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Text: Our SEC filings can be found in the Investors section of our website at unum.com.
Net income for the third quarter of 2020 included a net after-tax realized investment gain of $3.8 million and after-tax cost 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.
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.
So in the 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 remains 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 relatively 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 the 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 time of need.
Our average death 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 rate negatively impact our short-term disability and leave services businesses.
These increases will follow the course of the pandemic and will abate as infection rates slow.
Coming out of the March timeframe, 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 are happy to see at 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 to return to more normal business and economic conditions, while demonstrate to 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 continue 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 experienced 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 is executed well in this environment.
And finally, our capital position remains 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 cost we recorded this quarter was part of an ongoing effort and continue to manage our operations with an eye toward the future.
The savings generated allowed us to continue to reallocate dollars to invest in the growth areas of our business.
Importantly, we are seeing the pay-offs with investments made to date with the growing adoption of our digital assets throughout the organization, which is leading to strengthened 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 claim submission tools and automated claimant communications.
And one final example I'll mention is the MyUnum 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 has 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.
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 U.K. 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 impact 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 the continued high level of infections.
Excess deaths in the U.S. from 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 high rate of COVID infections that continued through the third quarter resulted in elevated short-term disability claims and drove higher expenses in the leave services business.
Second, employment conditions remained challenging.
The unemployment rate is rebounding to 7.9% for September compared to the peak level in April of 14.7%, but by comparison remained significantly higher than 3.5% % at September 30, 2019 and a 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 for month-to-month.
Finally, financial markets were generally stronger in the quarter.
This is most impactful to Unum and 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 reporting 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 60% above year ago volumes.
And third, pressure on premium growth due to lower recent sales activity and a reversal 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, but generally stable in new claim incidents and continued strong claim recoveries as well as favorable net investment income driven by a higher level and miscellaneous investment income.
As Rick said, we continue to be very pleased with the consistency of the results in LTD as demonstrated by 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 remain depressed at $13.9 million for the third quarter compared to $19.4 million in the second quarter.
When we analyzed 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 a weaker performance in the AD&D line where we experienced higher claims.
This is driven in part by seasonal patterns, but also by reopening of the economy, which resulted in higher rates 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 excess death or about 14% higher than expected relative to reported base of 120,000 COVID-related deaths.
As we stated before, our rough estimate is that we expect to see approximately 1% at the 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 is correlated closely to national trends and statistics, and over the year, the characteristics of our COVID claims has 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 a 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 they put off in prior months.
This resulted in the 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 and 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 by natural 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 lines showed more pressure than the group lines.
Voluntary benefits sales declined 35.8% year-over-year.
But keep in mind that third quarter sales for this line largely reflects 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, continue to be a strong performer overall, the bulk of the sequential quarter improvement came from Unum U.K., which produced adjusted operating income of GBP15.2 million in the third quarter compared to GBP10.1 million in the second quarter.
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 with in-force cases.
The benefit ratio was slightly elevated in the third quarter at 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 the telephonic enrollment and the 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 claimant 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 recorded on a one quarter lag.
The positive mark on the holds was $11.3 million this quarter compared to a loss of $31.3 million in the second quarter, which we've 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%.
Our claimant 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 seen 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 $15 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 yield continued 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 expectation for potential credit impairments and credit downgrades given the performance of the portfolio the past few quarters and are 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 are seeing remain consistent with what we had anticipated.
We will likely continue to experience more volatility in our results as long as the pandemic persist, but remain encouraged by the overall profitability of the company and our financial position.
We continued 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.
So I'll ask the operator to begin the question-and-answer session.

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q3 adjusted operating earnings per share $1.21.
qtrly after-tax adjusted operating income was $1.21 per diluted common share.

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