Unum Group

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

Great. Thank you, Tracy. Good morning, everyone, and welcome to the Fourth Quarter 2020 Earnings Conference Call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2019, and our subsequent Form 10-Q filings. Our SEC filings can be found in the investor section on our website at unum.com. I'll also remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. Excuse me. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included And today's presentation can be found in our statistical supplement on our website in the investor section. Yesterday afternoon, Unum reported fourth quarter 2020 net income of $135.4 million, or 66 cents per diluted common share, compared to $296.2 million, or $1.44 per diluted common share in the fourth quarter of 2019. Net income for the fourth quarter of 2020 included the following items, a net after-tax gain from the closed-block individual disability reinsurance transaction of $32 million, an increase to the reserves backing the closed-block long-term care product line of $119.7 million after tax, an increase to reserves backing the group pension block, which is a part of the other product line within the closed block, of $13.8 million after tax, and a net after-tax realized investment gain on our investment portfolio, excluding the net realized investment gain associated with the closed-block individual disability reinsurance transaction of $1.6 million. So net income in the fourth quarter of 2019 included a net after-tax realized investment gain of $7.2 million and after-tax debt extinguishment costs of $1.7 million. So excluding these items, after-tax adjusted operating income in the fourth quarter of 2020 was $235.3 million, or $1.15 per diluted common share, compared to $290.7 million, or $1.41 per diluted common share in the year-ago quarter. Participating in this morning's conference call are Unum's President and CEO Rick McKinney, Chief Financial Officer Steve Zabel, and Chief Operating Officer Mike Simons, as well as Peter O'Donnell, who heads our Unum International business, and Tim Arnold, who heads our Colonial Life and Voluntary Benefits businesses. And now I'll turn the call over to Rick for his opening comments.

Thank you, Tom, and good morning, everyone. We certainly appreciate you all joining us today, and today we will take you through our financial and operating results for the fourth quarter, which finalize many of the items we shared with you our investor day. in our investor meeting in December. This will be inclusive of our closed individual disability reinsurance transaction, which we are very happy about. So let me start by saying we closed out a very tumultuous year in a very strong position as we continue to navigate the challenges of the pandemic. Our leadership team is here, as usual, to address your questions, but I'd also like to recognize the entire Unum team who have shown great resilience through the year in ensuring that our customers are well cared for and that we continue to build a dynamic employee benefits franchise. So let me start my comment this morning by providing some high-level views of the markets and macro factors that have been significantly impacting our business, not only in the fourth quarter, but through the entire pandemic in 2020. Many of these factors, including COVID-related mortality, saw a resurgence in the fourth quarter that has carried over into the early weeks of 2021. These factors will help frame up our financial results during our discussion today, as well as our views for 2021. First of all, the impacts from COVID-19 and related economic challenges in 2020 have been very transparent in our financial results. And those impacts were amplified in our fourth quarter results by this resurgence that I mentioned with related deaths and infections, specifically in December. As we'll discuss in greater detail, COVID-related deaths in the U.S. for the full year totaled 345,000, with 138,000 occurring in the fourth quarter. Further, over half of these fourth quarter deaths occurred in December, alone making it the deadliest month that we saw in the pandemic in 2020. Since we met with you at our investor meeting in mid-December, death counts have increased significantly. Sadly, that trend has continued into January, and it will no doubt impact our first quarter results even more than what we've seen in previous quarters. To detail that, high mortality in our life insurance business lines, high claim rates in short-term disability, and high expenses from leave volumes with partial offsets from high claim terminations caused by mortality in the closed long-term care block. As we look forward, we are very optimistic that this will turn. Recently, we have seen infection rates declining, coupled with the rollout of vaccines. The CDC reports that approximately 80% of the COVID-related deaths have been over the age of 65, and this population will be vaccinated in the coming months. This same group also represented about 50% of our group life deaths by count, many of whom are retirees who maintain some level of their coverage. So as the vaccine makes its way through these ages, we should thankfully see meaningful decreases in overall mortality. This, in turn, is expected to drive a strong rebound in our results, likely in the second half of 2021, and cause us to expect to get back to our historic levels of growth and profitability in 2022. There will be some volatility in our results as we progress through this rollout period, but we remain highly confident in a full recovery as we get the pandemic behind us. The pandemic and related impacts on the economy have also had significant impacts on our top-line premium income. Our premiums in our core businesses for several years have seen growth in the 5% range, but this year it only grew by 0.6%, and in the fourth quarter it was down by 1.4%. This outcome was consistent with the revised outlook we provided when the pandemic first hit. that premium income would be flat to up slightly for the full year, with declining year-over-year comparisons throughout 2020. So to give perspective on the drivers of premium headwinds, there are three macro factors to highlight. First, the immediate shift to a work-from-home environment in March, resulting from the onset of the pandemic, had significant impacts on new sales. Full-year sales for our core business segments all declined in 2020. Unum US by 10%, Colonial Life by 27%, and Unum International by 9.5%. Most impacted were the voluntary benefit lines, which have a heavier emphasis on face-to-face sales and enrollments, which require active selection. Looking forward, this has created an acceleration of the trends we were seeing with an increased adoption of digital sales and enrollment tools that we have invested in over the past few years, especially for our Colonial Life agents, where we saw a 240% increase in the number of agents utilizing these digital tools. Looking at the group market, we're encouraged by the momentum, which was initially impacted by the dramatic economic shock of the pandemic, but is recovering to a more normal pace of activity as people have slowly returned to work. Also helping our premium is how persistency has held up well in the face of the pandemic across most of our business lines. The benefits and services we provide are highly valued by employers and their came through in the retention of benefit plans despite the financial stress many employers were facing. I believe it also reflects the investments we have made in our customer service and the dedication of our employees to serve these customers in this time. And finally, natural growth had a significant impact on the slowdown in premium growth in 2020. The shock to employment levels in the spring rising from 3.5% to a peak of 14.7%, virtually wiped out all the benefit we usually see from growth in employee count and wages for existing customers. We expect to see the benefits of natural growth reemerge as the pandemic slows and employment levels improve throughout 2021 with a more complete recovery in 2022. The next broad factor to highlight is the interest rate environment. which continues to be a headwind for all insurance and financial services companies. Over the course of 2020, the yield on the 10-year Treasury fell from its peak of 1.92% at the beginning of the year to a low of 50 basis points in March and ended the year at 92 basis points. These levels, coupled with historically tight credit spreads, continue to create challenges for achieving attractive new money yields for our investment portfolios. Our strategy to gradually build out our alternative investment portfolio has benefited us with a well-diversified portfolio that focuses on consistent, predictable cash flows. In addition, we have also taken the necessary steps to lower our interest rate assumptions as part of our annual reserve adequacy assumption updates. In the tragedy of the pandemic, we see the economic effects on Unum as a once-in-a-lifetime event. Unlike what you might see in a P&C CAT event, This impact has been spread out over the course of a year. It will impact our growth and profitability for a period of time, but we will come back strong. We would also note that through this period, our capital remained in excellent shape as we ended the year in a strong financial position with healthy capital levels above our targets and holding company cash almost four times our target. This speaks to the financial resiliency of our franchise. And just as importantly, the pandemic will be looked at as an event which we have successfully met our purpose, which is helping people through life's challenging moments and reinforce the social value of the benefits we provide to working people and their families. We have paid out over $150 million in COVID claims, mostly in small face amounts and provided by a company as a benefit. I continue to be very proud of the work of our employees to provide excellent service to our customers but we have navigated through this disruptive year. In our most recent surveys, we have seen strong improvements in both overall employee engagement and claimant satisfaction scores over 2019. I'm also very pleased that despite the disruptions presented in 2020, our teams were able to complete an important transaction, which was the sale through reinsurance of our closed block of individual disability business. Once fully executed, it will have the benefit of freeing up approximately $650 million of capital, primarily to holding company cash, part of which we see in our fourth quarter numbers. The transaction is a culmination of many years of effectively managing this book of business and helps us move our capital to more effective uses. While the numerous disruptions of 2020 have masked the progress we are making in growing many of our more capital-efficient businesses, such as voluntary benefits, dental and vision, and medical stop loss, we are well positioned strategically and competitively in these product lines, and I'm very optimistic about their long-term growth potential. So to wrap up the year, we will look back on 2020 as the year of COVID. It changed so much of our world. It changed a lot in how we operate our business, but it only reinforced our purpose as a company. We saw high mortality rates, short-term claims volatility, and the unprecedented disruption to the economy and the workplace. But these are times when we step up and deliver on our promises, and we did, as our highly engaged and dedicated employees provided excellent service to our customers when they most needed it. In a year of unprecedented challenges from the economy, interest rates, credit markets, and the health crisis, the strength of our capital metrics improved a year in 2020, compared to a year ago. With holding company cash increasing $650 million to $1.5 billion, risk-based capital holding steady at 365%, and leverage declining almost three points to 26%, the measures of strength and stability of the company, combined with the know-how of our team, give us great confidence as we work through what we all hope are the last stages of the pandemic to a more stable environment ahead.