Unum Group (UNM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Unum Closed Block Update Conference Call. [Operator Instructions] I'd now like to turn the call over to Matt Royal, Investor Relations. You may begin.

Thank you, and good morning. I hope everyone had a good holiday weekend. Earlier today, Unum announced we have entered into an agreement to seed a portion of long-term care policies effective April 1, 2026. The transaction is expected to close during 2026, subject to receipt of required regulatory approvals and satisfaction or waiver of other customary closing conditions. The press release announcing the transaction and supporting materials for today's call have been made available on the Investors section of our website at www.unum.com. Let me briefly take care of the safe harbor statement before we jump in. Today's call may include forward-looking statements, and actual results may differ materially, and we are not obligated to update any of these statements. Please refer to our earnings release and our periodic filings with the SEC for a description of factors that could cause actual results to differ from expected results. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; and Chief Financial Officer, Steve Zabel. Now let me turn the call over to Rick.

Thanks, Matt, and good morning, everyone. We appreciate you joining us on short notice to discuss an exciting transaction for Unum. Earlier today, we announced that we have an agreement to enter our third major external reinsurance transaction and second, with regard to long-term care. Following the success of last year's transaction, we are executing a similar structure to remove the risk of another significant portion of our long-term care exposure. This transaction covers an additional $3.8 billion of long-term care reserves, bringing the total reinsurer to $7 billion, reducing our exposure by 40% compared to the beginning of last year. This also removes all of our individual long-term care that was originally written by Unum America and subsequently reinsured to Fairwind. The remaining liabilities in Fairwind are all group long-term care, which have a very different risk profile. As we embark on this next transaction, we have spent the appropriate time to balance cost and risk mitigation. Although we ultimately landed with the same strong partners as our first LTC transaction, the evaluation process and the engagement with multiple parties has been extensive. A key part of this process has been to evaluate a price that makes sense, given our desire to remove long-term care from the overall Unum story and be sure to do so at a level that makes sense for our shareholders. When you boil it down, this transaction will cost us $650 million of holding company excess capital, which is well balanced with the derisking that we achieved. As we take you through the details, you will see that the remaining risk sensitivities have been greatly reduced, and the pricing is consistent with the cost of the first transaction. An additional positive is that unlike the first transaction and others in the market, we did not include other lines of our core franchise. Looking forward, as we deploy some of our excess capital to back this transaction, we remain in a position of capital strength and our deployment plans of $1.3 billion returned to shareholders through dividends and share repurchase remains intact. As we discuss this transaction today, it's important to keep in mind the backdrop of our leading franchise in employee benefits that has been steadily and profitably growing while we have a dedicated team focused on reducing and managing this block. It is also important to give a sense of what the journey has looked like and an expectation that the work continues. So let me take a moment to set the context of where this transaction fits within the overall strategy. Since stopping active marketing of LTC in 2012, we've taken significant actions to mitigate the risk of this block. In the years following closing the block, we established a successful and thoughtful premium rate increase program. To date, we have achieved billions of dollars of rate improvements through disciplined and persistent execution and doing this by working closely with regulators and customers through the process. This continues to remain an important tool for us today. In addition, in recent years, we have accelerated actions to reshape this exposure for the company. It includes our ability to derisk our position including meaningful internal actions and the establishment of the risk transfer market. The time line shown exhibits with notable actions to reshape the block over the last 5 years. Taking you back just a couple of years with the implementation of our interest rate hedge program and the fortification of our capital, we were able to make the commitment in 2023 that no further capital contributions would be needed for this block. While these actions were all significant throughout this time, we were talking to counterparties about risk transfer. And in the beginning of 2025, we were happy to execute on our first external risk transfer deal, removing $3.4 billion of reserves at disciplined pricing levels. Alongside this deal, we also restructured internally to optimize our first unit LTC reserves and released $600 million of capital. Later in 2025, we made 2 additional important steps. We removed morbidity and mortality improvement assumptions, which significantly derisked our assumption set. Also notable at that time was our announcement that we would stop the enrollment of new lives on existing GLTC or group long-term care policies, which led to 7% of cases closing in the first quarter of this year with continuing discussions with employers as they evaluate the cost and value to their employees of this legacy offering within their broader employee benefits package. That takes us to today. I'm very pleased with what today's transaction represents for you. We have continued to work diligently to reduce the footprint and capital demands of the closed block. And today's agreement is another meaningful step in that strategy. All of our actions up to this point have highlighted our intense focus on limiting our exposure to this business. I am appreciative of the Unum team that has gotten us to this point and continues to think about next steps. Their tireless efforts have allowed the other 10,000 unit associates to build an industry-leading benefits franchise across the U.S., U.K. and Poland. And with that, let me turn it over to Steve for more details.

Great. Thanks, Rick, and good morning, everyone. Let me walk through the transaction in detail. I'll cover the scope and characteristics of the block, the economics, the impact on the remaining LTC block the sensitivity and protection picture in our post-transaction capital position. Starting with the transaction itself, we are reinsuring $3.8 billion of LTC statutory reserves to Fortitude Re with an effective date of April 1, 2026. Similar to the first deal, the biometric risk ceded to Fortitude Re will be retroceded to a highly rated global reinsurer. This represents 26% of our total LTC block and 52% of our individual long-term care business. Importantly, this is a stand-alone transaction that removes 100% of the remaining individual LTC reserves held in Fairwind. The reinsured block is comprised of approximately 50,000 policies with an average attained age of 76 years compared to 86 years for last year's transaction. The block is also concentrated in active life reserves at approximately 75% of reinsured reserves with a materially richer benefit profile than what we retain. 83% of policies have inflation protection and 43% have lifetime benefits. The block also carried best estimate reserves nearly $700 million higher than statutory reserves reflecting a more adverse reserve profile than the block we reinsured in 2025. As you can see in the chart, this transaction reduces total LTC statutory reserves from $14.8 billion to approximately $11 billion. ILTC reserves declined meaningfully, while GLTC remains stable, leaving the remaining block predominantly group long-term care which has a more basic benefit profile. So then turning to the economics on Slide 6. We believe the most appropriate way to evaluate and compare pricing across deals is relative to best estimate reserves because that reflects the underlying exposure being transferred. This can differ compared to statutory reserves due to differing reserve margin profiles of each block neither last year's transaction or importantly, the remaining block in PLA have negative reserve margins. When considering this, the cost of this transaction is approximately 12% of best estimate reserves and is closely aligned with the 10% we achieved on the 2025 transaction. Combined costs across both transactions is approximately 11%. While the absolute costs relative to statutory reserves is greater, that difference is driven entirely by the more adverse reserve profile of the ceded block. As you can see, the 2026 block carried a negative reserve margin of approximately $660 million, while the 2025 block carried a small positive margin. Similar to our deal last year, we also realized meaningful economic benefits as part of the transaction, including required capital release and tax benefits. When considered together, these economic benefits offset a significant portion of the gross cost. The key takeaway is that pricing across both transactions is consistent when evaluated relative to best estimate reserves. The level of funding differs across transactions, reflecting differences in the underlying blocks and statutory reserve levels while maintaining consistent pricing. So then turning to the remaining LTC block on Slide 7. The most important point on this page is that this transaction materially improves the risk profile of what we retain. Following the transaction, group long-term care represents approximately 70% of LTC reserves and 95% of insured lives. That mix shift towards GLTC is structurally important as group long-term care carries materially less rich benefit designs, younger attained ages and lower ultimate risk than individual LTC. To put that in context, the average daily benefit on GLTC is about 1/3 of ILTC, 77% of GLTC policies have no inflation protection and only 7% have lifetime benefits compared to 33% of retained ILTC. The younger average attained age of the GLTC block also supports continued rate adjustments and block management actions over time. Considering these less rich benefits paired with the younger age of the block, there is the potential that lapse rates become structurally higher over time. Importantly, this risk profile improvement flows directly through to our sensitivity analysis. Across all key Fairwind assumptions, including premium rate increases, lapses and mortality, claim incidents, claim resolutions and interest rates, sensitivities decreased by 28% to 42%. The net result is a smaller, less risk benefit profile with materially lower sensitivities. So then on Slide 8, we walk through the protection picture across the 2 legal entities holding the remaining LTC reserves. Following the transaction, Fairwind retains approximately $7.1 billion of GLTC reserves supported by approximately $2.1 billion of reserve margin and total protection of approximately $1.9 billion. PLA or Provident Life continues to hold the remaining LTC exposure supported by diversification from a broader and growing product portfolio. Total entity-wide protection of approximately $1.9 billion is the combination of asset adequacy margin plus entity excess capital above 350% RBC. The funding of this transaction modestly reduces absolute LTC protection in Fairwind by approximately $200 million, while Fairwinds RBC position remains strong at approximately 300%. The Fairwind RBC will grow as margin in the group LTC reserves is released -- is realized through future runoff. Considering total LTC protections across both entities we expect to close to $2 billion in Fairwind alone to be more than sufficient to eliminate the need for future capital contributions. Thus, we will be evaluating the protections going forward, including the rate at which excess capital builds. Importantly, following the transaction, we continue to be confident that no incremental capital contributions will be required to support the remaining LTC reserves. The remaining LTC block is self-supporting across both legal entities. So finally, I'll turn to capital on Slide 9. As Rick noted, the transaction was funded in part by leveraging Fairwind excess capital to adjust for the remaining risk limiting the use of holding company liquidity to approximately $650 million. As part of the funding mix, we are also utilizing temporary financing as we will realize the future tax benefits associated with the transaction over the next several years. As a result, leverage will be slightly higher in the near term and then decrease as we pay down this financing. Our year-end 2026 capital metrics remain robust. We expect risk-based capital in the range of 400% to 425%, holding company liquidity of $1.5 billion to $2 billion and leverage of approximately 25%. Our 2026 capital sources and uses are unchanged, including expected capital generation of $1.4 billion to $1.6 billion and expected uses of approximately $1.5 billion inclusive of approximately $1.3 billion of buybacks and dividends. The bottom line is that sustained capital strength enables our continued capital deployment strategy. There is no change to our priorities no change to our planned actions and no change to our expected return of capital to shareholders this year as a result of the transaction. With that, I'll hand it back to Rick.

Great. Thanks, Steve. And to wrap up today's announcement reflects continued deliberate execution of our closed block strategy. This is the second external reinsurance transaction for LTC, we have announced in just over a year and it represents another meaningful step in actively managing this business. As a result of this action, we further reduced LTC exposure, materially improved the risk profile of the remaining block and reinforce the protection supporting our retained reserves all while maintaining capital strength and our capital deployment priorities. Our focus remains on the strength and growth opportunities of our industry-leading core franchises. While managing the closed block, we will continue to be active, selective and opportunistic over time. And with that, we're looking forward to your questions. So I'll turn it over to the operator.

[Operator Instructions] Your first question today comes from the line of Joel Hurwitz from Dowling.

Congrats. First, just, Steve, can you talk about future rate increases. Looking at Slide 6, it shows no benefit on this deal. I guess just why is that? And what is different from how this deal was structured versus the prior one in terms of rate increases?

Yes. No, good question because there is a slight structural difference in the second deal versus the third. But let me back up. I mentioned that we do get benefits that help to offset the growth seed. And we've done that in both the deals. And there was really 3 of those in the first deal. There was basically the capital released on the block that was reinsured tax benefits that we're able to realize because there is a statutory loss on that. And on the first deal, it was rate increases that we expected over time. The difference with the second deal is we did get paid for those upfront. So that would have been reflected in the actual seating commission itself. And so it's kind of embedded in the gross seed to begin with. And so that's not something now that we've reflected as a benefit over time. So we were kind of indifferent in how that was structured as long as we were able to get the economic benefit of us executing that strategy. But obviously, getting paid for it upfront, we view as very favorable in this deal.

Joel, I'd say that's a positive development when you think about structuring of deals over time and the fact that we can get paid upfront with that shows the confidence in the counterparties that that's going to come through as well.

That makes sense. And then just on the funding of the deal, I guess, I had thought that Fairwind had, had over $1 billion of excess capital at year-end. So I would have thought that would have covered most of the net negative seed, but you guys mentioned you need $650 million from the holdco. Can you just sort of take me through what Fairwinds excess capital position was how much of that is being moved to Unit of America and why the $650 million is needed?

Yes, Joel, it's Rick. Just to step back a little bit on to the $650 million. We're very happy with that number to bring that from the holding company. I think when you get into the details of the funding sources, I'll let Steve do that. But there's multiple sources that, that comes from. And so the $650 million we think overall in terms of what the company is going to spend to take this risk off the books is a very good deal, but there are some moving parts, Steve, which maybe I'll take through.

Yes. So think about the Fairwind protections pre-transaction, and it was really comprised -- it totaled just over $2 billion. And it was really comprised of 2 things: the excess margins that would have been on the reserves within Fairwind and then also the excess capital. That was split about 50-50. The one thing to note is those protections were on a pretax basis. So when you think about excess capital being about half of that, you have to recut that for the tax. So that's one funding source that we were able to use there. And then the other important thing here is that this was a block where our statutory reserves were lower than our best estimate. So just if you think about funding sources themselves, we did not have the assets backing the statutory reserves to back the specific block. It was a more risky block and just the dynamics of this block, that's where the reserving levels were. So we had to fund that. And then obviously, with any of these deals, you have to fund the return for the counterparty. And so that's something that would not have been contemplated in our best estimate reserves and how we feel about the protection. So you put those 3 things together, and it did require a little bit of holding company cash, which when you look at the risk reduction and just how we feel about the balance sheet and really what's remaining in Fairwind having pretty significant reserve margins we thought that this was a good trade. We look at it versus best estimate and was the pricing fair based on what our view of the liability was. We think about that always. And then we just think about it, is this a fair deal for shareholders and we felt that it was.

Your next question comes from the line of Wes Carmichael from Wells Fargo.

Congrats on the transaction. Just thinking about the remaining $3.5 billion of individual LTC reserve post transaction. I think a portion of that is New York business from First Unum that you reinsured. But can you maybe just comment on contrasting that profile, that block versus the 2 that you've done, just directionally, I'm just trying to figure out if you wanted to transact on any help with how to think about a directional seeding commission relative to the first 2.

Yes. Yes. That's a good question. And this is Steve. I'll take that one. Yes, you're right. The majority of what's left in Provident Life at this point is the New York business that we reinsured. We also have an individual block that was written out of Provident Life. I would say the characteristics of that New York block is probably pretty consistent with kind of the collective 2 blocks where we've transaction where we've had transaction. The Fairwind blocks one was a little bit older. This one is a little bit younger. So it's probably pretty representative of what's left in that First Unum block. The one thing that I would say that is different is just the level of reserves we do not have kind of negative reserve margins on that New York block when we compare it to best estimate in Provident Life.

And I think one thing was, you're trying to take it forward to what the next transaction. I'd caution you from doing that. We talked about the market continues to evolve and there's more dynamics there. But I think what Steve says, right, about what it looks like from a liability perspective, but I wouldn't extrapolate that into what future pricing might look like. We really won't know until we have such a transaction.

That's very helpful. And Rick, maybe just following up on that. Is there any help you can give us with how this market is evolving? And I mean, I guess, maybe the logical question is, are you seeing any interest in GLTC? And I mean, I know you don't want to get too far ahead of the next transaction, and I don't want to discount this one, but just curious if you have thoughts there.

Yes. No, I think it's very consistent with us with what we've been saying. Even after the first transaction, we saw an uptick. And even as another party did a transaction, that's when we started the momentum to build to being able to parse these blocks into assets and liabilities in the morbidity side, that's good developments getting to this next transaction with younger live more active life reserves, as Steve said, all important. And then 2 things that -- one, we talked about, one we haven't really yet is the price increases being paid for that upfront. That's a good development. And then this is stand-alone. So I'd highlight that piece, Steve and I both mentioned that in our comments. We think that's a good development. previous transactions have had an ongoing piece of business, part of our core franchise for us being part of that. This did not. And so that's all about evolution of a market, and that's how we've talked about this market. And so there's still counterparties out there looking at both sides of the morbidity side as well as on the asset side. And no predictions as we haven't all along, and we'll continue to talk to counterparties but the market is developing in some small ways.

Your next question comes from the line of Alex Scott from Barclays.

I wanted to circle back on comments you made about the Fairwind Capital and how it may build over time. I mean one of the things that I thought was notable about this transaction was the best estimate reserve was actually worse than the stat reserve. And so getting rid of it might help the capital generation on a go-forward basis. And I just wanted to understand how you're viewing that? How quickly does that $2 billion margin progress, just given it is, I guess, longer group LTC?

Yes, Alex, this is Steve. I can handle that. You're thinking about the model, right? If you look at the block pre-transaction, we still thought that Fairwind was going to be kind of capital self-sufficient. We felt good about that with the combined block given that we've reinsured a block that had negative margin and therefore, would run off, if we hit our best estimate assumptions going forward, needing a little bit of capital for that part of the block. We are going to generate more capital in Fairwind with what's remaining than pre-transaction. So it's going to run off over the life of the block. So it's going to be over several decades. But what I will tell you is we did bring RBC down to 300% to execute on this, which is below the 350, that's going to build back up in just the coming years. It's not going to take long for kind of that reserve margin to come through earnings and build capital back up in Fairwind. So we feel like that's a pretty temporary situation, and then we will build excess capital. It was kind of implied in my comments, but that is something, given the remaining block is even less risky. That is something we'll have to evaluate down the road, just how much of that excess capital will want to build when those margins release.

Got it. That's helpful. And then when I think through holdco cash, still at a strong level, even after paying this RBC ratio in Unum America still in strong place relative to where it's been over time. How do you think about capital deployment and the opportunities there, particularly when you consider continued risk reduction in long-term care?

Yes. Thanks, Alex. A couple of things there, I made comments on. One is we still have to get to close this transaction. So that will take place later in the year. So these are these are estimates of where we'll land. We still will sit in a strong excess capital position either way. I think the building capital coming from our core franchise has been good. The generation is good across the franchise. And as you've seen us do, putting it back to work is important. One of the things that you saw in this transaction is we use some of that holding company cash to execute on long-term care. I think we've also said around that with the excess capital position, it gives us flexibility in terms of managing this exposure. We chose to do that with this transaction. I think as you've seen the risk profile change or the liabilities we have, we may not need to do that next time around, but once again, those are things in the future that we'll have to deal with. This was a unique block that we're very happy to transact on and we're very happy that we still sit in a very good holding company capital position.

Yes. The only thing that I'd add, Alex, is we came into the year saying we wanted to really replicate the deployment strategy that we had last year, where we look at how much we're going to generate during the year, we deployed that much capital last year. We're still planning on deploying that much capital this year. So I don't think our employment strategy itself changes at all with kind of our view of it coming in. We're just going to have a little less excess capital as we get to the end of the year.

Your next question comes from the line of Tom Gallagher from Evercore ISI.

So just another question on the holdco cash. Since this was a use of $600 million or so of holdco cash, should we assume future deals would also draw down some of that access? Or because I'm thinking about it specifically with Fairwind. The buffer looks even larger now relative to what it had looked like? Is that going to be excess that might fund future deals? Anyway, yes, if you can comment on how do we think about the Fairwind versus the holdco and the plan going forward?

That's fair enough, Tom. I think as we've said all along, transactions will look different, and we have plenty of funding sources from different spots. This transaction, given the nature of what Steve took through around the reserves and capital in Fairwind, we had to bring some holding company cash. That may not be true next time because when you look at Fairwind, the excess position we sit in is pretty significant, not a lot less than what we had going into the transaction. So it's hard to say exactly how it will look because it's hard to say what the block will look like, but we're in a different spot now after this transaction, I should say, after we close this transaction, than today. So in today's transaction, $650 million of holding company cash, I still think it's a great use. It doesn't necessarily mean we'd have to bring that kind of money or any money to the next transaction.

Yes, it kind of gets back, Tom, to what we've been talking about. We think about pricing based on our view of the best estimate, but you have to think about the funding based on just the stat reserves that you have stacked up relative to that best estimate. And this was just a block that had statutory reserves that were about $700 million less than our view of the economic reserves. So that capital had to come from somewhere. If you look at the remaining block in Fairwind, that is not the case. We have considerable funding sources in that given the relationship between the statutory reserves and our best estimate for what's left.

Just for my follow-up. So the -- is it reasonable to think you would look to execute group LTC deals going forward? It's a different type of risk, much longer duration, probably a lot lower risk, but more out in the future. So it's a little hard for me to wrap my head around to think about how counterparties would look at that? And is that something that you're making progress on, I guess, is my question. And is that table if you kind of peel back the onion, is that generating positive cash flows within Fairwind?