Q4 2020 Unum Group Earnings Call
Good morning, and welcome to the <unk> group fourth quarter for 'twenty 'twenty earnings Conference call.
Today's call is being recorded.
At this time I would like to turn the conference Oh friends for life, You're Vice President Investor Relations. Please go ahead Sir.
Great. Thank you Tracy and good morning, everyone and welcome to the fourth quarter 2020 earnings conference call for Unum.
Our remarks today will include forward looking statements, which are statements that are not of current or historical fact, as a result actual results might differ materially from results suggested by these forward looking statements information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission and are also.
In the sections titled cautionary statement regarding forward looking statements and risk factors in our annual rate for annual report on form 10-K for the fiscal year ended December 31, 2019, and our subsequent form 10-Q filings our SEC filings can be found in the investors section on our <unk>.
Website at Unum Dot com.
I'll also remind you that statements on today's call speak only as of the day to day are made and we undertake no obligation to publicly update or revise any forward looking statements.
Excuse me for either.
Location for the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website in the investors section.
Yesterday afternoon, Unum reported fourth quarter 2020, net income of $135 $4 million or <unk> 66 cents per diluted common share compared to $296 $2 million or $1.44 per diluted common share in the fourth quarter of 2019.
Net income for the fourth quarter of 2020 included the following items a net.
Net after tax gain from our closed block individual disability reinsurance transaction of $32 million.
An increase to the reserves backing the closed block long term care product line of $119 $7 million after tax.
An increase to reserves backing the group pension block, which is a part of the other product lines within the closed block of $13 $8 million after tax and a net after tax realized investment gain on our investment portfolio. Excluding the net realized investment gain associated with the closed block.
Individual disability reinsurance transaction of $1 $6 million.
So net income in the fourth quarter of 2019 included a net after tax realized investment gain of $7 $2 million and after tax debt extinguishment cost of $1 7 million.
So excluding these items after tax adjusted operating income in the fourth quarter of 2020 was $235 $3 million or.
For $1.15 per diluted common share compared to $297 million or $1 41 per diluted common share in the year ago quarter.
Participating in this mornings conference call are <unk>, President and CEO, Rick Mckenney, Chief Financial Officer, Steve Zabel, and Chief operating Officer, Mike Simonds as well as Peter O'donnell, who heads our Unum International business and Tim Arnold who heads our colonial life and voluntary benefits businesses and now I will turn.
The call over to Rick for his opening comments.
Thank you Tom and good morning, everyone. We certainly appreciate you all joining us today and today, we will take you through our financial and operating results for the fourth quarter, which finalize many of the items, we share with you our investor day.
Okay and on our Investor meeting in December.
This will be inclusive of our closed individual disability reinsurance transaction, which we are very happy about so let me start by saying we closed out a very tumultuous year in a very strong position as we continue to navigate the challenges of the pandemic our.
For our leadership team is here to us as usual to address your questions, but I'd also like to recognize the entire unum team are showing great resilience through the year and ensuring that our customers are well cared for and that we continue to build a dynamic employee benefits franchise.
So let me start my comments this morning by providing some high level views of the markets and macro factors that had been significantly impacting our business not only in the fourth quarter, but through the entire pandemic in 2020.
Many of these factors, including Covid related mortality, so a resurgence in the fourth quarter that is carried over into the early weeks of 2021. These factors will help frame up our financial results during our discussion today as well as our views for 2021.
First of all the impacts from COVID-19, and related economic challenges in 2020 have been very transparent in our financial results.
Those are the impacts were amplified in our fourth quarter results by this resurgence that I mentioned with related deaths and infections specifically in December.
We will discuss in greater detail COVID-19 related deaths in the us for the full year totaled 345000 with 138000 occurring in the fourth quarter further over half of these fourth quarter debt. It's occurred in December alone, making it the deadliest months that we saw in the pandemic in 2020.
Since we met with you at our Investor meeting in mid December debt accounts have increased significantly.
I believe that trend has continued into January and we will no debt and it will no doubt impact our first quarter results, even more than what we've seen in previous quarters.
The detail that high mortality in our life insurance business lines high claim rates in short term disability and high expenses for lead volumes with partial offsets from higher claim terminations caused by mortality in the closed long term care block.
As we look forward, we are very optimistic that this will turn <unk>.
We have seen infection rates declining coupled with the rollout of vaccines.
The CDC reports that approximately 80% of the Covid related deaths have been over the age of 65 and this population will be vaccinated in the coming months.
This same group also represented about 50% of our group life debt by count many of whom are retirees, who maintain some level of their coverage. So as the vaccine makes its way through these ages, we should thankfully see meaningful decreases in overall mortality.
This in turn is expected to drive a strong rebound in our results likely in the second half of 2021.
Cause us to expect to get back to our historic levels of growth and profitability in 2022.
There will be some volatility on our results as we progress progressed through this rollout period, but we remain highly confident in a full recovery as we get the pandemic behind us.
The pandemic and related impacts on the economy have also had significant impacts on our top line premium income.
Our premiums in our core businesses for several years as gene grows into five per cent range, but this year. It only grew by <unk>, 6% and in the fourth quarter. It was down by $1 four per cent.
This outcome was consistent with the revised outlook, we provided when the pandemic first hit that premium income would be flat to up slightly for the full year with declining year over year comparisons throughout 2020.
So to give perspective on the drivers of premium headwinds there are three macro factors to highlight first the immediate shift to work for them to a work from home environments in March resulting from the onset of the pandemic had significant impacts on new sales.
Full year sales for our core business segments. All declined in 2020, Unum U S by 10% colonial life by 27% and Unum International by 95 per cent.
Most impacted were the voluntary benefit lines, which have a heavier emphasis on face to face sales in enrollments, which require active selection.
Looking forward. This has created an acceleration of the trends we were seeing with an increased adoption of digital sales and enrollment tools that we have invested in over the past few years, especially for our colonial life agents, where we saw a 240% increase in the number of agents utilizing these digital tools.
Looking at the group market, we're encouraged by the momentum which was initially impacted by the dramatic economic shock of the pandemic, but us recovering to a more normal pace of activity as people have slowly return to work.
Also helping our premium us how persistency has held up well on the face of the pandemic across most of our business lines. The.
The benefits and services, we provide are highly valued by employers and there.
Came through in the retention of benefit plans. Despite the financial stress. Many employers are facing I believe it also reflects the investments we've made and on our customer service on the dedication of our employees to serve these customers at this time.
And finally natural growth that had a significant impact on the slowdown in premium growth in 2020, the shock to employment levels in the spring rising from three 5% to a peak of 14, 7% virtually wiped out all of the benefit we usually see from growth in employee counts and wages for existing customers.
We expect to see the benefits of natural growth reemerge as the pandemic slows and employment levels improve throughout 2021 with a more complete recovery in 2022.
The next broad factor to highlight is the interest rate environment, which continues to be a headwind for all insurance and financial services companies.
Over the course of 2020 the yield on the 10 year Treasury fell from its peak of one 9% to 192% at the beginning of the year to a low of 50 basis points in March and ended the year at 92 basis points.
These levels, coupled with historically tight credit spreads continued to create challenges for achieving attractive new money yields for our investment portfolio.
Our strategy to gradually gradually build out our alternative investment portfolio has benefited us with a well diversified portfolio that focuses on consistent predictable cash flows.
In addition, we have also taken the necessary steps to lower our interest rate assumptions as part of our annual reserve adequacy assumption updates.
And the tragedy of the pandemic, we see the economic effects on Unum us a once in a lifetime event.
Unlike what you might see in a P&C cat event. This impact has been spread out over the course of the year.
It will impact our growth and profitability for a period of time, but we will come back strong.
We would also note that through this period, our capital remained in excellent shape as we ended the year on a strong financial position with healthy capital levels above our targets and holding company cash almost four times our target. This speaks to the financial resiliency of our franchise.
And just as importantly, the pandemic will be looked at as an event, which we have successfully met our purpose, which is helping people through life challenging moments and reinforced the social value of the benefits, we provide to working people and their families.
We have paid out over $150 million in Covid claims, mostly on small face amounts and provided by our company as a benefit.
I continue to be very proud of the work of our employees to provide excellent service to our customers, but we have navigated through this disruptive year in.
On our most recent surveys we have seen strong improvements in both overall unum employee engagement and claim and satisfaction scores over 2019.
I'm also very pleased that despite the disruptions presented in 2020, our teams were able to complete an important transaction, which was the sale through reinsurance of our closed block of individual disability business.
Once fully executed it will have the benefit of freeing up approximately $650 million on capital primarily to holding company cash part of which we see in our fourth quarter numbers.
The transaction is the culmination of many years of effectively managing this book of business and helps us move our capital to more effective uses.
While the numerous disruptions of 2020 have masked the progress we're making in growing many of our more capital efficient businesses, such as voluntary benefits dental and vision and medical stop loss, we are well positioned strategically and competitively in these product lines that I am very optimistic about their long term growth potential.
So to wrap up the year, we will look back on 2020 is the year of Covid.
It changed so much of our world It changed a lot on how we operate our business, but it only reinforced our purpose as a company.
We saw high mortality rates short term claims volatility and the unprecedented disruption to the economy and the workplace.
But these are times, when we step up and deliver on our promises and we did as our highly engaged and dedicated employees provided excellent service to our customers when they most needed.
In a year of unprecedented challenges from the economy interest rates credit markets and the health crisis, the strength of our capital metrics improved at year end 2020 compared to a year ago.
With holding company cash increasing $650 million to $1 5 billion risk based capital holding steady at 365% and leverage declining almost three points to 26%.
Measures of strength and stability of the company combined with the know how of our team give us great confidence as we work through what we all hope are the last stages of the pandemic to a more stable environment.
Let me cover the details for the fourth quarter results Steve.
Thanks, Rick and good morning to everyone and discussing Unum us fourth quarter financial results. This morning. My remarks, My remarks will focus on the analysis of our fourth quarter results relative to the third quarter rather than the traditional year over year comparison. This will allow us to show how the company's business lines are progressing through the pandemic and resulting economic challenges.
And outlined for you the impact it has had on our results before I do so I want to level set our reported adjusted operating income of $1 15 per share for the fourth quarter against the outlook. We provided at our December 2017 outlook meeting, which did call for adjusted operating earnings per share within a range of $1 14 to $1 24.
Looking back on those assumptions, we provided in December actual fourth quarter results for premium growth sales persistency yearend capital metrics and investment income impacts were consistent with the expectations. We discussed in addition, the capital benefits from our closed block individual disability reinsurance transaction, which.
Were realized in phase, one, we're slightly better and the reserve increase for LTC as well as the capital contributions. We made you back this block were consistent.
The one area that did diverged significantly from our expectations with linked quarter mortality for setting expectations for benefits experience. Our outlook was based on an assumption of fourth quarter mortality from COVID-19 of 92000 deaths nationwide.
Actual mortality turned out to be substantially higher at approximately 138000 excess deaths with December accounting for over 50% of those deaths.
More specifically, 25% of the quarter's excess deaths occurred in my last two weeks for the year with the average daily debt count approaching 2600, pushing on a reported income towards the lower end of our expected range.
The year end surge that occurred negatively impacted our before tax operating income by approximately $22 million relative to the midpoint of our expectation primarily in Unum US group life with minor impacts to short term disability voluntary benefits and colonial life insurance business. This was offset in part by us.
Approximately $10 million favorable before tax operating income in long term care from higher claim claim of mortality. This $12 million net impact late in the quarter impacted our operating income by <unk> <unk> per share.
As Tom outlined in his opening after tax adjusted operating income in the fourth quarter was $235 3 million or $1 15 per common share by.
By comparison in the third quarter. This year after tax operating income was $245 $9 million or $1 21 per common share. So we saw about an $11 million decline in sequential quarterly earnings as I outlined in my comments in more detail the primary drivers of that quarter to quarter change or higher mortality impacts in U S group life income.
O'neill higher short term disability claims and lead volumes in group disability and lower levels of miscellaneous investment income from bond call premiums. We did experienced some favorable offsets for long term care claims experience and positive marks on the alternative investment portfolio.
Before I begin my discussion of operating results. This quarter, let me summarize for you the economic and business conditions that existed in the quarter and outline the impact that it had on our results.
First as I mentioned COVID-19 continues to have a significant impact on the external environment driving a high level of mortality plus a continued high level of infections. These accounts showed a significant resurgence in the fourth quarter of excess deaths in the us from Covid totaled an estimated 138000 compared to 80000.
In the third quarter, the impacts to our business are higher mortality across our life insurance business lines and increased short term disability claims, which increased by 3% relative to the third quarter.
Employment condition remained conditions remained challenging Fortunately the unemployment rate has gradually improved to six 7% for December compared to seven 8% for September and the peak level in April of 2014, 8%.
Today's rate is higher than the three 5% level. The us economy was experiencing heading into the pandemic a year ago I am high unemployment rates negatively impacted premium growth in our core business lines as it negated the benefit we usually experience for natural growth in the in force blocks we.
We are seeing signs on our results of the impacted leveling out supporting our view that premium growth in 2021 for our core segments is expected to show a slight increase with group life group.
Group line increases offsetting small declines in the voluntary businesses.
With a resurgence of infections on mortality in the fourth quarter, the reopening of the economy with some people.
Returning to more normal activity in their day in.
<unk> generated some inconsistent season for them.
For Covid related STD claims increased with a resurgence of infections pressuring overall STD benefits experience lead requests continue to rise significantly above year ago levels and on a quarter to quarter basis, driving continued expense pressure on the group disability life.
Providing a small offset with dental utilization in the fourth quarter, which was somewhat lower than the experience for the third quarter net.
The net impact to our fourth quarter results from these trends was negative related to what we experienced in the third quarter.
Finally financial market conditions were generally favorable on the quarter. This is most impactful to unum and the credit markets, where corporate bond spreads continued to tighten while U S. Treasury rates did increase this combination continues to create a challenge for achieving attractive new money yield on investment opportunities, but it is favorable for overall credit quality in our outlook.
Moving forward for a potential credit impacts we've seen a dramatic reduction in downgrades and impairments and for first quarter of 2020 as well as the significant decline in our watch list for potential credit concerns. In addition, the marks on our alternative asset investment portfolio showed a strong improvement in the fourth quarter and we estimate the portfolio has recovered.
Roughly half of the valuation decline experienced in the second quarter.
Against this high level backdrop, I'll now focus on our business line at the beginning with Unum US group disability adjusted operating income for the fourth quarter was $64 $7 million compared to $73 million in the third quarter. There were three primary factors that impacted these results first we experienced pressure on STD claims from the resurgence in <unk>.
Covid infection rates with a volume of Covid related Standalone STD claims increasing 45% by count from the third quarter to the fourth quarter.
Pressure on expenses from leaf request volumes remains high and continued to impact results with those volumes running approximately 6% higher relative to the third quarter and.
And third pressure on net investment income impacted operating income as miscellaneous investment income was $10 million lower due to lower levels of bond call premiums.
Net investment income from bond calls was unusually high in the third quarter at $12 million and slightly below average in the fourth quarter of $2 million.
Trends were partly offset by continued favorable results in the long term disability block with generally stable new claims incidents and continued strong claim recoveries. We continue to be very pleased with the consistency of the results of the LCD throughout this volatile environment as demonstrated by the group disability benefit ratio ratio of $72.
5% this quarter.
The lowest in recent history compared to 74, 1% in the prior quarter.
Adjusted operating income for Unum US group life, and <unk> remain remained depressed with a loss of $21 $9 million in the fourth quarter compared to income of $13 9 million for the third quarter with the change driven primarily by unfavorable claims experience.
<unk> clearly impacted results.
Analysis continues to show a consistent pattern between our mortality trends and the national Covid mortality statistics that is we continue to see approximately one percentage of the excess mortality by count and our group life results specifically.
Specifically in the fourth quarter, we had approximately 1300 excess claims by count or slightly under 1% of the 138.
<unk> reported destination wide in the third quarter reported slightly more than 900 excess life claims benchmark against the base of approximately 80000 COVID-19 related destination wide.
The higher claim count of approximately 350 and average claim size of $50000 in the fourth quarter accounts for part of the decline in operating earnings.
Looking ahead to the first quarter the national mortality rate in January.
Exceeded the experience of December and will likely further pressure results in group life in the first quarter. We believe this 1% mortality relationship to national trends will continue in the early part of 2021 and suggest that you use that as a basis for your projections and estimates in future quarters overtime. This relationship could.
Change in potentially exceed 1% on what we expect to be a declining overall mortality count us vaccinations rollout to different sectors of the population initially to the elderly teachers medical personnel and first responders, but we will update you as these trends evolve.
The unum us supplemental and voluntary lines experienced consistent journey.
Generally consistent results in the fourth quarter with adjusted operating income of $107 million compared to $101 $3 million in the third quarter, while consistent in total there were some different trends for each of the primary product lines.
<unk> benefits results for salt softer in the fourth quarter driven by worse experience in the individual life in short term disability.
Higher COVID-19 related claims.
<unk> had favorable results with a benefit ratio declining to 42% in the fourth quarter from 48, 6% in the third quarter, driven primarily by favorable incidence and mortality trends in the block.
Finally results in the dental and vision business improved in the fourth quarter with a benefit ratio declining to 65, 4% from 76, 8%, primarily driven by a low to lower utilization.
Sales for Unum us declined 7% in the fourth quarter compared to the year ago quarter sequentially, though we see sales momentum building with improvement in the year over year decline from 18, 5% in the third quarter to 7% in the fourth quarter, reflecting is still there's still difficult yet improving commercial environment.
Total sales for group life, meaning LCD STD and group life combined decreased four 3% in the fourth quarter experienced the impact of a higher than normal level of large case sales recorded in the third quarter, Although new sales were down in total we continue to be encouraged by the success for our HR connect platform, which provides a.
<unk> experience on leading HCM platforms sales on the platform increased 6% in the fourth quarter over the year ago quarter and increased 17% for the full year.
On the persistency front, all group products on an uptick from the third quarter.
As discussed throughout 2020 and on our outlook call. The supplemental lines show more pressure than the group lines voluntary benefits sales declined 24, 2% compared to the year ago quarter, but did improve their sequential year over year decline, which was 35, 8% in the third quarter.
Dental and vision sales declined nine 4% as we continued to see disruption and group sales stemming from discounts and other incentives carriers are providing in response to the unusually favorable claim trends the industry experienced in the second quarter. This dynamic is evident in our persistency results as well, which improved to 85% versus 82, 6% in the.
A year ago quarter.
Similar to <unk>, we also see momentum building in the sequential year over year sales decline improved in dental and vision from down 33, 1% and <unk> down nine 4% and <unk>. Finally stop loss sales continued to grow from a small base up over 140% for the fourth quarter and full year, providing a good law.
Term growth opportunity for us in a very capital efficient product line.
Moving to Unum International segment adjusted operating income for the fourth quarter remained generally consistent at $27 million compared to $21 4 million in the third quarter income for Unum UK was $15 4 million pounds this quarter compared to $15 2 million pounds in the prior quarter overall benefits experience with <unk>.
<unk> favorable quarter to quarter for premium income was slightly lower due to persistency and an increase in reinsurance ceded.
Poland saw more pressure on its results in the fourth quarter relative to prior quarters due to impacts from Covid, which began to emerge late in the year. Although although we are encouraged by the improved income in the second half of 2020 in the international operations, we are cautious with our near term outlook at both the UK and Poland deal with Covid impacts on related economic shutdowns.
Colonial life had a more challenging fourth quarter with adjusted operating income of $71 $2 million compared to $92 $2 million on the third quarter. These results were primarily impacted by a higher benefit ratio of 56, 6% compared to 52, 2% in the third quarter, which was primarily driven by higher higher.
Covid related life insurance and disability claims as well as a weaker results in the cancer on critical illness products in previous quarters, the negative impacts on our Lifelock for Covid claims had been partially offset in favor.
Favorable results in our other two product lines.
However, in the fourth quarter those favorable offsets for negated by a pickup in utilization of many of our health and wellness and accident products, where performance had been favorable premium income for the fourth quarter was in line with the third quarter as we indicated in our prior meetings. It will take a return to more normal sales growth before we see growth reemerge in premium income.
I'd also point out that fourth quarter net investment income was lower than third quarter, reflecting the unusually large $8 $1 million of miscellaneous investment income we did record in the third quarter.
Sales for colonial life declined 26, 5% in the fourth quarter relative to a year ago. This represents some improvement related to year over year trends, we saw on second and third quarters, which were down 43% and 27, 6% respectively sales environment remains challenging, but we are encouraged by the adoption of the digital sales tools, we have developed.
While our traditional agent assisted sales remained pressured we saw 30% increase in telefonica enrollment and a 25% increase in our digital self service platforms. In addition agent recruiting remains strong with a 10% increase year over year.
In the closed block segment adjusted operating earnings increased to $104 2 million in the fourth quarter, which did exclude the significant items that I'll cover in just a moment.
This compares with $78 million in the third quarter, largely driven by the impact of higher climate mortality on the LTC block and positive marks on the alternative investment portfolio. Following the significant decline that we saw in value as of the end of the second quarter.
The positive Mark on the <unk> was $29 $4 million on the fourth quarter compared to $11 3 million in the third quarter and a loss of $31 3 million in the second quarter, which did reflect the negative market conditions at the end of the first quarter. We estimate that we have recovered about half of the valuation hit we saw in the second quarter for.
<unk>, mostly on the equity based on credit segment for the portfolio and we anticipate anticipate additional recovery in future quarters.
For the long term care block the interest adjusted loss ratio was 62% in the fourth quarter, excluding the impact for the reserve assumption update which I'll cover separately enrollment.
And for them.
The result of both quarters remain well below our expected long term range of 85% to 90%. The underlying results. This quarter continue to be highly favorable relative.
Driven by higher mortality on the claim of block climate mortality by count was approximately 15% higher than expected in the fourth quarter.
As a reminder, claimant mortality was approximately 15% higher than expected in the third quarter and 30% higher in the second quarter for the closed disability block. The interest adjusted loss ratio was 79, 5% in the fourth quarter, excluding the impacts on the reinsurance transaction compared to 86, 6% in the third quarter for.
Quarter experiences more consistent with our expectations as the reinsurance transaction closed in mid December our results reflect the performance of this block for the majority of the fourth quarter than wrapping up my commentary on the quarter's financial results. The adjusted operating loss in the corporate segment was $42 $7 million on the fourth quarter. This is favorable to the run rate of losses.
A $45 million to $50 million per quarter that we did outline for you back in our December meeting, primarily due to lower expenses in this quarter.
Now I'd like to cover the significant items recorded in the quarter, beginning with our closed block individual disability reinsurance transaction that we announced at our December outlook meeting, while the accounting treatment for the transaction is complex. The primary economic impact is the ultimate release of approximately $650 million of capital.
This block primarily us holding company cash this occurs with the closing of the first phase of the transaction were reporting today with our fourth quarter results and the completion of phase two which we're making very good progress on here in the first quarter and we will discuss on our first quarter earnings call.
The impact for fourth quarter GAAP earnings from the transaction was a net after tax gain of $32 million and you can see the components broken out in the digest in the earnings release.
From a balance sheet perspective, the active life cohort on the block is being accounted for under deposit accounting rules and then the disabled life cohort is being accounted for as reinsurance as a result of accounting at a different accounting model. We are separating the transaction components, which results in a recognized in our prepaid cost of reinsurance on the DLR component and a day.
Posit assets on the ALR cohort.
On the prepaid cost of reinsurance of $815 $7 million, which largely reflects the negative ceding commission and difference between GAAP and statutory reserves held on the block will be amortized over the life of the block with the amortization reported as a non-GAAP measure and excluded from our adjusted operating earnings.
On the deposit asset related to the ALR cover us initially $88 $2 million and will be adjusted going forward to reflect the net cash flows related to the performance and accretion accretion of interest.
As I mentioned, there is a lot of complexity in the accounting on the transaction, but the economic impact driving the rationale for the transaction is the release of capital back in the block primarily to holding company cash and the financial flexibility It provides us.
As we also discussed back in our in our December meeting, we completed an update of our GAAP reserve adequacy for the LTC block and did record a reserve increase of $119 $7 million on an after tax basis, which is really at the midpoint of our expected range.
Options, we implemented with this review were generally consistent with what we described previously as we mentioned we lowered the interest rate assumption for the 10 year treasury yield to an ultimate rate of three 5% and extended the mean reversion period to seven years.
This change added approximately $500 million to reserves, but we also had favorable offsets with the success of our rate increase approval program lower expense expectations and movements in our group LTC inventories.
Cash contributions for the LTC block ended 2020, consistent with the expectations. We provided at our outlook meeting the amounts contributed for full year 2020 were $411 million for fair wind and $55 million for first Unum, a fair wind contribution includes funding $181 million after tax for the.
LTC premium deficiency reserve.
In conjunction with the Maine Bureau of insurance examination.
These are all reflected in the capital metrics all outlined in the capital discussion.
Also on the fourth quarter as part of our GAAP Reserve Adequacy review, we did record a reserve increase of $13 $8 million after tax and the group pension block, which is included in the other product line within the closed block segment.
This closed block has reserves of approximately $700 million.
And runs off at a rate of approximately $40 million annually. The reserve increase was really driven by lowering the interest rate assumption for this block to be more consistent with that of the LTC block.
I'd like to now turn to our investment portfolio with a few points to highlight first we reported a large after tax realized investment gain of over $1 billion in the quarter. This is largely largely related to the reinsurance transaction as the assets being transferred to the reinsurer were mark to market before being transferred as part of phase one of the transaction.
These assets had large unrealized gains which were realized in the assets for transfer to the reinsurer at market.
Second and related to the reinsurance transaction, we were able.
Assets, which had into the closed disability block, but were not transferred to the reinsurers part of the transaction. This quarter, we allocated $360 million of these securities with a seven 4% yield and triple B rating to the LTC investment portfolio.
As above market yields that strength for the balance sheet and represent additional economics for the transaction.
Third the overall quality of the portfolio remains in very good shape. During the fourth quarter, we saw only $85 million of investment grade bonds downgraded to below investment grade and $52 million of which will be upgraded back to investment grade status. When the acquisition of that company is completed this year our watch list.
Is.
Potentially troubled investments has declined to very low levels and we have taken we have taken advantage of the rebound in the credit markets to trade out of these positions.
The final point I'll make is that we saw strong recovery in the valuation mark on our alternative investment assets of $29 $4 million for this quarter.
Given the current portfolio size, we would expect quarterly positive marks on the portfolio of between $8 million $10 million we.
We have recovered about half of the valuation loss for the market decline in early 2020 and continue to expect a full recovery over time I'd also note that it was an unusually low quarter for traditional miscellaneous investment income from bond calls following an unusually high amount in the third quarter, you will see that impact in many of our core business life.
Now looking to our capital position, we finished the year on very good shape with the risk based capital ratio for our traditional U S insurance companies at approximately 365% and holding company cash at $1 5 billion, which are both comfortably above our targeted levels. The cash balance includes the capital release from the phase one of the reinsurance true.
<unk> of approximately $400 million.
And we'll have an additional benefit at phase two of the transaction is completed in the first quarter. So in total once reinsurance transaction was fully executed in the first quarter, we anticipate releasing over $650 million per capital primarily to the holding company.
In addition, our leverage ratio has declined to 26, 2%.
So now I'll close my comments with an update to our expectations regarding our outlook for 2021 at our outlook meeting back in December we indicated that we expected 2021 after tax adjusted operating income to be relatively flat with our expected income for 2020.
We also outlined the pattern for expected income of the first half of 2021 mirroring the second half of 2020 with than the second half of 2021, beginning to rebound to more historic levels of growth and profitability.
For now based on the higher than estimated Covid related mortality, we experienced in the fourth quarter of 2020, and our revised assumption of a 30% increase in mortality accounts in the first quarter of 2021, we now expect a modest decline 5% to 6% for full year 2021, adjusted operating income per.
Sure.
We anticipate COVID-19, having a more negative impact on our first quarter results with mortality in January being our worst months of the pandemic. However, we continue to expect second half 2021 income to be in line with our previous outlook producing a stronger recovery as the impacts of the pandemic subside.
As for our outlook for capital metrics, we anticipate year end 2021 levels of holding company cash and risk based capital to be very in line with our year end 2020 metrics of $3, 65% RBC and $1 5 billion of holding company liquidity, which will provide a strong stable capital base as we work through the remaining impacts from the pandemic.
So with that I'll turn the call back to Rick for his closing comments and look forward to your questions.
Great. Thank you Steve for that summary of a very busy fourth quarter.
I'll summarize by saying that we continue to be pleased with the operational performance of the company through what continues to be an extraordinary environment and we do believe we are well positioned to benefit from improving business conditions as vaccines take hold and we move past the December and January surge in mortality in new Covid infections in the meantime, we will continue to focus on the crisp.
<unk> managed through the challenges we see today.
So one thing before we go to your questions I'd like to take a moment to recognize Peter O'donnell, who will be retiring from unum soon after a decade long career with the company.
We will be this will be his last quarterly earnings call. So I just want to recognize Peter Peter has been a great part of our executive team and we will certainly Miss his leadership and expertise I would say, we have an excellent leader coming in and Mark Til, which you may have seen the press release stepping into Peter's shoes, and so we do look forward to introducing mark to you in future meetings such as.
So the teams are ready to respond to your questions I will ask the operator to begin the Q&A session.
Thank you Sir.
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I would share reached a requirement.
Please ask one question and one follow up question. Please.
We will now take our first question for Brian Hooker from Keybanc.
Please go ahead.
Hi, good morning, everyone.
Got a question on utilization, our critical illness and related products.
Do you I guess are you expecting that to Rick.
For my elevated as we go through the beginning part.
2021 likely in the fourth quarter.
Mike you want answer sure Thanks, Brian and good morning, yet a little bit of validation and I think we would expect to see that persist here in the first quarter.
You kind of broaden out I think critical illness and other related if you think about the supplemental health products that employ an accident free.
Hospital indemnity with everything shutting down and people not knowing how to access services in the spring time, we saw this thing to follow up I think for.
Fortunately.
People have found a way even with social distancing to access for these services. So we're getting back to more normal on a couple of spots slightly elevated.
Don't see it as a long term persistent.
Point of pressure for us, but yes.
Yes, Ryan and Steve I'd, just add that that was incorporated into kind of the directional outlook that we gave us 5% to 6% EPS decline. So I think we've we've incorporated a little bit more pressure going into first quarter there.
Got it and then just one quick follow up on the 5% to 6% decline.
Is that.
When you think about that relative to the prior expectation of flat is that effectively all driven by <unk>.
Covid related impacts on the first half of 2021.
Yeah. Ryan this is Steve I mean, theres, some puts and takes in there, but generally speaking yes.
If you go back and you think about how we were thinking about 2021 going into Investor day, we were coming off of in October with about 24000 National Covid deaths November was about 37000 deaths and so that was setting our expectations for December and then going into the first quarter, but we ended up seeing was.
78000 deaths in December I think the final count for January was 97.
Nationally and as we've mentioned, we get about 1% of that by count on our group life business and then obviously there is also some impact of some of our other voluntary benefits businesses. So.
So, yes I would.
That's the main story all of our other expectations.
Remained relatively consistent on what I would say to us that we believe once we pass through the wave of mortality, which hopefully will subside very quickly here. We believe the second half of 2021 will be that right back on track with our recovery and then it's just a matter of growing the top line and we will have a great franchise that going into 2000.
Two.
Got it thank you.
Thanks, Brian.
We will now take our next question from Tom Gallagher from Evercore.
Good morning.
Just a question on on group disability the underwriting results.
Still look pretty favorable here.
Peers, we've seen this quarter are seeing a pretty meaningful level of deterioration in the quarter.
And then I guess I have also heard about.
Some are extrapolating the pickup in short term disability claims are going to convert to LGD claims when the elimination period, and so just kind of rolling all of that together are you are you expecting that you're going to start to see some of this is that embedded in the guide or are you still assuming relative.
I think you mentioned just a little bit higher.
Is the expectation, but are you are you seeing any of those trends emerge any debt.
Is that does that factored in.
Go ahead, Scott based on.
Yes. Thanks on good morning, it's Mike so.
A couple of things I'd say on group the first us.
Think about long term disability, a little bit of volatility on the net incidents, but paid incidence Rick.
Really solid and consistent.
<unk>.
Again quite consistent favorable and then I'd say average size was a little bit of positive volatility for us not major but certainly contributed to good results in the fourth.
Quarter.
Offsets from SSD I in line.
On a piece of the comp.
I think.
That offset a little bit for overall group disability was short term disability and Steve talked a little bit about that and we saw that.
Covid and you can really quite clearly see it COVID-19 related incidents and driving an increase in fully insured SPD. So the two netted to.
72% to 73% group disability loss ratio I think for the year, we finished around 73% and I think thats in line with what.
You've come to expect US we look out over 2021, something in that $73 74 per.
Percentage.
Range from a loss ratio point of view.
Gotcha and net we hit real quickly yes.
Tom you have to start.
Yes, good question too about the flow through rate from short term disability and yes, we have been watching that real closely.
Closely and at this point in line with what we would expected. If you think about the typical COVID-19 diagnosis, you certainly did a trigger of short term disability, but they get all the way through to the EEP into LTV, we're just not seeing that be a significant driver for us.
Okay got you and then.
On the statutory loss for the quarter the $145 million can you just remind me what drove that and I realize that day.
Very favorable closed block performance I think earning captain should they are not included in the result.
Shown on your financial in your supplement.
Does that is that largely what's driving it or something else and do you expect that to continue into Q.
Yeah.
Yes, Tom it's Steve good morning.
Really the driver of that loss in the fourth quarter with some of the accounting around the reinsurance transaction.
We recaptured by block for our North wind captive, but then when we seeded it out of our kind of traditional insurance companies. The negative for you did generate a loss from a statutory perspective because of the negative seed. If you kind of look at that ex that earning pattern ex the transaction for the full year.
We feel pretty good about where our statutory earnings were given the group life pressure probably came out between the $88 $900 million of annual earnings what I'd tell you, though is that was more than offset or if it was at least offset in our fair wind structure. As you can imagine all of the favorable LTC claim on mortality.
Was really realized and recognized in a fair wind.
The fairway captive and we had very good favorable statutory results. There. So that was kind of a wash. So we feel good about the statutory cash generation come.
Coming out of the year I would say going into 2021, we will still see a little bit of pressure.
Around our statutory earnings given the elevated life claims that we expect to see.
But still feel really good about the cash generation engine that we have in those traditional operating companies.
Okay. Thanks.
Thank you Tom Thanks, Tom.
We will now take our next question for Mark Hughes from Suntrust Takeshi <unk>. Please go ahead.
Thank you and good morning.
Well, let's talk about income.
The adjustments to the leave management agreements to.
Dampen some of the expenses.
Am I remembering that properly and when might that kick in and have an impact on us.
On the financials.
Sure Mark Good morning, it's Mike I'll take that one and I'll just start by saying recall that when we talk about the services component the group disability.
Leave management for sure. It's also our self insured fee based STD.
Business critically important to us our clients care deeply about it think about us.
Changes that have come at the National State municipal level. When it comes to leads everything that employers are doing with parental leave elder care leads being added to their benefit portfolio. So clients need help with it we only sell it in conjunction with insurance lines and look at.
<unk> on a customer level and feel good about our ability to continue to do that that being said I think Rick highlighted this a bit but when you look to cross that.
Self insured STD and leave we saw volumes up.
On a 57% in the fourth quarter.
Costs and expenses were up about half that so we are seeing the benefit of some technology and process change and some productivity coming through in for your specific question as I look out I mean, I think we're going to deal with us.
Another elevated first quarter here in all likelihood given the pandemic.
The expense ratio in the group disability segment, I would expect to be down pretty consistently as we.
As volumes come down, but I'd say, even more impactful.
As we get technology and process change helping us.
Gain some efficiency and then to the pricing changes, which I'd say, we're making good headway. Both in terms of some aggregate increase in fees that were charging them to and to your question embedding some callers in the pricing arrangements such that the price and revenue will fluctuate.
With big swings in volumes in the future and I think it will again be a gradual process.
For progress in the disability expense ratio coming down, but I do expect us to continue in a pretty steady fashion post <unk> over the next 456 quarters.
Just a quick follow up when you looked at the group life.
How did you how are you approaching pricing on that product.
Obviously, you've got the Covid is unusual but maybe could recur in the future. How do you how are you.
You're approaching pricing.
Yes, Mike ill take that one too. So it is a finite defined event. So we didn't do was made significant adjustments to say a manual rates that go into our pricing it will flow through and the experience. So typically when you are looking at a mid or large sized group life insurance client youre going to look at.
Three years of experience and that will flow into renewal and pricing decisions as we look out into the future I would also say as Rick made this comment in his opening.
<unk> been there for clients through this period, they understand and have felt firsthand the impact of this pandemic.
I think we've come through it really well in terms of delivering on our promises and so.
There's always a competitive and tough market, but I think our clients understand that they will probably be some some upward movement and I expect that persistency is going to hang to that process.
Thank you.
Thanks, Matt.
We will now take our next question from Erik bass from Autonomous research.
Hi, Thank you.
Steve I was just hoping you can go back to us.
Topic with the only company free cash flow for 2021, just wondering what do you anticipate for subsidiary dividends and then can you just remind us how much you're budgeting for LTC contributions or other cash needs.
Yeah, great. Thanks, Eric Yeah, just reiterating our expectation at the end of 2021 is to maintain both holding company cash levels at $1 5 billion as well as retaining RBC percentage at the 365 range.
So when we think at around 2021.
Generally speaking the statutory earnings from 2020 will influence what comes through dividends from the operating companies in 2021.
There's still going to be very strong, maybe a little bit lower than what we've seen in past years, but what I'd also say as we anticipate our contributions to fair wind to also be a bit lower because of our expectation to claim on mortality. There. So it's probably a bit of a wash all things being said, what I would say, though just to kind of give you a number.
Is when you think about cash contributions.
To support LTC, we anticipate those to be kind of in the same range that we saw in 2020, which was right around $450 million that they're going to shift a little bit and that we expect our New York company to have lower contributions in fairly might just be a tick up but all things being equal that's going to be pretty consistent with what we.
Fall in 2020.
Got it thank you.
And then I was just hoping you could talk a little bit more about the sales outlook for unum us where it sounds like youre getting optimistic on kind of seeing a return of activity. There and then relatedly what impact you expect to see on persistency in sales activity picks up.
Alright.
Yes, sure absolutely so.
Continued challenging environment, but finding a way into the variances to prior year continued to close in the fourth quarter as I think about Unum. You've asked your question down about 20% year over year, and <unk> narrowed that down to about 7% here in <unk>. It was encouraged to see core.
Sales to employers under 2000 employees are actually up in the quarter.
Large case was down but as we've talked about and have for many years, it's going to be selective we will see some volatility on large case sales.
So the value proposition is coming through.
If you are an employer that has gone to a cloud based HCM platform like workday for ADP, we are winning a disproportionate amount of that business.
I'll come back and as we look at the pipeline.
In line with the expectations, maybe slightly favorable.
The momentum I think is starting.
To build a low.
Ill actually ask us Tim's got some comments on the voluntary front Im sure Peter can hit international quickly because there is a slightly different dynamics between.
Group and voluntary, but just to close out the unum us siding I do expect sales to.
Build as we go through the year persistency hasn't been ticking up through 2020, and our expectations are for another strong year from a persistency point of view and then the third piece of that puzzle was the natural growth and again as the economy begins to recover at the turn here.
We would like to see and expect to see some level of growth.
Job and wage growth that would come through for.
For premiums for US is it such that we're just beginning to show a little bit on earned premium growth as we look at the balance of 2021, but Tim maybe you could talk a little bit about the voluntary market.
Sure Yeah, Thanks, Mike I'll pick up on some of the themes that you shared so for us from momentum perspective, we're pleased with the momentum we're seeing obviously second quarter of 2020 was the most challenged quarter and then we've seen incremental momentum each quarter and our fourth quarter results on the colonial life side, we were up against a very difficult comp we had.
Extremely large jumbo case debt.
<unk> was included in our 2019 fourth quarter results. So if you exclude the impact of that particular case our.
Sales growth rate was more like negative mid teens, but we like the momentum we're seeing we're encouraged by what we saw.
In January as both Rick and Steve pointed out adoption of our digital tools is going extremely well we're seeing.
Great adoption by our agents and also our clients policyholders of our digital portfolio.
As Steve pointed out.
We saw really nice on the corner of life brand Salt life recruiting in 2020 up 10% in the total number of 10 99 sales managers and the quality of life organization grew by about 15% last year.
Mike commented on persistency on the group side and persistently held up extremely well on the VEB lines overall on the colonial life brand persistency actually it wasn't better in 2020 than in 2019, we think a big part of that is people recognizing the value of these products.
As the vaccine really comes online here later this quarter and ended the second quarter. We are encouraged about markets opening back up and having the opportunity to really put our sales force back out in the field and then on the Unum side, we're extremely encouraged with our engagement with brokers and how strong that's been throughout the pandemic. So.
As others have suggested it's going to take a little longer on the BD side to recover from the pandemic, but we're encouraged.
Shall I pick it up from there on the international side.
Please.
So just a little bit of context on the U K first of all so you'll have noticed that.
Sales for the fourth quarter were particularly challenged where we are at the low it is at a very significant lockdown. So.
Locked down.
However, I would say to you the Sun is shining snowdrop the right side on the vaccination rates has just gone through 10 million people, 90% of over 75 people who've got the vaccination. So we're hopeful that we're going to get opened up soon I think.
The government has a big Conservative we've had on Q4 starts on opening so.
Just give us a call when but similar to the US I would expect momentum to start gathering for March April and then it takes about a couple of months to come through I do think Q4 was the low point and so I expect sales comparative to improve quarter on quarter and we're off to a reasonable start in January sales will be slightly lower overall for the year, but momentum will guide us through the <unk>.
Half of the year.
So that the full sales outlook I just want to make US one no we're going to keep going I know, we're up on the hour and so it'd be respectful of others that might be out there, but we're going to keep going answering questions. So if you want to stay on and we'd be happy to happy to keep going.
Thanks for that question Eric.
We will now take our next question from Brian Meredith from UBS.
Thanks, guys. Good morning, this is Mike on for Brian.
I was just curious in long term care, if there's sort of an acceleration of mortality occurring I know that should be theoretically reducing your policy count and so I know this is a closed block that'll be rolling off over time, but is it logical to assume that when COVID-19 kind of settles down the operating income that you report from long term care will sort of flipped.
That would become unfavorable just because of the pull forward of that mortality.
Yes, great. Thanks, Mike This is Steve I'll make a couple of comments on that first of all I wanted to distinguish between what we're seeing in our active life block and what we're seeing in our claim on the block we have not really seen.
Mortality on the active lifestyle and that that's where the.
So if you think about it that way so on an in force block has stayed fairly stable with what we've seen historically when it comes to the claimant block.
We have bought a little bit about are we just seeing an acceleration of some claimant mortality that we would see in future periods. We have made pretty significant provisions within how we think about our disabled life assumption set.
Specifically, we have decrease some of our near term mortality assumptions to take that into account. So we believe we've set an expectation within our reserving construct that that will happen to some degree we'll have to see how that plays out and we'll look at that over the coming quarters. As this thing on ones, we would not expect.
Check, though for this thing to flip and have higher than expected loss ratios on that business, but as you know, it's a very volatile block and we'll just have to see how much of it really was pull forward against the expectations that we set at our assumption set.
Great. Thanks, that's Super helpful. And then just quickly on Unum U S.
G&A seemed a little bit elevated is that all of that kind of lead volume that you were talking about or is there any other pieces that are driving that higher do you think that might remain elevated as we enter 'twenty one.
Should that be an indicator if it is lead volume net sales are kind of going on.
Jump later in the year.
Yes, Mike I can take it as the primary driver is both for us.
Self insured short term disability and leave expenses I'd say there are a couple of other kind of timing related things in the fourth quarter that had a bit elevated as we sort of look out I wouldn't read into it.
Sustained trend of upward OE ratio I think I think we would expect net and that would come back in line, particularly once we get past <unk> on the volumes in net interest in visibility and we've come down.
Vaccination hits then.
Frankly seen LNG.
First as you see the national statistics around infections come down and we've seen that now for about 516 weeks.
With a short lag of a week or two on short term and lead volume start to mitigate and again, we're on a sustained path.
And there as you would expect and then mortality should follow so.
Good continued OE discipline, but probably need to get past <unk>.
Thanks, guys.
Thank you all right. Thank you.
We will now take our last question from Humphrey Lee from Dowling partners.
Good morning, and thank you for taking my questions just to follow up on the whole leaf management expenses.
I understand that you continue to reinvest in the businesses.
So that part of the equation from the elevated expenses may continue.
Is there any way to help us just think about the the adjusted the elevated expenses kind of between.
Volume versus kind of continued reinvestment.
That's my guidance I do think <unk> got outsized impact to expenses. If you look at particularly Humphrey that group disability segment, driven by Covid very acute and <unk> just like we've been talking about I expect that to continue in <unk> boy things are lining up.
The way we are expecting at this point that as we get through that first quarter get to the time of the year, we would expect things to normalize quite a bit so that just to be clear that's going to be the big driver of those expenses.
The kind of the mid term to long term trend though.
We are feeling very good about for productivity.
Thats.
Coming with the technology investments that we have been making and so we do believe that we will see some pretty substantial margin improvement in net debt self insured STD.
Business as we book improved productivity bring down unit costs, and then make the pricing adjustment that we talked about earlier, that's a good combination for us I do think what you could expect to see again is that on.
Operating expense ratio within the group disability segment remain elevated here on <unk>, but just a gradual improvement as low cost improvement and pricing takes a hold over the coming quarters.
Got it got it.
And then going back to group life mortality.
Clearly.
Covid has been a big impact, but some of the other carriers.
Carriers have seen non COVID-19 related mortality as well.
Just wondering if you have any seen any kind of impact from differences between the COVID-19 related versus non COVID-19 related impact to your mortality book.
Yes for it's Dave good morning.
See just normal volatility in our non COVID-19 mortality.
Maybe average claim size, just a little higher in the fourth quarter, but it bounces back and forth. So we are not seeing anything that we would consider a trend in that non COVID-19.
Kind of block of mortality, we will continue to look at it monitor it over time, it's something we think about but I would say that it's not a meaningful driver of earnings in the fourth quarter or has it been in previous quarters other than just normal volatility that we would have in the block anyway.
Alright, thank you.
Thanks, all for great. Thank you operator, I think that is all the questions I do want to thank everybody for taking the time to join us taking on a little bit over the hour as well. So operating this does complete our fourth quarter 2020 earnings call I look forward to connecting with many of you at upcoming Investor events, and I would ask that you all stay well.
And the call. Thank you.
This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
Yeah.
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