Unum Group
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Operator:]

Good morning, and welcome to the Unum Group Fourth Quarter 2020 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Tom White, Senior Vice President, Investor Relations. Please go ahead, sir.

[Tom White:]

Great. Thank you, Tracy. Good morning, everyone. And welcome to the fourth quarter 2020 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements.

[Rick McKenney:]

Thank you, Tom. And good morning, everyone. We certainly appreciate you all joining us today and today, we’ll take you through our financial and operating results for the fourth quarter, which finalized many of the items we shared with you on our Investor Day – back in our Investor meeting in December. This will be inclusive of our closed individual disability reinsurance transaction, which we are very happy about. So let me start by saying, we closed out a very tumultuous year in a very strong position, as we continue to navigate the challenges of the pandemic. Our leadership team is here to as usual to address your questions. But I'd also like to recognize the entire Unum team who have shown great resilience through the year, and ensuring that our customers are well-cared for, and that we continue to build a dynamic employee benefits franchise. So let me start my comments this morning by providing some high-level views of the markets and macro factors that have been significantly impacting our business, not only in the fourth quarter, but through the entire pandemic in 2020. Many of these factors, including COVID-related mortality saw a resurgence in the fourth quarter, that is carried over into the early weeks of 2021. These factors will help frame-up our financial results during our discussion today, as well as our views for 2021. First of all the impacts from COVID-19 and related economic challenges in 2020. Have been very transparent in our financial results. And those impacts were amplified in our fourth quarter results by this resurgence that I mentioned, with related deaths and infections specifically in December. As we'll discuss in greater detail COVID-related deaths in the US for the full year totaled 345,000, with 138,000, occurring in the fourth quarter. Further over half of these fourth quarter deaths occurred in December alone, making it the deadliest month that we saw in the pandemic in 2020. Since we met with you at our investor meeting in mid-December, death counts have increased significantly. Sadly, that trend has continued into January and we will no doubt - and it will no doubt impact our first quarter results even more than what we've seen in previous quarters. To detail that, high mortality in our life insurance business lines, high claim rates in short-term disability and high expenses from leave volumes, with partial offsets from high claim terminations caused by mortality and the closed long-term care block. As we look forward, we are very optimistic that this will turn. Recently we have seen infection rates declining, coupled with the rollout of vaccines. The CDC reports that approximately 80% of the COVID-related deaths have been over the age of 65 and this population will be vaccinated in the coming months.

[Steve Zabel:]

Great. Thanks, Rick. And good morning, everyone. In discussing Unum's fourth quarter financial results this morning, my remarks will focus on the analysis of our fourth quarter results relative to the third quarter, rather than the traditional year-over-year comparison. This will allow us to show how the company's business lines are progressing through the pandemic and resulting economic challenges and outline for you the impacts it has had on our results.

[Rick McKenney:]

Great. Thank you, Steve, for that summary of a very busy fourth quarter. I'll summarize by saying that we continue to be pleased with the operational performance of the company through what continues to be an extraordinary environment. And we do believe we're well-positioned to benefit from improving business conditions, as vaccines take hold, and we move past the December and January surge in mortality and new COVID infections. In the meantime, we'll continue to focus on the crisp execution managed through the challenges we see today. So one thing before we go to your questions, I'd like to take a moment to recognize Peadar O'Donnell, who will be retiring from the Unum soon and after a decade long career with the company, we will be - this will be his last quarterly earnings call. So I just want to recognize Peter, Peter has been a great part of our executive team and we will certainly miss his leadership and expertise. I would say we have an excellent leader coming in and Mark Till, which you may have seen in press release, stepping into Peter shoes. And so we do look forward to introducing Mark to you in future meetings such as this. So the team's here ready to respond to your questions, I will ask the operator to begin the Q&A session.

[Operator:]

Thank you, sir. We will now take our first question from Ryan Krueger from KBW. Please go ahead.

[Ryan Krueger:]

Hi. Good morning, everyone. I got a question on utilization of critical elements and related products. Do you - are you expecting that to remain somewhat elevated as we go through the beginning part of 2021, like you saw in the fourth quarter?

[Rick McKenney:]

Mike, do you want to answer that?

[Mike Simonds:]

Yeah, sure. Thanks, Ryan. And good morning. Yeah, a little bit of elevation. And I think we would expect to see that persist here in first quarter. If you kind of broaden out, I think you said critical elements and other related. If you think about the supplemental health products that we saw in accident, group hospital indemnity, with everything shutting down and people not knowing how to access services in the springtime, we saw those things fall off. I think, fortunately, you know, people have found a way, even with social distancing to access those services. So we're getting back to more normal in a couple spots slightly elevated. I don't see it as a long term persistent, point pressure or so

[Steve Zabel:]

Yeah, Ryan. Its Steve, I’ll just add, you know, that was incorporated into kind of the directional outlook that we gave of the 5% to 6% EPS decline. So I think we've incorporated a little bit more pressure going into first quarter there.

[Ryan Krueger:]

Got it. And then just one quick follow up on the 5% to 6% decline, I guess, is this - when you think about that relative to the prior expectation of flat, is that effectively all driven by higher COVID-related impacts in the first half of 2021?

[Steve Zabel:]

Yeah. Ryan, its Steve. I mean, there's some puts and takes in there, but generally speaking, yes. If you go back and you think about how we were thinking about 2021, going into Investor Day, we were coming off of an October with about 24,000, National COVID deaths. November was about 37,000 deaths. And so that was, you know, setting our expectations for December and then going into the first quarter. What we ended up seeing was close to 78,000 deaths in December. I think the final count for January was 97,000 nationally. And as we've mentioned, we get about 1% of that buy count in our Group Life business. And then obviously, there's also some impact to some of our other voluntary benefit businesses. So yeah, I would - that's the main story. All of our other expectations remain relatively consistent. And then what I would say too, is that we believe once we pass through the wave of mortality, which hopefully will subside very quickly here, we believe the second half of 2021 will be right back on track with our recovery. And then it's just a matter of, you know, growing the top line, and we'll have a great franchise back going into 2022.

[Ryan Krueger:]

Got it. Thank you.

[Rick McKenney:]

Thanks, Ryan.

[Operator:]

We will now take our next question from Tom Gallagher from Evercore.

[Tom Gallagher:]

Good morning. Just a question on group disability, the underwriting results still look pretty favorable here. Most peers we've seen this quarter are seeing a pretty meaningful level of deterioration in the quarter. And I guess, I've also heard about some are extrapolating the pickup in short term disability claims are going to convert to LTD claims when the elimination period ends. So just kind of rolling all that together, are you expecting that you're going to start to see some of this? Is that embedded in the guide? Or are you still assuming, you know, relevant - I think you mentioned just a little bit higher is the expectation, but are you seeing any of those trends emerge in - you know, is that factored in?

[Rick McKenney:]

Go ahead, Mike.

[Mike Simonds:]

Yeah, thanks. Good morning. Its Mike. So a couple things I'd say on group. Yes, the first is, you know, if you think about long term visibility , a little bit of volatility on submit incidents, but paid incidents, really solid and consistent recoveries, again, quite consistent to favorable. And then I'd say, our average size was a little bit of positive volatility for us, not major, but certainly contributed to good results in the fourth quarter. Offsets from SSDI inline kind of piece of the puzzle, you know, I think, the offset a little bit for overall group disability was short-term disability. And Steve talked a little bit about that. We saw COVID, and you can really quite clearly see it, COVID-related incidents driving an increase in fully insured STD. So the two netted to, you know, 72% to 73% group disability loss ratio. I think for the year we finished around 73%. And I think that's in line with what we've come to expect as we look out over 2021, something in that 73%, 74% range from a loss ratio point of view.

[Tom Gallagher:]

Got you. And then…

[Mike Simonds:]

We hit real quickly. Yeah, Tom, you asked a good question, too, about the flow-through rate from short-term disability. And, yeah, we have been watching that real closely and at this point in line with what we would expect. And if you think about the typical COVID diagnosis, you're certainly going to trigger a short-term disability, but to get all the way through to the EP into LTD, we're just not seeing that be a significant driver for us.

[Tom Gallagher:]

Okay. Got you. And then the statutory loss for the quarter, the $145 million, can you just remind me what drove that? And I realize that the very favorable Closed Block performance, I think you're in captive, so they're not included in the result you're showing your financial and your supplement. Is that largely what's driving it or something else? And do you expect that to continue into 1Q?

[Steve Zabel:]

Yeah, Tom. It's Steve. Good morning. Really, the driver of that loss in the fourth quarter was some of the accounting around the reinsurance transaction. We recaptured by block for Northwind captive, but then when we ceded it out of our, you know, kind of traditional insurance companies, the negatives we did generate a loss from a statutory perspective, because of the negative cede. If you kind of look at that x, that bad earnings pattern x, the transaction for the full year, we feel pretty good about where our statutory earnings were given, you know, the Group Life pressure probably came out between, you know, the $8 million and $900 million of annual earnings. What I tell you, though, is that was, you know, more than offset or it was at least offset in our fair wins structure. As you can imagine, all the favorable LTC claim of mortality was really realized and recognized in the Fairwind - the Fairwind captive, and we had very good favorable statutory results there. So that was kind of a loss So we feel good about the statutory cash generation coming out of the year. I would say, going into 2021, we'll still see a little bit of pressure around our statutory earnings, given the elevated life claims that we expect to see. But you know, still feel really good about the cash generation engine that we have in those traditional operating companies.

[Tom Gallagher:]

Okay, thanks.

[Rick McKenney:]

Thank you, Tom.

[Steve Zabel:]

Thanks, Tom.

[Operator:]

We will now take our next question from Mark Hughes from Truist Securities. Please go ahead.

[Mark Hughes:]

Thank you. Good morning. You were talking about…

[Rick McKenney:]

Good morning, Mark.

[Mark Hughes:]

Making some adjustments to the leave management agreements to dampen some of these expenses, if I am remembering that properly, and when might that kick-in and have an impact on financials?

[Mike Simonds:]

Sure, Mark. Good morning. Its Mike. I'll take that one. And I just start by saying, you know, recall that when we talk about the services components of group disability, it's leave management for sure. It's also our self-insured fee based STD business. Critically important to us, our clients care deeply about it, think about you know, the changes that have come at the national state municipal level, when it comes to leaves, everything that employers are doing with parental leaves, eldercare leaves being added to their benefit portfolio. So clients need help with it, we only sell it in conjunction with insurers lines and look at, you know, pricing at a customer level and feel good about our ability to continue to do that. Now, that being said, I think Rick highlighted this a bit. But when he looked across the self-insured STD and leave, we saw volumes up of 57% in the fourth quarter. The costs and expenses were up about half of that, so we are seeing the benefit of some technology and process change. And so productivity coming through and to your specific questions, as I look out I mean, I think we're going to deal with another elevated first quarter here in all likelihood, given the pandemic. But that expense ratio in the group disability segment, I would expect to be down pretty consistently, as volumes come down, but I'd say even more impactfully as we get technology and process change, helping us gain some efficiency. And then to the pricing changes, which I'd say we're making good headway, both in terms of some aggregate increase in fees that we're charging, and then to – and to your answer your question, embedding some collars in the pricing arrangements such that, you know, the price and revenue will fluctuate with big swings in volumes in the future. And I think it'll, again, be a gradual process - you know, sort of progress in the disability expense ratio coming down, but I do expect that to continue in a pretty steady fashion post 1Q over the next four or five, six quarters.

[Mark Hughes:]

Then just a quick follow up, when you look at the Group Life, how did you - how are you approaching pricing on that product? Obviously, it got the - COVID is unusual, but maybe could recur in the future, how you're approaching pricing?

[Mike Simonds:]

Yeah. Mark, I’ll take that one too. So you know, it is a finite defined event. So what we didn't do was make significant adjustments to say our manual rates that go into our pricing, it will flow through in the experience. So typically, when you're looking at a mid or large size Group Life Insurance client, you're going to look at, say, three years of experience, and that will flow into renewal, and pricing decisions as we look out into the future. I would also say, and Rick made this comment in his opening, we have been there for clients through this period, they understand him to have felt firsthand the impact of this pandemic. I think we've come through it really well in terms of delivering on our promises. And so, it is always a competitive and tough market. But I think our clients understand that, that there will probably be some upward movement. And I expect that persistency is going to hang through that process.

[Mark Hughes:]

Thank you.

[Rick McKenney:]

Thanks, Mark.

[Operator:]

We will now take our next question from Erik Bass from Autonomous Research.

[Erik Bass:]

Hi, thank you. Steve I was just hoping if you could go back to the topic of become holding company free cash flow for 2021. I am just wondering what do you anticipate for subsidiary dividends? And then can you just remind us how much you're budgeting for LTC contributions or other cash needs?

[Steve Zabel:]

Yeah, great. Thanks, Erik. Yeah, just reiterating our expectation at the end of 2021 is to maintain both holding company cash levels at $1.5 billion, as well as retaining our RBC percentage at the 365 range. So when we think at around 2021, you know, generally speaking, the statutory earnings from 2020 will influence what comes through dividends from the operating companies in 2021. I think that they're still going to be very strong, maybe a little bit lower than what we've seen in, you know, past years. But what I'd also say is, we anticipate our contributions to Fairwind, to also be a bit lower because of our expectation to climate mortality there. So it's probably a bit of a wash, all things being said. What I would say though, just to kind of give you a number is, when you think about cash contributions to support LTC, we anticipate those to be kind of in the same range that we saw in 2020, which was right around $450 million. That they're going to shift a little bit and that we expect our New York Company to have lower contributions, and Fairwind might just be a tick-up. But all things being equal, it's going to be pretty consistent with what we saw in 2020.

[Erik Bass:]

Got it. Thank you. And then just hoping you can talk a little bit more about the sales outlook for Unum US. It sounds like you're getting optimistic on kind of seeing a return of activity there. And then relatedly, what impact do you expect to see on persistency and sales activity picks up?

[Rick McKenney:]

Great. Mike, do you want start this up?

[Mike Simonds:]

Yeah, sure. Absolutely. So you know, continue challenging environment, but finding a way and so the variances to prior year continued to close in the fourth quarter. So think about Unum US to your question, down about 20% year-over-year in 3Q. We narrowed that down to about 7%. Here in 4Q it was encouraged to see core sales to employers under 2000 employees actually up in the quarter, large case was down, but as we talk about, and have for many years, it's going to be selective and we will see some volatility in large case sales. So the value proposition is coming through. If you are an employer that has gone to a cloud-based HCM platform like Workday, or ADP, we're winning a disproportionate amount of that business. Come back and as we look at that pipeline, in line with the expectations, maybe slightly favorable. So the momentum I think is starting to build. I’ll actually ask if Tim's got some comments on the voluntary front, and I'm sure Peadar can hit international quickly because there's a slightly different dynamics between group and voluntary. But just to close out the Unum US side, I do expect sales to build as we go through the year. Persistency has been ticking up through 2020. And I - our expectations are for another strong year from a persistency point of view. And then the third piece of that puzzle was the natural growth. And again, as the economy begins to recover at the turn here, you know, we would like to see and expect to see some level of both job and wage growth that would come through for premium for us. And it's such that we're, just beginning to show a little bit of earn premium growth as we look at the balance to 2021. But Tim, maybe you could talk a little bit about the voluntary markets.

[Tim Arnold:]

Sure. Yeah. Thanks, Mike. I'll pick up on some of the themes that you shared. So first from momentum perspective, we're pleased with the momentum. We're seeing, obviously, second quarter of 2020 was the most challenged quarter and then we've seen incremental momentum each quarter sets. And our fourth quarter results on the Colonial Life side, we were up against a very difficult comp. We have extremely large several case that was included in our 2019 fourth quarter results. So if you exclude the impact of that particular case, our sales growth rate was more like negative 19. But we like the momentum we're seeing. We're encouraged what we saw in January, as both Rick and Steve pointed out, adoption of our digital tools is going extremely well. We're seeing great adoption by our agents and also our clients and policyholders of our digital portfolio. As Steve pointed out, we saw really nice on the Colonial Life brand saw a nice recruiting in 2020, up 10%, the total number of 1099 sales managers in the Colonial Life organization grew by about 15% last year. Mike commented on persistency on the group side, and persistency held up extremely well on the VB lines. Overall, Colonial Life brand persistency actually was better in 2020 than in 2019, and we think a big part of that is people recognizing the value of these products. As the vaccine really comes online here later this quarter and into the second quarter, we're encouraged about markets opening back up and having the opportunity to really put our Salesforce back out in the field. And then on the Unum side, we're extremely encouraged with our engagement with brokers and how strong that's been throughout the pandemic. So as others have suggested, it's going to take a little longer on the VB side to recover from the pandemic, but we're encouraged.

[Peadar O'Donnell:]

Shall I pick it up from there on the International side…

[Rick McKenney:]

Yeah.

[Peadar O'Donnell:]

So just a little bit of context on the UK, first of all, so you'll have noticed that you know, sales in the fourth quarter were particularly challenged, you know, where we are at the moment is in a very significant lockdown. So we are locked down in our houses. However, I would say to you, the sun is shining, the snowdrops are outside, and the vaccination rates has just gone through 10 million people, 90% of over 75 people have got the vaccination. So we're hopeful that we're going to get opened up soon. I think the government is a bit conservative. We've had a few false starts in opening. So I - it's difficult to call when, but similar to the US I'd expect momentum to start gathering from March, April. And then it takes about a couple of months to come through. I do think Q4 was the low point. So I expect sales comparatives to improve quarter-on-quarter, and we're off to a reasonable start in January. Sales will be slightly lower overall for the year, but momentum will gather to the second half of the year.

[Rick McKenney:]

So that's a full sales outlook. I just want to make one note, we're going to keep going. I know we're up on the hour. And so it would be respectful of others that might be out there more, but we're going to keep going answering questions. So if you want to stay in queue, we'd be happy to keep going. Thanks for that question, Erik.

[Operator:]

We will now take our next question from Brian Meredith from UBS.

[Unidentified Analyst:]

Thanks, guys. Good morning. This is Mike on for Brian. I was just curious in long-term care if there's sort of an acceleration of mortality occurring. I know that should be theoretically reducing your policy count. And so I know there's a Closed Block that'll be rolling off over time. But is it logical to assume that when COVID kind of settles down, the operating income that you report from long-term care will sort of flip around and become unfavorable just because of the pull-forward of that mortality?

[Steve Zabel:]

Yeah, great. Thanks, Mike. This is Steve, I'll make a couple comments on that. First of all, I want to distinguish between what we're seeing in our active life block and what we're seeing in our claimant block. We have not really seen mortality on the active life block. And that, you know, that's where the - bar, if you think about it that way. So the in-force block has stayed fairly stable with what we've seen historically. When it comes to the claimant block. Well, we have thought a little bit about, are we just seen an acceleration of some claim of mortality that we would see in future periods, we have made pretty significant provisions within how we think about our disabled life assumption set. Specifically, we have decreased some of our near-term mortality assumptions to take that into account. So we believe - we've set an expectation within our reserving construct that that will happen to some degree, we'll have to see how that plays out. And you know, we'll look at that over the coming quarters as this thing unwinds. We would not expect though, for this thing to flip and have higher than expected loss ratios on that business. But you know, as you know, it's a very volatile block, and we'll just have to see how much of it really was pulled forward against the expectations that we set in our assumption set.

[Unidentified Analyst:]

Great, thanks. That's super helpful. And then just quickly on Unum US, I know, G&A seemed a little bit elevated. Is that all that kind of lead volume that you were talking about? Or is there any other pieces that are driving that higher? Do you think that might remain elevated as we enter ‘21? And should that be an indicator, if it is, you know, lead volume, that sales are kind of, you know, jump later in the year?

[Steve Zabel:]

Yes, Mike. I could take it. The primary driver is both those self-insured short-term disability and leave expenses. I'd say there are a couple of other kind of timing related things in the fourth quarter that have - a bit elevated. As we sort of look out, I wouldn't read into it a sustained trend of upward you know, OE ratio, I think we would expect that - that would come back in line, particularly once we get past 1Q and the volumes in insurance and disability, and we've come down as the vaccination hits. And we are frankly, seeing that as, sort of first is to see the national statistics around infections come down. We've seen that now for about five sustained weeks. With a short lag of a week or two, our short term and leave volume start to mitigate. And again, we're on a sustained path. There you’d expected and mortality should follow. So good continued OE discipline, but probably need to get past 1Q.

[Unidentified Analyst:]

Thanks, guys.

[Steve Zabel:]

Thank you, Mike.

[Operator:]

We will now take our last question from Humphrey Lee from Dowling & Partners.

[Humphrey Lee:]

Good morning, and thanks for taking my questions. Just to follow up on the whole leave management expenses. I understand that you continue to reinvest in the businesses. So that part of the equation from the elevated expenses may continue. Is there any way to help us to think about the - I guess, the elevator expenses, kind of between volume versus kind of continuing reinvestments?

[Mike Simonds:]

Yeah. Its Mike, I mean, I do think you've got an outsized impact to expenses. If you look at particularly Humphrey, that group disability segment, driven by COVID, very acute in 4Q, just like we've been talking about expect that to continue in 1Q. Boy, things are lining up optimally, you know, the way we are expecting at this point that as we get through that first quarter, get to the turn of the year, we would expect things to normalize quite a bit. So that all just to be clear, that's going to be the big driver of those expenses. The kind of the mid term to long term trend, though, we are feeling very good about the productivity that's coming with the technology investments that we have been making. And so we do believe that we will see some pretty substantial margin improvement in that - that self-insured STD leaves business, as we both improve productivity, bring down unit costs, and then make the pricing adjustments that we talked about earlier. That's a good combination for us, I do think what you could expect to see again, is that operating expense ratios within the group disability segment remain elevated here in 1Q, but just a gradual improvement, as both cost improvement and pricing takes over in the coming quarters.

[Humphrey Lee:]

Got it. And then going back to Group Life mortality, clearly COVID has been a big impact, but some of the other carriers have seen non-COVID related mortality as well. I was just wondering if you have any or seen any kind of impact from or differences between the COVID related versus non-COVID related impacts to your mortality book?

[Steve Zabel:]

Yeah, Humphrey. Its Steve, good morning. our non-COVID mortality, maybe average claim size is a little higher in the fourth quarter, but it bounces back and forth. So we are not seeing anything that we would consider a trend in that non-COVID kind of block of mortality. We'll continue to look at it, monitor it over time. It's something we think about. But I would say that it's not a meaningful driver of earnings in the fourth quarter, or has it been in previous quarters, other than just normal volatility that we would have in the block, anyway.

[Humphrey Lee:]

All right. Thank you.

[Steve Zabel:]

Thanks, Humphrey.

[Rick McKenney:]

Great. Thank you, Humphrey. I think that is all the questions and I do want to thank everybody for taking the time to join us, sticking around a little bit over the hour as well. So operator this does complete our fourth quarter 2020 earnings call. I look forward to connecting with many of you at upcoming investor events. And I would ask that you all stay well. With that, we’ll end the call. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.