RBC Capital Markets Global Financial Institutions Conference

Mar 10, 2021

Good afternoon, everybody. Hope you've been enjoying the RBC Capital Markets Global Financial Institutions Conference. We're moving down into the home stretch, and we're pleased to be joined this afternoon by Rick McKenney, President and Chief Executive Officer of the Unum Group. If you're looking for something other than the Unum Group, then you're in the wrong place. But if you want to talk about group benefits and disability coverage, you're absolutely in the best place to be of all. Just as a reminder, a little bit of housekeeping before we dig into the session. If you have any questions that you'd like me to pass along, there's a question chat box off to the left-hand side of your screen. Key your question in there. It'll pop up on my screen, and I will pose that to Rick in the order that I receive them. Without further ado, I'm going to dig in with the first couple questions while we wait and see if that chat box fills up. Unum had a challenging year in 2020. But the 2021 guidance suggests a recovery as the year unfolds. Can you talk about just some of the challenges that you've been facing, how you see those resolving over the near term, thinking both in terms of the sales and on the kind of the loss and expense side? Sure. Thank you, Mark. First of all, thanks for having me here today. Really appreciate being at the conference with you and everybody that's joined. When you think about our recovery, and certainly it's something on everyone's mind right now, what recovery will look like in 2021 across the country, across the world in terms of recovery. If I go back to 2020 itself, it was a more challenging year across the world. I think some of the areas that we saw a challenge are things that we'll see changing here over the course of 2021. Hopefully, in the first half of the year, certainly we'll see that. When you look at the pandemic that we saw last year, it impacted us certainly in the areas of our group life business, where unfortunately we saw many deaths over the course of the year in our book of business. Unfortunately, we saw that continuing into the first couple months of this year. Although we're starting to see great signs of life in terms of what's going on from a recovery from a vaccine, the sickness levels being down, and so we're pretty excited about what the second half of 2021 will look like once we get past that. When you think about the sales dynamics that we saw through the course of 2020, we are a business that is at the workplace where we distribute our products. Certainly, the disruption we saw back in March and April of 2020 were a challenge. I think our teams have done a good job of continuing to adapt with that, and so as we got towards the later part of the year, we saw a much better outlook from a sales perspective. As we get into 2021, we will look for continued progress on that front. Certainly, we saw it a little bit better on the group side. It was a little bit more lagging on the voluntary side, but that is just the nature of those products. As we look to 2021, it will be a year of transition, I think, from the first half, where we will still see some pressure coming from some of the deaths that we see across this country, transitioning into a much different world as we look to the second half of the year where the vaccines have taken hold, the pandemic really has abated, and we will look to being back to the company that we were prior to the pandemic and looking for being on our stride as we get into 2022. No, I think that is certainly true. I mean, we all remember, it seems hard to believe January and February were only just like 30 and 60 days ago, but a lot has changed just in that short period of time and hopefully for all of us, not just Unum, for everybody, that we continue to build on some of that momentum. You talked about you are an employer or an employee-focused company. In what ways have companies and employees started to change their view of benefits? Some of the sales process surely has changed and maybe even just the centrality of that type of benefit in an organization. Maybe some of that has evolved. Can you talk about that a little bit? Yeah, I would be happy to. I think it is actually a positive thing that we have seen over a period of time, and there is a couple things to pull apart there. One is, certainly when we think about the protecting the people at the workplace, it is very much evolved into protecting people in the workforce. So it really is not dependent on somebody being at a particular location. It is that connection that an employee and the employer have together that the employer will provide good protection benefits for that individual, be it a life insurance policy, disability insurance, or voluntary benefits or dental. I think that that is something that will continue. We certainly saw that connection still continues as many people were working remotely. It is a little bit slower as we come back in some of our businesses where that face-to-face is still helpful. It is not the only way that we connect with our customers, but certainly in our Colonial Life business as an example, being at the workplace, being able to talk to people about their financial needs across the table was something that we were very good at. But now we actually look at that combined with digital capabilities, we think it can be just as good, if not better as we look to the future. So lots of optimism around what we see out there for the overall selling process. The second piece you said, which gives us some optimism, is one of the things that the pandemic has highlighted is that financial fragility. A lot of people that would not have thought about their own fragility, whether it be around disability, whether it be around a life event, certainly have had that raised to them that it is something they have to think about as they think about protecting their family, as they think about protecting their own livelihoods. I think that that is going to be a positive as we emerge from this, that more people will look to that protection. The best place for them to get that protection is at the workplace. The last thing I would say that has come out of this is many places, not 100%, but many places, the employee actually has a great deal of trust in their employer on these fronts. That has been exacerbated. As you look at a company that needs to move their entire workforce home, and has done so in a very responsible way, that connection between employer and employee is as strong as ever. That will actually transcend into the selection of benefits and things to help them with their financial lives as well. I think the dynamics coming out of this, although it may not be as workplace-centric, I think will certainly be that dynamic where people in the workforce are looking for these type of benefits to help protect themselves and their families. Is there anything you have had to change about just the sales process itself or the distribution process as a result of guys like me still working in their house? Yeah. Early days was acute. If I go back to March, April of last year, a lot of the processes we had were people getting together as we met with employers to talk about their benefits as we actually bid for their business. Those were often face-to-face. With some quick reaction time, similar to this conference, we adapted very quickly, and now a lot of those meetings are happening virtually, and it has become quite seamless in terms of that. I think the one place that we, and I mentioned Colonial Life and that face-to-face sale, that has had to adapt. That was very much a face-to-face interaction. Now that face-to-face can be like this, across a Zoom call, but making sure that we have adapted on that front. We will adapt to that. We have adapted to that. Team has done a really good job to adapt to this environment. If it goes back or not, we will be able to continue to adapt. We think there will be some shift back to the workplace, over time, as the pandemic wanes. We will be continuing to serve people face-to-face there, but in the meantime, we are certainly doing a good job interacting with people such as yourself, Mark, over these set of connections. People have become very used to that as a way to conduct business. No, I think that is certainly true. Definitely, when even young children and old senior citizens know how to work a Zoom call, it tells you a lot about how quickly a technology or a process has been adopted. Right. Maybe changing gears a little bit. I always hate to bring up the topic because it gets so overdone, but the long-term care book and the reserve adequacy is always a topic of interest on every earnings call. Your loss experience has improved somewhat due to the pandemic, some changes in utilization and so forth. Do you think there are any kind of long-term secular trends that are likely to develop out of this? Anything that we should anticipate in terms of how it might bear on both existing reserves and how they might develop going forward? Yeah, it is a really good question, and it is really one that we do not have a tremendous foresight into. It is going to transcend over a period of time. But what I will tell you, what we have seen, some of the things that we think could impact, certainly in the near term, as much as we talked about the group life business, the tragedy of loss of life on the long-term care side, the same has been true. We actually did see very good loss ratios over the course of last year. It is something that is just a fact of the time. We do see that reverting back to normal levels as we get through the pandemic. I mean, the good news across the country is the high level of inoculations for vaccines that have happened for seniors. I think it's very important that it happened as the country continues to heal. But there are other dynamics that we saw through the period of time, which we don't know if they'll last or not, such as the type of facilities where people receive their care. Are they receiving it in a facility or are they actually receiving it at home? Some of those dynamics changes are very understandable through this period of time as people went on lockdown. How that transpires over time, it's hard to know. We certainly have seen more people wanting to use a home healthcare situation as opposed to a facility. But that's going to be one that's going to happen over the coming years and over a longer period of time. We obviously keep a watch of it, but those kind of things will definitely impact how we look at that business overall. And I think it's to the positive. It's a lower cost of care that people get in the home, and our policies do reflect that. Yeah, I guess when I think about home care, I always think that there's pros and cons. The cost of care obviously is going to be considerably lower, but I guess people's ability or willingness to maybe access it might go up. So you trade a little bit of frequency against a little bit of severity in some respects. But yeah, ultimately it's about making sure people get taken care of the most efficient way that they can be. So that's really what it's about. Can you give us an update within the long-term care? We'll just touch on this for a little while. I always hate dwelling on this over much, but I know it's an area of investor interest. Can you just give us the latest update in terms of some of the statewide rate approvals and kind of how much runway is left in that process? You've made a tremendous amount of progress over the last year or two, I know that. Yeah. Just to take you back a couple of years, increasing rates on a justifiable basis is something we've been doing for a long period of time. I think when people look at a benchmark for us, they go back a couple of years when we changed our reserve assumptions, and we included in that roughly increases of about $1.4 billion of reserve, I'm sorry, of price increases that we'd take over a period of time. Since we did that roughly September 2018, we've done a billion of that billion and a billion and four has been taken out over a period of time. These are all things working state by state, making sure we're doing so also in concert with making sure we're doing a good job with our customers, maybe giving them benefit reductions as to just premium increases. We've done a good job over the last several years working through that. It's not done. At the time when we did it, we said this will be over multiple years. That's still the case, but we still feel like we're tracking to achieve those results over the, I'll call it medium-term. Okay. Maybe staying in that same part of the P&L, during the fourth quarter, Unum entered into a transaction with Global Atlantic to reinsure a portion of the closed block individual disability business. I guess a couple of things on that, just maybe talk a little bit about the transaction itself, why that was attractive, and kind of what made that the right moment to do it? It's obviously something that's been on your mind and similar minds for quite a while. Yeah. There's a longer history to that individual disability block. These are policies that are mostly prior to 2000 written. The block was closed in the 2004 timeframe. Actually, we were able to securitize that business back in 2007. When you think of the cash flows for that business, it's actually been reasonably steady. That securitization we did in 2007 performed really well. We paid off our last piece of that securitization debt actually last year, at the end of last year. As all that transpired, this is a risk that we did not want to have on our books. As you said, it's a closed block. It's something that we don't want to be ascribing capital to. We worked on a transaction then for a period of time to look at removing that transaction, having somebody take that on, and that's where the deal that we did with Global Atlantic came along. A good transaction. It's good for us, releases a lot of capital. It's something they can do with the block and makes sense for them as well. We're very happy with the transaction we signed in December. We closed on about three quarters of that in the fourth quarter, so that's already in our financial results, and we have about a quarter to go, which we'll do in the first few months of the year and talk about that probably as we get to our first quarter earnings call about how the finality of all that came out. But very happy with the transaction. It makes a lot of sense for us not to be carrying that capital. As a result of that, our capital position at year-end was very strong, with $1.5 billion of cash on the balance sheet and RBC levels where we expect, leverage a little bit lower than it's been. So a very good transaction for us, and we think ultimately it was the right time to do that, although this is something that has a long history to it. No, I think the transaction was pretty favorably received. That was certainly the feedback that we got from people, and I think the interest rate environment and a number of factors kind of come into play. As you consider then maybe are opportunities improving or evolving for maybe doing something similar with the long-term care or any of the other legacy blocks? Yeah, so there's really only one other one. That's our long-term care business. That's certainly what we want to do something with. I think the environment has evolved over time. So we've actually closed that block starting with our individual business back in 2009, and then closed our group business shortly after that. This is something, just like our individual disability block, we don't want to actually be continuing to have that on our books. It's a little bit more challenging on the long-term care side. But as we've looked over a period of time, it's looked like years, one of the things that is changing with time is more data. So more data is coming into the industry, the understanding of how this business will be performed through cycles. One of the challenges in this block of business has been the lower interest rates, which we've seen come down continually. It's good to see them moving up a little bit here in the first half of the year. When you look at all those dynamics, we have the same goal that we did with the individual disability block, and that's to find somebody that can actually manage that capital better than we can. It's very unlike everything else we do in taking care of people at the workplace, so we'll look for the right transactions. One of the things that we've talked about recently, it doesn't have to be the whole amount. There may be parts of that block of business which will have more attractiveness to some people. That's what we're going to pursue and look for the right partner to help us release some of the capital behind that block as well. No, I think, just a broader observation, it does seem like there is a number of different types of third-party vehicles that are pursuing different forms of transaction, whether they want the interest rate risk or they want the liability risk or the longevity risk or whatever. Everybody kind of has their angle, so to speak. It does make it possible then for you guys to trade and adapt against whatever structures might emerge that make the right financial sense at the end of the day. Yeah. Agree with that. Maybe moving on from the legacy block of the business. When you think about the Unum US piece, can you talk about just kind of the general competitive environment as we start to come out of the pandemic, we get some reopening. How is the pricing environment? Is the opportunity for new business, the pipeline there, how does that look? Maybe just some kind of overview thoughts on how that business is performing and where the opportunities might sit. Yeah, happy to. I think the key thing with our business on Unum US, particularly in the group space, in the voluntary, it can be a little bit different, but in the group space, this is about getting people back to work. So employment levels and everything we see and hear about that employment picture improving greatly is good for this business. You mentioned competitiveness, and I think that if you look over the last several years, we've actually had a number of players exit the business and move their books of business into somebody that is already in the business. I think that's actually good. When we talk to customers out there, to actually have a more limited scope of providers, I think is probably a good thing. It's still very competitive, and will be so, but I think that having that group that knows how to run this business, that thinks about it in a very rationally priced way, is a good thing overall for the competitive environment. It will be competitive, and we'll continue to compete very well with the capabilities that we have, some of the digital connections that we continue to put in the market today. A leave management business that creates some connectivity with that employer. All those things I think are good on the competitiveness front. The last thing I'd say is that we look at the economy improving and how we do that. So we're happy with what the pipelines look like, and even our year-end results that we put out were very good from our perspective. We'll look for a continuing improving economy, people looking to continue to add group benefits to their operations as people's perception around the risks and their own financial fragility has been only highlighted by the pandemic. We think that's a positive for us to continue to have deeper penetration with our customers out there. I mentioned the voluntary, you mentioned Unum US, which includes our voluntary business in the larger case group setting as opposed to on the Colonial Life side. That business is a little bit slower to come back because even when you have people back to work, you have to go back through the reselling process, if you will, because it is an individually elected provision. So we'll get there, but that might just take a little bit longer time than with the group business. When the people come back to work, generally they get protected in pretty rapid order. Speaking of the voluntary business, I know for a stretch of time there that some of the utilization patterns were a little bit disrupted with business, dental office closures and so forth. I know I missed an appointment somewhere along the way a year ago. Has all that kind of renormalized now? Things have been back open up enough that people have kind of caught back up? Yeah, I think through the summer and the fall, we started to see that open back up. A little bit of a dip as we got to the year-end timeframe, as things started to get a little bit worse. But I think we'll be back there very quickly on that front. So utilization is back up, particularly to the dental business that we see out there across the piece. And ours is how do we continue to grow that business for us? It's a relatively smaller business that we're looking to scale up. So we'll look to do that over the course of 2021 and into 2022. But utilization's pretty well back, and so make sure you get back to the You probably didn't double up your appointment, but certainly need to get back to the next one. It's one of those things where the utilization was not really recovered, if you will. But oftentimes people had different pricing scenarios, so it actually worked out well for the employer and ultimately for the employee as well. Okay. Yeah, that's useful. Actually, I was just back to the dentist. I'm back on schedule. I was just back last week, so my smile looks a little brighter. It's probably still because of that. I've got a couple questions that have come in over the line here, so let me go ahead and pose a couple of those. First question is, Unum has a somewhat above average level or investment in triple B positions. Is the company contemplating any changes to the portfolio as interest rates begin to move back up and potentially at some point the Fed might change some of their policies? Yeah, when you think about our investment portfolio, we're pretty well staying the course and things that will change over a period of time as we've added a little bit. Not that perceptible on the alternative side, but our triple Bs, single A type range of assets is we are a credit investor, and so we like those type of assets. I think through a period of time, we've actually withstood through multiple cycles that triple B space. Particularly when we don't invest in the index. We buy names, we buy situations as we look at those bonds have performed very well through a period of time. The same would've been true last year. I know the world healed quite a bit with a lot of the stimulus that was put in. Even if you look back earlier in the year at our performance, when things were a little bit more challenging, the number of downgrades we saw, the credit losses, which were very low. It's a space that we like to invest in and we'll continue to invest in that space as part of the portfolio. The overall mix of the portfolio I think will be pretty similar, just with perhaps a little bit more on the alternative side. Okay. Yeah, I know it was just about a year ago that we were all kind of holding our breath because we didn't really know how the credit scenario would evolve. As it turns out, everybody really did generally much better than, far better than their worst expectations, and generally much better than even just the base case expectations. Certainly a tribute to the credit diligence that you guys have been doing right the way along. Yeah. The other question that I have is Sorry? No, I was going to say, I appreciate that because that is exactly how we manage the portfolio, and the team did a really good job of staying the course in some names, lightening where necessary, and that is how you manage a portfolio of credit. The other question that we have, and maybe the question is a little premature, but I will ask it anyway. Can you talk about some of the pluses and minuses of the LDTI implementation on Unum? I know that is a little ways away yet, but is there anything you can share at this stage in terms of any preliminary thoughts? Yeah. No, I think you are right, Mark. It is much too early to be talking about that, and we will continue to work on that as everyone else is, and we will probably be into next year before we start talking about some of those dynamics a lot. We will continue to move as we work through that. Team is doing a good job of preparing for the implementation, but it is still pretty early on that front. Yeah. I think, as we were at the AFA conference last week, that question got asked in a lot of sessions that I was in, and it seemed like the consensus was sometime early in 2022 is when people first start putting out kind of their preliminary shots on how that might all go and where the soft spots and tough spots are going to be. The other business we haven't talked about much yet at this stage is the U.K. business. Obviously, the pandemic played out a little bit differently there, and the recovery there is likely to be a little bit different. Can you talk about what you're seeing there and how that business has evolved through the cycle? Yeah. So our U.K. business continues to be a great franchise. When you think about what we do there, it's very similar to what we do here in the U.S. We have a number one kind of share position across group income protection, which is similar to our long-term disability business. They've had that for a long time. The competitive environment over there, it is competitive, but there are less players in that space. As a result, we really like the franchise we've had there. The dynamics they had last year are a little bit different than here. I think we were pretty happy with the early stages of getting through the pandemic. On the top line, the team did a good job of sales that continued on. We felt a little bit more pressure as we got towards the back half of the year, as the U.K. went on a much more stringent lockdown than we saw here in the U.S. Right. The dynamic we saw there on the loss side is, because of our products on the long-term disability, ultimately we have to deal with a medical professional to help us out with some of those. We just didn't have that same dynamic with the NHS in the U.K. that we've had here in the U.S., where doctors really pretty well remained open for business, certainly as we got into the summertime, to help on some of those processes. So we saw some of those dynamics coming through our U.K. block of business. Interest rates went lower there than we saw here in the U.S., so that's a dynamic we saw there as well. But overall, the franchise is intact. If you look at what they're expecting as we get into this year, they're still more locked down than we are, but they're expecting with vaccines that are taking hold there as well in the U.K., that they're going to be in a much better place as we get into the summer. We'll see things revert there maybe a little bit slower than we see here in the U.S. But I think the key thing is the franchise is still very much there. Okay. That's helpful. Maybe just moving on, we have a few more minutes left. One topic everybody likes to talk about is just capital management, buybacks. I guess the expectations were there weren't any particular buybacks on the table for 2021. But just generally, how are you thinking about things in terms of maintaining your RBC levels? Any comments on dividend, just anything in the capital return environment that you'd like to share? Sure. Maybe it's a good place to start is actually talking about where our capital sat as of year-end. We're very happy with the individual disability transaction that we talked about as we brought that in. Although it hasn't all closed yet, we certainly felt some of the benefits of that in our year-end numbers. Our RBC has been steady. I think we ended the year in the 360-365 range. We'll expect to keep it around those levels in excess of what our overall targets are for RBC. We ended the year with about $1 billion, $1.5 billion of cash. So that was higher than normal because of the transaction. That's what we've got to work on. I think we've started to talk about what are we going to do with that cash that we have out there. Certainly, we want to wait till we get through the rest of the pandemic, and we don't want any false starts. We saw a little bit of that later last year. We don't expect that now given the rollout of the vaccines. We think it's a very different dynamic. But we're going to be patient around that, and then we have to wait till the end of the deal closes in our IDI business. Once all that has settled, we'll start to look at specifically how we'll put that capital back to work. I think it's important to know that when you think about our capital deployment, we think very much about our core business, how we put more capital behind our business lines that are generating those mid-teens type ROEs. The dividend you mentioned is good, steady payout ratio, and that's how we think about our dividend and being consistent on that front from a dividend overall. When we look at acquisitions, kind of not a major move, but certainly things that will be enhancing our current business that we have today. We think we have a really good portfolio already, but there are places where we may want to add capabilities, enhance product lines, things like that, and we'll always look to put a little capital behind that. You mentioned share repurchase, and so that's not off the table. You mentioned in 2021. It's certainly an option that we have out there in front of us. We're going to come back probably in the second half of the year and be more disclosive about what exactly we're going to do with some of this excess cap we've been fortunate to generate as we've gone through this process in selling our IDI business. More to come there. Very happy about the position we are in today. Even as we rolled out our projections to the end of the year, we still expect to have similar RBC ratios, cash levels still in that roughly $1.5 billion level. So we've got to think more and do more about what we want to do with that, which could include a number of fronts of putting that capital back to work. Okay. Well, we're pretty much at the time. That's a good place to end if we want to, but let me give you the final say. If there's one takeaway investors should have from our session with Unum here today, what would that be, and what would you like to share with the group? Yeah. I think, Mark, I have to highlight that last year was a challenging year. We were doing all the right things in terms of taking care of our customers at time of need. That's actually come into the beginning of this year as well as the pandemic is still working through its final stages. But I wouldn't want to leave it there, but we have an incredible amount of optimism as we look at the second half of the year once we're through that and then hitting our run rate as we get into 2022. We think we weathered the pandemic very well while taking good care of our customers, but we look forward to an environment where we can continue to grow the business, take care of more people, and continue to do the things that we've done very well over the last many years. All right. Well, thanks very much, Rick, for joining us this afternoon. I do not know if you have any more one-on-one meetings left, but I hope they are productive for you. And thanks to everybody in the audience for taking some time to learn a little more about the Unum Group. Thanks, everyone. Thanks for hosting, Mark. Appreciate it. Sure thing.