Hello, I'm Tracy Benguigui, Insurance Analyst at Barclays. Pleased to introduce to our session Rick McKenney from Unum. Welcome, Rick.
Good morning, Tracy. How are you today?
Great. Just some quick housekeeping items. On the left side of our screen, there is a Q&A box as well as a polling box, so just encourage everyone to go in there. Maybe just to quick kick things off, Rick, if you could share some high level thoughts on Unum in this dynamic environment we are living in.
Great. Thank you, Tracy, and welcome to everyone who's part of this session. Appreciate you joining us today. Talk a little bit about Unum. I'd make sure to give a little bit of background on the company. We are a company that is focused on the employee benefit space. We are at the work site, so when you think about Unum, think about delivery of benefits, ranging from group life insurance, disability, our voluntary benefits, dental, and across the spectrum. We've been a leader in the group disability for many years, but I think that as we've added new product lines, we continue to bring that whole suite of products to companies, to make sure they're protecting their employees at time of need and their families. You asked about how we're doing right now in terms of the midst of the pandemic.
I think it has highlighted what we've gone through, the need for those type of protection benefits at the workplace today. We're actually encouraged that some of these things will actually bring people to those protection benefits in a concerted way going into the future. Clearly, the pandemic environment has created some disruption in the markets overall in our space as well, and we saw some of that in our second quarter. Happy to answer your questions today. What we're seeing today overall, we think that we're well-positioned for this environment, and we look forward to an environment that returns to some type of normalcy that workplace benefits continue to be as appreciated by employees and as delivered by employers as they have been in the past.
Great. I think just listening to you speak, just carry on this cautious optimism by other speakers from the last three days. Just remind folks again that there is a polling question up. I'll kick it to you, Rick. What inning are we in for the industry to understand long-term care liabilities?
Yeah, it's a good question. I think the inning analogy doesn't work as well in the long-term care space because the amount of data, and knowledge and understanding is about data. If you think of the industry, it's been around in the '90s is really where it started. We're dealing with a situation where it was sold to people in their 50s and 60s back then, and so now they're getting into their 80s and 90s. We're just getting to the point now where we're understanding, as people are claiming on LTC, what that looks like. Unfortunately, it's not an inning type scenario, but it is a little bit more exponential in terms of how that data is coming in as people get to that point in time.
The data has gotten much richer over the last 10 years, certainly over the last five, and every day we're getting more information around what's happening on the claims front. I think as an industry, people are understanding long-term care liabilities much better, how people are claiming, how long they're utilizing their benefits, what they're using them for. Home healthcare versus what happens in a facility. All those things are transpiring, I think as you look out over the next five years, 10 years, it'll get even more robust in terms of the depth of that understanding. Inning analogy doesn't work, but we certainly are a far ways in terms of understanding what those liabilities will look like as an industry, and true for Unum as well.
Great. I'm wondering, as you're building that playbook, has COVID-19 changed how the industry should think about mortality? I'm thinking about the skew towards the older population under a pandemic, and maybe to challenge to what extent the notion of mortality and longevity being a natural hedge.
Yeah, it's a good question. When you think about our entire book, I take it to, we are a group life carrier. Oftentimes it's dealing with people in their working lifetime, you're going to see that skew to a little bit younger, think of 65-year-olds and down. That's one side of the equation. On the Long-Term Care side, it is going to be at the older ages where we'll see the mortality. In fact, we saw that in the second quarter. We did have a much higher level of mortality in the quarter that we saw, I think that in that challenging time, I think that's been part of the reality. You said, how does that actually change people's view on mortality?
A pandemic is a special situation that we have there. When we think about mortality as we get back into a normal mode, we'd say reverting to many of the same trends that we saw before. The way I think it will cause people to say is pandemics, unfortunately, do happen, you can't just exclude it completely when you're looking at a data set that ranges over many decades of understanding. We'll have to factor that in, as I think many of the companies will, in terms of overall mortality trends and what those look like.
Okay. Unum has taken a large Long-Term Care reserve charge. Charges basically at 3 to 4-year intervals, and more recently, the Maine review resulted in $2.1 billion of additional reserves over the next seven years. Could you discuss the liability trends you've seen in the last two years since the latest reserve assumption update, and likewise, what is the chance that it could happen from other states?
Yeah. Let me first start out by splitting across your discussion on the reserves into two different pieces. One is on our GAAP reserves, which we report out every quarter and go through. As you mentioned there, we have taken multiple reserve charges if you look over the last decade. A lot of that was actually related to a decreasing level of interest rates that we've seen. I think that's back in 2011, 2014, 2018, that was a big piece of what you saw there. What you're talking about on the Maine piece was on our statutory reserves, and so that's a very different set, and that's an area that we had not taken any reserve increases particular to any one-time events going back through that same decade of time. We've been building those statutory reserves, we thought, at a very good level.
As Maine came in and reviewed that level with an external actuary, they thought that we should put more conservatism into those reserves. That's where you saw us report earlier this year. The $2.1 billion represents what we'll put into increased reserves over what we think are the right levels over the next seven years. There's two different things going on there, and I want to make sure that people understand that. The GAAP side is reporting, that's our best estimate. We'll update those as we see fit. On the statutory reserve side, which comes more in terms of capital and reserves that we put behind our business, is really a different construct that we see.
Okay, great. Without sounding too ghoulish, COVID-19 deaths, as I mentioned earlier, were skewed to an older population, but that by itself doesn't seem to swing the pendulum back as people are still living longer. How are historically low interest rates in this crisis influencing your strategic positioning over the long term?
Yeah. Back to what we were talking about mortality, I agree on the pandemic. It has skewed towards the older ages as we've gone through the period of time. Not to say that it's not actually impacting across the spectrum. We've seen, as an industry, about 10% higher levels of mortality across all cohorts really. It's bigger in the older ages as you'd expect, just because of where they sit in the life cycle. It actually has impacted across the spectrum that we've seen. You asked about interest rates and how does that play into that, because people will continue to, post-pandemic, we'll continue to see mortality extend. We've seen that over a period of time, and so we have to make sure that we're investing behind that portfolio to be there to pay those claims when they come due.
As part of that, we maintain a good solid investment portfolio as we bring in those premiums today, investing them in good solid investments that will make sure that we're there to pay the claims when we get to that point in the cycle.
I do want to touch on your investment posture, but before doing that, just sticking with this theme, it seems that persistency rates are still high within your LTC block. It does imply that your liabilities are becoming more illiquid. Maybe you could extend that thought about the attractiveness to less liquid assets relative to more illiquid liabilities.
Yeah, certainly. The persistency in our long-term care block has really been much higher than expected since inception, it's been true across the industry. You can actually expect that most of the premiums that we take in will be there until you get to the point where we'll go out and claim. There really is no liquidity in those LTC reserves that we have today. As a result, we do want to have a posture that takes advantage of that illiquidity to back that book of business. We'll do so with duration matching, so we'll buy longer term assets on the credit side, 30-year type instruments to match that as best we can. We'll take on private placements that have no liquidity or less liquidity in them today to make sure we're backing those liabilities.
One of the things we've been doing over the last several years is investing in alternative investments that have more characteristics, once again, not as liquid as you'd see in the corporate markets, but we like the characteristics of those. We've expanded into that portfolio, that asset class over the last several years, and that's a place we'd like to still can take advantage of the illiquidity that's in our reserves, which is effectively no liquidity that's in the reserves today.
I recognize that not all LTC is created equal. Maybe you could help us understand the distinguishing factors of your group LTC versus individual?
Sure. If you take that's been more the standard type product which you hear about across the industry. People on a one-by-one sale will actually go to the individual, and they'll provide that LTC cover. There are small variations that happen within that as well, different product features. I think a big distinguishing difference is in our Group Long-Term Care that we have today. There's a few players out there that have done that today. We go to the employer. We actually have the employer often participates, about 50% of our cases today. The employer will go in and help provide the long-term care coverage for their employees. As a result of that, you get the pooling effects that we see and benefit from across our group businesses today.
We also have seen the features in those products, given that it's done by the employer, can be much less rich than you might see in an individual type policy. The group business is a very different one. I think it's good to recognize that roughly half of our business is group, half is individual. There can be very different dynamics that happen in that book of business.
Okay. What type of risk transfer solutions are possible, and what factors need to be considered for participating parties?
Yeah. I'd step back away from LTC for a second and say, when we think about risk transfer opportunities, there are different things that we use across our portfolio. It includes just straight reinsurance that we use, transferring risk to counterparties as we balance the portfolio. If you look at our closed block, there's two pieces there. One is our individual disability block of business, and so we're always looking at good opportunities there. For example, back in 2007, we securitized that block of business, and so looking at those cash flows and how can we free that up is something we look at. You get to long-term care, and that really does ebb and flow a little bit. I think that given the environment that we're in today, we talked about the liabilities.
People are understanding the liabilities better, which allows buyers and sellers to work together. We've seen that actually getting closer to actually being able to have transactions happen. We've seen a couple of them happen over time. I think in the current environment and the interest rate environment today, that gap has widened between buyers and sellers, and so it's more difficult to do a risk transfer type transaction today. Something we stay on top of, we know all of the potential buyers of that risk. We are certainly want to be a seller in that process. We've got to make sure that bid-ask spread comes into a reasonable level that we can execute.
Got it. Probably even more so these days, would you agree, given low interest rate environment on that bid-ask spread?
Yeah. No, that is an impact clearly today that we've seen. If you went back even 18 months ago, you were at levels that that bid-ask spread was probably tighter. Right where we sit today with a 30-year Treasury out there, the one in the 140 range, those type of transactions become more difficult.
Yeah. Can you highlight the progress you've made on premium rate increases? Are there certain states you're still awaiting a response from?
Yeah, we've actually been working with regulators for over a decade, raising rates on our long-term care policies as they're warranted. I think if you look at our most recent communication going back almost two years now, we've said that there's a $1.4 billion amount of rate increase that we're going to be actively working on to put into our book of business. We're over 60% of the way through that in the first two years. We're happy with how that's progressed, how we've been able to work with regulators, how we've been able to take care of consumers along the way. We're actually continuing that process. It's not a state-by-state. At this point in time, we've had success in seeing rate increases approved by all of our states that we operate in today.
This is about how do we actually look at incremental rate increases where it's warranted by how different products have performed. I'd say one of the things that we have now that we're looking at to get up to that $1.4 billion level is the rate increases we're pursuing in our Group Long-Term Care business. If you think about how that will impact and how regulators look at that, it's a little bit different than individual, because those rate increases will ultimately go to the employer. As we talked about, a lot of it's employer-paid, and then we'll get to their consumers within the employee base as well. That's all going, I think, according to plan, maybe even a little bit better than we had laid out back in 2018.
It's something we actively work on, and we've seen good engagement with our regulators to that.
Okay, great. Maybe shifting gears to capital management. Unum has not repurchased shares in the first half of 2020, $516 million remains outstanding under your board-authorized program. If you could provide any visibility on what guideposts you're looking at to resume activity, particularly, I think you pay attention to operating capital adequacy.
Sure. If you think about the beginning of the year, you're correct. We have not purchased shares this year. I think we would have been in good company in terms of the insurance space going into the pandemic. I think that was something that was stopped across financial services. I think when you look at us particularly, it's something that we don't expect that we'll be getting back into anytime soon. You still have the pandemic. We talked about some of the impacts we have relative to what we're doing with our agreement with the state of Maine. We're making sure that our capital adequacy remains very strong in this period of time.
That includes letting our RBC ratio continue to increase, having good cash in our holding company, where we ended the second quarter at over a billion and a half dollars of cash that we have out there available to us. Maintaining that strength through this period of time still becomes paramount. Getting back into share repurchase is not something we're looking at, certainly at the present time.
Okay. Maybe you could provide us some context on credit risk, with respect to ratings migration and credit defaults.
Yeah. When we went into the pandemic, we disclosed and talked about what we saw a potential for credit ratings migration. We looked deep name by name across our portfolio and highlighted that. If you look in the first couple of months of the pandemic into the May-type timeframe, we did see downgrades in our portfolio, and the capital impact of that was quite small. Less than $20 million of capital impact for all the credit ratings migration we saw to that point in time. We really haven't seen any since. I mean, very little in the way of credit migration. I think that's true across the industry, certainly true across our portfolio. As you've seen, liquidity flood into the market, as you've seen even energy prices increase across oil and gas.
All those things I think have contributed to our credit remaining quite sound at this point in time. Although we saw a little bit in the second quarter, I'm sorry, saw a little bit in the first quarter, didn't see very much in the second quarter, and I think the credit markets actually look pretty good right now.
Great. Yeah, I've read recently that fallen angels are starting to level off, and that's the key concern. Maybe moving on to voluntary, I actually have a 2-part question here. Just a little bit of a backdrop. When thinking about the recessionary environment we're in, I'd like to get your context of how that's hitting Main Street versus Wall Street. Seems like it's hitting Main Street more. The first part of my question is, how concerned are you of this headwind regarding your voluntary business having a distinguishing feature of Colonial Life's two-thirds focus in the less than 1,000 life space as opposed to mid and large case market? I have a follow-up on Unum US side.
Okay, sure. I would say that when you take all employers, we're looking to protect all employees here in the U.S. and the U.K. as well as in Poland. When you think about what's been impacting, we certainly went into the pandemic and seeing the recession happen and concerned about what was going to happen with overall employment levels, which obviously were highly impacted. It didn't impact all the sectors that we're in. Many of the sectors that got impact, we actually have lower exposure to, you can think of what we have out there in the hospitality business and things like that. It is something we're paying very much attention to smaller employers. That's true in Colonial Life.
It's true in our Unum US business as well, making sure that they continue to see the value that we provide, delivering that value to their employees. On the group side, which I guess is the second part of your question, we feel optimistic. On the Colonial Life side, we have our agents out there working very hard to connect with those employers and their employees to continue to deliver voluntary benefits. I tell you from a demand side, we actually have seen higher conversion rates. When you can get to that employee through the employer, we actually see people demanding these type of products. They're very important if you think about Hospital Indemnity type product and some of those things.
There are strong needs out there, but it's how do you get to that employee at a time where they may not be in the office or their employer may be in a tougher time. It's something we're focused on. We talked a lot about it in the second quarter. We'll keep an eye on what that small employer looks like, particularly for Colonial Life. Our agents are out there finding ways to connect ultimately to employees, and that's what's important in this point in time.
Yeah. It's a little bit different dynamic on Unum US side. Just if you could give us an update on competition, if it's becoming irrational.
Yeah. I think that it's one to watch that we have out there. One of the good things that I would say about our group business today is there's been consolidation in the industry over the last several years, the players that are in the group space today, and you're probably talking more about the voluntary side, but if I just say group in general, we have some good competitors out there that we have. What I'd like to see, what I hope to see as you get towards the end of the year, even though we're all kind of approaching potentially a smaller pie as we look at it, that rationality will hold. I'm optimistic that it will, particularly on the group side. On the voluntary side, pricing there is about how we interact with the employer.
Prices at the employee level are fairly standard of what we look at. Rationality there means that we're working well with our brokers and our agents to get out there to the employers at all size levels to get the voluntary benefits to them without people looking at different concessions along the way to attract business, because it may be a smaller pie that we're all looking at as we get to later in the year.
Okay. You mentioned agents. I'm wondering how they've adapted to a digital sales environment and social distancing and your recruitment efforts.
Yeah. Recruiting actually has been quite good. I think when you look at the agents that we have out there today, it is challenging. Our Colonial Life model was built on people having a face-to-face enrollment and giving a counseling session with an individual. I think that the pandemic and social distancing, and even getting access to people at the workplace has been more challenging. Our agents are finding ways to connect. I think when you look at the digital platforms that we have today that they can utilize to get to those one-on-one or even how do you modify a socially distanced face-to-face type of enrollment session, they're finding a way. I think we're encouraged, although we're not there, certainly.
We're encouraged that they will find a way to continue to connect with people and give them the protections that they're looking to protect themselves and their families.
Okay, that's one side of the equation. What about the customer receptiveness to voluntary products on the onset of a pandemic?
Well, I think Yeah.
Yeah.
No, I think the customer side of it, when they look at challenge in the environment, whether it's around health, when you look at Hospital Indemnity, when you look at our disability products, there's more demand. The challenges that you have in a pandemic just highlight the needs that we have out there. Even if you're looking at our voluntary business sells life products as well. People realize now that people of their age, similar coworkers or whatever, can actually be impacted. It really raises the level of need that people have around protection products. As we get through the pandemic, we hope one of the things that comes out of it is people will actually take much more seriously their need to take care of themselves and their families.
That's kind of, we see early indications that people certainly recognize that it can happen to them and making sure that we're there to be ones that help to protect themselves.
Okay, great. We have about 10 minutes left. I just want to remind folks to submit questions on the left side of your screen. As we're walking around the world with all your product mixes, maybe I could turn to Unum International. Disability recoveries in the U.K. have been impacted by lack of access to the healthcare system with COVID-19. How do you see that trend recovering in future quarters, and how quickly can profits in Unum U.K. rebound? I actually have a follow-up.
Yeah, no, I think that's good. Appreciate the question on the U.K. I would contrast what we've seen in the U.S. Our teams in the U.S., as doctors have been back, those processes have been working pretty consistently in the U.S. Certainly over the last several months coming out of what was probably challenging at the get-go, I think doctors are back in processing claims we saw. It was a little bit different in the U.K. in terms of what we saw working with the health services there. They were a little bit slower. The processes were a little bit slower than what we were used to, getting that back on track.
I think it's trending better over time, but it's certainly something that impacted us because we have the same goals in the U.K. as we do in the U.S., and it's how do we work with employers to get people back to work? The processes that we have there remain the same, but we've just got to continue to work that a little bit longer. The profitability question comes in in multiple forms there. Certainly we've got to be able to process claims well, get people back to work. We've also got to make sure we're continuing to take price increase, which we've done there over the last several years in the U.K. Clearly the U.K. is more challenged than we have in the U.S., with even lower interest rates than we see here, and certainly coming out of a Brexit environment.
Pre-pandemic, it was a challenging place. I think that our U.K. team is doing a great job of getting people back to work, looking at different product sets, doing a good job on the repricing. The U.K. has been a challenging environment for us to operate here over the last 18 months.
Okay. I think you also answered the second part of my question was seeing the same phenomenon in the U.S., you've mentioned it's a little bit different characteristics.
Yeah. Agreed.
Yeah. Maybe just moving on in this international banner. Bolt-on acquisitions have been a trend at Unum such as Unum Poland, Starmount, National Dental Plan in the U.K. I guess, Rick, what other type of assets are you interested in?
Yeah. I'd actually step back from it a little bit to say one of the things that each of those acquisitions that you mentioned helped to fill out our portfolio. I'd go back to first our dental acquisition here in the U.S. When you think about being at the employer, our employer's thinking about three needs to provide for their employees, the healthcare, savings products such as a 401(k), then all of the other benefits. We want to be there to provide all of those other benefits, dental being an important one as part of that process. We acquired a company a couple of years ago, good bolt-on acquisition, leverages our distribution both in Unum US and Colonial Life, we think that's gone very well. Very happy about that. You also mentioned our National Dental Plan in the U.K., similar type dynamic.
We added dental products in our U.K. as we talked to the employer, to give them a broader suite of products. Our Polish acquisition was how do we leverage what we know how to do well, and that's group benefits in different geographies. We've talked about that for many years that we'd like to do more of what we do today in other geographies. Poland was a great example. It was on our shortlist, and the opportunity came up, and we're really happy with that business. We want to continue to grow it, but we're very happy with what that team has been able to do. Those are the kind of things that we'll look at, is how do we fill in the portfolio? It's not to expand into an area that we don't know something about, that we don't bring value.
We'll think about different opportunities, either a geography or a capability that we don't have today that would help fill out the overall. Another example I'd give you is we bought a very small leave management consulting company a couple of years ago. That really fits in well with the portfolio to making sure that we're bringing more services such as Leave Management to employers to help them at time of need. The last one I'd give is we started up a Stop Loss business. Without acquisition, kind of a greenfield, once again, leveraging our good distribution footprint, our knowhow around underwriting and risk management, started up a Stop Loss business. It's small today. We're doing it in a metered way to grow that business, but we think it fits into the portfolio.
All these things that you mentioned, bolt-on, we think of them as integral in terms of what we're doing, but that's where we see the opportunities.
Okay, maybe just following up there with bolt-on and greenfield, is there anything within your existing platforms you think you need to add through M&A to build the scale?
Yeah, I think it would be adding to those capabilities today. Leave Management's a good example. That's probably going to be more of a greenfield. How do we build up that capability to connect with more customers so that we're helping them on the leave side, which can then translate through to them, helping them all the way through any kind of disability situation that they may have and providing for their employees? It's going to be much more on that capability front. The other thing I'd say is as we build out our dental business, how do we become a top 10, as we are today, dental player? How do we continue to move up the ranks and have a scaled dental platform, which our distribution certainly can distribute?
We have the knowhow to do so, we're going to continue to grow that business. There can be small capabilities, add-ons, technology we can bring to that to make it an even better business.
You mentioned dental. Do you have any insight now of are we back to a normalized activity in going to the dentist? How should we thinking about that business?
Yeah. That's one we certainly saw as part of the second quarter, really decreased utilization that we saw in our dental business, which was true across the industry as dentists were shut down effectively in many places across the country. That has really come back. That's an area where you'd have to look at every geography, I think pretty consistently across the country, dental services are back in the way that they were pre-pandemic. Certainly, a different mode if you've been to the dentist, I think it's going to be back. We'll have to see how that plays out in the third quarter across the industry. I think that has shifted back relatively quickly.
Okay. Maybe going back to interest rates. I don't know how much you could see here, but as you enter your assumption review, just any early insights of what you're looking at, how you're feeling about your assumptions, particularly as it relates to the long-term yield curve.
Yeah. I think that you have to look across our portfolio at interest rates. I'd start on We talked a lot about today about voluntary benefits, not very interest rate sensitive. When you look at that, I think we feel good about where that is. In our long-term disability business, you've got interest rate needs there, which we've managed yearly, and you can do so with repricing. You can do so with how we look at the overall portfolio. We maintain a margin there from our earned yields to ultimately what we've assumed in our discount rates. We'll continue to work through that and do that with pricing. I think we've shown we can effectively do that over a longer period of time. In our closed block, the two different pieces.
First, you have the individual disability business in a low rate environment, which can have some pressures, but the reality is there are cash flows that we bring in today in premiums and other cash flows from the portfolio are paying out claims. There's not a lot of new investment dollars that need to be put to work there. I think the last piece is Long-Term Care and making sure that we back that with the correct assets. We talked about mix and looking at what we can do in the overall portfolio with our alternative investments, how we think about the overall mix of higher yield assets that back that, and then straight corporate credit that we've always put it behind that portfolio. It is challenging. The interest rate environment is challenging.
I'd look back to a little bit of history. Since we went through the reserve review in 2018, we talked about having a target out there of 5.5% that would grade up over time. We've been able to achieve that up until this latest environment. We have to take into account what can we invest in today, what is the right mix of the portfolio as we evaluate what that might look like as we get towards year-end.
Okay. Maybe the last question I'll ask is if you have any bold predictions for 2021.
That's a good question, I think 2021 seems like a long way from now, but it'll be on us very shortly. I think the bold prediction is how Unum will continue to operate. Our team did a fabulous job quickly reverting to working from home, and has done so for a while. As we move back into the office over a period of time, I'd like to see 2021 as a time where we can be back in a physical space together, learning from each other, collaborating, and continue to drive Unum to the next level. I hope to see us there. It seems like a long way off.
I won't predict about when a vaccine will come in or how it will come in, but that would be a prediction is how do we get our teams back in a physical location we could continue to celebrate the growth that we see overall in the company.
Well, you're already leading by example because I see you in the office.
This is not my house, I don't have a whiteboard in my living room. We are back in the office in a limited way. We've actually provided good choice and optionality for our employees to make sure they can take care of themselves while we take care of our customers. I appreciate you noticing that.
Well, thank you so much. Really enjoyed chatting with you today, Rick.
Thanks, Tracy. Thanks to everybody who's tuned in. This has been helpful for us to get out our message in this volatile time. I appreciate it.
Excellent. Bye now.