Unum Group Q3 FY2020 Earnings Call

Good day, and welcome to the Unum Group Third Quarter 2020 Earnings Conference Call. Today's call is recorded. At this time, I would like to turn the conference over to Mr. Tom White. Please go ahead, sir.

Great. Thank you. Good morning, everyone, and welcome to the third quarter 2020 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the Securities and Exchange Commission, and are also located in the sections titled cautionary statement regarding forward-looking statements, and risk factors in our annual report on Form 10-K for the fiscal year ended December 31, 2019 and our subsequent Form 10-Q filings. Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that the statements in today's conference call speak only as of the date 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 today's presentation can be found in our statistical supplement, which is also on our website in the Investors section. Yesterday afternoon, Unum reported third quarter 2020 net income of $231.1 million, or $1.13 per diluted common share compared to $242 million or $1.16 per diluted common share in the third quarter 2019. Net income for the third quarter of 2020 included a net after-tax realized investment gain of $3.8 million and after-tax costs related to an organizational design update of $18.6 million. Net income in the third quarter of 2019 included a net after-tax realized investment loss of $20.8 million and after-tax debt extinguishment costs of $19.9 million. So excluding these items, after-tax adjusted operating income in the third quarter of 2020 was $245.9 million, or $1.21 per diluted common share compared to $282.7 million, or $1.36 per diluted common share in the year-ago quarter. Participating in this morning's conference call are Unum's President and CEO, Rick McKenney; Chief Financial Officer, Steve Zabel; and Chief Operating Officer, Mike Simonds; as well as Peadar O'Donnell, who heads our Unum International Business; and Tim Arnold, who heads our Colonial Life and Voluntary Benefits businesses. So, now I'll turn the call over to Rick for his opening comments.

Thank you, Tom, and good day, everyone. Our third quarter performance demonstrates a very good operating performance by our Unum team. This is in the face of difficult business and economic conditions that persist in our world and specifically in the employee benefits market. Overall, our financial results were solid this quarter and largely consistent with the expectations we set back in July. In the previous two quarters, we outlined what we believe are the factors that will influence our business and these have evolved largely as expected though impacts and recoveries are moving at different speeds. This morning, we will outline the most influential factors, while highlighting the key parts of our business that continued to deliver excellent results in this stressed environment. So as a backdrop, I'd like to outline the high-level business and economic conditions that persisted throughout the quarter and had meaningful impact on our results. As we look at it, there are three major trends to follow. First and foremost, the health effects of COVID-19 remain significant with high mortality and high infection rates that impacted our benefits experience in multiple ways. Second, the sharp spike in unemployment rates in the spring has abated somewhat, but unemployment remains high relative to pre-COVID levels and continues to present a headwind to our growth rates. Third, we are beginning to see parts of the economy reopen and individuals return to more normal behavior and activities in their daily lives. This trend, when done in a responsible way, we think is a positive. But it did produce more negative impacts on our results in the third quarter relative to the second quarter. It may take time, but the longer-term implications of a containment of the COVID-19 pandemic leading to a full reopening of the economy will be very beneficial for our business. So when we take these three dynamics: health, unemployment, and gradual reopening, I'd like to highlight the important trends affecting our business in the current quarter. Sadly, high mortality rates continued into the third quarter and impacted our life insurance businesses, as well as seeing higher mortality within our long-term care claimant population. Although these claims impact our results, it reaffirms exactly why we are here: to take care of people at times of need. Our average debt claim is around $50,000 and this may be the only form of life insurance these individuals and their families have. We are also seeing infection rates negatively impact our short-term disability and lead services businesses. These increases will follow the course of the pandemic and will abate as infection rates slow. Coming out of the March time frame, the shock of shutting down the economy froze new business trends and disrupted our delivery models. We also saw high unemployment negating what we usually see as growth in payrolls. As our delivery models adapt and employment conditions stabilize, our long-term premium growth rates will return as the economy improves and more people get back to work. Although we're happy to see the early phases of the reopening of the economy tend to produce more short-term negative trends for us with higher dental utilization relative to the second quarter and a return to more normal levels of non-COVID-related STD claims in concert with COVID-related claims remaining elevated. So this is a moment in time and we look forward to seeing these influences moderating and settling back down in future quarters. We remain very committed to our business model and we expect the return to more normal business and economic conditions will demonstrate that providing financial protections to the workforce is good for employers and their employees. As we head into the final months of 2020, there are clearly some positive trends that have continued despite the challenges of this year. An example is that we continued to see strong performance from our Unum U.S. long-term disability business. This is a testament to our disciplined approach over many years to all facets of managing this business. Benefits experience in the closed long-term care block remained favorable, while the team continued to make progress on achieving rate increase approvals. The investment portfolio continued to trend favorably and expectations around impairments and downgrades have not materialized to the extent predicted. Our investment team has done a good job of analyzing our credit portfolio at a granular level and has executed well in this environment. And finally, our capital position remained with very good RBC at approximately 380% and holding company cash at $1.2 billion at quarter end, both nicely above our targeted levels. Despite the pandemic and the challenges it presents in the day-to-day management of our operations, we continue to operate the company with a focus on the future. The $18.6 million of organizational design update costs we recorded this quarter was part of an ongoing effort to continue to manage our operations with an eye towards the future. The savings generated allow us to continue to reallocate dollars to invest in the growth areas of our business. Importantly, we're seeing the payoffs with investments made to date with growing adoption of our digital assets throughout the organization, which is leading to strengthen relationships with customers and their employees. A few examples of these returns on our investment include our HR Connect platform, which digitally links our customers' HCM systems directly to Unum benefits. This allows for the automation of activities such as enrollment, billing, leave management, and evidence of insurability. Additionally, we have made investments to improve the customer experience through web and mobile claims submission tools and automated claimant communications. And one final example I mentioned is the My Unum platform that creates a simple and intuitive end-to-end self-service experience for clients to administer their benefits and ultimately eases the administrative burden for HR managers. These are just a few of the ways we are transforming our operations to better serve employers, their employees, and their families throughout these difficult times. It also positions us well for the future. To wrap up, I want to express how proud I am of the hard work and dedication of our teams this year through these difficult conditions. Our teams feel the challenge and uncertainty in their own lives, but their efforts to support our customers and each other have been exceptional. We have remained true to our purpose of helping people thrive throughout life's moments and what we are witnessing today has amplified the need for what we have always done. And now, I'll ask Steve to cover the details of the third quarter results. Steve?

Great. Thank you, Rick, and good morning, everyone. In discussing Unum's third quarter financial results this morning, my remarks will focus more on an analysis of our third quarter results relative to the second quarter rather than the traditional year-over-year comparison. Our intent is to show how the company is progressing through the pandemic and resulting recession and outline for you the impacts it has had on our results. As Tom outlined in his opening, after-tax adjusted operating income in the third quarter was $245.9 million or $1.21 per common share. By comparison, in the second quarter of this year, excluding the lease impairment costs and net realized investment gain, after-tax adjusted operating income was $250.1 million, or $1.23 per common share. The tax rate was impacted this quarter by an increase in the UK corporate tax rate to 19% from 17%, adding $9.3 million in additional tax expense. So we believe a good starting point for analyzing our results this quarter on a sequential basis is to look at before-tax adjusted operating income, which showed a slight increase to $318.5 million in the third quarter compared to $316.5 million in the second quarter. As I begin, let me remind you of the economic and business conditions that existed in the quarter and outline the impacts that it had on our results. First, obviously, COVID-19 had a significant impact on the external environment, driving a high-level mortality once again, plus a continued high level of infections. Excess deaths in the U.S. during COVID totaled an estimated 80,000 in the third quarter. The high mortality rate clearly impacted results in the Unum U.S. Group Life and voluntary benefits businesses and Closed Block long-term care. In addition, the higher rate of COVID infections that continued through the third quarter resulted in elevated short-term disability claims and drove higher expenses in the lead services business. Second, employment conditions remain challenging. The unemployment rate has rebounded to 7.9% for September compared to the peak level in April of 14.7%, but by comparison, remains significantly higher than 3.5% at September 30, 2019 and the strong monthly employment reports leading up to the spike in April. High unemployment levels throughout the quarter negatively impacted premium growth in our U.S. employee benefits business lines as it negated the benefit we usually experience from natural growth in the in-force blocks. At the same time, there has been a reopening of the economy with some people beginning to return to more normal activity in their daily lives. We saw this with dental utilization that rebounded from the low utilization rates of the second quarter, higher AD&D claim activity, which often mirrors property and casualty claims, higher non-COVID STD claims as individuals begin to catch up on procedures postponed in the spring, and some normalization of LTC claim incidents though those trends remain highly volatile from month-to-month. Finally, financial markets were generally stronger in the quarter. This is most impactful to Unum in the credit markets, where bond spreads continue to tighten on average while U.S. Treasury rates increased a few basis points. While this combination continues to create a challenge for achieving attractive new money yields on investment opportunities, it is generally favorable for credit conditions and our outlook going forward for potential credit impacts that is credit downgrades and impairments. In addition, income from our alternative asset investment portfolio improved back to our historical expectations this quarter after a significant negative mark in the second quarter. Against this high-level backdrop, I'll focus on our lines beginning with Unum U.S. group disability. Adjusted operating income for the third quarter was $73 million, down slightly from $76 million in the second quarter. Several factors impacted results on a sequential quarter basis. First, we experienced pressure on STD claims from continued high COVID impacts, while non-COVID claims began to return to normal levels. Second, pressure on expenses from a continued high level of leave volumes, which increased over the second quarter and were approximately 50% above year-ago volumes. And third, pressure on premium growth due to lower recent sales activity, and our reversal of natural growth in the in-force block due to the increase in unemployment. These trends were partly offset by continued favorable results in the long-term disability block, with generally stable new claim incidents and continued strong claim recoveries as well as favorable net investment income driven by a higher level of miscellaneous investment income. As Rick said, we continue to be very pleased with the consistency of the results in LTD as demonstrated by the group disability benefit ratio of 74.1% this quarter, which is consistent with the ratio a year ago of 74.2%. Adjusted operating income for Unum U.S. Group Life and AD&D remains depressed at $13.9 million for the third quarter, compared to $19.4 million in the second quarter. When we analyze these results, we believe that the impacts from the Group Life mortality matched up very consistently with the mortality trends we outlined for you in the second quarter. The big driver of the sequential quarter decline in income was due to weaker performance in the AD&D line, where we experienced higher claims. This is driven in part by seasonal patterns, but also by the reopening of the economy which resulted in a higher rate of accidents. Shifting back to the COVID impact on the Group Life business in the quarter, we experienced slightly more than 900 excess life claims or about 12% higher than expected benchmarked against a base of approximately 80,000 COVID-related deaths nationwide as reported by Johns Hopkins. This compares to our second quarter reporting, which showed approximately 1,100 total expected deaths or about 14% higher than expected relative to a reported base of 120,000 COVID-related deaths. As we stated before, our rough estimate is that we expect to see approximately 1% of U.S. mortality by count given our market share of life insurance in the country. While there continues to be a lot of volatility in these trends, all in all, we view these results to be largely in line with our expectations. We believe our year-to-date experience in Group Life has correlated closely to national trends and statistics and over the year the characteristics of our COVID claims have followed the evolution of the virus' impact nationwide. We believe this close relationship to national trends will continue and suggest you use that as a basis for your projections and estimates in future quarters. I'll add that so far in the fourth quarter, these trends are matching our third quarter results with a slightly higher average claim size, which is now in the low $50,000 range. The Unum U.S. supplemental and voluntary lines experienced a more significant decline in the third quarter from the very favorable second quarter with adjusted operating income of $101.3 million in the third quarter compared to $136.5 million in the second quarter. The biggest driver we experienced was the pickup in utilization in the dental and vision block from the unusually favorable trends in the second quarter. In addition, we saw an elevation in average claim size as policyholders caught up on dental services that they put off in prior months. This resulted in a benefit ratio increasing to 76.8% from 36% in the second quarter. Within the voluntary benefits line, we saw an uptick in the benefit ratio due to higher life claims in the block, which we believe are largely driven by COVID. For the individual disability line, benefits experience returned to a more normal level of both claim incidents and size of new claims. Beyond these benefit trends, premium income in the supplemental voluntary lines declined 2.8% on a sequential quarter basis, due to lower new sales in recent quarters, slightly lower persistency, and the effects of weaker employment trends on national growth. Sales for Unum U.S. declined 18.5% in the third quarter compared to the year-ago quarter. The group lines which are LTD, STD and Group Life combined increased by 1.5% as we continue to see good traction from our HR Connect platform that links customer HCM systems directly to Unum. As we expected and outlined on previous calls, the supplemental line showed more pressure than the group line. Voluntary benefit sales declined 35.8% year-over-year, but keep in mind that third quarter sales for this line largely reflect second quarter enrollments, which were significantly disrupted by the pandemic and economic shutdown. Dental and vision sales declined 33.1%, largely due to the disruption we are seeing in group sales activity as in-force providers are offering discounts and other incentives in response to the unusually favorable claim trends the industry experienced in the second quarter. Moving to the Unum International segment, we are pleased to see improvement in adjusted operating income to $21.4 million in the third quarter compared to $15.1 million in the second quarter. While Unum Poland continues to be a strong performer overall, the bulk of the sequential quarter improvement came from Unum U.K., which produced adjusted operating income of £15.2 million in the third quarter compared to £10.1 million in the second quarter. The benefit ratio for Unum U.K. improved sequentially to 77.1% in the third quarter compared to 82.5% in the second quarter, driven by better performance in the group disability line from improved incidents and in the Group Life line from improved mortality experience that mirrors the national experience in the U.K. Although we are encouraged by the third quarter trend, the sustainability of this improvement in the fourth quarter is uncertain at this point, given the reemergence of COVID cases in the U.K. Colonial Life continued to report favorable results, with adjusted operating income of $92.2 million in the third quarter compared to $90.9 million in the second quarter and $87.2 million in the year-ago quarter. Premium income for the third quarter declined 4.3% from the second quarter, driven by the decline in sales this year and the negative impacts from individual lapses within forced cases. The benefit ratio was slightly elevated in the third quarter of 52.2% compared to 50.7% in the second quarter, largely reflecting the continued higher life and STD claims related to COVID with less offset from favorable accident and cancer lines. Net investment income also benefited this quarter from a higher amount of miscellaneous investment income. Sales for Colonial Life declined 27.6% year-over-year in the third quarter, an improvement over the second quarter, when sales showed a decline of 43% year-over-year. The 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 remain pressured, we are seeing strong double-digit sales growth from telephonic enrollment and a self-service platform. In addition, agent recruiting remained strong with an 8% increase year-over-year. And then in the Closed Block segment, adjusted operating earnings increased to $70.8 million in the third quarter compared to $36.7 million in the second quarter, largely driven by the continued favorable impact on high climate mortality on the LTC block and a return to more normal positive marks on the alternative investment portfolio from the significant decline in value as of the end of the second quarter. Keep in mind that the valuation of much of the alternative portfolio is reported on a one-quarter lag. The positive mark on the alternatives was $11.3 million this quarter compared to a loss of $31.3 million in the second quarter, which reflected the negative market conditions at the end of the first quarter. For the LTC block, the interest-adjusted loss ratio was 67.4% in the third quarter compared to 67% in the second quarter and over the past four quarters is now 75.6% compared to our long-term expected range of 85% to 90%. I claim that mortality was a major factor again this quarter as mortality was approximately 15% higher than expected. This impact was less than the second quarter, which was approximately 30% higher than normal. Unlike the second quarter, we did see new claim incidents for LTC return to more normal levels. However, the month-to-month trends remain highly volatile. Therefore, we increased IBNR reserves for LTC again this quarter. At this point, we are not seeing anything in these claim trends that would change our long-term assumptions. For the Closed Disability Block, the interest-adjusted loss ratio was 86.6% in the third quarter compared to 89.5% in the second quarter with slight improvement in underlying claims experience. Coming back to LTC, we are pleased to have another successful quarter of in-force premium rate increase approvals, which gets us to $1 billion of the $1.4 billion of margin in our reserve assumptions. So, then wrapping up my commentary on the quarter's financial results, the adjusted operating loss in the corporate segment was $77.4 million in the third quarter. Included in this are expenses related to the organizational design update that Rick referenced in his comments of $23.3 million before taxes or $18.6 million after taxes. Excluding these costs, the adjusted operating loss of $54.1 million was consistent with our expectations and was largely driven by interest expense on our outstanding debt, which totaled $49 million in the third quarter. With the maturity in September of a $400 million debt issue, our interest expense is expected to decline to approximately $45 million in the fourth quarter. For the corporate segment in total, we continue to expect quarterly losses in the mid-$50 million range. I'd like to now turn to a discussion of the investment portfolio, which continues to show a strong recovery from the first quarter, given the recovery in the financial markets. A few points to highlight are, first, net after-tax realized investment losses from sales and credit losses totaled $7.3 million this quarter compared to $7.7 million in the second quarter and $44.4 million in the first quarter. This is consistent with our expectation that the majority of the impairments would be realized in the first quarter. Second, the trend of downgrades of investment-grade securities to high yields continues to improve and our outlook for potential future downgrades has improved. In the third quarter, we saw $141 million of these downgrades compared to $193 million for the second quarter and $336 million in the first quarter. The impact to RBC this quarter was immaterial. Third, the net unrealized gain position on the fixed maturity securities portfolio improved to just over $8 billion from $7.4 billion in the second quarter and $4.3 billion at the end of the first quarter. And then finally, we continue to bring down our expectations for potential credit impairments and credit downgrades given the performance of the portfolio the past two quarters and our increasingly positive outlook for credits. Our outlook for Fallen Angels for 2020 is now half of our original scenario. This gives us further confidence in exceeding our capital targets at year-end 2020. Then looking to our capital position, we finished the quarter in very good shape with the risk-based capital ratio for our traditional U.S. insurance companies at approximately 380% and holding company cash at $1.2 billion, both comfortably above our targeted levels. Again, the cash balance at September 30 reflects the $40 million debt maturity in September and our next maturity is not until 2024. I'll wrap up by reiterating the results we were seeing remain consistent with what we had anticipated. We will likely continue to experience more volatility in our results as long as the pandemic persists, but remain encouraged by the overall profitability of the company and our financial position. Now, 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 our third quarter results. 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 an improving economy and better business conditions as society continues to reopen. And in the meantime, we'll continue to focus on crisp execution to manage through today's challenges. The team is here to respond to your questions. So, I'll ask the operator to begin the question-and-answer session.

Thank you. Our first question today comes from Mr. Jimmy Bhullar from JPMorgan. Please proceed; your line is open.

Hi. Good morning. I had a question first just on the product persistency. It's declined very slightly, but the premiums declined more. So I think you report case persistency. But if you could talk about what trends you're seeing in terms of premium persistency. And it seems like that's weaker than case persistency. And if that is the case, I'm just wondering why you wouldn't have seen more of an impact in the last quarter, because unemployments sort of peaked on here and it's a little bit of a delayed reaction that you're seeing on your premiums.

Yes, Jimmy, I think you're right. I think we're very happy with the persistency overall and what we've seen, but some of the dynamics you're talking about are right on. Mike, can you give some details around that?

Sure, Rick. Thanks and good morning, Jimmy. You are right. That's probably the first metric that we go to is what that persistency looks like, and that is strong and incrementally improved a bit from the second quarter at a tick over 89% for the group insurance lines. And as we sort of sit here and deal with a pretty challenging environment, I can also say that if you look at our renewal programs forward to the January 1st renewals, we're feeling pretty good and in line with expectations there, which I think is great and a really important underlying signal. To the question about how it flows through to premium, the first question is, are our clients sticking with us? The answer is yes. The second question is what's happening within those clients. And what we've seen is while we've got a really, I think favorable mix by industry, the reality is that we are seeing the natural growth impact of fewer new hires and fewer salary increases, which flow through typically as natural growth on the group insurance lines. In the year-ago period, we would have seen in the high 2%, 3% range of natural growth that's approaching flat at this point. So, favorable to what we're seeing in the broader economy due to the mix, but certainly a pressure item for us when it comes to premium. And then the last piece of the puzzle is new sales, which as Rick and Steve went through. We're seeing good incremental improvement as distribution figures out how to adapt to the new environment, but lower new sales in the prior period is certainly a little bit of a drag on earned premium as well.

Okay. And then just another question on your U.K. business, I think you've had issues in terms of closing claims and just delay in getting the information to close a claim because of the disruption related to COVID. Given that the case count has gone off recently, is it fair to assume that that actually gets more severe in the near term and claims closings get more difficult, which would have a negative impact on your margins in the short term?

Yeah. Peadar, can you take us through the U.K. dynamics?

Yes. So thanks, Jimmy, for the question. So you're correct. In the second quarter, we saw severe disruption to our health service and to employers as we basically went into the pandemic lockdown and the whole health service was focused on dealing with COVID. The third quarter has been more benign, and I think they've done a lot of planning now to think through how infection rates are going to grow through the fourth quarter. The main thing in the third quarter why we're not seeing sort of income protection come back is it would be more about people's behaviors, so they haven't been engaging in the health service. And obviously, the furlough scheme is still running hard here. So getting employers interested in getting people back to work has been a challenge. I'd expect the trend that we saw in the third quarter to continue. I don't think it will get worse even though infection rates are increasing. I think the government is doing everything it can to balance the economy, balance the health service. Based on what we're seeing today, I think they'll manage to work their way through that. So, the trend we've seen in Q3, I don't think it'll get better, but I think it will continue to sort of trend along the Q3 as opposed to the Q2 trends. So that's our expectation.

Thank you.

Thanks, Jimmy.

Thank you. We will now take our next question from Ryan Krueger from Keefe, Bruyette & Woods. Please go ahead. Your line is open.

Hi. Thanks. Good morning. In the past, you've talked about the possibility of doing something with the closed IDI block as you get close to paying back the rest of the securitization debt. Can you just give us an update on how you're thinking about that?

Yeah, great. Thanks. Ryan, good morning. Yeah, I would say there's not much news on that front. We continue to look at counterparties in the market on that. And you mentioned we're getting close to paying off the non-recourse debt on that. And we really probably have three options. One, it's a block that generates distributable capital every year. We've been using that to pay off the debt. When that debt is paid off, that will just be free and clear to the holdco. So that would be one option. The second option is we could look at re-levering it. I mean, I think the markets would be pretty receptive to an offering around that sort of risk. And then, three would be a more for risk transfer transaction. So, we'll continue to evaluate all three of those, but really nothing to report at this time.

Got it. Can you provide some insight on how the $1 billion you've achieved so far compares to your reserves or where you thought you would be at this point?

Yeah. So I'll just kind of take us back to when we reset our reserve assumptions in 2018, we had $1.4 billion of premium value within those margins. About half of it was old programs that we had on file with the states already; about half of that was new. I'd say it was pretty well weighted to the group block; at least the new program definitely. Yeah, we're very happy with where we are today, kind of getting close to ringing the bell on that $1 billion of value. What I would say is we're pretty much consistent with our expectations. The one area that we feel like we may be a little bit ahead is going all the way back to our California approval. We were very happy with the approval that we got there. But I would say, all things on balance, we're still on track. We still feel good about the $1.4 billion. We're still very happy about just the interaction with the regulators, the tone there and just the environment with the regulators through COVID. The activity has continued with them. So procedurally we still feel pretty good.

Got it. Thanks a lot.

Great. Thanks, Ryan.

Our next question comes from Suneet Kamath from Citi. Please go ahead. Your line is open.

Thanks. Good morning. I wanted to start with sales, Rick, at the outset you talked about your delivery models being impacted in the quarter. I was wondering if you could just provide a little bit more color in terms of what's going on. And sort of relatedly, how are you guys approaching 2021 open enrollment in a kind of virtual world? I would imagine that would change the dynamic relative to what you've seen in a normal year. I'm just trying to figure out what you guys are doing differently in order to make sure that you're getting in front of the right employees as many as you can.

Yeah. I appreciate the question, Suneet. I think my comments are very much about the shock that happened to the system going back to the March time frame. When you think about the people that would have been in the middle of thinking about their enrollment or even thinking about bringing on a new plan, everything just froze. So that throws that system. And then when you think about even in our face-to-face model that Colonial Life does such a good job at, obviously that was impacted as well. But things are moving along. And Mike, maybe we can give some commentary about what we're seeing out there on the sales front and what gives us optimism for the future.

Sure, happy to. And if I just took a step back and looked across products and geographies brands, I would say overall, actually, I'm pretty encouraged about sort of the continued and gradual improvement of the underlying fundamentals around proposal activities and contact with producers. And we hit that trough, as Rick was saying, at the end of the first quarter and the first part of the second quarter, and then it's been working its way through the pipeline, and we're refilling it albeit in a challenging time. I think we feel that most acutely in the small end of the market and in the voluntary, as you were raising, when it comes to things like face-to-face enrollment. But I'd tell you, across again brands and geographies, the distribution teams remain intact. Turnover is very good. This is a very engaged team. I think that bodes very well for us as they continue to adapt as broker and consultant partners continue to adapt to the new reality. I think that does bode well, particularly in the context of we're weathering quite a storm here with the pandemic. But it is clearly an indication that what we do, taking care of people when they get sick or when they get hurt, has never been more important. And I think that's a tailwind in terms of long-term demand. But if I look at Unum US, specifically, the core and voluntary lines is where we felt the challenge most acutely, and I am seeing a slow gradual incremental improvement month to month to month. I think it will continue to take some time before we're fully recruited and adapted to new ways of doing business. The large case market has been less impacted, and we saw a nice lift here in the third quarter that will be volatile as it has always been quarter-to-quarter; as some quarters you're going to have a big transaction and other you're not. The only other level of detail I would provide is the dental insurance market, which Steve alluded to in his opening comments. But with the fall-off in demand and a lot of practices closed in the second quarter, we did see a number of large carriers in the dental space extend rate guarantees in premium refunds at discounts. And that, in effect, has kind of slowed the new business market for group dental insurance. But the longer-term or even the mid-term trend, I think, is positive. It will take some time. And again, I do feel like what we do is important and it's never been more so, and that's how it's playing out from Unum U.S. point of view. And Tim, I don't know if you want to comment on Colonial Life?

Yes, sure, Mike. Thanks. So it is definitely a challenging environment and as Mike pointed out, especially in the small case market and in situations where sales are performed on a face-to-face basis. So it is challenging. We are encouraged by the incremental improvement we saw in the third quarter over the second quarter. And there are a number of bright spots, and Steve pointed to some of those in his opening comments. I'll just maybe walk you through a few others. So as Steve pointed out, new agent recruitment is up 8.6% year-over-year. The number of sales managers in our organization has grown by 8.4% year-over-year. When we do enrollments, we see participation levels that are in line to slightly above last year. And when we look at our enrollments by type, on an account basis, the number of enrollments that we performed with agent assistance this year is down 26.5%. But in many ways, you would expect that to be worse given that the economy especially in the second quarter was largely closed. We're very encouraged by the alternative forms of enrollment where we look at capabilities over the last few years. We're seeing great adoption. Telephonic enrollments were up 30% year-over-year. Self-serve enrollments are up 25% year-over-year. A number of our agents who can conduct enrollments virtually has grown by 243% year-over-year. So it's a challenging environment. We expect it's going to take some time to dig out, but we believe we're extremely well positioned for the future as it relates to sales on the BB business.

Got it. My second question is about long-term care. I understand it's early, but do you have any initial thoughts on potential lasting impacts from COVID? I'm considering whether there might be a reduced willingness for people to enter long-term care facilities or if facilities might have fewer beds, which could increase operational costs. I know the situation is still developing, but I would appreciate your insights on any possible long-term effects from COVID.

Yes. Great. Good question. So I'd probably put it in the three buckets as far as the dynamics that we're seeing just in behavior and also experience around our LTC block. Probably the simplest to describe is just the higher claimant mortality. We definitely have seen that continue. I noted in my comments, it continued to be higher than what our seasonal expectations would be for the third quarter. I would say it was not on a relative basis as high as we saw in the second quarter. But that's something that we'll just track, and we'll probably follow more just the health statistics that you see broadly. The second would be incidents. As we noted in the second quarter, we had very low incidents, quite a bit below our expectations. We've actually seen that come back to more normal trends in the third quarter. And so we think we're probably back to somewhat of a norm there. And then I would go to just kind of location of care and just movement between location of care. That normally you'd see kind of a progression of care that might go from the home to a facility over time. What we saw in the second quarter was really the movement from home care to facility really slowed down dramatically. And you saw a little bit of the movement from facility back to home care, which we do see some. What we saw in the third quarter was more of just the location of care locked up across the board a little bit more where people weren't necessarily transitioning from home to facility or facility to home care. It still occurs, but not at the pace that we maybe have seen in the past. I would say with all that said, and if you go back through the three buckets and you think about longer-term implications of that, clearly mortality is mortality. We would not reset our thinking around longer-term mortality trends based on kind of the acute experience that we've seen recently. But when it comes to people's desire to go on claim and to go into a facility or have people in their home that is something that we'll definitely need to track to see if there's longer-term implications. And then definitely, the movement, the normal progression of where people receive care, that is something that we'll clearly track over time and see if those behaviors change. With all that said, we're going into our reserve adequacy season here. We'll be completing that in the fourth quarter. We would not look to change any of our longer-term trends for what we've seen over the last two quarters. We'd want to see that over time, really understand the drivers of that before we make any long-term adjustments.

Okay. Thank you.

Thank you, Suneet.

We will now take our next question from Tom Gallagher from Evercore. Please go ahead. Your line is open.

Thank you. I wanted to follow up on the long-term care question. If you continue to experience favorable outcomes in long-term care, even if they are primarily short-term, it seems there could be a short-term earnings advantage. If this trend persists over the next few quarters, could it potentially reduce the annual contributions that Unum has to make as per the agreement with Maine regarding the $2.1 billion?

Yes. Yes. Thanks, Tom. So probably the way I think about it. First of all, the experience will kind of change the inventory of our block going into our year-end reserve adequacy work in the TDR. That might have very small impacts, and that's just kind of the math. You'd run the math through the prescribed assumptions to determine the TDR. So I'd say that's probably pretty immaterial. We have seen better statutory results in the LTC block and some of that is in Fairwind. So obviously, that will adjust our thinking on capital levels that we'll need in Fairwind at year end. And so that would be a dynamic. But when it comes to how we think about capital contributions, at least for now, we're still planning for the same kind of year-end full-year capital contributions into the LTC book that we've given guidance on before, which was about $600 million in total for the year. We put about $270 million of that down into the subs already. So well within our capital plan going into the end of the year. I mean, I think it's probably a little premature to really materially change what that expectation would be. But clearly it does help to have lower statutory losses on that book.

Can you share the changes you've observed in Fairwind earnings? Are they in line with the improvement we've seen on a GAAP basis, which has likely been about $80 million better over the last couple of quarters? Would the directionality of Fairwind earnings reflect that trend or be different?

Yes. I mean, again, in general, I think we'll have fewer losses that we'll have to fund, but we'll have to just see how the entire equation turns out for Fairwind before I want to talk about that. But the other thing is we do still need to go through and finalize our New York company asset adequacy testing. And with rates where they are now, that might be a little challenging. So I really wouldn't want to adjust down what we think our capital requirements are going to be right now. We need to get through those processes first.

That's a valid point. Following up, as we look ahead to 2021, I noticed your comments on how unemployment is affecting revenue. Your case persistency appears to be quite strong, yet there seems to be some pressure on revenue. Is there a way to evaluate how ongoing trends might impact overall revenue for Unum in 2021? I'm not sure if you can provide a range for that.

Yes, Tom, I think we would likely avoid making any decisions on that right now. As we approach the end of the year, we'll have a clearer perspective on the situation. However, as we mentioned, the underlying trends we've observed will persist as we move into the fourth quarter. We plan to provide a detailed update around mid-December regarding what 2021 may look like.

Okay. Thanks.

Thanks, Tom.

Our next question comes from Mark Hughes from Truist. Your line is open.

Yeah. Thank you. Good morning. Can you talk about the elevated leave management expenses the last couple of quarters? Can you share specifically or roughly what those were this quarter? And how do you think those will trend in FQ?

Great. Thanks, Mark. Mike, you want to take us through the leave management business?

Sure. Good morning, Mark. Thanks for the question. It's a good one. To address your specific inquiry regarding the operating expense ratio for the group disability segment, if we exclude services, it has remained largely flat year-over-year. The rise in the expense ratio is primarily driven by leave and the administrative services we offer to clients who self-insure their short-term disability plans. We have seen a significant increase in volumes during the second and third quarters as a result of both factors. As mentioned earlier in the call, there has been persistent COVID-related pressure on short-term disability, especially in the larger market segment, along with a recovery in non-COVID related areas. As discretionary surgical procedures have resumed and healthcare providers adapted to operate safely, we have observed volume increases exceeding 50% in the third quarter. However, these increases translate into expenses rather than benefits in terms of claims paid. Looking ahead, it's crucial for us to support our clients during this time, and we plan to implement increased fees to help manage some of these expenses. Additionally, we are restructuring our service contracts to focus more on volume-based arrangements rather than a flat fee per covered employee, allowing us to better adapt to future volume fluctuations. We will also continue to enhance efficiency in the coming quarters. We are optimistic about the business and are investing in technology that is already yielding positive results. We anticipate steady improvement in our unit costs and client experience over the next four to six quarters. It's important to note that we only offer these services alongside our insured lines. We are confident in the profitability of our overall customer relationships, especially when considering both insurance and services, which we see as a major differentiator. Most of our mid- and large-case requests for proposals now include bids for these services, underscoring their importance in our value proposition, which we are capable of meeting profitably. However, navigating this will take some time, especially in the current environment.

Is the typical duration of short-term disability claims affected by COVID? Have any of those transitioned to long-term disability?

Yes. Great question. And the reality is the nature of the COVID claim, it is not typically going to make it through elimination periods to the long-term disability plan. So typically, those are going to be 90 to 180 days and very, very, very few insignificant flow-through to LTD. And maybe in contrast Peadar was talking a little bit about what we're seeing with recoveries with long-term disability in the U.K. We here in the U.S. have actually been able to do pretty well and actually favorable to expectations. And again, as health care providers are figuring out the new normal, that's a little bit of tailwind for us too when it comes to recoveries on the LTD side.

Thank you.

Sure. Thanks, Mark.

Thank you, Mark.

We will now take our next question from Andrew Kligerman from Credit Suisse. Please go ahead. Your line is open.

Thank you. Good morning. Maybe just to tag on to that last question about leave management. And I know that the year-over-year increase in leave request was about what 50% to 60%. Maybe just even moving beyond that you talked about some of the restructuring that you're doing to that product, when might it transition from a cost-centered to an earnings contributor? Do you kind of have a timeline or a window when you think that might occur?

I can take one. It's Mike. Appreciate the question, Andrew. And first and foremost, we do look at it in the context of the overall client relationship and look at it insured and services together. But as volumes have increased related to COVID, it has definitely put pressure on the operations as we talked about in the restructuring of the contracts that we talked about. But as I look out over the next, I would say, four to eight quarters, it's a pretty steady improvement, I think, in revenue per covered member as we put the price increases through and then the benefit of unit costs coming down, which actually we're already starting to see here in 2020. So it will take some time to work all the way through. Their contracts look similar to what we see on the insured side with two-year contracts being pretty standard. So, it will take us probably the six to eight quarters to work it through. But I'm actually pretty excited about the potential for that business, not only for what it can provide for us for fee income, but probably more importantly because of the importance that our clients put to it and the real need that it needs. And as I kind of look out, I wouldn't try to predict what's going to happen from a legislative point of view. But in general, the trend has been towards more complexity when it comes to things like complying with leaves laws at the federal, state, and municipal level. And as more change comes down, I think that increases the need for professional outsourcing services and something that we can do there to meet our clients.

Got it. Thank you. And then with regard to credit and I think what I heard just specifically regarding Fallen Angels, you said your outlook for the Fallen Angels had reduced in half. If I remember correctly, at 2Q you cited expectations for all of 2020 to have defaults of $70 million and just overall downgrades of $1.3 billion including, let's see yes. And so far as of the first half, you had $52 million of defaults and $529 million of downgrades. So could you update that outlook for the full year? And if possibly even provide the third-quarter figures.

Great. Yeah. Andrew, hi, this is Steve. I would say from an impairments perspective, I think your numbers are relatively right. What we would say is for the remainder of the year, we anticipate impairments to be de minimis. It would be our view right now. We have a little bit built into our capital plan, but really aren't expecting anything for the remainder of the year there. From a downgrade perspective, our full-year estimate now is around $800 million. We've already reflected $670 million of that as of 9/30. And you're right that $800 million came down from about $1.3 million that would have been what we would have quoted in our last call. So, very, very little anticipated for the remainder of the year. The other thing I'd tell you, in the third quarter, the capital impact was pretty close to zero. A big part of that downgrade, that bond had already been adjusted as far as the NAIC rating, so it really didn't have a capital impact even though it was considered a Fallen Angel. So, we feel pretty good about that. And then, we do have a downgrade estimate in our capital plan going into next year. But again, we think that's pretty manageable.

On that note, that's pretty encouraging. When you say management book, could you give a little color around it? And tying into that, share repurchases, is there a possibility that you could resume in the first quarter?

Yeah, I would say we'd leave any discussion to capital plans for next year probably to our Investor Day in December. Really we're going through kind of our annual planning process and finalizing what we think next year is going to look like. I can tell you, though, our early read would be that the credit markets would continue to be pretty stable going into next year. And so we wouldn't anticipate large capital implications from downgrades next year.

That's great. Thank you.

Thanks, Andrew.

Thanks, Andrew.

Our next question comes from Humphrey Lee with Dowling & Partners. Please go ahead. Your line is open.

Good morning. And thank you for taking my questions. Looking at the Closed Block IDI, the claims continue to be elevated. I think last quarter you talked about you're seeing some normalization. But I was just wondering if you could provide some color in terms of what you've seen since the second quarter core and then into the fourth quarter?

Good morning, Humphrey. This is Steve. You're correct that last quarter our loss ratio in the CBD block was 89.5%, and it has improved to 86.6% this quarter. We have noticed some higher incidents during the COVID environment, although we haven't experienced a significant number of actual COVID claims. The current environment has led to more general incidents within the block, which we're closely monitoring. From an earnings perspective, it's been quite manageable, and we feel confident about that block. It is capitalized in our North Wind structure, which has been performing very well and continues to meet debt obligations on time. We expect this trend to continue.

Okay. And then, in terms of the long-term care, you talked about the mortality being 15% higher. Can you give us a sense in terms of whether those are concentrated in the possible life or in the active life?

Yeah. No, that's a great distinction. What I'm quoting there would be in the claimant block only. And that's really where we've seen the elevation over this entire period. I would say we have not seen any sort of significant movement in mortality in the active life block during this period of time.

Got it. Thank you.

It's a great thing that figured.

We will now take our next question from Josh Shanker with Bank of America. Please go ahead. Your line is open.

Yeah. Thank you very much. I was hoping you could give us some color on whether changes in short-term disability versus long-term disability purchasing will be with us for a while. Or do you think it's just a short-term situation related to COVID? And likewise, given that COVID will persist for a little while, how do you see the sales recovery in Colonial Life playing out over the next 18 months?

Mike, can you?

Okay. Yes. Yes. Yes. Happy to take it. So I would not read into the quarter-to-quarter shifts between product sales. I think the reality is we had a couple of larger transactions in the up market on the group insurance side. And they happen to be in a couple of product lines and not in a couple of others. So I don't know that there is a sustained trend to read into what consumers or employers are changing with their benefit plans. And then the second question, I'll put that over to Tim.

Yeah. Thanks, Mike. So again, we're encouraged by the quarter-over-quarter improvement we saw in the second quarter to third quarter. We expect to continue to see incremental improvement. Some of that's going to be dependent upon how the virus behaves and whether there are any additional impacts to the economy based on potential reemergence of the virus. But again, our agents are adapting to the environment we're in. They're adopting the digital tool set that we shared with them. And we're actually seeing face-to-face enrollments beginning to reemerge in places where the virus is lessened. So we're encouraged and optimistic. But it will be a choppy road ahead for a couple of quarters.

Without guidance, do you have some sort of planning about thinking about 2021 versus 2019, Colonial Life sales?

Yeah. I think we're not going to have clear visibility.

We'll talk about that in December, what our early outlook looks like around that. That's a good time to discuss some of those dynamics.

All right. Thank you very much.

Thanks, Josh.

I think we're up on time here. So I want to thank everybody for joining us this morning. Please do stay safe and healthy. And operator, this now completes our third quarter 2020 call.

This concludes today's call. Thank you for your participation. You may now disconnect.