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Edited Transcript of UNM earnings conference call or presentation 5-Feb-20 1:00pm GMT

·46 min read

Q4 2019 Unum Group Earnings Call CHATTANOOGA Feb 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Unum Group earnings conference call or presentation Wednesday, February 5, 2020 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Michael Quinn Simonds Unum Group - COO, Executive VP, President & CEO of Unum US * Peter G. O'Donnell Unum Group - Executive VP, President & CEO of Unum International * Richard Paul McKenney Unum Group - President, CEO & Director * Steven Andrew Zabel Unum Group - Executive VP & CFO * Thomas A. H. White Unum Group - SVP of IR * Timothy Gerald Arnold Unum Group - Executive VP, President & CEO of Colonial Life ================================================================================ Conference Call Participants ================================================================================ * Andrew Scott Kligerman Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst * Erik James Bass Autonomous Research LLP - Partner of US Life Insurance * Humphrey Lee Dowling & Partners Securities, LLC - Research Analyst * Jamminder Singh Bhullar JP Morgan Chase & Co, Research Division - Senior Analyst * Ryan Joel Krueger Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research * Suneet Laxman L. Kamath Citigroup Inc, Research Division - MD * Thomas George Gallagher Evercore ISI Institutional Equities, Research Division - Senior MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Unum Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Tom White of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Thomas A. H. White, Unum Group - SVP of IR [2] -------------------------------------------------------------------------------- Great. Thank you, Kevin. Good morning, everyone, and welcome to the fourth quarter 2019 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, 2018, as well as our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of our website. I remind you that the 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. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website also in the Investors section. Yesterday afternoon, Unum reported fourth quarter 2019 net income of $296.2 million or $1.44 per diluted common share compared to $249.1 million or $1.15 per diluted common share in the fourth quarter of 2018. Net income for the fourth quarter of 2019 included a net after-tax realized investment gain of $7.2 million and after-tax cost related to the early retirement of debt of $1.7 million. Net income in the year ago fourth quarter included a net after-tax realized investment loss of $32.6 million. Excluding these items, after-tax adjusted operating income in the fourth quarter of 2019 was $290.7 million or $1.41 per diluted common share compared to $281.7 million or $1.30 per diluted common share in the year ago quarter. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; and Chief Operating Officer, Mike Simonds; as well as Peter O'Donnell, who heads our International business; and Tim Arnold, who heads our Colonial Life business. And now I'll turn the call over to Rick for his opening comments. -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Tom, and good morning, everyone. We closed out 2019 with a good fourth quarter. Our after-tax operating earnings per share increased 8.5% over the year ago quarter to $1.41. This puts our full year operating earnings per share at $5.44 and a growth rate of just under 5%. In the fourth quarter, we had a good mix of growth with after-tax operating earnings growth of 3% complemented by the additional benefit from share buybacks, producing the 8.5% overall increase. The business environment we operate in remains mixed with headwinds from low interest rates and the economic impacts of Brexit on our U.K. business, offset somewhat by the favorable employment trends and a strong consumer in the U.S. All in all, we're pleased with our performance in 2019 and optimistic as we move into 2020. Looking at our business trends. I'm pleased with the premium growth we saw in our core business lines, which are approximately 5% overall for the fourth quarter and for the full year. Sales trends, however, were more volatile in this quarter and sales for Unum US were lower on the quarter, impacted by the competitive conditions in the employee benefits market and our desire to maintain discipline with our pricing and risk selection. I feel it's important to remember that because of our focus on discipline, Unum US sales can vary from year-to-year, but I'll put that in the context that our compound average growth rate has been 5.6% since 2016, and sales in total have exceeded $1.1 billion for each of the past 3 years. We saw favorable growth trends in our international lines and an improved rate of growth at Colonial Life in the fourth quarter, which helped us generate a slight increase in sales for the full year for Colonial Life. Total sales for the company for the full year were $1.8 billion. And persistency levels in our U.S. group lines and international business lines remained steady at very favorable levels, reflecting the strong value proposition we bring to our in-force customers and our distribution partners. Next, we continued very favorable overall margin trends across our core business lines. Benefit ratios remained within our expectations, particularly in our U.S.-based businesses. This reflects a disciplined approach we bring to product pricing and underwriting as well as in-force block management through renewals. While adding new customers in our core business segments is a driving force of our strategy, we know that sustainable growth requires us to maintain our focus on protecting the strong profitability of these businesses. Expense management trends also continued to be favorable in our core business segments. We're maintaining our focus on effectively managing our expense base while freeing up the capacity to invest in new capabilities. I'll come back to this in a moment, but we see significant opportunities for growth and efficiency as an important element of success, and we'll be continuing this focus on productivity, expense ratios and the profitability of our business. Taken in aggregate, these favorable operating trends in our core business segments continue to drive strong margins and capital generation. As a result, our adjusted operating return on equity was 17.2% for the fourth quarter. Our core businesses also generated healthy statutory after-tax operating earnings of over $1 billion in 2019, with the resulting cash flow funding our growth and supporting our capital deployment initiatives. Wrapping up on our financial results, the Closed Block had an excellent fourth quarter with historically low loss ratio in the Closed Disability Block. We also saw favorable overall results in the long-term care business, which has remained within our expectations since we updated assumptions 18 months ago. Steve will cover all of these results in more detail in his commentary. So to conclude my remarks, we're quite pleased with the results for the fourth quarter and full year 2019. We entered 2020 with a strong sense of optimism. You also saw 2 weeks ago, we named Mike Simonds as our Chief Operating Officer, a recognition of his past success and a well-deserved expansion of responsibilities to drive growth. We know that delivering consistent long-term success is a constantly evolving market for benefits. And through all of this new product introductions and business acquisitions we have made requires us to continually challenge our approach to how we do business, and Mike's new role will be instrumental in this process. Our team is excited about the opportunities we have ahead of us and for continued growth and success. And now I'll ask Steve to cover the details of the fourth quarter results. Steve? -------------------------------------------------------------------------------- Steven Andrew Zabel, Unum Group - Executive VP & CFO [4] -------------------------------------------------------------------------------- Great. Thank you, Rick, and good morning, everyone. I'm very pleased with our fourth quarter results. It was a good quarter overall with solid results in our Unum US and Colonial Life businesses, both of which came in consistent with our expectations. The Closed Block had excellent results, while the international business had a tougher quarter, reflecting the challenges we face in the U.K. business environment. Our fourth quarter tax rate was slightly higher than expected in the quarter but was in line with our expectations for the full year, a result of normal volatility we expect to see over the course of the year. Miscellaneous investment income rebounded in the fourth quarter from an unusually low amount in the third quarter but remained below our expectations and historical trends for the full year. All in all, we ended the year in good shape with after-tax adjusted operating earnings per share of $5.44, within our growth expectation of 4% to 7% that we established a year ago. Now I'd like to dig more deeply into the results. Starting with Unum US, we continued to see solid underlying results in the fourth quarter as adjusted operating income increased 5.8% to $263.1 million with each of our 3 reporting lines showing positive year-over-year results. Premium growth remained healthy at 5.1% year-over-year, driven primarily by continued strong group persistency. Net investment income increased slightly less than 1%, helped in part by an increase in miscellaneous investment income over the year ago quarter. Benefits experienced in the segment was generally favorable with the benefit ratio declining slightly to 67.3% in the quarter. The adjusted operating return on equity for Unum US remained quite strong at over 18% in the quarter. Then within Unum US, adjusted operating income for group disability increased 2.9% to $83 million in the fourth quarter. We continue to see good premium growth and strong benefits experience as well as slightly higher net investment income. Premium income increased by 5.7% as the in-force block increased from prior period sales growth and continued strong persistency in our group insurance lines. The benefit ratio improved to 74% in the fourth quarter from 76.2% a year ago, driven primarily by favorable claim recovery experienced in our group long-term disability product line, which was partially offset by higher claims incidents. Net investment income in the quarter was slightly higher as higher miscellaneous investment income offset the effects of reduced assets back in the line and lower portfolio yields on those assets. The increase in the other expense ratio compared to the year ago quarter was primarily driven by the rapid growth of our lease services. Keep in mind that the fee income related to those services is included in the other income line. Excluding the service business, we saw a slight improvement in the operating expense ratio in the fourth quarter relative to a year ago. Adjusted operating income for the Group Life and AD&D line increased by 6.1% in the fourth quarter to $68.2 million. Premium income increased 4.8% primarily from prior period sales growth. The benefit ratio of 71.7% was generally consistent with the year ago quarter of 71.6%. The expense ratio declined slightly due to the ongoing focus on expense management and operating efficiencies. It was a more volatile quarter for sales in our Unum US group lines of business, declining 9.4% from the year ago quarter. Full year sales, however, declined by less than 1%. Persistency in our group lines in aggregate continues to be a bright spot for us at 90.5% for full year 2019 compared to 90.3% in 2018. Finally, the supplemental and voluntary line, adjusted operating income was $111.9 million for the fourth quarter, an increase of 7.9% relative to the year ago quarter. Premium income grew by 4.5% primarily driven by prior period sales and the growth in our dental and vision product lines, partially offset by unfavorable persistency across all businesses. Looking at benefits experienced for each product line, the benefit ratio for individual disability was slightly lower relative to last year due to a lower average claim size and favorable claim recoveries. The benefit ratio for the voluntary benefits line was higher primarily due to unfavorable claims experience across all products. Finally, in the dental and vision line, the benefit ratio was higher relative to the year ago quarter due to higher utilization. The expense ratio for the supplemental and voluntary line improved relative to the year ago quarter from our focus on expense management and operating efficiencies. Sales for the supplemental and voluntary line were lower by 5% for the fourth quarter, with declines in both the individual disability and voluntary benefits product lines offsetting growth in the dental and vision product line. For full year 2019, sales in our supplemental and voluntary line were flat. Our Unum International segment reported adjusted operating income of $23.9 million for the fourth quarter, a decline of 21.4% from the year ago quarter. The decline was driven primarily by lower operating income from the U.K. line of business in local currency. In local currency, the U.K. -- the Unum UK line of business reported adjusted operating income of GBP 17.4 million in the fourth quarter, a decline of 21.6%. These results reflect growth in premium income of 8.6% relative to the year ago quarter from higher persistency, sales growth and the benefit of rate increases in the group's long-term disability product line. Net investment income for Unum UK declined 8.7% to GBP 20.9 million in the fourth quarter due in part to lower investment income from inflation index-linked bonds that we hold to support the claim reserves associated with our group policies that provide for inflation-linked increases and benefits and also lower yield on fixed-rate bonds. The benefit ratio for the U.K. business increased to 77.3% in the fourth quarter compared to 74.6% a year ago, primarily due to unfavorable claims experienced in both the group long-term disability and Group Life product lines, partially offset by lower inflation-linked increases in benefits. Unum International sales in U.S. dollars increased 13.8% in the fourth quarter with sales in the U.K. in local currency increasing 13.9% and sales in Unum Poland increasing 8.8% on a dollar basis. Persistency for the U.K. business continues to be favorable in the face of successfully implementing renewal rate increases over the past 2 years as we look to offset interest rate pressures. While our Unum UK results are facing continued headwinds from Brexit, we are pleased with the execution of our strategies, which are centered on implementing rate increases, maintaining strong persistency and discipline on new sales pricing and actively re-rating underperforming cases. In addition, we are very pleased with the performance of the Unum Poland business, which produced strong premium growth of 8.6% this quarter on a dollar basis. We continue to expect our 2020 operating income to be relatively consistent with our results for full year 2019. Moving on, the Colonial Life segment produced adjusted operating income of $87.7 million for the fourth quarter, an increase of 2.7% from the year ago quarter. Premium income increased 3.6% for the fourth quarter primarily driven by prior period sales growth, including expansion of the dental and vision products, offset in part by a lower level of persistency. The benefit ratio of 51.5% was generally consistent with the year ago quarter of 51.6%. Sales at Colonial Life continued to rebuild momentum with a year-over-year increase of 2.6% in the fourth quarter, which brings the full year sales to an increase of almost 1%. In the quarter, we saw positive trends in the public sector markets, where new sales increased over 41%. Persistency for full year 2019 declined to 77% from 78.1% in 2018, but we believe that persistency will level out in 2020 at current levels. We are confident in the actions we've been taking to rebuild our sales momentum and expect improved sales growth levels in 2020. Now moving on to the Closed Block. Adjusted operating income was very strong at $46.1 million compared to $34.8 million in the year ago quarter. As expected, premium income for this segment continues to decline, down by 4.5% in the fourth quarter, which is primarily due to the ongoing policy terminations and maturities for the individual disability line, which is partially offset by premium rate increases within the LTC product. Net investment income increased 3.1% in the quarter driven by an increase in the level of invested assets backing the LTC line, which is partially offset by a lower yield. In the individual disability product line, the interest-adjusted loss ratio was 74.7% for the fourth quarter compared to 81.2% last year, which was primarily driven by favorable claims experience. This quarter's loss ratio was the lowest we've experienced in over 10 years but going forward, we expect the loss ratio to be in the low 80s. In the long-term care business line, the adjusted -- the interest adjusted loss ratio was 86.7% for the fourth quarter and remains within our expectations of a loss ratio in the 85% to 90% range. Over the past 4 quarters, which we feel is a more appropriate time to measure a volatile line like LTC, the interest-adjusted loss ratio for LTC is 88.1%, again in line with our expected range. I'll then round out the Closed Block discussion with 3 other important topics related to LTC. First, we made incremental progress with premium-rate approvals in the fourth quarter with several new approvals on our group LTC rate filings. We are pleased with the rate of progress we are making to our $1.4 billion assumption and believe we can achieve this goal in the coming years. Second, we have exceeded the new money yield target of 5.5% since the third quarter of 2018. As we've often cautioned, the assumptions backing this business line need to be analyzed over a long-term time horizon, given its potential for quarterly volatility, but we remain satisfied with how the trends have evolved since the reserve update in 2018. And third, LTC-related cash contributions to subsidiaries for the full year 2019 for our first Unum subsidiary totaled $100 million and for the Fairwind captive totaled $268 million. Looking out over the next couple of years, our capital plans anticipate these cash contributions settling back to our previous historical average of around $200 million combined as we look through the impacts of low interest rates and tax reform. Wrapping up with the corporate segment, the adjusted operating loss, which excludes $2.1 million of before-tax costs related to the early retirement of debt, was higher in the fourth quarter at $50.5 million compared to a loss of $48.2 million in the year ago quarter. This was driven by lower net investment income and higher interest expense, which was offset by lower operating expenses. Statutory earnings for our traditional U.S. insurance companies were quite strong in the fourth quarter, with statutory after-tax operating earnings totaling $266 million compared to $215 million in the year ago quarter and totaled $1.03 billion for the full year. Our capital metrics remain in good shape with the weighted average risk-based capital ratio for our U.S. traditional life insurance companies at approximately 365%, consistent with our plans for the year. Also consistent with our expectations, cash at our holding companies totaled $863 million at year-end 2019. Early in the fourth quarter, we completed the tender and redemption transactions that we began late in the third quarter, which generated a small debt extinguishment cost reported in the fourth quarter. In addition, share buybacks in the fourth quarter were $100 million and totaled $400 million for the full year 2019. I'd also highlight that book value per common share, excluding AOCI, as of December 31, 2019, was $48.92, which was an increase of 11.2% over 2018. So for full year 2019, after-tax adjusted operating income per share was $5.44, an increase of 4.6% over full year 2018. Looking at 2020, we continue to expect growth in after-tax adjusted operating income per share in the 4% to 7% range, which is consistent with the outlook we provided at our outlook meeting in December. Now I'll turn the call back to Rick for his closing comments and look forward to your questions. -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [5] -------------------------------------------------------------------------------- Thank you, Steve. And again, we're very pleased with the fourth quarter, and we're in full swing for the new year in 2020. Our team is here to respond to your questions. So I'll ask Kevin to begin the question-and-answer session. Kevin? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Ryan Krueger of KBW. -------------------------------------------------------------------------------- Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [2] -------------------------------------------------------------------------------- On disability, can you give a little bit more color on the benefit ratio? I guess it improved despite absorbing the lower discount rate. So just hoping to get some incremental color on what you sought to offset that and drive further improvement? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [3] -------------------------------------------------------------------------------- Mike? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [4] -------------------------------------------------------------------------------- Yes. Sure. So as you noted, good solid loss ratio and the group disability line at 74%. I'd say, to your question, specifically, strong recoveries and offsets in quarter more than helped offset a moderate increase in new claim incidents. And as you noted, and as we have talked about at Investor Day, we did go ahead and lower the new claim discount rate on new incurrals by 25 basis points in the quarter. -------------------------------------------------------------------------------- Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [5] -------------------------------------------------------------------------------- Got it. And on competition, you made a number of comments in December about seeing more voluntary competition, you also had softer traditional group sales. Are you seeing more competition in traditional group as well? Or do you view the quarter as more volatility, it's more confined to voluntary? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [6] -------------------------------------------------------------------------------- Ryan, it's Rick. Let me just step back and talk a little bit about how the competitive landscape has changed over the last several years. You would note a number of players that have sold businesses to others that are incumbents in our space. And so that's been a dynamic that we have seen out there and that has covered across the group space. On the voluntary space, you would have heard us talk about new entrants, people getting into the voluntary space that would not have necessarily historically been in that space. And so we're seeing how that's playing out over time. I'd actually talk a little bit more about fourth quarter. I feel very good about the sales we saw in our U.K. operations, Colonial Life, we are on a better trend than we saw in the first half of the year. And then we did see Unum US down a little bit on the quarter. But when you look at the fourth quarter, I'd go back to the greater than $1.1 billion in sales and are maintaining our pricing discipline, which you see year in and year out. Yes. We'll continue to push through that. And I think the recognition of a competitive landscape changing are a number of players that really like this space, and I think that's -- that bodes well for us that we're at the front of the pack. And as they go through and come into the space and go through integration, we're focused on growth in the future. So I'm very satisfied with where we are, but we're also looking forward to where it is. So competition will come and go. We've been talking about that for many, many years. We don't necessarily see the irrational competitor, which is the one thing you can't do much about. But we expect competition, and we think it's actually good for our business in the longer term. Maybe, Mike, do you want to add anything on the -- what you're seeing, particularly to our lines in the fourth quarter? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [7] -------------------------------------------------------------------------------- I think you summed it up well. In the fourth quarter, maybe just a little bit more color, we did see a decrease of about 8% overall. But if you unpack it a little bit, sales to our existing clients, were actually up about 7%. And that's really important to us. Those tend to build stickier, longer-term relationship and they come in more favorably priced than what you have to do to go out and win a new client relationship. I think that's what we felt, Ryan, the most competition is in the new client market, and that's a -- not terribly different than what we have seen emerged over the full second half of the year and pretty consistent with prior cycles in the past. And I guess I'd just close by saying, as we look out into 2020, there's a lot of reasons for optimism. We're certainly going to maintain that pricing discipline that you have known and seen from us very consistently. But new capabilities rolling out, particularly in that core market where we have struggled to get some growth within our targeted underwriting margins with the rollout of our new digital platform, we'll now be taking core clients from the onboarding all the way through the administration of their benefits completely digitally, and we think that's going to help set us apart. As well as a new investment in sales reps in the core, where we have now built out a dedicated team to target the smallest end of the core market where we see a lot of opportunity to grow. And maybe, Tim, I think, might have a couple of comments about the market on the voluntary side. -------------------------------------------------------------------------------- Timothy Gerald Arnold, Unum Group - Executive VP, President & CEO of Colonial Life [8] -------------------------------------------------------------------------------- Yes, sure. Thanks, Mike. I think about the results that Colonial Life had in 2019, certainly, the competitive environment was one factor. But just as a reminder, some of the things we talked about in December, we made changes in our recruiting model that had an impact on our sales. That has nothing to do with the competitive environment. We also made changes in a number of key distribution relationships. We made some changes in migrating toward higher persistency industries and perhaps away from some lower persistency industries. So we feel great about the quality of the sales we had in 2019. The public sector growth that Steve talked about earlier with that being the highest persistency industry in our book, we feel very good about that. We feel great about the continued contribution of dental in our book, and we had a strong year, again, selling to our existing customers. So that's also helpful. And as we look forward, maybe at the risk of slightly over answering, but as we look forward, I agree with Rick. The market opportunities are tremendous. There is still 6 million businesses out there that have more than 1 employee and less than 100. Those businesses tend to be underserved. Their employees are certainly underserved with less than half of America's workers having adequate life or disability insurance. We have a very strong value prop in all markets, in all segments. With our current footprint, we can reach over 80% of America's workers within a 1-hour drive from one of our primary offices. We have 6,000 people who do benefits education and counseling, which is desperately needed in this environment. And on the recruiting front, after a challenging second, third quarter, we rebounded nicely in the fourth quarter and are back to the levels that we saw before we made the strategic shift in our recruiting approach. So we remain pretty optimistic, and we still feel comfortable with the guidance. -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [9] -------------------------------------------------------------------------------- So summing that up, Ryan, I think competition, yes, we welcome it. But as you can hear from the team, we're on offense. -------------------------------------------------------------------------------- Operator [10] -------------------------------------------------------------------------------- Our next question comes from Suneet Kamath of Citi. -------------------------------------------------------------------------------- Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [11] -------------------------------------------------------------------------------- Just first question on pricing, particularly in Unum U.S. I mean the interest rate are down a decent amount so far this year. So how do you feel about the level of pricing that you're putting out in the market? And do you have to maybe work some more price through to contend with where rates are today? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [12] -------------------------------------------------------------------------------- Suneet, thanks for the question. It's Mike. And actually, pretty consistent with where we were in December. Because like we talked about in the past, certainly, yields are one factor that we're going to put into new business and renewal policy claim trends and expense levels are also getting factors in -- factored in. So there's some puts and takes. And like we talked about in December, I think we're in a really good spot, given current returns, to probably nudge rates up a couple of points, certainly low single digits across most products and segments. But I think one of the things we work really hard to do is deliver consistency to clients in terms of predictability. So acquire clients at a sustainable rate. And then where we need to make adjustments, they're going to be pretty modest. -------------------------------------------------------------------------------- Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [13] -------------------------------------------------------------------------------- Got it. And then, Rick, in your opening comments, you talked a little bit more about expense efficiencies and some of the actions you guys might be taking. Can you just provide a little bit more color on what some of those actions would be? And sort of how material they could be in terms of driving growth? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes, thanks, Suneet. And it is a big part of our commentary, but it's part of the actions that we're focused on right now. It comes in 2 fronts, maintaining the efficiency that we've -- you've heard year in, year out, maintaining a very good expense ratio. It's not outsized. We do it -- in every year, we look at how we can maintain efficiency. I think we're leaning into it a little bit harder these days, and the goal is to actually be able to channel our investments into these growth opportunities we see. You hear the optimism that we have, but we've got to make sure that we're putting the money behind these opportunities to go after it. So the expense efficiency that you see will really be applied, most of it, back into our capabilities as we go forward. So that's why you hear about -- a little bit more about it because we're a little bit more focused on it, but it really will be going back more towards the opportunities, the capabilities that we see in the next several years. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Our next question comes from Thomas Gallagher of Evercore ISI. -------------------------------------------------------------------------------- Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [16] -------------------------------------------------------------------------------- Just the follow-up on the competition in group. Would you say -- and I heard your comment about the 7% increase in sales through existing clients. Some -- most of the competition is coming from new client sales. Would you say that you're close on a lot of these cases that you're not winning? And the reason I ask is if you're really losing on price by a larger or wider margin, just curious if you would have optimism that sales would recover in 2020? Or is it not that far apart on pricing to the point where you think you can kind of recover from a sales standpoint? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [17] -------------------------------------------------------------------------------- Yes, Tom, it's Mike. Thanks for the question. I would actually say, not that far off in general. There's going to be some volatility prospect to prospect, so one does not apply to all. But I think Rick hit it earlier in the call, where we really don't see an irrational competitor, too, which we have seen at times in the past where you might be significantly out. I'd say we've got a pretty healthy market out there. I'd say, in general, we're in the hunt. And that bodes well as we -- we already have put some new tools into our salespeople's hands here in 2020, and I think that does bode well and fuels the optimism around the guidance we put out there for continued steady top line growth. I'd say the other piece is there's just -- there's less churn in the market, and that's my observation certainly reflected in our persistency. And as we looked at our 1,1 renewal cycle, that -- there's just less business moving in the traditional group side. -------------------------------------------------------------------------------- Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [18] -------------------------------------------------------------------------------- Got you. And then just a question on IDI Closed Block performance was very favorable. Was that mainly just increased mortality in the quarter? And I guess just relatedly, just given that you've had several years of good performance there, does that -- would you say that improves the possibility or optionality of you doing something with that block to free up capital? Or where do you stand on thoughts regarding that? -------------------------------------------------------------------------------- Steven Andrew Zabel, Unum Group - Executive VP & CFO [19] -------------------------------------------------------------------------------- Tom, this is Steve. I'll take that one. So just related to the quarter around our Closed Block individual disability income business, I'd say it was a combination. Probably the main driver was just lower incidents. It was a bit of an anomaly for us to have lower incidents on that block. We did also see strong mortality, but probably not that was outsized what we would normally see in a fourth quarter. So I would I would say it was mostly driven by incidents. I definitely would not see that sustainable into the future. In my comments, I guided back down to the low 80s, and that's still where we are. But I do have to say, we feel good about how that block performed. If you go back, that block -- the majority of that block is in a special-purpose vehicle. It was securitized with nonrecourse debt. That debt has performed very, very well. So I think that really speaks to the consistency of the profits coming off of that block. The debt is actually going to be paid off going into the middle part of next year. So we feel good about it. But again, if you're thinking about kind of forward looking, the low 80% loss ratio is probably a more normalized level. When it comes to just the block itself and how we're thinking about opportunities, we continually test the market and continually explore the market in a variety of ways. One, we definitely look at reinsurance. Obviously, we'll look at potentially relevering that block once that debt is paid off. But it also is generating some nice distributable cash flows, and so we also have the option to just let that come through and have it be available at the holding company. So we'll continue to explore all 3 of those options as we see. But whatever we do, it's going to be for the benefit of the shareholders, and so we'll make sure that economically it makes sense for the company and the shareholders. -------------------------------------------------------------------------------- Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [20] -------------------------------------------------------------------------------- Okay. And if I could just sneak one more in. Just -- 365% RBC, do you have a pro forma estimate of what that RBC would be if you recapture the long-term care captive, what adjustment we should make to RBC? -------------------------------------------------------------------------------- Steven Andrew Zabel, Unum Group - Executive VP & CFO [21] -------------------------------------------------------------------------------- Yes. I would just go back to how we think about our targets for risk-based capital. We try to keep it in aggregate of 350% and that's what we guide towards as far as our traditional insurance companies. We don't really publicly disclose what that would look like. But I think we'd still be around that 350% range if we were to do that. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- Our next question comes from Humphrey Lee of Dowling & Partners. -------------------------------------------------------------------------------- Humphrey Lee, Dowling & Partners Securities, LLC - Research Analyst [23] -------------------------------------------------------------------------------- Looking at Unum UK, you pointed out there is the impact of Brexit and interest rates. And then also, you have some unfavorable underwriting in the quarter, but I think the profit margin is one of the lowest that I can recall. Like, given some of the ongoing impact, how should we think about the profit margin for that line of business going forward? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [24] -------------------------------------------------------------------------------- Maybe I'll just start, and then I'll turn it over to Peter. I mean one of the things I would remind you, Humphrey, that when you look at that line of business, it's still a mid-teens ROE business. So it has always been lower. We talked about that in our comments in the quarter. And in the world of Brexit, having a -- still, a mid-teens ROE business is very good. So let me turn it over to Peter to give some more details in terms of where margins stand and where they're going. -------------------------------------------------------------------------------- Peter G. O'Donnell, Unum Group - Executive VP, President & CEO of Unum International [25] -------------------------------------------------------------------------------- Yes. Thanks, Humphrey. Maybe I'll just take a step back and sort of give you my view of where the business is. So yes, we've experienced a challenging environment recently with a significant uncertainty around Brexit. And as you guys mentioned it, interest rates and the exchange rate, I would say, are the sort of most visible indicators of that would anticipates down below -- 10-year down below 1% and the exchange rate being under $1.30 for most of the year. Good news, it's now at $1.30 and seems pretty stable around that. I'm very positive about the election results in December. It's really good, I think for businesses in the U.K. If you talked to most businesses they want to see a stable government for at least 5 years. However, in 2020, we expect the external environment to be very similar to 2019 as the U.K. debates its future relationship with EU. As Steve mentioned in his remarks, I feel good about the progress we're making in many areas. We've seen good growth in products that are sensitive to interest rates, good expense control, good core growth and persistency has been good given the renewal program. However, it's on our long-term disability product we've seen the most pressure, both from interest rates and higher claims incidents and severity, moving away from our long-term averages. But we've been responding to that, again, over the last 2 years with our rate program, which will restore margins, and we're also being very disciplined on pricing new business. We do see volatility by quarter. And in 2018, we averaged around GBP 20 million, higher in the first half and lower in the second half. I wouldn't worry too much about that trend in the second half. It does tend to move around a lot. But basically, we landed about GBP 80 million for the year and, as Rick mentioned, an ROE of under 40%. In 2020, we'll continue to rerate the book and work with clients to improve claims and grow those noninterest rate-sensitive products. And we expect BTOE to be broadly in line with 2019, but it can move around that GBP 20 million mean by quarter. It's difficult to call it by quarter. So overall, very positive about the positioning and prospects for the business over the medium term, given the actions we have and are taking and particularly as we see return to more normal and political environment as we clear Brexit. -------------------------------------------------------------------------------- Humphrey Lee, Dowling & Partners Securities, LLC - Research Analyst [26] -------------------------------------------------------------------------------- That's helpful. And then shifting gears back to U.S. So you talked about the efficiency, and I think I appreciate the color that you provided. But just looking at group disability, the expenses kind of came up. I think part of it is because of the lease management that you have in there kind of -- you've been spending more in order to grow that business. So I guess, how should we think about kind of the general expenses for group disability going forward as we think about your efficiency gain for your underwriting business, but at the same time, while growing your lease management? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [27] -------------------------------------------------------------------------------- Mike? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [28] -------------------------------------------------------------------------------- Yes, sure. Humphrey, it's Mike. So you nailed it. So in that group disability segment is where we [have] our fee-based services business, primarily lead management, which increasingly is becoming not just FMLA at the federal level, but state level and municipal level as well as corporate fees. So that in combination with the sizable disability fee-based services that we provide is growing. We see that as a very attractive business for us over time and one of our biggest areas of investment. So the overall profile of the company that Rick was talking about, we're going to continue to drive efficiencies at the macro level, and that is one primary place that we're reinvesting funds back into the business. We see that as a real problem that we can solve for clients in a differentiated way. And so as we do that in the segment, as you're computing kind of an OE ratio with premium as your denominator in a fee-based business, you're going to continue to see that OE ratio continued to drift up. What I would tell you is that if you pull the fee-based businesses out of the segment, we actually saw about a 50 basis point decline in the traditional operating expense ratio there. So in summary, as you kind of lookout for that segment, I would continue to expect some modest growth in that expense ratio because of the gross in fee, but you should know that underneath that, we're continuing to sort of drive efficiency on the insurance side. -------------------------------------------------------------------------------- Humphrey Lee, Dowling & Partners Securities, LLC - Research Analyst [29] -------------------------------------------------------------------------------- So should we expect that kind of expenses for group disability to maybe at least in the near term, perhaps, growing faster than your top line? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [30] -------------------------------------------------------------------------------- I think it's going to grow slightly faster, but probably reasonable. We'll see that ratio climb a bit. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Our next question comes from Andrew Kligerman of Credit Suisse. -------------------------------------------------------------------------------- Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [32] -------------------------------------------------------------------------------- Just wanted to narrow in a little bit on some of the -- your earlier questions. So with Unum US, in the group disability area, this year, you had a full year benefits ratio of 74.4%. Last year -- I mean, in 2018, it was 76.1%. So as I think about an earlier comment you made about being able to get low single-digit rate increases, maybe you could give some color on where that benefit ratio could stabilize? It sounds like sub 75% is doable. And I know you had a favorable claims recovery this quarter, but it seems like 75% or lower is doable going forward. And maybe talk a little bit about that. -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [33] -------------------------------------------------------------------------------- Yes, Andrew, thanks for the question. It's Mike. So I think it's reasonable to have that sort of 74% to 75% range in mind. I would say just in general, that is pretty tight when you think about a business like this that can, over time, particularly at a quarter-to-quarter level, have some volatility. But as we look out and look at the trends on the major drivers of that benefit ratio, that seems like a reasonable range. -------------------------------------------------------------------------------- Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [34] -------------------------------------------------------------------------------- Great. And I'm still trying to reconcile your ability to grow sales in the voluntary market. I mean if we looked at Unum US's voluntary business, it's down to 12% year-over-year. And it looked like in Colonial overall, it was 3% flat versus 5% to 7% guidance. Maybe you could -- I mean, maybe focus specifically on the pricing there, is pricing coming down? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [35] -------------------------------------------------------------------------------- Yes. We'll start with the Colonial Life and come back to the... -------------------------------------------------------------------------------- Timothy Gerald Arnold, Unum Group - Executive VP, President & CEO of Colonial Life [36] -------------------------------------------------------------------------------- Yes, Andrew, thanks for the question. Pricing on the voluntary side really isn't an issue. Almost all of the products that are sold on the voluntary side are shelf rated and not -- price is not a negotiating point. So the negotiating points tend to be around what type of participation you think you might get based on the enrollment conditions, what the compensation looks like, whether there are technology companies that would need to share in some of the compensation, et cetera. So those are the negotiating points, and we don't see those being any particular real threat to us. -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [37] -------------------------------------------------------------------------------- Mike, on U.S.A... -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [38] -------------------------------------------------------------------------------- Yes. I'd say, we talked about it a little bit, but I'd say in the upper end of the market, it is, as Tim said, much less a price point, and it's around the underwriting and the product features. And we talked a little bit about that we've rolled out some new products. They are, I think, really oriented to creating additional consumer level value. There's less expense, both to cover administration because of the OE expense gains that we've had, but also through the channel. And as those commissions level out, we've seen actually some pretty nice growth on that subset of new products. And about 25% of all of our new sales in the quarter came in on those new product chassis and just looking at new clients, it's about 50%. So I think it will take some time. But as we look at the pipeline for voluntary under the Unum-branded side of the business, I think there's reasons for optimism. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our next question comes from Erik Bass of Autonomous Research. -------------------------------------------------------------------------------- Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [40] -------------------------------------------------------------------------------- Do you expect New York Life's acquisition of Cigna's Group business have much impact on the market? And historically, have you seen mutual companies approach the market much differently from a pricing or target margin perspective? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [41] -------------------------------------------------------------------------------- Yes, thanks for the question, Erik. I mean I think I would step back, I made some comments about how the market has changed as well. Prior to that acquisition, you have had consolidation in the benefits space we -- for different reasons and different players. You've also seen some acquisitions done from foreign players that have come into the space as well. So there's a lot of dynamics. Adding a new competitor in there that is in the mutual space, this is -- this business still needs to be all managed and worked through the business. So I don't -- we haven't seen the dynamics yet, but I think that it should be similar to other competition we've seen as people have gotten into the space. And Mike, do you want to add... -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [42] -------------------------------------------------------------------------------- I think you hit it well. Just also specific to the question, we've had a couple of long-term mutual competitors in the space and have not seen a materially different sort of orientation to other competitors. -------------------------------------------------------------------------------- Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [43] -------------------------------------------------------------------------------- Got it. And you've had some good success with the lease management services product. Are there other opportunities to add ancillary kind of fee-based services or products to drive growth in the future? -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [44] -------------------------------------------------------------------------------- Mike? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [45] -------------------------------------------------------------------------------- Sure. We absolutely do think that, that is the case. I think -- I believe service gives us a point of intersection in a pretty meaningful way down to the consumer level at the worksite, and we can see a lot of potential services branching off from that as well. So that is one of the things -- as we kind of look forward as a company, we've got a very strong insurance and benefits footprint across the U.S. and U.K., and we see increasingly that there's opportunities to introduce new, primarily digital backed by people services alongside those insurance products. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question comes from Jimmy Bhullar of JPMorgan. -------------------------------------------------------------------------------- Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [47] -------------------------------------------------------------------------------- First, just a question on loss trends in the disability business. Obviously, they've been very favorable and the labor market is helping as well. Do you see anything that would suggest that margins are not going to hold up at the recent level? I know your guidance is a little bit more conservative than what you've been reporting. And are you pricing based on what you've seen in terms of lost claims trends over the past year or so or more based on longer-term averages? -------------------------------------------------------------------------------- Michael Quinn Simonds, Unum Group - COO, Executive VP, President & CEO of Unum US [48] -------------------------------------------------------------------------------- Sure. Yes. So on group disability, I'd just take you back to the commentary earlier, I think, 74% to 75% on the loss ratio is very reasonable and consistent with what our expectations are. Looking out, as I was saying earlier, as you look at sort of the major factors that would sort of impact loss trends, and we don't see things that would materially impact that. But as I say every time, it's an insurance business it's going to involve taking some risk, and there certainly can be, particularly when you look at it on a quarterly basis, some volatility there. But our approach is about being really smart and disciplined upfront about the risks that we take on and then just investing heavily in a remarkably talented group of professionals that handles the claims process from the clinicians to the book, rehab to the disability benefit specialists. It is a really impressive machine and quite effective at helping support people return to work in a very consistent way. -------------------------------------------------------------------------------- Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [49] -------------------------------------------------------------------------------- And just on -- like the changes -- upcoming changes in long-duration contracts in terms of accounting, do you have any better insight you'll be effective? I guess the LTC and IDI businesses are where you have the most exposure, but when do you think you'll be able to give some idea on what the impact on your book value would be? -------------------------------------------------------------------------------- Steven Andrew Zabel, Unum Group - Executive VP & CFO [50] -------------------------------------------------------------------------------- Jimmy, this is Steve. I'll take that one. So I'd step back just a little bit just on the new accounting guidance, this is a GAAP-only accounting guidance, how we view it. We'll have to change our reporting in our disclosures for GAAP basis financial report. From a statutory cash flow, from a capital deployment perspective, we see this as a bit of a nonevent. It was delayed a year out, so the effective date is in 2020. And so the team is working through it. The recent change was adding the scope claim reserve liabilities, so we're working through that. The majority of the impact will be around discount rates, things that we've talked about before. So as we look out, we're planning for the 2022 implementation. The team is working hard at it. And as we get more information, we'll disclose it as it makes sense. But really, nothing new to talk about right now. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- We have no further questions at this time. -------------------------------------------------------------------------------- Richard Paul McKenney, Unum Group - President, CEO & Director [52] -------------------------------------------------------------------------------- Great. Thank you, Kevin. And I'd like to thank everybody for joining us on the call this morning. Kevin, that now completes our fourth quarter 2019 earnings call. Thanks, everyone. -------------------------------------------------------------------------------- Operator [53] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.