Unum Group (UNM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the 2021 Outlook Meeting for Unum Group. This is Tom White, Head of Investor Relations for the company. After many years of joining you face-to-face in New York for this meeting, we've been forced to change things up a bit, like so many things have been changed up here in 2020. And given the weather that I suspect you're having in the New York and northeastern area, we're happy to be coming to you from our offices here in Chattanooga, Tennessee. But we're happy to have you join us virtually this morning and intend to have a good and informative dialogue with you today. First the safe harbor statement. Our remarks this morning will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC and are also located in the sections titled cautionary statement regarding forward-looking statements and risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2019, and our subsequent Form 10-Q filings. And these filings can be found in the Investors section on our website. I remind you that statements in today's meeting speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. And a presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP measures are included in today's presentation. The presentation will be visible to you on the webcast along with the faces of our presenters, and hard copies of these slides can be downloaded from our website. In addition to the slide deck, you'll find a press release distributed this morning as well as the 8-K that we filed. You can see here on the agenda. For this morning's presentation, Rick McKenney will kick things off with opening comments followed by our Chief Operating Officer, Mike Simonds, who will provide an overview of the core business segments. Mike will be followed by our Chief Financial Officer, Steve Zabel, who will provide his CFO report and an outlook for 2021. And then finally a question-and-answer session will follow our prepared comments. So with that, I'll turn it over to Rick McKenney to start the meeting. Rick?

Great. Thank you, Tom, and thank you all for joining us today. I recognize people in the northeast sitting [Audio Gap] so I hope everybody is safe as you tune into this today. What we want to take you through today is actually, we think, a good story in a very challenging time. And so we want to XXXXXXXXXXXXXXX and reaffirm our business model and why we're so pleased with where we are in the markets today, why we can take good opportunity looking beyond the pandemic as we go through that in 2021. When you think about what we do in terms of protecting people at the workplaces, it's never been more important. People recognize that today when you think about the tragedy going on across the world having a spot to have a spot of light where people are taking care of you in time of need is something that we do, and so we think it really highlights that need. 2020 is a year that's been challenging. I think we are ending in a very good place. Steve will take you through that. From a financial position, it gives us the flexibility to continue to work through 2021. 2021 will be a transitional year. The pandemic does not end at 12/31. It's going to continue in the first part of the year. But we do see a trend line of positivity as we work through the year. And as we enter 2022, we feel very good about where we're going to be, how we're going to be positioned. That's what we'll talk about today is what that transition will look like. And then lastly, this morning, we announced a closed block transaction on our individual disability business. It was actually -- it's a very good transaction. We'll give you the dimensions of that. We're very happy to execute that. Our team has done a really good job working with a partner to structure transaction, and we think it works very well for us freeze up capital, and we'll take you through the dimensions of that. But all of you that are familiar with the company would know that our closed block is something we continue to work on. I think this is a good step in the process of continuing to free up capital behind those lines that have been closed for some time. So as we think about the business model and why we're excited about it, it continues to be our ongoing story of the market positions that we have. The breadth of the portfolio when you think about how we interact with customers today, we're known as a leader in the space. As we talk to human resource professionals, as we talk to decision-makers at companies, we're very well-known for being a leader in the space. We've done it for many years. We've known as a disability leader for the last almost 40 years, but we've actually enhanced that over time to emerge to be a full benefit of -- a full suite of benefits to employees at the workplace. We do this with good distribution strength. And when I say that it's really so that we're able to touch all employers. That's from the very large employers to take care of their employees and provide specialized needs to the very small employers to provide simple benefits through our voluntary portfolio. And that breadth, we think, helps us through times like this, when there's volatility about where people are getting their protection benefits, we can cover the gamut. And I think that the knowledge we gain from each of those segments makes the other one stronger. We're also a business that brings in a capital generation because of our cash nature. We bring in premiums on an annual basis. We turn around and pay out most of those in claims on every year. It generates good capital, but we think it also provides us flexibility around repricing and what we're able to do. So if you think about it as a company, it's very much a cash flow company when you think of many of our products that were out there writing today. And then, most importantly, it's resiliency through the pandemic. And I'll talk about that on the next slide a little bit to take you through what does resiliency look like for our company. It starts with our people. But I think that when you think about our franchise, overall, a couple of dimensions. First, the financial strength of the company. The strong capital position that we go into the pandemic with, that we maintained throughout what we've seen thus far in the pandemic. And as we look into 2021, we will maintain that financial strength. Steve is going to take you through some of the details of that, and that includes maintaining cash buffers for what may transpire. I mean, as we've seen in the fourth quarter of this year, there's been an uptick. We're prepared for what those upticks and changes might look like even as we go into 2021. And we're going to maintain those strong positions as we look into the depth of the pandemic, although we're optimistic about what we're seeing in the environment today of how 2021 will transpire. The last thing I mentioned as well is we have Martha Leiper here with us today. Our investment portfolio and credit profile is very good. That's an important piece of it. I think early on in the pandemic, we have a lot of questions. I think that our team did a good job answering. And as we sit here today, we feel very good about our positioning going into 2021 around what credit looks like. Our closed block in the pandemic has been something we've been taking action on. If you think about -- we'll talk about today updating our long-term care assumptions, which all of you have been focused on, rightfully so, and Steve will take you through how we've updated those assumptions to reflect where the markets are today. And then also, earlier in the year, we'll talk about one of the things that we've dealt with is a main bureau has come in and talk about our overall insurance reserves that we have at statutory level. So we have a path in terms of where we know what those will look like over the next several years. And going through that in the pandemic, we have a good understanding of where we are from that front. And as I mentioned, the close disability block sale in this environment is very good in terms of freeing up that capital. So all of these things help us with the resilience that we need in the pandemic. And I'd wrap up there. It's all about our employees and what they've done. And I can't say enough about the actions that they took early on to move to a work-from-home environment early in the pandemic, continuing to operate that way. This is a time where we actually see claims go up. It's what we expect. It's what we do. And our employees have been there to rise to the challenge. So I have a great appreciation for what they've done, the resilience that they've shown and the strength that they've shown. And then, lastly, the brand that we have today continues to be untarnished as we go out in the markets today to talk to our individual employers that are out there. We're very happy about the relationships we've been able to develop in the pandemic as we've taken care of customers in this time of need. As we look to the pandemic, the pressures have been real, and they continue. When you look at the mortality rates that we see in the environment today, as I said, this is not an end at 12/31. That will continue. We're hopeful with what we see out there in the vaccines. But those mortality rates will continue certainly into the early part of 2021, and we'll talk a little bit more about that. And then we have seen workforce disruption. So when you think about the employment picture, the sharp downturn in the unemployment picture earlier in the year [Audio Gap] good. But we've also seen our point of distribution, which I'll talk about, that we like very much. It was disrupted as well, as people work from home, a lot of uncertainty in the workplace, but we see ourselves coming out of that as we look into 2021. And it's hard to not look at interest rates and the pressure we've seen, the rapid decrease in the 10-year treasury. The actions of the Fed, even the words of Fed in terms of where we expect interest rates will be. How we continue to manage through that? We've done that for many years, watching the interest rates come down. We'll continue to manage through that, but it's very important. And as I mentioned, earlier in the year, some of the things that we dealt with our long-term care review that we had, and we'll continue to work through that. So financial strength's paramount as we go through this, strength of our people as we go through this, and we're continuing to manage the closed block as we continue into the pandemic in 2021. So just a quick note as we think about where the franchise continues to be strong. Our purpose statement is helping the working world thrive throughout life's moment. So that's been out there for some time. This is [Audio Gap] tested. I'm very proud of what our [Audio Gap] has been able to do to take care of our customers, to take care of employers through this period of time, through our multiple brands in Unum US, what we have in our international business and Colonial Life have all done a good job knowing where we are today, taking leading-edge capabilities that we've had even prior to the pandemic, but also working through digital disruption -- or digital enablement of our distribution channels as we look to the future. And as things have moved quickly on the distribution front, on digital, our teams have responded, and we're very happy about some of the things they did prior to the pandemic, and how they brought that in to the ability that we've been able to use throughout the pandemic. And then those decision-makers count on us, as we continue to work through the pandemic [Audio Gap] a source of strength, a source of knowledge as we've gone through that, and our team has really responded to that challenge this year. Our strategy overall is about that purpose statement, though. When you think about the U.S. today as well as the U.K. and Poland, people are still in a state of financial fragility living paycheck to paycheck. The thing that we talk about, oftentimes, one in four workers will become disabled. We've also seen the challenges that have happened through the pandemic of unanticipated challenges that people have, I think, there's a much greater appreciation of what can happen even in your working lifetime. And so I think as we look to that, that need has never been greater, and I think we'll look to the future in terms of how that need transpires and actually comes into more protection provided to the workers across the world. And then the last thing I mentioned there is leave management, too. As people have worked through this period of time, leave management has become even more a top-of-mind item. As we work through that, our teams do a good job of managing leaves at the workplace. And you can see some of the stats that we have out there. Currently, 38 million customers that we are out there serving them and their families today, we'll be there to serve them. And in fact, if they need it, almost 200,000 companies that we have relationships with today, that we will continue to support them through a period of time. And then getting people back to work is really important. 300,000 people that we help to get back to work with being there as a source of knowledge, not just a paycheck, but making sure that we're there to provide guidance and support as people move back to work. What we think as you look through this period of time, there's been tremendous disruption at the workplace, but I want to go back to reaffirm why we think the workplace or the workforce is so important. It's not just about the place of work, it's about that relationship that happens between the employer and the employee. And if you think about the employee, 75% of them hold actually trust their employer. They know their employer has their best interest in mind. As they think about supporting products that they have out there, as they think of supporting them through this pandemic, employees actually trust their employers through this period. It also gives us great access. And when you think about 90% of all disability insurance and 75% of all life insurance is actually provided or bought at the workplace, this is a place where people are going to get those protection benefits as their mindset continues to evolve through this pandemic of their own financial needs. And then second, the employer, actually, when they use it as a tool to attract and retain employees, having a good benefit package and showing that care for your employees is incredibly important. And then when you think of leave management, some of the things are working out, it also helps with the workforce management. So as people are going out on a disability plan, making sure there's a good partner there. And that's where we come in. As a provider, making sure we have the economies of scale. So when you think about that, being able to provide either from leave benefits all the way through what we've seen throughout the pandemic, being that economies of scale have been important. From an overall perspective, we have risk pooling. So we're able to actually provide very good prices to the individuals who are looking for those protection. And then the digital connectivity that we have through HRS platforms. If you think about today, with a distributed workforce, currently in the pandemic, being able to get those products to individuals through HRS platforms continues to be very important. So -- and the last piece I had mentioned is education. People need a point of education, and the workplace is a great place to do that. And that all cycles right back to the employee. So we still think that this model is actually perfect in terms of providing the needs for people here in the U.S., the U.K. and Poland, and we'll continue to believe that, that's our best point of differentiation that we have out there because that is the only place where we actually provide protection products is at the workplace. So over the last decade, if you look at it, we've also been changing the shape of the portfolio. Yesterday, it was actually -- or this morning, the announcement was actually another step in that process. If you go back over the last 10 years, we've been shifting the portfolio as we've been growing the portfolio. So if you look back a number of years, you'd see, 3 quarters of the portfolio were in capital-efficient businesses. As of now up to 88% of our business today is now in capital-efficient business, as we look at it. We still are managing some capital-intensive businesses that will continue to shrink as part of that portfolio. But if you think over that period of time, not only have we gotten as a percentage more capital efficient, we've also increased the size of the portfolio by about 25%. And so that comes from things like the increase we've seen in voluntary benefits that we've had out there, the addition of dental and vision a couple of years ago. And then as we said, shrinking the size of the capital-intensive businesses, such as the sale of our closed disability block that we announced this morning. So we'll continue to shift that portfolio to these capital-efficient business on behalf of our shareholders and continue to run this company in the way that we've been running it for the last many years. Lastly, I mentioned before turning it over to Mike, is we continue to actually look at our efficiency across the company as well. And so the efficiencies we've driven into the company, making sure we're simplifying processes, making sure that we're actually looking at how we can do things better and interacting with our customers, we take the funds that we generate from that efficient running of the business and think about growth. Where can we continue to invest in the growth of the company? That's been true over the last several years in terms of investment in new capabilities, investment of new areas of expansion and products. And I think it's also been very true in the last 2 years and beyond around what those digital capabilities have looked like. And I can mention there things that we've invested in, such as our HR Connect, connecting with employers in a different way than what we're doing to enable distribution channels. We're going to dig into these a lot more as we go through the rest of the conversation. But we are becoming more efficient as we continue to channel those funds into new areas. So with that, I'm happy to turn over the conversation to Mike Simonds, our Chief Operating Officer, to give you a view of many of the things that are going on within the company. Mike?

Thanks, Rick, and I appreciate it, and glad to be speaking with all of you today. I think my seventh year, having the good fortune to talk about the outlook for the business. And certainly, in this case, the most, I think we can safely say, unique circumstances to be doing it. But also, while 2020, I would say, has been a challenging year, it has been a remarkably rewarding one. And Rick made the point, and I will reiterate it. Our purpose as a firm has been front and center, day in and day out. And since the middle of March across products and brands and geographies, we have been living our purpose every day. And I guess I would just start by saying, I feel incredibly grateful to be a part of this team and to have an opportunity to talk to you today about the outlook for our commercial operations. So maybe we start by just saying, COVID-19 has been disruptive in the ways that Rick outlined, but the business model has proven resilient throughout the period. Our operations have stepped up and met the challenge, which is really good to see. And it gives us a lot of confidence that as we work our way through lingering an important impact still here in the first half of the coming year. But as we work through and past that, the outlook to get back to the growth that we had been enjoying, I think, is incredibly good. So let's start maybe with the top line. If you look at this next slide, you can see to the left persistency for the major segments. And for us, it starts there. Keeping clients is job one, and You can see the persistency results 3Q year-to-date, well in line with historical average, which, given the environment, I think, is a really, really good result. It says, not only are employers keeping their benefits through this period, but they're choosing to do so with the Unum brand. And so that's a really good sign. That being said, while the clients are staying underneath is natural growth. And so that's to the degree to which our clients are adding new employees or increasing their pay, and therefore, driving up covered payroll, a number of our products are indexed to that. And in a typical year, we would see 2% to 3% natural growth. And the net impact in 2020 has actually been 0. So natural growth is really flatlined in the year. To the right of the page, you'd see sales. And certainly, it's been a challenging new sales environment really across segments. You see in the first half of the year as well as in the second half declines year-over-year. The arrows on the page, though, give you a sense for what we are anticipating in growth as we look forward into 2021. You see that we begin to recover in the first half of the year, even as we're dealing still with the pandemic, as we hopefully are turning the corner by the middle of the year, you see that line start to seep in and you start to see stronger year-over-year variances for sales growth, which is encouraging. You take these 2 effects maybe hit the next slide, we can take them into how does that persistency, natural growth and sales, how does that play out in terms of earned premium? And so we showed 2019 on this slide as a pre-COVID baseline. And the dotted line across the top, think of that as our earned premium coming into the period. First thing you do is subtract out the lapses, you would add in that natural growth, and then you would add in the first year sales premium. And importantly, first year sales premium is going to be largely a factor of the prior year's reported sales results that were getting booked through that prior year. So you see the net effect of this in 2019 was good mid-single-digit growth, just a bit above market. So you go into 2020, and we've got, like I spoke through, good in line persistency, but that natural growth has gone away here in 2020. Still strong first year premium because of the good sales year we had in 2019, the net effect being a pretty flat year for operations in terms of premium. And then we look 1 year forward into 2021, and what we anticipate next year. Again, we expect persistency to be in line. As we look at what's in the renewal track for 1/1, January 1, that strengthens our conviction that we're going to have a good year from a persistency point of view. That's when growth starts to come back, particularly in the second half of 2021. But you see the muted first year sales premium. And again, that's a function of the very difficult sales environment we have this year. And again, so it looks like a pretty constant year in terms of flat earned premium. I'd also say a couple of notes. Underneath the covers, you'd see group insurance responding a bit faster and recovering a bit faster as that natural growth comes through and the sales cycle there. Voluntary, whether it's Colonial Life or the Unum voluntary lines, those are going to be a little slower to recover. And then in the 2021 sales year, we would expect to have some good growth in recovery, as I was speaking to. So if you looked out again into 2022, you start to see that earned premium getting back into the kind of growth ranges that we've grown across them, too. Please, the next slide. The optimism around the growth beginning to materialize as we get around the corner on the pandemic is rooted in some basic things and Rick hit on them. First is engaged employees. And so just taking you through 2020, we saw some of our highest transaction businesses, short-term disability, the number of leaves jumped by over 50%. And during the spikes in the pandemics. This is why we were -- transitioned 11,000 of our colleagues to work from home. They, like all of us, are dealing with that transition. Schools being done from home, the stresses that hit family. And yet, we started 2019 from a really good place for employee engagement, and we saw that jump up another 9 points in terms of engagement. This is a team that's locked in and is doing the job and feels more connected to the work and to the company into our purpose than ever before. And then when I'd say, well, it's kind of a -- from a slide perspective, it's kind of a happy coincidence that it's exactly a 9% increase in client satisfaction over the period. The 9%, the exact number is a coincidence. The fact that they're moving in tandem isn't. When you've got a team that's fully engaged and believes in what we're doing, that's going to translate into outstanding outcomes for clients. And so having this as a bedrock to build on as we see improving conditions we anticipate in 2021 is a really, really good sign. One of the key parts of the franchise is the distribution. Rick hit on it a little bit. It's certainly something we've paid a lot of attention to as being sure that those distribution channels across our markets and not just weathering the storm, buy they're gaining skills as we go through it. And so if you look across, there's a couple of good stats there, with the Unum US team, 90% retention of profit's a really good number. I think for the first time, I've maybe ever seen the average tenure of a rep out there is over a decade. That means they've got great relationships in their territory. They thoroughly understand the portfolio and capabilities. That's a really good foundation to build on. Colonial Life team, despite this environment and the challenge with restrictions to the work site, we've seen -- that team just did a remarkable job. And Tim Arnold going to join up for Q&A, but he'll be able to take advantage of the challenging employment situation to grow recruiting, grow the number of sales managers we've got out there keep that strong broker network intact. And the U.K. and Poland teams are in an exceptionally good place as well. Before I leave this page, I think not only do we have a great and tenured team, but I'd say they developed skills at an accelerated paces on 2 important dimensions. The first -- and Rick had this a bit is learning how to sell using digital tools. And I would highlight the small business consultants, that's 80 strong completely using digital and phone-based relationship building for the small employer market, that's up and thriving here in 2020. So they're using that digital to get out there. The second is not only are they using technology to sell, we're learning how to sell technology itself. And so, traditionally, selling a contract, selling the underwriting approach, that's an important part of winning business in our markets. Increasingly, it's about the delivery capability and the technology we can bring to help with enrollment, engagement, helping our clients support their team. And I'd highlight that help at hand that the U.K. team has brought to market in a very short period, over 250,000 consumers utilizing this tool. And it has really helped set us apart, and gives us a really bullish outlook particularly in the small business segment for that kind of service is something new to a small employer, and it's really helping us win some business as we turn the corner into 2021. So teams are intact. They're learning how to use digital to sell, and they're learning how to sell the technology itself is a really important part of our value prop. And that is critically important because if we look at the business units themselves, a big part of what we're rolling out to market in 2021 are expanded digital capabilities. For the Unum US, we're at a big part is our small business platform. We love the underpenetrated small end of the market. And we were talking to you at this time last year, we had a few thousand folks on our My Unum platform. We're going to close out the year with 25,000 clients on that platform. And in 2021, we will put some industry-leading enrollment capability out into the market so that we can bring those cases in completely digital from sourcing leads, to quoting, to onboarding, enrollment all the way through administration and into claims. And that's a pretty exciting opportunity at the market recovers. So being able to sell technology critically important. I'd probably be remiss if I didn't mention the dental business. It's been a challenging dental environment from a new sales point of view, with dental practices closing in the spring and into the summer, claims volumes depressed. A lot of the major market players in dental insurance put extensions to rate guarantees and new business really sort of slowed down for the period of time. We're relatively new to the market. We've been taking share. And so that's impacted our new sales. But nonetheless, we continue to invest. New claims and provider management capabilities will come online in 2021, and we're really excited about that business, both through to the Colonial life and the Unum distribution. And then lastly, stop-loss, again. It's been a theme in the last 3 years. It's very sort of thoughtful and deliberate entry. Last year, we put up about $20 million in new business. We'll more than double that here in 2020 despite the environment. Feel really good about the team and the opportunity. I think, really proved the thesis that our brand and our distribution is a winner in that stop-loss market. So we see that as a contributor to sales growth in 2021 and premium towards the back half of the year and earnings within the next couple of years. Importantly, you talk about -- Unum, you asked to talk about disability and absence. Certainly, in a challenging economic time, one of the concerns is going to be, does it trigger increase in long term disability claims? The team has done a really good job, I would say, in our claim operation of making some changes to the model and continuing to invest. I'd just highlight one, which was moving to a duration-based model, where we now have dedicated teams focusing on the initial new claim and that first liability decision, another separate team that picks it up at the mid duration, and finally, a team that's leveraging data and analytics to really take the longer-term duration at claims and management. And the impact has been pretty steady. If you look at that red line in terms of paid incidents. So even though new claims submit, they have a little bit of volatility, and we've experienced a bit of that. The paid has come through quite consistently. And we've actually continued to have very good success in stable line in terms of recovery. So getting people early, getting the right clinical and vocational resources supply to be sure that recoveries come through. So our optimism around continuing to provide that service, make sure that we're putting the right people, the right resources to the right consumers and helping them get back to a productive lifestyle. It doesn't mean that there's risk tied to the economic environment, but go into 2021 with some good momentum on that front. And then on the right side of the page, absence management. We saw a very big increase in the number of leaves being reported. As you could anticipate with COVID, and you see that illustrated in the chart there. So being there for customers is very important. But certainly, that led to a good deal of expense growth in the disability segment for us. As we look into 2021, a couple of changes that you should be aware of. The first is, we continue to gradually increase prices of the fee-based business. Importantly, we've also changed the structure of that pricing, so moving from more of a flat per employee per month towards pricing that's more sensitive to volume. So a client that is -- has -- sees a very high leave counts is going to pay more. And conversely, a client who's not utilizing the service as much will see decreases in fees paid. And that will help us deal with the volatility over the next couple of years. And then as probably a bit more importantly, we've got some new technology that we'll be rolling out that underpins the lead business to get out unit cost. And so as the pricing structure and strategy burns in and the technology burns in from the unit cost point of view, we see this being a nice margin business for us over the next 2 years. And even as those changes are beginning to take hold, you see, in the current environment, the return of don the group disability segment, to the far right there, is still one that we are quite happy with. So we should see the changes we make to leave as upside. Go to next slide. Colonial Life, I mentioned it before. It's challenging where a lot of your business model is small business focused, and a lot of how you're driving participation is at the work site physically and face-to-face. So some of the biggest changes that we face across the group commercially hit this team, and they have responded really remarkably well. I talked about the strength of the distribution and the digital adoption. We've seen big growth in the number of digitally delivered enrollments, benefit counselors, on demand. And as we look to 2021, some of the most exciting things we'll be taking to market are extensions around that digital enrollment capability. And so what's really special about Colonial Life is that remarkable agency force and that benefit counselor team increasingly repairing them with great technology that expands their reach and their effectiveness. And so in 2021, we'll be rolling out a new engagement and enrollment platform that will enable our agents to get further and farther in terms of getting to employees for enrollment and supporting those events and then maintaining those connects through the whole life cycle, which is, I think, an opportunity that we'll continue to recognize over the coming years. And then the international team, we talked about Help@hand, where at -- on your mobile phone, you've got access to that general practitioner within 2 hours, whether it's physical health issue or mental health issue that which we know is a need that's only growing across all of our markets. It's really helped us differentiate. And similar to the U.S., a big focus on the small to mid-sized business where we see a real opportunity to grow penetration for financial protection. An online broker quoting portfolio, we've also had some success with some of the major brokerage firms just recently in terms of becoming preferred providers in that small business market. Price increases in the large case market. It's been a challenge, particularly on the LTD side, with Brexit being somewhat disruptive, followed by the pandemic. We'll continue to be quite disciplined in that large case market and continue to put prices through. And Peter will be on the call during the Q&A to discuss when we get to that second question. Hopefully, you got a sense there's a lot going on. We haven't been standing still in 2020. And as we look into 2021, we've got exciting things that we're taking through the market through a remarkably engaged team. I think it's also important to note that we're going into a market that's got heightened awareness around the need for financial protection. And it just makes sense if you think about it, all of us, every day, getting pounded whether it's social media or it's new -- other news outlets, it's conversations with family or friends, we're just constantly getting reminded about how fragile and how quickly our health status of financial well-being can be impacted. And I think that is a tailwind for us. We've got certainly challenges to overcome. But I think in the mid- and long term, what we do, the need and the awareness of that need is higher than it's ever been. And we're committed to being there through new channels, new products, using new technology, but it's encouraging to know that, that awareness has been heightened. And so if you put the 2 together, what we've been doing operationally, what we think the environment is going to look like, particularly as we get through the first half and into the second half of next year? We feel very comfortable about these kinds of long-term objectives in terms of sales growth, premium growth that you see on the right side of the page, and continued strong returns. I'd like to think about 2021, but I think, provided vaccine takes hold, provided things start to turn here as you get into the late spring and at the middle of the year, we're probably, frankly, looking at sales growth that's north of these ranges and kind of coming down in 2022 into that range, like we were talking about earlier. Premium will just lag that a bit. So probably somewhat flat in 2021. But as we head into 2022, that trend starts to move up into those premium growth ranges. And as we look at all of our cost factors, and where we are from a pricing risk kind of return targets are quite reasonable. So that hopefully gives you a sense for where we've been across the commercial operations. And I think with that, I will turn it over to Steve Zabel to give you a financial overview.

Great. Thanks, Mike, and welcome, everybody, this morning. I'm, as you might imagine, as CFO, very excited to talk about some things this morning, not only the financial residence of the business, but also talk a little bit about our transaction. So my agenda is, I want to just cap 2020, talk a little bit about what we're seeing in the fourth quarter and give you a little guidance about how we think we're going to end the year. I want to take you through just COVID-19, and how we've seen it impact the business, not only through 2020, but also how we're thinking about it going through 2021. We do have to talk about long-term care. We did go through our reserve adequacy review and have an update there. I'll talk about the transaction that's been mentioned. We thought it would be good to spend some time just on our alternative investment portfolio. Martha is here as well to take some questions in the Q&A section. But her part of our strategy, specifically around our LTC book. And so wanted to give a little bit of perspective there. And then, obviously, talking about capital management and how we're thinking about that going into next year. So I'll start off with just the environment. And you've seen this, and we've talked about it, but we think it's something that, obviously, is going to continue, a lot of these things, to be challenges into 2021. Interest rates kind of are where they are. They started to come back a little bit, but obviously, that puts pressure on absolute earnings as well as pressure on some of our reserves. I'll kind of think about unemployment and GDP in conjunction. We think that stabilized pretty well. We've seen a lot of the impact going through our investment portfolio earlier in the year. That's really stabilized. We've talked about the commercial challenges that, that might present, but we also think that, that should stabilize as we get into 2021. And then obviously, just the pandemic itself. And I think if we stood here midyear, remainder of the year, we were probably thinking about the impact reducing as the year played on. But clearly, that hasn't happened. We've seen it in both lead volumes as well as mortality across various product lines. And we do think that's going to continue in the first half of 2021. And obviously, that has ramifications on the profitability of the company, and we'll take you through that a little bit more. So how has COVID impacted us in 2020, and these are things that we've talked about on many of our earnings calls, but just to kind of recap. LTD benefit performance really consistent throughout the pandemic. We think that will continue. LTC active life mortality, that's also been very stable. We have not seen the trends that we've seen on our claimant block in our active life block, and that probably holds through as well for our ID I claim at block that's been fairly stable. And then from a case persistency perspective, we talked a lot about natural growth and the pressure to that and the sales. We've really seen some good stability on case persistency. Mike talked about that when we looked at persistency on a prior slide. So what are the areas of pressure? Clearly, like claims. We've seen that through 2020. We do think that will continue specifically into the first quarter of next year and maybe into the second quarter. Sales and natural growth, Mike talked about, I think, we've covered that. And then just generally, our service levels and the profitability there as well as some of the troubles we've had over in the U.K. closing claims, I think we've seen earnings in the U.K. stabilized. We think that will continue, but that's been a pressure. And then clearly, the investment portfolio. But I would say in the investment portfolio. The first half of the year, while pretty challenging, both from a fallen Angele's perspective as well as impairments for our block, that's really stabilized over the remainder of the year. And we think that, that's very manageable going into next year. The other thing we'll talk about is just the volatility in our alternative asset portfolio. We had a pretty large negative mark in the second quarter. We saw that recover somewhat in the third quarter. We actually think we're going to have seen quite a bit more recovery in the fourth quarter, and I'll give you a little bit color on that. So we also had offsetting effects. First of all, I mentioned the client mortality in our long-term care block. That was fairly severe in the second quarter. We saw that moderate a little bit in the third quarter. In the fourth quarter, though, we're starting to see pretty high clinic mortality as well. Dental and vision, that's something that was really a blip in the second quarter utilization. Went very low, and then the third quarter popped back to almost normal levels. We believe that will continue into the fourth quarter. And then just medical procedures generally. There's a lot of shutdown with those types of elective procedures in the second quarter. We've seen that come back to more normalized as we get into the third and fourth quarter. And we'll show a chart a little bit later on to put a quantum around what those different effects are, what the assets were? Or -- and how we're thinking about really our forecast going into 2021? So fourth quarter, this is how we're thinking about fourth quarter. Some of these are pretty obvious. But from a claim perspective, we definitely are seeing continued high group life mortality that will come through in pressured life earnings in the fourth quarter. We're also continuing to see high volumes of SJD at FCB and service lead management. And so that will continue. But I would say that plays out from a life perspective and in the Colonial book as well as it plays out into what we're seeing in our LTC claim in mortality for the fourth quarter. LTC is going to, again, have a fairly low loss ratio in the fourth quarter from what we're seeing so far because of that dynamic. I'll spend a little bit of time then maybe talking about top line and what we may be seeing there. So for Unum US, if you think about sales in the third quarter, overall, they were down about 19%. In the fourth quarter, we think we'll have some improvement from a year-over-year perspective. And -- but they'll still be pressured on a year-over-year basis. From a premium perspective, third quarter, we were about flat year-over-year. We think that probably will continue in the fourth quarter and will be flat, maybe a little down from Unum US premium. When it comes to Colonial, third quarter sales were down about 28% in that third quarter. We think that's probably about what we're going to see in the fourth quarter as well, with year-over-year sales drops in that range. And then from a premium perspective, in the third quarter, we are pretty flat year-over-year. We're starting to see a little pressure as we get into the fourth quarter, and we think overall premiums might be down 1% to 2% on the Colonial brand. So you add all that up, and obviously, there's still a lot of uncertainty left, but we wanted to give you a range of where we're ending up. Just for perspective, third quarter, our EPS was at $1.21. So we think we're going to be fairly flat in the fourth quarter from an EPS perspective. There's going to be a lot of moving parts, but one of the moving parts that's on the closed block slide here, is just around the alternative asset portfolio. If you recall, we had a negative mark in the second quarter of about $31 million. The third quarter, we had a little bit of recovery. It may have been a couple of million dollars. We actually think, in the fourth quarter, we may have $15 million to $20 million of recovery in that portfolio. And so we'll see how that plays out. Obviously, we still have a little bit of time before we close the books. But all in, we think we're going to be fairly flat in the fourth quarter. So trying to just give you a quantum around the impacts of COVID. And what we've done here is to try to quantify those things that are fairly discrete, things like claim volumes, both on the claimer block as well as our group life block, things like fluctuations in our dental utilization, the alternative asset portfolio. It's a little bit harder to quantify those things around premium margins and impacts of sales. So we've kind of excluded that. But I wanted to give you some hard dollars just around what we're seeing. As you can imagine, in the first quarter, we saw a lot of volatility -- or during the second quarter, saw a lot of volatility in the different product lines have gone into those in the past. But we had offsets around dental, around LTC, mortality, but then obviously, life claims hit us pretty hard. And then that kind of plays forward. So what we're thinking as we get into next year is, mortality is going to continue to be fairly high. We think fourth quarter mortality is going to be pretty consistent with third quarter. We're assuming that there is a vaccine available first part of the year, but that's not kind of fully distributed until we get to midyear of next year. So we still are envisioning some pretty high levels of mortality in the first half of next year. The offsets, really, the major offset there is going to be mortality in a claimer block. You do see a little bit of a blip in the fourth quarter on assets. That's really the positive mark that we're anticipating on the alternative asset portfolio. But other than that, we're just -- we're seeing both of those impacts of mortality kind of dwindling and then really becoming inconsequential by the end of the year. So the punchline on this, and we show it graphically a little bit later, is normal, really, we don't think it's going to occur until the second half of the 2021. So let me shift gears a little bit to some things that have occurred in the fourth quarter. First of all, we did complete our annual reserve adequacy review across all of our product lines. As you may imagine, we looked very hard at our LTC line. I'd say the good news there is, from a morbidity perspective and mortality perspective, we feel very good about the assumptions that we set now a couple of years ago. And that's even when you take out the impacts of COVID kind of in the near term, I feel very good about those. Made no adjustments with any of those assumptions. We are maintaining our long-term assumptions around mortality and incidence, even given the fluctuations that we've seen in the near term. As we've mentioned before, we've made adjustments kind of short term around our claim liabilities to anticipate potentially higher levels of submitted claims that have been stored up in the system. We set up some IBR -- IBNR. We've also looked at our near-term mortality assumption for the claimant reserve and have built that in that maybe we've just accelerated some of the mortality. We'll take care of that within the claim liability, but we do not think that we need to adjust our longer-term assumptions. What we did do is we lowered our interest rate assumption. Given where prevailing interest rates are, we looked at that. We looked at some of the benchmarks. We looked kind of more broadly across the economy. And we thought, at this point, it made sense for us to go ahead and adjust. The assumption that we use, we're kind of basing this off with the 10-year treasury. And I think that's become kind of the standard for carriers to talk about what they're doing with their interest rate assumptions. So what we're going to do is we're grading from really current prevailing 10-year rates. I think we locked in at around 85 basis points, in that range, so a little bit lower than maybe where we are today. But having that grade up to 3.25% over a 7-year period, we think that's prudent. We think that there's definitely support for taking that. And we've been in the past, we like to take a very stable approach to how we adjust interest rates over time. So we made that move. That did cost us about $500 million in margin for that piece, so a reduction in our margins of around $0.5 billion for making that move. Offsetting that, though, is we had positive margins in some other places. Specifically, our rate increase program has been more successful than we'd anticipated back in 2018. A big part of that was the California approval that we obtained pretty early in the process. But we also feel really good about where we are on our other submitted rate increases and the program that's in flight. We have not, in essence, launched another program that somehow increased the margin built into this reserve. We just think we're going to be more successful on the one that we initiated a couple of years ago. The other dynamic is we have a little bit more margin that's been generated based on how our group LTC inventory has evolved. We do have some margin within the group business generally. And depending on which group cases kind of continue with us versus which one is lapsed, that can create a dynamic of increasing or decreasing margins within the overall reserve construct. And what we've seen is that that's actually evolved fairly positively for us. So there's a little bit of margin there. And so all-in, that offset the negative impact of interest rates and where we ended up on an after-tax basis is somewhere between $110 million and $130 million. Obviously, we have to wait until we close the books at year-end. That's why we've given that a range. We will reflect that as a below-the-line adjustment as we get to close in the fourth quarter, and that will show up in our 10-K. The other good news is, on a statutory reserve basis, really no surprises there. We've gone through the process. Our year-end funding is pretty consistent with everything that we discussed coming out of third quarter call. And I'll get into that a little bit when I talk about 2020 capital, and where we're going to end up, but we're very happy with how that process has ended up. Obviously, we need to finalize some of that specifically in New York as of year-end, but feel very confident where we're going to end up there. So then I'll move on to our transaction. Obviously, very excited about that. The team has been working on this for quite some time. We were able, as of yesterday, to sign that transaction and very excited to be able to come and talk to you about it today. So just as grounding, in our Closed Block operations, we really have 2 major business lines, our LTC line and then also the individual disability block that we closed some time ago and that we've been running off. The majority of that block was reinsured into a special purpose vehicle, Northwind. We had securitized some of the capital within that with nonrecourse debt. As many of you know, that debt is paid out of the capital released on that block. And is paid out very routinely over the years. We did go ahead and mature the remainder of that debt. We had about $30 million left. We matured that in December, and it really opened us up to be able to do something else from a capital perspective with that block. So we did execute these agreements. It's actually a series of agreements that are fairly complicated. If any of you go through it and look at our filing with the SEC and read through those, it's a very complicated structure. In essence, we are going liabilities from our Northwind structure, we're reinsuring those to Global Atlantic. The impact of the transaction is, Global Atlantic is basically going to be assuming the disabled life risk on the book. But we are providing a cover, again, to really lock in the margins on the active life reserve. The active life reserve is only about $400 million of the total $7.1 billion reserve, but we are going to give a volatility cover over a 12-year period for that and are getting paid for that. It is going to be executed in 2 phases, which is important. We're closing 1 phase as we speak, which is about 75% of the book. We'll be closing the remainder of it in the first quarter of next year. The reason we split it up was there's a lot of consents that go along with that second phase that we still need do obtain. The first phase, we did sign with really no contingencies. We have approval and also any consents that we needed for the first phase. So we are closing on that transaction this week. The second phase, it's a little uncertain how much of that will close, it will be based on the consents that we actually do receive. That block is made up of a lot of business that we've assumed from other carriers. And so we'll just need to work through that process. On a net basis, we're paying negative cash flows all-in consideration of about $370 million in Phase 1. The good news on that is between the tax benefit of the negative ceding commission itself as well as other cash tax benefits that we'll be able to get upfront, it's fairly statutory earnings means neutral to us in Phase 1. That's also the case in Phase 2. And so I feel really good about the upfront capital implications, but also, obviously, the punchline on this, we're going to free up the majority of the required capital that was behind that block. That cash, right now, is in Northwind. Once this is executed, that cash will find its way up to the holding company and will be reflected as Unum Group holding company cash. We do have a nice structure for collateral. As you may imagine, we'll be over collateralizing this deal, both the actual statutory liabilities as well as the IMR associated with it. So I feel good about just our counterparty protection. We will continue to service the block. Our folks -- we've got a very good 200-plus claims adjudication team. They will continue to administer the block for the counterparty. One of the upsides of this is, we are going to retain some of the assets that were in that portfolio. And as many of you know, the yields on that portfolio are very good. We're going to hold back about $700 million of those assets that the counterparty did not want. We'll be able to redeploy those assets to other product lines, specifically LTC. We did not take that in consideration when we went through our reserve adequacy, and so those higher yields will really be winning our back, we think, as we move forward with that portfolio. The one thing that I will note that's not on the page is there will be some Day 1 accounting that we'll have to finalize as we get to year-end. Mechanically, we'll be marking the portfolio to market and running that through realized gains, there's a pretty significant realized gain in that portfolio buildup. We will realize that gain. At the same time, though, then we'll reflect that new interest -- lower interest rate in our reserve liabilities, and that will come through as kind of a reserve strengthening Day 1. There's no economic impact of it. It's, in essence, flushing through what's now in OCI through retained earnings. We think it will have a very minimal impact to retained earnings, but we need to see how that plays out when we do the final accounting. And so the punchline on this, we just think it provides a lot of financial flexibility right now. There's a lot of uncertainty in the markets in the economy, around the pandemic. We -- like we've said, we think that will continue somewhat in the first half of the year. And so we just saw this as a great opportunity to not only derisk the balance sheet a little bit for more longer duration types of business, but also free up capital flexibility at the holding company. So very excited. The one thing that I'll note is with the Phase 1, Phase 2, we're not going to free up the entire $600 million this year. Some of that will come in, in the first quarter of next year as Phase 2 concludes. So the other topic I was going to hit on is the alternative asset portfolio. As you can see, we're getting close to $700 million in that portfolio. Very happy about it. The one thing that I might note is, we've talked a lot about the combination of our high-yield portfolio and our alternative assets. And we kind of manage those in conjunction with each other, try to keep that below 10%. What we're seeing is, as we redeploy to the alternative asset portfolio, we've really redeployed a lot of the concentration from our high yield over there. So you'll see our high-yield portfolio coming down a bit over time as we redeploy. We really like this asset class. We think we do a nice job of working with outside managers. There is volatility that comes along with this type of investment class. But we're matching this against our long-term care liability, which, obviously is very long duration in nature. We can ride through that volatility, we think, and very comfortable with overall the types of returns that we're going to get on this portfolio is well worth that trade-off. So very excited. We give a little bit just around some of the types of alternatives we're in. We mentioned this in the past. We're not in just all straight to equity base. It's one of the reasons that you didn't see the rebound immediately in the third quarter. Some of our asset classes within the alternative investment distribution, it takes a little longer for those to kind of work back from a valuation perspective. So in closing out 2020, just from a capital management perspective, we believe risk-based capital is going to be over approximately 365% that being above our target. We'll be around $1.5 billion in holding company cash. That's going to include about $300 million to $350 million of additional cash from the transaction that I discussed earlier, with the remainder of the $600 million coming in the first half of next year. We feel good about the capital contributions to LTC. I know we've messaged something in the $550 million to $600 million range for full year 2020. We're actually coming in quite a bit below that. The main reason for that is around just the profitability within Fairwind and First Unum. As you can imagine, some of the favorable profitability on the LTC book that's come through the latter half of the year for GAAP has found its way through the statutory earnings as well. So it's reduced the amount of capital contributions that we've had to make down to those subs. So all in, like, we feel we're really well positioned going into year-end, starting next year, and being able to manage through our capital plan in the coming year. So let's shift a little bit and talk about 2021. Won't spend a lot of time on this page. You can second-guess whether these assumptions are right or wrong, I don't think any of us know. The thing that I would say is, from a GDP growth and from an unemployment, we think these are pretty reasonable. I'd also say that these are very supportive of how we're thinking about our commercial strategy. And so, a point here, a point there is not going to impact that significantly. But what we are assuming is there's not another shutdown, and we don't see what we saw in the second quarter of 2020 that how the pandemic plays out, that the economy will ride that out well. And that's really what we've seen in the latter half of this year. This is the assumption that we have for total U.S. COVID-related deaths. And as we've talked about in the past, our book is showing about 1% of that U.S. number as well as our average claim is around $50,000. So a good way to just think about our book. This is the assumptions. You can see the Johns Hopkins information that comes out. If there's volatility in these assumptions, you can really do the math and understand what that volatility may be. We think these are prudent, but obviously, there's a lot of uncertainty. And then oil prices, major driver as part of our investment portfolio as far as what oil prices do. $45, we think, is a pretty reasonable, given where prices are today. And so feel good about that. I mentioned earlier, this is assuming that the vaccine is fully distributed in the first half of next year. And so, again, a pretty big driver of what may happen with mortality as the second half of the year -- or the first half of next year plays out. Then when it comes to the financial outlook, we're thinking it's really going to be a tale of 2 cities a little bit next year. As far as what the first half of the year looks like and the second half of the year looks like, we have a chart later to try to quantify that. We think the first half of next year is going to look a lot like the second half of this year, from a profitability perspective, from a growth perspective, from a premium perspective. We do then think that those trends will be -- continue -- will begin to improve in the latter half of 2021. And then we really think we'll be back to 2019 type levels across the board as we get into 2022 on a run basis. Assumptions that we have in our plan, capital deployment being very consistent with what we've done in 2020. Dividends continuing at the rate that they played through in 2020. Right now, I'd say it's a question mark around buybacks, we don't anticipate those as we stand here today given the uncertainty, but that's something that we'll evaluate as the year plays out, but right now, that would be our running assumption. Continued pressure on net investment income, as you may imagine. Our corporate segment, which I know has been a bit volatile over the years, over the quarters. We think that's going to be between $45 million and $50 million on a quarterly basis just for your models. There may be some volatility there quarter-to-quarter, but that's probably a pretty good assumption. And then a 21% effective tax rate is what we're seeing as we get into 2021. So I'm not going to spend a lot of time on this slide. These are pretty obvious. I'm sorry. I think these are pretty obvious. If vaccines are accelerated and are deployed faster, we think the recovery and the impact on claims is probably going to be faster. And then on the other side of that coin, if it's delayed, there'll be pressure there. I think the one thing like I mentioned, we have not incorporated into this renewed shutdown of the economy. That, obviously, would be a pressure ...

You guys are definitely into something else. You didn't sign up for this. This is supposed to be just one easy start live thing, but now you get 2 crazy things at once. So...

Okay. I'm sorry, yes, we're getting some feedback. And then I would just say, so on the renewed shutdown, we're not incorporating that, that could have implications, both on commercial strategy as well as the investment portfolio. So then, just pictorially, this is what we think. I gave you the outlook on fourth quarter. It's kind of the midpoint of the range that we've given here around the BTOE that would reflect the EPS range that I gave you. Again, we think, overall, the first half of next year, earnings will be pretty consistent with what we saw in the second half of this year. And then we do think we'll have beginning recovery maybe back to the first half of '20 earnings levels in the second half of '21. And then obviously, as we get into 2022, we would look for earnings to get back in the range of what we saw in 2019. So capital outlook. We think we have ample cushions. This transaction is very important to how we think about holding company cash and the cushions that we have there. We think it's prudent to keep that. We think there's still a lot of uncertainty out there. We're confident in our year-end 2021 targets of both 350% RBC or greater as well as over onetime fixed costs in our holding company. While we do anticipate capital deployment to be very consistent with what you would have seen in 2020, capital contributions to LTC may be a little bit more as we go into 2021, just because we do believe that the performance of the LTC block itself will normalize. That will lead to more capital contributions just to fund the losses in the subsidiaries than maybe what we saw in 2020. We're also going to need to fund the C1 charge modification. We do anticipate to see that going in and being effective in 2021. That's going to impact both the contributions to subs because it impacts our Fairwind portfolio pretty significantly, but also impacts how we think about capital management on the others. And then obviously, annual interest expense, we think, will be right in that $175 million. So that's kind of a recap of how we're thinking about 2020 as well as going into 2021. So I'll hand it over to Rick for just a few closing comments.

Great. Thank you, Steve. And Mike, I think took a view through the organization, what we see in 2020-2021. I'll go back to my opening comments. I think we come out of this call as we go into 2021 into 2022, the business model still remains very good. We're going to navigate what we see continuing with the pandemic as we've done through there, showing in 2020, making sure we do that in 2021. But we do see the trend line changing in 2021. I think that's important as we look at our business model, continuing to deliver good results. And I just reiterate, Steve and a broader team did a really nice job working through Closed Disability Block transaction in the middle of pandemic. Most appreciative of that. And I think it sets us up really well for what we're doing. So we're going to move to a question-and-answer period. We're going to do it audio because we're going to add a couple of other team members to the call. I'd like to introduce 2 new team members that haven't been here as part of our Annual Investor Meeting at least. We're also going to have Tim Arnol and Peter O'Donnell, who join us on each of our earnings calls. But first, I'd like to introduce Chris Pyne, who some of you might have met in previous calls as well. Chris was recently promoted to Executive Vice President of Group Benefits in the company. Has long tenure with the company coming up through the distribution ranks. As Mike said in his comments, our distribution epitomized best in the industry, and I think Chris represents that. And is elevated now to help us run the overall business. So we're really happy to have him on the call today. Also, Martha Leiper, has joined the company a year ago. I should say she returned to the company a year ago after a stint with USAA, who is part of our investment team going back many years. We're actually happy to have her back on the team. She's done a tremendous job helping to navigate the crisis, the financial downturn that we've seen is part of -- a part of this. So she'll be here and as well as Chris to help answer your questions today. So look forward to that, I'd ask everybody that's online please do mute phones if you're not asking a question. And with that, operator, we'll turn to a question-and-answer period.

[Operator Instructions] Our first question comes from Mark Hughes from Truist.

I wonder from the buyback perspective, if you were satisfied that the vaccine was working and the economy seemed to be on the even keel, would there be adequate capital to restart the buyback?

Yes. Thanks for the question, Mark. This is Steve. I think we're going to just wait and see how the first half of the year plays out before we really evaluate that. As you see in the COVID numbers right now, it seems like this is accelerating again, and we think there's going to be a bit of uncertainty about just the rollout of the vaccine, how that plays through the economy. We just feel really good about showing capital strength right now at the holding company level. But that's definitely something as we get through the first half of the year, we'll take pause. We'll look at our capital position. We'll look and see how the first half of the year, the performance played out, and then we'll make that evaluation. So we just think it's too early to make the call at this point.

Yes. And I think I'd step back from that, too, Mark. Go back to the place we're going to deploy capital. As Steve mentioned in his comments, we're going to continue to look at our dividend. But more importantly, we're going to continue to invest in the business. So as you see our capital generation, we think now is a good time to invest in the capabilities that we really like out there. So notwithstanding what Steve said, I mean, think about the areas we're going to invest. And then it could include some areas where we want to enhance the portfolio through some capability type acquisitions, which we think will also help the company. So it's a multifacet deployment approach that we have based on the good capital levels that we have.

The reinsurance transaction, what's the impact on GAAP book value from there?

Yes. We're still working through the year-end accounting on that. We need to see where kind of this Day 1 accounting ends up, and that's going to be really based upon prevailing interest rates and prevailing spreads. So we'll give more color just on kind of the year-end accounting as we get into our fourth quarter earnings call, there'll be a lot more clarity. So I'll maybe leave that discussion to that call.

And then one more, if I may. On the recoveries, you talked about the good performance. It looked like acceleration in those recoveries in 2020. How much more opportunity is there for continuing improvement in this -- the long-term disability?

Yes. Okay. Thanks. Thanks, Mark. Appreciate the question. This is Mike. I do think there's good momentum as we go into the year in terms of the effectiveness of getting our LTD claimants back to work in line just slightly ahead of where our expectations had been. I would say, we are planning for that. If you look back at that paid incidence line, that was largely flat, but was a slight upward gradual need. And I think just kind of prudent for us to be building plans that suggest that there may be a little bit of pressure on new claims volumes coming in. I think the net effect of both of those, though, I think it's reasonable to think stepping back and looking at the group disability segment overall, our loss ratio is similar to what we were in third quarter, is a reasonable estimate for 2021, when you kind of net those 2.

Your next question will come from Erik Bass from Autonomous Research.

To start 2 -- just questions on the IDI sale. I was wondering if you could talk about the impact on go-forward closed block GAAP earnings and then on overall company cash flows going forward?

Yes. This is Steve. I can take that one. I'll take the GAAP first. This block is in loss recognition. So the kind of bottom line GAAP earnings is pretty marginal on this, it's mostly just the earnings that supports the capital itself behind the block. So there's not a -- there's no premium margin really coming through GAAP earnings. So it will have some impact. It's going to kind of depend on how we redeploy the capital that was in Northwind and what the relative yields are on that capital between when it resided in Northwind and what we do with it at the holding company. But we'll work through that and talk about that a little bit. Because the one thing to this is, this Phase 1 is going to be kind of restated back to the effective date, which is 7/1. And so there's going to be a little bit of noise that we're going to have to work through there. On the stat basis, though, it's fairly clear. The way to think about this is that the capital behind this block over time has been released into the Northwind structure, and it's been used to pay the nonrecourse debt that was outstanding. So it really, historically, has not generated free cash flow at all up to the holding company. Once the debt was paid off, which should -- it had been scheduled to pay off first second quarter of next year, that free cash flow would have been free and clear up to the holding company. In essence, what we've done is we've accelerated a decade or 2 of free cash flows coming out of that block. We've accelerated that to today. And so it really doesn't change what has, historically, been our cash flows coming off that block to the holding company because those were 0. And it's really just accelerating the cash flows we thought we were going to get in the future.

Got it. That's helpful. And then how are you thinking about the level of holding company liquidity that you want to maintain over the intermediate term? And do you want to maintain a bigger-than-normal cushion in case any opportunities emerge for long-term care risk transfer?

Yes. I would say it's not just long-term care risk transfer. I would say it's just generally thinking about strength of the balance sheet right now. As we think about our constituents, we think that, that makes a lot of sense. Our target is still onetime fixed cost, it's $400 million on a normal annual basis. So after the Phase 1 of this transaction, we believe we have over $1 billion of cushion. But we also just think it's prudent right now for us to go ahead, see how the first half of the year plays out, see what other opportunities may be out there, both around LTC, but just around, as Rick you mentioned, looking at different capabilities that might help the commercial growth of the company going forward. So I think we'll kind of stay path on our hand. We feel really good about holding that level of holding company cash, and we'll just see how next year plays through.

And your next question will come from Tom Gallagher from Evercore.

So the -- thinking about the $600 million and eventually starting to do something with it, is there a consideration to do -- to accelerating some of the LTC funding? Or is the plan really just to stick with that schedule of funding it over the 7 years? Is that at all on the table? Or would you be more likely to consider share repurchase when you think about -- when the environment does improve?

Yes. Tom, this is Steve. And by the way, you hit the reserve adjustment right on the head. I'll give that one to you and you're right. So thanks for doing the work on that. It's great to talk to you this morning. We see no reason to prefund the reserve. In essence, we would just be trapping capital down in Fairwind. We would like to keep the flexibility up at the holding company. Once that cash kind of gets down into the reserve structure even to kind of prefund some of that, it's obviously very difficult to get it out if it ends up actually performing in some favorable way at the Fairwind Entity. So now, I think we would keep it up at the holding company, keep our options open and just have the flexibility if we do have variations either in what we need to put up with the LTC reserve or other things.

Okay. And then on the balance sheet review charge, the favorable experience that were offsetting items to the interest rate adjustment -- well, first question, did you say you lowered your interest rate assumption by 85 basis points, did I hear that right?

No. No. What I said was we're using a 10-year assumption, and that 10-year treasury assumption starts at kind of prevailing rates today, which, I think, when we marked it, it was somewhere around 85 bps, maybe 80 bps. So we're a little bit above that, but we basically started at what the 10-year is today, and then we're grading up to the 3.25% over the 7 years.

Got you. And what was the 3 -- I had never heard you guys reference it that way before. Just out of curiosity, what did you move it to? How much did you lower your interest rate assumption by to get to the 3.25% ultimate?

Yes. We don't really think about it that way necessarily. And that's why we try to change our language. So it's more comparable to the market to really understand what our assumption is compared to others. We always spoke in terms of all-in rate. And so we just want to simplify -- kind of simplify the market's evaluation of our assumption and comparability to others. So there's really not kind of an apples-to-apples number I can give you.

Okay. And then the favorable group experience on long-term care that you had referenced. Can you just maybe comment a bit what you're seeing there? And also the better-than-expected rate approvals that wasn't offset. Was that you're just booking rate approvals that you've gotten? Or was that a better future expectation for rate approvals?

I'd say that's a little bit of both. The -- a big part of it is the California approval that we received, which seems a long time ago, but I think it was only maybe 1.5 years ago. That's been implemented. So that's kind of in the house, but that was much larger in value than what we had anticipated in our 2018 reserve study. But then we also do feel better now about kind of all-in cumulative rate increases, both that we've received as well as that we think we'll receive in the future just based on where we've been. So I'd say it's a little bit of both. On the group life inventory, our group life business -- I'm sorry, our group LTC business has very different profitability patterns depending on whether it's employer paid, employee paid, voluntary benefit, a mix of both. They have different implicit margins within those. And so it's just based upon what group stay, what groups go. Over time, those margins can fluctuate a bit just based on what you're left with when you do kind of the point in time balance sheet review. We've seen that be favorable over this period of time where we actually feel we have more margin in that group LTC block of business than we did if you go back to 2018.

Okay. And then one final one, if I could sneak it in. Just on this issue of favorable LTD risk results continuing on claim recoveries, and now, I guess, you've seen a bit of a pickup in short-term disability claims. How do you -- it sounds like that, overall, should not be a net negative, it's still probably a net positive as you think about into 2021. Can you talk a bit about that dynamic in whether -- I guess, your level of confidence that you don't think you're going to have any adverse overall net experience on disability benefit ratio driven by unemployment.

Sure, Tom, it's Michael. I'll take that one. And I think we feel good about where that loss ratio has been through 2020, particularly given the circumstance. And as we look into next year, I think, you actually hit on the moving parts. They largely offset, and I think that sort of 74% range for the segment that we saw here in the most recent reported quarter is a reasonable number. Specific to your question, I'd say, confidence is as high as it ever is when you're going into another 12 months at a risk-taking business. That being said, what does -- if there is a lean, it is towards the confidence side that's because we can see the operational actions that we've taken, and we've seen the recoveries directly match back to those operational actions. And so, to that extent, it feels like a very reasonable assumption.

And your next question would come from Humphrey Lee from Dowling & Partners.

Related -- about the transaction for the second piece of the ceding commission and the cover payments, is there anything that you can help us just think about how those 2 pieces may be?

Yes. Are you talking -- Humphrey, by the way, good morning. Are you talking about Phase 2 of the transaction?

Yes. Yes. Phase 2 of the transaction and then also the cover payments?

Yes. So how that's going to work on Phase 2, there will be a small ceding commission kind of on the coinsurance part of that for the disabled life reserve risk. And then there'll be a small piece of the ALR cover premium that will be paid back to us. Overall, the premium we received for the ALR cover was around $90 million. We've reflected about $60 million of that -- $60 million of that in Phase 1. So it'll be about $30 million coming our way in Phase 2. The net ceding commission on the coinsurance is, it's fairly minimal on that second tranche on the Phase 2. So there really won't be much statutory earnings impact when we execute or close Phase 2. What you will see, though, is, if you think about this transaction, Humphrey, we recaptured the entire book back from Northwind into our operating subsidiaries. We only ceded back out, as of year-end, 75% of the book. So we're carrying some of the required capital for that 25%, and it's been reflected in the 365% RBC estimate that we gave. We're kind of carrying the weight on that a bit through year-end. We would then see that being released out of our RBC requirement as we get into the first quarter. So it's going to be kind of behind the scenes, but there will be a release of capital on whatever we get for the remaining 25% in the first quarter.

Okay. That's helpful. And then shifting gear, a question for Mike, maybe. So you talked about the premium growth outlook for 2021. This should be a little bit of a modest growth. You talked about natural growth now coming back a little bit, but kind of hurt by lack of sales this year. And then you also talked about the conventional group lines would see a little better growth versus for voluntary benefits. Is there anything that you can kind of help us to think about the conventional group lines versus voluntary benefits in terms of premium for 2021?

Yes. Thanks. Humphrey, good to hear from you. By the way, kudos for listening, so I appreciate that. It came right through. You nailed it in terms of what our anticipation is about those key levers, strong, continued persistency. A little bit of natural growth coming back, but this year's sales impacting next year and then that being kind of flat. And maybe a way to think about it is, if the aggregate commercial operations are about flat, maybe it's a couple points up on group insurance, a couple of points down on the voluntary lines across our brands, give or take something like that.

And your next question will come from Jamminder. Jamminder, please state your company.

It's JPMorgan. So I just had a question first on the timing of the various sort of cash implications of the transaction, the disability transaction I think you're saying you're going to release about $600 million of capital. There's the ceding commission of about $376 million. I don't know how much of that's offset by cash benefits. But if you could discuss what the actual cash tax benefits are, but then how does the timing of the various sort of cash implications work? Is it altogether? Or do the cash sort of use as go first and the release comes later? So we have a better idea of how holding company cash kind of move around?

Yes. Great. Jimmy, it's Steve. I can take that. So Phase 1, we'll free up somewhere between $350 million of cash directly to the holding company. So that will be reflected at year-end in holding company cash. It's reflected in the $1.5 billion estimate that we gave. Then we'll see the remainder come through in the first quarter of next year. And then that will be reflected in holding company cash. So that on a cumulative basis, we'll be right around the $600 million. I do want to, again, caveat. The Phase 2 is a little bit more complicated. There's a lot of consents that we need to get. And so if we're not able to get some consents on pieces of that book, we'll end up retaining it. But right now, that would be our estimate that we'd be able to achieve the $600 million. On your other question about the kind of the net negative considerations. Yes, the -- within a few million bucks, we're going to be able to pretty much pay for the net ceding commission, negative ceding commission through both the tax benefit on the ceding commission itself as well as really the acceleration of our cash tax benefits related to that book. So Day 1 kind of statutory earnings impact should be fairly minimal on both Phase 1 and Phase 2.

But you'd pay the consideration or the ceding commission first and then you get the cash taxes over time. Is that the right assumption?

No. We actually accelerate those cash benefits, the current cash benefits -- tax -- cash benefits.

Okay. And as you went through this process, did your view on your ability to do something with the LTC block change at all? And obviously, different blocks, one is more season, the other one is not. But are you any more confident in your ability to be able to do something with the Closed Block in the next 1 to 2 years? Or is that still too early to say?

Jimmy, it's Rick. I'll just say that overall. I think when you look at this transaction, it exhibited a number of things. One is when you look at our books of business in closed status as they stabilize, we're able to do transactions with them to free up some of the capital. So I think that's very positive. The other thing I'd say is it's also hone the skills of the team in terms of being able to look at these type of transactions, working with counterparties. When we think about different ways of structure, as you've heard, there's a little bit of complexity in this deal. I think that's actually a good thing because it says that we're able to customize a little bit to make sure we can have 2 parties that can get together and both achieve their desired goals. And then when you think about moving on to long-term care, it's -- as we've voiced in previous calls, it's a little bit more difficult environment, particularly to that line of business. I'd tell you that as people continue to get understanding around what the liability structures look like, comfort with that as the industry gets more and more data around what might look like. Even if you look in the current environment, all the things that are transpiring through the COVID environment. People are many more knowledgeable in looking at that. I'd say a barrier there is still -- the low interest rate environment is challenging to get those 2 parties together, but that's going to be a reality, I think, for a little while. And you take all that together, I think that hopefully, you look at in this transaction is a very good harbinger of something to come. The question is when, and the team has been actively looking at it for a number of years as we did with our Closed Disability Block. We'll continue to look hard at. We talk with a lot of players out there that have interest in the type of -- some of the attributes of these block, and we'll continue to do it. So I'd hate to put a time frame on it. I think the same would have been proved for the Closed Disability Block. You've got to get the right 2 parties together and the right construct, with the right structure to make it work. The same is going to be true as we look to the future and our ability to do LTC.

And then just lastly, any comments you have on what you've seen in terms of usage in dental and supplemental policies just given the uptick we've seen in cases and stuff? And what your expectations are if COVID cases remain through the first -- high through the first part of the year? Do you think usage will be affected, potentially, favorably, for you guys? Or have you not seen that reasonable?

Yes. Thanks, Jimmy, it's Mike. So if I take just one step back and said, okay, the impact of dental was the restrictions that got put in place and that shut down dental and optometry practices, impacting those new claims, those same COVID cases that drove the restrictions also had an impact on non-COVID related short-term disability claims. So when you look back, the net impact is really restrictions. And Chris, you can talk a little bit probably about how practices have figured out ways to stay open safely with slightly lower volumes, but still pretty normal claim counts.

Yes. You do see a return to a normal claim activity on the dental side. One of the ways that we're seeing it show up in a little different way is those large dental players saw a big slowdown. They're kind of working through their commitments around rate increases and no rate increases or premium holidays. And so we're starting to see all that play through back to normal. So I'm kind of tracking the performance of the dental offices and how their claims have returned to maybe a return to normalcy around quote activity for dental -- the dental business for new sales going forward as well.

And your next question will come from Ryan Krueger from KBW.

Could -- I don't know if you did this yet. If not, could you give us some quantification for the expected capital contributions in 2021?

Ryan, yes. This is Steve. The way I would think about it is we ended up contributing about $500 million of capital down in 2020. That included some fairly favorable performance of the LTC block within Fairwind. We do not think that's really going to recur next year. Fairwind loses somewhere around $50 million a quarter, so we do think there's going to be a little bit more pressure going into next year. The other thing is we are going to have to cover the C1 charge for the LTC asset portfolio. So I think we probably got a little bit of relief in 2020 on the earnings, which may be $50 million to $100 million. And then we've also got to cover the C1 charge, which is more broad. We gave the amount just over $200 million kind of across the board. That would be both in our traditional subsidiaries as well as in Fairwind. So yes, so we're going to have to see. The big wild card is just how the LTC experience actually plays out. If we continue to have very favorable experience, then that may be able to dampen the contribution a little bit. But there's a lot -- as you know, there's a lot of wildcards that go into that, what interest rates do, all those types of things. But it's another reason why we feel pretty good about having a lot of flexibility at this point with the holding company cash.

And is the C1 changes, has that been finalized by the NAIC? I guess I could have -- I guess, I missed that.

Well, what's been -- what's definitely been finalized is the new classifications are being incorporated into the 2020 blanks, so that's kind of the predecessor to actually implementing the new factors. I believe there still has to be finalization of that in 2021 of approval of the new rates. Everything we're hearing though is it's probably going to happen. Now the NAIC though is also looking at some other things, I think, around RBC factors for other asset classes, so we're a little hopeful. We might get some relief from some other places, but we're really planning on just those increased requirements -- capital requirements around that current proposal.

Is the potential offset on things like alternative investments -- or, I guess, can you give any sense there?

Yes. There's some dialogue just around how you treat equity-type investments that are backing long-duration insurance liabilities. Obviously, that would really play well for us, especially given we're upsizing our alternative asset portfolio. But when you think about why equities ended up with the RBC factors they did, it was more around just kind of play in the market type risk versus actually having liabilities that you could hold those assets kind of for the duration and play through all that volatility to kind of an overall expected return over the long haul. So there is dialogue about should we better reflect the use of those types of assets and there -- for the longer-term risk profile of the assets.

And your next question will come from Suneet Kamath from Citi.

I wanted to go back to the IDI transaction. Can you provide any color in terms of how deep the market was in terms of potential counterparties that were interested in this transaction? Just curious if it was just you and Global Atlantic negotiating. Or were there other folks that you were talking to?

Yes. Suneet, I don't think we want to give a lot of insight on how that played out. If you go back over the last several years, we talked about opportunities and having good relationships on a -- from a broad perspective. We're very happy with Global Atlantic as a partner, and I wouldn't give you much more color on how that process played out.

And then on the consents for Phase II, I mean, it seems like there's a decent amount of the capital being freed that's tied to that issue. Any color on what just -- just provide some perspectives on what exactly that means and how you expect that to play out? It seems like you're confident that there won't be any issues. I'm just curious, is there any kind of risk that it doesn't play out as you expect it?

Yes. There's always uncertainty. I wouldn't call it risk. There's always uncertainty. We're going to have to work with the counterparties. I'd say it's a manageable number. They have already ceded the risk off and really have no economic interest in these books of business anymore. So in most cases, it's just to get approval to go ahead and reinsure those kind of off the back end of us. So we don't think there's a lot of risk. What it does is it incorporates complexity, and that's why we tranche this out in 2 phases, so we could go ahead, move forward with Phase I, close it, get the financial flexibility still this year and get the deal closed and then really work through kind of that remaining tranche as the first part of next year plays out.

Got it. And then just one last numbers one. Can you just give us a sense in terms of long-term care reserves where you expect to end the year, both on a GAAP and a stat basis?

Well, I don't know. I mean, that's hard for me to predict the level of reserves. We need to see how the quarter plays out and close the books.

[Operator Instructions] The next question comes from Tracy Benguigui from Barclays.

Just going back to the IDI transaction, you actually paid a ceding commission opposed to receiving one, and I'm wondering if the fact that you're holding back $700 million of assets with higher yields played into that consideration.

Yes. This is Rick. Let me just start and say when you think about that transaction, the rate of return, as Steve mentioned, on that block of business, you would fully expect, we would have to pay a ceding commission to a counterparty to take on and achieve returns that would be market normal. And so that's really what drove the ceding commission. I think as Steve said, we're really happy from an after-tax basis. When you pull it all back together, it's an after-tax ceding commission of close to 0. And so I think that's good. I think that being able to retain assets was just another part of the structure of the deal that we really like, being able to keep some of these higher returning assets. The counterparty, they weren't as effective for the counterparty, so we're very happy to keep those in. So that's just -- that's an added benefit of the deal that will benefit some of our other lines. So we're really happy with that. So the structure of the deal was very good. When you pull it apart, very happy about it. It's a great job getting it together. We're happy with our partner in this process as well. And like we've said, we're going to manage these claims, so this is actually still very much in the house in taking good care of our customers. It's a good financial transaction, but we still very much care about administering a good block on behalf of our customers.

Okay. And then maybe just going back to your interest rate assumption update. To your point, you're better aligning your assumptions, what everyone else does looking at treasury. But just looking at what you previously published at -- on new money yield, that 5.5% grading up to 2025 at 6.25%, I'm wondering if you're optimistic about interest rate improving by 2025 in your new assumption update.

Yes. I mean, it's an assumption. And I guess, it's for the market to evaluate whether it's aggressive or conservative. We feel good about it. We look at the benchmarks that are out there that have been published, and we look at where other competitors are, and we just think about kind of some historical norms. We feel very comfortable with where we are right now with that assumption. But obviously, this is a long-tailed book. We'll continue to evaluate it over time, and we'll make adjustments as necessary.

Yes. And it is over a 7-year period, so you talk about the destination. I'd say, as Steve has said, this is -- I wouldn't look at the old way that we talked about it. I don't know if that was helpful. I think pending to a 10-year treasury, if everyone can get their head around assumption very clearly, I think it's helpful to investors, and that's how we're going to talk about it going forward.

Okay. And I guess, just the last one, if I could sneak in is from the motivation, looking at potential sales LDTI, you could talk about C1 on the statutory side that plays into capital, but I'm wondering about other type of external consideration.

Yes. No, we still feel really good about our process for LDTI. It was great that we got a deferral for a year to get that implemented. We're spending a lot of time internally just making sure that we have the infrastructure to adopt, and we're on schedule to do that. It's kind of -- it's a little premature to probably start talking about impacts and those types of things. We're still working through that. But obviously, as we get into latter part of next year, there will be more conversation just around LDTI and the related impacts of that.

Yes. I'll look much more at this transaction as part of a longer-term strategy in terms of how we want to reduce our exposure to capital-intensive business and increase our exposure to some of our more capital-efficient businesses. That's what the transaction is all about. It wasn't predicated on any one thing happening, and it's about the overall shift in our portfolio to that. And so we're very happy to do that transaction just from a longer-term capital management perspective. I think that's all the questions we have for today.

We have no further questions in queue. I turn the call back over to presenters.

Yes. Great. Thank you. I just appreciate everybody dialing in today. I know there's a lot of disruption going on in the Northeast, and so having you be part of this meeting, we very much appreciate it. Certainly very happy about where we are. I think you hear that from us today. We look forward to getting through the year-end and take you through our fourth quarter results in more detail at the end of January. And with that, operator, I would like to end the call. Thank you very much.

Okay. Thank you, everyone, for joining today. This will conclude today's conference call. You may now disconnect.