Q2 2020 Unum Group Earnings Call
Good day and welcome to the Union Group second quarter 2020 earnings Conference call.
Today's call is being recorded.
At this time.
I'd like to turn the conference over to Tom White Investor Relations. Please go ahead Sir.
Great. Thank you Jonathan Good morning, everyone and welcome to the second quarter 2020 earnings conference call for Unum.
Our remarks today will include forward looking statements, which are statements that are not of current or historical fact, as a result actual results might differ materially from results suggested by these forward looking statements information concerning factors that could cause results to differ appears in our filings with the securities and Exchange Commission and are located.
It in the sections titled cautionary statement regarding forward looking statements and risk factors in our annual report on form 10-K for the fiscal year ended December 31, 2019, and our subsequent form 10-Q filings are FCC filings can be found any investor section of our website that unit.
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I remind you that the statements in today's call speak only as of today. They are made and we undertake no obligation to publicly update or revise any forward looking statements and a 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 supplement on our website also in the Investor section.
Yesterday afternoon, Unum reported second quarter, 2020, net income of $265.5 million or $1.30 cents per diluted common share compared to $281.2 billion or $1.33 cents per diluted common share in the second quarter of 2019.
Net income for the second quarter of 2020 included net after tax realized investment gains of $25.4 million and an after tax impairment loss of $10 million on the right abuse asset related to one of our operating leases on an office building, we do not plan to continue.
Occupied.
Net income in the second quarter 2019 included a net after tax realized investment losses of $5.7 million. As a reminder, net realized investment gains and losses include changes in the fair value of an embedded derivative in a modified co insurance arrangement, which reached.
Belted in an after tax realized gain of $33.1 million and the second quarter of 2020, and an after tax realized investment losses of $600000 in a year ago quarter.
Therefore, the net after tax realized investment losses from sales and credit losses totaled $7.7 million in the second quarter of 2020. So excluding these items after tax adjusted operating earning income in the second quarter of 2020 was $250.1 million.
Or $1.23 cents per diluted common share compared to $286.9 million or $1.36 cents per diluted common share in a year ago before.
Participating in this morning's conference call, our Unum, <unk>, President and CEO, Rick Mckenney, the Chief Financial Officer, Steve Zabel, and Chief operating Officer, Mike Simons as well as Peter O'donnell, who heads our Unum International business and Tim Arnold who heads our colonial life and voluntary benefits businesses and now I'll turn the call over to Rick.
His opening comments.
Thank you Tom and good day everyone.
I'd like to thank you all for joining us today, our second quarter earnings call.
Despite the many challenges brought on by the covert 19 pandemic, the corresponding sharp economic downturn, and the resulting upheaval and unemployment conditions and workplace environments. We produced solid financial results in the second quarter.
The operating trends, we experienced were generally consistent with the expectations. We discussed in the first quarter. However, the magnitude of the pluses and minuses was different than expected, particularly in with mortality trends will outline these impacts as well as other kobin related impacts on the business in greater detail throughout our commentary today.
Before I give us a discussion of the results I want to express how proud I am the hard work dedication of our teams over these past several months through this difficult time.
Our teams are feeling challenge and uncertainty in their own lives, but their efforts to support our customers communities as well as each other as soon as time has been exceptional.
We remain true to our purpose of helping people thrived throughout life's moments and what we are witnessing today is amplified the need for what we do.
We're also focused on the disciplined execution of our business plans and adapting to our changing world.
We are operating very well in a largely work from home setting with high customer satisfaction and solid productivity.
In this environment, we continued to be well prepared to navigate through a variety of economic scenarios.
The entire set of circumstances, we face today reinforces the need for our core business of providing affordable and accessible financial protection products to individuals and their families through the worksite.
The fragility of many Americans financial ice has never been more obvious and what we're experiencing today.
Focus on delivering great social value remains Paramount.
It ranges from supporting a family it was a loss of a loved ones that helping Americas workers with short term disability. So many other needs created by this pandemic. It is why we are here.
If we turn to the totality of our second quarter financial results. We were pleased with the overall performance this quarter in the wake of the stressful conditions in the business environment.
Adjusted operating earnings per share were $1.23 cents, which is down from the $1.36 cents of the year ago second quarter, but was solid overall, given the headwinds of the market.
We experienced more volatility within our segment results unusual and will walk you through the details throughout our commentary.
Starting with our topline we continued to see growth in premiums were up 1.7% well underlying business origination was more mixed.
When you think of our business grows we think first of customers that are staying with with us because of the value of the protections. We provide this is even more true in the midst of the pandemic.
Persistency levels are holding up well so far this year with only modest impacts currently it is reasonable to expect that persistency will be further pressured in the second half of the year as the effects of lower unemployment lower employment levels flow through our blogs, particularly in our voluntary benefits businesses.
Sales trends showed varying levels of impacts dependent on the distribution model size of customer and product and services.
Unum US total sales declined just under 3% international sales increased just over 1% well colonial life sales declined 43%, reflecting the challenges of face to face sales.
These trends were consistent with our expectations as cases with large companies performed better than smaller businesses and group was performed better than the voluntary lines.
We expect premium income for our core business segments to be flat to a slight increase for full year 2020, after increasing just over 2% in the first half.
From a benefits perspective, clearly mortality impacts are the biggest variable on people's minds.
When the pandemic started it was believed to impact older age is much more severely which meant the belief was that group carriers, such as us would see less claims as the working population skew younger.
In fact, what we saw was a death rates were similar to our overall non cobot age distribution negatively affecting our us group Lifelock and our other life insurance blocks within our voluntary benefits businesses in the UK.
On the other had higher mortality drove significantly higher claim terminations in the long term care block, resulting in the interest adjusted loss ratio of 67%, which is well below historical trends.
We will provide more detail in his comments, but our experience was generally consistent with the trends for mortality as published in National Studies.
Beyond these outsize mortality impacts experience this quarter, we saw several other less severe anomalies in our benefits trends, resulting from the pandemic, which touch every part of the company.
In the UK disability results continued to be challenged by the limitations, we are experiencing and accessing the healthcare system to get the information we need to adjudicate and settle claims and returned claimants to work.
Within Unum us our golf are growing leave management business experienced higher volumes, which drove higher expenses and Deb and profitability in the group disability line.
Our dental businesses on the other has benefited from unusually low utilization rates producing favorable operating income for unum us supplemental and voluntary.
And within the group disability line newly submitted long term disability claims were slightly higher what was strong claim recoveries and favorable short term disability trends, we experienced favorable risk performance in the Unum Us group disability loss ratio.
On our investment portfolio, we saw very dramatic improvement in the credit markets in the second quarter as the fed became heavily involved in bringing new forms of stimulus to the economy and the purchase of debt securities.
Mind with improved oil prices, we saw reduced credit losses, much lower ratings migration is sharply improved net unrealized gain position in our fixed income portfolio relative to the first quarter.
So far we are tracking favorably to the credit scenario, we laid out in the first quarter.
The other half fed actions at a more difficult economy have pushed interest rates to low levels.
So in the world of tightening credit spreads are due in low government rates ongoing pressure its new money yields is creating a challenging environment to put money to work for our team.
When we bring it altogether, we saw excellent statutory earnings generated again this quarter, which has been true for the first half of the year.
Our capital metrics remained solid with RBC at approximately 370% and holding company cash of $1.6 billion.
The results this quarter demonstrates the resilience of the franchise and underscore the disciplined approach, we take to operating the business well, bringing good value to our customers.
No as Steve to cover the details the second quarter results, Steve Great. Thank you rank and good morning, everyone. This morning, I want to cover second quarter results in greater detail with you and while doing so give you some insights into what impacts were seeing from the current business environment and how they could play out in the third quarter. I'll also discuss what trends were seen in the investment portfolio and the.
Impacts, we see it having on our capital position.
To reiterate Ricks comments, we are pleased with the overall results for the second quarter. There was more volatility than we normally see in our segment results, but the fact that overall results remain solid and our statutory results were very good speaks to the balance of our business mix and the focus we have maintained disciplined in all aspects of managing the company.
Looking at the quarter from a high level perspective, I want to start with a summary of what we estimate the kobin 19 and related impacts were on our second quarter results to be clear. These are our best estimates as we do not always know that claim is directly tied to cobot, but this is intended to give you our best approximation of the impacts a break the impacts in the.
Lorries, starting with impacts to claims experience.
We estimate that cobot produced net unfavorable impact to our claims experience so between 12 million and $16 million with the biggest unfavorable impacts occurring within Unum US group life. The overall unum UK results and the close disability block, we did experienced favorable financial impacts and the dental and long term care blocks to go.
I will describe in a moment.
The second category covers impacts to net investment income and the investment portfolio, which we estimate in the range of $24 million to $28 million unfavorable larger items, where the mark on our alternative asset investment portfolio and the valuation of hybrid securities, which I'll detail in the closed block discussion.
The third categories expenses, which relates primarily to higher expenses in our leaves services business driven by iterate higher utilization of those services in all these items produced an unfavorable impact in the high $40 million to $50 million range on it before tax basis for the second quarter.
Although there was an unfavorable impact to sales and persistency is more difficult quantify the current quarter impact on areas.
With that said I'll start my discussion with Unum us adjusted operating income declined 9% to $231.9 million, primarily reflecting adverse mortality impacts from Kobin 19 on the group life business, along with higher expenses in our lead management operation, It's offset favorable benefits experienced in the group disability line and strong.
Earnings growth in the supplemental and voluntary lines of business.
Premium growth for Unum us in the second quarter was 1.2% year over year, which has a slightly lower trend than we've seen in recent quarters. The current sales environment remains challenging declining by 2.9% in total for the segment as we expected we thought better sales results in the large case market for group products with those sales advancing 9.5 per se.
Compared to a decline of 3.6% for sales for market group products using 2000 line lives as a dividing line.
In the large case segment, we continue to experience success selling packaged products with HR connect which is a secure connection between unum and select employer HCM system that automates, many time consuming HR activities.
Persistency in Unum US was generally lower year over year, though we did see a slight increase in voluntary benefits persistency levels and new sales activity will continue to be watch areas as we navigate the volatile employment trends in coming quarters.
Claims trends for Unum us showed a wide range of results in the second quarter, but the benefit ratio for this segment was generally consistent year over year at 68.1% compared to 67.6% in the year ago quarter, reflecting our broad diversification within the employee benefits market.
The group disability line continue to show strong performance, producing an improved benefit ratio of 72.8% in the quarter compared to 74.7% last year driven by strong claim recoveries. This was offset by higher submitted claim incidence. Although the recent trend and paid claims has been more favorable within the supplemental.
A voluntary lines, both the individual disability and voluntary benefit lines showed consistent trends year over year, while the dental and vision line benefited from a sharp decline in utilization due to cobot 19. This push the benefit ratio significantly lower to 36% from 71.6% last year, we are already seen a.
Well they should already seen utilization returned to more normal levels for dental and vision and expense expect the benefit ratio to increase but remain volatile as a pin debit continues to play out.
The lead management business, which is reported within the group disability line experienced significantly higher volumes related to covert 19, driving higher expenses for that line, which negatively impacted earnings.
The group life Canadian de line had a sharp decline and adjusted operating income to $19.4 million in the quarter from 62.7 million a year ago as the benefit ratio increased significantly to 81.8% in the quarter from last year's 72.9% predominantly driven by coven 19 related mortality.
We experienced an increase in the number of paid claims this quarter by approximately 12% or slightly over 900 excess claims along with an increase in the average claim side by approximately 7% in.
In addition at the end of the second quarter, we estimated in additional number of incurred but not reporting cobot claims leading to an increase in the IB in our reserve balance for group life of $7 million.
To put this into perspective, the total impacted the quarter was approximately 1100 excess life claims above our quarterly average, which is slightly less than 1% of the approximately 120000 cobot nine deaths reported by Johns Hopkins and the second quarter.
Our experience track national trends closely throughout the second quarter with higher claims reported from the New York, New Jersey Metro area area early in the quarter and the later skewing more to the south and Midwest in the second half the quarter.
Overall, despite the volatility was a good quarter for Unum US looking ahead third quarter claims trends will likely continue to be volatile as a pandemic continues the likely less than what we experienced this quarter given the recent trend in cobot related mortality. We expect group group life claims to remain elevated in the third quarter and recommend that you follow the mortality.
Data provided by Johns Hopkins to get a sense for how're claims experience may evolve. Finally, we are already seen a return to more normal utilization in the dental block.
The colonial life segment produced very good earnings this quarter with adjusted operating earnings of $90.9 million, an increase of 7.7% over the year ago quarter premium increase in premium income increased 4.2% as persistency held up well offsetting the decline we are seen in new sales activity. This quarter, new sales declined by 40.
3%, reflecting the challenges of selling and enrolling in what has traditionally been a face to face silk environment.
Benefit ratio was slightly lower at 50.7% compared to 51.4% a year ago has improved results in accident sickness and disability and cancer in critical illness, offset the incrementally higher mortality, we experienced in the business.
Overall, it was good earnings quarter for colonial life, but we're likely to see further pressure on top line growth from the pandemic until sales activity recovers, we anticipate some rebound in third quarter sales, though it will continue to remain pressured relative to the year ago quarter. We believe that the investments we've been making in digital capabilities to support growth and.
Improved productivity will benefit benefit us in this environment. We're excited to see increased utilization of these new tools by our agency Force. In addition, we will likely see further pressure on persistency in coming quarters, given the volatility in employment conditions and pressure on small businesses.
Results in our Unum International segment remained weak this quarter with adjusted operating income of $15.1 million compared to $30.7 million a year ago, we continue to have challenges and getting the necessary documentation and certifications claim assessments and terminations given the disruption in our customers workplaces and the overburden health care.
Our system in the UK Suncoke 19, while we did see some improvement at the end of the second quarter. This trend continue to pressure results in the group disability line.
Additionally, like our US group life trends, we experienced higher mortality in the UK group, Lifelock, which represents a little less than 20% of the overall UK business.
Premium income however, did increase in both Unum, UK up 1.9% and unum pulling up 11.1% both in local currency financial results from our our colon operation were very good again this quarter with a strong year over year increase in adjusted operating income.
Looking forward economic conditions in the UK are expected to remain pressured by the coven 19 pandemic the ongoing Brexit negotiations and the low interest rate environment, creating significant headwinds for the UK business business trends in June were more favorable than April and May as we are beginning to see some improvement in the information flow necessary to.
Produce claim recoveries. However, a full recovery maybe slow and is not expected until there is increased confidence that the health aspects of the pandemic are under control and at the economy will rebound.
The closed block segment produced a very good quarter with adjusted operating income, increasing almost 9% to $36.7 million I'll discuss the operating trends of the LTC and close disability block. So just a minute, but first let me walk through some of the factors impacting net investment income, which is an important driver results in this segment.
In total net investment income for the closed block segment declined 8% in the second quarter to $326.3 million as we have discussed with you in the past we allocate most of our alternative investments to this segment as we feel that over time. These investments can generate higher returns, which are important in supporting the LTC line.
Along with these higher potential returns over the long term can come volatility in quarterly investment income that was evident this quarter with a negative market value adjustment on these investments of $31.3 million, reflecting market values at March 31, which are reported on a lag basis to put this in perspective in 2019, we repeat.
Got it average quarterly positive marks at approximately $8 million a quarter. So this was a significant negative variance from historical results with the second quarter recovery in financial markets. We do expect the valuation for many of these investments has also improved and we will be reflected in our third quarter reporting we do not expect however, a full recovery.
During the third quarter, but do expect them to fully recover over time and generate our assumed returns.
Second item to note regarding investment income for the closed block are the marks 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. These are energy related investments and both rebounded strongly in the second quarter with the recovery in oil prices. Therefore, there.
As a positive market value adjustment of $10 million in the second quarter compared to the $17 million negative adjustment in the first quarter.
Aside from these impacts the net investment income the long term Caroline within the closed block had an exceptionally positive quarter.
Second quarter interest adjusted loss ratio dropped to 67%, bringing the rolling four quarters ratio to 81.1% well below the expected range of 85% to 90%. The favorable results were primarily driven by elevated claim mortality, which was approximately 30% higher than average this quarter.
Saudi was not evident this quarter and the active life block, but we continue to closely monitor that experience new claim incidents for LTC was also favorable this quarter driven in part we believe by the hesitancy of many to enter nursing homes or assisted living facilities or receive homecare because of the pandemics.
Given the uncertainty of the timing of future claim filings as a result of the pandemic. We did increase the incurred but not recorded reserve for long term care by an incremental $20 million in the quarter. In addition, we decreased our near term mortality assumption in our best estimate claim reserve. We believe this will take into account potential acceleration of mortality.
And our claim of population.
Looking after the third quarter, we expect mortality in the claimant walk to remain elevated though not at second quarter levels.
Also related LTC, we made further progress this quarter with several new rate increase approvals on enforce business and our 65% of our $1.4 billion reserve assumptions.
The closed this disability block experienced an increase in the interest adjusted loss ratio to 89.5% in the quarter from 81.3% a year ago, driven primarily by higher submitted and for this new claims submissions, which we attribute in part to covert 19 and related to economic impacts were heavy in the early part of the second quarter, but they did return to more new.
Normal levels later in the quarter.
Mortality did not have a meaningful impact on close disability results this quarter.
I'd like to now turn to a discussion of the investment portfolio, which showed a dramatic recovery from the first quarter given the recovery in the financial markets.
A few points to highlight our first net after tax realized investment losses from sales and credit losses declined to $7.7 million in the second quarter from $44.4 million in the first quarter of this year.
Second downgrades of investment grade Securities to high yield told US ahead totaled $193 million for the second quarter compared to $336 million in the first quarter, you'll recall, we previously referenced $119 million downgrades that occurred in April so the activity in May and June declined significantly in the increase.
And second quarter down create grades created a minimal 11 million dollar increase to required capital, which impacted the second quarter RBC ratio by only one point.
And then third the net unrealized gain position on the fixed maturity securities portfolio improved to $7.4 billion in the second quarter from $4.3 billion at the end of the first quarter within that the energy Holdings Holdings, which do totaled 9.2 million or percent of our fixed maturity securities move to a net unrealized gain position.
One of $437 million from a net unrealized loss of $350 million a significant improvement in values due to spread tightening given the recovery in economics in oil prices.
In the first quarter, we outlined investment credit scenario for defaults and downgrades of investment grade Securities to high yield for 2020 that assumed as a base case $85 million of defaults at $1.6 billion of downgrades. We are tracking favourably to this scenario and have refreshed our view of our portfolio on a credit by credit basis, our capital for.
Our cash now includes $70 million of default at $1.3 billion of downgrades in 2020, including what we have already experienced.
We will monitor our investment portfolio and realize there is continued uncertainty in the markets for the remainder of the year, but are optimistic that the portfolio will outperform these planning assumptions even with this scenario, we still expect to meet our capital metric targets for risk based capital and holding company liquidity throughout 2020.
Looking to our capital position, we finished the second quarter in very good shape with the risk based capital ratio for traditional U.S. insurance company that approximately 370%.
Above the 350 targeted level and holding company cash at $1.6 billion.
Target, maintaining holding company cash at greater than one times, our fixed obligations, which is approximately $400 million.
During the second quarter, we issued $500 million of debt and as a reminder, we have a 400 million dollar debt maturity in September beyond this upcoming maturity. The next maturity is not until 2024.
In addition, and important driver of our capital position is after tax statutory operating earnings in our traditional U.S. insurance companies, which were quite strong again in the second quarter totaling $327 million compared to $278 million in the year ago quarter now I'll turn the call back to read for his closing comments and look forward to your questions.
Thank you Steve for that summary of our second quarter I would reiterate that in a very tough environment that the team and the strength of the franchise have responded.
We entered the second half of the year, recognizing the challenges of a pandemic persists, but we have been adapting well and continue to stay focused on serving our customers well.
The team is here to respond to your question. So I'll ask Jonathan to begin the question and answer session.
Thank you.
If you will like to ask a question. Please signal by pressing star one on your telephone keypad.
If you're using a speaker phone. Please make sure. Your mute function is turned off to allow you signaled to reach for equipment.
Again press Star one to ask a question.
Just for just a moment to a lot everyone an opportunity to signal for questions.
Well take our first question from Humphrey Lee with Dowling and partners.
Good morning, and thank you for taking my questions.
First question is really my first question is related to the earnings power for you guys could visibility.
I think Steve you talked about how the high expenses in the quarter for believe management because of activities.
Were to look at it from the trailing 12 month basis.
The earnings is still down 6% year over year, even build the underwriting margin actually having has grown by 12%.
So I understand and lower and deal in the asset level has resulted in lower than investment income, but the growth in underwriting margin more than covered that so I guess is is that at this point.
At least management believes that drag.
Q2, you ask it did look visibility because of the investments or is it something else.
Like what is your expectation for.
At least management business from the earnings contribution perspective, and when do you expect us group disability to be backlog positive growth trajectory.
Okay over a lot in there so we'll try to unpack it a little then it will start with Steve talk a little bit above.
The dynamics of that Mike will talk a little bit more about leave as well, yes. So I'll just say thanks Humphrey I'll just start out by just talking about the benefits experience that we've seen in group disability. When you look at long term disability, we're very happy with performance in the second quarter, Yes, we continue to see very good recovery rates.
We did start to see some increase in our submitted claims but actually have as seen very normalize experience in our paid claims. So we feel pretty good about how that business is performing in the current environment.
As it relates to short term disability. We also feel good about the quarter. We did see an elevation of claims that are kobin related but we did see a decrease in non coded related short term disability claims in the quarter and there they were largely offsetting so overall the earnings outlook look very good I'll kick it over to Mike to talk a little bit about.
Our lead management business and just the dynamics there.
Thanks, Steve appreciate and good morning, Humphrey So the lead management.
Business.
Experienced a.
Pretty significant spike here in the second quarter Colgate related I think about volumes, increasing about 50% in the second quarter over the prior year quarter, and well that did absolutely put additional expense pressure on us as Rick teed up at this is what we are here for and we were able to.
Meet that demand in a very high quality way a couple of points strategically about the leave business stepping back we only sell leave services in combination with insured lines of business and we really think about.
Making sure that it's a sustainable economic relationship across both insured and services and and you look at a mid to high teens are we feel very good about that strategically if it is actually a very good business for us in that it puts us front and center with our HR clientele and with the frontline employee base.
And so that's something that I think is going to bear fruit for us overtime and the last thing is in addition to the volumes. We are investing significantly in terms of technology, and we think about our digital agenda, which is broad at you and on.
This is the number one priority because of the strategic importance and because of how we bundle it with other line. So I think you've correctly identified the expense pressure, but these are.
Thanks moments to be there for our clients and investments I think are going to generate good returns for us over time.
And I understand the synergy between that kind of risk business and the leaf management.
If you worked to look at it in isolation like is it fair to say writing a lease management. This is the cost center and do you expect that to be earnings.
Contributor down the road.
Yes, Thanks, Humphrey I think certainly in the current environment.
We're not collecting fees commensurate with the expense so it's a slight loss.
That's as much due to the incidence and how much we volume we're seeing coming in but our our plans are particularly on the back of those investments to continue to improve the efficiency and as we grow the topline.
This be a contributor.
I think is my set up for this and this is a very important strategic piece to the operation and so we'll continue to invest in it and so you may not see it turned the corner in terms of being a profit generator, but the integrated part of the offering I think is critical as we look to the future.
I guess in terms of these investments for leaf management innings in right now because again like for past several quarters being a drag on earnings growth for us disability. So when short like I guess like when should we start to see that turning a corner.
Yeah, I think it's Mike again, I would say for the balance of the year until we start to see coven infection rates stabilizing come down in the US we're going to continue to see elevated operating expense.
Pressure.
We think over the coming four quarters or so in terms of.
The pace of investment in business, but as Rick said.
Well it maybe a bit lumpy right now in terms of the pace of investment we're going to continue to invest in the business going forward well beyond that.
Got it thank you.
In summary.
Thank you and ladies and gentlemen, once again, if you will I Taski question. Please press one also to ask a follow up question you May also press one.
And if you find that your question has been answered you may remove yourself from the Q by pressing star too.
We'll take our next question from Ryan Krueger of KBW.
Hi, good morning.
Could you provide some additional color on persistency trends, you're seeing across the businesses and your expectation in the back half of the year and I guess that's related to that.
Have you have you been doing anything like like Grace periods on premium payments in any of the businesses that that I guess has had any any impact so far.
Yes, I will take that a par there's multiple multiple products dealing with differently and customers. So maybe we'll start on the the U.S. groups FX, It's Mike Good morning, right. So.
Ill hit some of the group lines, and then flip to Tim who can cover voluntary and then Im sure Peter will have a couple of comments on the international.
Business and you think about persistency broadly I feel good about the results that we've achieved across all the lines of business, but certainly within group insurance I'd say at the margin certainly working with clients on one on one basis as they're dealing with challenges in their business, we want to make sure that were appropriately flexible in there with them I'd say the bigger.
Impact in the quarter.
Our the state level Grace period extensions by mandate and those went into place relatively quickly early in the quarter and then have kind of begun to roll off in by the time, we're sort of through this month of July we'd expect that about 85% of the group both will have come out from under those state mandates.
Good hold orders that maybe put some degree of additional pressure on persistency as late notice is do start going out that have been held up but actually our experience as states has hit.
The group insurance side has been it's actually been a good instigator for getting premium in house. So steady as she goes I would say on the group insurance side, Tim on voluntary.
Might be on mute Tim.
Sorry, Mike Thanks, Ryan for the question the only thing I would add mikes comments is that.
We believe that.
Well, obviously, we're encouraged by what we're seeing so far with persistency. We've had our account management teams, reaching out to clients, who have passed new premium and we're updating our assumptions based on some of those conversations and what we're seeing our models and.
We're cautiously optimistic.
We recognize it will be pressure over the balance of the year, but we're a little bit more optimistic than we were.
A quarter ago.
Peter any thoughts on international.
Yes, Thanks, Mike.
On the it's not just sites in Poland Persistency theme tremendously strong actually and although sales have dipped a bit premiums are growing very nicely and mainly as we see the business very sticky there. So thats excellent in the UK, we do except to say, we have expected and are expecting to see persistency trend down.
Thats a combination of employers coming under a bit of pressure, we are continuing to push race.
We expect to see it maybe a little bit lower than it was last year.
Thank you and then just.
Just to.
I just had a quick follow up separate but.
How did the new money rate come in I guess in the quarter four for LTC relative to your.
Your expectation.
Yes, Thanks, Ryan it's Steve I'll take one I would say if you go back.
To when we reset our reserve assumptions I guess, it's been close to two years now we put in a new money rate behind the LTC book that was 550 grading up to 625 over several years.
I would say, we have been able to achieve that rate cumulatively up to this point.
And you know feel pretty good about what we've been able to do clearly in the current environment. It would be the challenge is going forward as we look to the regression to the 625, but that's something we'll continue to monitor and just see how rates progress over the next couple of years, but.
For the quarter, we continue to be able to achieve that rate and a lot of that is through as we mentioned earlier invested in some of our alternative asset portfolio alternatives.
Got it thank you.
Thanks, Ron.
Thank you we'll take our next question from Tom Gallagher with Evercore.
Good morning, just just a question on the net cobot impact of 12 to 16 million.
That you cited this quarter when when you consider the puts and takes heading into Q3 Q.
How would you see that playing out would you still expect that could be kind of a similar net negative amount.
Or just how would you see that changing.
Yeah, good that Tom Good morning, This is Steve.
I'm not going to give a number of it but let me just give a framework to kind of think about it on a product by product basis, and I'll I'll start with group life and the pressure that we saw there in the second quarter in my comments I mentioned that we actually track pretty well with some of the national statistics that are out there specifically, if you want to anchor to Johns Hopkins.
We track a little under 1% of than National accounts.
And so for us in the second quarter that was about 1100 claims.
Our average claim size in the quarter what was around 48000.
That's a little bit inflated from what we normally see but thats probably good construct just a thing going into the third quarter, what those to national statistics look like and you can probably estimate pretty well what are our impact will be.
As I look at some of the other variations in the quarter, one would be dental we did see very low utilization early in the quarter. That's trended back to a more normalized so I wouldn't see dental getting back closer to more normalized earnings level in the third quarter.
I would say in the closed block IDI block, we did have pressure there we saw higher incidence that again occurred earlier in the quarter normalize a little bit more as the quarter progressed. So I would see that loss ratio coming back down to closer to normalized and then I would say in long term care.
It's just hard to say.
As we look at our claim of mortality, which was a big driver it's hard to really link that to what you're seeing nationally just because it is those specific too.
Certain facilities, it's specific to a certain age group and also these these folks already have co morbidity so that ones I think a little bit tougher to determine what we did see though in that block April mortality was very elevated may and June continued to be elevated but maybe not to the same degree so.
Or maybe a little bit of an normalization there, but I'd say, there's still a lot of uncertainty how that will play out. So that's how we're just kind of thinking about it looking for I'd say the other thing is in the UK. We have had pressure on our on our long term disability product there I think thats going to be a slower recovery.
I mentioned in my earlier remarks, we really need the health the medical services profession to kind of become more focused on what we need from them and just where the UK is within the pandemic thats, probably going to be a slower recovery.
From just a performance perspective, there so.
Can't give you a number but thats probably just.
So a way to think about the different lines of business.
No I appreciate the pieces are helpful. Just on that the LTC incident.
Would you would you expect to favorable incidence trends to continue for awhile and just related Lee are you actually seeing the overall a big drop in number of LTC claims being submitted or is it more of a shift out.
Word home health care and away from nursing home and assisted living facilities.
Yes, it's I'm I would say, it's not a shift it's a decrease in the absolute submitted claim counts that we're seeing that theyre down about 15% from what we would normally see regardless of location.
As far as that continuing.
I think I think it will continue the question is to what degree and again I think that'll just be based upon.
People's comfort.
To go into facilities.
And I do think is just the logic would follow that we would probably see that emerge more with home health care first I think people and be more comfortable about that may be going into facilities, but but thats still a real unknown for us I would say I mentioned in my my remarks, we do believe that Theres, probably some level of just.
Delay of submitted claims and so we thought it would be prudent to increase or I mean are fairly significantly we quoted $20 million in the quarter to try to take into account. The fact that some of the claims that might already otherwise been submitted in the current quarter will be submitted in a in a future quarter. So.
But I'd say, there's still a lot of uncertainty there.
Thanks, and then final question just statutory earnings were quite strong.
GAAP earnings were softer.
Can you can you comment at all why why does that kind of disconnect or was it really just the sales strain differential or something else driving that differential between the two.
Yes, I think I think thats, probably one of the bigger items was just the strain on new business you do have that differential and yes, theres, obviously, some puts and takes in statutory accounting versus GAAP accounting, but I would say that's a that's a pretty large contributor to it.
Okay. Thanks.
Thanks.
Thank you we'll take our next question from Andrew.
Klingerman of credit Suisse.
Great. Thank you good morning.
No thats on the persistency question and more specifically.
Colonial life.
I think if I get it right roughly two thirds of the businesses in cases of under 500 lives with an average case size.
100 to 150, so that would be more vulnerable area. So you get a better feel for the persistency I'd be interested to know.
Do you do you tally of mix of the sectors that you and food services are you in retail entertainment and maybe you could give us some percentages because from where I sit maybe that might be helpful to get to read into how how persistency might play out over the.
Next 612 months.
Great Jim can you give some insight into.
Yeah, absolutely. Thanks, Andrew So the question, so maybe it'd be best to start with a little broader context around the voluntary benefits businesses and I'll get to your specific question Andrew So.
The challenges of the second quarter have not changed our view about the long term market opportunity for voluntary benefits the need for simple affordable financial services products for America's workers and their families.
As always been great. It's been amplified in the current environment.
And we think having to brand serving different segments of the market was really strong market share and brands and capabilities is going to give us leverage in the future, we're reaching the market through traditional distribution methods, but we're also supplementing our teams with digital tools to help them reach.
And serve customers in new ways and so we have the cause for optimism. Despite the challenges in the second quarter with respect to your specific question.
We have very little business, and retail and leisure entertainment and we're fortunate that a significant share of our business at colonial life is public sector and public sector has the highest persistency of any segment figure out schools and municipalities, where layoffs or does not very common so.
We could break it down a little bit more for you offline, but we we like the mix of business, we have an industry segments. We're in.
That was very helpful. Thank you.
And then on the group disability in.
Unum us.
We saw it I think it was 72.8%.
Loss ratio and that compared with.
74.7 in the year ago quarter, and you cited favorable claim risa recoveries. Despite.
Higher incidence rates.
It's it's improved pretty nicely.
In the recent Petsense over the last few years. So I'm wondering is sub 73%.
Hey.
Good targets, even even in this coated 19 oriented environment could we see that pickup in the second half, but then longer term.
With that either right kind of normalized ratio.
Yes, maybe I'll take that one so I would say.
You.
Captured the dynamics of the quarters, so a little bit upward pressure on submitted incident, but as Steve noted actually paid incidence was pretty consistent.
With prior period.
Recovery is very strong as well as as offsets with good good to see so it is a credit too.
Very strong and tenured group disability benefit professionals the clinicians in the vocational experts that they work with every day. So it is good to see Thats continued consistency and outcomes and getting people back to work in terms of the specific question I mean, I think there was some favorability in the.
Loss ratio that that may repeat but may not and Steve hit it around the fully insured short term disability lot of the elective surgeries and and other sort of non critical procedures got pushed in the quarter that which yielded a pretty favorable short term disability fully insured.
Benefit ratio so that may be.
I would expect that would normalize as some of those are now being scheduled here in the third quarter, So I'd say consistency, but but probably a bit of.
Favorability here in second quarter.
Got it so 73 seems like a good longer term ratio in your view without the noise that we may see in second half of the year.
Yes, 70, 374, probably is a good number.
Got it thank you.
Thanks.
Thank you well take our next question from Mark Hughes of Suntrust.
Yes. Thank you good morning.
Any update you margin provide on.
Needs for capital.
What contribution would be for supporting ongoing business the.
The updated numbers on her material contribute.
The extra LTC reserves.
Yeah, Great Mark. Thanks for the question. This is Steve I'll take that one so just to kind of backup.
And think about our capital position and how we're thinking about.
Capital deployment for the remainder of the year right now RBC levels are right around 370, holding company cash as a 1.6 billion and so do you think about the remainder of the year, probably a good model to use would be we haven't maturity coming up in the third quarter. So that's a 400 million of maturity that will fund.
Out of Holdco cash.
We'll continue to pull dividends out of the operating subsidiaries and we have our fixed costs that we have to cover whether its interest or at dividends and then we do have contributions that we make throughout the year to both our New York entity as well as Fairwind.
We've discussed in the past.
That we were anticipating about a 400 million dollar kind of base rate contribution that was going to grade down to 200 million over the next couple of years.
And then we did have our examination findings from Maine, and we estimated that that would.
Require reserve strengthening between two and $250 million. This year, we still feel pretty good about the that level I'll remind you, though that the capital contribution necessary for that would be on an after tax basis.
The other thing that I would say is as you saw on a GAAP basis. Our LTC results were very good that did flow through to the results. We saw in Fairwind just on an ongoing operate operating basis. So you kind of put that all together and we still feel like the full year capital contributions are it's still in that $550 million to $600 million.
Range I would note that we do make contributions throughout the year and through the end of the second quarter. We've already made around $150 million of capital contributions that would already be reflected in our June 30 capital metrics. So we have about 450 on an estimated basis for the remainder of the year so well.
Within.
Our capital plan and we still feel very good based on what we know now we'll be able to hit risk based capital targets holding company cash targets by the end of the year.
Then in the.
Good luck visibility going into effect could buy mortality this quarter.
Should it be mortality continues to be elevated those who.
We will benefit.
Yes, and interesting question is we look across all of our product lines. You know clearly we saw mortality increases in many of our product lines. As you would anticipate there were two one being our close block disability claim blog and also our long term care active lifelock, where we did not see elevated mortality as you can.
Think of a lot of hypotheses why that might be.
None of them, we would be able to confirm but what we would say is for those pots specific populations. We have not seen elevated mortality and frankly are not really forecasting.
That right now that we would but we'll have to continue to monitor that and we'll we'll adjust kind of our expectations as we see that.
Play out.
And then the question is good.
We review the competitive environment within the group sales area.
Yes, Mike I'll take that one so actually I would say second quarter was relatively quiet on that front and I think that was because.
Employers we're sorting.
Transitioning to work from home and dealing with that pandemic. So the.
The number of.
Boats in the marketplace slowed down and I would say carriers were very focused on taking care of existing clients and transitioning their own workforces. So how that plays out over the balance of the year is a little bit of latency we would.
We expect and have begun to see.
Tivity levels improve really each week since since we've had kind of the middle of the second quarter and would hope and expect that that will continue through.
Whether.
Yes carriers look to make up for sort of a very slow first half from a sales perspective.
Can really speculate I would just say that will we're going to remain.
Very disciplined and our approach our strategy is always been saying, which is to price and underwrite business with the long term and mine I think our clients very much value consistency.
In pricing so.
Good thing to see activity beginning to really pick up back into markets is going to take some time to recover fully the competitive environment actually has been quiet, but we'll see how it plays out over the balance here.
Thank you.
As Mark.
Thank you we'll take our next question from Suneet Kamath of Citi.
Thanks, Good morning, just on colonial life and the drop in sales due to lower face to face how quickly can you migrate to more of a virtual sales model in that channel.
Do you have to make some incremental investments or do you have those capabilities. It already and you just need the agents to sort of embrace them.
Jim you want to take us to.
Yes.
Thanks for the question.
So about three years ago, we began to build digital tools that would be necessary for our agents to be successful and more importantly, perhaps for.
Our employer customers and consumers to interact with us digitally so in full portfolio of digital tools that enable us to be successful across the entire cycle.
We didn't see adoption rates quite as strong as we would have hoped since some of those tools until coded. So if you think about a silver lining to a very dark cloud. This is one of those places we've seen extremely strong adoption of digital tools that have been employees over the last.
Weeks and the last couple of months.
We're very encouraged many of our leading indicators right now we think.
As long as economic environment continues to improve we're going to see continued improvement in our sales results and partially because of the digital tools. We have in place, but we also believe that post cobot, there will continue to be a place for.
In person face to face enrollments and that may be done by video or perhaps even across the table from each other so we like the fact that we believe the traditional models. We continue to serve us well, but were supplementing that with a full portfolio of digital tools that will enable our agents to be successful and we've seen very strong results in recruiting.
And we think a big part of that has to do the fact that we can show new prospects. These digital tools that we have to be confident they can be successful. We've had good success with agent retention so far.
Lost about 9% of our agents that that's not terribly unusual so we're encouraged by agent recruiting and retention as well and we believe we've got the tool kit necessary, though people be successful long term.
Okay. Thanks, and then just quickly on long term care, if we do end up seeing a pretty significant shift in terms of.
Folks not wanting to go to nursing homes, and preferring to have in home care does that have any dramatic impact on the assumptions that are underlying your current long term care reserves are you fairly agnostic in terms of.
Where people decide to get the the long term care.
Yes. This is Steve I'd, probably a couple of things to think about first of all we set our assumptions based on longer term experience. So we would have to see that play out over a longer period of time that not just through several quarters types of experience. So thats, one too I would say on on the fringes home health.
There is cheaper and how our policies our structure there indemnity. So it's just a fixed cost per day, but that cost the benefit that we provide is lower in most situations for home care situation versus a facility. So on the edge is the average size the claim maybe lower but we we'd have to see that play.
Out over longer period of time before we would make any changes to our assumptions for that.
Okay, and then maybe just one quick follow up on long term care, Steve if I could you'd given a stat on how much progress you've made in terms of the price increases and I forget what that comparable number was last quarter, but just any color in terms of.
The impact of Covidien is impacting the ability to get those rate increases if regulators are focused on other issues that kind of stuff.
Yes, so as far as the progress I forget the exact number but I think it was 16, maybe 61% last quarter progress. So so we have moved the needle up to 65% of the target just from a regulatory environment. We're still very optimistic both from a process perspective. The states. They are working from home or they have transitioned to kind of their their new.
Protocols. So we haven't really seen in much of a slowdown there as far as them processing and just more from kind of a commission or perspective and their desire to approve these rate increases again.
I have not really seen a slow down on that we still feel good about the progress we're making so that's something we'll continue to monitor.
Got it thanks, Steve.
Yes. Thank you did actually we're going to take one more question were the top of the hours. So one more question.
Thank you.
We'll take our next question from Erik Bass Autonomous research.
Hi, Thank you thanks for squeezing me in.
Could you just talk a little bit more about your expectations for premium growth in unum us and colonial.
Given the current sales trends the trends, you're talking about and persistency in unemployment levels.
Yes, sure Achatz, Mike I think.
After first quarter, we sort of looked at it and said more or less a flattish premium year and I'd say, Kevin come through the second quarter. We're in a similar place I'd say, we talked a little bit about the persistency trends to kind of.
Watching closely and working with clients to keep as much premium in force as they're experiencing some economic difficulty that's one of the variables.
The second variable is really less so for premium growth for the year, but more of the trajectory ended 2021 is the sales that we haven't.
The other way to maybe think about it on the group insurance side is that that pipeline of activity really slowed in the second quarter like we've talked about I suspect thats going to show up as pressure and reported sales in the third quite a bit third quarter is a very small sales quarter for us anyway traditionally in really all our focus.
With our field teams and underwriting and by management teams is building the inventory for fourth quarter sales. That's traditionally our most important quarter for us and Thats, where the January 1st Effectives fall. So that's probably the other big variable is how quickly our markets recovering people getting back to a little bit more adjusting to the new norm.
No.
We are seeing activity increase week over week, which is good but thats really the other second important variable is what can we do in the fourth quarter for new business.
Got it and on that note I mean, how are you preparing for the 2021 enrollment process and do you expect to see any material differences in either sponsor participant behavior.
Yes, I think Tim hit it really well I mean, so the the silver lining here is the digital adoption. So we are seeing that pick up very rapidly and again don't see that as supplanting face to face ultimately on the other side of Copel, we really see it is augmenting our reach into clients it into situations, where digital just make.
A lot more sense. So it's it is a challenge there is no doubt about it pivoting as quickly as we've had to pivot.
But I will say there is a good offsetting that is what Rick hit at the opening which is.
Where we are getting in front of folks digitally or in person our participation rates at the consumer levels are holding to improved from what we've seen and I do think thats reflective of the fragile.
Eight of the average consumer when it comes the financial protection. It is just front and center for folks. So I think there is some reasons for optimism there.
Great. Thanks, Mike.
Got it thank you Eric I'd like to thank you all for taking the time to join US. Some sporting please do so stay safe and healthy Jonathan This now completes our second quarter 2020 earnings call.
Thank you ladies and gentlemen at this time. This concludes todays conference you may now disconnect.
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