Q1 2020 Earnings Call

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Good day.

First quarter 2020 earnings Conference call. Today's conference is being recorded and at this time I would like to turn the conference over to Tom White. Please go ahead.

Thank you Savannah, good morning, everyone and welcome to the first quarter 2020 earnings conference call for Unum. Our remarks today will include forward looking statements, which our 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.

Subsequent filings our SEC filings can be found any investors section of our website at noon on dot com.

I remind you that statements in today's call speak only as the date. They are made and we undertake no obligation to publicly update or revise any forward looking statements in the presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in todays presentation can be found in our statistical.

Plummet on our website in the Investor section.

Yesterday afternoon, Unum reported first quarter 2020, net income of $161 million or 79 cents per diluted common share compared to 280.9 million or $1.31 cents per diluted common share in the first quarter 2019.

Net income for the first quarter of 2020 included a net.

After tax realized investment losses of $113.1 million net income in the year ago first quarter included net after tax realized investment gain of 1.6 million.

As a reminder, net realized investment gains and losses include changes in the fair value of an embedded derivative and a modified co insurance arrangement, which resulted in an after tax realized loss of $68.7 million in the first quarter 2020, and an after tax realized gain of 4.4.

In in the year ago quarter. Therefore, the after tax net realized investment losses from sales and credit losses totaled $44.4 million in the first quarter of 2020.

So excluding these items after tax adjusted operating income in the first quarter 2020 was $274.1 million or $1.35 per common diluted share compared to 280.3 million or $1.31 cents per diluted common share in the.

Year ago core.

Participating in this morning's conference call, our Unum, <unk>, President and CEO, Rick Mckenney, Chief Financial Officer, Steve Zabel, and Chief operating Officer, Mike Simons 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.

Correct.

Thank you Tom and good morning.

As we talk to you today, we find ourselves an unprecedented times, we have the backdrop of a good quarter. While we are seeing the emergence of the coven 19 pandemic and the resulting dramatic contraction of the economy.

The current environment is created multiple uncertainties for the world.

As we work through it reinforces the importance of units corporate purpose, helping the working world thrive throughout life's moments.

While we are one of those life's moments I'm very confident to unum team is fulfilling our purpose in these times and providing excellent service to people at time of need.

It is a powerful differentiator for our company, we have built a reputation of providing best in class service, which only grows and importance in challenging times like these I cannot be more proud of the way. Our teams have responded and are performing on behalf of our customers.

We think we are still in the early stages of the lifecycle as pandemic and we don't yet have the full picture of how the expected recovery will unfold.

Scenario planning, including stress testing of our portfolio is part of our standard practices and ensures we have a roadmap in place to take decisive action.

We have a strong financial position the seasoned management team, which has successfully manage through stress scenarios in the past and a business where the resilience to weather the storm and emerged stronger on the other side.

We have much to cover worthy of this morning. In addition to first quarter results will provide an update on the impact Coven 19 is having on our business. Both in terms of what we saw in the first quarter and how we see potential impacts playing out throughout the year.

This provides the basis for how we're positioning ourselves to manage through a variety of scenarios will also cover in detail. The May Bureau of insurance requirements to increase statutory reserves that are long term care blog over the next several years, our move that will build additional margin over our best estimate assumptions and should address some of the markets uncertainty related to this.

Good luck.

So let me begin by discussing the health of our franchise in the important role that we play.

We are focused on delivering social value with the financial protection products and services, we provide to employers and their employees in the time of need.

Quality providers of employee benefits play a vital role at times like this providing financial benefits to millions of families as difficult times in their lives.

The competitive Differentiators, we have outlined for you in the past are more important than ever today and will remain important as we emerge from this crisis.

These advantages include our excellent reputation with employee benefit decision makers superior and consistent distribution reach technology connections with digital capabilities from the front end front end origination of new business to the servicing and claims and leaves a disciplined risk management approach to approach to price.

And claims and our people and culture, which have proven time and again to demonstrate unwavering customer focus.

In addition, given our leadership role employee benefits, our business is well diversified by geography industry and Capesize.

These advantages are backed by our strong balance sheet, our capital position and liquidity, which will cover more detailed this morning.

All this translates to strong core businesses with a track record of generating capital. We will continue to build on these advantages by investing in the service capabilities digital enhancements and organizational structure, which underscore our commitment to our customers.

Turning to the real time view of our business. The cobot 19 pandemic has necessitated many changes to our workflows and processes over the past several weeks.

Our emergency preparedness plans have served as well and we successfully made the transition to working remotely from was 99% of our people within the first week of instituting a work from home policy I.

Im proud of the commitment professionalism and resilience of our employees, who have maintained consistent service levels for our customers and the can do attitude of our teams throughout this transition has been great to see.

As other companies, who our customers have gone home and adjusted their workforce. One implication is that generating top line growth will be challenges.

While the depth and duration of the pandemic is still not yet known we are planning for multiple scenarios dry insights from previous stress situations, including the 2000 2000 2008 to 2009 recession.

As part of our ongoing risk management planning process, we have analyzed the potential impacts that a pandemic and resulting economic slowdown could have on our business.

As an employee benefits and voluntary benefits provider the level of employment and wages are the building blocks on which we provide protections and in turn generate premium levels.

As a leader for many years and employee benefits, we have a well diversified business profile.

While we expect pressure from declining GDP and rising unemployment these headwinds our buffered by the fact that we have limited exposure to part time workers and lower exposure to highly impacted sectors like discretionary retail oil and gas and restaurants and entertainment.

One additional headwind to near term growth comes from a difficulty in getting in front of benefits decision makers and their ability to engage when most businesses are at home.

From a risk perspective trends in new claim activity can vary by product line.

With more pressure expected in short term disability and lead management and lower levels of utilization in dental and vision.

Sadly in this environment, we also need to think of elevated mortality rates essentially negative for group life, depending on impacted age ranges contrasted by claims cessation in long term care and closed block disability.

From what we see an external data, even though younger people do not do get sick. They generally recover a much greater rate.

This environment could also affect claim processing activity were disruptions can occur as customer navigate the current state of the healthcare systems.

This potentially impacts the flow of documentation required to file new claims to gather support for people to return to work and to receive the level of care required for some claim payments.

Given the overall dynamics, we have moved quickly to reallocate our resources people to areas, we expect higher volumes such a short term disability claims and leave management, while maintaining excellent service.

The last area to explore the impact from a rapidly growing rapidly slowing economy and actions of the federal government particular to how the impact our investment portfolio and overall the declining interest rates, we have seen continued to pressure portfolio yields and evaluation to discount rates.

This latest moved down a rate impact segments of our business in varying ways.

We have historically managed our group blocks over time with our pricing strategies, although our immediate focus is to work with customers to retain and through the sharp downturn overtime, we will return to our approach of managing interest rates through pricing.

Additionally, we actively manage and monitor the profile of our investment portfolio, which is comprised largely of corporate credit.

Over many years and different credit cycles, we have consistently shown favorable default rates compared to industry averages and have maintained a generally consistent overall credit rating.

There are pressures on many corporate issuers at the moment, but as we evaluate name by name we see the portfolio continuing to perform in this environment.

Based on these trends our expectation is that the second quarter could be challenging.

With most stay at home orders remaining in place through May.

As these orders lift we expect the environment to begin to slowly normalize. However, we simply do not know today when that will occur or how long full recovery will take.

Steve will discuss with you our view of how always influences will impact our earnings and capital plan over the course of the year.

Given the volatility all around US we are not continuing to provide our outlook for the year, but today, we will give you more color on the trends that we're seeing in recent weeks that we could see going forward as well, which should help give you a sense of how we see the year playing out.

Bringing back to the first quarter results were solid in generally consistent with our overall expectations. We did see some pressure from the current environment later in the quarter, which will likely continue into the second quarter, we'll highlight those trends throughout our discussion this morning.

For the first quarter after tax adjusted operating earnings per share was $1.35 cents compared to $1.31 cents in the year ago quarter, an increase of 3%. These results were driven by an increase in before tax adjusted operating income of almost 4% from unum, us, which offset slightly lower even colonial and weaker results in Unum International.

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Additionally, and on a positive note after tax statutory adjusted operating earnings and important driver of cash flow were favorable at $326 million, an increase of 46% over the year ago quarter.

Our results also reflect after tax net realized investment losses from sales and credit losses of $44 million, which Steve will cover in greater detail.

Looking at premiums premiums, while we did experience year over year growth in premium income in our core business segments of 2.5% in the first quarter that as a slowdown in the pace, we had seen in previous quarters, which embedded in the 4% to 5% range.

With the exception of Unum UK, we saw marginal declines in premium persistency as well as lower sales trends in our core businesses.

Sales trends were clearly more challenges in the month in March and we anticipate this continuing into the second quarter.

Our anticipation is that persistency going forward will be stable on a case basis in traditional group, but challenging our voluntary benefits lines in smaller case business.

Given all of this we anticipate a full year premium income to be relatively flat to 2019.

Benefit ratios generally speaking more in line this quarter with a year ago quarter, we saw favorable year over year results across the Unum us product profile portfolio, while colonial had a slight increase in his benefit ratio and results in the international segment were more challenged.

Results and closed block long term care were very favorable in the quarter with an interest adjusted loss ratio of 81% for the first quarter well below our expected range of 85% to 90% primarily driven by mortality. Our disabled lives. This takes our loss ratio to 86.2% over the past four quarters.

Our capital metrics held in very well for the first quarter with the RBC ratio in our U.S traditional life insurance companies at 365% in cash at our holding companies of just over $1 billion. Both in excess of our targets. We expect to continue to meet our capital targets throughout the year and we will not repurchase shares in 2000.

20, given the current environment.

One other important event this quarter as the announcement at the main Bureau of insurance is requiring us to establish additional statutory reserves for our long term care block.

This is the result of mains financial exam of unit life of America, which includes a review of our long term care reserves by mains external consulting actuaries.

We respectfully disagree with man's inclusion and see these additional statutory reserves further increasing margin over our best estimate assumptions.

The added reserves, we began at the end of this year will be added each year for seven years. The amount for 2020 is estimated buyer actuaries to be within a range of 200 million to 251, Steve will touch on more of the details.

We plan to fund these additional reserves or existing cash flows. In addition, our businesses capital generation has provided substantial financial flexibility to the company. We believe that for 2020, we will continue to maintain our primary capital metrics inline with our targets and we anticipate maintaining our current shareholder dividends.

As we step back from the pandemic and look to the future the products and services. We provide have never been more important to employers employees and their families. While today's environment is challenging in evolving rapidly our business model has successfully navigated crises in the past and I'm confident it will do so again.

While growth rates for premium income and earnings may be impacted a near term, we intend to act decisively and continue to invest in our operations and expand into new areas, where we can best leverage our expertise and capabilities to capture growth opportunities as those opportunities reemerge.

At the same time, we'll remain disciplined on where and how we spend our money being reflective of how the current environment emerges.

Prior to the Coca 19 pandemic operate with Mike Simon's New role as Chief operating Officer, we had already begun work to transform our business model to ensure the proper alignment with the evolving needs of the market as well as changes in our own business.

We see this period of time as an opportunity to advance that transformation and continue to look for improvements for our business model to better serve our customers.

When we think about the long term care closed block. We also see the announcement, we are making today addressing concerns on our LTC business for the long term and doing so in a measured way.

We have a highly resilient franchise with tremendous core businesses that has successfully grown and maintain consistently strong margins over the last decade.

We see ourselves getting through this period of time with the reinforce purpose of high quality high quality highly connected employee benefits provider I'll now ask Steve to cover the detailed in the first quarter results Steve Great. Thank you Rick and good morning, everyone I want to cover first quarter results in more detail and while doing so give you some insights into what impacts were seen from the current bill.

In this environment and how that might play out in the second quarter and deeper into 2020 I'll also discuss what trends we're seeing in the investment portfolio in the impacts we see it having on our capital position and then finally I'll provide more details on the main LTC Reserve review first let me say that I feel good about results reported in the first quarter not only work.

Gulf solid, but we're very pleased with the operational performance and productivity of our employees and what has been a challenging environment over 99% of our people been working from home since the middle of March and the adjustment has been very submitted with customer service levels and operate inefficiency remaining quite good.

First looking at Unum us premium growth for the first quarter was 1.7% year over year, but did show a floating rate of growth from previous quarters. The current sales environment as challenging as evidenced by the 15% decline in sales we had in the first quarter with this slowdown in March continuing into April persistency for Unum Us was generally.

The lower year over year with more crusher and voluntary benefits and the small case business.

Persistency in the mid larger Keith block has not been material impacted these will clearly be watch area of going forward claims trends were generally good at inline with expectations with improvement in the group disability benefit ratio to 73.2% from 74.7% a year ago, driven by favorable recoveries and group.

Ltd.

This offset higher group STD claims, which increased significantly in March met APAC codes. So far in April keep in mind that FTD claims are generally smaller in dollar amount as they cover claim periods of two to three weeks on average we saw favorable results in group life as well as supplemental and voluntary although we did see.

Pressure on premium growth compared to previous quarters overall, it was a good quarter for Unum US was strong with continued strong margins.

And the colonial life segment premium in income increased 3.7%, which is lower than the growth rates. We've seen in the past. This is not surprising as we have seen pressure on sales and persistency trends, which have continued through April.

The benefit ratio was slightly higher at 52.4% due to higher claims from the accident sickness and disability product lines. Overall, it was a solid quarter from an earnings perspective, but we're likely to see continued pressure on topline growth with lower sales and persistency, we don't expect to see a material impact claims trends from either.

Their co bid or the recession, and therefore feel that benefit ratios will continue to be relatively stable for colonial.

Results in our international segment were weaker this quarter relative to last year's result in our expectations.

Bringing income finished the quarter with an increase of 6.9% with positive sales and persistency trends in the UK segment benefit ratio than the UK. However were challenged with higher claims a group critical illness and weaker results in group disability as it was more difficult to get necessary documentation answer.

Vacation for claim terminations, given the disruption in our customers workplaces heavy overburden healthcare system in the UK for Kobin 19.

We will be watching these trends as it pertains to all of our product lines in the coming months.

Results for our Poland operation were very good with strong year over year increase in adjusted operating income.

Well one is a small contributor to corporate results, but we are quite quite pleased with this performance.

Within the closed block LTM very strong quarter, the interest adjusted loss ratio of 81% of the lowest we reported since reserve update in the third quarter of 2018.

For the past four quarters, the benefit ratio is 86.2% well within the 85% to 90% range. We expect over the long term with claim trends are tracking in line with our revised assumptions.

The favorable results in the quarter were primarily driven by higher mortality experience on the disabled lives, which was really spread fairly evenly throughout the quarter and not just concentrated in March new claim incidence was inline with our expectations this quarter.

Net investment income for long term care was negatively impacted by negative market value adjustments of approximately $17 million on two perpetual preferred securities that are mark to market quarterly and reported through net investment income not as a part of realized investment gains or losses.

Additionally, miscellaneous investment income was higher than a year ago quarter, and just slightly higher than average for the closed block overall.

I should note that most of our alternative investments are allocated to the LTC investment portfolio, we receive financial information on investments in partnerships, usually on a one quarter lag basis and expect to recognize losses of approximately $40 million in the second quarter. As we received the financial statements as of March 31 for these partnerships.

Yes. This compares to a positive first quarter Mark of approximately 10 million.

Also on long term care, we had very good quarter for rate increase approvals on enforce business and now are slightly over 60% to our ultimate goal of $1.4 billion. So far we have not seen a slowdown in the regulatory review process for our request due to covert 19.

The closed block this that closed disability block produce and 84.5% interest adjusted benefit ratio compared to 80.1% in the year ago quarter, driven by the impact of a onetime reinsurance cost related to a small block of policies, which also negatively impacted premium income.

Overall, we feel good with what we saw in the first quarter with relatively minor impacts from cobot related claims.

You asked FCD claims were higher in the quarter with some evidence of Cove it but in April we have seen that trend plateau.

Unum US Ltd claim trends have not exhibited much impact from coded and were favorable with good continued recovery trend more than offsetting a slight increase initiatives.

Overall mortality trends were generally favorable for the company with stable experience in Unum Us group life and unusually elevated trends in the LTC block, which have continued through April.

We expect to the larger watch area for us over the impacts to sale the persistency going forward and how that will impact future premium trends as Rick indicated we are suspending our outlook for 2020, which previously called for growth of 4% to 7% in adjusted operating income per share we feel it's appropriate to hold back at this time as we assess the impact and during.

One of economic contraction as I said, we believe that coat the impact of cobot will be much less about the claims related activity will experience and more about the impact from the economy and significant increase in unemployment.

As a result, we now expect premium income growth to be approximately flat in 2020 compared to last year.

We believe the flexibility and agility will be critical navigating the next several months. Accordingly, we are closely watching several dynamics that will impact such parts of our business itself persistency the flow of information, we need to profits new claims and generate claim recoveries and impact for the investment portfolio.

This information will help us decide what actions to take.

I'd like to now turning to our investment portfolio in the trends we experienced in the first quarter, specifically I'll outline what we experienced with ratings migrations and defaulted impairments within the portfolio and the resulting impact on capital in the first quarter, we had $336 million a downgrade that investment grade securities to high yield which can.

Attributed to the increase in our holdings of high yield securities from 7.5% of our fixed maturity securities at year end, 2019% to 8.2% at the end of the first quarter on an amortized cost basis on a fair value basis exposure was stable at 6.6% for the portfolio of the portfolio.

This increase create an approximately $14 million increase to required capital, which impacted the first quarter RBC ratio for traditional use life insurance companies by approximately two points, reflecting in part the diversity.

Patients benefit we have on such downgrades. In addition, we reported $44.4 million of after tax net realized investment losses from sales and credit losses in the quarter.

For the month of April we have seen an additional $119 million of downgrades of investment grade securities to high yield. It appears that the fed bazooka secondary market corporate credit facility program is benefiting the credit markets producing a tightening in spreads in many of these crossover securities.

This program is providing needed liquidity is a high yield market and open the market for refinancing opportunities for many of these companies in the upper tier of the market.

Overall credit market conditions in April have improved from March those significant strain on corporate America remains to be worked through and conditions remain difficult.

In our scenario analysis for 2020, we are assuming a base case assumption for defaults and an impairment of $85 million with downgrade that investment grade securities to below investment grade of $1.6 billion, including what we have experienced so far this year.

With this impact on the investment portfolio, we still expect to continue to meet our capital metric targets for RBC and holding company liquidity throughout 2020.

We have analyzed our portfolio of thoroughly and understand our exposure as well, while some investors focused on our exposure to high yield bonds I'd remind you that our exposures to other risk asset classes, such as equities commercial mortgage loans, the yellows RMBS and many structured asset class categories are below peer company averages.

Additionally, our fixed income exposure to consumer cyclical, which have been stress due to covert related shutdown is approximately 3% of the portfolio.

Within the sector, we have no exposure to liege leisure or lodging.

Our holdings and other stress industries, such as airlines is minimal at less than one quarter of 1% of the portfolio and we did not have exposure to hotels or cruise lines.

The energy exposure of the portfolio at quarter end was 8.2% of total fixed maturity securities and approximately 90% of these holdings were investment grade.

Half of our holdings, our midstream or pipeline companies that are not as correlated the price of oil.

18% of our holdings are in the large integrated companies and only 2% of our holdings are in oilfield services companies that tend to be most impacted by low oil prices.

Additional detail in our energy Holdings is included in our statistical supplement and our supplemental filing.

We have a robust research process and review our portfolio on a bottoms up individual credit basis, we believe our portfolio as well position and evaluate our names based on their credit fundamentals, we believe our portfolio will perform well compared to market trends as it did during the energy downturn in 2015.

Some interesting insights into our portfolio can be taken from our research piece. The Fitch ratings published in mid April outlining their bonds of top concern list their tier one list of bond the highest concern out like outlined 45 name of which we held only three in our portfolio totaling $49 million.

All of these three up all of these three securities or on our current watch list and two are written down in the first quarter.

And there are two tier two list, which included an additional 54 name we held positions and only three names with an aggregate exposure of approximately $70 million two of these names or on our watch list.

This limited exposure to these heightened risk named was outlined by Fitch speaks to the quality of our research and diligence in making long term fixed income investment decisions.

Returning to our capital position, we finished the first quarter with a risk based capital ratio for our traditional us insurance companies at 365% above the 350% targeted level and holding company cash in just about $1 billion up from $863 million at year end 2019, we target maintaining.

Holding company cash at greater than one times, our fix obligations, which is approximately $400 million.

I remind you that $400 million of the current cash position is earmarked for the September maturity of a similar amount and then the next debt maturity is in 2024.

In addition important driver of our capital position of after tax statutory operating earnings in our traditional us insurance companies, which were quite strong in the first quarter totaling $326.1 million compared to $223.1 million in the year ago quarter.

Now, let me turn to the main Euromoney insurances.

Fine financial examination that includes the target examination of our Unum America LTC reserves have you found our release main has concluded based on their consulting actuaries opinion that unum Americas LTC statutory reserves are deficient by $2.1 billion as of December 31, 2018.

Based on our comprehensive LTC assumption review in late 2018 in our subsequent experience we respectfully disagree with me this conclusion.

However, given the position of a regulator we have reached reached a resolution with Maine to establish an additional $2.1 billion to our statutory reserves, which main has allowed us to recognize over a seven year period.

The strengthening will be accomplished by our actuaries incorporating explicitly agreed upon margins into our existing assumptions for annual statutory reserve adequacy testing, the resulting increase in statutory reserves will be primarily driven by adding more conservatism to assumptions related to three areas those being interest rates.

Length of morbidity improvement and mortality related assumptions for older Ages, where experienced data is less credible.

Where interest rates, we are lowering the discount rate by approximately 50 basis points, reflecting a reduced expectations for new money yields.

We anticipate this assumption change will account for roughly half of the reserve increase.

For morbidity improvement, we shorten the period of improvement from 20 years to 10 years and reflect the wearing off at older Ages. We estimate this change will account for approximately $400 million of additional reserves.

Finally, the majority of the remaining reserve increase reflects a more conservative view on assumptions related to mortality in very old ages on both our active and disabled lives. This is primarily for ages over 90, where experiences less credible and actual outcomes will not be known for many years.

By addressing these assumptions in this way that is by this amount over an extended period of time, we believe will be addressing many of the markets primarily primary questions related to this block. In addition, I think it is worth noting that during examination. It was clear that unum and the main bureau of insurance shared similar views on a number of reserve weighted.

It's one such area agreement with a statutory reserves are expected to peak at approximately the same level and that our new funding pattern will get us to that level more quickly.

There is no impact to our current GAAP reserve assumptions at this time, though we will continue to review all of our assumptions on our normal annual cadence later this year through our reserve adequacy testing process.

We have done extensive modeling to look at our ability to fund. These additional reserves, we believe that even under a stress scenario brought on by the current economic downturn that we'll be able to fund it with our existing cash flows.

Our modeling suggests that we can maintain the current shareholder dividend and maintain the targeted capital metrics of an RBC ratio above 350% and maintain holding company cash levels of at least onetime six obligation.

This modeling includes funding the extra LTC costs absorbing a higher level of potential investment impairments and reflecting a recessionary impacts on our operating results.

Finally, I'd also highlight that book value per common share excluding AOCI.

As of March 31, 2020 was $49 in 28 cents, an increase of 9.4% over the year ago quarter.

Now I'll turn the call back to Rick for his closing comments and look forward to your questions.

Thanks, Dave in closing, let me leave you with these thoughts.

First I would highlight the resilience of our franchise through numerous economic and business cycles. Our core businesses have proven to be solid growth generators able to maintain strong margins and generate significant amounts of capital.

Second we have a well develop roadmap for managing through today's environment with such proven capabilities as interest rate management in our core business lines, our ability to manage the investment portfolio through periods of stress the consistency of our capital position and our ability to manage vital aspects of our business such as claims management underwriting and the management.

Enforced block through disciplined sales and renewals.

Third over the past year and a half our LTC block has been thoroughly examined by several outside consulting actuaries and state regulators. The reserve actions, we announced today, we will we believe enable us to address many of the market's uncertainties in a measured way over an extended period of time.

And finally over the past several decades is built and maintain excellent brands and a strong reputation in the benefits marketplace, which positions us well when the economy recovers.

The team is here to respond to your question. So I'll ask Dennis to begin the question answer session. So that.

And if you ask your question. Please take note.

Thank you.

Thank you are using speakerphone. Please make sure that action is turned option.

Please.

My question.

Right.

And again.

Good question.

We'll take our first question from Ryan Krueger with KBW.

Hi, some money.

Thank you.

Give us I guess, maybe a more complete picture.

What you'd expect for LTC capital uses I guess going forward over the next several years when you take into account fee that new main reserve additions that also including New York and if there's any additional amount in the captive.

Yes, yes, great. Thanks, Ryan Yes. So we've stayed in the past when we think about capital contributions for LTC that does go down about fair when and first Unum, we mentioned in the past over the last couple of years those have been around 400 million.

And we.

Herb increase would be between two and 250 million in 2020 at net taken accounts that theres. Some offsetting dynamics it will be going on in fairwind around the actual.

Oh statutory earnings performance of that.

The LTC portfolio portfolio had a pretty good first quarter on a statutory basis because of the level of mortality. We saw there that theres also a tax benefit to those reserves in fairwind.

I'd tell you know that pretty it's pretty good number for 2020 as being additive to the guidance again, given the past.

Thanks.

And can you give any more color on it gets how this all came about with with maintenance a fairly unusual unusual step to occur Adam.

Our financial examinations.

Anymore color on how to have it transpired in like how would how involved the overall anyway.

And with more Okay main specific.

Yes. So so this was part of a routine financial exam.

We are examined by all of our regulators on a three to five year kind of.

Rotating basis.

As you can imagine a focus of the exam was around our long term care statutory reserves on so there was a lot of focus placed on that main brought in their own outside actuarial consultant to perform the exam.

And then they reach their conclusions.

Those conclusions were agreed to buy out the other regulators.

In the country. So we view this as being a final resolution for all states not just main as it relates to our Unum America reserves.

Got it thank you.

That's right. Thanks.

And we'll take our next question from Jimmy Bhullar with JP Morgan.

Hi, good run.

Question first on how regulators are reacting to request for price increases in in long term care, given sort of the weaker in economy and rising unemployment.

And then add another with us.

Yes, Jimmy this is Steve I'll take that one we feel really good about our rate increase strategy and the success. We've had there and I mentioned in my comments are up to 60% against our GPV expectation of $1.4 billion.

That continued in the first quarter on we had very strong first quarter approval of level and what we've seen so far in the second quarter is really no slowdown we've seen really good interaction with our state regulators, they're open for business.

Theres a lot of back and forth communication and so I would say to date, we have not seen a material impact on any of our interactions with the states as it relates to our rate increase programs. So we're optimistic going forward.

And then if you think about your sales.

They were down.

I think 15% in the us business, 9% and colonial I'm, assuming most of that happened in March.

And if that is the case should we assume a significantly larger decline for twoq.

Michael I think that sure yes Thanksgiving question.

Thank you read on it is accurate. So if we took a look at where we were up through the first two month for the quarter across across most of our lines of business, particularly here in the units are tracking.

Roughly inline with expectations and then as we went through March and certainly in the latter half of margin looking to close out that quarter, which is pretty important from a sales point of view.

South precipitous.

Decline, there and I'd say as we look through April and continued to see significant pressure on proposal activity coming in and feeling and most acutely in the small business marketing effort.

That's probably the reason as well as voluntary benefits, where a lot of our engagement is direct.

With the employee and obviously with many many businesses.

Following workers closing and even to remote that proved more problematic I'd say that declines plateaued as we went through.

April has actually started this slowly climb back as they give you a little bit of ascent code activity in April has kind of down in that 30% range again, most acutely in the small end of the market, which will drive a lot of that volume large case activity up and most by spent in line with historical norms.

And then a lot of connectivity broadly benefits from the Sir.

Yes, I think persistency at the case level does tend to does tend to benefit is less movements between carriers. The pressure obviously comes at the individual employee level and so for lines like a voluntary benefit line, we're going to see some pressure here in the in the second and third quarter.

And then just lastly on the main contribution should we assume that in future periods. It will be in the roughly.

300 million dollar range annually or is it.

More likely to fluctuate.

Yes, I think thats, probably a good level just for planning will go through an annual process.

We will roll forward the inventory of the block will look at what the experience was for the block will apply these assumptions to our premium deficiency reserve testing.

But for planning purposes that probably not a bad place to be.

Okay. Thank you.

And our next question will come from Mark Hughes.

Yes, yes. Thank you good morning.

How do we think about that capital management, we think about the 2021 with these incremental contributions in Maine.

How much of your former of kind of pace can you get back to.

Yes, when we look forward to 2021, obviously theres a lot of variables that will play into that.

As we mentioned we.

We did our stress testing our capital plan for this year, incorporating what we thought impairments were going to be on the portfolio as well as credit downgrades opt to see how that plays out for 2020.

Also overall so we'll we'll have we'll have to look at how that plays out for the remainder of 2020, we did announce that were suspended share buybacks for this year that will provide some capital and then the other thing to think about going forward is we've been running about 400 million of capital contributions over last couple of.

<unk>.

Down to those subsidiaries that will start to grade down closer to 200 million X. The agreement that we have now with main so going for that that'll help provide a little bit of leeway there as well as we go forward well upset 2020 played out and then we'll assess at that point.

And then on the benefit ratio in them you keep the F.T.D.

Queen said, good plateaued and into April could you talk about what you might expect on the benefit ratio in the near term here and then also your.

Experience in the last recession, or you know how them by might play out over time.

Especially Mar Mike.

Yeah sure. So it was good first quarter from a group disability point of view.

You got it right L.L.C.D. recovery performance was strong and that more than offset some pressure on short term disability and we did see the fully insured short term disability claims come in Kobe related at an increased Hey said he ended a quarter and then the first couple of weeks in April as.

I think Steve had earlier in the call. We did actually see those <unk> short term disability claims plateau here in April and give you a sense. Yeah. Those are usually hang out you know a total benefit of I'm out in the tape 650 $750 per claim range. So it's really about just getting people some immediate.

Dollars in their pockets and you feel good actually about the ability to the kind of managed within the group disability Las ratios. We've been talking about you know one keys, probably a little bit a favorable because some of those L.T.D. recoveries, but.

You know.

You know being there and that 70 374 kind of range feels at this point at least reasonable couple of watch areas. You highlighted one of them that would be the economic climate. So you know we've looked closely at the last three recessions actually.

And what we found generally is that there is there is a correlation disability incidents for social security in particular, the private industry actually has a much more muted.

Correlation to unemployment you know usually with more than half your lag and then I'd say you don't spend pretty successful as having even less of a correlation to the point, where it's almost because none after the financial crisis now that doesn't suggest that there'll be none in the in the economic challenge that we're headed into right.

Now, but you know reasons at least for optimism you think about pretty pretty disciplined underwriting approach in and out benefits management approach. The second thing we'll watch pretty closely is just the more short term impact.

A lot of health care very appropriately focused on the response to the crisis. So.

Mentioned the home bed problems in the U.K. getting just getting to the information that you need to adjudicate and to get people back to work at this point or managing through that pretty well here in the U.S., but we'll we'll we we'll watch that over the next couple of months as well.

<unk>.

I'm from Alex got at Goldman Sachs.

Hi, good morning.

First question I had reached just on a 2.1 going if you could commit showed a little more light on the interest rate piece of it.

You know I know is mentioned to do is out of your in 18 I'm sure lower rates has been contemplated to some degree but rates are down 200 basis points. It to tenure level since since I was just interested or like how how it works in terms of.

The rate assumption is it started with the current Spock rating gradient I'll do some level any any 30, you can give there would be helpful.

Yep Yep, Alex is the Steve all all dressed up for it yeah. So it's interesting that the effective date the financial statement affected examination was 12 31 18.

Just because it's kind of the time and it when they kicked off the exam, but yeah. We brought forward kind of how we thought about assumptions two more current levels of both both experience in the interest rate than just the market environment. So probably the best way to think about the interest rate assumption is first of all there there's no kind of.

Regression to a longer term rate, it's more of a flat rate forever. That's built into the new money assumption right now the other thing to think about is it's based more on short term historical averages for the treasury.

And so you know it would bring into kind of the market environment at the end of 2019 now where we are now you know obviously is a little bit lower than that but it did roll forward. The treasury rate environment to the end of 19, and then a bills then just what our credit spreads expecting credit spreads would be for the types of investments.

We invest in based on our our portfolio investment strategy. So <unk>. So the way to think about it somewhere in the hype fours for kind of it all in new money.

Field.

Yeah. It it Okay and then the fall of course, you may have ones that could just help us walk through how to think about the statutory capital generation and then sort of services and uses I I think in the past you talked about.

Just like 1.1 to 1.2.

Data earnings and I, just want to think through see God, you've got to the 400.

For the time being fairway Fairwind and for T.U.N., you've got some some new.

To consider.

You don't hear anything else, we should be thinking about in terms of detonating coverage and you know what pouring. It if you do started to cry to <unk>.

<unk> started to see the credit environment deteriorating would you take a harder look at what you're doing only to common dividend.

Yeah, no great. So yeah, so I'll try to walk through all all those pieces. So yeah. Our statutory capital generation you know we have about a billion dollars right now I've kind of traditional life company income we pull off of another you know hundred to 200 million of cash flows between investment management fees.

In other things from the operating companies up to the holding company yeah, what we've seen so far this year as we had a really good first quarter or statutory earnings quarter. We are a ride around 330 million in essence, what that did that help pay for the impairments that we had on a statutory basis.

If you look at our income after the impact of impairments in the first quarter was about 250, so really weren't right online to generate a billion dollars of earnings. So we kind of feel like we've paid in the first quarter for a lot of the impairment to expect to see in our portfolio then yeah. Your role that forward to the end of the year.

At the end of the year, we'll look at contributions down into sub as we were expecting somewhere in that 400 million dollar level. This the main exam resolution will be incremental to that we we talked about the range of the river reserve increase that'll be you know somewhat less just because of the impacts of taxes and other other things.

You know and Fairwind that the one thing to that I might node is it did become official recently that the any I see is pushed off the implementation of their c. one risk factor changes. So that that does also give US you know give us some cushion against what our original capital forecast was and then you layer n. suspending shirt.

Buybacks and so that generates another 400 million so what we actually feel pretty good knowing what we know now we're pretty competent and being able to hit her capital targets by the end of the year building in what we you know expect for downgrade that I noted that we have about $1.3 billion, a downgrades built into that capital plan and we we.

See some of that and the first quarter, we've seen a little bit more in April I noted in my my comments, but we're planning for quite a bit more and the the increase in response capital requirements that the that that one too.

Thank you.

Yeah.

Oh, Hi next.

I'm from Eric.

This research.

High. Thank you do you mind going into a bit more detail on your outlook for premiums across the different business lines. Maybe also talk about how the outlook could get for it gets in this recession from prior event given that you have more <unk> benefits, maybe also what I'm assumption you're using for unemployed.

Mm.

So I think that might yeah sure I, maybe I'll start a little they give you an overview of what the group insurance mine's look like you're in the U.S. and then to models on the phone. It can talk a little less a voluntary and Peter if you want it international very quickly and I'd say, we hit it a little bit at the beginning of the call but.

I would say you know premiums it's going to be pressured at the individual member level. Most acutely in the small and have a market here and in the voluntary lines I think when we look at that and we look at muted sales, particularly here in the first half.

A year, we would sort of be looking at roughly flatish kind of premiums number versus you know that got it made for lower single dig. It does your growth that would have otherwise Ah Ben anticipating.

The good news for US is that we we tend to be overweight sectors of the U.S. economy that are less less economically sensitive. So he took things like retail travel leisure, which might be 20% of employment here in the U.S.

For our book a business that's going to be about eight per cent of our total exposure says we work our way through this.

Through this downturn, we will be the impact on the <unk> a bit more muted.

Tim you Wanna talk a little bit about voluntary <unk>.

Sure Yeah. Our models follow most of the economic models that we're seeing where the second correspond to be the most challenged quarter for growth and then Ah recovery beginning in the third quarter and building.

The balance of the year, we are definitely seeing pressure from a sales and <unk> perspective for P.B., both at colonial lights, and then you'd.

A couple of bright spots, though this environment you'd mentioned unemployment and as we see uninformed, increasing we are seeing actual improvement increases and agent recruiting.

The last three or four years. So we've been busy building a digital tool kit that is enabling many of already kids to continue to be successful even in a very challenging environment. So even though it's challenging there's a few bright spots on the horizon.

<unk>.

Great. Thanks, Yeah, so a U.K. slightly different than the U.S.. So we're seeing a longer lead time in terms of the impact on premium and sales so.

<unk>.

As soon as the three d. reinforced two people devalue all of our benefits. So we're seeing persistency held up well, we're still seeing our ability to get price and rate increases through I'm not pipeline is helping helped the first quarter I don't think it'll help second quarter, we do and.

See the same trends that might contend talked about so smaller business core business sales is good to become quite challenging us again, the second half and we come back on line effectively as as an economy and businesses go back to work so little definitely see some pulled out there, but overall, we still see premium grow driven by that return persistency in the year.

[noise] here, it's going to get for like 4% to 7% is the latest protection kiddie, it's hard to cold exactly but I think you know we feel pretty good about what three minutes ago at the moment, given the alarm or in.

Thank you and then I can just that's one follow up on that even as we look towards 2021.

I think this year people have made their benefits selection. So clear like you lose your job that that would affect.

Kind of premium contributions, but do you expect any changes in kind of election behavior and.

What people may do further benefits going into the future years or into 2021.

Yeah, My daughter, given inside Yeah, I, it's actually a really good and important question and I'll just pick up on a point that can just made that we're seeing across a number of on line to business. So.

I think a re a reality that's emerging out of the current pandemic is increased awareness sensitivity and demand for basic financial protection across the enterprise that's really what we do and so you know you you know where where we are getting in front of folks and increasingly doing that through digital me, but.

Are we are getting in front of folks were seeing.

Good luck continue take up I think that's actually going to play really well for us as we get to the fall, whereas businesses start to reopen people get back into the office and back to work I think they're going to take with them. This this tailwind around that the.

Financial protection.

I I think the other place that we see it is actually at the client alright, the employers and think about the H.R. a person that's navigating the current situation in what we're seeing we actually just did some some outreach proactively through a survey to clients that we're seeing is even for those clients that are needing a furlough workers.

Nearly half of them are going to continue payments on their boss airing benefits at least for the first month or so so thank our clients are also seeing and feeling first and the importance in it so it's going to be a challenging a year no doubt about it over the next couple of quarters, but I think the long term.

The very real one around reinforcing importance to these benefits and I'm optimistic about how the following woman cycle and headed into 2021 I'll take up rates are going to go.

I think it's an important point or too. It's just when you when you think about the overall business balls. So we are withdrawing a an outlook for the year, that's not about our business model. We actually think we'll performed pretty well in this environment given everything it's just the noise in the environment around that so that's telling us that's probably the smart thing to do right now. So I think what you would have heard through the course of today.

<unk>.

This is models so works unsupervised key projections people need those productive protections whether they you know go through a period of time of evaluation same time overall, you know returns in our business or ability to managed through these these periods of time, we we feel pretty good about all bad so I want to make sure you realize that remove of the outlook as much more.

Off the environment than it is about our belief in the ability of our business ball to perform through cycles.

You got to thank you.

Yeah.

Oh.

The next question from Humphrey when he was telling him partners.

Yeah.

Good morning, and some people taking a question, especially interested clarification question <unk> you mentioned that he main regulators like Google skewed in terms of the peak researched but just essentially disagree on the timing or went to reach that it's that one is that right.

Yeah, that's right. So if if you think about well one one key point and all this is when we talk about adjusting our assumptions to create margin. It's in the assumptions that we use for a premium deficiency reserves. So it's not the underlying statutory reserve assumptions and as you might recall you know are.

<unk> grow at a faster rate than our best estimate so those were already planned to grow faster than our best estimate and then peak at a certain point.

With incorporating these new assumptions that mains prescribed to us that that's going to grow at a faster rate, but it does peak at the same place and just peaks several years prior to what we had anticipated in our laid on normal sexual reserve calculation.

That's helpful. And then in terms of D. to Catholic contribution to <unk> like you mentioned that you you'd mentioned the parents. It right. It has been in the 400 million range would be great down to 200 million overtime does this changed kinda how that grading <unk>.

<unk> well, it's so that essentially take longer to get to the 200 million or.

<unk>.

No I mean, if if if he set aside or need to fun. This additional reserve for that pattern would be the same but you can think about probably just layering this on top of that expected pattern.

Done it thank you.

Yep.

Yeah.

And with no further questions.

<unk>.

<unk>.

Great. Thank you Savannah I'd like to take everybody. The thank you for taking the time to join US. This morning, Oh Savannah, No completes our first quarter or 2020 earnings call. Thank you.

And this guy.

Thank you for your participation and you may not.

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