Unum Group Q1 FY2022 Earnings Call

Hello, and welcome to Unum Group's First Quarter 2022 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. I would now like to hand over to our host, Tom White, Senior Vice President of Investor Relations. Please go ahead.

Great. Thank you, Elliot. Good morning, everyone, and welcome to the first quarter 2022 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2021. Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website, also in the Investors section. Yesterday afternoon, Unum reported first quarter 2022 net income of $253.5 million or $1.25 per diluted common share, an increase from the $153 million or $0.75 per diluted common share in the first quarter of 2021. Net income for the first quarter of 2022 included the after-tax amortization of the cost of reinsurance of $13.2 million or $0.06 per diluted common share and an after-tax investment loss on the company's investment portfolio of $10.6 million or $0.05 per diluted common share. Net income in the first quarter of 2021 included the net after-tax loss from the second phase of the closed block individual disability reinsurance transaction of $56.7 million or $0.27 per diluted common share. Also the after-tax amortization of the cost of reinsurance of $15.8 million or $0.08 per diluted common share, and a net after-tax investment gain on the company's investment portfolio, excluding the net realized investment gain associated with the reinsurance transaction of $13.5 million or $0.06 per diluted common share. So excluding these items, after-tax adjusted operating income in the first quarter of 2022 was $277.3 million or $1.36 per diluted common share, an increase from the $212 million or $1.04 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 Mark Till, who heads our Unum International business. Tim Arnold, the head of our Colonial Life and Voluntary Benefits business, is away with his family attending his son's graduation from law school this morning, which is a very exciting and proud moment for the Arnold family. So now I'll turn the call over to Rick for his opening comments.

Great. Thank you, Tom, and good morning, everyone. We do appreciate you joining us this morning. And let me start by saying our first quarter results were an outstanding start to the year. We saw dramatic shifts in the environment throughout the quarter which have been very favorable to our business. Since we've last talked to you, we have seen COVID mortality levels come down consistently. Of the estimated 153,000 COVID deaths in the U.S. population in the first quarter, fewer than 30,000 were reported in March. And there was also a notable change in the demographic impacts by the Omicron variant relative to what we saw last year. Additionally, we have seen positive impacts from the current inflationary environment, seeing 10-year treasury move up nearly 140 basis points since the start of the year. These are welcome developments and helped our recovery accelerate faster than we anticipated. As a result, we saw first quarter after-tax operating earnings at $1.36 per share, which was up 31% over the previous year. There was broad-based solid performance on both the top and bottom line. And taking that into account, we now look to an expected operating EPS growth rate for the year of 15% to 20%, up from the 4% to 7% previously expected. To set the broader context of how we stand in the current environment, the three elements most being discussed in the financial markets are all on a positive trend for us. First is how COVID has lessened and shifted its age demographic. It is not making the same headlines, but COVID-driven mortality is still one we need to monitor as our life lines look to get back to pre-COVID claim levels. The second is the full employment and inflationary environment we're operating in. For employers, there is pressure to increase wages as they look to find workers in a very unique time. This creates top line growth for us as these workers look to protect their higher levels of income. And third, our interest rates, which play very positively for our new investments backing our product lines, both in our ongoing core business lines and new cash flows coming into our closed block. Before getting further into the results, I do want to take a moment to reflect on how our purpose of helping the working world thrive throughout life's moments continues to guide all that we do. As the effects of COVID continue to lessen, our employees have stepped up in new ways, and I would like to highlight our colleagues in Poland who have shown uncommon resilience as they continue to demonstrate compassion, outreach, and support to the growing Ukrainian refugee crisis. The situation remains heartbreaking, but we take the utmost pride in our team's caring spirit in this time of need. So turning to our operating trends for the quarter. There are a few areas I'd like to highlight. First, we are pleased with the growth in premium income that is emerging in our core business segments. In the first quarter, we recorded 1.7% growth year-over-year in premium income from our core business segments combined. This compares to a growth of 1.2% for all of 2021. For the rest of 2022, we are anticipating growth to accelerate so that we are at just over 2% for the full year, and we are well on track to accomplish that. Adding to our confidence is a solid start to the year for new sales, with year-over-year increases of 7% in Unum US in total and 15% for Colonial Life as well as 55% for Unum UK and 35% for Unum Poland in their local currencies. Persistency levels are solid across the company, and we are making good progress with our renewal plans as we look to continue to prudently implement targeted rate increases. Second, benefits experience was generally positive as we look at our benefit ratios for the first quarter compared to the fourth quarter of 2021. The Unum US group disability line showed substantial improvement at 73.8% for the first quarter as our claim recoveries and long-term disability were very strong, and short-term disability results improved sequentially. The Unum US group life and AD&D line showed significant improvement as well, declining approximately 10 points from the prior quarter as the age demographic shifted, lessening the mortality impact for working-age individuals. And also related to that age shift, with COVID-related mortality impacting the elderly population more significantly this quarter, we saw the LTC interest-adjusted loss ratio decline by 12 points to 70% in the first quarter. And finally, to highlight the improved benefits experience in Colonial Life, which generated its lowest benefit ratio in some time at 49% in the first quarter. A third operating trend I'd like to highlight from the first quarter was on expenses. At our outlook meeting earlier this year, we indicated that we expected to see increased pressure on expenses this year as we manage through increased people costs, pandemic-related costs, and a normalizing environment. We still see this emerging later in the year. The reality is our teams have done an excellent job of managing through these pressures so far in 2022 as we have been working hard to fill open positions. Each of our core business segments reported an improved operating expense ratio in the first quarter compared to the fourth. We don't believe that these pressures have gone away, as we will continue to invest in several major initiatives to connect with customers, improve our efficiencies, and catch up on staffing, but I am pleased with the discipline we have shown in managing expenses in this inflationary environment. In addition to these strong operating trends, the current business environment remains very favorable for us. Rising interest rates and widening corporate credit spreads so far this year have been very beneficial in new money yields. In addition, it is particularly beneficial to the LTC line. To the extent rates remain at current levels, it would strengthen our ability to fully fund the premium deficiency reserve for long-term care ahead of the original schedule. Rising wages and strong levels of employment across the economy also provide a tailwind for us to top-line growth as the natural growth created by these forces helps drive growth in the premium income for many of our business lines. And looking at our capital position, just as we showed strong GAAP earnings this quarter, our statutory results were also quite favorable, increasing by over $60 million on a year-over-year basis to $200 million for the first quarter of 2022. This helped drive the risk-based capital ratio for our traditional U.S.-based insurance companies to approximately 400%. With holding company liquidity at approximately $1.3 billion, leverage is 25%, which is the lowest level we've seen since 2014. And with our contingent capital structure in place, we are in great shape with our capital position to execute the deployment priorities we outlined at our recent investor meeting, including the ability to fund the LTC premium deficiency reserve by the end of 2024, repurchasing $200 million of our shares annually as well as increasing shareholder dividends which we will discuss when our Board meets later this month for our Annual Shareholders' Meeting. In summary, I'm very pleased with our performance in the first quarter and the optimism it creates as we move forward. Now I'll ask Steve to cover the details of the first quarter results.

Great. Thank you, Rick, and good morning, everyone. As Rick outlined, the first quarter was very strong for the company, benefiting from favorable COVID-related trends and strong operating performance across many areas of our business. I will focus on our first quarter results in comparison to the fourth quarter of 2021, which will illustrate how our business lines have progressed through the pandemic. To provide some broader context, there were two significant shifts in COVID trends this quarter that impacted our results. First, COVID-related mortality in the U.S. increased in the first quarter of 2022 compared to the fourth quarter of 2021, and it was higher than we had estimated. Additionally, the shift in age demographics saw a greater effect on the elderly population and less impact on the working age population. In early 2021, COVID-related mortality affected the elderly more significantly, but in the first quarter of 2022, the trend reversed, impacting the elderly population more once again. This shift significantly affected our group life block, which mainly covers working-age individuals, as evidenced by the percentage of national COVID-related mortality in our book and the average benefit size. The increase in mortality among the elderly also led to higher mortality in our long-term care business, contributing to a lower interest-adjusted loss ratio in the first quarter. The second trend was a rapid decline in COVID infection and hospitalization rates, which positively impacted our short-term disability results and improved our Unum US group disability benefit ratio this quarter. As we discuss the performance of these lines, I will go into these trends in more detail, but the age demographics of mortality and declining infection rates played crucial roles in our first quarter results. I will begin with the Unum US segment. Adjusted operating income rose sharply to $171.6 million in the first quarter of 2022 compared to $81.4 million in the fourth quarter of 2021, primarily driven by strong improvements in the group disability and group life and AD&D lines, along with continued high operating income from supplemental and voluntary lines. Within Unum US, the group disability line reported a strong rebound in adjusted operating income to $62.6 million from $34.1 million. The primary driver of this earnings improvement was the benefit ratio for group disability, which improved to 73.8% in the first quarter from 78.3% in the fourth quarter. This improvement was largely due to strong long-term disability performance with favorable claim recoveries. Additionally, new claim incidents for LTD decreased sequentially, although this was somewhat offset by higher average claim sizes. As mentioned earlier, short-term disability results also improved compared to the fourth quarter. Looking ahead, we expect the group disability benefit ratio to average in the mid-70% range, consistent with our outlook. Adjusted operating income for Unum US group life and AD&D also improved significantly, resulting in an operating loss of $9.4 million in the first quarter compared to a loss of $71.7 million in the fourth quarter. This quarter-to-quarter improvement was mainly due to an enhanced benefit ratio, largely driven by the shift in COVID-related mortality demographics. In the fourth quarter of 2021, an estimated 127,000 COVID-related deaths occurred in the U.S., with around 35% among the working age population. In the first quarter of 2022, while the mortality count rose to about 153,000, the working-age population's impact fell to approximately 24%. For our group life block, we estimate that COVID-related mortality claims decreased from about 1,725 claims in the fourth quarter to around 1,400 claims in the first quarter. Consequently, our results indicate a reduced exposure to national mortality, slightly less than 1% in the first quarter compared to around 1.4% in the fourth quarter and 2% in the third quarter of last year. Historically, we saw a similar exposure to national mortality of about 1% in 2020. The average benefit size also decreased to slightly under $55,000 in the first quarter from roughly $65,000 in the fourth quarter. Non-COVID-related mortality did not materially influence results in the first quarter compared to the fourth quarter. Throughout the pandemic, account and age demographics of COVID-related mortality heavily impacted our group life results. We anticipate a significant decline in national mortality from COVID in the second quarter, remaining at lower levels for the rest of 2022. For the second quarter, we expect the group life and AD&D benefit ratio to decline to around 80%. However, as these metrics have historically been challenging to predict, we encourage following national trends for projections and estimates. Moving to the Unum US supplemental and voluntary line, earnings remained strong with adjusted operating income of $118.4 million in the first quarter compared to $119 million in the fourth quarter. Looking at the primary business lines, we are pleased with the performance of the individual disability block, which has shown strong results throughout the pandemic. The benefit ratio was slightly higher sequentially but remains within the experience we've observed over the past two years. Similarly, the voluntary benefits line reported solid income, with a slight decline in the benefit ratio due to strong performance in A&H and disability products. Utilization in the dental and vision line increased compared to the fourth quarter, accompanied by a somewhat higher cost per procedure, which raised the benefit ratio for that line sequentially. Overall, the supplemental and voluntary lines continue to perform very well and serve as strong income generators for us. Regarding premium trends, we are pleased with the momentum for Unum US, with premium income growth of 1.3% in the first quarter year-over-year. For full year 2021, premium income for Unum US rose by 1% compared to 2020. Within group disability, premium income grew 1.9% year-over-year, supported by high employment levels, rising wages, positive business and persistency trends, and careful renewal management. Sales growth for Unum US was encouraging, showing 6.8% year-over-year growth, as growth in group lines and individual disability offset softer sales in voluntary benefits. We are also satisfied with the persistency trends this quarter, which varied by line of business, but our total group loss remained stable at 89.6%. Natural growth continues to act as a tailwind, increasing 3.5% to 4% year-over-year, benefiting from strong employment and wage levels, particularly in our core market segment. We are also encouraged by the progress with our pricing strategy, especially in the large employer group disability, group life, and services market where appropriate pricing action is being taken. Turning to the Unum International segment, we had another solid quarter, with adjusted operating income of $27.2 million, consistent with the $27.1 million reported in the fourth quarter. The primary contributor to our international segment results is Unum UK, which generated adjusted operating income of GBP 19.2 million in the first quarter, up from GBP 18.7 million in the fourth quarter. The reported benefit ratio for Unum UK was 80.7% in the first quarter compared to 81.4% in the fourth quarter. As previously outlined, inflation trends in the U.K. will affect our reported benefit ratio and can obscure our actual claims experience. In the first quarter, excluding the impact of inflation, our overall benefits experience was slightly unfavorable compared to the fourth quarter, with favorable results in group life offset by less favorable experiences in group disability. We are pleased to see Unum UK results trending closer to our goal of GBP 20 million per quarter. Unum Poland also experienced a slight uptick in benefits on a sequential basis, although adjusted operating income remained generally consistent. Year-over-year premium growth in our International business segment was strong this quarter, increasing 7.7% in dollars. On a local currency basis, Unum UK achieved growth of 11% year-over-year, the highest rate in several years, fueled by strong persistency, improving sales trends, and successful rate increases on our in-force block. Sales in Unum UK rose 55% compared to the same quarter last year. Unum Poland generated 35% growth in local currency, continuing its strong growth trend. Next, results for Colonial Life were also robust, with adjusted operating income of $90.1 million in the first quarter compared to $80 million in the fourth quarter. A key contributor to these results was an improvement in the benefit ratio in the first quarter to 49.3% from 52.5% in the fourth quarter, driven by favorable experience in cancer and critical illness, alongside improved performance in the accident, sickness, and disability line. We are encouraged by the continued upward trend in premium growth for Colonial Life, which rose 1% year-over-year, recovering from a 1.3% decline in full year 2021. This positive trend is largely driven by a rebound in new sales over the last four quarters along with generally stable persistency. In the first quarter, Colonial Life sales increased 15.3% compared to the same quarter last year, after a 16.1% increase for the full year 2021. Persistency for Colonial Life stood at 78.7% for the first quarter versus 78.4% for the year-ago quarter. While it may take a couple of years to return to pre-pandemic premium growth levels, we are heartened that the quarterly premium income for Colonial has returned to pre-pandemic levels. In the closed block segment, adjusted operating income, excluding the amortization of reinsurance costs related to the closed block individual disability reinsurance transaction, was $94.1 million in the first quarter, up from $76.7 million in the fourth quarter. The segment earnings increase was mainly driven by higher earnings in the long-term care line due to favorable benefits experience. The interest-adjusted loss ratio for LTC fell to 70.2% in the first quarter from 82.2% in the fourth quarter, driven by higher claims and mortality, which were approximately 10% above our seasonal expectations, alongside favorable new claim incidents. In the closed block individual disability line, the interest-adjusted loss ratio rose to 78.7% in the first quarter from 75.4% in the fourth quarter, but remains within our long-term expectations. Strong levels of miscellaneous investment income have continued to bolster the closed block's adjusted operating income in recent quarters. However, we have noticed some moderation in this contribution compared to recent peak levels. Specifically, total miscellaneous investment income in the closed block declined by about $4 million in the first quarter versus the fourth quarter. Previously, we saw a $10 million reduction in total miscellaneous investment income from the third to fourth quarter, primarily due to lower bond call levels. Current miscellaneous investment income levels remain well above our ongoing expectations as the return and alternative investment portfolio continues to outperform. In wrapping up my commentary on the quarter’s financial results, the adjusted operating loss in the corporate segment was $40.4 million in the first quarter compared to $45.1 million in the fourth quarter. We expect quarterly losses in this segment to remain consistent with this quarter's results. Now, regarding investments and net investment income, we are seeing a much better environment for new money yield opportunities due to rising interest rates and widening corporate spreads. In the first quarter, our new money purchases exceeded those in the fourth quarter by 110 basis points. Although current new money yields are still below our portfolio yields, the gap has narrowed significantly thus far in 2022. Miscellaneous investment income for the company reached $41 million in the first quarter, compared to about $58 million in the fourth quarter, which is lower than what was seen in 2021. Miscellaneous investment income from bond calls dropped by about $10 million sequentially, mainly affecting net investment income in our core business lines. We anticipate that income from bond calls will remain below the elevated levels of 2020 and 2021 as higher interest rates diminish refinancing incentives for companies. While this is likely to negatively impact current net investment income, it will help sustain current portfolio yields as we retain higher-yielding securities. Income from our alternatives portfolio remained significantly above our long-term expectations, declining to $32.4 million in the first quarter from $39.4 million in the fourth quarter. Our current expectation for quarterly income from alternatives is in the low $20 million range, but we continue to see strong outperformance from the portfolio, with the closed block segment being a key beneficiary. Looking at our capital position, the company remains financially strong, offering considerable flexibility. The weighted average risk-based capital ratio for our traditional U.S. insurance companies improved to around 400%, and holding company liquidity was $1.3 billion at the quarter's end, both well above our targeted levels. Additionally, leverage has decreased and ended the quarter at 25.1%. Statutory after-tax operating income for the first quarter was $200.5 million, significantly up from $136.7 million in the first quarter of 2021. Like our strong GAAP performance, statutory results benefitted from improved outcomes in group life, group disability, Colonial Life, and LTC. Turning to capital deployment in the first quarter, we executed a $50 million accelerated share agreement and continue to plan for the repurchase of approximately $200 million of our shares for the entire year. Capital contributions at the parent subsidiary level were $215 million for the quarter, and with favorable performance in the LTC block and rising interest rates, we are trending positively in the full-year capital contributions range of $550 million to $650 million we outlined at our investor meeting. Finally, regarding our outlook for the year, we initially anticipated growth in after-tax adjusted operating income per share in the range of 4% to 7% for 2022, which we are now raising to an expectation of 15% to 20% growth. This improvement reflects our strong first-quarter performance and expectations for further upside through the remainder of the year, particularly in the second quarter. During our investor meeting in February, we also projected after-tax adjusted operating income per share to rise within a range of 45% to 55% by 2024, or equivalent to 2021 earnings per share of $4.35. At this time, we are not changing that outlook. Now, I'll turn the call back to Rick for his closing comments, and I look forward to your questions.

Great. Thanks, Steve. I'll just wrap up by reiterating we are very pleased with the performance of the company as we continue to deliver for our customers throughout the pandemic. We believe we are very well positioned in today's business environment and remain very encouraged with our outlook going forward. The team is here to respond to your questions. So I'll ask the operator to begin the question-and-answer session.

Our first question today comes from Erik Bass from Autonomous Research.

Since the time of your outlook call, interest rates are up significantly. And based on your disclosure, this should materially reduce the outstanding long-term care PDR balance. So does this change your thinking at all about the cadence at which you plan to fund remaining deficiency? Would you consider hedging interest rates to lock in some or all of the benefit?

Eric, this is Steve. I can take that one. I think there's a couple of things to think about. I go back to the Investor Day conversation that we had about the premium deficiency reserve. I think there's two things to keep in mind. One is just how the interest rate assumption works for creating deficiency reserve. It's based on a trailing three-year average. And so although we're really encouraged with where rates have gone early in this year, we do still have a little bit of past interest rates that we need to work through in just the construct of that calculation as we saw the '21 and '20 prevailing rates in there. So that's one dimension of it. The other is we do amortize that over a period of time. Originally, it was a seven-year period of time. And so that amortization will decrease a little bit the current period's impact of any reduction in the overall PDR. So as we sit here today, we're very encouraged about where rates go. We obviously want those to continue and even potentially go up. I'll say that the contribution or the impact on our 2022 capital deployment plan will be somewhat modest because of those two dimensions. And so we'll just see how this plays out over the year. Where we end up in our year-end calculation, we'll calibrate our Fairwind contributions at that point and then we'll think about go-forward capital deployment opportunities. On the hedging front, that's definitely something that we look at. We're continuing to evaluate our hedging strategy. I do agree with you that where rates are now makes that look more attractive. We have not executed on anything to date this year, but it is something that we are looking at.

And then if you could just provide maybe a little bit more detail on what assumptions are embedded in your EPS guidance range for both additional COVID tests and variable investment income over the course of the year?

Yes. Let me start with the variable alternative investment income. And probably where I would start there is we have a little bit over $1 billion portfolio. And our expected yield on that is between 8% and 10%. So you kind of do the math on that, that's $80 million to $100 million annually of income, which breaks down about $20 million to $25 million per quarter. That is what we would expect for the remainder of the year. So somewhere in that range, in the low $20 million range. But as we've seen that, that can be fairly volatile. So we'll just have to see how that plays out quarter-by-quarter. And then when you just think about the general pattern for 2022, we've obviously locked in the first quarter results that we've seen. We believe that second quarter is going to be an improvement from what we originally had in our expectations. So probably the simple math to do for the remaining three quarters is somewhere in the 1.25 per quarter range. I think that's pretty consistent with what our expectations previously were for the third and fourth quarter, but would be an increase to what we had originally thought the second quarter might be. So that's probably a pretty good range to calibrate to.

Our next question comes from Alex Scott from Goldman Sachs. Please go ahead.

I just wanted to follow up on the response on the hedging consideration. And I know you mentioned the backward-looking sort of rolling aspect of the way the rates work and the actual premium deficiency calculation. I mean is that an issue or a hurdle with potentially putting on a hedge? Or do you think the powers that be might be receptive to the idea that this would be a pretty significant risk management action that I think will be very beneficial? Would they work with you to maybe change that practice to help you align something with the economics and allow us to significantly change your view of the cost of equity of your company?

Yes. I would say it's not a hurdle. It's obviously something that we'll work through with our regulator. I do agree with you that they will view that as very positive from a risk management perspective, and I think they'll be very willing to work with us and incorporate that sort of risk management in how we think about forward-looking interest rates. That is part of those we're going through and evaluating, how we might approach a hedging strategy that we will work through with our regulator.

Yes. I think it's important, this is about how we manage the book of business, right? So the construct of how it gets measured is not something we hedge. We're with the hedging and the risk management for the overall book of business. The construct will take care of itself over a period of time. So any hedges that we look at are about an overall risk management of interest rate risk around our long-term care business.

As we consider the group benefits businesses, can you provide an update regarding the premiums? There are positive factors like the labor market and inflation influencing the rates. Now that we've completed the first quarter, what do you anticipate the combined impact of these factors will be as we move through the year?

Alex, it's Mike. Thanks for the question. And we are really pleased with the start that we've gotten off to here in the first quarter, sales up for Unum US, as Rick was highlighting, by 7%. Colonial, 15%, international, and maybe I'll flip it to Mark in just a second to talk about the market over there, where we've seen the market grow and our position in that market improve, which is a good story overall. So as we continue to see those sales improve and come up in relation to the block, paired with strong persistency and, as you said, some tailwind on natural growth, we would expect to see our overall top line or premium growth continue to move up sequentially as we work through 2022. We talked a little bit about it last quarter and the outlook meeting. We do see a need to gradually increase rates, as we talked about, probably most pronounced in the fee-based businesses. Those are where we've seen that increasing complexity and serving our clients with state, municipal, corporate, and federal levels, leaves integrated with disability. That's also, given the nature of fee-based business, where wage pressures are most acute, so we want to stay a little bit ahead of that. Placement of rates for that all-important January 1 date were right in line with expectations. We're in the midst of another again, sort of a moderate single-digit type program on the insured side, a little bit higher on the fee-based side for 1/1 of 2023. And it's too early to say, but at this point, doing the client relationships we've got and the strength of our distributions kind of allow us to deliver that renewal program pretty successfully. So as I look across the brands, the products in the segment in the U.S., we've certainly got a long way to go here in 2022, but encouraged by the start that we've got on the U.S. side. And maybe, Mark, you've got a couple of thoughts on international?

Yes, Mike. Thanks. I believe both Poland and the U.K. are strong markets. Poland has experienced double-digit growth for a while, and the U.K. market has shown noticeable improvement. This seems to be a result of increased demand for employee benefits, especially after the value has been clearly demonstrated during the pandemic. We have been making significant efforts to enhance our value proposition for brokers, employers, and employees. Consequently, we are very pleased with our sales results, which have increased by 47% across both businesses. We have also been actively exploring selective price management opportunities during renewals. It is encouraging to observe that despite these price management opportunities, the persistency rate in the U.K. has improved and remains around 98% in Poland. When looking at the quarter-on-quarter growth in the U.K., it was quite strong, indicating a good quarter. While I hope we continue to experience favorable quarters, we are currently adjusting our expectations in this area.

Our next question comes from Tracy Dolin-Benguigui from Barclays. Your line is open.

Thank you for referring to the PDR balances at your February outlook date, Slide 23. Just based on my understanding, I think you shared the 10-year treasury illustration for simplicity. But really, since LTC risk is so long-durated, you're also using your formula, the 20- and 30-year treasury tenure, and you've footnoted an assumption of a 50 basis point spread between the 10 and the 20 plus 30. So with the yield curve flattening, even inverting, any thoughts on the sensitivity of those 20, 30-year tenures?

Yes. Tracy, this is Steve. And sorry, I stole your thunder, right? I caught that in your writeup, addressing the dynamics of how the PDR works, and I think that's a really good call out. Yes, we are heavily weighted to the 20- and 30-year in that portfolio, so you're right. We use the 10-year as a guideline, but it is very important where the 30-year ends up. So I think that's a good comparison to make to where we are kind of in the current market. The other thing that I would say is we do have allocation to an alternative asset class of investments that also backs LTC. But I think a good indicator is where the 20 and 30 years. And although, obviously, the 10, 30 spread isn't at the 50 basis points, I would say we feel good about where the 30 actually is on an absolute basis.

It becomes less of an issue if you just arrive at that point on its own, even if the trajectory might not align with what Steve would have preferred. Regarding your updated outlook for 2022, you're clearly just speeding up the timeline. You're observing a return to pre-pandemic trends based on the results from the first quarter and what you’ve seen so far in the second quarter. You've indicated that you’re still aiming for a 45% to 55% EPS growth from 2021 to 2024, but the path to reaching that may appear more stable compared to what you anticipated back in February. There could have been a sharper rise in 2023. I want to ensure I'm interpreting that correctly. Also, it seems you haven't factored in higher interest rates in your 2022 outlook. So, can we conclude that higher interest rates will primarily affect capital considerations for Unum and will take time to influence earnings?

Yes, Tracy, this is Rick. A lot in there, so let me kind of address each individually. You are right on how we're thinking about the 2022 forecast. It is really just an acceleration. If you go back to our Investor Day, we had several contributions to the longer-term EPS growth for the company, and one of the largest was just recovery from the pandemic. So for that component, I would say, yes, it's an acceleration back to kind of a normalized core benefit ratio in many of our lines. We also, though, had other contributors to that, whether it's expense efficiencies, it's growth, it's renewal and rate increases or its capital management that also factored into that longer-term 2024 expectation. Those still hold. We still feel very good about those other contributing factors. So I think that's the right way to think about it. And then as far as rates go, you're right. I would say we have not really incorporated much upside into our outlook right now for where rates are. I think there's two places that, that could show up. One would be around capital management and the implications for the premium deficiency reserve. As I mentioned earlier, though, the 2022 impact probably is not going to be all that significant. It will set us up though as we move through subsequent years, if rates stay where they are, for maybe more oversized implications to our capital deployment plan. The other thing that I would say is just on closed block, because we do put so much money to work within the year, that could be potential upside to the closed block's earnings. But again, we just want to see how that plays out over the year. I would say in a lot of our other lines, any upside to interest rates would be something that we would just probably incorporate into our thinking about pricing and really how that might play out versus actual upside to our earnings.

Our next question comes from Tom Gallagher from Evercore. Please go ahead.

Just a few questions on long-term care. If you do end up locking in some interest rate hedges, would you see that having a material influence on the pricing that you might get on a potential risk transfer deal? And is that part of the reason that you'd be contemplating it?

Yes. I would say that there is some potential there. It would depend on the buyer and how the buyer views their own investment strategy versus our investment strategy. And that's something we just have to work through, how we settle the initial transaction. I do think though, obviously, higher interest rates are favorable to a deal overall, and that's obviously something that we're looking at. But it would kind of depend on the buyer and how they would view that as a risk management versus just their own investment strategy.

My follow-up question is about the potential deal. I understand you've mentioned that it would take time due to the required actuarial work. Considering the current interest rates, do you have any insight on the bid-ask spread? Do you believe the pricing has improved significantly due to the higher interest rates? If it has narrowed, would implementing more rate hedges be a sensible approach? Or do you feel rates need to rise further for pricing to become attractive?

Yes, Tom. I would say we have a lot of work still to do on any type of transaction. There's really nothing imminent. Again, rising rates are going to be a positive from a buyer's perspective as what they're able to get in the market. But that's something that we have to just work through the actual construct of the transaction to just see how meaningfully that would impact the buyer's view of the block.

I have one final question. If you were to exclude the positive mortality experience from the long-term care benefit ratio, where do you think you're currently trending? It seems there are still favorable claims trends, but is it nearing normal levels? Is it still somewhat favorable compared to historical averages? Additionally, if we experience a favorable 2022, that would mark three years of positive long-term care results. Related to this, do you have any insight into whether regulators are changing their perspective on implementing rate increases after three years of favorable outcomes?

Yes. I would say, in the quarter, we, as we mentioned, have higher claim payment mortality. We also had pretty favorable claims incidents. We do still think that during a pandemic, even if it's with pandemic for the remainder of the year, somewhere in that 80% feels about right. But over time, when we get back to a more I guess, stable given environment and it even abates more. We do think we'll be back up in that 85% to 90% range. But we'll just have to see how it plays out and whether there's any longer-term behavioral changes within the block. Now when it comes to how we think about long-term assumptions and also how our regulator thinks about long-term assumptions, COVID is viewed as an anomaly. And so far, we really haven't had much debate on either side about whether we should take a more favorable view when we look at things like the premium deficiency reserve itself or, on the other side, how regulators might view our rate increase requests. We haven't really incorporated some of the more acute claimant mortality that we've seen into either of those analyses. And I think the regulators are very supportive of that approach.

Our next question comes from Ryan Krueger from KBW. Please go ahead.

Can you touch on the level of new money rates that you're getting at this point and how that compares to your portfolio yield?

Yes. Ryan, we haven't really disclosed a lot around what our new money rate is on a quarter-to-quarter basis and try to stay away from that. I'll tell you, we are really encouraged. If you just look at where prevailing rates are, they've gone up about 140 basis points from the beginning of the year. So clearly, we're closing the gap between new money yields and our portfolio rate, but they are still below the portfolio rate. And so feel good about it, very encouraged about it. But we don't disclose that on a quarter-to-quarter basis.

And then in the outlook call, you talked about some pressure on premium growth in the large employer market. I saw that your sales reps are pretty good there this quarter. I was just hoping for an update there and if the pressure on premium was more related to some potential persistency impacts or you had also expected lower sales than you kind of achieved in the first quarter there.

Yes, Ryan, it's Mike. It was an encouraging first quarter. Most of the growth came from sales to existing clients, and this quarter is usually not the largest for sales in the big case market. We are currently in the middle of the large case selling season, which will continue for about 90 days. At the outlook meeting, we discussed that this segment of the group insurance market in the U.S. is quite competitive. As we consider the rate increases we mentioned earlier, particularly in the fee-based and short-term disability areas, we are taking a more cautious approach. We will see how this year unfolds. I am optimistic that both disability risk and interest rates have performed better than we expected in the first quarter, which might give us some added flexibility. However, we plan to maintain a long-term perspective regarding the trade-off between pricing growth. We look forward to updating you in the upcoming quarters on how this year develops, but I am very confident in our value proposition in the market and our ability to integrate with our clients' HR platforms, which we have been successful in on the lead front. Let's see how it unfolds.

Our next question comes from Suneet Kamath from Jefferies. Your line is open.

Just overall at a high level on group sales. I mean, we're seeing strength pretty much across the board for all the companies that have reported so far. And my sense is that's not a lot of competition, a lot of it is sales to existing customers. And so the thought is that most of the players are behaving and acting rationally. Just want to make sure that, that's consistent with what you guys are seeing in terms of the competitive environment.

Yes, Suneet, it's Mike. I think that is broadly pretty consistent. That large case end of the market is where we see it most acutely competitive. I think your read actually is right. We've seen pretty much across the board other carriers looking to retain their clients first and foremost. And so that's certainly our lean and orientation as well. The degree of rate underwriting competitive as kind of oscillate a bit year-to-year. I'd say we're in a period right now which is sort of solidly average in terms of what we're seeing on pricing.

And then the other thing that struck me was Colonial. Unfortunately, Tim is not there to brag about the quarter, but the persistency improved and one note that one of your large competitors is seeing the opposite impact where the more mobile job market is leading to lower persistency. So just curious if that dynamic is affecting you guys as well and it's just being offset by something or where the improvement is coming from.

Yes. Really pleased to see persistency. That is our primary focus is making sure we're doing a good job for clients. And so it's at a great spot at 79%, and that's a really solid foundation for premium growth. And then you layer in the 15% growth in new sales, as that sales level continues to move up sequentially and get to the right spot relative to the in-force block, the overall earned premium will start to click in. And it's good to be back in the black from that point of view, Pretty broad-based success for Colonial Life in the new business markets. In the direct small end of the market, really good growth. Great growth with existing clients. Good growth in the public sector. So all the places that we're trying to hit with our Colonial Life branded distribution, it's clicking for us.

Our next question comes from Jamie Buller from JPMorgan. Your line is open.

Most of my questions have been addressed, but I would like to hear more about the long-term care segment and the strong results over the last few quarters. Can you provide more specifics for this quarter regarding the benefits from lower incidents and mortality compared to pre-pandemic levels? I'm assuming mortality will reflect the impacts of COVID, but do you think the incidence patterns may have changed due to the pandemic and the reluctance of people to visit nursing homes or other influencing factors?

Yes, this is Steve. I want to revisit the trends we observed in long-term care during the pandemic and how they may project into the future. In the second quarter of 2020, during the peak of the pandemic, we experienced an increase in claimant mortality that was about 30% higher than our seasonal expectations. Initially, the focus was primarily on the elderly population, which includes those receiving long-term care. Subsequently, that increased mortality rate decreased to 15%, then 10%, and eventually down to 5%. However, during the Delta variant surge in the fall, claimant mortality started to align more closely with our seasonally adjusted expectations. In the first quarter, we noticed an uptick again, with claimant mortality about 10% above where we would have expected. In terms of incidence, we had very low claims at the onset of the pandemic, particularly in the first quarter and possibly the following quarters. But that changed as those eligible for claims began to file them, and we saw a steady flow throughout the pandemic. We believe that the claim activity will remain consistent with pre-pandemic levels moving forward. The first quarter's results were likely an anomaly due to unexpectedly strong performance. Given the inherent volatility of this segment, I do not expect those results to continue. For the first quarter, our loss ratio was roughly 10% better than anticipated, influenced by normal fluctuations in claims incidence and increased mortality due to COVID. Looking ahead, we anticipate maintaining an 80% loss ratio for the remainder of the year, eventually returning to a more normalized expected loss ratio beyond that.

And then if I think about your guidance, obviously, there's a lot of uncertainty and lots of moving parts. But given the results in the first quarter, it would seem like you're going to hit the top end of the guidance even without any changes in expectations that the Street had in terms of future earnings. So it seems like the guidance is overly conservative. But do you agree with that? Or are there other things that might be headwinds like in future quarters that people might not be seeing?

Yes, Jamie, it's Rick. I would just say when you look at our first quarter performance, very happy with that. And when we look out over the course of the year, we increased our outlook just given what we're seeing in the first quarter, expect second quarter to be a little bit better and normalize over the second half of the year. If you go back to our outlook in the second half of the year, we're expecting that to be pretty consistent with what we thought going into the year. So we put out a range to give you our kind of best view. It's going to be volatile. We'll have to see how it plays out, but we still think that's a pretty good range.

Our next question comes from Mark Hughes from Truist. Your line is open.

On the top line in Unum US, you've got a lot of tailwinds it seems like, the natural growth, pricing and good sales. You talked about 2% growth for the full year. As you exit the year and get into 2023, any sense you can give us of what the top line might shape up to be with these kinds of tailwinds?

Yes, Mark, it's Mike. I would answer it in two ways. One is that for those businesses pre-pandemic, we really liked the sort of 4% to 6% or 7% growth. I don't see any reason to expect that we can't return to that. I'm not certain about the exact timing for when the current 2% run rate can go back up into that range. However, as you mentioned, there are many reasons for optimism, including really strong persistency, effectively implemented rate increases, new sales growth, and another good jobs report this morning, all indicating continued building momentum on the top line in the upcoming quarters.

Our next question comes from Josh Shanker from Bank of America. Your line is open.

I want to talk about, you have a lot of protection against inflation in the long-term care block with caps and caps on the CAGR of the benefits. Can you talk about the percentage of claimants who are maximizing their JV benefit? And did that change from where it was at the beginning of the pandemic?

Yes, this is Steve. To address your question, let me clarify the structure of our business in terms of indemnity versus reimbursement. About 98% of our business is indemnity. For context, this means that if a claim-eligible individual receives services daily, it is a contractual benefit we are obligated to pay. The remaining 2% involves reimbursement for actual expenses, which is minimal and doesn't significantly impact our operations. Therefore, we are not particularly concerned about inflation regarding the services provided since the benefit amount adjusts according to the contract and remains consistent.

And then how is face-to-face interactions and Colonial Life comparing with where you were in February of 2020?

Yes, I understand. I appreciate it. The situation varies a bit as the pandemic impacts us, but generally, we have found a good balance. It involves ongoing book prospecting at the employer level and delivering enrollment services through face-to-face interactions, increasingly supported by the digital capabilities we've developed for the Colonial Life brand. This includes everything from fully digital enrollment options via chat and video, ensuring we meet consumer preferences for education and communication. We are genuinely encouraged by the digital acceleration that occurred during the pandemic, which has helped boost agent productivity. We observed strong productivity levels from our new agents and expanded our market reach to areas that were previously difficult to access.

Our final question comes from Josh Esterov from Credit Suisse. Your line is open.

I just wanted to follow up on the PDR funding question from a few minutes ago, make sure my head is in the right place. And I'm cognizant of the look-back period that plays in the PDR funding. But hypothetically, if rates were to stay the same or at least they don't decline over the next year or two and that you do ultimately make that $550 million to $650 million contribution of Fairwind that you previously guided to, then at the end of the day, the dabbing is somewhere less than roughly $500 million in total PDR funding that you would need to do by the end of 2026 or 2024, whatever cadence timeline with you.

Yes, this is Steve. I'll take that. The math becomes a little complicated, and we need to make sure we're talking about apples to apples. So when you think about the PDR itself and the sensitivities that we've given, that's on a before-tax basis. So when you look at capital contributions, those are going to be more driven by an after-tax recognition of the PDR. The other thing to think about there is we do also have ongoing funding requirements outside of the PDR for Fairwind. If you go back and you look historically, that was about $150 million a year, give or take, in any one year. Those will continue at some level over time regardless of the timing of recognizing the PDR. So I would just step back and say, we still feel very good about the $550 million to $650 million for this year. As I mentioned, rates aren't really going to impact all that much, the requirement for this year. But if rates do continue at the level they are, specifically the 20- and the 30-year, you can kind of see the sensitivities that we provided what ultimately, as we work through the next two, three, four years, ultimately that PDR could be under those scenarios. And obviously, that would impact how we think about capital deployment and the speed at which we can recognize the entire PDR. But it's still a little too early to call that, but we're very, very encouraged by where rates have gone over the last 60, 90, 120 days.

We have no further questions. I'll hand back to Rick McKenney for closing remarks.

Great. I want to thank everybody for taking the time to join us this morning. This will complete our call for first quarter 2022. We do look forward to seeing many of you in upcoming conferences and investor events and also welcome shareholders who join us for our annual meeting in three weeks. So with that, we'll end the call. Thank you very much.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.