Earnings Call Transcript - UNM Q3 2021

Operator, Operator

Hello and welcome to the Unum Group 3Q 2021 Earnings Conference Call. My name is Robin and I will be coordinating your call today. Operator instructions were given. I will now hand you over to your host, Tom White, from Unum Group. Tom, please go ahead.

Tom White, Head of Investor Relations

Great. Thank you, Robin. Good morning, everyone and welcome to the Third Quarter 2021 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, 2020, and our subsequently filed Form 10-Qs. 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 in the Investors section. So yesterday afternoon, Unum reported third quarter 2021 Net Income of $328.6 million or $1.60 per diluted common share compared to $231.1 million or $1.13 per diluted common share in the third quarter of 2020. Net income for the third quarter of 2021 included the after-tax impairment loss on internal use software of $9.6 million or $0.05 per diluted common share, the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share, the net after-tax reserve decrease related to reserve assumption updates of $143.3 million or $0.70 per diluted common share, and a net after-tax realized investment loss on the Company's investment portfolio of $100,000 or a de minimis impact on earnings per diluted common share. Net income in the third quarter of 2020 included after-tax costs related to an organizational design update of $18.6 million or $0.09 per diluted common share, and a net after-tax realized investment gain on the Company's investment portfolio of $3.8 million or $0.01 per diluted common share. Excluding these items, after-tax adjusted operating income in the third quarter of 2021 was $210.5 million or $1.03 per diluted common share compared to $245.9 million or $1.21 per diluted common share in the year-ago quarter. Participating in this morning's conference call are Unum's President and CEO, Richard McKenney; Chief Financial Officer, Steven Zabel; and Chief Operating Officer, Michael Simonds, as well as Mark Till who heads our Unum international business and Tim Arnold who heads our Colonial Life and voluntary benefits businesses. And now I will turn the call over to Ric for his opening comments.

Richard McKenney, President & CEO

Thank you, Tom. Good morning everyone, and thank you for joining us today. As we look at our third quarter earnings results this morning, let me start by highlighting that our core business has continued to perform well. We saw top-line growth in our business lines at good returns. We also recognized a continued challenge that COVID presents on our near-term results. It has cast a shadow on our core returns but we still see a great business that we believe will return to the levels of profitability that we expect. Let me start with the overall operations before commenting on these COVID trends. I would first highlight that core premium growth has been steady and tracking to the expectations we previously laid out for you. On a year-over-year basis in the third quarter Unum U.S. generated an increase in premium income of 1.2%. Colonial Life was slightly better than breakeven, following three previous quarters with negative comparisons, and our International lines also generated positive premium trends. This premium growth momentum is building back as sales growth re-emerges, persistency remains favorable and the external environment of employment growth and wage inflation benefits our business. Outside of the COVID related impacts, we remain very encouraged with the benefits experience and operating income contributions from our other business lines. The Supplemental and Voluntary lines, Colonial Life, our International Businesses and our Closed Block segment all show generally stable results and made substantial contributions to income this quarter. We're also pleased with our overall investment results this quarter. It was another quarter for strong returns from our alternative investments and also another quarter of higher-than-normal bond call premiums. The underlying credit quality of the portfolio is excellent and the investment team remains diligent in their analysis of our credits through the changing market dynamics. With this backdrop of strength, we were also highly affected by the evolving nature of the COVID pandemic. Given the breadth of our customer base across the U.S., we have seen this quarter that we have been impacted by the resurgence of higher infections, hospitalizations, and mortality brought on by the Delta variant. As we have discussed throughout the pandemic, the best way to monitor COVID's impact on our results is to follow national mortality and infection rates. Differently in this quarter, we also need to focus on how the demographics of the incremental mortality relates specifically to our customer base. To put it in context, in the third quarter, the U.S. experienced a significant increase in national COVID mortality counts to approximately 94,000 lives, which is almost double the 52,000 in the second quarter. The dramatic increase over the course of the third quarter occurred very rapidly and consistently throughout the quarter. In fact, just 90 days ago, most experts were estimating a third quarter mortality count of approximately 44,000 deaths, an estimate that has more than doubled over the course of the quarter. The absolute increase in mortality has certainly been impactful to our industry and for us. Most notably in our Unum U.S. Group Life business, although we also saw impacts in our voluntary benefits lines. Beyond the higher mortality counts, aggregate data from the CDC also shows that the third quarter working-aged individuals comprised approximately 40% of the COVID-related mortality — double that of the fourth quarter of 2020 and the first quarter of 2021, before vaccinations became widely available. This shift in demographics impacts us threefold. First, we now see higher impacts in the working-age population, our primary customers, who are covered by our group and voluntary products. In addition, these younger working-aged individuals tend to have higher benefit amounts than we saw before. And finally, with the welcome news of the decline in COVID related deaths among the elderly population, the higher mortality in our long-term care block has substantially subsided. An additional but smaller impact that we see is that the Delta variant has brought on a resurgence of infections and hospitalizations leading quickly to higher claims in our short-term disability business, and pressure on our group disability benefit ratio. While COVID impacts are evident in our results this quarter, we believe as the pandemic continues to come better under control with increased vaccinations and advanced treatments, that we will see a strong reemergence of growth and profitability in our business. The recovery from COVID has been delayed longer than we anticipated by the Delta variant, but we do expect to see recovery ahead. It is because of that view that we are excited to begin to deploy a portion of the Company's excess capital in a way that we believe can create value for our shareholders. We start first with a capital position that remains very healthy with Holding Company cash at $1.6 billion and a weighted average risk-based capital ratio for our traditional U.S.-based life insurance companies at approximately 380%. This gives us the opportunity to begin to deploy a portion of that capital to enhance shareholder value, while also maintaining a healthy position for opportunities that could materialize in the future. Last week, we were pleased to announce the $250 million share repurchase authorization approved by our Board, which we intend to initiate in the fourth quarter with an execution of an accelerated share repurchase of $50 million. We expect to continue the program through the end of 2022. In addition to buying shares, we also plan to accelerate recognition of the premium deficiency reserve for the long-term care block by a similar amount over this same time frame. We see value in accelerating the recognition ahead of the original seven-year schedule and could see its completion as early as the end of 2024 under certain market conditions. Even with the additional capital we plan to allocate to share buybacks and accelerated PDR recognition, we will continue to maintain a strong capital position and flexibility. While we remain optimistic over the long term, given the volatility of the pandemic, we will move our traditional December analyst meeting to the first quarter of 2022 to discuss with you our full-year outlook. The areas we will focus on are our continued premium growth in our core business lines looking into 2022, as well as the impact of our capital deployment plans. We expect the impact of the pandemic to subside over the course of next year, but we do expect the fourth quarter of this year to be impacted similarly to the third quarter. We are watching the national numbers as are all of you. As the Delta wave subsides, we look to return to the growth and profitability we believe we can deliver. Now I'll ask Steve to cover the details on the third quarter results. Steve.

Steven Zabel, Chief Financial Officer

Great. Thank you, Ric, and good morning, everyone. As I discuss our third quarter financial results this morning, I will again primarily focus on analysis of our third-quarter results relative to the second quarter of 2021, which allows us to show how the Company's business lines are progressing through the pandemic. I will also describe our adjusted operating income results by segment excluding the impacts from our GAAP reserve assumption updates. As we outlined in the press release, the net reserve decrease related to our annual reserve assumption update totaled $181.4 million before tax or $143.3 million after-tax. The biggest component of the actuarial reserve review was the release of $215 million before tax in the Unum U.S. Long-Term Disability line. Claim reserves should represent our best estimate of the future liability and since the last GAAP reserve review, investments in our operations have impacted our claims management and resulted in improvements in claim recoveries over the past several years, which we now believe are sustainable. As such, these reserves have been adjusted to better reflect the expected costs of claims. This reserve update will have little impact on our forward expectations for earnings from this line or the expected benefit ratio. The reserve review also determined that reserves should be increased in three lines within the Closed Block reporting segment. For the closed group pension block, policy reserves were increased by $25.1 million before tax. For the closed disability block, claim reserves were increased by $6.4 million before tax. And finally, for long-term care, claim reserves were increased by $2.1 million before tax. Although the net of these reserve updates are excluded from adjusted operating income, they did contribute $0.70 per share to the Company's book value. I'll start the discussion of our operating results with the Unum U.S. segment where COVID significantly impacted our results this quarter, driving higher mortality and a higher average claim size in the Group Life business and higher short-term disability claims in the Group Disability business. For the third quarter in the Unum U.S. segment, adjusted operating income was $88.5 million compared to $179.3 million in the second quarter. Within the Unum U.S. segment, the group disability line reported adjusted operating income, excluding the reserve assumption updates, of $39.5 million in the third quarter compared to $59.9 million in the second quarter. The primary driver of the decline was an increase in the benefit ratio to 78.9% in the third quarter, compared to 74.7% in the second quarter, which was primarily driven by increased claims in the short-term disability line related to the COVID Delta variant and the current external environment. Premium income declined slightly on a sequential quarter basis, but we were pleased to see an uptick in growth to 2.6% on a year-over-year basis. While Short-Term Disability results were challenged this quarter, the Long-Term Disability line performed in line with our expectations as new claim incidents showed an increase mostly driven by the flow-through of STD claims to LTD status, which was offset by continued strong claim recoveries. It is likely that we will continue to see an elevated overall Group Disability benefit ratio as COVID and the current external environment continue to impact our STV results. We do feel that COVID is a key driver of the higher benefit ratio for the Group Disability line. As direct COVID impacts lessen over the first part of next year, we expect to see improvement in the benefit ratio. Adjusted operating income for Unum U.S. Group Life and AD&D declined to a loss of $67.1 million in the third quarter from income of $5.2 million in the second quarter. This quarter-to-quarter decline of roughly $70 million was largely driven by the changing impacts from COVID that Ric described in his comments. We were impacted by the deterioration in COVID-related mortality from a reported 52,000 national deaths in the second quarter to approximately 94,000 in the third quarter along with the age demographic shifting to higher impacts on younger working-aged individuals. Estimated COVID-related excess mortality claims for our Group Life block increased from approximately 800 claims in the second quarter to over 900 claims in the third quarter. Accordingly, our results reflect mortality at a level that represents approximately 2% of the reported national figures compared to a 1% rate experienced through 2020 when mortality was more pronounced in the elderly population. With a higher percentage of working-aged individuals being impacted, we also experienced higher average benefit size, which increased from around $55,000 in the second quarter to over $60,000 in this quarter. Finally, non-COVID-related mortality did not materially impact results in the third quarter relative to the experience of the second quarter. Looking ahead to the fourth quarter, our current expectation is for U.S. COVID-related mortality to continue to worsen to approximately 100,000 deaths. With continued higher mortality among working-aged individuals, we believe that Group Life results will remain under pressure with the expected fourth quarter loss similar, if not potentially worse than the experience of the third quarter. Now, looking at the Unum U.S. Supplemental and Voluntary lines, adjusted operating income totaled $116.1 million in the third quarter compared to $114.2 million in the second quarter. Both were very good quarters that generated adjusted operating returns on equity in excess of 17%. Looking at the three primary business lines: first, we remain very pleased with the performance of the recently issued individual disability block of business, which has generated strong results throughout the pandemic. We continue to see very favorable new claim incidence trends and recovery levels in this block. The voluntary benefits line reported a strong level of income as well, though income was slightly lower on a quarter-to-quarter comparison. The uptick in the benefit ratio in the third quarter to 46.6% from 44.2% in the second quarter was driven by increased COVID-related life insurance claims, which offset generally favorable results in the other voluntary benefits product lines. Finally, utilization in the Dental and Vision line improved, leading to an improvement in the benefit ratio to 75% this quarter from 77.1% in the second quarter. Looking now at premium trends and drivers, total new sales for Unum U.S. increased 7.7% in the third quarter on a year-over-year basis compared to the declines that we experienced in the first half of the year. For the Employee Benefit lines, which do include LTD, STD, Group Life, AD&D and Stop Loss, total sales declined by 2.5% this quarter, primarily driven by lower sales in the large case market and generally flat sales in the core market, which are those markets under 2,000 lives. Sales trends in our supplemental and voluntary lines rebounded strongly in the quarter, increasing 21.8% in total when compared to the year-ago quarter. We saw sharp year-over-year increases in the recently issued individual disability line, up 22.9%, and in the Dental & Vision line, up 48.2%. Voluntary benefit sales also recovered following lower year-over-year comparisons in recent quarters, growing 13.7% in the third quarter. We also saw overall favorable persistency trends for our major product lines in Unum U.S. Our group lines aggregated together showed a slight uptick to 89.4% for the first three quarters of 2021 compared to 89.1% last year. Both the Voluntary Benefits and Dental & Vision lines also showed year-over-year improvements while the Individual Disability line declined slightly. These solid persistency numbers and improving sales trends provide a good tailwind for premium growth as we wrap up this year and move into 2022. Now let's move on to the Unum International segment. We had a very good quarter with adjusted operating income for the third quarter of $27.4 million compared to $24.8 million in the second quarter, a continuation of the improving trend in income over the past several quarters. The primary driver of these results is our Unum U.K. business, which generated adjusted operating income of £18.4 million in the third quarter compared to £16.8 million in the second quarter. The reported benefit ratio for Unum U.K. improved to 79.2% in the third quarter from 82.5% in the second quarter. The underlying benefits experience was favorable for our Group Income Protection block primarily due to lower new claim incidents though claim recovery has continued to lag our expectations somewhat. The Group Life block experienced adverse mortality primarily from non-COVID-related claim incidents and higher average size. We did not see much impact this quarter from COVID in our U.K. Life block. Benefits experience in Unum Poland was also favorable this quarter, helping generate a slight improvement in adjusted operating income. Premium growth for our international businesses was also favorable this quarter compared to a year ago. Looking at the growth on a year-over-year basis in local currency to neutralize the benefit we saw from the higher exchange rate, Unum U.K. generated growth of 2.9% with strong persistency and the continued successful placement of rate increases on our in-force block. Additionally, sales in Unum U.K. rebounded in the third quarter, increasing 40.2% over last year. Unum Poland also generated growth of 12.5%, a continuation of the low double-digit premium growth this business has been producing. Next, results for Colonial Life were in line with our expectations for the third quarter with adjusted operating income of $80.1 million compared to the record quarterly income of $95.8 million in the second quarter. As with our other U.S.-based life insurance businesses, Colonial's Life Insurance Block was negatively impacted by COVID-related mortality, which was the primary driver in pushing the benefit ratio to 55.9% in the third quarter compared to 51.7% in the second quarter. We estimate that adverse COVID-related claims experienced in the Life Block impacted results by approximately $16 million — the worst impact we have seen from COVID throughout the pandemic, and a level that is likely to persist through the fourth quarter. Experience in the other lines being accident, sickness, and disability and cancer and critical illness remained in line with our expectation and continued to drive strong earnings for the segment. Additionally, net investment income increased 25% on a sequential basis in the third quarter, largely reflecting unusually large bond call activity this quarter. We do not expect the benefit from bond calls to net investment income to continue at this level in the fourth quarter. We were very pleased with the improving trend we are seeing in premium growth for Colonial Life, which was flat this quarter on a year-over-year basis after showing year-over-year declines in each of the past three quarters. Driving this improving trend in premiums is the continuing rebound in sales activity at Colonial Life, increasing 28.6% on a year-over-year basis this quarter, and now showing a 21.1% increase for the first three quarters of 2021 relative to last year. Persistency for Colonial Life continues to show an encouraging trend at 78.9% for the first three quarters of 2021, more than a point higher than a year ago. In the Closed Block segment, adjusted operating income, which does exclude the reserve assumption updates and the amortization of cost of reinsurance related to the Closed Block Individual Disability reinsurance transactions that did fully close earlier this year, was $109.8 million in the third quarter and $111.2 million in the second quarter, both very strong results driven by favorable overall benefits experience in both the long-term care line and Closed Disability Block, and strong levels of investment income due to higher-than-expected levels of miscellaneous investment income, which I will cover in more detail in a moment. Looking within the Closed Block, the LTC block continues to produce results that are quite favorable to our long-term assumptions. The interest-adjusted loss ratio in the third quarter was 74.8%, and over the past four quarters is 71.8%, which are both well below our longer-term expectation of 85% to 90%. In the third quarter, we continue to see higher mortality experienced in the Claimant Block, where accounts were approximately 5% higher than expected, which is similar to our experience in the second quarter. LTC submitted claims activity was higher in the third quarter though much of the increase has not resulted in significant ongoing claim costs. Looking out to the end of 2021 and into 2022, we do anticipate that the interest-adjusted loss ratio for LTC will likely trend closer, although slightly favorable, to our long-term assumption range as mortality incidence trends continue to normalize from the impacts of COVID. For the Closed Disability Block, the interest-adjusted loss ratio was 58.2% in the third quarter compared to 69.6% in the second quarter, both very favorable results for this line. The underlying experience on the retained block, which largely reflects the active life reserve cohort and certain other smaller claim blocks we retained, performed very favorably relative to our expectations, primarily due to lower submitted claims again this quarter. So overall, it was a very strong performance again this quarter for the Closed Block segment. Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the segment, driven by both higher-than-average bond call premiums, as well as strong performance in our alternative asset portfolio. Looking ahead, we estimate the quarterly adjusted operating income for the segment will over time run within a range of $45 to $55 million, assuming more normal trends for investment income and claim results in the LTC and Closed Disability lines. So wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the Corporate segment was $45.4 million in the third quarter, compared to $48.5 million in the second quarter, and is generally in line with our expectations for the segment. This does exclude the special items we listed in our earnings release. As you read in our earnings release and heard through my comments, the quarterly results benefited from a high level of miscellaneous investment income, which typically comes from two sources. First, we saw a high level of bond calls again this quarter as many companies refinanced higher-coupon debt and took advantage of today's favorable credit market conditions. We recorded approximately $20 million in higher investment income from bond calls this quarter relative to our historical quarterly averages. The Closed Block and Colonial Life segments were the primary beneficiaries of higher investment income this quarter. Unum U.S. was in line with its historical averages, but lower this quarter than what we received in the second quarter. While these calls enhanced current period investment income, they are volatile from quarter-to-quarter. Second, we continue to see strong performance in our Alternative Investment Portfolio, which earned $38.2 million in the third quarter, following earnings of $51.9 million recorded in the second quarter. Both quarters are well above the expected quarterly income on the portfolio of $12 to $14 million. The higher returns this quarter were generated from all three of our main sectors, being Credit, Real Estate, and Private Equity, and reflected the strong financial markets and strong economic growth. It is hard to predict quarterly returns for Miscellaneous Investment Income but for the fourth quarter, we believe that they will moderate to our expected quarterly returns. Moving now to capital. The Company continues to be in great shape providing significant financial flexibility. The weighted average risk-based capital ratio for traditional U.S. insurance companies improved to approximately 380% and holding Company cash was $1.6 billion as of the end of the third quarter, both of which are well above our targeted levels. In addition, leverage has trended lower with equity growth and is now 25.7%. As Ric mentioned, we're very pleased to clarify our capital deployment plans for the balance of 2021 and for 2022. For context, with the capital measures that I just discussed, we are in a very strong capital position with substantial financial flexibility. Our strategy for deployment has not changed, and our priorities remain consistent including first, funding growth in our core businesses; second, supporting our LTC Block; third, executing opportunistic acquisitions that support our long-term growth; and fourth, returning capital to shareholders in the form of dividends and share repurchases. We began to roll our plans out last week with the announcement of the authorization by our Board of Directors to repurchase up to $250 million of our shares by the end of 2022. We plan to begin this program with the execution of an accelerated share repurchase of $50 million in the fourth quarter. We also plan to allocate capital to accelerate the recognition of the premium deficiency reserve for the LTC block by a similar amount by the end of 2022. We feel that this combination strikes a good balance of repurchasing our shares at what we believe are very attractive prices, while also fully funding the PDR ahead of the original 2026 target to help lessen the valuation drag on our stock from the LTC exposure. With this additional deployment of capital, we continue to project having a very solid capital position at the end of 2022, with holding Company cash around $1 billion and an RBC ratio well above our target. Now shifting topics, I wanted to give you a brief update on our progress in adopting ASC 944 or long-duration targeted improvements. As a reminder, this accounting pronouncement applies only to GAAP basis financial statements and has no economic, statutory accounting, or cash flow impact to the business. We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023, and we'll be sharing some qualitative information in our Form 10-Q filing, which is later today. Although we continue to evaluate the effects of complying with this update, we do expect that the most significant impact at the transition date will be the requirement to update our liability discount rate with one that is generally equivalent to a single A interest rate. We expect this will result in a material decrease to accumulated other comprehensive income and primarily be driven by the difference between the expected interest rates from our investment strategy and the interest rates indicative of a Single A rated portfolio. As we continue to progress our work, we plan to provide updates to you in 2022 as we near adoption. So let me close with an update on our expectations for the remainder of 2021. With COVID-related mortality expected to increase further in the fourth quarter to approximately 100,000 nationwide deaths, we expect to see similar, if not slightly worse, trends for mortality impacts on our life insurance businesses in the fourth quarter than we did experience in the third quarter. The Unum U.S. Group Disability benefit ratio is also likely to remain elevated due to continued high levels of STD claims. In addition, we do not anticipate miscellaneous investment income to be as strong in the fourth quarter as it was in this quarter. These impacts will likely pressure our fourth quarter results relative to what we experienced here in the third quarter. As Ric mentioned, we plan to update you on our 2022 outlook during the first quarter of 2022 when we expect to have a more informed view of COVID mortality and infection trends. We feel confident that premium growth in our core business segments in 2022 can build off of the momentum that began to reemerge this year, and then we'll also see the benefits of executing our share buyback authorization. With that said, future COVID trends will be a very important factor in our expected benefits experience. Now I'll turn the call back to Ric for his closing comments and looking forward to all of your questions.

Richard McKenney, President & CEO

Thank you, Steven. Just a couple of closing thoughts. We do continue to be pleased with the operational performance of the Company through what has been an extraordinary environment. We believe we are really well positioned to benefit from today's strong business conditions and we have to remain vigilant as COVID-related mortality and infection rates continue to persist. The team's here to respond to your questions, so I'll ask Robin to begin the Q&A session.

Operator, Operator

Thank you. If you would like to ask a question, operator instructions were given. We would kindly limit your question to one and one follow-up question. When preparing to ask your question please make sure that your phone is unmuted. Our first question is from Ryan Krueger from KBW. Ryan, please go ahead.

Ryan Krueger, Analyst (KBW)

Hey, thanks. Good morning. First, could you just remind us what is the remaining amount of the main PDR that you have left to fund?

Richard McKenney, President & CEO

Steve?

Steven Zabel, Chief Financial Officer

Yeah, here, Ryan, it's Steve. I'll go back to kind of what we've disclosed in the past. Originally, the permitted practice that we had related to the PDR was that we would need to increase our LTC reserves by $2.1 billion over the seven-year period. We did have an increment last year of $229 million or just south of $230 million. We'll continue to assess that as we go through the remainder of the seven-year period. And so we'll have our year-end work for statutory reserves coming up this quarter and we can talk more about what the 2021 increment there would look like.

Ryan Krueger, Analyst (KBW)

Thanks. And then on LDTI, I know you're not ready to share the quantitative impacts yet, but can you give us any sense of how far along you are in discussions with the rating agencies and how they're thinking about the GAAP book value decline and potential implications to acceptable leverage ratios?

Steven Zabel, Chief Financial Officer

Yeah. We're in constant communication with the rating agencies. And to date, I would say those conversations are somewhat similar to what we've discussed, where they understand this is a GAAP accounting pronouncement, doesn't affect cash flow, and is not going to affect coverage and our ability to service our debt. Those conversations will be ongoing. I'm sure they're having conversations with many others around that as well. So those will continue in the next year as we get closer to adoption.

Ryan Krueger, Analyst (KBW)

Great. Thank you.

Richard McKenney, President & CEO

Thanks, Ryan.

Steven Zabel, Chief Financial Officer

Thank you.

Operator, Operator

Thank you. Our next question is from Jimmy Bhullar from JPMorgan. Jimmy, please go ahead.

Jimmy Bhullar, Analyst (JPMorgan)

Hi. Good morning. So on buybacks, I just had a question about, do you intend to complete the program by the end of next year or is that amount that you've outlined just a policy and what you do will depend on the environment?

Richard McKenney, President & CEO

Hi, Jimmy, it's Ric. Yes, we do intend to do that. We put out the $250 million authorization; that is our plan for next year. We'll get into the details as we get to laying out a full 2022 outlook. But that is not just a policy — that's factored into our plans. It's part of why you're seeing us do $50 million here in the fourth quarter and that's the general run rate that you might see, although it might deviate over the course of the year based on what we're seeing. But that is our expectation.

Jimmy Bhullar, Analyst (JPMorgan)

And then any thoughts on like why you wouldn't — especially if the stock is a lot weaker in the near-term, why would you not do even more than that if you've already sort of earmarked that gap to why wouldn't you just do more than $50 million in the near-term to take advantage of the stock base?

Richard McKenney, President & CEO

Jimmy, when we look out over the course of the next year, the $250 million that I just mentioned — like I said, it may deviate by quarter based on market conditions, so I don't want to imply it's an even level, but we're going to pace this in. We just started this authorization — just got approval for that last week, so we'll pace our way into it and I'm sure we'll have more to say as we get through the fourth-quarter reporting period.

Jimmy Bhullar, Analyst (JPMorgan)

Okay. And then when do you expect to give out details on the impact on your business from the changes in accounting for the long-duration products?

Steven Zabel, Chief Financial Officer

Yeah, I can take that one. We haven't really set a firm date on it but we imagine it will be consistent with many others; in the first half of next year we'll start to talk more quantitatively about that.

Jimmy Bhullar, Analyst (JPMorgan)

Okay. And then just lastly, can you compare and contrast what's going on in the U.S. with COVID and international? It doesn't seem like there's much of an impact obviously, fewer deaths in the markets but Europe versus the U.S. — why is it having a surprisingly greater impact in the U.S. and not as much of an impact in UK or Poland?

Richard McKenney, President & CEO

Jimmy, that's a really good question and I think it's one we can explore a little bit because I think given our exposures in each of the countries, they're going through COVID very differently at the moment. Mike, maybe you can give an overview and we can have Mark speak as well on International.

Michael Simonds, Chief Operating Officer

Sure. Thanks. Good morning, Jimmy. I think you've put an important point of distinction and we are seeing, as Steve covered in his comments, pretty acute impact in our short-term disability line which has got that Group Disability loss ratio elevated and obviously in Group Life and in our voluntary both the Colonial brands and the Unum brands here in the U.S. No doubt, I think the practices around COVID in the U.K. as well as some elements of business mix represent points of distinction. Mark, you want to speak to that?

Mark Till, Head of Unum International

Yeah, Jimmy, I think the biggest difference in the U.K. is the vaccination rate and there was something that came out from the U.K. Office of National Statistics a couple of days ago that said the mortality rate among the unvaccinated population was 850 per 100,000 but among the vaccinated population was only 26 per 100,000. In the U.K., we've got around 90% vaccination rates amongst adults. So it's that vaccine piece that's making the biggest difference to mortality and therefore hospitalization and impacts on Disability claims.

Jimmy Bhullar, Analyst (JPMorgan)

Okay. And then just lastly, it's a little surprising that everybody sort of knows that the pandemic is going on, but nobody seems to have adjusted prices in the Group Life business going into renewal season. I realize it's an unusual time, but those are mostly one-year policies. So any thoughts on why pricing for Group Life has not adjusted at least even a little bit for what's going on and that shift more towards the younger age cohort?

Michael Simonds, Chief Operating Officer

Thanks Jimmy. Maybe I will take that one. I can speak to our pricing strategy a little less so to other carriers in the market. I'd say for us, our objective always is to manage price on a gradual basis so that our clients can anticipate what is coming. We act relatively conservatively so that they're not getting last minute changes to what they're going to see on their expense line. So we've been feathering in COVID-related pricing this year into the new business and the renewal up-markets. And we've done that on the Life Insurance side; I expect that feathering in will increase as we go through the fourth quarter and into next year. It's a little bit more gradual on the disability side, particularly around short-term disability. A couple of thoughts around the impact: I do think that becomes a way that we moderate back to our long-term expectation in the Group Life loss ratio, as well as in Group Disability. Second, I do anticipate that we will see some pressure in new business sales, particularly in the mid and large case Group Life and Group Disability segment. I share some of your curiosity around why the industry hasn't moved as quickly; I do anticipate that that will happen over time. Just may take a few quarters to get there. I'd wrap it up by saying most critically to us is our clients sticking with us through those gradual rate increases. As I look forward to January 1st, which is an important effective date for the Group insurance lines, we're seeing persistency tracking actually just a tick or two above expectation, and that's while placing a reasonably substantial amount of rate increase. So we've been there in 2020 and 2021 for our clients. We've been delivering through a really challenging period of time and it's gratifying to see them stick with us.

Jimmy Bhullar, Analyst (JPMorgan)

Okay. Thank you.

Richard McKenney, President & CEO

Thanks, Jimmy. We'll try to keep to one question and one follow-up so we can get through more participants.

Operator, Operator

Thank you. The next question is Tom Gallagher from Evercore ISI. A reminder: one question and one follow-up. Tom, please go ahead.

Tom Gallagher, Analyst (Evercore ISI)

I got those instructions, thank you. My main question is on Disability Benefit ratio, the 79 that you had this quarter, should we — is that a good placeholder into Q4 or is there anything that you thought was not trendable in that result?

Michael Simonds, Chief Operating Officer

Hey, Tom, it's Mike. Yes, I mean I've certainly given up trying to predict exactly what's going to happen in any given quarter. But as we look at the elevation of COVID-related short-term disability being the primary driver of that elevated group disability overall, it feels like that's a reasonable placeholder as we go into the fourth quarter. We've mentioned it a little bit, but you see a bit of elevated incidents on the LTD — that's a watch item for us. Fortunately, the recoveries from the benefits team that we've got in-house have been above expectation and have offset that new claim incidence. But it is higher than our longer-term expectation. And until the external environment settles a bit, that's a reasonable placeholder.

Tom Gallagher, Analyst (Evercore ISI)

Okay, thanks. And then my follow-up is just trying to do some of these calculations for LDTI. I realize you're not going to quantify the overall expected impact at this point, but can you answer one question for me? Your active life reserve liability duration on your long-term care block, would that be closer to 15 years, 20 years, 25 years? Can you give me some help on that one?

Steven Zabel, Chief Financial Officer

Tom, we don't really disclose that level of detail on duration for LTC. I know where you're going and so I'd reiterate something that I said in the script: our view would be that the vast majority of the impact that we're going to have in adoption is really the differential between our investment strategy — whether it's around liquidity, the duration of our liabilities and what types of assets match up well with that, the credit profile of our portfolio — and how that differs from a single-A type of portfolio. That differential will drive the majority of the impact upon adoption.

Tom Gallagher, Analyst (Evercore ISI)

Got you. Okay. Thanks.

Steven Zabel, Chief Financial Officer

Thanks, Tom.

Operator, Operator

Thank you. Our next question is from Erik Bass from Autonomous Research. Go ahead, Erik.

Erik Bass, Analyst (Autonomous Research)

Hi, thank you. Mike, maybe want to come back to the Long-Term Disability claims incidents that you mentioned and saw this quarter. Do you have any sense of what's driving this and are there any signs long COVID impacts beginning to emerge and causing STD claims to move into LTD claims?

Michael Simonds, Chief Operating Officer

Thanks for the question. There's a little bit of that certainly with long COVID, but that's not really the driver of the LTD incident. I'd say it's more generally claims coming in where there is pretty aggressive change in the external environment. These are claim types that we were actually pretty good at managing. We've got really strong vocational and clinical resources that we apply to those. We're increasingly weaving really good data and analytics to help sharpen the focus of those resources on the individuals where we're going to see the best impact from a recovery point-of-view. So we've certainly got an unsettled period to weather here but I feel really confident about the team and our ability to get back to our long-term ranges as the environment settles.

Erik Bass, Analyst (Autonomous Research)

Got it. Thank you. And then for Group Life COVID claims was the sensitivity to population deaths pretty consistent across the quarter? Or have you seen any of the percentage of claims or the average claim size continued to trend higher?

Steven Zabel, Chief Financial Officer

Yes. Early in the pandemic, our average claim size was right around $50,000 per claim. There were some months that were even a little less. Now it's pretty consistent. When vaccination started to roll out, our average age started to come down dramatically. Last quarter, our average claim size was about $55,000, and this quarter it was a little over $60,000 — consistent with the age demographics of those in our claim population.

Erik Bass, Analyst (Autonomous Research)

Got it. So basically we should watch the percentage of population being in the working-age cohorts as a driver of severity?

Steven Zabel, Chief Financial Officer

Yes. And going into the fourth quarter, the level of vaccinations will probably remain fairly consistent with what we've seen. It may tick up a little bit, but that $60,000 range is probably a good estimate, maybe a tick higher. I don't see it dramatically increasing from where it is today, but we'll have to see how it plays out.

Erik Bass, Analyst (Autonomous Research)

Got it. Thank you.

Operator, Operator

Thank you. Next question is from Tracy Benguigui from Barclays. Tracy, please go ahead.

Tracy Benguigui, Analyst (Barclays)

Thank you. Good morning. Just a follow-up on Ryan's question on the PDR. You mentioned that your acceleration could see completion as early as the end of 2024 — will that be a straight-line amortization or will that be lumpy because it's incremental to get there? I'm getting at whether you'd have an annual run-rate of accelerated pre-funding that you're thinking about?

Steven Zabel, Chief Financial Officer

Yeah. I would say the acceleration of the recognition will follow pretty closely with the level of share buybacks that we execute in any one period — that'll be a fairly consistent number. The PDR itself is calculated after the end of every period and that isn't necessarily straight line; it kind of lags over time. But the additional incremental capital that we're going to put behind that in the recognition of the PDR will be pretty consistent with the buyback levels.

Tracy Benguigui, Analyst (Barclays)

That's very helpful. And just another question on LDTI on future disclosure. You've talked in the past about cash flows. Will we see more details on that or any new non-GAAP metric that better aligns with the way you view your business economically speaking?

Steven Zabel, Chief Financial Officer

It's a good question and it's something we'll have to work out. Clearly, the disclosures we are going to have to make are pretty prescriptive. I would also say that the SEC will likely be clear that this accounting pronouncement needs to be applied and reflected in the earnings that you report. I'm not sure there's going to be a lot of leeway for non-GAAP adjustments. For us, we'll need to make sure people understand the cash flow generation of the business because that drives the health of the business and the capital we have to deploy to grow and return capital to shareholders. We'll continue to stress our capital generation and deployment model, but we'll have to follow the accounting guidance as it plays out.

Tracy Benguigui, Analyst (Barclays)

I totally got that. I guess if I were to make a parallel on IFRS 17, I think there's introduction of new supplementary metrics. So when it changes the accounting rules, it adds an additional lens for speaking about performance.

Steven Zabel, Chief Financial Officer

Yes. I think this will evolve how the industry explains the economic performance of the business. We'll stay close to what our peers are reporting and how they're addressing it as we go towards adoption.

Tracy Benguigui, Analyst (Barclays)

Okay. Great. Thank you.

Richard McKenney, President & CEO

Thank you, Tracy.

Steven Zabel, Chief Financial Officer

Thanks, Tracy.

Operator, Operator

Thank you. Our next question is from Humphrey Lee from Dowling & Partners. Humphrey, please go ahead.

Humphrey Lee, Analyst (Dowling & Partners)

Good morning. Thank you for taking my questions. My first question is related to the reserve update on recoveries for disability. I understand that as a GAAP exercise for this quarter, but as you go through your fourth-quarter cash flow testing, could you be updating the recovery assumptions for your LTD as well and if that is so, could that have capital benefits in your cash flow testing?

Steven Zabel, Chief Financial Officer

Humphrey, it's Steve. It's probably a little premature to really discuss our year-end cash flow testing and asset adequacy. Also, the claim reserve construct under a statutory basis is a little different than GAAP — GAAP is strictly best estimate. There are some prescriptive things to think about within statutory reserving, as well as the minimums we need to consider in addition to the overall legal entity cash flow test results. We'll work through that as we get closer to year-end. If there's an update there, we can talk about it when we report our fourth-quarter results.

Humphrey Lee, Analyst (Dowling & Partners)

Okay. Got it. And then just another follow-up question on LTD. I understand that there's some long COVID effects, but as we think about the cases for COVID and how they trended maybe nine to twelve months ago, do we see more spillover from Short-Term Disability to Long-Term Disability in the coming quarters?

Michael Simonds, Chief Operating Officer

Humphrey, it's Mike. Similar to previous responses, it's tough to predict quarter-to-quarter. But you are right that LTD operates with a bit of a lag. So as STD remains elevated, we would expect, using normal flow-through rates, sustained pressure on LTD incidence over the next few quarters. A lot of that depends on the external environment. The two levers we have: first, the best benefits team in the business — we've continued to invest there and feel very good about recoveries; second, pricing — we've been feathering in pricing and will continue gradually. That will also help the loss ratio.

Humphrey Lee, Analyst (Dowling & Partners)

Thank you.

Richard McKenney, President & CEO

Thanks, Humphrey.

Operator, Operator

Thank you. Our final question is from Josh Shanker from Bank of America. Josh, please go ahead.

Josh Shanker, Analyst (Bank of America)

Yeah, thank you. This is going to be a process question. What is the difference between a paid claim and an incurred claim in long-term care today? When we look at the good results in long-term care mortality and whatnot that obviously plays into lower paid, and you had taken assumption review in the third quarter and not including any of the current data. I'm trying to figure out how sustainable low mortality could be on near-term results found in assumption reviews. What's the relationship between incurred claims and paid claims right now?

Steven Zabel, Chief Financial Officer

Hey, Josh, it's Steve. I'll try to cover that. There were a few points in your question so let me give some history on the LTC block and experience through COVID. Early in the pandemic, we saw very low submitted and paid claim incidents. I'd say that has pretty much normalized. So where we sit today, the levels of both submitted and paid claims for LTC are fairly consistent with what we might have historically seen. When it comes to mortality, early on we saw very acute impacts on claimant mortality. If you go back to the second quarter of last year, our excess claimant mortality was somewhere around 30%. That graded down over time to about 15% excess claimant mortality, and where we've sat for the last couple of quarters is about 5% elevated claimant mortality that may continue for a little bit. I'd say that also is the flip side of what we're seeing on Group Life, where a lot of the mortality now is in younger ages, which doesn't necessarily impact our LTC block. If I step back and relate that to our GAAP reserve assumption review: we do not really view the acute pandemic information as something to layer into our longer-term reserve assumptions. We completed our assumption review update in the third quarter. We really did not impact and do not anticipate impacting our GAAP reserves for Long-Term Care this year. We feel good about those liability assumptions. Looking forward, we may continue to see some elevated claimant mortality in the block and I would anticipate normalized submitted and paid claim incident volumes. I do think we may continue to see a slightly lower loss ratio, favorable to our expected 85% to 90% long-term assumption range, but I also expect that when we get on the other side of this we'll be back in that 85% to 90% range.

Josh Shanker, Analyst (Bank of America)

Okay. So I probably have the data to track it, but does the incurred loss excluding reserve assumption reviews pretty much track with the paid loss trends? Are they related if I try and put one over the other?

Steven Zabel, Chief Financial Officer

I'm trying to get at whether you mean submitted claims versus paid claims or just timing. But I would say we haven't seen a difference in the relationship between submitted, paid, and incurred claims over this period. They've kind of trended the same and are both back to more normalized levels currently.

Josh Shanker, Analyst (Bank of America)

And at what point will you interpolate COVID data into your assumption review?

Steven Zabel, Chief Financial Officer

To date, we've pretty much excluded it. It's hard to draw long-term expectations based on the last 18 months. We need to get back to more normalized experience and then reassess. But today, we really haven't factored COVID acute impacts into how we think about longer-term experience.

Josh Shanker, Analyst (Bank of America)

Fantastic. Thank you.

Richard McKenney, President & CEO

Thanks, Josh.

Operator, Operator

Thank you. We currently have no further questions. This concludes our call. I will now hand over to Ric McKenney for any further comments. Thank you.

Richard McKenney, President & CEO

Very much, thank you, Robin. I'd like to thank everybody for joining us today. I'd also like to recognize employees that are listening in today. The senior team is most appreciative of everything you're doing to help us fulfill our purpose and I just want to recognize you all today. So with that, we'll wrap up this call. I look forward to talking to you through the fourth quarter. Thanks everyone.

Operator, Operator

Thank you, everyone. You may now disconnect your lines.