Unum Group (UNM) Earnings Call Transcript & Summary

Good afternoon. We're going to get started with the next session. Great to have Unum with us today. Up on stage with me is Rick McKenney, President and CEO. Maybe just start with some opening comments on how you view Unum's performance in the first half of the year and how the company is positioned in the back half of this year and into 2027.

Certainly. Thanks, Ryan. Good to be here with everyone. I appreciate everybody in person or following us on the webcast. For Unum, it's been a continuation of a good year, and I really will dimension that on a multiple fronts. One is we always start with the core business and being in the employee benefit space at the worksite, the business continues to still do well dimensionally across the board. When we think about it, our Group Benefits business is a leading franchise, and we've been very happy how that's performed over the course of the year. We've seen some good sales growth. I think that through the first half of the year, we saw our U.S. business growing kind of in the teens, really good to see our Colonial Life business catching more pace in terms of what it does. So our U.S. business is doing well. Top line, margins are still pretty good. There's some dynamics underlying that, but in aggregate, still doing very well. And then our U.K. business doing well, but some work to do there on our U.K. business as we reprice the book a little bit. It's something we know how to do, and we'll certainly get on that. But in aggregate, the company doing well. I think we talked about even for the rest of the year, being within a range of $8.60 to $8.90. So that's kind of right in line with what we talked about going into the year. Capital generation is still very good, what we see across the company. And so very happy about that. And then, of course, we need to talk about long-term care, and we've continued to reduce the risk across that block, one organically from this year coming out of some actions we took late last year and then announced a transaction in the July time frame of reducing risk through reinsurance. So all of those things good. I think we continue to be in a very good spot, looking forward to growing through the rest of the year. Clearly, a lot of things happen in our business in the third and fourth quarter that we're focused on, but those will be important as we go into 2027. So I think overall, Ryan, very happy about where we are, but always work to do and always opportunity ahead of us.

All right. Let's dig into the Unum US business a bit more, starting more on the growth side. Can you talk about -- you mentioned it a little bit, but can you talk about the sales trends that you're seeing as well as premium persistency at this point?

Yes. So I think I'll start with your last point, which is the premium persistency has been very, very strong. So in a business that has high returns for us, we've been able to keep a significant amount of that on the books. And the thing that we'll talk about overall, which drives sales, which drives persistency are the digital connections that we continue to make. And so if you think about 70% of our U.S. business has some type of digital connection that's been added over the -- since 2023. So we're very happy about that. And those capabilities are critical as we think about the connections with customers, the ability to have that business persist, get high returns and continue to deliver for our customers overall.

This is, yes, somewhat related, I guess, to what you just mentioned, but can you talk about some of the technology investments you've been making in recent years? And I constantly hear from companies in the group benefits market, how you need to keep reinvesting in technology and improving the customer experience, where -- how you feel Unum is at, where you're at in both -- also in terms of kind of how it compares to some of your competitors?

Yes, we would echo those same comments. I think we started some of those comments in talking about how we want to connect with our customers with good digital capabilities. Think about embedding that in terms of what the process within the customer looks like. And we talk about that as HR Connect would be one digital connection that we've been investing in for 7 or 8 years now. And so we've been at it for a while, always iterating, always getting better, making things simpler for our customer would be one piece of digital. And we'll continue to invest in that. Just like any good piece of technology, you can always improve it, always make things better, and we've been doing that in concert with our customers. But it's not just that. It's across the board. So leave management is another piece where we've invested significantly over the last 7 or 8 years. And that has really paid off. Leave management has become a big differentiator in our market today. It's a basis of competition. And because we were early in that game, I think we have iterated faster than a number of our competitors. But it is something we always have to keep investing in. So that would be across our U.S. business, really good in our Colonial Life business, which is an agency-driven business. What we do with Agent Assist, think about the systems that an agency force would use. The investments there have continued to pay off, and we've seen good momentum in Colonial Life. And even in the U.K., what we've done with some partnerships we've had there, embedding new services within the product lines we have. So technology is a big piece of it. And so we've continued to invest in it. It's not a new thing. It's not a new step function. It's been just a continual investment over a longer period of time. And I think the team has done a good job of iterating new and developing areas and then always thinking about what the future looks like.

Going back a few years ago, it seemed like you were maybe making some heavier investments and you did see some uptick in your expense ratio. It seems like it's started to stabilize from here. But where are you at kind of in the evolution? I'm sure there's always ongoing investments, but where are you at in the evolution of some of these larger initiatives?

Yes. So I think we did see our expense ratio come up coming out of the pandemic. There's a couple of things we highlighted there. One is the technology we're investing in. It was a little bit heavier, but not that much. The other was investment in our people. So you would have seen that across the board, I think just given that environment we saw in 2022 in that timeframe, we did see an increase in the cost for some of our people. So the combination of those 2, we've seen that flatten out, even get a little bit better. And so we manage our expense ratio pretty tightly. And so we would expect to see that slowly improving over time while still making very significant technology investments. It's not because we're slowing the investment. It's just as we burn that in and continue to work through productivity across the company.

And when you -- this is more of a Unum US question, but although I guess we could expand it to the other areas, too, but how would you characterize the current competitive conditions in the market today?

Yes. So the U.S. side, always competitive, right? So it's -- I think that we don't look for competition going away. I think one of the things about our space is it's pretty clear. It's a good place to compete in. The margins are high. Others see that and others have participated in that. All we look for is having a rationally competitive environment. And so we've had periods of time in the past, which was a little bit more irrational. Some of those players that were more on the irrational front have left the industry, which has been a good thing. But the players that are there today are there for the longer term. So we'll compete based on capabilities, based on relationships, based on price to some degree, but it's not just price. And as long as we see that overall, we think that's a good environment for our customers. And I think about that more macro perspective customers because they don't want to see radically different prices year in and year out. They like to see that stability. We can deliver that and our competitors hopefully will deliver the same.

Have you seen much change in the environment over the last year or so? Or is it -- would you say it's pretty stable?

I would say -- I think that there's always -- every case by case, there's plenty of competition around that because we're all trying to grow our businesses. But I think it's within a range of stability that we have out there. And I expect we'd hear that from some of our competitors as well. We will compete hard day in and day out. But I think overall, we will win our share based on the capabilities we deliver, the relationships we've had over time and just the know-how that Unum has in this space, this is all we do. And so I think we have a great team to execute on that front.

I want to shift to underwriting experience in Unum US and really start with group disability. You had come into the year expecting a 62% to 64% benefit ratio was 65% in the first half of the year, so a little bit above that. Can you unpack some of the drivers of what drove that and how you're thinking about the outlook for the rest of the year?

Sure. I think what we've said for the rest of the year, we expect a similar level of what we see. And I think unpacking that, we did a fair bit of that in the second quarter, talking about looking at the different pieces between our long-term disability, short-term disability and PFML. And I think we highlighted that in PFML, paid family medical leave, we highlighted that, that's a place which is not performing to our expectations, and it's a place that we will reprice over the next year. So that's caused some of the elevation that we've seen over the course of last year, something we'll get after from a pricing perspective. And so we've said over the longer term, which we've said 65% is a good number longer term, that's what we'll be working towards.

And then maybe it would be helpful if we could just step back and paid family medical leave or PFML is a newer -- generally newer product. Maybe a little background on it and how you're viewing that market.

Yes. So this goes back a long ways in terms of administration of paid family medical leave goes all the way back to the Family Medical Leave Act 30 years ago. And so what companies are looking for is to help them with the administration of leaves. You really saw and we've been at this for a long time, and we would have talked about this going back, like I said, last 8-plus years ago, we could see this coming. Where you came out of the pandemic is a lot more focus on leaves. And when I think about that, think about employee base, the type of leaves that their employees are expecting now, some of them have been just evolution of employers. So you think about what used to be a maternity leave is now a bonding leave, which includes both mothers and fathers in that process or somebody that's adopted a new child. It's all expanded in that area. There's also caregiver leave, think about taking care of a parent over a period of time through a tough so I'll just give you 2 examples. Now there's 10 in employers. So the complexity of that has gone very -- kind of a straight up kind of thing. You've also seen with that complexity, it's different state by state. And that's where some of the complexity comes in. Every state is different in terms of what it has out there. Now take across roughly 14, 15 states today that have a mandated paid family leave, PFML as we talk about it. That's gone state by state as it has evolved. We've added a couple over the last couple of years. Each state will dictate what the leaves are that they expect employers to provide. And companies like ours will administer those. And so we'll work with an employer to administer that. You've seen that evolve over time, the prices that we charge over that. And so where that's come out over the last couple of years and why we talked about it more is, one, it's more prevalent, but it's still a minority of the states that have this, but it's more prevalent. And then our ability to do that is based on the technology we have, the knowledge we have, the history we have to make sure we can do a good job for customers. In the last year, we brought on some states that were kind of -- you don't really know exactly what the pricing or the experience will look like. And so some of the states have had less good performance over the course of the last year or 2. And so now we'll have to price for that. So that's the process you go through. So these are generally 1-year products. So when you see experience at an employer, what they've got, you come back and you reprice for those levels. And so although it's been a little bit elevated to date, that's something we can rectify and address with customers, doing so in a very thoughtful way because it is important to them to have somebody take care of this for them. So anyway, it's a bigger topic. It's something we've been involved with for a long period of time and helping to educate in the industry. It's ultimately a good thing for an employer to do this because it is complex, and we can actually manage some of that complexity for them.

And then when you think about the longer-term expectation for the group disability benefit ratio, you've talked about like the 65% steady state. I think some people still say it was 70% plus before the pandemic. So I guess what gives you confidence that you can maintain it at 65% and really hold the line there?

Yes. So you'd have to go back over a longer period of time, thinking about what the trend has looked like there. And certainly, we saw levels come down around long-term disability that got down into the high 50s, which we said at that time was too low. It's come back up now right around that mid-60s level. Different than what it would have been if you went back a decade ago is you've seen a lot of change in terms of the ability to get people back to work over a period of time. So the recovery rates, as we talk, somebody goes out on disability, the recovery rates are dramatically different than they were a decade ago. That could be for a few reasons. One is our knowledge; two, accommodations that employers provide; three, even just the medical process is different in terms of people's ability to recover from certain things can be different. All those things feed into that over a period of time. So we've seen better experience. And then you get back to the competitive environment, you say, okay, well, competition take that away. The dynamics there have changed as well. So now it's more about the services that you provide, the connectivity that you have today. And so the pricing dynamic because you have a broader portfolio may not change that dramatically. So that's our view of where we have it today. We still lead in that space. We want to continue to be a leader around disability management, but we want to do the overall portfolio in a very reasonable way.

And then on group life, things have kind of been, I guess, the opposite trend, which is experience has been very favorable lately for you and the entire industry. Are you, at this point, optimistic that this can continue at least in the near term? And then at what point do you think there -- could there be pressure to potentially pass through some of this into pricing given how favorable the margins are?

So we have seen very good results in our Life space. I think as you say, the industry has been good on that front as well. It gets back to the packaging when you think about overall. And so how quickly does that price go back into the market. You asked about the near term. We've kind of said it will look similar to what it looked like for the first half of the year, I think, which is kind of in the high 60s, 66%, 67%, something like that, lower than our expectation, which would have been right around 70% loss ratio. And I think that it gets back to the overall bundling and the packaging of the different products in terms of why necessarily the price won't just find a new level of where it is today. And so we're happy about where it is. We haven't really kind of projected out beyond this year, but we continue to be very happy with how our group life business is performing.

And maybe moving into Colonial Life. Your premiums have been -- growth has improved to about 3%. Do you still think that's a higher growth business than that longer term? And then what are the -- some of the key things that need to happen to accelerate growth from here?

Yes. No, we're very excited about our Colonial Life business, and we have been. So Colonial Life, it's an agency-driven force, and so they're selling mostly voluntary products, simple products at the employer ranging in sizes from very small customers to kind of that 2,000 employee level. So it's a really good place to get reach into the market because these are people that may not be served as benefit plans anywhere else. And so Colonial Life is a very good business model. It was more impacted by COVID, and we're still talking about that. Because we had both the -- what was happening from an overall at the workplace type impacts. And for Colonial Life, which is an agency-driven force, we also had some challenges kind of in that next wave '23 -- I'm sorry, 2022 area, where our recruiting of our agents was not as good as it could be. All that's kind of -- we're working through a momentum right now. You would have seen 6% growth last quarter in sales at very high returns. And so we really like that business. And we'd like to see a higher growth business. It's about getting feet on the street, giving them the right technology, getting the reach that we have out there today. And so we're very optimistic about Colonial Life, but it's one of building very strong fundamentals in that business, which the team is doing a good job of seeing good momentum.

Can you talk a little just about how Colonial interacts with Unum US and the voluntary business that Unum US has and how you avoid channel conflict between the 2 divisions?

Certainly. I think it's one thing we've been working on for a very long time. And I think we're in a better spot now than we've ever been with how they would work together. I think our Colonial Life agents now understand where they can bring our Unum product set to solve certain needs that we have out there. We actually are doing that more today than we ever have. But I think there's a fundamental different value proposition that's brought to the employer. So if you think about Colonial Life, I mentioned it's an agency force. They'll do the enrollment for the employer, whereas the Unum side is much more of an electronic delivery, a little bit larger case working through a broker. It's just a very different delivery model. And so depending on what the employer is looking for, we'll be happy to have them have Colonial Life if they want that higher level enrollment experience or on the Unum side, bringing some of that connective technology we've talked about. And so the channel conflict is actually not that high. We want to compete. We want to be there. But I think when there is the opportunity to bring both or have the employer choose, we want to bring the best of both out there as well. And we've seen more of that over the last couple of years than we have in my time at the company.

I guess shifting to the U.K. You mentioned this initially that there's some work to do to improve the underwriting. What have you been seeing that has gone worse than you expected? And then what's the time frame that you think you can fix it?

Yes. So the U.K. -- first of all, the U.K. business has a tremendous franchise. Even at these levels, has been for a long period of time. We have a leading market position over there, particularly around group income protection, which is akin to what we have in the U.S. around long-term disability, leading market position. And so we're going to be ahead of the market in terms of what these things look like. And that gives us the ability to price for it differently. And so some of the results we've seen this year, if you go back a couple of years, very, very high returns. We've seen that come down, still be a decent return. I mean think about it it's still low teens type returns on this product set, but we think they can be higher. That's the repricing process we're going through right now with the U.K. Eyes wide open. The team is focused on it. We think we know where there are spots that we can work on that. And they'll do that over the course of the next year or 2 as we work through a repricing process.

Is that -- are the rate guarantees in the U.K. typically in that 1- to 2-year range?