Unum Group Q4 FY2023 Earnings Call

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 lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. Thank you, Matt Royal, Senior Vice President of Investor Relations. You may begin your conference.

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 risks 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. Now I'll turn the call over to Rick.

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. Our 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. Our discipline with how we run the business has not 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 its performance, 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. We exceeded expectations on value delivered to our shareholders, raised our dividend by 10%, and increased the pace of our share repurchases throughout 2023, announcing 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 deficiency reserve and contribute the capital needed to support our long-term care block. We have stated that we believe long-term care will not need additional capital for five years, but in reality, we believe that will be true for much longer. Across the company, the reason we have been able to achieve such capital results goes back to the fact that our businesses steadily generate strong cash flow. 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 disciplined 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, 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 milestone 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 generation, CRM, and workflow, boosting agent productivity. Another key development is our arsenal’s gather, which modernizes enrollment and benefits administration and streamlines the client experience. The offering has been building as evidenced by the annual premium associated with it increasing from $10 million to $50 million over the course of 2023. Finally, enabling Colonial Life agents to offer Unum employer-paid products ensures they have the solution for any employer or broker. In 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. Finally, in Unum Poland, we are 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, which 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 our franchise value, and the consistency of our capital priorities remains intact. First, we ensure investments directly supporting our business. We have a clear growth strategy to continue to build out 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. Third, we will continue to return capital to shareholders via regular dividend increases and share repurchases as we have demonstrated through our actions, 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.

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% and 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 of 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 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 Q4. 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 were below our expected run rate of $30 million to $40 million. 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 lifetime 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 the third quarter. Incidents remained above long-term expected levels but have 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. 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. 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 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. 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. Top line growth is very strong and fueled by the momentum and the digital capabilities that Rick mentioned. The earning growth rates are stabilizing back to our long-term expected range after two years of very high levels of growth coming out of the pandemic. We have a full recovery of our U.K. business model with double-digit growth rates. And lastly, momentum continues to build in Colonial Life and the franchise that we have there. Our capital generation is really at full strength with all capital metrics well in excess of targets. We continue to expect our adjusted operating expense ratio to taper off over time as the impact of our investments take further hold. I would quickly like to highlight that the fourth quarter results were encouraging and we have a great deal of confidence looking ahead into 2024 and beyond.

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.

Your first question comes from the line of Joel Hurwitz from Dowling & Partners. Your line is open.

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. 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?

Yes, this is Steve. I can take that question. The key to think about with our core businesses is that we do believe that we're going to be able to maintain the margins in our group disability business through the next year. 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. Several one-time items did dampen the earnings of Colonial Life in 2023, and we think in 2024 those earnings will come through on a more core basis. We're seeing favorable results from our disciplined underwriting and pricing strategies.

Thanks, Steve, and thanks for the question, Joel. We're really excited about where we stand. I would 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 looking to solve significant challenges that we address through what Rick mentioned with Total Leave, HR Connect, and MyUnum. That changes the game versus a more traditional price-check type environment. From a new business perspective, we are riding strong levels of business. We expect that to continue, and we're hitting price points. From a renewal perspective, business is favorable and we look at it very much on a case-by-case basis. Our history of strong risk discipline from an underwriting perspective serves us well. These customers value what we bring, and we're able to show up in these discussions with an opportunity to talk about long-term price stability, whether it be modest rate increases, rate pass, or rate reductions. Our persistency results through the close of ‘23 were quite strong as we go into ‘24.

Yes, 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. All those indicators that we talked about, and as Chris articulated, particularly for our group disability, but even with our Colonial Life business, are all intact. That leads us to a positive outlook coming off of an incredibly strong year.

Okay, helpful. And then in terms of long-term care, 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 what's embedded in 2024 guidance for Closed Block earnings?

Yes, this is Steve. I can take that one. 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 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 our inventory trend lines that we were a bit below the trend lines that we would ultimately expect. As we approach back to those, that gives us confidence that this was just kind of pent-up demand. I would also say there has been a higher level of resubmission of claims, claims that had previously been submitted but either denied, closed, or recovered for other reasons. We've seen the frequency of those increase, indicating claims originally pulled back, but now have been submitted. Obviously, we need to continue monitoring this. We do believe the level of incidents for a while in ‘24 will probably continue at an elevated level, but we’ll keep an eye on that as we get into the back half of the year. We have still built a level of elevated incidents into our outlook.

Okay, thank you.

Thanks, Joel.

Thanks, Joel.

Hi, good morning. First question I had is just on the excess capital position. It got a lot stronger with a big dividend in 4Q and you're projecting it to get better in 2024. 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, sort of not earmarked. What are the priorities for using that?

Sure. Thanks, Alex. Just to take you back, we've mentioned several times that the capital generation this year was very strong. We see it continuing as we go forward. We ended the year in a very good capital position as we've been building that throughout 2023. Last year, a priority was putting more money behind long-term care and funding that level of PDR, and so that was accomplished. That leaves us in a good place as we've talked about—we're not planning any contributions towards long-term care. Looking to deployment opportunities in 2024, I'd start with investing back into our core businesses, enhancing the digital capabilities we talked about. From an organic perspective, that's contemplated in our earnings as we fund internal initiatives. We will look at M&A to see how we can continue to accelerate growth, particularly in areas surrounding our business, whether it's distribution, product, or internal capabilities. We have lots of potential uses for it with nothing in particular set aside today. If we don't see immediate opportunities for investments, we will consider returns to shareholders.

Yes, this is Steve. I can add that our capital generation and returns to shareholders will remain dynamic. We're not locking in numbers too tightly.

Got it. Very helpful. And then I wanted to go back to some of the comments you're making on being fully funded on LTC. When I look at the one slide that’s got the bullet on reserves peaking in 10-years, given the interest rate uncertainty and the PDR balance coming down, is that enough to be fully funded just for a finite period of time? Or is your base case projecting that you actually never have to fund it again?

Yes, this is Steve. So I would separate the term 'fully funded.' That specifically refers to actions around the PDR in 2023, where we fully recognized that. Looking ahead, we believe our current capital position and assumptions will meet the required capital needed for the build of reserves over the next 10 years. Post that, these reserves will start to release capital. Current projections suggest we won't need to contribute any capital to fund long-term care.

Thanks. Good morning. Just starting with long-term care, Rick, you had mentioned this in your opening comments about pursuing risk transfer. Other companies have talked about bid-ask dynamics coming in. Can you give us a sense of where you are in that process and has the climate changed these past few months?

Sure, thanks, Suneet. Just a couple of comments. The transaction late last year was a positive step. It's good to see it happen after many years of discussion. I believe it aligns with our approach to parsing risks within our block and identifying suitable counterparties. We continue to engage with various parties actively, so we look forward to future opportunities. It’s a positive development for the industry.

Got it. That makes sense. And is there a thought on delaying capital deployment in anticipation of a long-term care transaction?

That’s really not the case. Our capital positioning gives us flexibility. We have ample capital to fund any such transaction should the opportunity arise without needing to hold back from other growth initiatives.

Hey, good morning. So first had a question on competition in the disability market. If you look at margins for you guys and most of your peers, they've been very strong. So just wondering why you haven't seen competition pick up? I would have thought margins being as strong as they are, you would have seen prices come down significantly on one-one renewals.

Chris?

Yes, thanks for the question, Jimmy. Competition is always present. Our capabilities and strong claims management set us apart. We deliver quality insurance and value-added services. Our contracts ensure stability in pricing, whether it's modest increases, rate passes, or reductions. This, combined with our risk discipline, has kept our business favorable and continued strong performance.

Okay, and then regarding M&A, what are you looking for ideally? Would you be open to larger deals or should we anticipate a consistent approach to smaller ones?

While we’re primarily looking for opportunities to build on our current positions rather than larger acquisitions, we’re open to anything that aligns strategically. We’ve had success with smaller transactions, and we’ll remain consistent with that approach.

Good morning. Just a few on long-term care. First is the elevated claim frequency versus your expectation? My calculations suggest around 3% to 4% elevated levels. Does that sound accurate?

Yes. I wouldn't specifically attribute the claims incidents to the loss ratio directly. The best point of reference is the net premium ratio. If actual performance meets expectations, we should have a loss ratio of around 95%. Claims incidents have been higher in recent quarters, leading to a slight increase in the NPR, but I wouldn't expect it to go beyond 105 to 107 in terms of loss ratios.

Got it. And regarding the higher level of resubmission of claims, can you unpack what's happening there?

Resubmission occurs for various reasons, including withdrawal or changes by policyholders. We've noticed a higher level lately than we traditionally observe, impacting our expected incidence counts over time. We're keeping track of this closely.

Yes, hi there. Regarding the LTC transaction landscape, do you think unique circumstances allowed a recent transaction to transpire, or is there an appetite among buyers that could facilitate more transactions?

I wouldn’t speculate too much. I believe the recent transaction is a positive development for the industry, indicating buyers and sellers can meet. We continue to engage in discussions, and we’ll pursue opportunities as they arise.

Thanks, guys. I wondered about the benefit ratio guidance for AD&D or supplemental and voluntary, like you provided for group disability?

Yes, this is Steve. For group life, the expectation would be around 73% to 75%. For other lines, I suggest referencing last year’s guidance as a good indicator moving forward.

Good morning. Can you confirm if $1.4 billion to $1.6 billion of annual capital generation is a good run rate going forward? Is there some risk to that level if disability results normalize?

Yes, this is Steve. I think that's a good run rate. Ideally, it anticipates group disability to remain in the low 60s. Our capital generation aligns well with expected GAAP earnings.

Yes, thank you. Just one quick one. Any nonrecurring items in the recoveries? They've been very strong. Is that sustainable?

Yes, Mark. We've seen consistent improvement in recoveries within our group disability block, so we do not view the fourth-quarter performance as non-sustainable.

Yes, thank you for the question. Colonial sales were pretty strong this quarter, up 12%. We think the market is growing in the 4% to 6% range, and we performed at the top end. Our strategy is focused on supporting our agents and promoting our offerings in the large case commercial market.

Great. Thank you, Rob. I appreciate everybody sticking with us for a little bit more time today. We’re looking forward to engaging with investors, and I appreciate your time during today’s call. With that, we’ll conclude the call.

This concludes today's conference call. Thank you for your participation. You may now disconnect.