Unum Group (UNM) Earnings Call Transcript & Summary

Hello. I'm Tracy Benguigui, Insurance Analyst at Barclays. Pleased to introduce to our session, Rick McKenney from Unum. Welcome, Rick.

Good morning, Tracy. How are you today?

Great. [Operator Instructions] Maybe just to kick things off, Rick, if you could share some high-level thoughts on Unum in this dynamic environment we are living in.

Great. Thank you, Tracy, and welcome to everyone who's part of this session. Appreciate you joining us today. I'll talk a little bit about Unum, I'd make sure to give a little bit of background on the company. We are a company that is focused on the employee benefit space. We are at the work site. So when you think about Unum, think about delivery of benefits, ranging from group life insurance, disability, our voluntary benefits, dental and across the spectrum. And so we've been a leader in the group disability for many years, but I think that as we've added new product lines, we continue to bring that whole suite of products to companies to make sure they're protecting their employees in the time of need and their families. You asked about how we're doing right now in terms of the midst of the pandemic. I think it is highlighted what we've gone through, the need for those type of protection benefits at the workplace today. So we're actually encouraged that some of these things will actually bring people to those protection benefits in a concerted way going into the future. Clearly, the pandemic environment has created some disruption in the markets. Overall in our space as well, and we saw some of that in our second quarter. But happy to answer your questions today, what we're seeing today overall. We think that we're well positioned for this environment, and we look forward to an environment that returns to some type of normalcy that workplace benefits continue to be as appreciated by employees and is delivered by employers as they have been in the past.

Great. And I think just listening to you speak, just carry on this cautious optimism by other speakers from the last 3 days. [Operator Instructions] Just remind folks again that there is a polling question up. But I'll kick it to you, Rick. What inning are we in for the industry to understand long-term care liabilities?

Yes, it's a good question. I think the inning analogy doesn't work as well in the long-term care space because the amount of data and knowledge and understanding is about data. If you think of the industry, it's been around for -- in the 90s, it's really where it started, but we're dealing with a situation where it was sold to people in their 50s and 60s back then. And so now they're getting into their 80s and 90s. And so we're just getting to the point now where we're understanding as people are claiming on LTC, what that looks like. And so unfortunately, it's not an inning-type scenario, but it is a little bit more exponential in terms of how that data is coming in as people get to that point in time. So the data has gotten much richer over the last 10 years, certainly over the last 5, and every day, we're getting more information around what's happening in the claims front. So I think as an industry, people are understanding long-term care liabilities much better. How people are claiming, how long they're utilizing their benefits, what they're using them for. Health care -- home health care versus what happens in a facility. All those things are transpiring. And so I think as you look out over the next 5 years, 10 years, you'll get even more robust in terms of the depth of that understanding. So inning analogy doesn't work, but we certainly are far away in terms of understanding what those liabilities will look like as an industry and true for Unum as well.

Great. And I'm wondering as you're building out playbook, has COVID-19 changed how the industry should think about mortality. So I'm thinking about the skew towards the older population under a pandemic, and maybe to challenge to what extent the notion of mortality, longevity being a natural hedge?

Yes. So it's a good question. So when you think about our entire book, do I take you through, we do are a group life carrier. Oftentimes, it's dealing with people in their working lifetime. So you're going to see that skew to a little bit younger, think, of 65 year olds and down. So that's one side of the equation. On the long-term care side, it is going to be at the older ages where we'll see the mortality impact. We saw that in the second quarter, so we did have a much higher level of mortality in the quarter that we saw. And so I think that in that challenging time, I think that's been part of the reality. You said, how does that actually change people's view on mortality. A pandemic is a special situation that we have there, and so when we think about mortality as we get back into a normal mode, we'd say reverting to many of the same trends that we saw before. Now well, I think it will cause people to say is pandemics, unfortunately, do happen. And so you can't just exclude it completely when you're looking at a data set that ranges over many decades of understanding. And so we'll have to factor that in, as I think, many of the companies will in terms of overall mortality trends and what those look like.

Okay. And Unum has taken a large long-term care reserve charge -- charges basically at 3 to 4 year intervals. And more recently, the Maine review resulted in $2.1 billion of additional reserves over the next 7 years. Could you discuss the liability trends you've seen in the last 2 years since the latest reserve assumption update? And likewise, what is the chance that it could happen from other States?

Yes. So let me first start up by splitting across your discussion on the reserves in the 2 different pieces. And one is on our GAAP reserves, which we report out every quarter and go through. And so as you mentioned there, we have taken multiple reserve charges if you look over the last decade. A lot of that was actually related to a decreasing level of interest rates that we've seen, and so I think that's back in 2011, 2014, 2018. That was a big piece of what you saw there. What you're talking about on the Maine piece is on our statutory reserves, and so that's a very different set. And that's an area that we had not taken any reserve increases particular to any onetime events going back through that same decade of time, we've been building those statutory reserves. We thought at a very good level. As Maine came in and reviewed that level with an external actuary, they thought that we should put more conservatism into those reserves, and that's what you saw us report earlier this year. And the $2.1 billion represents what we'll put into increased reserves over what we think are the right levels over the next 7 years. So there is 2 different things going on there, and I want to make sure that people understand that. The GAAP side is reporting, well, that's our best estimate. We'll update those as we see fit. And then on the statutory reserve side, which comes more in terms of capital and reserves that we put behind our business, is really a different construct that we see.

Okay. Great. And with health sounded too [ gullish ], COVID-19 does, as I mentioned earlier, skewed to an older population. But that by itself doesn't seem to swing the pendulum back as people are still living longer. How are historically low interest rates in this crisis influencing your strategic positioning over the long term?

Yes. So back to what we're talking about mortality. I agree, in the pandemic, it has skewed towards the older ages as we've gone through the period of time. And not to say that it's not actually impacting across the spectrum. So we've seen, as an industry, about 10% higher levels of mortality across all cohorts, really. It's bigger in the older ages, as you expect, just because of where they sit in the life cycle, but it actually has impacted across the spectrum that we've seen. You asked about interest rates and how does that play into that because people will continue to -- post-pandemic, will continue to see mortality extend. We've seen that over a period of time. And so we have to make sure that we're investing behind that portfolio to be there to pay those claims when they come due. And so as part of that, we maintain a good solid investment portfolio as we bring in those premiums today, investing them in good, solid investments that will make sure that we're there to pay the claims when we get to that point in the cycle.

And I do want to touch on your investment posture, but before doing that, just sticking with the theme. It seems that persistency rates are still high within your LTC block, and it does imply that your liabilities are becoming more illiquid. So maybe you could extend that thought about the attractiveness to less liquid assets relative to more illiquid liabilities?

Yes, certainly. The persistency in our long-term care block has really been much higher than expected since inception, and it's been true across the industry. And so you can actually expect that most of the premiums that we take in will be there until you get to the point where it will go on and claim. So there really is no liquidity in those LTC reserves that we have today. As a result, we do want to have a posture that takes advantage of that illiquidity to back that book of business. We'll do so with duration matching, so we'll buy longer-term assets on the credit side, 30-year type instruments to match as best we can. We'll take on private placements that have no liquidity or less liquidity in them today to make sure we're backing those liabilities. And then one of the things we've been doing over the last several years is investing in alternative investments that have more characteristics once again, not as liquid as you'd see in the corporate markets, but we like the characteristics of those. And so we've expanded into that portfolio, that asset class, over the last several years, and that's a place we'd like to still take advantage of the illiquidity that's in our reserves, which is effectively no liquidity that's in the reserves today.

Okay. And recognize that not all LTCs created equal. So maybe you could help us understand the distinguishing factors of your group LTC versus individual?

Sure. The individual LTC, so if you take that, that's been more of the standard type product, which you hear about across the industry. People on a one-by-one sale will actually go to the individual, and they'll provide that LTC cover. There are small variations that happen within that as well, different product features, but I think a big distinguishing difference is, in our group, long-term care that we have today. And there is a few players out there that have done that today. We can go to the employer. And so we actually have -- the employer often participates about 50% of our cases today. The employer will go in and help provide long-term care coverage for their employees. And so as a result of that, you get the pooling effects that we see a benefit from across our group businesses today. We also seen the features in those products, given that it's done by the employer can be much less rich than you might see in an individual type policy. So the group business is a very different one. I think it's good to recognize that roughly half of our business is group, half is individual. And so there can be very different dynamics that happen in that book of business.

Okay. And what type of risk transfer solutions are possible? And what factors need to be considered for participating parties?

Yes. So I'd step back away from LTC for a second and say, when we think about risk transfer opportunities, there are different things that we use across our portfolio. So it includes just straight reinsurance that we use, transferring risk to counterparties as we balance the portfolio. If you look at our Closed Block, there is 2 pieces there: one is our individual disability block of business, and so we're always looking at good opportunities there. For example, back in 2007, we securitized that block of business. And so looking at those cash flows and how can we free that up is something we look at. And then you get to long-term care, and that really does ebb and flow a little bit. I think that given the environment that we're in today, we talked about the liabilities. People are understanding the liabilities better, which allows buyers and sellers to work together, and we've seen that actually getting closer to actually be able to have transactions happen. We've seen a couple of them happen over time. But I think in the current environment and the interest rate environment today, that gap has widened between buyers and sellers. And so it's more difficult to do a risk transfer type transaction today, but something we stay on top of. We know all of the potential buyers of that risk. We are certainly want to be a seller in that process, but we've got to make sure that bid-ask spread comes into a reasonable level that we can execute.

Got it. Probably even more so these days, would you agree, given low interest rate environment on that bid-ask spread?

Yes. No, that is an impact clearly today that we've seen. But if you went back even 18 months ago, you were at levels that that bid-ask spread was probably tighter. But where we sit today with a 30-year treasury out there in the 140 range, those type of transactions become more difficult.

Yes. So can you highlight the progress you've made on premium rate increases? And are there certain states you're still waiting a response from?

Yes. We've actually been working with regulators for over a decade, raising rates on our long-term care policies as they're warranted. I think if you look at our most recent communication going back almost 2 years now, we've said that there is a $1.4 billion amount of rate increase that we're going to be actively working on to put into our book of business. We're over 60% of the way through that in the first 2 years. We're happy with how that's progressed. How we've been able to work with regulators, how we've been able to take care of consumers along the way. And so we're actually continuing that process. And it's not a State by State. We've actually, at this point in time, we've had success in getting rate -- seeing rate increases approved by all of our States that we operate in today. And so this is about how do we actually look at incremental rate increases where it's warranted by how different products have performed. And I'd say one of the things that we have now that we're looking at to get up to that $1.4 billion level is the rate increases we're pursuing in our group long-term care business. And so if you think about how that will impact and how regulators look at that, it's a little bit different than individual because those rate increases will ultimately go to the employer. As we talked about, a lot of its employee are paid, and then we'll get to their consumers within the employee base as well. So that's all going, I think, according to plan, maybe even a little bit better than we had laid out back in 2018, but it's something we actively work on, and we've seen good engagement with our regulators today.

Okay. Great. Maybe shifting gears to capital management. Unum has not repurchased shares in the first half of 2020. So $516 million remains outstanding under your Board authorized program. If you could provide any visibility on what guidepost you're looking at to resume activity, particularly, I think you pay attention to operating capital adequacy.

Sure. If you think about the beginning of the year, so you're correct, we have not purchased shares this year. I think we would have been good company in terms of the insurance space going into the pandemic. I think that was something that was stopped across financial services. I think when you look at us particularly, it's something that we don't expect that we'll be getting back into anytime soon. You still have the pandemic. We talked about some of the impacts you have relative to what we're doing with our agreement with the State of Maine. And we're making sure that our capital adequacy remains very strong in this period of time. So that includes letting our RBC ratio continue to increase, having good cash at our holding company where we ended the second quarter at over $1.5 billion of cash that we have out there available to us. And so maintaining that strength of this period of time still becomes paramount. And so getting back into share repurchase is not something we're looking at certainly at the present time.

Okay. Maybe you could provide us some context on credit risk with respect to ratings migration and credit defaults?

When we went into the pandemic, we disclosed and talked about what we saw a potential for credit ratings migration. We looked deep, name by name across our portfolio and highlighted that. If you look in the first couple of months of the pandemic into the May type timeframe, we did see downgrades in our portfolio, and the capital impact of that was quite small. So less than $20 million of capital impact for all the credit ratings migration we saw to that point in time. We really haven't seen any sense. I mean very little in the way of credit migration. I think that's true across the industry. It's certainly true across our portfolio. As you've seen, liquidity flood into the market, as you've seen, even energy prices increase across oil and gas, all those things, I think, have contributed to our credit remaining quite sound at this point in time. And so -- although we saw a little bit in the second quarter. We don't see any -- we didn't see -- I'm sorry, still a little bit in the first quarter, I didn't see very much in the second quarter. And I think the credit markets actually look pretty good right now.

Okay. Great. Yes. I've read recently that Fallen Angels are starting to level off, and that's the key concern. Maybe moving on to voluntary, and I actually have a two-part question here. So just a little bit of a backdrop. When thinking about the recession environment, we're in -- I'd like to get your context of how that's hitting Main Street versus Wall Street. It seems like it's hitting Main Street more. So the first part of my question is, how concerned are you of this headwind regarding your voluntary business, having a distinguishing feature of Colonial Life, 2/3 focus in the less than 1,000 life space opposed to mid and large case market? And then I have a follow-up on Unum U.S. side.