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Unum Group
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Hello, and welcome to the Unum Group 1Q 2023 Earnings Results and Conference Call. My name is Elliott and I'll be coordinating your call today. [Operator Instructions]
I will now hand over to Matt Royal, Head of Investor Relations. The floor is yours. Please go ahead.
Great. Thank you, Elliott. Good morning, and welcome to the first quarter 2023 earnings call for Unum Group. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results may differ materially from 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 section 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, 2022.
Our SEC filings can be found in the Investors section of our website at www.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 that may be non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website in the Investors section.
Results discussed in today's call reflect the first quarter following the company's adoption of the Long Duration Targeted Improvements accounting pronouncement or LDTI. Unless otherwise noted, all comparisons to historical results are based on recast financials which we furnished in March of this year and can be found in the Investor's section of our website. As we've described LDTI applies only to GAAP based financial statements and has no economic, statutory accounting or cash flow impacts to the business.
Yesterday afternoon, Unum reported first quarter 2023 net income of $358.3 million or $1.80 per diluted common share, an increase from $240.4 million or $1.18 per diluted common share in the first quarter of 2022. Net income for the first quarter of 2023 included the after-tax amortization of the cost of reinsurance of $8.7 million or $0.04 per diluted common share. The after-tax impact of non-contemporaneous reinsurance of $5.7 million or$0.03 per diluted common share, and a net after-tax investment gain on the Company's investment portfolio of $0.1 million or de minimis amount per diluted common share.
Net income in the first quarter of 2022 included the after-tax amortization of the cost of reinsurance of $10.6 million or $0.05 per diluted common share, the after-tax impact of non-contemporaneous reinsurance of $9.8 million or $0.05 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.
Excluding these items, after-tax adjusted operating income in the first quarter of 2022 was $372.6 million or $1.87 per diluted common share an increase from $271.4 million or $1.33 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; and Tim Arnold, who heads our Colonial Life and Voluntary Benefits Lines.
Now I'll turn it to Rick for his opening comments.
Great. Thank you, Matt. We are pleased to be with you this morning. As we look to the results of the first quarter, I would like to place that in the context of a company that continues on a positive trend, serving more than 180,000 employers and 45 million people across our markets. The environment remained uniquely positive for us on multiple fronts as macroeconomic factors at play breaks favorably for our business.
To highlight, higher interest rates, wage inflation, and a continuing tight labor market are all positives. Also when we look to more current events around credit and balance sheet management, our credit portfolio has performed very well and we have ample liquidity across our franchise, compounded by the illiquid nature of our policies. It's through that positive environmental lens that I'd point you to our first quarter results with very strong start to 2023.
After-tax operating earnings for the quarter were $372.6 million, an increase of 37% from the same time last year. Double digit sales growth across our core operations and earned premium growth near 4% on a constant currency basis highlights the ongoing momentum of our franchise. As a result, we are incorporating the first quarter results and expectations of continued good performance of our group disability business into our view for the full year 2023.
This pushes our 2023 EPS growth expectations to be in the range of 20% to 25% over last year's historically reported results and 10% to 15% over our recasted 2022 results under LDTI, which as a reference point was $6.75. Across our business the need for what we do has never been more evident and the breadth of our benefit offerings and the differentiation of our digital capabilities have positioned us well to continue our growth trajectory.
A major part of our success story is our deep connections with employers and customers. Our nearly 11,000 employees are focused not only on providing a high quality experience, but on building meaningful relationships with the individuals we help and the companies we serve. Our sales results for the quarter show that this approach continues to resonate with customers. Across our core operations sales were up nearly 19% on a constant currency basis.
Growth in our group lines was particularly strong as Unum U.S. saw a 22.5% jump and our International business was up nearly 47% in constant currency. Persistency while mixed remained within our expectations across our lines and along with our strong sales results drove higher premiums. For Unum U.S. a key driver of our long-term growth is our new total leave offering. This is a transformational update to our absence management business, which we have been for -- in for the last two decades.
We're also seeing healthy gains through HR Connect as the ability to deeply integrate our benefits into our clients' talent management systems and it continues to be a differentiator for us. Internationally our business fully supports our growth picture with some very strong results. Our businesses in the UK and Poland have delivered good top line growth over the last several years in fact, and as a result, premium levels are now more than 30% higher than the first quarter of 2019 on a constant currency basis, showing good sustained top line not only in this period, but over the last several years.
And turning to Colonial Life, as articulated at our outlook meeting earlier this year, the pace of growth has been slower for the segment. This is evidenced by relatively flat premiums in the first quarter. Sales growth was also a more modest 2.7% this quarter. But make no mistake, we think Colonial Life is a tremendous franchise. These are solid results off of a good year ago quarter and we're encouraged by some early successes in key initiatives at Colonial Life that we believe will drive growth as we move through 2023.
As an example, we launched Gather [ph], our new technology platform for small business, which provides opportunity for us as we look to enhance benefits enrollment and administration. We have also introduced an expanded portfolio available to our Colonial Life agents to offer a more comprehensive set of products to meet the needs of small business.
Looking to the company-wide product returns, we continue to see attractive margins as our multi-year discipline around pricing has driven favorable benefit ratios across our businesses. On a consolidated basis, ROE was a healthy 13% fueled by over 20% return in our core operations. Coupled with our strong top line results that I referenced earlier, before tax operating earnings and return on equity across our core operations were at or above the top end of our outlook ranges.
And from a market perspective, while always an area for attention for us, the overall stress that we've seen across financial services has caused heightened awareness of management of balance sheets for both liquidity and asset quality. These are areas we have managed well, thanks to the prudent approach of our team and are focused on long-term returns. We have avoided exposure to sectors that have been in the news of late, which have allowed us to remain focused on improving our book yield and mitigate balance sheet risks through our ongoing hedging program. Activities that enable us to generate predictable investment returns that our businesses and ultimately our customers count on.
The results across the board have solidified our strong capital position that gives us ongoing financial flexibility. We have maintained capital metrics that are historically among our highest levels and our performance in the first quarter provides additive strength as we have begun the process to accelerate funding of the premium deficiency reserve, which we will complete by the end of the year. While doing so, we will continue to reinvest heavily in our business, repurchase our shares at an increasing rate in the second half of the year and contemplate an increase in our dividend in the coming weeks.
I'm proud of what we've accomplished as we extend the momentum we've seen into 2023. Our purpose drives us to reach more people, a goal that is aided by our Digital First approach and favorable operating environment as we advance our market leading positions.
Before I turn it over to Steve to provide more details about our results, I would note that the first under LDTI as Matt referenced, and I appreciate the effort of our team preparing us for this change. The results under this basis as well as on a statutory basis, reflect the strong underlying fundamentals in our business.
Steve?
Great. Thank you Rick, and good morning everyone. As Rick described, the first quarter was a very good quarter for the company as we benefited from strong operating performance in many parts of our business, including Group disability where trends are supporting our full year after-tax adjusted operating EPS outlook increase. Sales were strong on a constant currency basis with consolidated sales growth of 18.9% across our core operations, highlighted by 22.5% growth in Unum U.S. and 47% for Unum International.
Core operations premium growth of 3.9% in the first quarter on a constant currency basis was higher than anticipated at this point in the year. Despite some variation across lines, persistency showed nice stability and improvement in areas where our technology has the opportunity to drive an excellent customer experience such as our growing leave business.
Let's review our quarterly operating results across the segments beginning with Unum U.S. Adjusted operating income in the Unum U.S. segment increased to $312.5 million in the first quarter of 2023 compared to $168.3 million in the first quarter of 2022. Results across all product lines improved year-over-year with our Group products seeing the biggest improvement driven by claim trends in Group disability and the shift from a pandemic to an endemic COVID environment for Group Life and AD&D.
The Group disability line reported another robust quarter with adjusted operating income of $145.7 million compared to $62.8 million in the first quarter of 2022 with the increase driven by improved incidents, strong recoveries, and a higher discount rate on new claims. These drivers contributed to a benefit ratio of 60% for the first quarter.
We are very pleased with how this block is performing and have now experienced four consecutive quarters of benefit results below our historical expected range. A key contributor to serving our clients is helping them get back to work, and this recent experience continues to demonstrate that we are in an extremely supportive return to work environment. Given this, we now expect the group disability benefit ratio to sustain in the low sixties for the remainder of 2023.
Results for Unum U.S. Group life and AD&D rebounded from the first quarter of last year with adjusted operating income of $40.1 million for the first quarter of 2023 compared to a loss of $10.6 million in the same period a year ago. The benefit ratio decreased to 75% compared to 87.9% in the first quarter of 2022 as COVID related mortality decreased significantly to endemic levels.
Adjusted operating earnings for the Unum U.S. supplemental and voluntary lines in the first quarter were $126.7 million an increased from $116.1 million in the first quarter of 2022. The increase is driven by strong underlying benefits experience in both the individual disability and the voluntary benefits lines.
Turning to the premium trends and drivers, natural growth, a tailwind for our group products continued to contribute to strong year-over-year premium growth and supported the growth of 4.3% in Unum U.S. Sales trends for Unum U.S. were also solid with sales increasing 22.5% year-over-year in the first quarter. Total group persistency of 89.1% for the first quarter remained generally stable with mixed results within our supplemental and voluntary lines.
Moving to Unum International, the segment experienced exceptional overall earnings results with adjusted operating income for the first quarter increasing to $38.4 million from $25.9 million in the first quarter of 2022. Adjusted operating income for the Unum UK business improved in the first quarter to £31 million pounds compared to £18.6 million pounds in the first quarter of 2022. The reported benefit ratio for Unum UK decreased to 68.5% in the first quarter compared to 81.2% in the same period a year ago.
You may recall a portion of our policies in the UK have an inflation rider, which are backed by inflation-linked gilts. The inflation-linked benefits are capped, but the income we receive from the linked gilts is not, which benefits earnings levels in periods of very high inflation. When removing direct inflationary impacts, Unum UK adjusted operating income was in the mid £20 million range reflecting strong underlying performance.
On a dollar basis premium income for our Unum International business segment increased slightly on a year-over-year basis, but was dampened by exchange rate movements. Premiums continue to show strong growth on a local currency basis. Unum UK generated premium growth of 9.1% on a year-over-year basis in the first quarter, while our Poland operation grew 19%. Both businesses continued to generate positive levels of year-over-year sales growth with Unum UK up 37.8% and Unum Poland sales up nearly double in local currency.
Next, adjusted operating income for the Colonial Life segment was $93.9 million in the first quarter compared to $102.9 million in the first quarter of 2022 with the decrease driven by higher total expenses. The benefit ratio of 53% compares to 53.2% in the year ago period, and though improved was higher than our expectations due to volatility in the cancer and critical illness block, which was partially offset by improving life experience.
Premium income of $429.5 million finished slightly below prior year, primarily driven by lower persistency, partially offset by higher prior period sales. Premium income was higher than our expectations and is on the full year growth trajectory that we laid out in February. Sales in the first quarter of $106.8 million increased 2.7% from prior year, primarily driven by robust agent recruiting and productive small case sales, partially offset by a decrease in new account sales across to other sized segments.
In the Closed Block segment adjusted operating income excluding adjustments related to the Closed Block individual disability reinsurance transaction was $58.2 million compared to $78.6 million in the first quarter of 2022. The decline was primarily due to a year-over-year decrease in the segment's miscellaneous net investment income of $21 million. For benefits experience, the LTC interest adjusted loss ratio was 86.6% compared to 82.2% in the year ago period, driven by higher claims incidents. The interest adjusted loss ratio on a rolling 12-month basis was 84.7%.
So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $33.5 million compared to $40.4 million loss in the first quarter of 2022, primarily driven by higher investment income on shorter duration corporate owned assets, a dynamic that should continue while short-term rates remain elevated.
So then moving now to investments, we continue to see a good environment for new money yields and risk management. Purchases made in the quarter were again at levels above our earned portfolio yield, which was 4.35% in the first quarter. In addition, we are pleased with the ongoing progress with our interest rate hedge program for LTC. Since inception of the program last year, we've entered into $1.6 billion of treasury forwards, which include $772 million this year.
Miscellaneous investment income decreased in the first quarter to $15.8 million compared to $41 million a year ago as both traditional bond call premiums and alternative investment income declined. Income from our alternative invested assets was $14.3 million, below our longer-term expectation of $20 million to $25 million, but was in line with our guidance from last quarter.
Looking ahead, alternative asset income will remain directionally correlated with market conditions. As has been the case for the last several quarters, traditional bond call activity remained low in the first quarter and we do expect this to persist following the run-up in interest rates experienced in 2022.
So as we discussed at our outlook meeting, our investment team thoughtfully constructs our investment portfolio to manage through cycles and we have a long track record of outperforming downgrade and default benchmarks. Our management of commercial real estate investments is no different. Following a rigorous origination process, we have established a multi-tiered approach to monitoring loan performance and valuations.
Our commercial real estate exposure is also substantially underweight compared to industry averages. Commercial mortgage loans of $2.4 billion account for approximately 5.5% of our overall invested assets with an average LTV of approximately 60% while CMBS exposure is limited to a single $2 million investment in the UK, which carries a double A rating. Within the CML portfolio, office exposure represents 18% of our portfolio with LTVs also approximately 60%.
Refinancing risk within office is also very low. We have two office loans maturing before the end of 2024 with a total book value of approximately $30 million. Our low level of overall real estate exposure, which is heavily weighted to CM1s, allows us to thoughtfully seek attractive opportunities that might emerge during times of dislocation.
I'll end my commentary this morning with an update on our capital position. As expected, our capital levels are well in excess of our targets and operational needs offering tremendous flexibility. The weighted average risk-based capital ratio for our traditional U.S. insurance companies strengthened further to approximately 425% and holding company liquidity remains robust at $1.3 billion. Both of these metrics are expected to fluctuate throughout the year with both ending the year around our expected levels of 400% RBC and $1.5 billion of holding company liquidity.
Capital metrics did benefit from the strong start to the year for our statutory results. Statutory after-tax income was $276.2 million for the first quarter, putting us on pace for generating over $1 billion for the year, which translates to strong free cash flow generation at the holding company. Our strong cash generation model drives our ability to return capital to shareholders and in the first quarter we paid $69.2 million in common stock dividends and repurchased 1.3 million shares at a total cost of $53.6 million.
As Rick mentioned, our plans for 2023 include increase in the pace of share repurchases as well as the level of our common stock dividend. Other capital plans such as fully recognizing the premium deficiency reserve by year end also remain on track. And as a reminder, we will contribute capital into our Fairwind subsidiary over the course of the year and began this process with capital contributions of $200 million into the Fairwind subsidiary in the first quarter.
Full recognition of the premium deficiency reserve this year will result in significant excess margin over our current best estimate and support our plans of not contributing capital on the Fairwind fair wind, as we discussed at our outlook meeting. So we could not be more pleased with our strong capital position and flexibility as a fundamental trend across our businesses.
The expected group disability performance for the remainder of the year significantly strengthens our earnings power and supports our updated outlook. And so to reiterate, we now expect an increase in after-tax adjusted operating income per share of 20% to 25% over 2022 on a historically reported basis or an increase of 10% to 15% on a consistent basis under LDTI.
So now I'll turn the call back to Rick for his closing comments and I look forward to your questions.
Thank you Steve, and thank you all for taking the time to join us this morning. As you've heard, we're very pleased with a strong start to the year and the momentum it creates as we look to execute on our growth strategy throughout 2023. Broad-based execution and taking care of our customers is leading to a strong top line, good returns and capital generation that provides substantial financial flexibility. The team is here to respond to your questions, so I'll ask Elliot to begin the Q&A session.
Thank you. [Operator Instructions] Our first question today comes from Suneet Kamath from Jefferies. Your line is open.
Thanks. Good morning. I just want to start on the group disability loss ratio. I think you said that low 60% range is sort of sustainable. I was just hoping you could unpack that a little bit in terms of what the underlying drivers are, because I don't believe we're seeing this level of sort of year-over-year improvement from some of the other companies. And sort of relatedly, I'm assuming you're going to expect that to revert at some point to the longer-term ranges, but just given the pricing dynamics of two to three year guarantees, shouldn't there be like a tail benefit associated with this at least for the next few years?
Great, Suneet. Good morning and thanks for the question. I think I'd start off with just saying that we're very happy with the results that we've seen in group disability. Coming towards the end of last year and into the beginning of this year, I think it's broad based in terms of the positives are swinging. And I'll turn over to Mike and Steve to talk a little bit more because this was a big driver in the quarter. It changed our outlook for the year because of the good performance we've seen. Very happy about how it's influenced the overall, but there's a lot to unpack there. So, hey, we'll start with Mike.
Thanks and good morning, Suneet. As Rick said, we were starting to see favorability on a number of claim trend fronts towards the back half of last year, and we've seen those continue here in the first quarter and I'd just start with new claim incidents. We had gotten back into that pre-pandemic range and really what we've seen emerge here through the start of the year is, kind of sort of continues to move favorably down towards the bottom of that of that range. And when we look forward most of our LDTI claims are coming through the short-term disability product first. That gives us a little bit of lens into the pipeline. And so again, we feel like some of that favorability, which is quite broad based on new claim incidences, is likely to continue as we go through the balance of the year.
And then the other piece, recoveries just continue to improve. We do think the environment is one that is conducive to helping people get back to a productive lifestyle. We also feel very good about not only a fully staffed benefits organization, but one that's experienced very low turnover from a historical point of view. So the proficiency is there across our benefit specialists, the clinicians, the vocational specialists, our analytic teams are all working together in concert, which the sum total of that says we're likely to end in the mid-60s that we were forecasting prior that more likely to stay in this low 60 range as well.
And then just quickly on the market dynamics, you are right. Just in general, our philosophy is one, to make any changes to pricing gradual. We think our clients really appreciate consistency and predictability as they're building their budgets as always and we will keep a close eye on claim trends, other cost factors that go into pricing as well and of course market dynamics. And that's probably a point to end on, which is we do feel good about how we're positioned in the market, strong sales as Rick highlighted 22.5%.
Very often our disability is packaged with life insurance and voluntary benefits. We've seen our HR Connect building our products into the workday. ADP and UKG platforms performed really well over the preceding quarters. And then of course the total leave offering is a differentiator for our disability business. So all those things will factor in and I do expect that any changes that occur are going to be gradual on the pricing front.
Got it. And I don't know if Steve wanted to add anything.
No, probably the only thing I'd add is just to put a bow on the math. We did talk about the cause and effect of what we did with the overall guidance going to the 20% to 25% against the historical basis. That change was driven in its entirety by the change in our benefit ratio expectations for group disability. And we still feel good in aggregate about the rest of the guidance that we gave in February and really have still incorporated that into the new guidance.
Okay, that's helpful. And then I guess my second question is just on that strong sales growth, particularly in Unum U.S. It would seem to suggest to me that you're not seeing any pressure, at least not yet from unemployment or layoffs or anything, but we're reading more and more about that every day. So maybe just some color on the block and any impacts that you could see kind of as we move forward as unemployment starts to pick up if that in fact has happened? Thanks.
Yes, so I think you're raising a broader question. It's been talked about really through the course of the year is what are the recessionary impacts that we might see across the company. And I'll let Mike talk about the top line impacts. But when we think about it, we have been getting lift and so that's been good to grow the block. But we think even in a more difficult slower environment, we'll see some of that top line slowness, but it doesn't really change our trajectory. But Mike, maybe you could talk about what we're seeing across the business from an employment perspective.
Yes, I think that's right. We continue to see a little bit of a tailwind both in terms of our clients adding employees and then that salary increases that are coming through that a number of our products are levered to. When we think about a change in the economic climate, we generally do think on two fronts, first on the top line. And, and even as we sort of think about some different forecasts through the balance of the year, we do still feel comfortable on our top line forecast that we had laid out in that kind of 3% to 5% across all of core ops and 4% to 6% for the Unum brand here in the U.S. So that still is, I think, a really good place for us to be.
And then always we're going to think about potential disability claim impacts that come should unemployment move up, we're going stay very close to that. Again, it is extremely advantageous to have such a strong underwriting and benefits team ready to respond should we need to. And I would just remind folks, we've talked about it before that when we do see a tick up in claim incidents due to sort of environmentally sensitive factors, those come over a period of quarters and you do generally have a line of sight before those start to emerge. And again, we're feeling like the current favorability and disability incidents is likely to continue at least for the balance of this year.
Yes and the only thing I'd add to that Suneet is, when we laid out our expectation on Investor Day, we did have a mild recessionary scenario built into that, which had pretty much GDP relatively flat, maybe just a modest increase for the year actually decreases for the second and third quarter and we did anticipate a tick up in unemployment. So that was really built in to how we built the models at the beginning of the year.
Okay, thank you.
Thanks, Suneet.
[Operator Instructions] We now turn to Tom Gallagher from Evercore ISI. Your line is open.
Good morning. Just a followup on the low benefit ratio in group disability. If I think, and I'm not going to ask you to recast it on the old GAAP. That's sort of where I'm headed on the question though. So in other words, is there some feature of the new LDTI accounting that is flattering that benefit ratio relative to what it would have been under the old accounting? I guess that's my first question. Because I'm thinking about historically you were in the low to mid 70s and now we're at 60, it's a huge difference, is some element of this low 60s driven by the new accounting? That's first question.
Yes. Hey, Tom, it's Steve. I can take that one. I would say generally speaking, it was de minimus. We did have a little bit of upside year-over-year from the discount rate, just the relative discount rates and we noted that in the earnings release. Year-over-year gave us a little bit of an uplift, but it was pretty de minimus. So the majority of the favorability result for the loss ratio is driven by what Mike talked about, incidents and recoveries and that interest rate will fluctuate over time. But I would say that's not the main part of the story.
Got you. So that would have been call it pretty darn close directionally even under the old accounting and you would, I presume, also see a similar statutory benefit?
That's correct.
Okay, thanks. And then just out of curiosity, because I think you are a clear standout among disability carriers, I guess we'll still see what others report this quarter. But are you, if you had to make your best guess for why your performance is so much better right now, is it underwriting? Have you avoided certain sectors where things might be under a little more pressure or maybe you're overweight in some sectors that are really favorable at the moment? Are you seeing differences in case size? Is there any way to sort of unpack why what's, beyond just the mechanics of the underlying claim trends and whatnot in terms of why the experience is looking so good right now?
Yes, Tom, we appreciate you focusing on that. I think I would just say across the franchise, this is something we've been a leader in for many years. And Mike mentioned in his comments, we have a really good team and that matters in terms of our ability from the top of the business to be able to underwrite all the way down through pricing, analytics across the board and then ultimately claim management is a key piece of this business. And so, I'd let Mike unpack it a little bit, but it's -- this is about running a disability business for the long-term. We've been a leader in this space and have a really good team on that front. But maybe Mike, you can dissect that a little bit to Tom's curiosity.
Sure. Good morning, Tom. And we would say in general it's a favorable environment and we would expect it may vary, it certainly would vary a bit carrier to carrier, but overall as an industry it's a pretty positive environment. And as we look at some industry studies that are done periodically, there is generally pretty favorable trend on a couple of these dimensions. That being said, I'd say it is the connectivity between the claim experience we have, how our finance and actuarial teams feed that in, in support of our underwriting teams, field folks that are really good business people and know how to balance growth, profitability and then benefits team very, very tenured in that group and know how to get people back to work. So I'd say it's a balance of internal and external factors for sure.
And just because it is a point of interest, I would say it is broad-based too. So when we break it down and look at sort for instance recoveries by duration of claim or diagnosis, or occupation, or industry of claimant, we're seeing that it's really playing out across a really broad cross section, which again gives us a little bit more confidence that the trade -- that trends will sustain.
Got you. That's helpful. Thanks guys.
Thanks, Tom.
We now turn to Ryan Krueger with KBW. Your line is open.
Hey, good morning. My question was on, first question was on the additional interest rate hedges. Can you frame how that would come through the PDR in a lower interest rate scenario? I think I recall you saying that in the 2.5% 30-year interest rate scenario the prior interest rate hedges had benefited that sensitivity by $150 million. I think you doubled them from where they were at your end. Just curious if we should extrapolate that?
Yes, Ryan, this is Steve. The math and kind of the history that you just went through is accurate and so that is what we had communicated back at Investor Day. The one thing that I would say is depending on where we're hedging and the cash flows that we're hedging within the five-year cycle, it could vary a little bit and probably doesn't straight line. But I think philosophically and directionally you've got it right. The more protection that we can put on that will scale up the protection on downside scenarios that we get. And then just to remind, there's really not a lot of day one impact the premium deficiency reserve itself when we put the hedges on that block of business, but it does provide that downside protection and that's really why we're doing it. It's for risk management. But I think in theory what you described is accurate.
Got it, thanks. And then on free cash flow at the investor meeting, you had talked about $1.1 billion to $1.3 billion of upstream sources of cash flow. Given the more favorable benefit ratio trends in group disability how should we think about the expenses upside to that?
Yes, I would, wait, I'll break that into two pieces. One, when you're thinking about 2023 cash generation, that's pretty much locked in at this point, because it's going to be driven by the dividends that we're actually pooling out of the subsidiaries, which is more based on financial performance last year. Your comment though is spot on around we do think that there probably is upside as we go into the remainder of the year because the over performance that we've seen in group disability will translate in the higher statutory reserves. And you saw that where our run rate is over that $1 billion, that will really be reflected in free cash flow as we get more into next year and we look at our dividend plans in 2024 coming out of the operating companies.
Great, thank you.
Thanks Ryan.
Our next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hey, good morning. I thought I'd just ask about the competitive environment broadly, maybe if you could talk about it broadly and then also particularly for disability. When when I think about sort of rewinding, year, year and a half ago, we were sort of in an environment where it looked like in a lot of products you potentially needed to take price to offset pressures from COVID. And you sort of fast forward to now and maybe some of that price that was put in wasn't necessarily needed in certain products versus others and but we're also staring at a potential recession. So with all these different elements falling into to the pricing, like what is that competitive environment look like right now and how long do you think you can hold on to the favorable results, particularly in disability.
Good morning, Alex. It's Mike. I'll take that one on the pricing dynamics and perhaps what we're seeing from a growth point of view for the Unum brand here in the U.S. And then maybe, Tim, you can comment on voluntary benefits and Mark on International.
I think there are good stories to tell across all the markets. And like we talked a little bit about, certainly, we're sitting in a favorable point from a group disability loss ratio. Very often, that's packaged with life insurance. That life insurance sits squarely to the middle of the range of where we would expect to see that and also with voluntary benefits as well. I feel very much like we are well positioned. Typically, clients are making decisions based on factors that certainly include price, but also the service that you deliver and increasingly the technology that you can bring to bear to make things easier for the HR teams and ultimately for the employees.
And our total leave offering and our HR Connect offering are helped really differentiate us in the mid and large case markets for the group lines of business, and you see that reflected in the sales results to date and again, an accelerating top line forecast for us as we go through the year here. So we will stay very close, make sure that we're delivering really good strong value to clients, but I feel very good about how we're positioned. And Tim, maybe you can talk a little bit about voluntary?
Yes. Thanks Mike and Alex thanks for the question. I'll start with the Unum side for VB. We feel great about the value proposition. We had a fantastic first quarter, which is the largest sales quarter for Unum on the VB side. We have huge opportunities to continue cross-selling VB into our existing group employer paid book. We also have opportunities to add more voluntary benefits to our HR Connect platforms. And we have an outstanding distribution system with very strong broker relationships. So we feel great about our opportunities on the Unum VB side. For Colonial Life, clearly, it is a competitive marketplace, but we have a number of differentiators that we believe serve us extremely well going forward.
I'll start with the distribution system, more than 12,000 independent agents representing Colonial Life every day with a unique ability to get at small clients, especially, but also Colonial Life continues to do extremely well in public sector where we had strong growth in the first quarter, just had a bit of a challenging quarter overall. Our direct sales were up nicely in the first quarter as well. And in addition to that distribution system, we're extremely excited about Gather [ph]. Rick made some comments about Gather [ph] in his opening comments, an HR tech platform that we can make available.
In the small case market, especially that's really creating significant opportunities for our distribution team. We're excited about the opportunity to distribute Unum Group employer paid products in certain market segments with the Korne [ph] life distribution team. And we're also really excited about some investments we began about six years ago in an agent productivity application that we are using at Colonial Life to really improve the effectiveness and success rates of our agents. So, very competitive market, as you pointed out, Alex, but we like our value proposition on both brands for VB. I'll turn it over to Mark.
Thanks, Tim. What I would say is in both the UK and Poland, we've definitely seen rising demand for the products post pandemic particularly the group risk products in Poland and obviously the UK business, which is all group risk, much more rational, sustainable pricing being demanded by brokers less inclined to be running towards the best deal, a lot more focus on the value-added services. So we launched Help@hand 360 in the UK, which is a high value-added employee proposition.
And the other thing that's consistent in the selection is claims management. And again, that's a real strength of our franchise, particularly in the UK where we're consistently ranked as the best for claims. And being a broker-led business in the UK, a big focus on improving the broker experience has seen our satisfaction rise here and us generally being rated number one or number two in the market. And I think that's what's being behind what has been a 38% growth between sales in the UK and 107% growth in Poland.
So Alex, it's Mike again. So hopefully, you get a sense really across our markets about sort of the confidence that we have in our positioning. We operate in competitive markets to be sure. We haven't seen any big moves from any particular competitors. And in general, we're pretty enthusiastic about what we've been doing to invest in our people and in our differentiating technology over the last year or so, and we're starting to see that emerge in terms of that accelerating top line.
Got it. Thank you. The second question I had is on capital management. When I think about the strength of the statutory results where the RBC ratio is getting to the additional hedges, maybe giving you a little more confidence about the range of outcomes and getting closer to a point where you're going to have a lot more flexibility with the voluntary contributions coming down. Maybe you could provide just a broad update on how you're thinking about capital management and what your priorities may be as we get closer to year-end?
Yes, Alex, talking about the overall capital management, I don't think it's changed dramatically since we were with you at Investor Day. We were very pleased with the first quarter. And as you said, it does -- it's additive from a capital generation perspective from what we're doing, but the plans for the year in terms of reinvesting in our business, continuing to fuel that growth engine that Mike talked about across all of our franchise is critically important, and we're going to continue to put money there. We've talked about funding of the PDR. We've started that process over this quarter. We're going to keep doing that.
I think when you think about our capital deployment over the course of the year, that is a primary use. So back at Investor Day, we told you we'd be putting $800 million to $900 million there to make sure that we're looking out over the course of the next few years and having that being fully funded and not needing to put more capital there.
And then when you think about redeploying to investors, continues to be important. We mentioned that we're going to increase the pace of share repurchase in the second half of the year by about 50%, about $75 million a quarter starting in the second half of this year. And then dividend is always critical. So very happy with the results of where we are, what we have, what the generation looks like on a statutory basis, but I think our plans are, we're going to stay pat for now as we continue to work through that, but obviously, thoughts of flexibility as we get towards the end of the year and start to look towards plans in 2024.
Thank you.
Our next question comes from Wilma Burdis from Raymond James. Your line is open.
Hello, good morning. Is there an interest rate level at which you would consider cutting back the LTC hedging or is it more to be used as a tool to get some certainty in the expected investment yield for LTC cash flows?
Wilma, its Steve. Yes, we don't really have a number that we're looking at. It's kind of an on/off for this program. We think it's a great program and a pretty broad range of interest rates, to be honest, because clearly, we're looking to protect the downside. And as we went through, obviously, some pretty depressed interest rates over the last 10 years we view it as a really good tool and so we're not giving any guidance around what the floor of our program would be. We're just really happy with where rates have been, say over the last year or so and we're very happy with where we've been able to lock in rates through that period of time through our hedging program. So we'll proceed with the program, continue to look for opportunities and just carry that program forward.
Yes. Wilma, I'd just add too, and just to be clear, we think about the longer end of the investment curve. So as you see a lot of volatility even with announcements that will come out today, those are really not what we're focused on. The hedging is focused on the long end of the curve.
And then can you talk a little bit about the coal benefit ratio? It seems like the cancer block had a little bit of noise. Should we expect the benefit ratios to kind of normalize in the short-term?
Tim?
Yes. So the Colonial Life benefit ratio in the first quarter was impacted by volatility in the cancer and critical illness line. That line tends to be a little bit more volatile. We actually saw favorable volatility, I would call it in 2022, so it bounces around a little bit. We continue to believe that the long-term range for the benefit ratio for Colonial Life is what we shared at Investor Day in the 47% to 50% range.
Great. Thank you.
Our next question comes from Erik Bass from Autonomous Research. Your line is open.
Hi, thank you. I was just hoping if you could talk a little bit more about the Colonial business and sales and persistency trends. I mean it sounds like you still expect to hit the 1% to 3% premium growth target for the year. So just hoping you can give us a little more color on what's giving you the confidence there?
Yes. Erik, this is Tim. Thanks for the question. We see a lot of trends that are moving in the right direction for us on the Colonial Life side. I mentioned some of the differentiators earlier with Gather [ph] and with cross-brand, what we call cross-brand sales and Agent Assist. I didn't really comment on the growth that we're seeing in recruiting the very positive developments there. So you probably remember, fourth quarter of last year, we saw recruiting growth 22%. In the first quarter of this year, recruiting was up over 33%. Sales from new reps are up 14% in the quarter, and we're seeing that positive momentum continue into the second quarter.
We've got about 6% net growth in sales managers who are 10/99 [ph]. So we see a lot of really positive momentum in the infrastructure. That, coupled with the differentiators that we talked about earlier, gives us a lot of confidence that we're going to be able to hit our annual goals. First quarter is one of the -- unlike Unum, first quarter is one of the lower quarters in sales for Colonial Life and fourth quarter is the bigger quarter. So as the momentum builds, we see an opportunity to continue to grow.
The other thing that's unique about first quarter comparisons, in 2022 Colonial Life had a really big first quarter with 15.3% sales growth. So this was the toughest comparable we'll have. In 2023, things get a bit less challenging from a comparable perspective from here. So a long way of saying we are confident in what we shared at Investor Day for sales growth. We think on the persistency side, most of that challenge in the first quarter was large case commercial. We think that that's going to smooth out over the balance of the year.
Great. Thank you. And then maybe just turning to International, I think you commented that kind of stripping out the inflation benefits earnings would have been in kind of the mid-£20 million range. Is that kind of the right base to think of going forward? And given how growth has accelerated in recent quarters, should we think that will trend up from there over time?
It's Mark here. Yes, we are really pleased with the performance of the international business and the UK in particular. As we touched on earlier, sales are up 40%, premiums are up 9%, and earnings this quarter at 31%. But as you say, that includes some benefit from the inflation, as Steve said in his covering comments. We see something in the 20 million to 25 million range being a good place for us to aspire to be over the course of this year. And then we would hope that as the investments we're putting into the business come through, we would hope in the coming years, that would be on an upward trend from there as well.
Thank you.
Our next question comes from Wes Carmichael from Wells Fargo. Your line is open.
Hey, good morning. First question was just on group disability and maybe on recovery trends and you're seeing some favorability there. But just wondering if you have any evidence or any thoughts on kind of external factors impacting recoveries in terms of either work from home or wage inflation or the tight labor market and how you might expect recoveries to trend through the balance of 2023?
Hey Wes, it's Mike. Thank you for the question. And you're asking a lot of the questions that we ask all the time as well as just really digging in and understanding what underlies the recovery trend. And I'd say similar to what we're talking about on incidents, it's quite broad-based. And so when we look at things like manufacturing, service, hospitality, places where you need to be physically present, we're seeing really good recovery trends there as well as office based in places that might lend itself to more hybrid or work from home as well. And I do expect these are big macro trends that they will play out over long periods of time.
So I'm not sure that the story has been completely written yet on how some of the changes in the economy and those are going to play out with disability risk. But from where we sit right now, it is that broad-based nature of the recovery success that we've had that lends some confidence that we're going to be able to stay at these levels as we work our way through the balance of the year.
Thanks. And I think with sales being stronger, I think nearly 19% growth in the core operations. Is there any reason to think that your guidance that you laid out on Investor Day of 4% to 6% in the U.S. or even the overall 3% to 5% for the core should move higher?
Yes. Well, so a couple of things I talk about our sales. Very happy with how things came in. I'd say that first quarter and it fluctuates, you've heard different dynamics. It's a little bit smaller sales quarter for us, so but we're very happy about how that starts. And then it really is how that translates into premium and so that's where we're really focused. That's about growing a good sustainable top line is on the premium line, making sure we have good persistency, taking care of our customers, and we still feel very good about our overall outlook there, 3% to 5% across the franchise, a little bit higher, Unum U.S. and as Tim talked about, Colonial Life catching up fast.
Thanks.
Thanks, Wes.
Our next question comes from Tracy Benguigui with Barclays. Your line is open. Tracy, your line is now open. We'll move on to Jimmy Bhullar with JPMorgan. Your line is open.
Hi, just had a question along the lines of the discussion that's gone on, on pricing during the call. But as you went through 2023, 2022 renewals, did you implement any price reductions in your business in group disability? And did you see any of the other competitors do that as well, given how strong the experience has been over the past year?
Thanks, Jimmy, it's Mike. So the renewals that we have done to date, so again, those are to be most heavily in that mid and large case market. They will have experience in it. They will typically have multiple years of experience in it. So some portion of some of the favorable claim trends would certainly have gone into that, in general, the cases that come through our renewal programs, there's work to be done from a rate perspective. And we were really pleased with how the 1/1 has finished in terms of the profit improvement we project from placed rate increases those are right in line with our expectations.
And as you can imagine, we're right in the middle of 1124 renewals. Those are out in the market, particularly at the larger end. I would say it's a competitive market. To your -- second part of your question I think it's been a competitive market for a while. There is a sense that perhaps some carriers are leaning in a bit, but nothing that I would say is outside the norm.
Okay. And then the ramp-up in buybacks from $50 million to roughly $75 million, that was sort of something that you had already communicated. But given that your earnings, at least so far this year are trending a lot better than expected. That implies that all else being equal, you should see a further improvement in 2022 or beyond what you would have expected at the beginning of the year, right?
Yes. So most of our comments that we had at Investor Day were about 2023, I think those stand. Very happy with how the first quarter results came out. But we've got a lot to do in terms of our overall capital deployment, but the generation looks good. And like I said, as we get towards the end of this year, we'll start to talk about 2024. We've got a few more quarters before we get there where we can talk about what that trajectory would look like. I think we did mention just we kind of gave a rough range, $300 million is kind of something we're expecting looking forward as well, but put a little plus line around it to say that we could increase that. So that's going to be something you're going to hear about more, I think, as we get closer towards the end of this year.
Thank you.
Our next question comes from Mike Ward with Citi. Your line is open.
Thanks guys. Good morning. Most of my questions were covered. So maybe I'll just ask one sort of on longer-term capital management, specifically debt capacity in out years, I think you've got a pretty sizable gap between your leverage ratio and your target, almost $1 billion, I think. Just curious if you could frame how you think about that and potential uses of that if you eventually execute on that, take that up?
Yes, it's a good question. We've managed our leverage over time and certainly it's been coming down, and we saw that come down again this quarter. I think what you think about that is that distance area gives us a lot of firepower, a lot of capacity to do all the other things that we're talking about. So whether its cash to holding company, strong capital levels that are enterprise or that debt capacity, all of those kind of work together to think about how we fuel our growth engine. So we feel really good about how that's come down and we'll have to see how that plays into the overall capital as we look post 2023.
Thanks guys.
Thanks Mike.
Our next question comes from Maxwell Fritzer [ph] from Truist. Your line is open.
Hi, good morning. I'm calling in for Mark Hughes today. In regards to a lower interest rate environment, I was wondering if there are any other measures you could take to mitigate the risk of the investment portfolio other than the hedging program?
Yes, this is Steve. I can take that. I would say we clearly think about it probably in two pieces. One is the hedging program that we've talked about. But one of the other things that we've done over time is just thinking kind of around the edges about just asset allocation and where we feel like we're getting value when you do see rates fluctuate. And we did take the opportunity during COVID when there was some disruption in the alternative asset market to take advantage of maybe leaning into that asset class a little bit more. That's really paid dividends for us, which has been great. We backed off of high-yield investments. We didn't think we were getting the value there on a risk-adjusted basis.
And so, I would say that's another tool that we have. We don't have to buy the market because of the size of our investment portfolio. We can be very selective and we've proven we've done that. So I'd say that's an area that we've done for years and we'll continue to do is just take advantage of where rates, spreads and just other asset classes might play into our allocation.
That’s helpful. That’s all I have. Thank you.
Thanks, Maxwell.
Our next question comes from Tracy Benguigui with Barclays. Your line is open.
Hey, good morning. Is my audio working? Can you hear me?
Yes you're fine. Go ahead, Tracy.
Okay. Awesome. Just a quick question. Okay great. It looked like you made great progress with the hedging this quarter, it's a little bit higher amount than you typically do. Looking back at the outlook day, you didn't want to provide a forecast because of the accounting rules. Maybe if you could just walk us through maybe this quarter more successful and it sounds like you still want to carry that program forward, so any kind of forward-looking guidance would be helpful.
Yes, Tracy, this is Steve. Thanks for the question. We continue to really not give guidance on the expansion of the program. One thing that I will note the dynamic that's going to go on as we go forward is, we are hedging periods that are really laddered through a forward-looking five years. And there will be a dynamic, which we saw start this quarter, where we are starting to see those hedges roll off and then we're able to then put that money to work, that expected cash flow to work. And so, that will build the program over time itself of just extending the time period for which we're actually hedging.
So that's part of the dynamic that you're going to see is we're going to be able to continue to expand the program just because of that. We have more cash flows that we're going to work with. I would say our desire continues to just make sure we stay on the right side of the accounting guidance and make sure that we get hedge accounting. But I would say it's just being able to move through the program, also get a little bit more surety around projections and really what the cash flow needs will be. So both of those things factored into it a little bit, and we'll just continue to work the program in the way that we have over the last year.
Got it. Very helpful. I also want to make sure I'm thinking about your new 2023 outlook the right way. So it sounds like the new guide is mostly driven by a better outlook in group disability book. But I want to make sure I'm not missing any other notable factors to consider both favorable or less favorable compared to what you shared in February.
Yes, Tracy. Obviously, when you see the first quarter results, there were small fluctuations across the board, but we basically took all of our first quarter results into consideration and basically baked those into our full year projections. But then if you look at the last three quarters, it's really based on group disability loss ratio expectations that would have changed that overall outlook. Again, there's on the margins, some puts and takes, maybe across other product lines, but it's all pretty de minimus. So I would think about it just focused on the group disability product line.
Thank you.
Thanks, Tracy.
Thanks, Tracy.
This concludes our Q&A. I'll now hand back to Rick McKenney, President and CEO, for any final remarks.
Great. Thank you, Elliot. Thanks everybody for joining us today. Clearly, some good results we're happy to bring to the market. We're going to be out there actually talking to a number of investors as well, so you can see us at a number of conferences. We'd love to have further discussion. I appreciate your time today. And with that, Elliot, that wraps up our first quarter earnings call. Thank you.
Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.