Unum Group (UNM) Earnings Call Transcript & Summary

Yes. Disability. Results have been strong for you, strong for others. Is this good experience reminiscent to you of a previous cycle?

Yes. I think I -- as you said, I've done this a long time. And you think back, I mean remember in the early 2000s, difficult time for our company, and it was really because of the significant growth. I mean we were kind of a growth for growth sake mindset, and we certainly grew the top line, we jumped both feet into the large case market, successful on sales, it killed our margins. And so we had to address that. So the -- and -- I think back and a lot of the profitability pressure that we felt was not so much raw incidence levels, it was our pricing and underwriting of it, all right? And so then we get -- so we kind of became very risk averse and we cleaned things up in 2005, '06, '07 and really built profitability and margin back into the business, very disciplined around it. We -- it turned out we were very well positioned going into the financial crisis. So we really didn't see much of an impact to the benefit ratio, to claims, that type of thing. Certainly, saw a decline in the rate of growth, top line growth. But in terms of risk experience, came through that cycle pretty well. And so we sit here today and you see a lot of companies -- most companies in this business doing pretty well. Margins are good. Your company...

One feels nervous when that happens.

Yes, I understand. And we share some of that. And we would -- again, going back to my comment about having fewer bigger players in the market, we think, is ultimately probably pretty good. Because they've all -- these folks here are all going to scrutinize them every quarter as you are about, what are they doing? How is that business progressing? What kind of margins are they seeing? What are they doing to grow it profitably as opposed to it just being a business over to the side that you don't ask very many questions about. These are more important businesses for the companies that are in there. So we'd like to think there's a little more kind of discipline overall in the marketplace, which would lead to a more -- a little more stable environment. But we'll have to see how that plays out. But you can count on us being -- we're going to be disciplined. We're going to stay the course. It will be interesting. We're obviously in a good employment environment. I think that helps incidence rates. I think that helps recovery rates to the extent that we get into a more difficult economic environment. While we go back to 2008 and '09, we didn't see the deterioration on the claims side. Every recession is a little bit different in how it comes on, how it impacts different parts of the economy, different employee groups. So we'll just have to see. But if you -- stay disciplined, I think the other great thing about this business is you do have that repricing flexibility. And so -- for example, we've done -- we've been pretty consistent in rate increases the last few years primarily to address interest rates and discount rate adjustments. But to the extent that claims get a little bit sidetracked, there is that availability to go in and reprice if incidents and recoveries do deteriorate.

That makes sense. One thing you've done is, over time, bring the expense ratio down. I guess part of that is just premium growth. But do you feel as if it's more than just that? Or if there is some efficiency being able to push rates?

Yes, there's certainly some efficiency. And I think back over the last several years. This has been something internally that we really focused on. And if you think about the -- you kind of line up the income statement, certainly like for Unum U.S. or for Colonial Life. We're seeing kind of 5% premium growth. You've got this steady grind down in interest rates and portfolio yields. And so NII is under pressure. And so in that kind of environment, if you're going to create -- if you got to take that 5% premium growth and turn it into 4% or 5% earnings growth, you got to do something on the expense side. And plus, the business changes, customers want more, we all sign up for our benefits on our iPhones now and do things like that. And unless you are investing in those capabilities, you're going to fall behind. And so what we have done for several years is focus on -- being as efficient as possible in order to free up the investment dollars that we're going to put to work. A lot of it goes in -- for us goes into digital capabilities. We're investing pretty heavily in the leave service space and how we can be efficient in that market. But it really just kind of comes down to how do you manage your business, how do you manage expenses. I worked within our financial area. And while I'm a teeny tiny new corner of the side of it, I do see how -- in the treasury area, how we're finding more effective ways of doing business. Financial reporting, some little bit of outsourcing that we'll do just find -- just be cognizant of how can we run our business more efficiently to free up those dollars to invest back into business.

This is theme that goes across all businesses?

Absolutely. It's an interesting environment. Yes. And again, in a declining interest rate environment, where historically, we've -- you can always count on a nice level of new money yields and how that would feed investment income, that's not there. And so you've got to address it. And that's one of the ways that we've gone about that.

No question. Any question about Unum U.S. you guys have out there about this business? There's a question down here.

So to go back to the point that Jay made and when asking about previous cycles and the cyclicality that tends to happen with disability insurance, would you say that Unum is diversified amongst industries? If, for example, you have manufacturing, you're exposed there and there's a lot of jobs that are lost and disability claims rise. Is that something you guys think about -- like thinking about as far as what industries you're -- oh, sure.

Yes, yes, definitely. And I'd say, we probably have a little bit less economically sensitive block of business. It is a little more kind of blue collar and -- to white collar kind of business. So for example, we don't do much in the construction area. We're not going to do much in part-time workers, that type of thing where you would see probably more economic sensitivity. But that's definitely something that we look at. We love to be involved in more rapidly growing areas. Health care is a fairly big chunk of our business. We look at the overall percentages, but it is a growing area in terms of employment, and that certainly helps with managing that.

By the way, that question came from Ian Ryave. Ian is my associate, does a lot of work on the life insurance sector. If you ever read a note, we've written, and you read something and say, that's pretty well written on life insurance, that's a very, very good chance Ian actually wrote that sentence. So thank you for the question, Ian. Shifting overseas, internationally.

Yes, yes.

So U.K. sales, I guess, are expected to be somewhat muted, given some of the uncertainty with Brexit. This is a tough question, but when do you think sales can start to recover there?

Yes, it's been an interesting and pretty difficult business environment in the U.K. Again, our -- the bulk of our international business is U.K.-based. It is primarily employee benefits. I think it mirrors our U.S. business, a lot of group disability, some group life insurance and dental and critical illness, that type of thing. The challenge is really, you think about it, with Brexit, you had a pretty immediate drop in interest rates and that necessitates discount rate adjustments, price increases. And so it feels like we've been working very hard the last 2.5 years to kind of stay in place. Because you -- we -- with our disability block, again, it has that repricing feature. So about -- you -- we can work through the entire block in about a 2-year time frame. And we've had pretty consistent, 9%, 10% rate increases each of the last 2 years, and it's really gone to offset the discount rate pressure that we've seen. So again, premium growth actually hasn't been too bad. Sales growth has been okay in that market. But unfortunately, it's just going to offset the discount rate adjustments. And so what we felt last year was, we felt like we did a pretty good job of executing on what we can control, which is some level of sales get the rate increases that we need and also persistency is held in well. So it kind of tells us that we're not alone in this. That other companies are needing to do the same thing. So by and large, premium growth has been okay. The challenge that we had, particularly in the second half of last year, was a little more volatility on the claims side, little bit more in disability, little bit higher on life. Some of that's probably economic related on the life side. I'd say, it's just the nature of the business. It's smaller. This is much more of a white collar block of business for us in the U.K. So when we do get a move up in life claims, they tend to be larger dollar amounts or pound amounts, I guess.

It sounds like the competitive conditions are pretty reasonable.

Yes. I'd say the competition is pretty reasonable. It's just how do you -- in an environment like that, how do you drive -- how do you turn that 6% or 7% premium growth into much in the way of earnings growth. That's been the challenge that we've seen.

And then with Poland, how would you assess the acquisition now? You're just a couple of years into it. How would you assess it from your standpoint?

We feel very good about it. I mean we're probably really looking for any kind of international opportunity. What we're really focused on is, is there a model for distributing insurance products into the worksite. That's our business model. And so that's important. And then with Poland, what we looked at was, what did the kind of the demographics of the country look like, and we found a good, growing middle-class educational attainment is increasing, incomes are increasing. And so that's kind of the recipe that we're looking for. And so with that particular acquisition opportunity, it was really the worksite marketing component. They do sell some accident riders on what tend to be kind of the traditional life and asset types of -- and investment types of products. So that's the opportunity that we saw there. Very good business on its own. It's not one where we have to go in and change a lot of things. The noncore businesses from our perspective are performing very well. And we don't want to change that. We just want to grow that worksite marketing and that little disability accident component that exists there. So we feel very good about Poland.

Got it. Just a couple of things on Colonial Life. I think you mentioned on the call, your recruiting is now being handled internally. And I wanted to understand the implications of that. Why you made the change and what that means for you?

Yes. I think -- well, why we made the change is -- if you think about it, we've got a territory structure. We have a territory manager. That individual is in charge of managing that in-force block of business. So it's sales, it's handling re-enrollments, renewals, but also recruiting because it is a feet on the street kind of game with that type of business. And so what we've seen is -- we kind of change the recruiting model. It seems like, every few years, there's some adjustments that are made to it. But we really had more of a model that kind of relied on third-party recruiters, headhunters to help in that process. And while that works okay, what we found is that where we were really having our own people do the recruiting and bringing the new agents in that they tended to be a bit more successful. We'll go in and we'll look at -- once a new person comes on board, how quickly is their business ramping up. And this is all commissioned. These people had facility. And that's a different mindset than what I could possibly do there. But anyway, they -- we just found that with -- by using our territory managers to be responsible for the recruiting, that was driving a more productive better group of people coming into that organization. And so we're kind of expanded on that. We did see a little bit of a low going back to late '18, early '19 in terms of the recruiting trends. We feel like we're back on track. We like seeing the productivity numbers of the new people that are coming on board and very excited about what that means going forward for the business.

We've got 6 minutes left. We should probably hit long-term care.

My day would not be complete unless we spend a little time on long-term care. So...

I guess I'm curious. There must be a certain level of -- high level of frustration from your standpoint. Given where your stock is trading, arguably, the rest of your business is a business that would attract a reasonably good multiple. Your overall multiple is crap, like a lot of other companies, by the way. So clearly, the market is putting a negative value.

Absolutely.

There's no -- we know that. As you think about that, are there ways that you can communicate with The Street information you can provide, I'm sure you thought about it, that can somehow allow the market to value the company differently?

Yes. Great point. It is an area of extreme frustration for all of us at the company in terms of the valuation and all of that. Going back to when we did the reserve adjustment in the third quarter of 2018, we did like to think we really increased the level of disclosure. What we tried to do with that is to -- for the kind of the big drivers of the business to show what our experience has been, what our assumption is, and then to provide some sensitivities around that. And so if you -- so for example, new money yields. We're at 5.5% for a couple more years, it grades up over a few years to 6.25%. So if you don't like that, and if you think it should be lower, then here's the math, 25 basis points to $250 million if we just ratchet that that new money yield curve down. Morbidity assumption, kind of a controversial topic. We tried to show that we have seen, in our block, a pretty consistent 3% morbidity improvement over a long period of time. Unfortunately, nobody believes that, but that -- it is what it is. We try to show that. And we -- in that way, we're supporting the 1% improvement that we have baked in. So we actually think it's a somewhat conservative assumption because we're estimating 1%. Historically, we've been seeing 3%. Now again, if you don't like that, it's -- if we eliminate it, it's $1.4 billion. And so we tried to give the market and analysts like yourself the math to kind of be able to go through and make those adjustments. So that's one thing. Yes. Second thing is -- march madness for me is not so much the NCAA basketball. It's one of these LTC exhibits come out and everybody looks at it. And to us, there's a lot of just kind of misinformation and not very helpful information. So something that we've been doing is working and other companies have been involved with this. It's is working with the NAIC on what they can do to improve the disclosures in those because people put -- analysts put a lot of weight on that. And there won't be any changes this year, but looking out a year from now, there will be some adjustments. And hopefully, those documents will be a little bit and more informative as to what's kind of the -- some of the underlying trends that are going on in LTC block. So information is important. At the same time, it's -- there's still a lot of information out there. A lot of times, it's not analyzed particularly well or it's misunderstood, and that can create some problems on its own. So we have to deal with that. But I get it. It's a very complicated book of business. Every time I go to our folks and I ask them a specific question, I'm kind of overwhelmed by the complexity of it. And so trying to find a way to get information out to analysts and investors like yourself to be able to make a judgment is a challenge. Now what I tried to do is boil it down in kind of 3 big pieces. What are new money yields doing relative to our assumption, the liability flows, the -- so the interest adjusted loss ratio. We put the 85% to 90% range around that. And the other thing is, the big thing is, what are we getting in terms of rate increases on in-force business. We try to frame it around that. We try to give you an idea of how those are tracking. I'd like to think that the reserve charges that we had in 2011 and '14 and '18 were not necessarily shocks to anyone because you could see that risk results were -- either interest rates were low. Risk results were running higher or worse than expected. So we tried to be transparent. Again, it's a complicated business, and we're trying to do these things to shed a little bit of light on it.

I did have a bunch of other questions on it, but we are out of time. So you're off the hook on that. But I'm sure others will see you during the day and hit you up with other questions.

I'll be in the Miami Room.

Fantastic. Tom, thank you very much.

Thank you, Jay. It's appreciated.

Great stuff.