Moving on to our next presentation. If you could find seats in back there, please. Next speaker is Tom White, who runs Investor Relations at Unum. The CEO of Unum, Rick McKenney, couldn't attend the conference this year, we're really happy to have Tom with us. Tom has been with the company since 1982. That's 38 years of institutional knowledge. Not only does he know where the bones are buried, he knows who buried them and which shovel was used.
That's right.
Is that fair?
That's exactly right.
Okay. Again, thanks for coming up.
Yeah, thanks for having me, Jack. I appreciate it.
Spending time with us. I want to, I guess, jump into this by looking at the different businesses and talking about some of the trends we're seeing, obviously reflecting on last year a bit, and hopefully looking into 2020 and 2021. Let's start with Unum US.
Okay.
Obviously an important business for you. In the fourth quarter, sales did slow. You guys talked about showing discipline from an underwriting and a pricing standpoint, which is obviously critical. My question is, how long do you expect the pressure you're seeing to last? Based on past experience.
Sure
When you get this kind of increase in competition, how long does it last?
Yeah, good question. Good point. It was a little bit slower sales growth for us in, really not only fourth quarter, but for all of 2019 in Unum US. In the quarter, we were down 8% or 9%. I think full year, down a little less than 1%. You take a step back, what we're really focused on as a company is a good solid level of profitable premium growth. Certainly sales is important, no question about that. What's probably more important is the pricing and the underwriting that goes into that. You look at us over the last, say, five, six, seven years, we've had pretty consistent premium growth, 5% or so within Unum US. Sales are anything but consistent. We'll have a flat year, we'll be up 12%, another flat year.
I think what we're really trying to do is give what the market is allowing us to take, and we're going to be disciplined around sales. Competition will kind of come and go, and I think what we're seeing right now is probably a little bit more of a competitive environment in terms of pricing. We don't think it's irrational at this point. We looked at the quote activity, for example, was at a good solid level, so really not much change there. We did see a little bit lower close ratio, and as we dug into that, we found that we really weren't off the market by a material amount. I can remember years where we would be 25% off the market, and obviously we're not going to sell anything in that, but we really didn't see that.
That tells us that by and large, that competition is pretty rational. We're not far off. We're going to stay disciplined. Really what we're doing internally is looking at where we can make some tweaks to how we approach different business segments to make ourselves more competitive, not necessarily on a pricing basis, although you can make pricing tweaks here and there. It's really more about the emphasis that we put on a market segment, the product bundling that we'll do, different services that we can bring. That's really what we're doing. We feel good about coming into 2020 that we can get back to kind of a low to kind of mid-single digit rate of sales growth. We're going to do it on our terms. We're not going to chase business just for the benefit of sales.
Given some of the things that we're working on within the sales organization and product bundling and that type of thing, we feel we can get back to a nice level of sales growth.
For sales to increase, it's something that you believe kind of is within your control rather than waiting for the market to become a little less competitive.
Right. Yeah. If you think about it, there is some element of price increases that we'll be dealing with from the discount rate adjustment that we made in the fourth quarter.
Right.
We're probably not alone in that. I hadn't had a chance to sit in on all your other company presenters, but I suspect most companies, at least in the disability space, probably need to think in terms of some pricing adjustment to reflect the lower interest rate environment. I don't think we're alone in that. Again, it's more kind of how we approach different business segments and market segments, not far off, and just feel that things that we can do that are under our control can kind of get us back to the rate of sales growth that we're looking for.
Got it. You mentioned that you're not seeing irrational competitors. In the past, there have been times, it sounds like, where there have been some irrational competitors. My question is, has the world changed a bit? Is there something different in today's environment where there's just less irrationality, whether it's people have better systems in place or better discipline? I'm not sure. I don't have a great history with this business, as you know.
Yeah. This industry, this business does, at least from our perspective, does have a little bit of a history of you'll see one or two competitors get particularly aggressive on price. For whatever reason, might be wanting to grow the business, might be accommodations with other product lines that they might have. It just seems like that has been the case. We take a step back and we look at today, and we don't really see that. It is interesting in the group space, some of the consolidation that has gone on, with good companies like Lincoln and Hartford and the transactions that they have done. They have become bigger. Group benefits is a bigger part of what they do, and they're managing those businesses very well. You got some very impressive margins and earnings that are coming off of it.
We like the market environment that we're in. A little bit more concentrated, fewer competitors. We're more than happy to compete on that type of basis. We're more than happy to compete against good companies with good product offerings that are bringing a reasonable price into the market, because then you're competing not just on price, but the services that you bring, the capabilities that you bring, the product offering that you bring. I'd like to think that that's the market that we're going to see going forward, and if that's the case, we feel very confident in the success we can have.
Net, that consolidation you feel is good for you?
We think it's generally good.
Yeah. Domestically, how has wage inflation impacted sales?
Sure. I would say.
Earned premium too, I should say.
Yeah. Where we've probably seen a little more benefit is just from the level of employment growth. Again, being in employee benefits, an in-force customer adds employees, they're adding coverage. That's been positive. You go back kind of pre-crisis, go back to the 2006, 2007 kind of timeframe, that was adding probably 3% to premium growth. I'd say in the depth of the financial issues, 2008, 2009, back in that period of time, it's probably a negative 2% or 3%. We feel like we're probably back maybe in the 1.5% to 2% range right now. That's been more just people back at work as opposed to wage inflation.
Right.
It's not the most scientific thing to figure out premium dollar comes in to try to figure out exactly what bucket to put it in. Our sense is that we're not seeing real significant tailwind from wage inflation at this point.
Yeah.
Our business model would benefit greatly from a higher inflation, higher wage inflation, higher interest rates. That would be a wonderful thing for us. We can deal with the downside of it, but all of that would be positive. Directly to your question, I'd say much less benefit from wage inflation at this point, but certainly we've seen some benefit from just the employment levels coming back.
Yeah, no, that makes some sense. Let's talk about the small business market and some of the investments you've made, initiatives you've put in place to drive growth there. Kind of remind us again what you're doing and how successful it has been.
Sure. Yeah. We really go after the smaller market, not only from our Unum US brokerage distribution system, but we also have Colonial Life.
Right
With the payroll deduction. Colonial Life is really set up to get after that smaller end of the market. Average case size for us is about 100 lives. We do a little bit of large case business, a little bit of public sector business from Colonial Life. That's really kind of the heart of what they do. It's a big agency system, about 14,000 agents constantly recruiting and constantly going into that market. We think it's a very under-penetrated market and one that you really have to have the infrastructure to get after. We feel like we definitely have that with Colonial Life. Now, on the Unum US side, it is still Unum US, think of that as more of a brokerage-driven market.
Right.
Within that, we have a pretty significant presence in the smaller end of the market. Going back to your first question about sales growth, one of the areas where we were a little softer on sales within Unum US was in that very small end of the market, say under 100 lives. We're going to be doing some things there to kind of increase the focus of our sales reps. We got 250, 275 sales reps around the country, but really carve some number of those out to really focus on the smaller end of the market, say 50 lives plus or minus, to really bring the attention and focus to that market that we think it deserves.
I think you noted, it was on the conference call where you said you can reach 80% of, I guess, the workforce with your current office footprint. With small commercial, how important is that physical location? Can't this business over time be done much more electronically?
I think we're seeing some of that. That statistic was directly related to our Colonial Life business.
That was Colonial. Oh, sorry. Okay.
Still, it's a business model that helps us get after that market. These products have to be sold. You don't wake up in the morning and say, "Hey, I want to go buy a group critical illness product or a medical supplement product." This stuff has to be presented and sold to someone. Dental insurance, health insurance, yeah, but a lot of the types of products, they're very much needed. There's, we think, a great social value to it, but it's not always top of mind. You got to be in front of people, and that's where having the distribution systems, both brokerage as well as the agency model, that really gets us in front of people to be able to present.
Increasingly, that is more not just a face-to-face, but there are a lot of different ways to get in front of people, either through internet, through things like that get our message out as opposed to just sitting down. Sitting down is important, and it's certainly an important part of the model that we have.
No, that makes sense. Voluntary benefits.
We had Voya here before. We had MetLife here before. Both talked about growing in this business. Everyone seems to be talking about growing in this business.
Yeah.
What are you seeing from a competitive standpoint, how are you navigating this market?
Sure. Great question. If you think about what we talked about before was competition in the traditional group market, which is different from what we're seeing in the Voluntary benefits.
Right.
Voluntary benefits is clearly a more crowded space. I think last count, something like 66 companies profess to be in the Voluntary benefits market. Go back several years ago, and it was a lot less crowded market, if you will. With the influx of new competitors coming into the market, there has been some kind of changing dynamics that have gone on that they'll have to settle out. Some of it involved commission structure, some of it involved the payments for who's going to pay for the enrollment costs and things like that, how that gets shared between the insurance company, the broker, the enrollment firm. There's a little bit of shakeout that I think will occur over time. Our approach, again, is we're going to be disciplined. We have our approach to the market.
One thing that we're doing is pushing more and more towards the levelized commission structure. You would see that on the group side. In Voluntary benefits, there is a little bit of that history of the high first-year commission and the lower commissions going forward. What that can cause is a little more churn in the market, where if you find yourself doing business with brokers who are looking to kind of move business around, collect the first-year commission, you keep the business, move it in two or three years. That's a recipe for weaker persistency, tougher to grow premiums, and we've seen some of that, and we do a lot of work to measure kind of what our different distribution partners are doing in terms of the growth of the in-force business.
One of the issues that we dealt with, this would be more on the Colonial Life side last year, is we stopped doing business with a couple of distribution partners, and it was because we'd see nice sales, but it wasn't turning into nice premium growth, and there was a fair amount of churn going on. You see that in persistency numbers. If you look at our Voluntary benefits business, Unum US or Colonial Life, you've seen persistency for us creep down a little bit in the last three or four years. We're going to direct that. We're going to really look at how the overall compensation is set up on a case and then also the commission structure. Those are areas of emphasis for us.
I guess the guys that have scale, that have brand, that have distribution, eventually will have a pretty notable advantage, I would think.
I would think so. We have a significant presence. When you combine our Colonial Life and our Unum US voluntary benefits, I think we would rank second to Aflac, obviously.
Right
The big 800-pound gorilla in the market. We kind of have the two different approaches in terms of the distribution, in terms of the brands that we bring to market. It makes us very well-positioned in the marketplace.
Yeah. Disability results have been strong for you, strong for others. Is this good experience reminiscent to you of a previous cycle?
Yeah. As you said, I've done this a long time, and you think back, I remember in the early 2000s, difficult time for our company, and it was really because of the significant growth. We were kind of a growth for growth's sake mindset, and we certainly grew the top line. We jumped both feet into the large case market.
Successful on sales. It killed our margins. We had to address that. I think back and a lot of the profitability pressure that we felt was not so much raw incidence levels, it was our pricing and underwriting of it. All right? We kind of became very risk-averse, and we cleaned things up in 2005, 2006, 2007, and really built profitability and margin back into the business, very disciplined around it. It turned out we were very well-positioned going into the financial crisis. We really didn't see much of an impact to the benefit ratio, to claims, that type of thing. Certainly saw a decline in the rate of growth, top-line growth.
Right.
In terms of risk experience, came through that cycle pretty well. We sit here today and you see a lot of companies, most companies in this business are doing pretty well. Margins are good.
Makes us nervous when that happens.
Yeah, I understand. We share some of that, and we would, again, going back to my comment about having fewer bigger players in the market, we think is ultimately probably pretty good because these folks here are all going to scrutinize them every quarter, as you are, about what are they doing? How is that business progressing? What kind of margins are they seeing? What are they doing to grow it profitably as opposed to it just being a business over to the side that you don't ask very many questions about.
Yeah.
These are more important businesses for the companies that are in there. We'd like to think there's a little more kind of discipline overall in the marketplace, which would lead to a little more stable environment. We'll have to see how that plays out. You can count on us. We're going to be disciplined. We're going to stay the course. It'll be interesting. We're obviously in a good employment environment. I think that helps incidence rates. I think that helps recovery rates to the extent that we get into a more difficult economic environment. Go back to 2008 and 2009, we didn't see the deterioration on the claims side. Every recession is a little bit different in how it comes on, how it impacts different parts of the economy, different employee groups. We'll just have to see.
If you stay disciplined, I think the other great thing about this business is you do have that repricing flexibility.
Right.
For example, we've been pretty consistent in rate increases the last few years, primarily to address interest rates and discount rate adjustments. To the extent that claims get a little bit sidetracked, there is that availability to go in and reprice as if incidence and recoveries do deteriorate.
That makes sense. One thing you've done is over time, bring the expense ratio down. I guess part of that is just premium growth, but do you feel as if it's more than just that? There's some efficiency you've been able to put in place?
Yeah, there's certainly some efficiency. I think back over the last several years, this has been something internally that we've really focused on. If you think about, you kind of line up the income statement, like for Unum US or for Colonial Life. We're seeing 5% premium growth. You got this steady grind down in interest rates and portfolio yields, so NII is under pressure. In that kind of environment, if you're going to take that 5% premium growth and turn it into 4% or 5% earnings growth, you got to do something on the expense side. Plus, the business changes. Customers want more. We all sign up for our benefits on our iPhones now and do things like that. Unless you are investing in those capabilities, you're going to fall behind.
What we have done for several years is focus on being as efficient as possible in order to free up the investment dollars that we're going to put to work. A lot of it, for us, goes into digital capabilities. We're investing pretty heavily in the leave service space and how we can be efficient in that market. It really just comes down to how do you manage your business? How do you manage expenses? I work within our financial area and while I'm a teeny-tiny little corner off the side of it, I do see how in the treasury area, how we're finding more effective ways of doing business, financial reporting, some little bit of outsourcing that we'll do. Just be cognizant of how can we run our business more efficiently to free up those dollars to invest back in the business.
Theme that goes across all businesses.
Absolutely. It's an interesting environment. Again, in a declining interest rate environment where historically you could always count on a nice level of new money yields and how that would feed investment income, that's not there. So you've got to address it.
Yeah.
That's one of the ways that we've gone about that.
Good question. Any questions about Unum US you guys have out there about this business? Here's a question down here.
To go back to the point that Jack made, and when asking about previous cycles and the cyclicality that tends to happen with disability insurance, would you say that Unum is diversified amongst industries if, for example, you have manufacturing and you're exposed there, and there's a lot of jobs that are lost and disability claims rise. Is that something you guys think about, like thinking about as far as what industries you're covering?
Sure. Definitely. I'd say we probably have a little bit less economically sensitive block of business. It is a little more kind of blue collar and to white collar kind of business. For example, we don't do much in the construction area. We're not going to do much in part-time workers, that type of thing, where you would see probably more economic sensitivity. That's definitely something that we look at. We love to be involved in more rapidly growing areas. Healthcare is a fairly big chunk of our business when we look at the overall percentages, but it is a growing area in terms of employment, and that certainly helps with managing that.
Thank you for the question, Ian Ryave. Ian is my associate, does a lot of work on the life insurance sector. If you've ever read a note we've written and you read something and say, "That's pretty well-written on life insurance," there's a very good chance Ian actually wrote that sentence. Thank you for the question, Ian. Shifting overseas, internationally.
Yep.
U.K. sales, I guess, are expected to be somewhat muted given some of the uncertainty with Brexit. This is a tough question. When do you think sales can start to recover there?
It's been an interesting and pretty difficult business environment in the U.K. Again, the bulk of our international business is U.K.-based. It is primarily employee benefits. I think it mirrors our U.S. business, a lot of group disability, some group life insurance, and dental and critical illness, that type of thing. The challenge is really, you think about it with Brexit, you had a pretty immediate drop in interest rates, and that did necessitate discount rate adjustments, price increases. It feels like we've been working very hard the last two and a half years to kind of stay in place.
Right.
With our disability block, again, it has that repricing feature. We can work through the entire block in about a two-year timeframe. We've had pretty consistent 9%, 10% rate increases each of the last two years, and it's really gone to offset the discount rate pressure that we've seen. Again, premium growth actually hasn't been too bad. Sales growth has been okay in that market. Unfortunately, it's just going to offset the discount rate adjustments. What we felt last year was we felt like we did a pretty good job of executing on what we can control, which is some level of sales, get the rate increases that we need, and also persistency held in well. It kind of tells us that we're not alone in this, that other companies are needing to do the same thing.
By and large, premium growth has been okay. The challenge that we have, particularly in the second half of last year, was a little more volatility on the claims side, a little bit more in disability, a little bit higher on life. Some of that's probably economic related on the life side. I'd say it's just the nature of the business. It's smaller. This is much more of a white-collar block of business for us in the U.K. When we do get a move up in life claims, they tend to be larger dollar amounts or GBP amounts, I guess.
It sounds like competitive conditions are pretty reasonable.
Yes, I'd say that competition is pretty reasonable. It's just in an environment like that, how do you turn that 6% or 7% premium growth into much in the way of earnings growth? That's been the challenge that we've seen.
With Poland, how would you assess the acquisition now? This is a couple of years into it.
Yep.
How would you assess it from your standpoint?
I feel very good about it. What we're really looking for, any kind of international opportunity, what we're really focused on is there a model for distributing insurance products into the work site? That's our business model. That's important. With Poland, what we looked at was, what did the demographics of the country look like? We found a good, growing middle class, educational attainment is increasing, incomes are increasing. That's kind of the recipe that we're looking for. With that particular acquisition opportunity, it was really the work site marketing component. They do sell some accident riders on what tend to be kind of the traditional life and asset types of investment types of products. So that's the opportunity that we saw there. Very good business on its own.
It's not one where we have to go in and change a lot of things. The non-core businesses from our perspective are performing very well, and we don't want to change that. We just want to grow that work site marketing and that little disability accident component that exists there. Feel very good about Poland.
Got it. Just a couple of things on Colonial Life. I think you mentioned on the call your recruiting is now being handled internally, I wanted to understand the implications of that change, why you made the change and what that means for you.
I think, well, why we made the change is, if you think about it, we've got a territory structure. We have territory manager. That individual is in charge of managing that in-force block of business. It's sales, it's handling re-enrollments, renewals, but also recruiting, because it is a feet on the street kind of game.
Yeah
With that type of business. What we've seen is we kind of change the recruiting model. It seems like every few years, there's some adjustments that are made to it. We really had more of a model that kind of relied on third party recruiters, headhunters to help in that process. While that works okay, what we found is that where we were really having our own people do the recruiting and bringing the new agents in, that they tended to be a bit more successful. We'll go in and we'll look at once a new person comes on board, how quickly is their business ramping up.
Right.
This is all commission. These people have to be able to eat, and that's a different mindset than what I could possibly do there. Anyway, we just found that by using our territory managers to be responsible for the recruiting, that was driving a more productive, better group of people coming into that organization. We kind of expanded on that. We did see a little bit of a lull going back to late 2018, early 2019 in terms of the recruiting trends. We feel like we're back on track. We like seeing the productivity numbers of the new people that are coming on board, and very excited about what that means going forward for the business.
We've got six minutes left. We should probably hit long-term care.
My day would not be complete unless we spent a little time on long-term care.
I guess I'm curious. There must be a high level of frustration from your standpoint. Given where your stock is trading, arguably the rest of your business is a business that would attract a reasonably good multiple. Your overall multiple is crap, like a lot of other companies, by the way. Clearly the market is putting a negative value.
Absolutely. Yeah.
There's no-- We know that.
Yeah.
As you think about that, are there ways that you can communicate with the Street, information you can provide, I'm sure you've thought about this.
Yeah
That can somehow allow the market to value the company differently?
Yeah. Great point. It is an area of extreme frustration for all of us at the company in terms of the valuation and all of that. Going back to when we did the reserve adjustment in the third quarter 2018, I'd like to think we really increased the level of disclosure. What we tried to do with that is for the big drivers of the business to show what our experience has been, what our assumption is, and then to provide some sensitivities around that. For example, new money yields.
Right.
We're at 5.5% for a couple more years. It grades up over a few years to 6.25%. If you don't like that, and if you think it should be lower, then here's the math, 25 basis points to $250 million if we just ratchet that new money yield curve down. Morbidity assumption, kind of a controversial topic. We tried to show that we have seen in our block a pretty consistent 3% morbidity improvement over a long period of time. Unfortunately, nobody believes that.
It is what it is. We try to show that, we tend in that way, we're supporting the 1% improvement that we have baked in. We actually think it's a somewhat conservative assumption because we're estimating 1%. Historically, we've been seeing 3%. Again, if you don't like that, if we eliminate it's $1.4 billion. We tried to give the market and analysts like yourself the math to be able to go through and make those adjustments. That's one thing. Second thing is, March Madness for me is not so much the NCAA basketball. It's when these LTC exhibits come out, and everybody looks at it. To us, there's a lot of just kind of misinformation and not very helpful information.
Something that we've been doing is working, other companies have been involved with this, is working with the NAIC on what they can do to improve the disclosures in those, because analysts put a lot of weight on that. There won't be any changes this year, but looking out a year from now, there will be some adjustments, and hopefully those documents will be a little bit more informative as to what's some of the underlying trends that are going on in LTC blocks. Information's important. At the same time, if you throw a lot of information out there, a lot of times it's not analyzed particularly well or it's misunderstood, and that can create some problems.
Yeah
On its own. We have to deal with that. I get it. It's a very complicated book of business. Every time I go to our folks and I ask them a specific question, I'm kind of overwhelmed by the complexity of it. Trying to find a way to get information out to analysts and investors like yourself to be able to make a judgment is a challenge. What I try to do is boil it down to kind of three big pieces. What are new money yields doing relative to our assumption? The liability flows, the interest-adjusted loss ratio, we put the 85%-90% range around that. The other thing, the big thing is, what are we getting in terms of rate increases on in-force business?
Got it.
We try to frame it around that. We try to give you an idea of how those are tracking. I'd like to think that the reserve charges that we had in 2011 and 2014 and 2018 were not necessarily shocks to anyone, because you could see that risk results were either interest rates were low, risk results were running higher or worse than expected. We tried to be transparent. Again, it's a complicated business, and we're trying to do these things to shed a little bit of light on it.
I did have a bunch of other questions on it, but we are out of time, so you're off the hook on that.
All right.
I'm sure others will see you during the day and hit you up with other questions.
I'll be in the Miami room. How's that?
Fantastic, Tom. Thank you very much.
Thank you, Jack. Appreciate it.
Great stuff.