We’ve got that capital down.

And we think that although we have the ability to move it around to other parts of the entity for other purposes, we would like to keep a lot of it there to make sure that we can live up to our five-year no more capital going into our Fairwind entity. And I think that’s the clear message there. So although we have the ability to giving shorty to investors around not needing to put more money behind long-term care we think has shareholder value. So that’s our intent going forward.

Thomas Gallagher: That’s helpful. Thanks, Rick.

Operator: Our next question comes from Joel Hurwitz with Dowling & Partners. Your line is open.

Joel Hurwitz: Hey, good morning. Another one on LTC. Can you just talk about the opportunities for further portfolio duration extension? And any way to quantify the benefit from that and the rate hedges that you put on?

Steven Zabel: Yes, this is Steve. Yes, probably the points that I would make around that is just we’re really happy about both the hedge program that we’ve put in place. We’re up to about $2.6 billion of notional amount on that hedge program. We’ve already seen the benefit, but it also just protects us from some of those downside scenarios. We took the opportunity to reposition part of the LTC portfolio, selling out of some short duration bonds and being able to increase both duration credit quality and frankly, the annual earnings coming off of that block. We’ll continue to roll that program forward from a hedging perspective. As I mentioned before, it’s really — it ladders in based on quarterly cash flows. So we will continue, as those hedges mature quarter-by-quarter, we’ll continue to extend that.

So we think that will be really good protection in the future. I also mentioned in my script that we’ve kind of extended that time horizon for those cash flows from five to seven years, and so we took the opportunity to extend. As far as scenarios and that sort of thing, we’ll have a guidance call coming up here in the next several months to talk about 2024. In our Investor Day last year, we gave some scenarios, which really gave you an idea of what the downside protection is. I think that’s the best way to articulate it. And so we’ll probably just wait until we refresh that going into next year and give you a little bit more guidance, just how much protection we do have against the PDR, given the actions that we’ve taken.

Richard McKenney: And Joel I think you are asking a little bit about the repositioning trade that we did as well. And so the team did a really nice job looking at cash flows throughout the cycle and thinking about how we put those cash flows in the right space. That’s what that trade was as well that we did in the quarter. And so is there more opportunity to do that? We were feeling pretty good about the cash flow match, not just in general, as we’re talking about the hedging, but also as we look at specific durations throughout the curve. And so Martha Leiper, Steve and the team did a really nice job of positioning us for that.

Joel Hurwitz: Okay. That’s helpful. And then shifting to group disability. Can you just provide an update on expectations moving forward? And in terms of pricing for 1/1, how is it being affected by the continued favorable experience that you’re seeing?

Richard McKenney: Mike?

Michael Simonds: Yes. Thanks and good morning, Joel. You’re right. We continue to feel good about the group disability benefit ratio of 57.5% this quarter and continues to benefit, I think, from a favorable macro environment, like Rick highlighted, paid incidents has been favorable. recoveries, both in count and average size continue to be strong for us. And I do think that the actuarial underwriting teams, the renewal delivery over the last couple of years through sales and client management. And ultimately, our benefits team is a big contributor to that. And as you said, certainly, that favorable experience will and has begun to flow into renewal conversation as we sit here, having worked through the large employer inventory for January 1st effective, and kind of working down into the middle and smaller end of the market.

We feel really actually quite good about the persistency levels that we’re achieving. Like we’ve talked about, over time, we would expect a gradual increase back towards longer-term targets for our group disability loss ratio. But again, the dynamics are such that we would see that happening pretty gradually over the coming six, eight, 10 quarters and feel like this high 50%, low 60% is a pretty good target here for the short to midterm.

Joel Hurwitz: Okay. Thank you.

Richard McKenney: Thanks, Joel.

Michael Simonds: Thanks, Joel.

Operator: Our next question comes from Ryan Krueger with KBW. Your line is open.

Ryan Krueger: Hey, good morning. Unfortunately, one more question on long-term care. I guess in terms of the capital contributions still being the same for the year. But doing the $200 million to $300 million in First Unum, what was the — what was caused or what drove the offset in terms of lower capital contributions to Fairwind? Is that just the gradient of higher rates? Or is there something else there?

Steven Zabel: Yes. Basically, Ryan, it is the gradient of higher rates. That’s the main thing drive. And it’s really the combination of that, but also the hedging program and some of the de-risking that we did in the portfolio. That gives us downside protection in the future, but it also does give us a little bit of benefit kind of in the current calculation. So I’d say it’s a combination of those two things. The higher rates bleeding into kind of the new money assumption we’re able to use and also in de-risking

Ryan Krueger: Okay, makes sense. Thanks. And then in terms of the 4Q sales pipeline, can you give any color on early reads on how that should be up so far?

Michael Simonds: Good morning, Ryan, it’s Mike. Thanks for the question. And I’d say, we talked a little bit about for the Unum US Group business, the January 1st renewals coming in at or favorable to expectations, which is really good. I’d say the same thing about the new sales pipeline. Rick had a few things in his opening comments, but the investments that we have continued to make over the last couple of years, particularly around our lead management offering in our HR Connect into leading HRIS platforms are really paying off. We’re seeing really good sales growth, very high attachment rates of our group insurance premium to those services. I mentioned last quarter is a good time to be in group disability. And I think that’s both because of risk dynamics, but also lead management has presented a real opportunity for us to differentiate ourselves in the market.

It’s a top concern for HR teams, and having a really strong digital solution backed by great people has allowed us to kind of move off the spreadsheet in a lot of instance and has us feeling good about the January 1 implementations that are already beginning to occur. And maybe we’ll just take a minute and check in on January 1st in sales growth in our voluntary and international businesses.

Timothy Arnold: Sure. This is Tim. Thanks, Mike. So we’ll start with the Unum brand. Mike mentioned attachment rates for group insurance to our HRC and Leave solutions, and we see opportunity to continue to drive VB adoption there as well. We’re seeing good sales growth in the Unum VP business in 2023 through the third quarter, and we expect to continue to build momentum in that business as we look to continue to benefit from those solutions Mike mentioned around HRC and Leave and also just cross-selling into our existing group business on the Unum brand. For the Colonial Life brand, this year is not worked out as we had expected at Investor Day from a sales perspective, but we do see a number of very encouraging trends. One is we see building momentum.

Each quarter of 2023 has seen progressive sales growth over the prior year quarter. In addition, there are a lot of encouraging signs in our business, public sector business is the most profitable business for Colonial Life and that’s grown 13% for the first three quarters. Certainly, new agents are the future pipeline for Colonial Life sales, new agents are up 28% through the third quarter. Sales from those new agents up 15%. Through the third quarter, we have 12% more 1099 sales managers than we did a year ago. And in addition, we’re really excited about the progress we’re seeing with our gather platform, which is a benefits administration enrollment platform, primarily for small employers. We’re well ahead of expectations there. We’re seeing very good traction with Colonial Life selling Unum Group Insurance through our cross-brand sales initiative, and that’s also helping with Colonial Life sales as well.

And the sales from our new districts are up very significantly this year. So those things are encouraging. We’re still seeing a good bit of headwind in the large case market on the Colonial Life brand, and we have plans to begin addressing that in 2024.

Richard McKenney: Mark, do you want to give any sense for international?

Mark Till: Yes. I mean we’re feeling positive about the look forward based on the strong performance we’ve had so far this year. So I think sales in the international business this year, up about 24%. The UK accounts for about 15% of that. The trends are looking positive. We’ve had some market data that shows our share of new business has been rising slightly and we’ve been the largest writer of business in the first half of the year. So I think we feel good about the momentum going into 2024. The tailwinds still look favorable. So, yes, we’re feeling pretty confident at the moment of the growth.

Richard McKenney: So there you have it. I’d say, in general, pretty much across products and segments. We’ve got not only good results year-to-date, but feeling pretty good actually about accelerating momentum across the business lines, Ryan.

Ryan Krueger: Great. Thanks a lot.

Richard McKenney: Thanks, Ryan.

Operator: Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

Alex Scott: Hey, apologies. I’m going to go back to long-term care for one and then I have one on the core business. So first on long-term care. I was just interested, to what extent these changes had to do with individual versus group? And just with group being less seasoned, interested in like how the actual expected trends are coming in? Yes. I mean that’s the just, but I was just interested in sort of geography and seasoning group?

Steven Zabel: Yes, probably just a couple of foundational things. First, for a lot of kind of our claims assumptions and as we think about that, we don’t necessarily think about individual and group separately. They do have different kind of richness of benefits, which will just cause differences in severity. But by and large, we look at those claims consistently. Probably by and large the same with mortality lapse, assumptions are going to be a little bit different. But what I’d say is this reserve assumption was pretty focused on older ages. And so I would say our data set would be predominantly individual, just because of the relative age of the block of business. And I mentioned earlier, we’re talking about very old age, 90-plus kind of in that range. Our data set has doubled in the last five years in those cells, and that’s going to be predominantly individual policyholders that reach that age.

Alex Scott: Got it. But I guess some of those changes you made, your comments sort of suggest that you made those adjustments to both individual and group because the assumptions are more or less the same.

Steven Zabel: Yes. That’s right. Yes. As appropriate, we would make them a profitable block.

Alex Scott: Got it. All right. That’s helpful. And then in the core business, can you talk about net investment income, the benefits you’re seeing from higher rates, maybe remind us of the trajectory that, that can have. And also interested if you’re doing anything around reallocation that could accelerate some of the benefits?

Steven Zabel: Yes. I would say, generally speaking, we’ve had a pretty consistent asset allocation over time, and we’ve talked about this a little bit in the past. Over the three or four years, we probably reallocated a little bit of our new money away from high-yield investments more into your investment-grade corporate bonds behind LTC, put it behind alternative asset portfolio, a bit more than maybe historically speaking. We feel good about our trends. I mean our portfolio rate basically has increased over the last two or three quarters, as we’re able to invest at rates higher than what’s in the current portfolio. The other thing, I guess, that I would think about is when we think about products like long-term disability, we are able to look at the types of rates that we’re getting in the market, and that’s going to have an influence on how we think about pricing.

Under LDTI, the accounting regime is a little bit different than what we maybe did in the past where we looked at our portfolio. And kind of created this interest margin that we wanted to be consistent between discount rates and what we were earning on the portfolio. That’s changed a little bit with LDTI, where it’s a little bit more prescribed in what the discount rate is. But I’d say, overall, we still feel really good about the margins that we’re earning there. Obviously, we feel really good about the yields. We’re putting money to work behind the LTC portfolio. And so we’re pretty optimistic going forward.

Alex Scott: Got it. Thank you.

Steven Zabel: Thanks, Alex.

Operator: Our next question comes from Joshua Shanker with Bank of America. Your line is open.

Joshua Shanker: At the risk of being repetitive, my question is about long-term care, apologies. Look, we’re still far, far away from the large claiming period for the book. Matt helped us a little bit, but I’d love more information. As we go into the future, we’re going to have more information, and the amount — now is much less than what you’re going to know in the future. Is there a reason to believe, especially given post LDTI, that you would be making more adjustments, could go either direction to the lapse assumptions mortalities in the future, and the volatility around accurately marking that book will get greater as you get better information about claiming habits.

Steven Zabel: Yes. I think I’d go back to some of the comments I made before. We really did not make significant adjustments around kind of our younger age population, whether it be claim counts were incidence mortality. We feel pretty good about those assumptions. We have very robust data sets. This last change was really around where there was a little bit of uncertainty, and certainly just because of the level of data that we had in the population. And it will age into having better data in those cells, and we just got to the point this year as we were going through our experience study where we thought we had credible data to say that we needed to make the adjustment. It was validated by other industry information that I’d say, had more robust information in those older age populations.

And so the thing that I’d probably leave it with is your point about positive or negative adjustments going forward. LDTI does require you to look at really every assumption individually. And when you think it’s appropriate, adjust those assumptions individually. The former construct was more of looking at overall reserve adequacy and having to only make adjustments when you felt like your aggregate reserve was no longer appropriate. And you really saw that in Colonial this quarter. As we went through and we looked at those assumptions, we did see some assumptions where our experience was running favorable to the assumption built in or for active life reserves. So we made those adjustments for the assumption. Even though in aggregate, that — we would view that reserve as being more than sufficient.

We actually chose to go ahead and release reserves based on the current accounting guidance. So yes, I would say it could go both ways, but I would also say, we’ve compiled a lot more data than we had several years ago, and we’ll just continue to monitor that as we go forward.

Joshua Shanker: And how many years into the future would we need to go before we can make some comments with confidence about the role COVID mortality might have on the LTC book?

Steven Zabel: Yes, it’s a good question. I think as we think about claimant mortality, we have pretty good confidence that we’ve probably kind of run our course as far as how COVID might have impacted that, because we’re seeing claimant mortality back to pretty much expected levels. I would say the adjustments that we made this quarter around policyholder mortality and lapses in the older age wasn’t necessarily based on any volatility that we maybe saw during COVID. It was just building a better data set, a more robust data set, and then being able to, with confidence, make an adjustment there. But as you know, I mean, this is a very, very long tail business. And so we’ll just have to continue to monitor experience as it comes in over time.

Joshua Shanker: Thank you for the answers.

Steven Zabel: Thanks, Josh.

Operator: Our next question comes from Mike Ward with Citigroup. Your line is open.

Michael Ward: Hey, guys, thanks for squeezing me in. I was just kind of wondering if you could discuss the landscape for risk transfer and I have to imagine that actions between the PDR First Unum contributions and then the credit sort of repositioning, I don’t know, at the margin, does that change the profile at all? Any update there?

Richard McKenney: Yes. Happy to do that, Mike. Thanks for the question. When you think about the risk transfer options, we talked about, the market has been consistent. So there’s no news there. But I think when you talked about the dynamics, it really is about how a potential buyer or a reinsurer might look at the different dynamics we see. So many of the things you talked about, many of the changes are going to be more from our side of the equation. When they look at it from the other side, I think that’s going to be very consistent. So many of the things you talked about in terms of funding levels, PDR, that would just change how we recognize such a transaction. It doesn’t change the ability of somebody else to come in or the ability for us to be able to do the transaction. So I think that world is pretty consistent as it would have been prior to the third quarter.

Michael Ward: Okay. Thanks, guys.

Operator: Our next question comes from Wilma Burdis with Raymond James. Your line is open.

Wilma Burdis: Hey, good morning. Could you talk about the lapse rate assumption on the LTC block? Should we assume that it’s pretty close to zero on the older block with richer benefits?

Steven Zabel: Yes. Well, we haven’t disclosed that and probably won’t. We already had a fairly low lapse rate on those. So it’s a reasonable assumption to assume we’re getting pretty close to zero.

Wilma Burdis: Okay. Just trying to see if there’s any potential for future lapse rate assumption decreases there. And then maybe this is a very obvious question, but should we assume the 500 million of share repurchase authorization to represent a run rate in ’24 and beyond. And if so could you provide — go ahead.

Richard McKenney: Well, just to give you a little bit of a history. So last year, we came into the year at a run rate of $200 million. We upped to $300 million kind of halfway through the year. And you can look at this as we’re upping that run rate again. So the authorization goes in 1/1 ’24, but I think it’s a reasonable assumption that we’ll complete that throughout the course of the year.

Wilma Burdis: Okay. And just if I could get one follow-up on that. Just could you talk about what gives you the confidence to move that up to 500? I think it was around 400 kind of pre-pandemic, pre-PDR, so a pretty meaningful bump up there.

Richard McKenney: Yes. I think it really goes back to the full capital generation model that we have. And a big move that we talked about this quarter is the PDR being fully funded. So there’s not capital that’s going to be going behind long-term care. And when you think of our statutory generation, also the robust positions that we have, both RBC and cash levels. We feel very good about moving that up to 500. And we think even with that, we’re going to still have good flexibility to execute on our strategy. So a lot of confidence about moving that up and also the other opportunities that we have out there to deploy that capital.

Wilma Burdis: Okay. Thank you.

Operator: Our next question comes from Wes Carmichael with Wells Fargo. Your line is open.

Wesley Carmichael: Hey, good morning. I just had one follow-up on Closed Block. And I guess, just curious, I think with the assumption review, you reset the net premium ratio to the low mid-90s. But the LTC loss ratio was 105% around there in the quarter. So just curious if you expect the same level of earnings roughly in the fourth quarter. Should we expect that loss ratio to be in that near 105% range or I’m just curious if it comes down towards the NPR?

Steven Zabel: Yes, this is Steve. I can take that. The guidance that I gave as far as setting different expectations for go-forward earnings in long-term care that would be more resetting the loss ratio from the previously expected 85 up to that level where the new net premium ratio is in the low to mid-90s. What I would say is we did continue to see elevated claims incidents in third quarter. And so we need to see how that plays out in the fourth quarter. But short of those types of variations, we would expect that low to mid-90s to be our loss ratio going forward. And the guidance that I gave around earnings would have been based on that in long-term care or for the total Closed Block.

Wesley Carmichael: Got it. Thanks Steve.

Operator: Our next question comes from Jimmy Bhullar with JPMorgan. Your line is open.

Jimmy Bhullar: I had a couple of questions along the lines of what’s already been discussed on the call. But on long-term care, what were the specific assumptions that you changed that led to the reserve increase? And I’m assuming there’s some puts and takes, but what were the main ones?

Steven Zabel: Yes. I would say just kind of reiterate the comments that I made. It was very focused on lapse and mortality assumptions for our active life policyholders, so those policyholders that are still in force and not on claim. It was very focused on older age policyholders where we’ve built a lot of more data over the last three, four to five years. And then it was also focused on those with richer benefits. So those that would have policyholder benefits that were a lot of lifetime benefits or higher inflation. So just richer benefits within the policies. So that would be one major category. And then as I mentioned, the other would be we did modify then our rate increase program assumption and the value that we do think we’re going to get from that, because we’re basically going to incorporate these other liability assumption changes into how we think about actuarially justified rate increases with the regulators. So those would be the two big areas.

Jimmy Bhullar: And on lapse assumptions and some of the other key assumptions, how are those on a statutory basis versus where you’ve gone on GAAP? Because I realize your overall reserves in stat are higher, but are those assumptions more conservative as well, the ones you changed or not?

Steven Zabel: Yes. So I think the key thing there is for the premium deficiency reserve for the Fairwind block. This change to assumptions did not change our view of the level of reserve — statutory reserves needed related to the premium deficiency reserve. For First Unum, it didn’t change our view a little bit, and that’s why we’re going to need to strengthen our asset adequacy reserve and why we are going to put a little bit more money down in the First Unum entity. So I think that’s the way to think about it.

Jimmy Bhullar: And would that have any implications on a go-forward basis as well in terms of earnings generation or cash flow generation from the block or lack thereof?

Steven Zabel: No. Because really, these two blocks are ones that have not been cash generating. Historically, we’ve had to contribute capital to support them. And as we’ve stated, we believe coming out of 2023, we’re not going to have to do that over the next five years. So I would say just from a capital needs position, nothing has changed in our view based on these assumption changes.

Jimmy Bhullar: Yes. What I meant was this is sort of a onetime injection that you’re viewing or at least in the next few years as opposed to ongoing every year.

Steven Zabel: Yes, I just think about it as a onetime injection.

Jimmy Bhullar: Okay. And then just lastly on disability. Your margins have been pretty good. Everybody else’s have been good as well. Why isn’t that resulting in more of a reduction in pricing as companies are doing their renewals? And I recognize not all the entire block doesn’t get re-priced every year, but the stuff that is getting re-priced. Is it being re-priced somewhat lower or not really?

Michael Simonds: Yes, it’s Mike. I’ll take it, Jimmy. I would say in general, what you’re seeing is that good experience coming through. And like you said, it’s coming through on the portion of the book that is being renewed. And from most of that book, that’s about 1/3 every year that it’s coming through. I’d also say one of the things that muted a little bit as well, Jimmy, is you’re typically using two to three years of experience. So what we’ve encountered for instance here in the last four quarters would just be part of what goes into that renewal and it would extend back a year or two. And so that is going to slow a little bit of the experience coming through as well. In general, it is a good time to be in group benefits and group disability in particular, to the extent that a client is up for renewal.

We’re going to pass along good experience. We still will have sales, where, frankly, we’re seeking rate increases and the balance of the two, we think puts that group disability loss ratio kind of in that low 60s as we look forward here in the short to midterm.

Jimmy Bhullar: All right. Thank you.

Operator: Our final question comes from Maxwell Fritscher with Truist Securities. Your line is open.

Maxwell Fritscher: Good morning. I’m calling in today for Mark Hughes. So you mentioned the pressure in large case sales at Colonial Life. Can you expand on that and maybe the steps that you pointed to that you plan to take in 2024?

Timothy Arnold: Yes, Maxwell, thanks. This is Tim Arnold. Over the past couple of years, we’ve seen some pressure in large case, and we’ve been pretty consistent in saying that at Colonial Life, we’re going to be opportunistic in that segment. 75% of our customers have fewer than 100 employees, and we feel really good about our value proposition in that space. We’ve seen nice growth this year in the 500 and 999 segment. It’s that 1,000 plus segment where we’re feeling the most pressure. There are a couple of capabilities that we’re developing in the second half of ’23 and early ’24 that we think will position us more effectively for sales in ’24 and ’25.

Maxwell Fritscher: All right. Thank you.

Operator: This concludes our Q&A session. I will now turn the call back to Rick McKenney for any closing remarks.

Richard McKenney: Thank you, Brianna. I appreciate everybody staying over a few extra minutes. There’s a few things to get through this quarter, but I just reiterate that as we wrap up this year and head into 2024, lots of confidence across the company in terms of what we’re going to be able to execute on. We’re here for follow-up questions. I’d also say we’ll be out at a couple of conferences and hope to see you around through the rest of this year and early into 2024. And I think that concludes our call today. Thanks for joining.

Operator: Thank you, everyone. This concludes today’s conference. You may now disconnect.