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Unum Group
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Hello and welcome to the Unum Group Fourth Quarter 2021 Earnings Conference Call. My name is Harry and I'll be coordinating your call today. [Operator Instructions]
I will now hand you over to your host Tom White, Senior Vice President of Investor Relations to begin. Tom, please go ahead.
Great. Thank you, Harry. Good morning, everyone and welcome to the Fourth 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.
Yesterday afternoon, Unum reported fourth quarter 2021 net income of $159.7 million or $0.78 per diluted common share compared to $135.4 million or $0.66 per diluted common share in the fourth quarter of 2020. Net income for the fourth quarter of 2021 included the after-tax amortization of the cost of reinsurance of $15.5 million or $0.08 per diluted common share and a net after-tax investment loss on the company's investment portfolio of $6.8 million or $0.03 per diluted common share.
Net income in the fourth quarter of 2020 included a net after-tax gain from the closed block individual disability reinsurance transaction of $32 million or $0.16 per diluted common share; a net after-tax reserve increase related to assumption updates of $133.5 million, which is $0.66 per diluted common share; and a net after-tax investment gain on the company's investment portfolio excluding the net after-tax realized investment gain associated with the Closed Block individual disability reinsurance transaction of $1.6 million or $0.01 per diluted common share.
So excluding these items after-tax adjusted operating income in the fourth quarter of 2021 was $182 million or $0.89 per diluted common share compared to $235.3 million or $1.15 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, and 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 businesses.
And now I will turn the call over to Rick for his opening comments.
Thank you, Tom and good morning, everyone. As we wrap up 2021, what we saw in the fourth quarter is a continuation of the good performance of our business model impacted by the difficult environment of ongoing COVID-related claims. Before getting to the quarter, I'd like to recognize the extraordinary work of our teams in serving our customers in this challenging time through their empathy, passion and resilience.
Throughout the pandemic, they have not wavered in fulfilling our purpose while still positioning the company for the future. As we turn to our financial results, our fourth quarter played out largely as we anticipated, with after-tax adjusted operating earnings per share at $0.89 for the fourth quarter.
I'll come back to the COVID impacts in a minute but as we look beyond these areas of our business directly impacted by COVID, I'm very pleased with many of our product lines that performed well in the quarter. Adjusted operating income for the Unum US supplemental and voluntary line this quarter was among the highest in our history, with strong results in the IDI recently issued and voluntary benefit lines as well as more stable performance in the dental and vision line.
Colonial Life produced a solid level of income this quarter with a strong adjusted operating return on equity of approximately 16%.
In addition, adjusted operating income in our International business continues to build momentum. And the overall performance in the Closed Block remains strong. We saw a favorable benefit experience in both long-term care and individual disability and continued excellent returns from our alternative investment portfolio. In addition to the favorable returns from the alternative investments more broadly, our investment portfolio is in great shape as we continue to see very healthy credit trends.
Looking at the topline, we are also very pleased with the trend in premium income growth for our core business segments. This includes the acceleration in year-over-year growth that we have seen in recent quarters. Premium growth in the fourth quarter on a year-over-year basis was just under 3% for our core businesses in aggregate with growth of 3% for Unum US, 7% for International businesses and 1% for Colonial Life.
Persistency levels have remained healthy. We are also seeing a growing benefit to our topline from natural growth with strong employment levels and wage growth coming through in our in-force block. From a benefits perspective our results were significantly impacted by COVID claims. We saw continued elevated mortality in the group life business.
COVID-related mortality remained elevated at the national level and the age demographics continue to show a high impact among working aged individuals. As in the third quarter the fourth quarter was due to the Delta variant. The age demographics are a key driver for our business and there was a slight decrease to 35% of national deaths in the fourth quarter from 40% in the prior quarter. We will continue to watch this dynamic as new variants like Omicron emerge.
In addition, we continue to see pressure on our short-term disability results from the high levels of infection rates and hospitalizations. These also lead to an increase in lead request volumes which pressure expenses in the group disability line. These COVID impacts are clear in our results and will linger into 2022. But as the impact from the pandemic lessen, we anticipate seeing recovery from the underlying strength of the business.
And finally our capital position remains in very healthy shape even after paying more than $0.5 billion in life claims through the pandemic. The weighted average risk-based capital ratio for our traditional US-based life insurance companies was approximately 395% to close the year and holding company cash totaled $1.5 billion. Both of these metrics are well ahead of our long-term targets and relative to year-end 2020 holding company cash remained stable and RBC improved by approximately 30 points.
This is the highest year-end RBC level since year-end 2016 and also reflects the impacts from the C1 factor changes that were implemented in 2021. In addition, we added $400 million of pre-capitalized trust securities which gives us contingent capital on top of our pre-existing credit lines. All of this points to broad financial flexibility moving into 2022.
Steve will get into our total LTC funding actions, but one area to highlight is our First Unum subsidiary where we have been adding reserves and capital for the last decade. For the first time in many years, we released reserves at year-end and we're able to pay a dividend to our holding company. This is an example that the funding needs for LTC can turn particularly as interest rates move up. Overall, we wrapped the year with a very strong capital picture.
Looking forward our outlook in the near term will be influenced by COVID trends specifically the level of mortality, its demographics and the rate and severity of COVID infections. We expect improvement in these trends over time, but it has proven difficult to forecast these trends and their impacts.
Our focus remains the same that is to ensure that we are taking the appropriate actions to rebuild profit margins and the overall level of earnings back to pre-pandemic levels. This will take several quarters assuming diminishing COVID-related impacts overtime. An important step in this process is to take the appropriate pricing actions with our new sales and renewals. That disciplined approach can have near-term implications for sales and persistency, but we have worked hard to be known in the market as a disciplined and consistent pricer, when we work with our customers through these pricing actions.
We experienced that to some extent with fourth quarter sales in Unum US particularly large case and mid-market sales in the group disability and life lines. But we think it is the appropriate path to take. As we take these actions, we were pleased with the multiple business lines that showed very good sales trends, particularly Colonial Life, the Unum US voluntary benefits and Individual Disability benefits businesses and our International segment.
The breadth of our offerings allow us to manage through challenges in some lines as we look to overall growth.
Looking ahead we plan to connect with you later in February on the 25th to provide our outlook for the full year 2022 and give you insights into the strategic actions we're taking to deliver on our purpose to protect more people and position ourselves for good profitable growth.
To wrap-up I'm very pleased with our position as we move into 2022. It's a testimony to the strength of our franchise that despite the impacts from COVID in the past two years, the primary measure to the topline growth and capital strength have improved over the course of the year, providing us with optimism for growth and the underpinnings of a strong capital base.
Now, I'll ask Steve to cover the details of the fourth quarter results. Steve?
Great. Thank you, Rick and good morning everyone. As I discuss our fourth quarter financial results this morning, I will again primarily focus on an analysis of our fourth quarter results relative to the third quarter of 2021, allowing us to show how the company's business lines are progressing through the pandemic. I will also describe our adjusted operating results by segment excluding the impacts from our GAAP reserve assumption updates that did occur last quarter.
I'll start the discussion of our operating results with the Unum US segment where COVID again significantly impacted our results this quarter, driving high mortality and a high average claim size in the Group Life business and higher claims in the group disability business.
For the fourth quarter in the Unum US segment, adjusted operating income was $81.4 million compared to $88.5 million in the third quarter. Within the Unum US segment, the group disability line reported adjusted operating income of $34.1 million in the fourth quarter compared to $39.5 million in the third quarter. We saw promising trends in premium income which increased 2.9% relative to the third quarter and 5% on a year-over-year basis with increasing levels of natural growth as we benefit from improving employment levels along with rising wages.
The expense ratio was elevated this quarter at 29.9% compared to 28.1% in the third quarter which reflected higher people-related costs and technology spend to support our digital strategies. The benefit ratio for group disability and the underlying drivers were generally steady in the fourth quarter relative to the third quarter. The ratio did improve slightly to 78.3% from 78.9% in the third quarter primarily driven by a lower level of incidence in the short-term disability line.
While short-term disability results did improve this quarter SDD continues to be impacted by high COVID-related claims and therefore remains a drag on the overall profitability of this line relative to our pre-COVID trends.
The LCD line experienced generally stable incidence in the fourth quarter relative to the third and claim recoveries remain strong. We expect to continue to see an elevated overall group disability benefit ratio as COVID and the current external environment continued to impact our results.
We do feel that COVID is a key driver of the high benefit ratio for the group disability line and that as direct COVID impacts lessen over time we will see improvement in the benefit ratio back towards pre-pandemic levels.
Adjusted operating income for Unum US Group Life and AD&D declined to a loss of $71.7 million for the fourth quarter from a loss of $67.1 million in the third quarter. This quarter-to-quarter decline was primarily impacted by a decrease in the deferral of acquisition costs in the quarter due to lower expected recoverability in the short-term as a result of the losses driven by COVID-related life claims for the full year. This impacted the quarter by approximately $15 million.
The benefit ratio improved to 98.3% for the fourth quarter compared to 106% in the third quarter. We were impacted by the continued high level of national COVID-related mortality which was a reported $94000 in the third quarter and increased to a reported $127,000 in the fourth quarter. Age demographics continue to show a high impact on younger working-age individuals though this impact is lessened in the fourth quarter.
For our Group Life block, we estimate that COVID-related excess mortality claims declined from over 1,900 claims in the third quarter to an estimated 1,725 claims in the fourth quarter.
Accordingly our results reflect an improvement to approximately 1.4% of the reported national figure in the fourth quarter compared to approximately 2% of the reported national figures in the third quarter. We also experienced a higher average benefit size which increased to around $65,000 in the fourth quarter from just over $60,000 in the third quarter. And then finally non-COVID related mortality did not materially impact results in the fourth quarter relative to the experience in the third quarter.
So looking ahead, the level of composition of COVID related mortality will heavily influence our group life results. While we are waiting until later this month to hold our 2022 outlook meeting when we expect to have a more informed view of potential trends for the year, it is clear that first quarter mortality will continue to impact our group life results and we suggest that you follow the national trends as a basis for your projections and estimates.
Now looking at the Unum US supplemental and voluntary lines, adjusted operating income totaled $119 million in the fourth quarter compared to $116.1 million in the third quarter, both of which are very strong quarters that generated adjusted operating returns on equity in the range of 17% to 18%.
Looking at the three primary business lines. First, we remain very pleased with the performance of the individual disability recently issued block of business, which has generated strong results throughout the pandemic. The benefit ratio was generally stable at favorable overall levels from the third quarter to the fourth quarter with strong recoveries offsetting an increased level of incidents.
The voluntary benefits line reported a strong level of income as well with a benefit ratio in the fourth quarter declining to 42.9% from 46.6% in the third quarter primarily reflecting strong performance across the A&H products. And finally utilization in the dental and vision line decreased relative to the third quarter, leading to an improvement in the benefit ratio to 65.6% compared to 75% in the third quarter.
Now looking at premium trends and drivers, we were pleased to see an acceleration in premium income growth for Unum US in the fourth quarter with a year-over-year growth of 3%. For full year 2021, premium income increased 1%. The group disability product line had a very positive quarter with premium increasing 5% year-over-year with strong growth in the STB line as well as the benefit of natural growth on the in-force block.
We estimate the benefit we're seeing from natural growth across our businesses to be in the 3% to 3.5% range measured on a year-over-year basis with different impacts to our various product lines. To date we've seen more of a benefit from rising wages overall with the benefit from higher employment levels being more pronounced in the less than 2000 life sector of our blocks than in our larger case business.
Persistency levels were slightly lower year-over-year but remain at strong overall levels. New sales were down for both the STD and LTD lines, reflecting the pricing actions we are taking in the market and increased competition. For the group life and AD&D line, premium income increased 2.1% year-over-year, benefiting from higher persistency and favorable trends and natural growth. Compared to a year ago fourth quarter sales were lower by 4.7%.
Finally in the supplemental voluntary lines, premium income increased 0.6% in the fourth quarter relative to last year with strong sales growth in both the voluntary benefits and the individual disability recently issued lines, a year-over-year increase of 8.3% in dental and vision premium income as well as strong improvement in persistency in the voluntary benefits line.
Now moving to the Unum International segment, we had a very good quarter with adjusted operating income for the fourth quarter of $27.1 million, compared to $27.4 million in the third quarter. The primary driver of our International segment results is our Unum UK business, which generated adjusted operating income of £18.7 million in the fourth quarter compared to £18.4 million in the third quarter. The reported benefit ratio for Unum UK was 81.4% in the fourth quarter compared to 79.2% in the third quarter. The underlying benefits experience was generally consistent between the two quarters with favorable experience in group life offsetting a slightly higher benefit ratio in group disability.
The quarter-to-quarter increase in the benefit ratio was largely driven by the impact of rising inflation in the UK. As we have outlined in previous quarters, the higher benefit payments we make that are linked to inflation are offset with higher income that we received from inflation index linked yields in the investment portfolio. Benefits experienced in Unum Poland continued to trend favorably and adjusted operating income was generally consistent from quarter-to-quarter.
The year-over-year premium growth for our International business segment was also strong this quarter. On a local currency basis to neutralize the impact from changes in exchange rates, Unum UK generated growth of 5.1% with strong persistency, good sales and the continued successful placement of rate increases on our in-force block. Additionally, sales in Unum UK were strong in the fourth quarter increasing 28.1% over last year. Unum Poland generated sales growth of 43.6%, a continuation of the strong growth trend this business has been producing.
So next I'll move to the Colonial Life results. They remain at healthy levels and in line with our expectations with adjusted operating income of $80 million in the fourth quarter and $80.1 million in the third quarter. One of the primary drivers of results between the third and fourth quarters was an improvement in the benefit ratio in the fourth quarter to 52.5% compared to 55.9% in the third quarter. This was largely driven by lower cancer and life insurance claims. Offsetting this improvement was a lower level of miscellaneous investment income with the fourth quarter at an average level for bond calls compared to the unusually high income we saw in the third quarter from calls.
We were pleased to see a continuation in the improving trend in premium growth for Colonial Life, which did increase 1.1% on a year-over-year basis after being flat to negative over the past four quarters. Driving this improving trend in premiums is the improvement in persistency and sales activity.
For the fourth quarter, sales for Colonial Life increased 7.8% compared to a year ago, and for the full year 2021 sales increased 16.1% [ph]. Persistency for Colonial Life ended the year in a strong position increasing to 79.3% for the full year compared to 77.8% in 2020.
In the Closed Block segment, adjusted operating income excluding the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction and the items related to the reserve assumption update in the prior quarter was $76.7 million in the fourth quarter, compared to $109.8 million in the third quarter. For both the long-term care and Closed Block individual disability lines we saw favorable results relative to our long-term assumptions, but we did see benefits experience continuing to return to more historic levels of performance.
For LTC the move in the interest adjusted loss ratio to 82.2% in the fourth quarter from 74.8% in the third quarter was driven by less favorable terminations and recoveries partially offset by lower submitted new claims. For the Closed Block individual disability line the move in the interest adjusted loss ratio to 75.4% in the fourth quarter from 58.2% in the third quarter was driven by higher submitted claims. Again, the experience for both lines in the fourth quarter remained favorable relative to our long-term assumptions.
Higher miscellaneous investment income continues to contribute to the strong adjusted operating income for the Closed Block segment. However, we did experience a reduction of approximately $10 million in total miscellaneous investment income from the third quarter to the fourth quarter with the reduction driven by a lower level of bond calls. The contribution to income from our alternative asset portfolio remained approximately the same between the two quarters, with improved results from our exposure to real asset partnerships.
Looking ahead, I'll reiterate from our messaging in prior calls with you that we estimate quarterly adjusted operating income for this segment will over time run within a $45 million to $55 million range, assuming more normal trends for investment income and claim results in the LTC and Closed Disability lines.
So then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $45.1 million in the fourth quarter and $45.4 million in the third quarter, which are both generally in line with our expectations for this segment. This excludes the special items we listed in our premium -- our previous earnings release.
I'd also mention that the tax rate for the fourth quarter of 2021 was lower than we historically reported at 17.3% with the favorability as compared to the US statutory tax rate driven primarily by tax exempt income and various credits. The comparable full year tax rate of 20.2% is consistent with our expectations and in line with the past two years.
Moving now to investments and net investment income. Miscellaneous investment income has had a meaningful impact on our financial results and quarterly comparisons. For the fourth quarter, we saw a decline of approximately $16 million relative to the third quarter driven by a significant reduction in bond call activity which was unusually high in the third quarter, but was still elevated above average levels for us in the fourth quarter.
Our alternative investment portfolio remained very strong generating income of $39.4 million in the fourth quarter compared to $38.2 million in the third quarter. The Closed Block segment continues to be the primary beneficiary of the strong performance of the alternatives portfolio, while the reduced level of net investment income from bond call activity, primarily impacted Colonial's sequential results. For the full year 2021, miscellaneous investment income generated unusually high levels of income which we expect to moderate in 2021.
Moving now to capital. The financial position of the company continues to be in great shape providing us significant financial flexibility. The weighted average risk-based capital ratio for our traditional US insurance companies improved to approximately 395% and holding company cash was $1.5 billion at the end of the year both well above our targeted levels.
In addition, leverage has again trended lower with equity growth and is now 25.3%. During the fourth quarter we successfully added $400 million of contingent capital through pre-capitalized trust securities with a 4.046% coupon and 20-year tenor which we view as a cost-effective way to enhance our balance sheet strength and flexibility. In terms of capital deployment in the fourth quarter, we executed an accelerated share repurchase transaction to buyback $50 million of our shares. We continue to anticipate repurchasing approximately $200 million of our shares during 2022.
And looking at the capital contribution to support the LTC business, we were really pleased with the improvements in the fourth quarter outcomes. Capital contributions in the Fairwind subsidiary were $165 million for the fourth quarter and totaled $285 million for the full year 2021 which was a decline from $424 million in 2020. The recognition of the premium deficiency reserve for LTC which is included in the Fairwind capital contributions totaled $346 million after tax for full year 2021. A portion of the funding for the PDR was generated from the favorable operating earnings in the Fairwind subsidiary and its high capital levels.
Moving to First Unum, given the better position of the LTC Block in that subsidiary resulting from higher interest rates and the benefit of rate increase approvals for that block during 2021, we were in a position to release $75 million of the asset adequacy reserve after many years of additions to that reserve. With this reserve release we were able to take a $30 [ph] million dividend out of First Unum in the quarter, the first in several years.
Finally, we have a small portion of our LTC business in the Provident Life and Accident subsidiary. And with the increase in interest rates and repositioning our investment portfolio, the premium deficiency reserve in that block was reduced by $66 million after tax. To summarize, we experienced favorable outcomes for LTC contributions, given the improved interest rate environment, recent underlying performance of the block and rate increases on the in-force block.
So in closing, I wanted to give you an update on our progress in adopting ASC 944 or long-duration targeted improvements. As I mentioned in October this accounting pronouncement applies only to GAAP basis financial statements and has no economic, statutory accounting or cash flow impacts to the business. We continue to feel good about our readiness to adopt the pronouncement as of January 1, 2023 and began to communicate some qualitative information with the filing of our third quarter Form 10-Q.
Although we continue to evaluate the effects of complying with this update, we expect that the most significant impact of 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.
As we stated in the 10-Q, we expect this will result in a material decrease to accumulated other comprehensive income and primarily being driven by the difference between the expected interest rates from our investment strategy and interest rates indicative of a single A-rated portfolio. We plan to provide updates to you in 2022 as we near adoption. Specifically, we plan to provide an update on the impact at the transition date, as well as our 2022 outlook with a conference call on February 25. We'll release details on the logistics for that call in the next several days.
So now I'll turn the call back to Rick for his closing comments and I look forward to your questions.
Great. Thank you Steve. I'd reiterate we continue to be pleased with the operational performance of the company through what continues to be an extraordinary environment. We believe we're well-positioned to benefit from today's business environment but remain vigilant as COVID related mortality and infection rates continue to persist.
The team is here to respond to your questions, so I'll ask Harry to begin the Q&A session.
Thank you, Rick. [Operator Instructions] And we have our first question from Suneet Kamath from Jefferies. Suneet, I will open your line if you’d like to proceed with your question.
Great. Thank you. Good morning. Just a question on the first Unum dividend, which is obviously good to see. But if I think about interest rates I mean, obviously, in prior years they've been higher than where they were at the end of 2021 and you guys weren't able to take dividends out. So did something else change here? And maybe just provide a little bit more color around what drove the ability to take the dividend out.
Yeah, Suneet this is Steve. I would say there's really two main things as we were wrapping up our statutory reserve adequacy work. One is we were able to secure a pretty significant approval of rate increases in New York. As you know in New York you're not able to incorporate that into asset adequacy reserve testing until actually approved by the state. So we're very happy that we were able to get that approval through during 2021 and incorporate that. And then the other difference is just where kind of prevailing interest rates were as we went into the end of the year. So we'll monitor that as we go into 2022. As you know interest rates can fluctuate go up and down. So it's something that we'll monitor. But we're really pleased with the fact that we've been able to inflect there and not contribute capital but instead be able to take capital out of that legal entity.
Okay. Make sense. And then I guess my second one on LDTI, you said that the biggest impact is going to be lowering the discount rate on the liabilities. But are you going to have to separately test your group LTC relative to your individual LTC? I believe now you kind of combine them both. But will this accounting change cause you to have to disaggregate those two? And do you see an impact from that disaggregation if that's what you have to do?
Yeah. We'll get into that a little bit more at the end of February, but we don't really see a material impact from disaggregation. We're able to really aggregate and treat it as a block. One of the big issues with LDTI is just kind of issue of your cohorts. And we feel like we're in pretty good shape there. But we'll give you more on that when we get together later in February.
Okay. Thanks.
Thanks, Suneet.
Thank you Suneet. Next question is from Ryan Krueger from KBW. Ryan, your line is now open if you’d like to proceed with your question.
Hi, good morning. Could you give any more detail on the group LTD incidence in particular can you help us think about maybe how much higher it is running at this point relative to pre-pandemic? And then I guess to what extent do you think that's being driven by COVID or other factors?
Mike?
Sure. Ryan it's Mike. And you're right, we continue to see -- we saw in the third quarter and talked about it and saw it again here in the fourth quarter some elevated LTD incident, and you take a step back for a second, the group disability loss ratio remains elevated although it did come down just a bit from 3Q.
COVID is driving short-term disability claims and that portion of the loss ratio. We really don't see COVID as a diagnosis flowing through in any material way into long-term disability, but it is what I would characterize as the unsettled external environment that's impacting a few of our other diagnoses. And we've seen LTD that is elevated.
The good news is it's been partially offset by continued really strong recoveries and we're continuing to invest in the team and in the technology and the data and analytics that allows us to put those resources to best effect. I do think it will require the external environment settling down a bit over the coming quarters before we start to see that LTD submitted incidents coming through. But have a lot of confidence that the benefits team will stay on top of it through the period. And as we get through the rest of this year as Rick and Steve both mentioned, the price increases that we've been putting through the group insurance lines we'll be feathering in and that will be an offset as well.
Are the causes things that are more subjective in nature like soft tissue claims and mental-related claims, or can you give more detail there?
Yeah, right. It's pretty – you're in the right ballpark for the type of diagnosis. So it's a little bit broader set than just that. And when we go back and look at the last the three recessions, where you have a bit of dislocation in labor markets, those are the kinds of diagnoses that will show a little bit of a of a flare from a submitted incidence pattern. So we're tracking this current period with an eye towards what we've seen in those prior periods.
Got it. Thank you.
Sure.
Thank you. And our next question is from Alex Scott from Goldman Sachs. Alex, your line is now open, if you'd like to proceed.
Hi. Good morning. First one I had is just on the capital contributions for LTC. That looks like a pretty good result. Could you talk about how much of the capital contribution being a little more favorable this year is driven by the actual experience in 2021 versus how things are looking going into 2022? And what do you think the sustainability of this lower level of LTC contributions looks like?
Yeah, Alex, this is Steve. I can take that one. So let me just give you a couple of kind of dimensions of capital contribution and the different drivers. One is that, we did contribute $185 million for the full year at Fairwind in 2021 and that was less than our original estimate of $450 million. So we're pleased by that. Really that was driven by Fairwind benefiting from favorable earnings in the LTC Block. You've seen it throughout the year both alternative asset income as well as the benefit ratio has been lower than prior norms. Historically, we've contributed anywhere in that $100 million to $150 million range to Fairwind, just to fund the ongoing operations, and that was clearly a lot better this year.
If you kind of stepped back, we recognized about $667 million on the premium deficiency reserve in Fairwind over the last two years, and that includes $50 million in the fourth quarter, where we accelerated that kind of in conjunction with our share buybacks for the fourth quarter.
If you look forward to 2022 capital contributions in Fairwind, they will be greater than 2021. There's a few things. One, we anticipate buying back $200 million of shares. So we'll have an equal amount of accelerated premium deficiency reserve. And so that will have to be funded in Fairwind. And then we also anticipate that the LTC statutory earnings, they'll revert back to those historical levels as well as kind of the normal RBC requirements.
So if you got to take all that into account into the levels of just our contributions and the anticipated share repurchase we anticipate ending 2022 with about $1.1 billion to $1.2 billion of holding company cash. So we'll get into some of the details of that when we get together later in February. We want to talk a little bit more about the PDR. But we will be able to fund the 22 requirements in Fairwind and still have holding company cash levels that are going to be above $1 billion.
The one thing that, I'd also do is kind of step back and think about all of our funding needs and just the dynamics of each of those. I just talked about Fairwind that's clearly a piece of it. First Unum, we do think that we've turned a corner there and we won't have as many funding means going forward on that. We've talked about the PDR funding. We'll get into that a little bit more later in February. And then we do have the share repurchases that we do anticipate at that $200 million level as we go into 2022.
Got it. That was all really helpful. Second question, I had is on expenses in Unum US. I think, they were elevated probably in part by the tech investments that I think were mentioned in the opening remarks, but I think there's also some impact lead management and COVID impacts as well. Can you help us think about those elevated expenses sort of that other expense line item and what that could look like going into 2022 as maybe you have some of the lead management weight come off and a little bit better pricing, but maybe still some of the tech investment there?
Sure. It's Mike, I can take that. And you've got two of the three I would say continued consistent investment in technology and was highlighted at the outset. And in particular, what we're doing around lead management and short-term disability and really working hard to get that to be a digital as high quality and as efficient a process as it could possibly be as well as what we're doing around plan administration in the small employer market which we really like the growth segment. So that is part of the expense story.
The second part which you did hit is elevated short-term disability and leave volumes. And again, that will be another one to track with the external environment. So we get past this current wave, we would anticipate some of those expenses coming down within the group disability segment.
And then the third piece is wage cost inflation that we're certainly experiencing like most employers out there and so we're taking the actions necessary with our teams. We are extremely biased but love the people that we have here at Unum. We want to make sure that we're competitive in those markets.
And I would look to those digital investments to be an offset to those wage increases and the impact on the OE ratio. So should the environment improve, labor markets stabilize a bit, I would expect to see those OE ratios generally and consistently coming down over the coming quarters.
Yes. The only thing I'd add and we mentioned it in the opening remarks, we have to take into account COVID, when we think about pricing going forward and we've already started to do that. Expenses are another area that we'll take into account as we think about pricing levels just generally around our group disability product volumes.
Thank you.
Thanks, Alex.
Thanks. And our next question is coming from Tom Gallagher from Evercore. Tom, your line is now open. Please proceed.
Good morning. Steve, I just wanted to come back to how you're thinking about excess capital. I heard your comment where you said you were expecting to end 2022 with over $1 billion of holding company cash and that assumes not much favorable development of LTC, which I guess you could see. But what's the overall thought? I know there's the $200 million buyback planned, which seems pretty conservative at this point given the level of excess capital. Are you just waiting to see how the pandemic plays out and when you see the light at the end of the tunnel before getting more aggressive potentially, or just high level what are you thinking about excess?
Yes Tom, it's Rick. Just to reset that, I think when you look at our capital I think you highlighted the strength of our capital position. I'd just reiterate that. Certainly, going into the year even better – it ended up better than we thought. We've mentioned some of those changes. I think when you think about capital utilization, we're happy with our share repurchase plan of $200 million.
I understand that $200 million of share repurchase is really a consumption of $400 million because we've also committed to accelerating some of our PDR funding. And as Steve said, we'll end the year next year and we'll get into some more details around that as we get out there in a very strong position.
You mentioned a pandemic. And so as we look into the first quarter, you've heard a lot of the things, a lot of the unknowns still in the Omicron wave, I think that's all very real. So we feel good about our capital deployment but there's more to see here through the first quarter. And I think we'll stand where we are for the moment, knowing that we're doing a good job I think of redeploying some of that capital back for both share repurchase and PDR acceleration and we'll see how that plays out over the course of the year.
Okay. Thanks, Rick. The – just curious if you from a capital standpoint whether you have any initial sense for whether LDTI or the S&P capital model changes that are out there could represent a call on capital in any way shape or form whether that's deleveraging or otherwise?
Yes. This is Steve. I'll break those two parts because I think probably the thinking is a little bit more mature and evolved on the LDTI front versus the S&P capital model. On the LDTI front, we continue to talk to our rating agencies. The impact of LDTI is going to be going through other comprehensive income. And the feeling that we get as we're having those discussions is that the impact of this and as we think about leverage, it's probably not going to be as consequential in their thinking.
Those are kind of the early reads we're probably getting. But that's something we still need to work through with the rating agencies. So I have I don't have a lot of concern there, given that the capital situation for the company, the free cash flow for the company hasn't changed.
On the group capital front for S&P, I'd say that's still early days. That draft came out just a matter of weeks ago. We're still evaluating and having conversations with S&P. I think that's something that will just play out here over the next few months.
Again in that situation I think rating agencies are usually pretty flexible kind of looking at the impact on companies, working with them what's the right path forward. So, that's something we'll continue discussions and just see where that requirement ends up because as you know there's going to be a lot of discussion about that. I think a lot of debate a lot of opinions about it. And so we'll just track that and monitor that. And as that plays out probably over all of 2022 before that's finalized we can talk more about it as it becomes more an focused.
Got you. Thanks. That's helpful. If I could just slip one more in. Just curious how you're thinking about the group environment. I saw it looks like you held the line on pricing or tried to get better rate in light of the uncertainty in the environment and you saw the impact on sales. Are you seeing more aggressive pricing competition than you have in a while here, or is it just the lack of company's pricing for rate that you see impacting new business?
Hey Tom, it's Mike I can hit that. It might be worth just taking a second stepping back and talking about what we're seeing in new sales results across the products end markets. Because if I think about it from a macro point of view it's actually I think a pretty good period that we're in and headed into when it comes to clients needing to enrich their benefits program. And I think we're seeing that across the piece.
So, maybe I'll ask Tim and Mark in just a second to comment on that. But to your specific question around group disability, I think you hit the nail on the head. Like we've been talking about we started feathering in COVID pricing. As Steve mentioned, starting to think about some expense increases due to wages also working its way into pricing.
And I think -- I can't speak to competitors I can just sort of speak to where we are relative to the market and I'd say in the mid and large case market we certainly felt that difference as we were working it in maybe a bit ahead of the market and you saw that the falloff in group insurance sales. I would say that the factors we're pricing for are pretty universal in our point of view. So, I would have the expectation that that relative gap will mitigate in the coming quarters and feel pretty good about actually some of the new capabilities we've rolled into the mid and large case market here for 2022.
Coming back from mid and large and small case sales, which you wouldn't be able to see in our reporting, but actually came through ahead of where they were prior year. So, we feel good about that part of the group insurance market and momentum continuing to build. We've actually put a new distribution model in place and scale that for 2022.
In the supp and vol category I'll let Tim speak to voluntary, but the individual disability sales results were strong in the quarter and we like the outlook for that recently issued individual disability market segment. Maybe Tim you could comment a little bit about new sales for voluntary and Colonial?
Yes absolutely. Thanks Mike. So, on the Unum brand we were pleased with sales results in the fourth quarter for voluntary. They came in a bit ahead of our expectations. We're especially encouraged by the activity as Mike pointed out in the small and mid-case segment. So, encouraging news there. Feel good about the plans that we have in place and the investments we've made to help continue to grow the VP business under that brand.
On the Colonial Life side, great momentum coming into the fourth quarter and great momentum throughout most of the fourth quarter. At the very end of the fourth quarter, we did see some disruption in enrollments that were scheduled because of Omicron and so that dampened our overall sales results for the quarter a bit. But very encouraged with what we're seeing through the month of January and the bounce back that we're seeing results on the Colonial Life sales side. I'll turn it over to Mark.
Thanks Tim. Tom we've been seeing good sales growth in the International business versus prior year. Sales are up 35%. If you -- if I look at that in local currency in the UK that's up 29%; in Poland that's up 5% and in Poland, that's pretty much all driven by the Group business or predominantly driven by the Group business. So, to your earlier point we're seeing positive signs in the group business.
I also think that's interesting that we're finding despite rates hardening a little bit persistency levels in the UK are improving. And in Poland they remain very high at 98%. So, the result of that is our premium income is up about 7% on a year ago. So, at the moment the signs encouraging.
Got you. Thanks for all that.
Yes.
Yes. Overall, I'd say, some building momentum price adjustments coming, you've got to see how kind of the competitive landscape plays out. I would just wrap up on the group insurance line by saying, in more than a dozen years biggest renewal program that we put in for 1/1/2022 and you saw the persistency results. So it's really heartening to see clients sticking with us and being willing to pay the fair pricing. And I think that bodes well for us going forward.
Thanks.
Thanks for your questions, Tom. And our next question is from Mark Hughes from Truist Securities. Mark, your line will be open now, if you’d like to proceed.
Yes. Thank you. Good morning. In the disability line you mentioned that your recoveries were good. What's your experience been with government disability benefit awards as a component of recoveries? How has that trended compared to earlier periods?
Hey, Mark, it's Mike again. We actually have seen a little bit of a slowdown, although, I would say, it's coming up a bit short of being material at this point. It will be a continued watch item as we look at staffing for SSDI and how that backlog builds or abates over the coming months.
I think, in general, it's been a bit more of a struggle moving to remote work for that organization. And we're hopeful it'll smooth out with some accrued staffing, but it's a little bit of a watch item not overly material.
Yes. And then the COVID mortality, any kind of early read on Omicron? Looks like you had better experience within your population that you've seen less excess mortality. Anything you're seeing here? January, I guess, we've had a little bit of a bump and perhaps receding. Any early comments?
Yes, Mark, it's hard to predict. As you know, there's a lot of uncertainty around it. We're going to talk a little bit more about that when we get together later in February what our assumption is. But depending on who you read, the estimates are higher and they seem to come down. There are some that were lower, they're starting to come up. So we'd like to see just a little bit more of how February plays out, I think, before we try to call how the first quarter is.
But as you've seen over the last few years, it's really hard to call that from a forward-looking perspective. I would say, though, we continue to kind of follow what you'd see in some of the national figures. So it all gets back to Johns Hopkins and the statistics that you see coming out of them it's probably pretty indicative of the trends you'll see with our block.
Very good. Thank you.
Thank you, Mark.
Thank you, Mark. And our next question is from Erik Bass from Autonomous Research. Erik, your line is now open, if you’d like to proceed.
Hi. Thank you. Can you talk broadly about the impact of higher inflation on your business? How much benefit do you get from rising wages in the premiums? And are there any areas where you're exposed to higher potential claim costs because of increased general inflation? And how does it affect your outlook for G&A growth?
Yes, it's a good broad question, Erik. I think, when you think about inflation, so you think about inflation and then possibly interest rates as well. But focusing on the inflation side, we will see some benefit. I think, we articulated some of those results and what we talk about is natural growth. When we see wages go up, we're going to benefit by that, just given the covers that we have out there and protecting people.
We see a little bit of it in our own costs, as Mike articulated. But I think it's -- from an overall perspective, an inflationary environment is a good one for us and that's pretty much holistic, Mike. I don't know if you'd add anything to that.
No, I think you're right. I think the benefits that we pay out on the disability side and the life insurance side, are oftentimes a function of salary. So the benefits will move up, but the premium will move up in lockstep and that's really a good premium. It comes in with very low acquisition costs and very little incremental expense to serve. So, like Rick said, I think it's roundly positive for us.
Got it. So are there any lines where there is inflation exposure, I guess, outside of the U.K.? And you're thinking about something like LTC where you have a set benefit how much -- I guess, is there a gap between what your assuming for the daily benefit and the maximum amount allowed.
No, Erik, I think, you kind of hit the two lines that there could be some impact. With LTC 98% of our business is indemnity. So it's a contractual inflation rate that's just locked into the contract and won't fluctuate with inflation in the actual cost.
In the UK, we do have some inflation-linked benefits, but we pretty much have those hedged off with our investment portfolio. And so those move together. Sometimes it creates a little bit of noise in period-to-period earnings. But overtime that's pretty much neutral. So yes, I would say those would be the two that there could be impacts from inflation, but really it's income neutral to us.
And I'll just say Erik, at the end of the day as inflation influences interest rates, rising interest rate environment good for many financials, very good for us. And so you saw a little bit of that even in our fourth quarter results, but we'd love to see potentially higher interest rates although it's hard to predict that one as well.
Got it. Thank you.
Thank you, Erik. And our next question comes from Jimmy Bhullar from JPMorgan. Jimmy, your line is now open. If you’d like to proceed.
Hi, good morning. So most of my questions were asked, but just on what you're seeing in terms of claims trends in the long-term care product. And it seems like early on in the pandemic there was a big benefit in that line, but it's starting to abate. But if you could just talk about what you're seeing in terms of usage of nursing homes and mortality and the other factors that are affected by the pandemic?
Yes Jimmy, this is Steve. I would say we're almost back to historical normal trends across the board. When you think about the things that were impacted early, incidents we had very low incidents early in the pandemic. Those have been back to historic levels now for several quarters. We saw very high claimant mortality early on in the pandemic. That's come down, I'd say more slowly.
But this was the first quarter that we saw claimant mortality counts that were really consistent with what our seasonally adjusted expectations would be. So I'd say, that's pretty much back to normal. And then just transitions were something that we were looking at early. I would say that's kind of worked its way through at more normal levels. So we're -- and the loss ratio shows that we're back almost to the lower end of our expected range of 85% to 90%. So that's kind of what we anticipate going forward for the block as well.
And then similarly can you talk about usage for A&H and supplemental policies both at the supplemental but then also Colonial?
Yes. I think in general, it's been favorable for us. It has fluctuated quite a bit. And then when you get through a wave as we saw in the fall, we saw a little bit here in the fourth quarter where some of the scheduled surgeries, some of the provider practices were shutting down to create capacity -- on some of those procedures to create capacity for COVID treatment. So that tends to be a little bit of a tailwind. I think that our expectation would be that will normalize here in 2022. But feel very good about the loss ratios in those products.
Okay. And then just lastly when do you expect to give guidance on the impact of the accounting changes, or any sort of color on how you...
Jimmy, are you saying LDTI?
Yes, yes.
Yes. Yes. So when we get back together later in February we're going to give more detail around the initial adoption and the impact that that has on the opening balance sheet. And then as 2022 plays out, we'll give you more on kind of the -- what we think about emerging earnings trends but that will probably be later in the year.
Okay. Thank you.
Great. Thanks Jimmy.
Thank you, Jimmy. And our next question is from Andrew Kligerman from Credit Suisse. Andrew, your line is open, if you’d like proceed.
Yes, thank you. Good morning. With regard to a little more color on pricing, could you give us the magnitude to whatever degree you can maybe, large case that seems to be the area where your sales were most impacted. How much pricing did you get in life and disability respectively?
Sure Andrew, it's Mike. And the way to think about it and Rick teed this up a bit. We want to be pretty consistent with our clients around pricing. We don't want to sell up and surprise them. So for us, it's usually a pretty gradual approach. I would be thinking in total in sort of the mid-single digit again depending on product and segment. You are right in highlighting the large case segment.
We've seen sensitivity to COVID in some of those environmental claims on the long-term disability side be more acute in the larger end of the market and hence the price increases in been more have been higher in that part of the segment.
I'd also just highlight important for us to be bringing in new clients and new lines at the right price with a forward-looking view. More consequential though frankly is the renewal programs. And so I just -- we hit that again and say, we had a very successful program leading up to the 1/1/22. We've got a similar sized program here building 3/22 [ph] for 1/1/23 and are quite optimistic about how that will land.
I see. And when you say mid single-digit across product area, was it generally that way, whether it be group life and AD&D versus short-term disability? Was there any distinguishing between products, or was it generally mid single-digit across products?
Yes. I mean, the way, I think -- the largest increases are in our short-term disability and our services lines of business. We've seen the biggest increases in volumes given the environment there. That's also where we just see more transactions. There's more people involved in that process and some of the cost pressures we're dealing with are flowing through into the pricing on services and on short-term disability. Life's kind of in the middle. And then LTD it's a little bit more modest increases in LTD, because we have seen the improvements on interest rates has given us a little bit of an offset there. Again, putting gradual increases out there, but LTD is probably most modest.
I see. And maybe just a little color on Colonial and what you're seeing in terms of this environment for recruiting. Are you able to increase your rep count in this environment? How are you going about recruiting? Is there more virtual going on?
Yes, Andrew. Hey, this is Tim. I can take that sort of question. It’s clearly, in a year where there were on talent there's certainly headwinds around recruiting we experienced that. However, we are very encouraged by the development of the people that we are recruiting last year our new rep sales were up a little bit more than 13%. And also our average weekly producers were up a little bit more than 13%. So despite the headwinds from recruiting itself, we feel good about the quality of the people that are going in the organization and the productivity and impact they're having.
Yes, that's really good. Maybe if I could sneak one quick one, I know, we're on the hour. M&A in LTC, I know you had talked quite a bit about it a few quarters ago. How is activity looking in terms of talk and interest, et cetera?
Yes. Sure, Andrew. It's Rick. When you think about the overall M&A environment, clearly strong. When you get to LTC, I think, as we've said before, there's probably less interested counterparties there. We're spending the time thinking about our LTC block. And as we've said in the past are there tranches of that block of business, which would be attractive to others and those are the types of parties, which we're looking to connect with and go through that.
But I'd say, it ebbs and flows in terms of the interest level around LTC. Now is a time where it's probably in the -- there's a few counterparties out there still looking and active in that market, but we're going to stay active. This is a multi-year project to work through. And so we're going to stay on top of the markets and look to find the right time for that block or sub-blocks of that business to be able to transact. So that's our current look at the world, but we are staying very active in the markets.
Thank you much.
Thanks, Andrew.
Thank you, Andrew. And we have no further questions registered. So I'll hand back to Rick McKenney for any closing remarks.
Great. Thank you, Harry. Thanks everybody for taking the time to join us this morning. That does complete our fourth quarter earnings call. We do look forward to reconnecting with you on February 25 for our outlook meeting. We'll take you through all the different pieces that we talked about over the course of the morning. So, we look forward to talking to you all then. Thanks very much.
Thank you to everyone who has joined us today. This concludes the call and you may now disconnect your lines.