Unum Group (UNM) Earnings Call Transcript & Summary

Good afternoon, everybody. I hope you've been enjoying the RBC Global Financials Conference. We're moving down into the home stretch, and we're pleased to be joined this afternoon with -- by Rick McKenney, President and Chief Executive Officer of the Unum Group. If you're looking for something other than the Unum Group, then you're in the wrong place. But if you want to talk about group benefits and disability coverage, you're absolutely in the best place to be of all. Just as a reminder, a little bit of housekeeping before we dig into the session. [Operator Instructions] Without further ado, I'm going to dig in with the first couple of questions while we wait and see if that cap box fills up.

Unum had a challenging year in 2020. But the 2021 guidance suggests a recovery as the year unfolds. Can you talk about just some of the challenges that you've been facing, how you see those resolving over the near term, thinking both in terms of the sales and on the kind of the loss and expense side?

Sure. Thank you, Mark. First of all, thanks for having me here today. I really appreciate being at the conference with you and everybody that has joined in. When you think about our recovery, and it certainly is something on everybody's mind right now, what recovery will look like in 2021 across the country, across the world in terms of recovery. If I go back to 2020 itself, it was a more challenging year across the world. I think some of the areas that we saw a challenge are things that we'll see changing over the course of '21, '21. Hopefully, in the first half of the year, certainly, we'll see that. When you look at the pandemic that we saw last year, it impacted us certainly in the areas of our group life business where, unfortunately, we saw many, many deaths over the course of the year in our book of business. Unfortunately, we saw that continuing into the first month, couple of months of this year. Although we're starting to see great signs of life in terms of what's going on from a recovery, from a vaccine, the sickness level being down. And so we're pretty excited about what the second half of 2020 what will look like once we get past that. When you think about the sales dynamics that we saw through the course of 2020, we are a business that is at the workplace where we distribute our products. Certainly, the disruption we saw back in March and April of 2020 were a challenge. I think our teams have done a good job of continuing to adapt with that. So as we got towards the later part of the year, we saw a much better outlook from a sales perspective. And as we get into 2021, we'll roll our continued progress on that front. Certainly, we saw a little bit better on the group side. There's a little bit more lagging on the voluntary side, but that's just the nature of those products. So as we look to 2021, it will be a year of transition, I think, for the first half. But we'll still see some pressure coming from some of the deaths that we see across this country transitioning into a much different world as we look to the second half of the year where the vaccines have taken hold, the pandemic really has abated. And we'll look to being back to the company that we were prior to the pandemic and looking for -- being on our stride as we get to 2022.

No, I think that's certainly true. I mean we all remember, it seems hard to believe January and February were only just like 30 and 60 days ago, but a lot has changed just in a short period of time. And hopefully, for all of us, not just Unum, but for everybody that we continue to build on some of that momentum. You talked about you're an employee -- employer, and a employee-focused company. In what ways have companies and employees start to change their view of benefits? As some of the sales process surely has changed. Maybe just the centrality of that type of benefit in an organization, maybe some of that has evolved. Can you talk about that a little bit?

Yes. I'd be happy to. I think it's actually positive thing that we've seen over a period of time. And this coming to full bar there. One is, certainly, when we think about the -- protecting the work, people at the workplace, it's very much evolved to protecting people in the workforce. So it really is not dependent on somebody being at a particular location. It's a connection the employee and the employer have together that the employer will provide good protection benefits for that individual, be it a life insurance policy, disability insurance or voluntary benefits or a dental. And so I think that, that's something that will continue. We certainly saw that. That connection still continues as many people are working remotely. It's a little bit slower as we come back in some of our businesses where that face-to-face is still helpful. It's not the only way that we connect with our customers. But certainly, in our Colonial Life business, as an example, being at the workplace, being able to talk to people about their financial needs across the table is something that we were very good at. But now we actually look at that combined with digital capabilities, we think it can be just as good if not better as we look into the future. So lots of optimism around what we see out there for the overall selling process. The second piece you said, which gives us some optimism is one of the things that the pandemic has highlighted is that financial fragility. A lot of people that would not have thought about their own fragility, whether it be around disability, whether it be around a life event, certainly, had that raised to them that it's something they have to think about as they think about protecting their family, as they think about protecting their own livelihoods. And so I think that, that's going to be a positive as we emerge from this, that more people will look to that protection. And the best way for them to get that protection is in the workplace. And the last thing I'd say that's come out of this is many places, not 100%, but many places, the employee actually has a great deal of trust in their employer on these fronts. So that has been exasperated. As you look at a company that needs to move their entire workforce home and has done so in a very responsible way, that connection between the employer and the employee is as strong as ever, and that will actually transcend into selection of benefits and things to help them with their financial life as well. So I think the dynamic is coming out of this, although it may not be as a workplace-centric, I think will certainly be a dynamic where people in the workforce are looking for these type of benefits that help protect themselves and their families.

Is there anything you've had to change about just the sales process itself or the distribution process as a result of guys like me still working in their house?

Yes. So early days -- in early days, it was acute. If I go back to March, April of last year, a lot of the process that we had, when people get together, as we met with employers to talk about their benefits as we actually bid for their business, those were often face-to-face. And so with some quick reaction times and more of this conference, we adapted very quickly. And now a lot of our meetings are happening virtually, and it's become quite seamless in terms of that. I think the one place that we -- and I mentioned Colonial Life and that face-to-face, that has had to adapt. That was very much a face-to-face interaction. Now that face-to-face can be like this across a Zoom call. But making sure that we've adapted on that front. So we'll adapt to that, we have adapted to that. The team has done a really good job to adapt to this environment. And if it goes back or not, we'll be able to continue to adapt. We think there will be some shift back to the workplace over time as the pandemic wanes. We'll be continuing to serve people face to face there. In the meantime, we're certainly doing a good job interacting with people such as yourself, Mark, over these set of connections. And people will become very used to that as a way to conduct business.

I think that's certainly true. Definitely the -- when you have young children and old senior citizens know how to work a Zoom call, it tells you a lot about how quickly a technology or a process has been adopted. Maybe changing gears a little bit. I always like to bring up the topic because it gets so overdone, but the long-term care book and the reserve adequacy is always a topic of interest on every earnings call. Yes, your loss experience has improved somewhat due to the pandemic, some changes in utilization and so forth. Do you think there are any kind of long-term secular trends that are likely to develop out of this? Anything that we should anticipate in terms of how it might bear on both existing reserves and they might develop going forward?

Yes. It's a really good question. It's really one that we don't have a tremendous foresight into. It's going to transcend over a period of time. Although I would tell you what we've seen in some of the things that we think could impact certainly in the near term, as much as we talked about, the group life business, the tragedy of both loss of life on the care side, the same has been true. And so we actually did see very good loss ratios over the course of last year. It's something that's just a back of the time. We do see that reverting back to normal levels as we get through the pandemic. I mean the good news across the country is the high level of calculations for vaccines that have happened for seniors. I think it's very important that it happens as the country continues to heal. But there are other dynamics that we saw through the period of time, which we don't know if it would last or not, such as the type of facilities where people receive their care. Are they receiving it in a facility? Or are they actually receiving it at home? Some of those dynamic change is very understandable through this period of time. People went on lockdown. How that transpires over time, it's hard to know. We certainly have seen more people who want to use a home health care situation instead of a facility. But that's going to be one that's going to happen over the coming years and over a longer period of time. So we obviously will keep a watch on it, but those kind of things will definitely impact how we look at that business overall. And I think it's still positive. It's a lower cost of care that people get in the home and our policies do reflect that.

Yes. I guess, I mean, when I think about home care, I always think that there's pros and cons. The cost of care, obviously, is going to be considerably lower. But I guess people's ability to -- or willingness to maybe access that might go up. So you trade a little bit of frequency against a little bit of severity in some respects. Yes, still, I mean, ultimately, it's about making sure people get taken care of the way -- the most efficient way that they can be. So that's really what it's about. Can you give us an update on -- within, staying within the long-term care, we'll just touch on this for a little while. We don't dwell on this over much, but I know it's an area of investor interest. Can you just give us the latest update in terms of some of statewide rate approvals and kind of how much runway is left in that process? You made a tremendous amount of progress over the last year or 2. I know that.

Yes. So just to take it back a couple of years, and then increasing rates on a just file basis is something we've been doing for a long period of time. I think when people look at a benchmark for us, they go back a couple of years when we changed our reserve assumptions. And we included in that roughly increases of about $1.4 billion of reserve -- I'm sorry, price increases that we take over a period of time since we did that roughly September of 2018. We've done $1 billion of that $1.4 billion, has been taken out a period of time. So these are all things working state by state, making sure that we're doing so also in concert with making sure we're doing a good job with our customers, maybe giving them benefit of reductions just we're going to have increases. And so we've done a good job over the last several years working through that. It's not done yet. The time when we did it, we said this will be over multiple years. It's still the case. But we still feel like we're tracking to achieve those results over the, I'll call it, medium term.

Okay. Maybe staying in that same part of the P&L. During the fourth quarter, you entered in a transaction with Global Atlantic to reinsure a portion of the closed block individual disability business. I mean, I guess, a couple of things on that. Just -- and then maybe talk a little bit about the transaction itself, why that was an attractive and kind of what made that the right moment to do it? It's obviously something that's been on your mind and similar minds for quite a while.

Yes. There's a longer history to that individual disability block, so these are policies that are mostly prior to 2000 written. The block was closed in the 2004 time frame. Actually, we were able to securitize that business back in 2007. So you think of the cash flows for that business, it's actually been reasonably steady. That securitization we did in 2007 performed really well. We paid off our last piece of that securitization debt actually last year -- at the end of last year. And so as all that transpired, this is a risk that we do not want to have on our books. As we said, it's closed lock. It's something that we don't want to be ascribing capital to. And so we worked on a transaction, and then for a period of time until we get -- remove that transaction, having somebody take that on, and that's where the deal that we do with Global Atlantic came along. Good transaction. It's good for us, releases a lot of capital. It's something they can do with the block and makes sense for them as well. And so we're very happy with the transaction we signed in December. We closed on a about 3/4 of that in the fourth quarter. So that's already in our financial results. We have about 1/4 to go, which we'll do in the in the first few months of the year and talk about that probably as we get to our first quarter earnings call about how the finality of all that came from. We're very happy with the transaction. It makes a lot of sense for us not be carrying that capital. As a result of that, our capital position at year-end was very strong with $1.5 billion of cash on the balance sheet, and RBC levels where we expect, leverage a little bit lower than it's been. So a very good transaction for us. And we think ultimately, it was the right time to do that, although this is something that has a long history to it.

No. I think the transaction was pretty favorably received. That was certainly the feedback that we got from people. And I think the interest rate environment and a number of factors kind of come into play. As you consider then maybe are there opportunities improving or evolving for maybe doing something similar with the long-term care or any of the other legacy blocks?

Yes. So there's really only one other one. That's our long-term care business. And certainly, if we want to do something, we'll -- I think the environment has evolved over time. So we've actually closed that, starting with our individual business back in 2009 and closed our group business shortly after that. And this is something just like our individual disability block, we don't want to actually continue to have that on our books. It's a little bit more challenging on the long-term care side. But as we've looked over a period of time, split by years, one of the things that is changing with time is more data. So more data is coming into the industry, the understanding of how this business will be performed through cycles. One of the challenges in this block of business has been the lower interest rates, which we've seen come down continually. So you have to see that moving up a little bit here in the first half of the year. But when you look at all the dynamics, we had the same goal that we did with the individual disability block. And that's to find somebody that can actually manage that capital better than we can. It's very unlike everything else that we do, continue to cure people to workplace, and so we'll look for the right transactions. And one of the things that we've talked about recently, it doesn't have to be the whole block. There may be parts of that block of business which will have more attractiveness to some people. That's what we're going to pursue and look for the right partner to help us release some of the capital behind that blocks as well.

No, I think -- I mean just a broader observation, it does seem like there is a lot of different -- a number of different types of third-party vehicles that are pursuing different forms of transaction, whether they want the interest rate risk or they want the liability risk or the longevity risk or whatever. Everybody kind of has their angle, so to speak. And it does make it possible then for you guys to trade and adapt against whatever structures might emerge that make the right financial sense at the end of the day.

Yes, true.

Moving on from the legacy block of the business. When you think about the Unum U.S. piece, you talked about kind general competitive environment. As we start to come out of the pandemic, we get some reopening. How is the pricing environment? Is the opportunity for new business to pipeline there? How does that look? Maybe just some kind of overview thoughts on how that business is performing and where the opportunities might sit?

Yes, happy to. I think with our business on the U.S., particularly in the group space. And [indiscernible] on the group space. This is about getting people back to work, so employment levels and everything we see and hear about the employment picture improving lately is good for this business. You mentioned competitiveness. I think that if you look over the last several years, we've actually had a number of players exit the business and move their books of business into somebody that is already in the business. And so I think that's actually good. When we talk to customers out there to actually have a more limited scope of providers, I think, is probably a good thing. It's still very competitive and it will be strong. But I think having that group that knows how to run this business, that thinks about it in a very rationally priced way is a good thing overall for the competitive environment. But it will be competitive. And we'll continue to compete very well with the capabilities that we have, some of the digital connections that we continue to put in the market today, a lead management business that creates some connectivity with that employer, all those things, I think are great on the petition. The last thing I'd say is that we look to the -- we look at economy improving and how we do that. So we're happy with what the pipelines look like. And even our year-end results that we put out were very good from our perspective. We look for a continuing, improving economy. People looking to continue to add group benefits to their operations as people's perception around the risks and their own financial fragility has been only highlighted by the pandemic. We think that's a positive for us to continue to have deeper penetration with our customers out there. I mentioned the voluntary, you mentioned U.S., which includes our voluntary business in the larger case group setting as opposed to on the Colonial Life side. That business is a little bit slower to come back because even when you have people [indiscernible] you have to go back through the reselling process, if you will, because it is individually elected provision. So we'll get there, but that may just take a little bit longer time than with the group business. When the people come back to work, generally, they get protected in a pretty rapid order.

Speaking of the voluntary business, I know for a stretch of time there that some of the utilization patterns were a little bit disrupted with [indiscernible] office closures and so forth. I know I missed an appointment somewhere along the way a year ago. Is all that kind of renormalized now and things have been back open up enough that people have kind of caught back up?

Yes. I think through the summer and the fall, we started to see that go back up. A little bit of a dip as we got to the year-end time frame as things started to get a little bit worse. But I think we'll be back there very quickly on that front. So utilization is, in fact, it will, take a dental business that we see out there across the piece. And ours is how do we continue to grow that business for us. It's a relatively smaller business that we're looking to scale up. And so we'll look to do that over the course of '21 and '22. But utilization is pretty well back. And so actually, we'll get back to the -- you probably didn't double up here but certainly need to get back to the next one. so one of the things where the utilization was not really recovered, if you will. But oftentimes, people had different pricing scenarios, so it actually worked out well for the employer and ultimately, for the employee as well.

Okay. Yes, that's useful actually. I was just back to the dentist. I'm back on schedule. I was just there last week. So my smile looks a little brighter. It's probably still because of that. I've got a couple of questions that have come in over the line here. So let me go ahead and pose that -- post a couple of those. My first question is a somewhat above-average level or investments in BBB positions. Is the company contemplating any changes to the portfolio as interest rates begin to move back up and potentially, at some point, the Fed might change some of their policies?

Yes. When you think about our investment portfolio, we're pretty well staying the course. So things that will change over a period of time as we add a little bit, not that perceptible on the alternative side. But our BBBs, single A-type range of assets is -- we are a credit investor, and so we like those type of assets. And I think through a period of time, we've actually withstood through multiple cycles that BBB space. Particularly -- we don't invest in the index. We buy names. We buy situations. We look at those bonds that have performed very well through a period of time. The same would have been true last year. And I know the world feel quite a bit for a lot of the stimulus that was put in. But even if you look back earlier in the year and our performance, when things were a little bit more challenging, the downgrade we saw, the credit losses, which were very, very low. It's a space that we like to invest in, and we'll continue to invest in that space as part of the portfolio. But the overall mix of the portfolio, I think, will be pretty similar, just perhaps a little bit more on the alternative to.

Okay. Yes, I know it was just over a year -- just about a year ago that we were all kind of holding our breath because we didn't really know the credit scenario would evolve. As it turns out, everybody really did generally much better than -- far better than their worst expectations and generally, much better than even just the base case expectations. So certainly a tribute to the credit diligence that you guys have been doing right the way along.

Yes. I appreciate that.

But the other question that I've got is -- sorry?

No, I just said I appreciate that because it's exactly how we manage the portfolio. And the team did a really good job of staying the course in some names, lightning where necessary and that's how you manage a portfolio of credit.

The other question that we have, and maybe this is -- the question is a little premature, but I'll ask it anyway. Can you talk about some of the pluses and minuses of the LDTI implementation on Unum? I know that's a little ways away. But is there anything you can share at this stage in terms of any preliminary thoughts?

Yes. No, I think you're right, it's much too early to be talking about that. And we'll continue to work on that as everyone else's. We'll probably be into next year before we start talking about some of those dynamics. We'll continue to move as we work through that. The team has done a good job of preparing for the implementation, but it's still pretty early on that front.

Yes. I think we were at the AFA conference last week and a question got asked in a lot of sessions that I was in, and it seemed like the consensus sometime early in '22 is when people first start putting out kind of their preliminary shots on how that might all go and where the soft spots and the soft spots are going to be. The other business we haven't talked about much yet at this stage is the U.K. business. Obviously, the pandemic played out a little bit there. And the recovery there is likely to be a little bit different. So can you talk about a little what you're seeing there and how that business has evolved through the cycle?

Yes. So the U.K. business continue to be a great franchise. When you think about what we do there, it's very similar what we do here in the U.S. Number one kind of share position across group protection, which is similar to our launch or disability business. They've had that for a long time. The competitive environment over there is competitive. But there are less players in that space. And so as a result, we really like the franchise we've had there. The dynamics it had last year, a little bit different than here. I think we were pretty happy with the early stages of getting through the pandemic. On the top line, the team did a good job on sales to continue on. We felt a little bit more pressure as we go the back half of the year as the U.K. went on a much more stringent lockdown than we saw here in the U.S. The work we saw there on the loss side is because of our products on the long-term disability. Ultimately, we have to deal with a medical professional to help us with some of those. We just didn't have the same dynamic with the NHS in the U.K. that we've had here in the U.S. The doctors really pretty well remain open for us. Certainly as got into we the summer time to help on some of those processes. So we saw some of those dynamics coming through our U.K. block of business. The interest rates went lower there than we saw here in the U.S. So that's a dynamic we saw there as well. But overall, the franchise is intact. So if you look at what they're expecting, as we get into this year, there's still more lockdown than we are. But they're expecting with vaccines that are taking hold there as well in the U.K. that they're going to be a much more better place to begin to the summer. And so we'll see things revert there, maybe a little bit slower than we see here in the U.S., but I think the key thing is the franchise is still very much good.

Okay. That's helpful. Maybe just moving on. We have a few more minutes left. One topic everybody likes to talk about is just capital management buybacks. I guess the expectations where there weren't any particular buybacks on the table for 2021. But just generally, how are you thinking about things in terms of maintaining your RBC levels? Any comments on dividend? Anything in the capital return environment that you'd like to share?

Sure. Maybe it's a good place to start actually talking about where our capital had as of year-end. We're very happy with the individual visibility transaction we talked about. We brought that in. It hasn't all closed yet. We certainly felt some of the benefits of that in our year-end numbers. Our RBC has been steady. I think we ended the year in the 3 60 to 3 65 range. We'll expect to keep it around those levels in excess of what our overall targets are for RBC. And we ended the year with about $1.5 billion of cash. So that was higher than normal because of the transaction. And so that's what we've got to work on. I think we've started to talk about what we're going to do with the cash that we have out there. Certainly, we want to wait until we get through the rest of the pandemic and we don't want any false starts. We saw a little bit of that later last year. We don't expect that now given the rollout of the vaccines. I think it's a very different dynamic. We're going to be patient around that. And then we have to wait until the end of the deal closes in our IDI business. And so once all that has settled, we'll start to look at specifically how we put that capital back to work. I think it's important to know that when you think about our capital deployment, we think very much about our core business. We put more capital behind our business lines that are generating the teens-type ROEs. The dividend you mentioned is a good steady payout ratio, and that's how we think about our dividend, being consistent on that front from a dividend overall. And we're looking at acquisitions, and not a major move, but certainly, things that will be enhancing our current business that we have today. We think we have a really good portfolio already, but there are places where we may want to add capabilities and a lot of lines, things like that. And we'll always look to put a little capital behind that. And you mentioned share repurchase. And so that's not on the table. You mentioned in 2021, it's certainly an option that we have out there in front of us. We're going to come back probably in the second half of the year to be more disclosive around where exactly we're going to do with some of the success cap we've been fortunate to generate as we've gone through this process in selling our IDI business. So more to come there, and very happy both the position we are in today. As we rolled out our projections to the end of the year, we still expect to have similar RBC ratios. Cash level is still in roughly $1.5 billion level. So we've got to pay more and do more about what we want to do with that, which could include a number of fronts, so putting that capital back to work.

Okay. Well, we're pretty much at the time. Let me just give you -- that's a good place and if we want to. But let me give you the final say what -- if there's one takeaway investors should have from our session with Unum here today, what would that be? And what would you like to share with the group?

Yes. I think, Mark, I have to highlight that last year was a challenging year. We were doing all the right things in terms of take care of our customers at time we need. That's actually come into the beginning of this year as well as the pandemic is still working through its final stages. But I wouldn't want to leave it there, right? We have an incredible amount of optimism both for the second half of the year, once we're through that, and then hitting our run rate as we get into 2022. We weathered the pandemic very well while taking good care of our customers. But we look forward to an environment where we can continue to grow the business, take care of more people and continue to do the things that we've done very well over the last many years.

All right. Well, thanks very much, Rick, for joining us this afternoon. I don't know if you have any more one-on-one meetings left, but I hope they're productive for you. And thanks to everybody in the audience for taking some time to learn about a little more about the Unum Group.

Thanks, everyone. Thanks also, Mark. Appreciate it.

Sure thing.