Unum Group (UNM) Earnings Call Transcript & Summary

Before I continue, I just want to remind everyone that you can ask questions and send me through veracast and I'll be happy to take your questions. I do just like sometimes focusing things on long-term care, I'm sure you do, too. I mean -- I do have a few more questions, and we'll get through them. So how widespread is the ownership of long-term care policies among the 0.5 million dead Americans from COVID? And I know it's not including your assumptions, but if we just sort of brainstorm, could there be a material impact from persistency being lower than expected among the people who have died, unfortunately, from COVID? I mean that's clearly positive in the long-term territory. I know no one is including their numbers, but how should we think about it?

Yes. So I think what we've reported to date and the tragedy that we saw last year was the impacted people that were disabled. So the people that were actually on claim and were impacted by COVID through that process, and that's what we've been reporting all throughout the year. I think what you're referencing is when you think about our active lives, people that have an active policy today and they are not on claim, how many have been impacted by COVID as well? The average age of our -- particularly our individual long-term care block is a little bit older. And as the COVID has skewed more to older ages, how does that come through? I would tell you, we have not seen that yet. It doesn't mean that it won't exist and that it won't be a little bit of a lag to that. But as we look at our book of business, we just haven't seen that many people that have terminated because of COVID has been impacted by them. Sometimes we don't know because once again, we'll know that they've stopped paying premium along the way. And so we don't necessarily get a specific report. It may take some time for that to come through. But your supposition that there should be some of the people in our book that are included in that numbers is not unwarranted. We just have not seen it yet. So it's something we'll keep an eye on over the next year.

People who I know have received some material year-on-year rate increases in their long-term care policies. And my hunch is the regulators wants the long-term care carriers to stay as solvent as possible because they want them to continue to off work. But two, they also want to do right by the policyholder. The 2 things together are sort of intention with one another. But when I think about the size of the increase, I'm wondering that some companies have probably very adeptly managed their long-term care portfolio, and some companies have probably done a poor job. Are the companies that have done a good job at a disadvantage that the regulators are going to be granting pricing increases to those who've managed their launch of care policies more poorly in order to get them closer to breakeven or some sort of solvency? Or it's going to be, they've been following the rules all along and playing correctly and thinking about this with conservative assumptions? Because they've been conservative and done right, they can't get the same kind of rate increases?

Well, I think what you're talking about, Josh, has been an industry issue. And so it's -- a lot of people have been challenged by some of the dynamics that have affected that block of business. And I think we have been a company that has gone forward and increased prices as warranted in some of those blocks of business. I think as we approach states and look for rate increases that are justified, it's based on what we're seeing in the book of business, which I think has been consistent across the industry. So I don't actually think that they're changing their tune towards carriers based on how they've done it. I think it's much more about what is the underlying book of business, say. And are those rate increases justified and then going through that process? And as we've said multiple times, this is a process we've gone through as well to make sure that we're adequately pricing. We've also given, over that period of time, the option for policyholders to adjust their benefit streams, which is where that tension that you mentioned actually works well because a customer can adjust their benefit stream, not just pay a higher price, and I think that works well for both parties.

So I have a question coming through. It's a Colonial Life question and the individual wants to know what has been the risks and benefits to Colonial Life going forward? And how is the COVID disintermediate the sales functions?

Yes. So Colonial Life, obviously, is a franchise that we love. I think it's a great opportunity for Americans to get protections at the workplace or, I should say, through the workplace to make sure they're covered in needs. The voluntary benefits we provide there are very, very good. We think it's been a good avenue to get there. I'm not sure exactly you meant the risks associated with that. It was clearly impacted in a COVID world. When you think about how they have done their business historically for many years, oftentimes face-to-face enrollments, and as everybody was forced to go home back in the March time frame of last year, those face-to-face enrollments couldn't happen. And they've slowly come back as people have come back to the office. But what's really happened that's been helpful as we've been able to enhance just those face-to-face enrollments to more digital enrollments. The team has done a good job of adapting to that. Even if it's a face-to-face through digital means, all those things are positive. So when we get back to a world where we're able to have people get back together face-to-face, you combine that with a digital capability, we think Colonial Life will be as good and will likely be better than they were in the past because they will be a more digitized-enable workforce or sales force that will get those benefits to the people that need them out there across American. Very excited about the businesses.

Has it been difficult for salespeople at Colonial Life to equal their compensation from a previous year, as this year like have been a deferent to how they're compensated, given that they've not been able to sell the same way if you adapt your sales tactics? I mean are there agents sort of saying that 2020 was a year that caused me to question my long-term association with Colonial Life?

Actually, we've seen a little bit of the opposite. We've seen actually recruiting levels to Colonial Life have been good. So when you think about why our Colonial Life teams are there? They are very much there to protect the customers. They love what they do. And yes, for many of them, given their business model was adjusted over the course of 2020 is something that will have impacted them because it is a commission-based sales force. I think very much the people there are focused on the purpose of the company. They understand the challenges we have, but I think they're also equally as excited about the digital tools that have been brought to them. And they, as we kicked off the year just a few weeks back, are very excited about what we can deliver in 2021.

In terms of cash flow, a year ago with main resolution, it seemed like fortifying that capital need was a major use of cash. Obviously, supporting the dividend was a major use of cash. And the stock, which arguably is very cheap right now, buying back stock became a less obvious thing that could be done given those schemes. But now you have this block of cash coming in, how free are you to utilize that cash for buybacks? And in -- look, obviously, it's not growing your business as well, but maybe given what the stock price is, it just doesn't make sense given the 2 choices, how should we prioritize use of cash flow among the various needs?

Absolutely. So when you think about our cash we have today, I mentioned $1.5 billion sitting on the balance sheet, about 4x in excess of what we normally like to hold at our holding company, we have the capability, the ability to actually put that capital back to work. And as we said, the first thing we want to do is put it back into our core business. It's a good, high-returning business. We want to make sure that we're putting as much investment and putting as much protection out there across America and the U.K. and Poland, as we've seen in the past. So that's first and foremost what we'll do. M&A is interesting to us, probably on a smaller scale. Looking at infill capabilities that we have out there. So we have the cash and capital to be able to do that to enhance our overall business as we've done over the last several years and the acquisitions that we've made. You mentioned the dividend, important to us to maintain that dividend, maintain the payout ratio that we've done for many years. And I think that, that's important to our shareholders as well. And then when you said -- mentioned in the last piece, which is what do we want to do in terms of buying our own shares? I think that's something that can come. It's not something we're talking about doing today. We still are in the middle of COVID. We're optimistic. We're coming towards the end. But until we are coming to the end, it's not something we want to commit to today. And so with that and the fact that the ink is still drying on our reinsurance agreement and that cash continues to come in here through the course of the first quarter, it's something that we don't expect we're going to be doing right now. But that option is not precluded from us somewhere in the future.

There's a question we have here about whether or not COVID has impacted long-term mortality tables and whether the take-up concerns around the vaccine mean COVID is with us for a long time to come and, therefore, we should consider that in the long-term pricing of life insurance?

So 2 very different questions. In terms of has it been factored into the table, when we think about the mortality impacts that we suffered in 2020 and we've seen here in the first month that we expect to see here into the first quarter, we don't see them as long term in terms of factoring that into pricing. Now that won't be true across every industry, across every area. It will get factored in, but it will be on a more localized basis as opposed to our belief that mortality will be factored into our pricing across the board. The second thing you asked is somewhat of an unknowable in terms of how people get vaccinated, what does that look like? I don't think that's our belief. I think as vaccines start to take hold and you look at the population that was most impacted with 80% of the people that lost their lives over the age of 65, the faster we bring vaccines to that population, which is what we're doing right now, the more important than it is. So I think that, that's our expectation that, that continues. We're hopeful that the infection rates will slow down through the spring. And that we'll see a very different world as we get to the summer. Now do we have a perfect insight into that? No, but I think that's the path that we expect to follow here over the next few months.

Can we talk a little bit about rating agency views? As you weigh all your constituents, rating agency requirements, NAIC requirements and I guess shareholder demands, what are the sort of guidelines on -- you guys post obviously your RBC ratio, but we don't really know like -- we don't get much impression about how the rating agencies view things at this point in time and what you could do to satisfy them. And when you get to the point where you're happily satisfying, both of those constituencies, NAIC and the rating agencies, how much flexibility will you have to meet shareholders' demands?

Yes. So I'd put NAIC in the rating agencies, and just pure capital levels that we continue to hold and how we're making sure we satisfy all of those constituents. We feel very good about our capital. I mean we have for some time, as we've dealt with both rating agencies and what we see out there from regulatory bodies and holding the amount of capital, and we've been able to flexibly deal with that given the strong on cash flow generation that we have in the company. Now when you look at the last couple of years in the cash flows and where they've gone and satisfying all those parties, one of the things as we talk to rating agencies and everyone talks to rating agencies, COVID is clearly a question mark that has been in their eyes and that will work its way out. Because I think if you look at how we were able to navigate the 2020 COVID environment, it was challenging. We saw our premium levels slow, but we still grew premiums by just over about 0.4% in the year. So premiums grew. We generated about $1 billion of earnings over the course of that year. Our capital level is strong and actually cash level is much stronger. So we feel like we're coming out of 2020 in a very good spot and satisfying all of our stakeholders is something we're looking at doing and starting with our customers and working through all of those bodies that we talked about and our shareholders, obviously, being a big part of that, continuing to pay our dividend. And then when the opportunity is right, thinking about how we can change the capital structure in the company to make sure we're doing the best job for our shareholders as well.

And one more question from the audience. Following the individual disability transaction, are there other parts of the business that you think you could monetize through a transaction? I don't know, that's all it says, but I mean are there -- what are blocks that might be attractive to some sort of reinsurer private equity type business, I guess, at the right price?

Yes. So when you go through our portfolio of our core businesses, we like these businesses very much, they are strategic and how they add value to each other and helping consumers at the workplace, continue to protect themselves. So there's a very strategic linkage to all those businesses we have today. The one clear area that we would like to continue to free up capital -- actually started to free up capital through risk transfer would be in our long-term care block. So we think about that in terms of what are the pieces there that we could actually go through a process of risk transfer to help monetize that. It is challenging in today's environment, given the perceptions around long-term period, given where interest rates are. But an area that clearly could use the ability to free up capital will be in long-term care. When you think of the rest of the company, we like the returns and you go through and all of our product lines we have out there have been generating double-digit, mid-teens type ROEs. Those are areas we want to invest in. We don't want to actually look to get out of. So we're excited about the portfolio overall. There's the one area that we need to continue to work on is how do we free capital from behind our long-term care and I would just reiterate what you said, the one that we were looking to free up before that was individual disability block. Team did a good job of monetizing that block of business, but there's more work to do.

And I think about -- I guess, CNO was successful a few years back in doing a transaction around long-term care, but there haven't been so many, I guess. And I guess that was done in a higher interest rate environment. Of course, there's more appetite in the market right now for these types of transactions. Do you expect that not just Unum, but in talking to bankers and investors, is there more appetite for proposing opportunities to do some with long-term care plan?

Yes. I think the thing I'll highlight that's important is there is more opportunity or more appetite for assets, asset-rich businesses that are out there. We're very happy with the transaction we did around IDI is a good example, whereas that business would have been one that if you went back 5 years ago, probably wouldn't have transaction. So I think that's a representative of the desire in the market for these type of transactions. There are hurdles specific to long-term care, and you mentioned one, which is around interest rates and the level we have today, having a buyer and a seller meet around what we think will be longer-term views of interest rates versus the spot rate is a challenge today. But those are the kind of things that buyers and sellers can negotiate and look at. And although that market is tough right now, I think there is activity and certainly we'll explore it, but interest rate is being a little bit higher. I think we'll facilitate that a lot more. And those tend to be a lot higher than these rates. If you go back a couple of years, it was not so long ago when we saw 30-year treasuries up over 3% and that's kind of an environment where those transactions can happen.

I'm just thinking about, you have a lot of skill set in that and maybe an acquirer wouldn't have the same kind of skill set. I guess could you envision a quota share type deal where you free up a lot of capital, but you still have skin in the game? And therefore, your reinsurance partner relies on you to effectively manage the business, but it is giving you the capital adequacy to extract capital from the business at the same time?

Yes. No. Possibly. If you look at our individual disability reinsurance that we just did, we're still managing the block of business for them. We're administering the claims because we've got some of the deepest sets of knowledge, et cetera. Our reinsurance partner recognizes that. And so we're actually going to manage the claims on their behalf, which I think is great, leveraging that skill set. You might see something like that transfer to a long-term care as we also have a skill set there, combined with our disability claims management skill set. We also have that on the long-term care side. So you could definitely see that, but also still having the ability to free up capital through those types of transactions.

Well, I appreciate all the answers, and it's obviously going to be an interesting year. Hopefully, it's interesting in a positive way in a couple of months. And we're all hoping to that. Thanks for your time, Rick. And everyone check New Go in all of countries in which Unum are doing a great job under very unusual circumstances. They may -- they find safety and good things. And thank you for giving us the time today.

We appreciate the team is doing a great job and continuing to operate through this COVID environment. We're obviously very proud of what we've been able to accomplish and take care of people at the time of need, and certainly appreciate the chance you provided to us today to talk to some of our shareholders, investors and constituents, which count on Unum. So thanks a lot, and have a good rest of the afternoon.

Thank you very much. Take care, everybody.