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Unum Group
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Hello, and welcome to today's Unum Group Fourth Quarter 2020 Earnings Results and Conference Call. My name is Bailey, and I'll be the moderator for today's call. [Operator Instructions] I would now like to pass the conference over to our host, Matt Royals, Senior Vice President, Investor Relations. Please go ahead.
Great. Thank you, Bailey. Good morning, and welcome to the fourth quarter 2022 earnings 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, 2021, and our subsequent quarterly reports on Form 10-Q.
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 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 2022 net income of $279.6 million or $1.39 per diluted common share, an increase from $159 million – $159.7 million or $0.78 per diluted common share in the fourth quarter of 2021. Net income for the fourth quarter of 2022 included the after-tax amortization of the cost of reinsurance of $12 million or $0.06 per diluted common share and a net after-tax investment gain on the company's investment portfolio of $4.9 million or $0.02 per diluted common share.
Net income in 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. Excluding these items, after-tax adjusted operating income in the fourth quarter of 2022 was $286.7 million or $1.43 per diluted common share, an increase from $182 million or $0.89 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 Benefit Lines.
Now I'll turn it to Rick for his opening comments.
Thank you, Matt. And good morning, everyone. As we head into 2023, we couldn't be more pleased with the performance and trends of our company throughout 2022. Our team of more than 10,000 dedicated employees are delivering on our purpose of helping and protecting the working world. These record results have been tremendous, highlighted by an accelerated recovery to pre-pandemic operating levels.
The strength of our industry-leading employee benefits franchise is driven by a singular focus on serving employers and their employees. It is driven by a combination of our longevity and expertise in managing this business, along with innovation that recognizes the needs of a changing workforce.
The fourth quarter was a good continuation of this progress. We built on the momentum from the first nine months of the year with a total annual growth on adjusted operating earnings per share of 43%. After-tax operating earnings were $287 million in the fourth quarter and a record $1.25 billion for the full year. This is an increase of 41% over full year 2021.
Looking at the top line, our premiums in our core businesses grew at a rate of nearly 4% on a constant currency basis for the fourth quarter. This is trending to our long-term expectations of 4% to 6% per year.
Persistency of our in-force business was healthy across all products and strong sales performance further aided the top line growth and premium momentum. For the full year, consolidated sales grew at a rate of 16%, again, on a constant currency basis, driven by Unum US and Unum International. We are also encouraged to see Colonial Life's growth with 6% sales growth in 2022 as they get back to high single-digit growth rates.
Our margins remain healthy across our lines of business, prudent underwriting and customer-oriented management of our claims; have kept our benefit ratios at very good levels. And despite some expense pressure from the inflationary environment, our core businesses all finished the year earning mid-teen to low 20% ROEs. Combined ROE for the core businesses was 17% for the full year 2022, up from 10% in 2021.
These results from top line growth to bottom line management would not be possible without relentless attention on our customers in every aspect. How we connect with and serve our customers are critical in building our leading market positions. A couple of examples include services that have been in the market for several years, like HR Connect, and more recently, Unum Total Leave. They are excellent examples of how we have continually improved our service to both the employer and employees. With Total Leave, which we rolled out at the beginning of 2022, employees and employers utilize a modern digital platform to help better manage all aspects of employee leads, a benefit that has taken root in importance with employees. It is also important part of the overall value proposition to employers as they look at the broader benefits package.
While our core operations are running well, we continue to execute actions, which effectively manage the financial risks of the Closed Block. For long-term care, we have been very pleased with the continuation of our interest rate hedging program, which we began earlier in 2022 and continue to build upon. These are actions which reduce exposure to future rate changes.
We have also stayed focused on working with regulators on achieving appropriate premium rate increase approvals. The pace of approvals remains on our expectations, and we have received multiple approvals throughout 2022 and even into 2023. Steve will provide additional details of recent activity on both the hedging program and premium rate increase approvals in just a moment.
The many positive operating trends that helped drive our GAAP earnings improvement also helped drive strong statutory income, which on a run rate basis is back to our pre-pandemic level of close to $1 billion a year. This is another reflection of our business model's resiliency and its cash generation capabilities. A strong core business and prudent Closed Block management have also created an outstanding capital position, which continued to strengthen in the fourth quarter.
Risk-based capital for our U.S. traditional insurance companies increased to approximately 420% at the end of the fourth quarter, and our holding company liquidity of $1.6 billion is some of the highest levels we've seen. Both remain well in excess of our targeted levels. Combined with leverage below 25%, the strength of our balance sheet gives us tremendous flexibility to pursue our strategy and continue to return capital to shareholders through dividends and share repurchase.
To summarize, our purpose-driven, profitable, industry-leading employee benefits business is building momentum as we come out of 2022. Coupled with a favorable operating environment, strong capital position and prudent risk management, we are in position to continue advancing on our leading market positions as we head into 2023.
We look forward to taking you through more depth on our business and why we are optimistic at our upcoming investor meeting at the end of February.
Now I'll ask Steve to cover the details of the fourth quarter results. Steve?
Great. Thank you, Rick. And good morning, everyone. We are very encouraged by our strong fundamental performance in the fourth quarter and financial strength, which provides solid momentum headed into 2023. As expected, strong group disability loss trends continued in the fourth quarter with the group disability loss ratio remaining in the mid-60s, a trend we expect to continue into 2023.
We also achieved strong consolidated sales growth of 16.8% on a constant currency basis and maintain steady persistency across all product lines, while advancing our renewal pricing programs. Externally, the favorable operating environment continues to aid results. Natural growth, which comes from increase in employment levels and rising wages, continues to support top line growth for our group lines.
As Rick mentioned, we ended the year with an after-tax adjusted operating EPS growth rate of 42.8% over full year 2021. This includes after-tax adjusted operating income in the fourth quarter of $286.7 million or $1.43 per diluted common share. Given foreign tax dynamics, our corporate effective tax rate was 22.4% for the fourth quarter. The difference between our effective tax rate and the expected rate of 21% equates to approximately $0.03 of after-tax EPS. For the full year, our effective tax rate was 19.4%.
Included in our results was also the impact of a critical illness reinsurance treaty recapture, which added $8.2 million to operating expenses. Earnings in future periods will benefit from this action, providing an attractive rate of return. Regarding operating expenses, the full year 2022 adjusted operating expense ratio was 21.3% or 150 basis points above 2021. Excluding the reinsurance recapture, the 2022 result would have been closer to the low end of our estimated range.
As I review adjusted operating results, I will primarily focus on analyzing our fourth quarter results compared to the third quarter of 2022. This will allow me to describe how our business lines have been progressing.
For items, such as premium and sales growth, I will continue to focus more on year-over-year comparisons. I expect to return to focusing on year-over-year results for business line performance with our first quarter 2023 results, given the continued endemic progression of the COVID-19 pandemic.
I'll begin my review of our operating performance with the Unum US segment. Adjusted operating income decreased to $228.7 million in the fourth quarter of 2022 compared to $275 million in the third quarter. This was driven primarily by lower earnings in the supplemental and voluntary lines, despite very strong levels of operating income from the group disability line. The group disability line reported another strong quarter with adjusted operating income of $114.6 million in the fourth quarter of 2022 compared to $129.8 million in the third quarter.
Favorable claim recoveries continue to drive earnings and a benefit ratio of 64.1% for the fourth quarter. For the full year of 2022, our adjusted benefit ratio was 66.7% compared to 76.7% in 2021. We are very pleased with how this block is performing. And given improved incidence trends, we expect the group disability benefit ratio will continue in the mid-60% range in 2023 given our stable staffing levels and supportive return to work environment. Results for Unum US Group Life and AD&D declined modestly from last quarter, with adjusted operating income of $29.3 million for the fourth quarter of 2022 compared to $30.9 million in the third quarter.
The adjusted benefit ratio increased slightly to 78.2% compared to 78% in the third quarter as overall mortality continued to pressure results with average claim size remaining on the higher end of our long-term expectation. We estimate that COVID related impacts were close to our expectation of approximately $10 million per quarter. Adjusted operating earnings for the Unum U.S. supplemental and voluntary line in the fourth quarter were $84.8 million, a significant decrease from the result of $114.3 million in the third quarter. As mentioned, this result was driven by the recapture of a critical illness reinsurance treaty of $8.2 million as well as the change in estimate within the individual disability unearned premium reserve of $9 million. Results for the dental and vision line were slightly above third quarter results as the benefit ratio decreased to 65.9% compared to 74.5% in the third quarter and 65.6% in the same period a year ago.
Turning now to premium trends and drivers, as we saw the strong momentum experience in the first nine months of the year for Unum U.S. continuing. Growth in premium income in the fourth quarter was 4% on a year-over-year basis, adjusted for the change in estimate within the individual disability unearned premium reserve with particularly strong performance in the group disability business. Natural growth, a tailwind for our group products helps support year-over-year premium growth in group disability of 7.3% in the fourth quarter compared to 7.4% in the third quarter. Sales growth for Unum U.S. was solid with an increase of 23.7% year-over-year in the fourth quarter and 18.4% for the full year. Persistency continued to remain generally stable with only minor variation by line of business with our total group block at 89.6% for the fourth quarter.
So moving on the Unum International segment experienced exceptional results with adjusted operating income for the fourth quarter increasing to $45 million from $29.9 million in the third quarter. Adjusted operating income for Unum UK improved in the fourth quarter to £37.7 million compared to £23.6 million in the third quarter. The reported benefit ratio for Unum UK lowered to 76% in the fourth quarter compared to 78.6% in the third quarter. As has happened in the past few quarters, the high levels of inflation experienced in the UK distorted the reported benefit ratio this quarter. As a reminder, a significant 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 link gilts is not which benefits earnings levels in periods of very high inflation. When removing the direct inflationary impact, the Unum UK adjusted operating income was closer to our long-term target of £20 million per quarter. For the first quarter of 2023 we're expecting a muted inflationary impact in the Unum UK. Premium income for our Unum International business segment increased slightly on a year-over-year basis, dampened by exchange rate movements. Premiums continue to show strong growth on a local currency basis. Unum UK generated premium growth of 15.4% on a year-over-year basis in the fourth quarter while our Poland operation grew 13.6%. Both businesses continue to generate positive levels of annual year-over-year sales growth with Unum UK up 43.5% and Unum Poland up 26.3% in local currency.
Next, adjusted operating income for the Colonial Life segment increased to $93 million compared to $90.4 million in the third quarter. The increase was driven by a benefit ratio of 45% in the fourth quarter compared to 46.8% in the third quarter. For Colonial Life's top line we have previously indicated it will take premium growth a couple of years to return to pre-pandemic levels. This quarter's result trended slightly downward with premium income 0.7% lower than prior year. However, full year premium income did grow by 0.7%. Sales in the fourth quarter were 2.3% higher compared to the prior year quarter and 5.9% higher for the full year 2022 compared to 2021. We continue to feel very good with the progress we've made to build-back premium income to pre-pandemic levels for this business with full year 2022 premium levels, now 1% higher than in 2019.
In the Closed Block segment adjusted operating income excluding the amortization of cost of reinsurance related to the Closed Block individual disability reinsurance transaction was $40.4 million compared to $34.1 million in the third quarter, driven by favorable benefits experience in individual disability within our all other product line. This quarter, we also saw lower miscellaneous investment income, which includes earnings from alternative investments and bond call premiums of $12.2 million compared to $14.8 million in the third quarter. I will speak more to our investment portfolio in a few moments.
For benefits experience, long-term care remains stable with the interest-adjusted loss ratio at 86.3% compared to 85.7% in the third quarter and 82% on a 12-month rolling basis. The level of performance for LTC this quarter is consistent with our long-term expectations of an interest-adjusted loss ratio between 85% to 90%, while our rolling 12-month ratio remains below the range due to pandemic-related claim of mortality in early 2022. I would also like to take a moment and provide an update on our long-term care premium rate increase program. We continue to make good progress with our regulators in achieving actuarially justified rate increases for long-term care.
In 2022, our total rate increase approvals totaled just over $100 million of net present value. And since the start of 2023 we received approval for another significant increase in a single state worth roughly $200 million of net present value. This program is an important tool in managing the risk of this block, and we are very pleased with the progress we are making.
So wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $37.5 million compared to $49.5 million in the third quarter, primarily driven by higher investment income on shorter duration corporate owned assets and lower interest and debt expense.
Moving now to investments; we continue to see a good environment for new money yields and risk management. Purchases made in the quarter continue to be at levels above our portfolio yield, and we experienced an overall increase in portfolio yield in the fourth quarter. In addition, we are pleased with the ongoing progress with our interest rate hedge program for long-term care. Since the start of 2023, we continued to expand the program and entered into an additional $200 million of treasury hedges, bringing the program to approximately 25% of near-term estimated investable cash flows in Unum America. We expect to continue expanding the hedging program over the coming quarters. We will provide additional details on our interest rate risk management strategy at our outlook meeting.
Miscellaneous investment income decreased in the fourth quarter to $13.9 million compared to $18 million in the third quarter. Last quarter, we set expectations for alternative income to moderate below our longer-term expectation of $20 million to $25 million due to market volatility. Despite this volatility, income from our portfolio remained positive, posting $11.5 million of earnings as our diversified portfolio of real assets, credit and equity demonstrated its resiliency.
So looking ahead, alternative asset income will remain directionally correlated with market performance. For the first quarter of 2023, we estimate alternative asset income of $10 million to $15 million. Likewise, traditional bond call activity and the resulting miscellaneous investment income reduced with the rapid rise in interest rates in 2022, while lower bond calls pressure net investment income in the short term maintaining higher-yielding securities is beneficial to our portfolio yields in the long run.
As discussion continues around the likelihood of a recession, I wanted to take a few moments to again highlight the strength of our investment portfolio and management. Our investment portfolio is well positioned if we move into a weaker economic period, and we have a long history of outperforming the benchmarks through cycles. Stress testing is performed at the individual issuer level and the modeled impact of a mild-to-moderate recession is not material.
Further, we experienced net upgrades of over $500 million in the fourth quarter and estimate net neutral rating actions in 2023 within our portfolio. Also, as mentioned last quarter, since the end of 2020 we greatly decreased our exposure to below investment-grade securities from just under 9% of fixed maturity investments at amortized cost to under 6% at the end of 2022. 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 remain robust at approximately 420% and holding company liquidity was $1.6 billion at the end of the fourth quarter compared to 415% and $1.1 billion, respectively, at the end of the third quarter. The increases were primarily attributable to the C2 mortality factor changes, which added approximately 25 points of RBC and strong dividends from our subsidiaries. Specifically, we made dividends from First Unum for the second straight year in the amount of $39 million.
Dividends paid from our Unum UK business were $37 million in the fourth quarter and totaled $66 million for the full year. Our capital metrics have benefited from the rebound we saw in our statutory earnings this year. Statutory after-tax operating income was $240.4 million for the fourth quarter and nearly $1 billion for the full year.
Looking at capital deployment in the fourth quarter, we paid $65.8 million in common stock dividends and repurchased $62.6 million of our shares this quarter. For the full year, we paid $255.3 million in dividends and purchased $200 million of our stock. Capital contributions into the Fairwind subsidiary were $50 million in the fourth quarter, which brings the total for the year to $515 million, which is below our original expectations of $550 million to $600 million coming into the year.
Looking ahead, we plan to provide our views across the business on 2023 during our outlook meeting on February 23rd. Next year's results and outlook will be the first under the new long-duration targeted improvement accounting pronouncement. As we've described in the past, this applies only to GAAP basis financial statements and has no economic statutory accounting or cash flow impacts to the business. While we will discuss in more detail, the meeting I'll provide two reminders about LDTI's impact to Unum.
First, there will be an adjustment to accumulated other comprehensive income and adoption, which we have estimated in previous filings, based on the difference in our investment portfolio and a single A rated bond yield as of reporting – as of the reporting period date. Second, based on recasting prior year financials, 2021 and 2022 will see higher earnings under LDTI, and we expect a favorable earnings relationship to continue based on our current forecasts.
In closing, I wanted to reflect on the incredible year Unum has had in 2022. Our 42.8% growth in after-tax adjusted EPS vastly exceeded the initial expectations we laid out at last year's Investor Day of 47% [ph]. Our capital metrics ended the year at historically strong levels, and we took the opportunity to reduce risk in LTC through our hedging program, which narrows the range of outcomes for that block. Execution of these items help drive a sector-leading total shareholder return of 74%.
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, and I do appreciate everyone taking the time to join us this morning. Let me put out one more advertisement for our outlook meeting scheduled for later this month. At that meeting, we will dive deeper into a discussion of our business strategy. What our updated capital plans look like for the year and provide additional outlook for the entire exciting year ahead.
So we are here to respond to your questions.
I'll turn it over to the team and the operator for the Q&A session.
Thank you. [Operator Instructions] The first question today comes from the line of Wilma Burdis from Raymond James. Please go ahead. Your line is now open.
Good morning. You just got strong LTC premium rate increases and my question is; are there more opportunities in the pipeline? And do regulators seem more open to improving rate increases due to inflation?
Great. Thanks Wilma. It's Steve, I'll take that question. And probably the first thing I'll do is just step back and just talk about our expectations for rate increase programs. If you go back to 2020 when we reset our reserve assumptions for GAAP basis behind LTC, we had set an estimate of right at $800 million of net present value for that program. If you carry that forward then through the end of 2022, including the year 2022 the $100 million that we achieved during that year that I mentioned, we're at around 44% achievement against that estimate. If you carry that forward to then the approval that we received in the first month of this year that added another 20% to 25% of achievement of that.
So we, we feel really good about where we are. I'll tell you throughout the pandemic, we've seen good responsiveness. We haven't really seen a change in the tone for regulators. There was a period of time operationally that they were dealing with COVID. But philosophically, they are still [indiscernible] for approving actuarially justified rate increases. And we really haven't seen that change with the change in interest rate. Many states actually prescribe the interest rate that you use for those calculations, and so it has probably less of an impact in those states and how states view those. But we feel very good about where we are. We still have a ways to go, and there's quite a few states that approve these and phased in amounts, and so we'll keep working those. It will continue to take us a few years to work through the rest of the program, but a very good – feel very good about where we are today.
Thank you. Makes sense. And then is the LTC block exposed to inflation risk?
It's not. Well, it's not to inflation risk. Obviously, we work with new money rates that we put into portfolio. But when it comes to cost to care itself, 98% of our block is indemnity. And so the benefits are contractual on a daily basis. And so we're not really subject to what the cost of care actually is in inflationary periods. So we feel pretty good about that. It just really eliminates the variables as we think about our cost of claims going forward.
Thank you.
Thanks Wilma.
Thank you. Our next question today comes from the line of Erik Bass from Autonomous Research. Please go ahead. Your line is now open.
Hi. Thank you. I was hoping you could talk a little bit more about what's giving you the confidence to project the group disability benefits ratio remaining in the mid-60% range for 2023. Is this being driven by structural factors that you expect to persist over time? Or do you expect some upward pressure on the ratio in the future as pricing adjusts and the labor market benefits normalize?
Great. Thanks Erik. It's Rick. Just an overview and we'll kick it over to Mike. I think you highlight an important part of our franchise and our group disability line. And so we saw very good results over the course of the year. And as we've talked about today, and we see some of those factors certainly can persisting into 2023 as well.
And Mike, maybe you can give a broader perspective of that line of business.
Sure. Thanks. Good morning Erik. Just to maybe go one quick down the incidence that we saw elevate a bit around those environmentally sensitive claims through the COVID period have just continued to abate. And where we see them today is really where they were pre-COVID on a pretty sustained basis. So that gives us a little bit of confidence that that's a good point estimate for us going forward on new claims coming in. And then recoveries have been really strong, third straight quarter that those have outperformed our expectations. And at this point, we really feel like it has stabilized at the levels that we're currently achieving and believe that that's something that is likely to recur in the coming quarters.
So the combination of those two things lands us in the mid-60s. We think that's good point estimate as we can come up with for the next several quarters. And you said a little bit in your question, Erik, but over time our target for the group disability segment would be kind of in that high-60s to low-70s range. And as experience comes through at the client level at renewal time, we would expect that to moderate to that kind of a level over the next two, three years or so. We do find ourselves like in a good spot from a growth point of view. It's a healthy book of business. So sort of where we are relative to competition in market, we think we're in a good spot to be able to tell our story about some of those capabilities that Rick highlighted at the outset.
Great. Thank you. And then maybe switching to the LTC hedging; I was just hoping you could talk a little bit more about the tangible benefits for the company. And is this just protecting NII in the event that rates decline in the future? Do you also get some benefits in your reserve calculations and sort of how you think about the level of capital you might need in a stress scenario, i.e., this give you more confidence to deploy some of the current excess capital that you have?
Erik, this is Steve. I can take that one. If you pull it down to the real purpose of a hedging program like this, it's risk management. We want to reduce uncertainty with the new money yields that we're able to get in the future, specifically around long-term care. So it's a risk management tool that we think is very important.
Now if you think about how that's been placed through to some of our reserving constructs for First Unum, it was more clear that, that did have benefit upfront because we were able to incorporate that into some of the scenarios that they have with pop down rates and those types of things. So that was kind of an immediate benefit to how we thought about our asset adequacy testing reserve there. With the premium deficiency reserve, it really just protects us from downside scenarios. As you know, our new money rate assumption works off of a trailing three-year treasury rate experience.
And so we're able to really take those hedges and get more certainty around what our new money rate assumption is for those portions of the cash flows coming off of that block. So I would view that as downside protection. One of the things that we want to do as part of Investor Day is really quantify that a little bit more for the market to really show what the impact of that is under different scenarios, different interest rate paths. And I think that will give you a better idea of really what the benefit is. But again, fundamentally we're doing this for risk management purposes.
Perfect. Thank you. If I can just squeeze one more; and is there a target for how much you want the hedge program to build to. So I think you said you've done about 25% of cash flows for the next, I think, five years or so. Is there a level that you can see that building to?
Yes. I would say that's something that we're just planning on expanding over time. I'm not trying to set a bright line target. We can talk a little bit more about how we're thinking about that later in February, but really don't want to get locked down to specific number. We're just happy with where we are today, and we do think we can continue to expand.
Got it. Thank you.
Thanks Erik.
Thanks Erik.
Thank you. The next question today comes from the line of Jimmy Bhullar from J.P. Morgan. Please go ahead. Your line is now open.
Hey. Good morning. So first on a question just on competition in the disability market. So your results obviously have been very good and so have most of your peers. Did you see any of that reflected in renewals for one-one? Did you see any indication of prices going down a little bit just given the strong margin? And what did you do with your prices in your own book?
Hey Jimmy, it's Mike. I'll take that one. And we talked a little bit about it last quarter because we sort of have a good line of sight on those January 1 renewals. But it was a successful program year, both in terms of placing the desired increases that we need to put through as you're just kind of actively managing that block and having persistency rates that were at or above where our expectations.
So we see sort of aggregate pricing levels in the market as being pretty rational and in line with sort of how we would have an outlook on the major costs that make up the prices that we set. In terms of the outlook for the coming year, we – looking at our pipeline of new business, I feel like we're in a pretty good position to continue to sort of build on the momentum that we established here in 2022 from a new sales standpoint. We try not to make dramatic changes to our pricing stance. We think our clients really value consistency in their budgeting processes year-to-year. So any changes that we make will be more so at the margin versus wholesale.
Okay. And then just on the labor market. Obviously, it's been a big deal win for results across a number of your product lines. There have been like more signs of layoffs or unemployment picking up a little bit. And I realize that is not a big part of your business mix, but are you seeing – should we assume that the tailwind from the labor market has, or the benefit on your results has already peaked? Or are you still viewing it as a tailwind into 2023?
Yes. Jimmy, it's Rick. I think you have to step back and think about it holistically in terms of what the forecast looks like. If you look at what we've seen in the news and the particular layoffs, I don't think I'd isolate any of those things. You think about the broader base of employees that we have at ranges in all sizes from the very small case with 10 employees all the way up to the very large case. And that's what you're hearing about more are some of the large cases. And so we haven't felt that impact today, but we're also very thoughtful about what may be coming over the horizon.
And when you think about the talk certainly of recession and what that looks like to our overall premium growth, we have benefited over the last – certainly, over the last 12 months, last 18 months from an increasing amount in the labor markets from both wages as well as from good employment, so that may wane. But I'll take you back to; we are fundamentally an underwriting business. And so although you'll see that on the margins, we still feel very good about our opportunities to grow and work through that and maintain good premium levels, good persistency, and so we – some of our cognizant of, but nothing that we pay too much attention to in any daily type of announcement that we see.
Thank you.
Thank you. The next question today comes from the line of Tom Gallagher from Evercore ISI. Please go ahead. Your line is now open.
Good morning. The first question I have was on group life. The higher average claim size, would you say that's – is that at all a function of wage inflation, meaning your insurance face amount of coverage per life has gone up? Or is it actually coming in worse if you do that kind of analysis to look at whatever the natural inflationary coverage you have in that block looks like?
Yes, Tom, it's Steve. I can take that one. I wouldn't attribute it to inflation necessarily. I would just attribute it to normal volatility in the average size. We tend to see some volatility there. And when you think about how those products are structured, we charge for higher salaries because a lot of those benefits are indexed to salaries themselves. And so we're getting paid for it. So it shouldn't really affect our loss ratio necessarily. So I just attribute to normal volatility, and the loss ratio this period was up around 78%.
If you take out the impact of that, we think something in the mid-70s is probably more realistic. And then, I guess, pandemic endemic wears off, hopefully, over time, we do ultimately think that, that loss ratio would be down more in the low-70s, but it will take probably a bit longer to do that. I mentioned in my remarks we still had $10 million of life claims in Group Life, I think just under 200 deaths in that block. So that is still attributing to our performance, but hopefully that will wane over time.
Got you. And then in international, I just want to make sure I understand the way this is likely to play out. There was a big spike in earnings related to inflation I heard those comments. Did you say you expected it to revert back to £20 in Q1? Or would you expect that inflation benefit to last a bit longer into early 2023?
Yes, I appreciate that question, Tom. I'm going to turn it over to Mark Till, who runs our international operations. Mark?
Yes. Thank you, Rick. The way I would think about it is, firstly, we've got a strong underlying performance in the business. Secondly, in the UK, we have had very high inflation building through the course of 2022. In the UK, the inflation benchmark we used has peaked at 14.2% in October because we cap our benefits where they are inflation-linked at 5%; it creates a margin for us. We expect that to decline during the course of 2023 as the inflation rate starts to trend downwards. We have a government stance of halving inflation in the UK. So therefore, you should start to see it coming off during the – probably during the first half of 2023. And we think our long-term position with this business should be generating something in the low-20 millions.
Got you. And just related to that, Till, would you expect some level of favorability to persist into the earlier part of 2023?
Yes. In the early part of 2023, as it starts it trend down from what's now 13 and a bit towards a more long-term average. We'll get that benefit probably in the first half of the year.
Got you. Thanks. And then if I could just sneak one more in. The 100, I thought the rate increase comments on long-term care were interesting. I guess I was a little surprised you only got 100 million of NPV of rate increases in 2022, which then makes your January success of 200 million for one state, a very big number, certainly in proportion. But can you just give a little bit about what's going on there? Was there a big backlog? Would you expect other meaningful increases? Or do you think this is the big one for most of 2022?
Yes, Tom, it's Steve.
Sorry, I meant for most of 2023?
2023, yes. This is the big one. We have a lot of outstanding requests in a lot of states that are meaningful, but in most of those states their annual approvals that are phased in over time. And so they really approve portions of it on a year-to-year basis. And that's mostly what we have left, and so we were very happy with the 100 million in 2022. That's just kind of where we are with the program that what we're down to, it's going to take multiple years to get it through the process. But what I would say is that they are getting through the process, states are approving them. We continue to make progress and so we have no reason to believe that our best estimate is not a good estimate ultimately.
Okay. Thanks.
Thanks Tom.
Thanks Tom.
Thank you. The next question today comes from the line of Mark Hughes from Truist. Please go ahead. Your line is now open.
Yes. Thank you and good morning. You mentioned natural growth a few times. Could you give a specific number for that in the fourth quarter?
It's Mike. Good question. Sort of ranges a bit by product line, but you placing it somewhere in the 5% to 6% range for group insurance is a pretty good number for us. Pretty evenly split, Mark, in terms of new employees coming on as well as the wage increases that are coming through.
I think it's important, Mark, to realize that is, as Mike mentioned, that is the group line. So we have premiums coming through all of our voluntary lines, et cetera, which just don't feel that immediate benefit like we do get to see on the group side.
Yes, exactly. And then the – could you talk about the benefit ratio in Colonial Life? Obviously some improvement here through the year. So what's the – what should we expect 2023 or what's the normal run rate?
Yes. I would say a normal run rate for that business is anywhere between 45% and 50% benefit ratio. That's pretty consistent with what our estimates would be. It's performed very well over the last few quarters. And I'd say it's been broad-based. There hasn't been one product lying that's significantly over performed. It's just that all of them are running pretty well right now. But longer term, but more closer to 50%, I think, would be our expectation. But feel great about how they've been performing over the last few quarters. I just kind of step back and you think about over the last three years, the Colonial business has been extremely stable from a profitability perspective and has really aided us and provided stability both in our statutory earnings as well as our GAAP earnings. So I just feel really good about that business.
And then the sales within Colonial that accident [indiscernible] visibility, the core product this quarter down a point, a little bit softer than what we saw earlier in the year. Anything to that?
Do you have some commentary, Tim?
Yes, thanks, Rick, and Mark, I appreciate the question. Let me step back and first I'll start talking about the market opportunity. We still see very strong interest in voluntary business products for employers. They are dealing with wage pressure and still trying to attract talent. And I appreciate the question earlier about the job market and whether unemployment is a factor, we're not seeing that yet at all. In fact, we're still seeing employers having a good peak more talent and as wage pressure is an issue for them, they turn benefits.
A recent Ernst & Young survey said 58% of employers benefits to being very, very important in terms of attracting the employees and pretty voluntary benefits. And when you think about employees, that same survey said 47% of millennials who are our largest customer segment at the moment, view the benefits available at work as being more important than they were before the pandemic. But they also want education around their benefits and employee [ph] wise pretty uniquely position provide that education across the benefit portfolio, including products that we do offer.
There have been some headwinds coming out of pandemic small businesses were significantly impacted by the pandemic, and they represent about 75% of Colonial Life. Customer base going into the pandemic, nearly 100% of our sales occurred physically face-to-face. Thankfully, we have the tools and technology to enable people to enroll digitally, and through telephone and other means, and so now that number is actually down to about 40% that are digital, 60% face-to-face. So we've been able to deal with it for the most part.
As was pointed out earlier on the Colonial Life side, you don't really get the benefit of natural growth, and there have been some recruiting headwinds. But let me pivot talk about why we're excited about the future. We have a number of technology solutions currently being introduced, including modern enrollment and benefits administration platform that we're seeing really strong excitement in our field force around that.
We introduced the opportunity in certain market segments. We're [indiscernible] agents to begin marketing group employer paid products, which we think is a significant advantage in the marketplace. A number of years ago, we introduced an agent productivity tools, we've invested in significant enhancements to that tool, and we see strong adoption and utilization of it.
So we ended the year with 6% sales growth a little bit below our long-term expectations. But given everything that we just talked about, we're excited about the future. We're really pleased, as Steve pointed out earlier, that we're about a point ahead in total premium of where we were going in to pandemic. I hope that gets to your question, Mark. Thank you.
Thanks Mark.
Thank you for that.
Thank you. The next question comes from the line of Ryan Krueger from KBW. Please go ahead, your line is now open.
Hi, thanks. Good morning. I had a question on expenses. When you think about 2023, do you view the full year expense ratio for 2022 as a reasonable starting point? Or do we think more about the more elevated level in the fourth quarter?
Yes. It's Steve. I'll take that one and then maybe kick it over to Mike for a little bit more detail. So just stepping back, when we came into 2022, we set the expectation that our expense ratio is going to be anywhere between 125 and 175 basis points higher than what we saw in 2021. That was mostly driven by getting the full employment and starting back up with travel and different things that we do to engage with our customer. And so we had expected that.
And then as we got into the year, we just feel really good about being able to have a sustainable, stable workforce and really rewarding those employees because it's just so important for us to be able to serve our customers. So we ended up pretty much in the middle of that range as far as what we saw on the expense ratio grow to.
I'd tell you that we expect that to pretty much be at a high point, peak a little bit more maybe in 2023 as we have full year of some of those compensation increases. But then definitely, I think, beyond that, we're going to be able to work that back down like we always do through adoption of digital tools, productivity, and so that would be our expectation. But maybe Mike can talk a little bit more specifically about where we're investing.
Yes. Thanks, Ryan, for the question. And just again, going down under what Steve says, would like the results we're seeing in the business and the momentum we've built with the investments that we're making. I think Steve appropriately highlighted our team. So we're the most biased you're going to find, but we feel we've got the best talent in the benefits industry. And you see that in things like 16% growth across of our core operation and sales. That's really strong sales client management and underwriting teams. You see that in our benefits organization and the recoveries we talked about, just exceptional team in terms of helping people get back to our product is lifestyle and back to work. And so making sure that we are fully staffed and appropriately rewarding folks is really important to us.
And the second item that's driving OEs is the technology investment. And so Tim just mentioned our new Colonial Life enrollment and engagement platform, we are very excited about what that's going to mean for our small business clients and what it's going to mean for growth. Rick at the outset mentioned total leads, our HR Connect capability and the way we're winning on Workday on ADP Workforce now and UKG platforms. We replatformed our dental business, and we're very encouraged with the growth that's helping us drive here, and you saw that in sales in the fourth quarter.
And that's probably the last thing I'd say, Ryan, is as you think about those investments in technology and as we have success with those in market, they have a dual benefit. The first is on the growth side. It's helping us differentiate and drive high levels of client satisfaction. But importantly, these are more efficient ways of doing business. And so like Steve said, as these take hold and more and more of our transactional volumes are coming digitally and through self-serve, we would expect that OE ratio to start coming down in the second half of next year, and that's both because our expenses will be growing at a slower rate, and we see that acceleration back into that 4% to 7% long-term growth rate that we have for the top line.
Great, thanks. And then just on the supplemental and voluntary, do you still expect quarterly earnings more in that $110 million to $115 million range going forward?
Yes, that's probably a decent marker, Ryan. I would say if you take out the two onetime items that we had in the quarter that are nonrecurring, I think, it's around $105 million would have been the earnings. And so there is still a little bit of unfavorable benefits results that are embedded in there, specifically with probably [indiscernible] but that's probably somewhere in that range is probably a decent planning estimate.
Got it. Thanks a lot.
Thanks, Ryan.
Thank you. The next question today comes from the line of Alex Scott from Goldman Sachs. Please go ahead, your line is now open.
This is Marley [ph] for Alex. I was wondering if you guys could provide an update on your capital deployment priorities on a go-forward basis.
Yes. Thanks, Marley. Good talking to you this morning. Let's talk a little bit about capital. I just start with the capital generation that we saw and the recovery we saw post-pandemic. I think it's tremendous to see the $1 billion statutory earnings as that comes in. You saw that flow all the way through our RBC ratios and our capital at the holding company are at current heights, we haven't seen the levels like this before.
And so I think when you think about how we're going to put that money to work, first of all, great conversation around the investments that we're making in the franchise. We're going to continue to put it back behind our business where we think there is still good growth opportunities. That's where it's going to go first. Sometimes, we can enhance that with some acquisitions. And so think about capabilities that are growth-oriented, who are the types of businesses out there that can help us to accelerate that path. And so we want to put money back there. And that's the growth trajectory where we want to put our capital today.
Now at the same time, we're certainly responsive to our shareholders watching our dividends grow. We've increased it at a pretty steady clip over the last several years. We will expect to continue to do that. And then buybacks. I think we had $60 million, $60 million plus in the quarter on a $200 million annual run rate. So those are two ways of response to shareholders.
And then in the background, I'd also talk about the PDR that we have, the premium deficiency reserve. We want to get that funded and behind us. And so I think that's an important use of our capital as we look forward.
So all those things in balance, we feel really good about our capital position. We've got great flexibility to attack on all those fronts, and we'll see how we do that in 2023, and we'll talk about that a lot more here at the end of this month.
That sounds good. And then I have one follow-up. It looks like you guys had some pretty strong sales in the U.S. and growth. I was wondering if you guys could just go into a little bit of what is driving that.
Yes, thanks for the question, it's Mike. And so it's pretty broad-based for us. And we talked a little bit about the capabilities. We are definitely seeing for the Unum brand in the mid and large employer markets, the need for a really strong both leave and administrative solutions. So again, our total leave platform, we had set them pretty big goals for this year as our first year in a national rollout phase, and we significantly exceeded those goals.
And as a reminder, we offer leave only in combination with insured products, when you see the really strong short-term and long-term disability growth, for instance, a good amount of that in the mid and large cases coming through on a packaged basis, a good amount is coming on those platforms that I referenced earlier.
In the smaller end of the market, we look to provide an administratively easy bundle for the small employers. So the strength of the dental offering, which is a really important benefit, particularly in that small employer market and our Unum administrative platform that has really started to take off. And so as we have success in dental, that's pulling other lines with us as well.
And then in the self-involved category, good continued strength in our individual disability business that is often a buy-up to the group long-term disability. So again, as we have a really strong, I would argue, the premier disability and leave franchise in the industry, that's very often bringing buy-up opportunities for that very steady and profitable individual disability business.
I think as you look forward, it's taking a little bit longer, but as our voluntary lines like Tim talked about under both the Unum and Colonial Life brands, we're seeing really strong underlying strength in the distribution of pipeline. And so that bodes well as we sort of think, again, about 2023 sales growth and then again getting back into a top line 4% to 7% range over the next couple of years.
That's great. Thank you.
Thank you, Marley.
Thank you. The next question today comes from the line of Mike Ward from Citi. Please go ahead, your line is now open.
Thank you, guys. Good morning. Maybe just a quick clarification, Rick. So no change to the $200 million run rate for buybacks into 2023?
Yes, we'll talk about that at our upcoming meeting. I think we were looking backwards more talking about the $200 million we've done over the last 18 months or so, at least on pace for that. So, I feel good about that. We'll talk about different types of flexibility we have going into 2023 at our outlook meeting here in a few weeks.
Awesome, thanks. And then maybe just curious about the commentary around credit. I'm wondering if you guys could expand on the commentary for net neutral rating activity in the investment portfolio.
Yes, Mike, this is Steve. I can take that one. Just stepping back a little bit, and we haven't really talked about recessionary pressures specifically, but we do a lot of work around our credit just around sensitivity testing, scenario planning. And as we look forward and we think about kind of a moderate recessionary scenario of GDP down low single digits, and we run that through our portfolio, we feel really good about the fact that we don't see any material impairments within the portfolio. We do think that for the positions we have, the net neutral is a pretty good planning estimate for us. But clearly, we have a lot of capital flexibility to manage in most scenarios.
The other thing that I'd say is we have over the pandemic, I had in my remarks, we've reduced our high-yield portfolio quite a bit during the pandemic. It's gone from just under 9% to just under 6%. And we took the opportunity to redeploy a lot of that money, obviously, in other asset classes, but specifically into our alternative investment class. And that's performed very well throughout the pandemic. That was a great move that we made.
We do not think, though, going forward, we're going to need to make significant shifts in how we think about our asset strategy and our investment strategy and just feel really good. We're a credit shop. This is what we do. We've, I think, proved through a lot of different recessionary actual experience that we managed this portfolio well and can really mitigate impacts on our portfolio. So we show very good against benchmarks as you go through those types of scenarios.
Awesome. Thanks guys.
Thanks Mike.
Thank you, Mike.
Thank you. Our final question today comes from the line of Suneet Kamath from Jefferies. Please go ahead, your line is now open.
Great. Thanks for sticking me in here. So just wanted to talk about the disability claims. As I think back to the industry's experience, it does seem like when we head into periods of economic weakness, disability claims tend to pick up a little bit. So just curious if that's something that you guys or who you agree with, A? And then B, kind of how are you thinking about that as we kind of move through 2023, particularly given your kind of guidance on the benefit ratio?
Hey Suneet, this is Mike. Thanks. Really good question, opportunity [ph]. And I guess where I would start is you do see a linkage when you think about disability. The first thing I'd say is it varies a little bit recession to recession. But on average, it's usually with a four- to six-quarter lag, so you do have lead time between the turn in some of the macroeconomic employment and any impact on disability. So that lag, I think, is important.
The second is where that impact gets built. You can sort of see the brightest line when you look at social security disability. And the private industry tends to be a bit muted, but it is there. And our experience, at least in the last three recessions that Unum has done a bit muted still. So not that it's inconsequential, but it's not terribly, terribly significant.
And I think for us, we sort of look at it and say, certainly with respect to 2023, you do have a little bit of line of sight given that short-term disability tends to be integrated with LTV with a high level of frequency. You can sort of see some of those incidence trends come through early.
As you play out the next, again, four to six quarters, could there be some pressure that emerges? Yes, I think there could be. I just kind of go back to where this most recent recession that we've come through, even with some of those environmentally sensitive diagnosis coming through recoveries really were quite strong and a really strong offset to it.
So what it looks like in 2023, again, I think the mid-60s is a pretty reasonable estimate. Where it ends in 2024, as you think about different scenarios, economically. It's a little bit more uncertain. But again, based on our experience that through the last three recessions, we feel like we've got a pretty resilient franchise there.
Got it. And then maybe just one quick follow-up. As interest rates declined, you guys were taking action on that new claims discount rate by kind of lowering it. Have you started to increase that now that rates have risen? And how do you think about that vis-a-vis pricing?
Yes. I would say we did increase it, I forgot what the percent was, but we did increase it over the past year when rates go up. But what's really interesting is when we get into the new LDTI accounting basis, those discount rates are going to be based more on the locked-in kind of market rates that you see. And so it's going to be a little bit more prescribed. And so that will create a bit of a different dynamic going forward with how we think about discount rates. I'm not sure it's going to really change how we philosophically think about pricing and what we want to earn on our portfolio, but there is going to be kind of that difference with how the GAAP accounting takes place.
Got it. Okay, thanks.
Thanks, Suneet.
Thanks, Suneet.
Thank you. There are no additional questions waiting at this time. So I'd like to pass the conference back over to Rick McKenney for any closing remarks. Please go ahead.
Great. Thank you, Bailey. Thanks, everybody, for joining us today. Appreciate it. Unum had some very good results over the course of 2022. We're very happy about the momentum we carry into 2023, and we look forward to taking you through some of the details around that as we look out over the next year and several years at our upcoming Investor Day meeting. I look forward to hearing from you then.
And that ends today's call. Thank you very much.
This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.