Unum Group (NYSE:UNM) Q4 2023 Earnings Call Transcript

Unum Group (NYSE:UNM) Q4 2023 Earnings Call Transcript January 31, 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: Good morning. My name is Rob and I will be your conference operator today. At this time I’d like to welcome everyone to the Unum Group Fourth Quarter 2023 Earnings Results and 2024 Outlook Conference Call. All line have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you, Matt Royal, Senior Vice President of Investor Relations. You may begin your conference.

Matt Royal: Wonderful. Thank you, Rob. And good morning to everyone. Welcome to Unum Group’s fourth quarter 2023 earnings call. Today, we will be discussing full-year 2023 results along with highlights from the fourth quarter. We will also use the time to discuss our outlook for 2024. Please note that today’s call may include forward-looking statements. 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. Also, today’s presentation may include non-GAAP financial measures, and a reconciliation to the most directly comparable GAAP measures can be found in our earnings release and the investor relations section of our website.

Also, please note, references to Unum International sales and premium are presented in local currency and core operations sales and premium results are presented on a constant currency basis. Further, discussion of adjusted operating 2023 EPS growth of 23% or $7.66, compares to 2022 historically reported EPS of $6.21. Yesterday afternoon, Unum released our earnings press release, financial supplement, and webcast presentation. All of those materials may also be found on the Investors section of our website. Participating in this morning’s call are Unum’s President and CEO, Rick McKenney, and Chief Financial Officer Steve Zabel. Following the remarks from Rick and Steve, additional members of management will participate in Q&A, including Mark Till, who heads our Unum International Business; Tim Arnold, who heads our Colonial Life and Voluntary Benefits lines, and Chris Pyne for Group Benefits.

Now I’ll turn the call over to Rick.

Rick McKenney: Great, thank you Matt, and good morning, everyone. It’s a pleasure to be here with you all today, sharing the journey of Unum throughout 2023 and where we’re headed in 2024. This is the first time we’ve shared our outlook in conjunction with our year-end results, and I think it works well given the consistency of our actions and performance across the company. As we reflect on our progress and look ahead, I am proud to affirm our unwavering commitment to our purpose of helping the working world thrive throughout life’s moments. Steadfast focus and commitment to this purpose is delivering value to customers, employees, communities, and of course to shareholders. 2023 was a year of exceptional results across the board, with the highlight being our decades-long leadership in disability insurance shining through, and core business growth momentum building stronger with significant strides in accelerating our industry-leading digital capabilities.

The capabilities we are bringing to market such as HR Connect, Total Leave, Gather, and Help at Hand are becoming connection points with employers and employees to bring greater customer satisfaction to the benefits experience. These advancements have been influential in attracting and retaining customers, setting us apart in a competitive landscape, and ultimately driving strong top line results, including sales of over 13% for the full-year of 2023, and premium growth of over 5%. This top line growth has returned steadily throughout the year, and has us on the trajectory that we look for in our business model. As the topline has returned in 2023 our discipline with how we run the business has now wavered. Our pricing in underwriting has remained consistent to continue to deliver growth and high returns on equity.

Overall, we grew EPS 23%, with most of our product line delivering on our expectations throughout the year. I mentioned the highlight of group disability returns, but I would extend that to most of our products that continue to generate mid to high-teen returns. An area that understandably received attention in the third quarter was our closed block. We have seen volatility in the performance of that block, and today Steve will provide some ways to look at its overall health and performance outside of just its loss ratio. From a capital standpoint, we’ve executed our plans exactly how we described them coming into the year and with good results. So we exceeded expectations on value delivered to our shareholders. We raised our dividend by 10% and increased the pace of our share repurchases throughout 2023 and announced a plan to double the amount we repurchased in 2024 with our $500 million authorization.

Most notably, we described the desire to fully fund the premium deserve — premium deficiency reserve and contribute the capital needed to support our long-term care block. Steve will discuss further, but let me emphasize given our current assumptions and capital buffers, we have stated that we believe long-term care will not need additional capital for five years, but in reality our belief is that will be true for much longer. Across the company the reason that we have been able to achieve such capital results goes back to the fact that our businesses steadily generate strong cash flow and with a year of good results we ended the year with financial metrics that were stronger-than-expected including holding company cash of $1.7 billion and RBC of 415%.

Looking forward, we now expect to generate free cash flow between $1.2 billion and $1.4 billion per year. As we transition to think about 2024, the momentum from the past several years continues. We’re witnessing both a market backdrop and economic environment that are highly supportive of our business, providing us with ample opportunities to grow and thrive. Our focus is to continue building on our solid foundation. We’re dedicated to enhancing our core operations, maintaining our discipline approach and continuing to innovate in ways that resonate with our customers and the market. When we look across the company, we are hitting the ground running and our teams are looking to build on some very strong growth rates with consolidated sales growth of high-single-digits and combined with good persistency yielding premium growth in the 5% to 7% range.

Consistent margins and the purchasing of shares will deliver growth of 7% and 9% on top of the 23% adjusted EPS growth we delivered in 2023. Our customer-centric approach remains at the heart of our strategy. We’re constantly adapting our services to meet changing market needs, ensuring we remain the preferred choice for our clients. When we met last February, we outlined our strategy and plans to build on our market-leading position. We can report that we are advancing along all fronts and we are seeing the results. For Unum in the U.S., we are leveraging our go to market expertise to connect benefit solutions to HR platforms effectively, while also ensuring our leave management is a differentiator. With over 1,500 customers and counting, we’ve reached a notable sales milestones with our HR connect capability, which deeply integrates with leading human capital management platforms, and we now cover over 1 million employees through Unum’s total leave offering.

In addition, we saw strong momentum in the trend of customers bundling products. Our efforts are geared towards seamless enrollment, billing, and administration via MyUnum, and establishing robust connections with select third-party platforms. These efforts to leverage technology to improve the customer experience are paying off. And in 2023, we saw record levels of employer satisfaction for customers on the MyUnum platform. In Colonial Life, the focus is on continuing to build and support our independent sales force with enhanced tools and solutions such as our proprietary industry leading agent assist technology, which enables automated lead generations, CRM and workflow, boosting agent productivity. Another key development are arsenals gather, which modernizers enrollment and benefits administration and streamlines the client experience.

The offering has been building is evidenced by the annual premium associated with it increasing from $10 million to $50 million over the course of 2023. And finally enabling Colonial Life agents to offer Unum employer paid products ensures they have the solution for any employer or broker. For Unum U.K., our approach has been to redefine the broker experience, setting a market leading standard that is distinctively Unum, and enhancing our relationship management model. We are dedicated to providing value-added services that drive customer engagement and loyalty, such as through Help at Hand, which offers integrated value-added services, and by delivering comprehensive management information that yields actionable insights. Moreover, we’re expanding our product set to encompass a broader spectrum of risk and well-being solutions, ensuring we meet the diverse needs of our clients.

And finally, in Unum Poland, we’re forging ahead with a robust strategy tailored to the local market. We’re scaling our direct to SME sales team and fortifying partnerships with local brokers, thereby extending our distribution network and geographical reach. All these efforts will drive growth in the number of employers and customers we serve and in turn will generate the growth of premiums and earnings we have articulated. Looking forward we will also remain disciplined stewards of our capital and franchise value and consistency of our capital priorities remains intact. First, we ensure investments directly supporting our business. We have a clear growth strategy continue to build at our offering and capitalize on our well positioned and profitable products.

Second, we will look externally to identify and pursue selective M&A that supports our internal initiatives and that are in line with this strategy. And third, we will continue to return capital to shareholders via regular dividend increases and share repurchases as we have demonstrated through our actions and increasing both commensurate with our plans. Summing it up, our strong capital generation $500 million of share repurchases and no LTC contributions will leave us in a position of greater than 400% RBC and holding company cash greater than $2 billion. For 2024, our commitment to innovation, prudent capital allocation, and shareholder returns remain steadfast. As a result, we are on track to surpass the objectives we established a year ago and our fortified position in the market is a testament to the hard work and dedication of our teams across the globe.

The strides we’ve made in our digital footprint, customer engagement and capital management are the very engines of our growth. In closing, we enter 2024 with confidence in our position and ready to build off of our achievements of 2023. With our customer first mindset, agile operations, and comprehensive financial strategies, we are not just anticipating the future, we are actively shaping it. 2024 is going to be an exciting year for Unum. 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. Thanks for your attention once again today, and Steve, I’ll turn it over to you.

Steve Zabel: Great, thanks, Rick, and good morning to everyone. As Rick mentioned, we were extremely pleased with the strong finish to the year across the board. This caps two years of continued momentum building in our core operating segments. This is evident in both our sales and operating results. For the full-year sales, we’re up 15.1% in Unum U.S., 26.7% in Unum International, and 6.2% in Colonial Life, where we saw accelerating growth each quarter, including 11.5% growth in the fourth quarter, compared to the same period a year ago. Premium for our core operations increased 6.1% in the quarter, compared to a year ago and finished up 5.2% for the full-year, exceeding the expectation laid out last February and more consistent with our long-term expectation.

Disability results were favorable across the company as well, highlighted by a group disability benefit ratio of 59.1% for the full-year and 59.5% in the quarter. We do expect benefit ratios in the low-60s to continue in the near to mid-term as we continue to see support for these levels in both our operations and in the market. These same trends are also supporting strong performance in our individual disability and U.K. Group income protection product lines. We ended the year with after-tax adjusted operating income at $1.5 billion and after-tax adjusted operating EPS of $7.66, which represents growth of 23.3% over historically reported full-year 2022. The fourth quarter’s results of reported after-tax adjusted operating EPS of $1.79 was impacted by two items that I would like to mention.

First, the effective tax rate in the fourth quarter was elevated at 22.8%. We expect the long-term rate to be between 21.5% to 22% and vary some from period-to-period due to foreign tax dynamics. The variance in the fourth quarter lowered EPS by approximately $0.03. Further, Colonial Life benefits were higher by $21.7 million or $0.09 of EPS pressure due to a one-time reserve model refinement. When adjusting for these two items, which represents a better view of underlying earnings power, adjusted operating EPS in the quarter would have been $0.12 higher. The strong earnings power for GAAP was also apparent in our statutory results, with full-year after-tax operating earnings of over $1.3 billion, well ahead of our outlook last year of roughly $1 billion.

These results drove significant upside to our original expectation of capital generation and as a result, our capital position. Top line results were also notable this year with both sales and premium for our core operations outperforming the top end of their outlook ranges at 13.4% and 5.2% respectively. Fourth quarter’s results also show that momentum isn’t slowing, which we believe will set us up nicely for continued growth in 2024. These strong growth metrics are a testament to the value of our offering in the market and the success we are seeing with our key strategic initiatives that Rick discussed. Investing in these capabilities to grow our core business is a key capital priority, and as a result, the full-year 2023 adjusted operating expense ratio increased to 21.7%, slightly above our expectations coming into the year.

We continue to expect the expense ratio to taper off over time as the impact of our investments take further hold. For full-year 2024, we expect our adjusted operating expense ratio to be slightly lower than 2023. Now let me briefly review our 2023 results by segment. For Unum U.S., adjusted operating income increased 39.4% to $1.36 billion in 2023, compared to $972.6 million in 2022. As mentioned earlier, these results were bolstered by disability performance with group disability experiencing full-year adjusted operating earnings growth of 56.1% and our individual disability line of business, driving overall supplemental and voluntary growth of 11.7% for the year. Further, group disability ended the year with an ROE of 30.8%. The Group Life and AD&D lines experienced adjusted operating earnings growth of 94.8% as the impacts from the pandemic waned.

The fourth quarter’s results of $68 million were the highest since the beginning of the pandemic and were driven by favorable labor experience, lower incidence in AD&D with continued lower mortality results. From a growth perspective, Unum U.S. earned premium grew 5.2% to $6.6 billion due to natural growth, higher sales and solid persistency. This result was in line with our expected premium growth rate of 4% to 6%. Now moving to Unum International, the segment continued to show strong trends in its underlying earnings power, with adjusted operating income of $158.1 million for the year of 18%, compared to the prior year. Fourth quarter U.K. results were in line with our outlook for adjusted operating earnings levels in the mid-GBP20 million range excluding the impacts of inflation.

Inflation has moderated since last year’s highs, and we expect this will continue as the environment normalizes, but still benefited the U.K. this quarter by approximately GBP5 million. We are extremely pleased with the growth levels in the U.K,. highlighted by full-year sales growth of 18.6% and premium growth of 11.6% well ahead of our original expectations of 2% to 5% and 2% to 4% respectively. While the U.K. business is the major driver of this segment, Poland saw significant levels of growth, increasing sales 76% and premium 24.2% for the year. Now turning to Colonial, the segment saw growth return after a couple years of challenged results due to the impacts of the pandemic on our sales process and agent productivity. Sales growth of 6.2% and premium growth of 1.4% for the full-year does drive optimism for the further growth in 2024 and our ultimate target to return to the high-single-digits level of growth that this segment historically achieved.

From an adjusted operating earnings perspective full-year results of $400.1 million were lower than $412.9 million a year ago largely due to a number of unique items throughout the year, including the reserve model refinement in 4Q. That said, full-year ROE was impressive at 18.1% and we expect a high level of earnings power from this line as we enter 2024. Switching gears to the Closed Block of business and focusing on this quarter, adjusted operating earnings of $21.3 million or below our expected run rate of $30 million to $40 million. And last quarter’s results of $34.2 million, as both long-term care and the remainder of our Closed disability block saw sequential declines. The net premium ratio which is indicative of the life time benefit ratio expectations increased slightly to 93.5% from 93.4% in the third quarter of 2023.

Under LDTI, the combination of earnings results and movements in the net premium ratio provides a more comprehensive view of long-term care claims performance, compared to the previously reported interest adjusted loss ratio, which we observed could distort underlying claims experience trends and focus solely on experience in that quarter. Overall underlying claims experience for the Block was largely in line with third quarter. Incidents remained above long-term expected levels, but has improved from the higher levels seen earlier in 2023. We continue to believe that the elevated incidence rates in 2023 were a function of inventory levels normalizing in the environment following the pandemic. We expect to see a continuation of claims catch up in 2024, albeit at a dissipating rate.

Lastly, for the Closed Block, our alternative investment portfolio, which largely backs LTC, produced income of $21.5 million in the quarter. Since inception, our diversified alternative portfolio has produced returns in line with our long-term expectation of 8% to 10%. Rounding out the segments, the corporate segment produced a loss of $36.5 million in the quarter and we expect this level loss to continue at slightly higher levels in 2024. So then stepping back 2023 was an incredible year for the company and as we turn to 2024 we see many of the same tailwinds and opportunities to win. So with all that considered it’s time to talk about our outlook for this year and I’ll start with our view of business growth and earnings power discuss how that plays in the capital generation and then I’ll end with a little bit of a discussion on how we’re executing on our strategy for long-term care.

So just to orient everyone on the slides and make sure that we’re following along we’re on page seven and I want to kick off this discussion. I really reflect back to a year ago at our last Outlook meeting and in summary we have delivered what we described last February when we were in New York city and are poised to deliver even stronger performance in 2024. We let off that discussion with a key message and that message was that we have the ability and capacity to chart our course in 2023, and I believe that is even more true as we go into 2024. So four key messages for the outlook discussion. Number one is top line growth. It is very strong and it’s fueled by momentum and the digital capabilities that Rick mentioned. Number two, the earning growth rates really stabilizing back to our long-term expected range after two years of very high levels of growth coming out of the pandemic, and specifically some highlights that I’d like to note.

First, group disability is back to pre-pandemic incidence rates with historically favorable levels of recovery. The second thing to note is Group Life is back to pre-pandemic levels of earnings. Third, we have a full recovery of our U.K. business model with double-digit growth rates. And lastly, momentum continuing to build in Colonial Life and the franchise that we have there. The third message for the outlook is we’re at an inflection point in free cash flow and that’s due to no contributions needed for long-term care in 2024, which will allow us to return more capital to shareholders, while maintaining significant capital buffers. And I would end with a key message of our capital generation is really at full strength with all capital metrics well in excess of targets.

Then I’ll move on to page eight and I just want to briefly hit on some highlights for top line expectations. We have healthy core businesses, which will deliver strong levels of growth in 2024, but I want to reflect a little bit that we just came off a really good growth story in 2023 in Unum U.S. sales grew 15% with premium growing over 5% in international sales, we’re close to 30% premium growing over 14% and in Colonial sales growing at 6.2% with premium close to 1.5% growth. And then I would say the top this all off, we have maintained industry leading margins. Our secret sauce is really to grow in a disciplined way that is sustainable and leads ultimately to earnings growth and capital generation for future growth and deployment to our shareholders.

Moving on to page nine, talk a little bit more about earnings growth. So the top of the house view here is with most of our 2024 metrics they are in or relatively in line with our long-term expectations. Long-term expectations for sales increased as we see the benefits of our investments in technology. We have strong projected earnings growth, despite record levels of earnings power in 2023. It really shows the strength of the franchise. But what I’m most optimistic about is our premium growth story as we believe that growth rates of our core businesses can surpass the growth we saw in 2023, which was still a year of recovery in some ways. Then transitioning to page 10, talk a little bit about our sources and uses of capital and I’ll orient you on the left side of the page around capital generation and really start with statutory earnings.

Similar to the GAAP earnings that we just discussed, U.S. Statutory earnings are also projected to be robust. But the one thing just to remind the audience of is that these earnings will be available for dividends up to the holding company in the following year or 2025. But 2023 Statutory earnings of over $1.3 billion are available to us this year in 2024. I’d move next to International dividends. Given the recent performance in the U.K., they are now able to contribute their fair share of earnings through dividends to the holding company. Next, our service agreements. Those are mainly through investment management agreements and they continue to be a strong source of free cash flow to the holding company. And so our capital generation capacity remains strong and in line with our 2023 actuals, but well above last year’s outlook.

So considering our interest expense expectation of $200 million, our free cash flow generation is a healthy $1.2 billion to $1.4 billion as we move past the period of capital contributions being needed for LTC. So then we arrive at capital deployment back to our shareholders and that is also increasing significantly with an expected increase in the dividend of 10% to 15%, which we will discuss with our board later this spring and announce in the coming months. And doubling the amount of dollars spent on share repurchase consistent with the authorization we received at the end of last year. I would note that these repurchases in 2024 may not be straight line throughout the year if we do see opportunities in the market to maximize this authorization throughout the year.

And then our use of excess capital generated will follow our capital priorities, grow core businesses either through organic investment or inorganically, shareholder dividends and then share repurchase. So then moving on to slide 11 talk a little bit about capital targets I’m not going to spend too much time here as you will see consistency in our targets and our company performance. 2023 saw capital levels well in excess of our targets and 2024 projections to be similar, providing a substantial financial flexibility. I will add that these levels of flexibility are supportive of our goal of maintaining a single A financial [strength] (ph) rating. We continue to make progress on that front in 2023 with our upgrade by Fitch towards the end of last year.

Okay, let’s move on to a few topics regarding long-term care, and I will move to page 13. So to recap our strategy, we have a focused strategy for managing the Closed Block, which we have progressed and continue to progress, and is focused on three things: creating value; reducing the footprint; and increasing predictability of outcomes. In line with this strategy, we executed on a number of items we teed up as priorities with you in early 2023, and we continue to use a number of actions as we enter 2024. We have continued to mitigate interest rate risk and have done so at the current favorable interest rate environment. By repositioning cash flows and hedging, we’ve been able to reduce interest rate sensitivity to-date by 2%. And how we measure that is with a basic DV01 measurement, which is really the dollar duration impact to surplus.

So think about the sensitivity of our surplus to 100 basis point movement in prevailing interest rates. We continue to pursue justified rate increases. Last year we achieved over $450 million in GPV of increases and are nearing $4.5 billion of rate increase value since we started our program. And then we are using our strong capital position to create capital capacity and flexibility, providing the ability to navigate adverse events and creating confidence in our go forward free cash flows. As committed last year, we fully recognized the premium deficiency reserve at year end. This was an important step in protecting our future cash flows, and we will talk more on this in a moment. And finally, we remain active and will continue to look for risk transfer solutions.

So then moving on to page 14, I want to spend a little bit of time talking about our interest rate risk management and really want to cover three topics here. One, discuss where we’ve been and accomplished over the last year. Two, what the benefit of those actions were. And three, how that has helped to mitigate any capital requirements in a downside interest rate scenario. So first of all, I’ll talk about hedging and repositioning and how that’s allowed us to better match duration, improve quality and reduce interest sensitivity. So we kicked off our more recent hedging program at the beginning of last year. Since then, we have entered into $2.6 billion of notional treasury fords, and those do have an average treasury yield of 4%. And as you know, we look out and take a seven-year horizon and it’s really to try to de-risk the yields at which we can invest those cash flows as we look to the near to medium term.

Secondly, in the third quarter of last year, we executed on a $700 million repositioning program within the LTC portfolio. And the objective of that was really to look at shorter duration assets and de-risk the new money rate that we would be able to invest those on and extend the duration to longer duration assets. We took the opportunity to do that at a nice place in the interest rate environment. We improved portfolio quality, we increased yield, and we did extend duration with no capital impact. And so the results of that is we were able, as I mentioned, we were able to improve our duration matching measures by 25%, but we also reduced the PDR in Unum America, the sensitivity to interest rate movements by 30%. And that’s really demonstrated then in the chart on the right side of the page.

And so let me explain the table on the right quickly. It’s really the same concept that we used in our investor day materials last year, but I just want to orient you on it. At year-end, the premium deficiency reserve that was recorded was at $1.6 billion, and then the sensitivities that we’re showing here are for the 30-year treasury yield and the impact that those would have over time with our new money rate assumption that then is incorporated into our liability discount rate. And so as an example at a 4% assumption, the $1.6 billion of PDR would be reduced by $1.1 billion, assuming that the 4% assumption worked its way all the way into our three-year trailing average that we use for that construct. So the [Technical Difficulty], it really provides flexibility and appropriately manage our LTC commitments.

And so I think it’s key to concepts here. One, we do have time to adapt as those rates work into our assumption. But I think the other thing that’s very important, and we have a note on the page, is that our interest rate management actions have significantly dampened any downside risk of interest rate movements on the PDR and I’ll call out the 2% assumption here and highlight the fact that that sensitivity has been reduced by $450 million, because of the actions that we have taken over the last couple years around both hedging and our repositioning of the portfolio. Alright then I’ll move on to page 15. And we wanted to give a little bit more information about both how we think about reserve sufficiency, but also some sensitivities. And so the orientation for this page is we talk about $2.8 billion of protection, what that really represents is our view of our current level of statutory reserves in excess of our view of the best estimate of that liability for the liability that’s within Unum America and reinsured to fair win.

Plus the excess capital that we have within the fair win entity in excess of those targets that we set. Then when you go to the table, those are really sensitivities independent of that protection where we look at the assumptions built into our best estimate and we look at the dollar amount impact to our best estimate given the sensitivities. And so specifically, I would say these are liability assumption sensitivities. We addressed interest rate sensitivities on the previous page. So let me walk you through a little bit sensitivities themselves. So on the premium rate increase, the $1 billion really represents the full amount of value we have currently in our best estimate assumption. And so the sensitivity is to completely remove that. I would say from my perspective, we have had a great track record over the years to be able to deliver on achieving our premium rate targets.

In fact, we’ve already made very good progress in the achievement of that $1 billion just since we’ve launched the program back in the fall. Secondly, morbidity and mortality improvement, the assumption within the best estimate reserve is $700 million. And so this sensitivity would be to fully remove that. We do believe, and we’ve seen over time, improvement in both morbidity and mortality in our experience. So we do believe that, that assumption is backed up by the data and the experience that we’ve seen, but we’ve gone ahead just for purposes of the presentation to fully remove that, to give an indication of the size of that assumption. And then we have three more assumptions, which are policy lapse mortality or claim and incidence and our claim resolutions.

We’ve given sensitivities here down 7.5% for the level of lapses and mortalities, an increase in claim incidence of 3%, and a decrease in claim resolutions mostly due to mortality of 2%. And the way to think about that is that those roughly approximate a one standard deviation difference over the entire life of the business for the sensitivities. And you can see the resultant impacts to our best estimate. The one thing to also remember, though, when it comes to those last three assumptions, it’s critical to remember that we still do have the ability to increase our rate increase actions as a form to mitigate those adverse developments and the impact of those additional rate increases are not reflected in these individual liability sensitivities.

So then two other items to note on this page. First of all, excess capital as it emerges, which we do think will emerge in Fairwind over time, it can be used to meet LTC needs across all legal entities. And the point there is we do have the ability over time to make decisions about how to use that excess capital that over time we believe will build in Fairwind. And then the second item note is given our current position along with the PDR balance dynamics described above would be expected to meet the capital needs of the book as it does progress to peak reserves in the next 10-years. So just to reiterate, under our current assumptions and in a current interest rate environment, the actions we have taken create confidence that future cash flows of the enterprise will be insulated from LTC needs.

And then I’ll finish off on page 16. So to close this out, let’s discuss some key indicators of long-term health of the business. And we look at four metrics. First, the net NPR or net premium ratio. With the shift to LBTI, we believe that NPR provides a long-term outlook for block claim experience. And we will look at the movement in that metric over time. We gave that movement in our comments this quarter and we’ll continue to do that over time. Secondly, Closed Block earnings. While we expect quarterly volatility, we would expect an annualized run rate in the $130 million to $160 million range in an environment where experience may vary quarter-to-quarter, assuming alternative asset yields are near longer-term ranges. The third metric would be rate increased progress, and this is a key element of our strategy, and we monitor progress against our best estimate assumptions.

We call that we increase the scope of the program with our latest assumption review, and so we’ll give information over time how we’re progressing as a percentage against that best estimate assumption within the reserve liability. And then lastly the 30-year treasury rate and in particular we will look for the three-year average to remain above the 2.84% rate, which represents the current three-year average. That rate underlines our new money assumption that feeds into our liability discount rate for the premium deficiency reserve. Rates above this would signal a positive impact on the overall discount rate and related balance of the premium deficiency reserve as we represented on page 14 of this stack. So to wrap up, we have very exciting top and bottom line expectations for 2024.

We think our financial flexibility has never been stronger and we look forward to the year ahead. Thank you again for attending today’s call and I look forward to your questions and now I’ll turn the call back over to Rick to close.

Rick McKenney: Great thank you Steve. As you can see and based on Steve’s and my comments, 2024 is shaping up to be a great year for Unum. The teams are very focused on what we want to achieve this year and continued momentum in our core business and the inflection point we’re seeing with capital now that our LTC block is funded as Steve articulated, really puts us in a very good spot. So there’s plenty of topics to discuss today. So with that, our team is here to field questions and I’ll turn it back to you, Rob.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from line of Joel Hurwitz from Dowling & Partners. Your line is open.

Joel Hurwitz: Hey, good morning. First on the core businesses, if I compare the ‘24 earnings I looked relative to what you guys guided a year ago. I estimate that core business earnings expectations are over $150 million better than what would have been implied a year ago. And I guess do you see this level of core business earnings as sustainable longer term or would you expect to have to give back some of the favorable risk results over time?

Steve Zabel: Yes, this is Steve. I can take that question and I’ll just maybe get into math a little bit how we’re thinking about expectations going into ‘24. I think the key to think about with our core businesses, we do believe that we’re going to be able to maintain the margins in our group disability business through the next year. And specifically, we believe that the benefit ratio for group disability will remain in that low-60% level. I would also note that we do anticipate an increase in Colonial Life earnings. I did mention we had several one-time items that did dampen the earnings of Colonial Life in 2023, and we think in 2024 that earnings will come through on a more kind of core basis. And then maybe we can hit a little bit on just the commercial environment and competitive environment and just the level of pricing in the group benefits line.

Chris Pyne: Yes. Thanks, Steve and thanks for the question Joel. This is Chris. You know, we’re really excited about where we stand. I’d like to start with capabilities. When we’re talking to new customers, we’re really there to help solve problems. We see many more prospects in the market, who are looking to solve big problems that we address through some of the things Rick mentioned with Total Leave, HR Connect and MyUnum. That changes the game versus a more traditional price check type environment. So from a new business perspective, we are riding strong levels of business. We expect that to continue and we’re hitting price point. That’s a great day. From a renewal perspective, you know, business is favorable and we look at it very much on a case-by-case basis.

We are — our history of strong risk discipline from an underwriting perspective serves us really well. Again, these customers value what we bring. We’re able to show up in these discussions with an opportunity to talk about long-term price stability, whether it be, you know, modest rate increase, rate pass, or rate reduction. And our persistency results through the close of ‘23 were quite strong as we go on to ‘24.

Rick McKenney: Yes, I think, Joel, you hit it. There was a step up in 2023 from an earnings perspective, but you can see from our outlook in 2024, we’re looking to grow off it. So 7% to 9% on top of a very strong year, you know, all those indicators that we talked about, and as Chris articulated, in particular to our group disability, but even with our Colonial Life business are all intact. And that leads us to our good outlook coming off of an incredibly strong year.

Joel Hurwitz: Okay, helpful. And then in terms of long-term care, I guess what gives you guys confidence that the experience you’ve been seeing is more of a catch-up versus a longer-term shift in trends? And then in terms of the outlook, what’s embedded in 2024 guidance for Closed Block earnings?

Steve Zabel: Yes, this is Steve I can take that one. So related to incidents, I just kind of take people back a little bit on long-term care and where we’ve been. At the beginning of 2023, we saw very elevated incidents through the first six months. We saw that start to abate a little bit in the third quarter, albeit at still elevated levels. Going into the fourth quarter, I would say those incidence levels were pretty consistent with what we saw in the third quarter. But what we also saw during the pandemic were fairly low levels of incidence, and we could just see when we’re looking at, you know, just kind of our inventory trend lines that we were a bit below, the trend lines that we would ultimately expect. And so as we approach back to those, that gives us some confidence that this was just kind of pent up demand.

The other thing that we’ve seen a lot of over the last six months, I would say, and maybe even a little bit before that, with a higher level of resubmission of claims, and those would be claims that had previously been submitted, but either denied or closed or recovered for other reasons. And we’ve seen the level of those come back in, which might indicate claims that originally had been pulled back, but now have been submitted. And so, obviously we have to continue to monitor this. We do believe that the level of incidents for a while in ‘24 will probably continue at an elevated level, but we would look to monitor that then as we get into the back half of the year. And I would say within our outlook, we still do have a level of elevated incidents built into that outlook.

Joel Hurwitz: Okay, thank you.

Chris Pyne: Thanks, Joel.

Steve Zabel: Thanks, Joel.

Operator: [Operator Instructions] Your next question comes from a line of Alex Scott from Goldman Sachs. Your line is open.

Alex Scott: Hi, good morning. First question I had is just on the excess capital position. At the Holdco, it got a lot stronger with a big dividend that seems in 4Q and you’re projecting it to get better in 2024. So just thought maybe you could give us a high level, what are the priorities there? You’ve outlined share repurchases, and we know where comp dividends are, it looks like you’re at $0.5 billion after that, the sort of not earmarked. So what are the priorities for using that?

Rick McKenney: Sure. Thanks, Alex. Just to take you back, everyone back, we mentioned a couple of times, but the capital generation this year was very, very strong. We see it continuing as we go forward. And we ended the year in a very good capital position as we’ve been building that throughout 2023. So first of all, I’ll start there. Second is last year, a priority was putting more money behind long-term care and funding that level of funding up the PDR, and so that was accomplished. And I think that leaves us in a good spot as we’ve talked about. No more money going towards long-term care. And so then we think about the deployment opportunities we have in 2024, I’d start out first with putting it right back in our core businesses, investing in the digital capabilities we talked about.

From an organic perspective, that’s contemplated in our earnings as we talk about that, as we fund internal initiatives. And we’d like to look at M&A to how do we continue to accelerate that growth rate. Capabilities, things that surround our business, whether it’s distribution, product, internal capabilities, we’ll continue to look at. And when you do all of those different things, we then look at our — how we’ll deploy it back to our shareholders. Steve mentioned the dividend expectation even ticked up a little bit, that 10% to 15% range this year. And share repurchase, which is double where it was a year ago at $500 million. Doing all of that, we still have building capital levels, and we’ll have to contemplate that over time, what we want to do with that.

These are different trend lines that we’re on from a generation, as well as from a deployment perspective. And so we’ll be thoughtful in 2024 about how we do that. I think Steve articulated on one of his slides and mentioned, we’re going to be dynamic with share repurchase. So it’s not something we’re putting out there today. But clearly, as you said, we’re in a much higher level of capital that we’ve seen over time. And we have lots of potential uses for it. Nothing particular that we have today it will build, but we’d love to use some of that capital to deploy to grow our business faster, and then if we don’t see that opportunity to turn it back to our shareholders.