Rick McKenney (Photo: Unum) Rick McKenney (Photo: Unum)

Unum Group is a giant in the U.S. group disability insurance and voluntary benefits markets, and it has one of the biggest closed blocks of long-term care insurance (LTCI) business.

Reading the company’s quarterly earnings reports and listening to recordings of the company’s quarterly earnings calls with securities analysts are two ways financial professionals can get an idea of what’s really going on in the U.S. benefits and LTCI markets, and what Wall Street thinks about those markets.

Unum has posted a packet of third-quarter earnings materials, including a recording of its latest analyst call, here.

(Related: Another Big Insurer Posts Another Big LTC Insurance Charge)

Here’s a look at three things Rick McKenney, the company’s chief executive officer, and Jack McGarry, the chief financial officer, talked about during the call.

1. The health of Unum’s LTCI insureds may be getting better.

In August, Prudential Financial Inc. added $1.4 billion to its LTCI reserves, bringing the reserve total to $6.6 billion. Prudential said it had been assuming that slow, steady improvement in the health LTCI insureds would reduce the insureds’ need for long-term care services. In reality, the company said, the percentage of LTCI insureds who file claims has stayed about the same.

Unum is continuing to assume that the morbidity of its LTCI insureds will improve about 1% per year.

Analysts asked the Unum executives about why they see LTCI morbidity than some competitors do.

McKenney said Unum has experience data showing that the morbidity of its own LTCI insureds has improved about 3% per year, relative to the underlying reserve assumptions, over the past decade.

“We think that, with that as the historical result, assuming 1% improvement going forward is actually a pretty conservative assumption,” McKenney said.

McKenney suggested that one reason for a gap between companies’ views may be differences in what companies mean by the term “morbidity improvement.”

Some companies might be comparing actual morbidity trends to the morbidity level that prevailed when policies were written, and some companies, like Unum, many be comparing morbidity trends to the initial assumptions about how morbidity would change over time, McKenney said.

When a company is comparing actual morbidity trends to initial assumptions about morbidity trends, rather than to the old morbidity levels, its satisfaction with the results may depend on how aggressive its initial assumptions about morbidity improvement trends were, McKenney said.

“Plenty of companies” appear to be seeing the kinds of LTCI morbidity trends that Unum is seeing, McKenney said.

2. The waves of increases in interest rates is starting to help Unum’s earnings.

Life insurers use trillions of dollars worth of bonds to support products that create long-term obligations, such as life insurance policies, long-term disability insurance policies and LTCI policies.

When possible, life insurers try to buy bonds with durations that match the durations of the liabilities.

Sometimes, however, life insurers do sell bonds before the bond matures.

Now that the Federal Reserve Board is trying to bring the interest rate benchmarks it controls back up from close to zero, one big question has been what the effect on life insurers might be.

Have insurers matched their assets and  their liabilities well enough that rising rates will help their earnings?

Or, in the real world, are insurers selling so many bonds before the bonds’ maturity dates that rising rates actually hurt insurers’ earnings, by cutting the prices insurers get when they sell bonds early?

McKenney told analysts that, in fact, rising interest rates have been good for many Unum product lines, including the company’s closed block of LTCI business.

Unum has been assuming that it can get rates higher than 5.5% on newly invested money, and the average rate Unum is now getting on new investments is higher than that, McKenney said.

“It’s a much better environment than we’ve seen,” McKenney said.

But McKenney said challenges remain.

One challenge, he said, is that somewhat riskier borrowers are paying interest rates that are close to what safer borrowers are paying.

Narrow credit spreads can limit insurers’  ability to get higher rates by buying bonds from slightly riskier issuers.

Company executives noted that the economy has been performing well.

A strong economy may increase employer and employee demand for the products Unum sells, and it may also lead to more increases in interest rates, which should be a plus for Unum, executives said.

3. The benefits market is competitive.

Some insurers have said that the market for employee-paid benefits has been strong, and that the market for employer-paid group benefits has also been strong.

 

McGarry said that, for Unum, in the United States, both the voluntary benefits and traditional group product lines have been profitable, due to premium growth and stable or improving ratios of claims to revenue.

Voluntary benefits sales have been increasing, partly because of the addition of dental and vision products, McGarry said.

But U.S. sales of group life and group disability were down, McGarry said.

“Market conditions seem competitive to us in the core market segments,” McGarry said.

McGarry said Unum will “remain disciplined with our pricing,” rather than cutting prices to increase sales.

 

— Read Unum Could Add Up to $750 Million to LTCI Reserveson ThinkAdvisor.

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