Good day, welcome to the Unum fourth quarter 2019 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Tom White of Investor Relations. Please go ahead.
Great. Thank you, Kevin. Good morning, everyone, welcome to the fourth quarter 2019 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, 2018, as well as our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of our website.
I remind you that the statements in today's call speak only as of the date they are made, we undertake no obligation to publicly update or revise any forward-looking statements. 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 on our website, also in the Investors section. Yesterday afternoon, Unum reported fourth quarter 2019 net income of $296.2 million, or $1.44 per diluted common share, compared to $249.1 million or $1.15 per diluted common share in the fourth quarter of 2018. Net income for the fourth quarter of 2019 included a net after-tax realized investment gain of $7.2 million and after-tax costs related to the early retirement of debt of $1.7 million. Net income in the year ago fourth quarter included a net after-tax realized investment loss of $32.6 million.
Excluding these items, after-tax adjusted operating income in the fourth quarter of 2019 was $290.7 million, or $1.41 per diluted common share, compared to $281.7 million or $1.30 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, Chief Operating Officer, Mike Simonds, as well as Peter O'Donnell, who heads our International Business, Tim Arnold, who heads our Colonial Life Business. Now I'll turn the call over to Rick for his opening comments.
Thank you, Tom, and good morning, everyone. We closed out 2019 with a good fourth quarter. Our after-tax operating earnings per share increased 8.5% over the year ago quarter to $1.41. This puts our full-year operating earnings per share at $5.44, and a growth rate of just under 5%. In the fourth quarter, we had a good mix of growth, with after-tax operating earnings growth of 3%, complemented by the additional benefit from share buybacks producing the 8.5% overall increase. The business environment we operate in remains mixed, with headwinds from low interest rates and the economic impacts of Brexit on our U.K. business offset somewhat by the favorable employment trends and a strong consumer in the U.S. All in all, we're pleased with our performance in 2019 and optimistic as we move into 2020.
Looking at our business trends, I'm pleased with the premium growth we saw in our core business lines, which are approximately 5% overall for the fourth quarter and for the full year. Sales trends, however, were more volatile in this quarter, and sales for Unum U.S. were lower on the quarter, impacted by the competitive conditions in the employee benefits market and our desire to maintain discipline with our pricing and risk selection. I feel it's important to remember that because of our focus on discipline, Unum U.S. sales can vary from year to year, but I would put that in the context that our compound average growth rate has been 5.6% since 2016, and sales in total have exceeded $1.1 billion for each of the past three years.
We saw favorable growth trends in our international lines and an improved rate of growth at Colonial Life in the fourth quarter, which helped us generate a slight increase in sales for the full year for Colonial Life. Total sales for the company for the full year were $1.8 billion. Persistency levels in our U.S. group lines and international business lines remain steady at very favorable levels, reflecting the strong value proposition we bring to our in-force customers and our distribution partners. Next, we continued very favorable overall margin trends across our core business lines. Benefit ratios remain within our expectations, particularly in our U.S.-based businesses. This reflects the disciplined approach we bring to product pricing and underwriting, as well as in-force block management through renewals.
While adding new customers in our core business segments is a driving force of our strategy, we know that sustainable growth requires us to maintain our focus on protecting the strong profitability of these businesses. Expense management trends also continue to be favorable in our core business segments. We're maintaining our focus on effectively managing our expense base while freeing up the capacity to invest in new capabilities. I'll come back to this in a moment, but we see significant opportunities for growth and efficiency as an important element of success, and we'll be continuing this focus on productivity, expense ratios, and the profitability of our business. Taking an aggregate, these favorable operating trends in our core business segments continue to drive strong margins and capital generation. As a result, our adjusted operating return on equity was 17.2% for the fourth quarter.
Our core businesses also generated healthy statutory after-tax operating earnings of over $1 billion in 2019, with the resulting cash flow funding our growth and supporting our capital deployment initiatives. Wrapping up on our financial results, the closed block had an excellent fourth quarter, with historically low loss ratio in the closed disability block. We also saw favorable overall results in the long-term care business, which has remained within our expectations since we updated assumptions 18 months ago. Steve will cover all of these results in more detail in his commentary. To conclude my remarks, we're quite pleased with the results for the fourth quarter and full year 2019. We enter 2020 with a strong sense of optimism. You also saw that two weeks ago, we named Mike Simonds as our Chief Operating Officer, a recognition of his past success and a well-deserved expansion of responsibilities to drive growth.
We know that delivering consistent long-term success is a constantly evolving market for benefits. Through all of this, new product introductions and business acquisitions we have made requires us to continually challenge our approach to how we do business, and Mike's new role will be instrumental in this process. Our team is excited about the opportunities we had ahead of us and for continued growth and success. Now I'll ask Steve to cover the details of the fourth quarter results. Steve?
Great. Thank you, Rick, and good morning, everyone. I'm very pleased with the fourth quarter results. It was a good quarter overall with solid results in our Unum US and Colonial Life businesses, both of which came in consistent with our expectations. The closed block had excellent results while the international business had a tougher quarter, reflecting the challenges we face in the U.K. business environment. Our fourth quarter tax rate was slightly higher than expected in the quarter, but was in line with our expectations for the full year, a result of normal volatility we expect to see over the course of the year. Miscellaneous investment income rebounded in the fourth quarter from an unusually low amount in the third quarter, but remained below our expectations and historical trends for the full year.
All in all, we ended the year in good shape with after-tax adjusted operating earnings per share of $5.44, within our growth expectation of 4%-7% that we established a year ago. I'd like to dig more deeply into the results. Starting with Unum US, we continued to see solid underlying results in the fourth quarter as adjusted operating income increased 5.8% to $263.1 million, with each of our three reporting lines showing positive year-over-year results. Premium growth remained healthy at 5.1% year-over-year, driven primarily by continued strong group persistency. Net investment income increased slightly less than 1%, helped in part by an increase in miscellaneous investment income over the year-ago quarter. Benefits experienced in the segment was generally favorable, with the benefit ratio declining slightly to 67.3% in the quarter.
The adjusted operating return on equity for Unum US remained quite strong at over 18% in the quarter. Within Unum US, adjusted operating income for group disability increased 2.9% to $83 million in the fourth quarter. We continue to see good premium growth and strong benefits experience, as well as slightly higher net investment income. Premium income increased by 5.7% as the in-force block increased from prior period sales growth and continued strong persistency in our group insurance lines. The benefit ratio improved to 74% in the fourth quarter from 76.2% a year ago, driven primarily by favorable claim recovery experience in our group long-term disability product line, which was partially offset by higher claims incidence. Net investment income in the quarter was slightly higher as higher miscellaneous investment income offset the effects of reduced assets back in the line and lower portfolio yields on those assets.
The increase in the other expense ratio compared to the year-ago quarter was primarily driven by the rapid growth of our leave services. Keep in mind that the fee income related to those services is included in the other income line. Excluding the service business, we saw a slight improvement in the operating expense ratio in the fourth quarter relative to a year ago. Adjusted operating income for the group life and AD&D line increased by 6.1% in the fourth quarter to $68.2 million. Premium income increased 4.8%, primarily from prior period sales growth. The benefit ratio of 71.7% was generally consistent with the year-ago quarter of 71.6%. The expense ratio declined slightly due to the ongoing focus on expense management and operating efficiencies. It was a more volatile quarter for sales in our Unum US Group lines of business, declining 9.4% from the year-ago quarter.
Full-year sales, however, declined by less than 1%. Persistency in our group lines in aggregate continues to be a bright spot for us at 90.5% for full year 2019, compared to 90.3% in 2018. The supplemental and voluntary line adjusted operating income was $111.9 million for the fourth quarter, an increase of 7.9% relative to the year-ago quarter. Premium income grew by 4.5%, primarily driven by prior period sales and the growth in our dental and vision product lines, partially offset by unfavorable persistency across all businesses. Looking at benefits experienced for each product line, the benefit ratio for individual disability was slightly lower relative to last year due to a lower average claim size and favorable claim recoveries. The benefit ratio for the voluntary benefits line was higher, primarily due to unfavorable claims experienced across all products.
In the dental and vision line, the benefit ratio was higher relative to the year-ago quarter due to higher utilization. The expense ratio for the supplemental and voluntary line improved relative to the year-ago quarter from our focus on expense management and operating efficiencies. Sales for the supplemental and voluntary line were lower by 5% for the fourth quarter, with declines in both the individual disability and voluntary benefits product lines offsetting growth in the dental and vision product lines. For full year 2019, sales in our supplemental and voluntary line were flat. Our Unum International segment reported adjusted operating income of $23.9 million for the fourth quarter, a decline of 21.4% from the year-ago quarter. The decline was driven primarily by lower operating income from the U.K. line of business in local currency.
In local currency, the Unum U.K. line of business reported adjusted operating income of £17.4 million in the fourth quarter, a decline of 21.6%. These results reflect growth in premium income of 8.6% relative to the year-ago quarter from higher persistency, sales growth, and the benefit of rate increases in the group long-term disability product line. Net investment income for Unum U.K. declined 8.7% to £20.9 million in the fourth quarter, due in part to lower investment income from inflation index-linked bonds that we hold to support the claim reserves associated with our group policies that provide for inflation-linked increases in benefits, and also lower yield on fixed-rate bonds.
The benefit ratio for the U.K. business increased to 77.3% in the fourth quarter, compared to 74.6% a year ago, primarily due to unfavorable claims experience in both the group long-term disability and group life product lines, partially offset by lower inflation-linked increases in benefits. Unum International sales in US dollars increased 13.8% in the fourth quarter, with sales in the U.K. and local currency increasing 13.9%, and sales in Unum Poland increasing 8.8% on a dollar basis. Persistency for the U.K. business continues to be favorable in the face of successfully implementing renewal rate increases over the past two years as we look to offset interest rate pressures. While our Unum U.K. results are facing continued headwinds from Brexit, we are pleased with the execution of our strategies, which are centered on implementing rate increases, maintaining strong persistency and discipline on new sales pricing, and actively rerating underperforming cases.
In addition, we are very pleased with the performance of the Unum Poland business, which produced strong premium growth of 8.6% this quarter on a dollar basis. We continue to expect our 2020 operating income to be relatively consistent with our results for full-year 2019. Moving on, the Colonial Life segment produced adjusted operating income of $87.7 million for the fourth quarter, an increase of 2.7% from the year-ago quarter. Premium income increased 3.6% for the fourth quarter, primarily driven by prior period sales growth, including the expansion of the dental and vision products, offset in part by a lower level of persistency. The benefit ratio of 51.5% was generally consistent with the year-ago quarter of 51.6%. Sales at Colonial Life continued to rebuild momentum with a year-over-year increase of 2.6% in the fourth quarter, which brings the full-year sales to an increase of almost 1%.
In the quarter, we saw positive trends in the public sector markets, where new sales increased over 41%. Persistency for full-year 2019 declined to 77% from 78.1% in 2018, but we believe that persistency will level out in 2020 at current levels. We are confident in the actions we've been taking to rebuild our sales momentum and expect improved sales growth levels in 2020. Now moving on to the Closed Block, adjusted operating income was very strong at $46.1 million, compared to $34.8 million in the year-ago quarter. As expected, premium income for this segment continues to decline, down by 4.5% in the fourth quarter, which is primarily due to the ongoing policy terminations and maturities for the individual disability line, which is partially offset by premium rate increases within the LTC product.
Net investment income increased 3.1% in the quarter, driven by an increase in the level of invested assets backing the LTC line, which is partially offset by a lower yield. In the individual disability product line, the interest-adjusted loss ratio was 74.7% for the fourth quarter compared to 81.2% last year, which is primarily driven by favorable claims experience. This quarter's loss ratio is the lowest we've experienced in over 10 years, but going forward, we expect the loss ratio to be in the low 80s. In the long-term care business line, the interest-adjusted loss ratio was 86.7% for the fourth quarter and remains within our expectations of a loss ratio in the 85%-90% range.
Over the past four quarters, which we feel is a more appropriate time to measure a volatile line like LTC, the interest-adjusted loss ratio for LTC is 88.1%, again in line with our expected range. I'll then round out the Closed Block discussion with three other important topics related to LTC. First, we made incremental progress with premium rate approvals in the fourth quarter, with several new approvals on our group LTC rate filings. We are pleased with the rate of progress we are making to our $1.4 billion assumption and believe we can achieve this goal in the coming years. Second, we have exceeded the new money yield target of 5.5% since the third quarter of 2018. We've often cautioned, the assumptions backing this business line need to be analyzed over a long-term time horizon, given its potential for quarterly volatility.
We remain satisfied with how the trends have evolved since the reserve update in 2018. Third, LTC-related cash contributions to subsidiaries for the full year 2019 for our First Unum subsidiary totaled $100 million, and for the Fairwind captive totaled $268 million. Looking out over the next couple of years, our capital plans anticipate these cash contributions settling back to our previous historical average of around $200 million combined as we work through the impacts of low interest rates and tax reform. Wrapping up with the Corporate segment, the adjusted operating loss, which excludes $2.1 million of before tax costs related to the early retirement of debt, was higher in the fourth quarter at $50.5 million, compared to a loss of $40.2 million in the year-ago quarter. This was driven by lower net investment income and higher interest expense, which was offset by lower operating expenses.
Statutory earnings for our traditional U.S. insurance companies were quite strong in the fourth quarter with statutory after-tax operating earnings totaling $266 million compared to $215 million in the year-ago quarter, and totaled $1.03 billion for the full year. Our capital metrics remain in good shape with the weighted average risk-based capital ratio for our U.S. traditional life insurance companies at approximately 365%, consistent with our plans for the year. Also consistent with our expectations, cash at our holding companies totaled $863 million at year-end 2019. Early in the fourth quarter, we completed the tender and redemption transactions that we began late in the third quarter, which generated the small debt extinguishment costs reported in the fourth quarter. In addition, share buybacks in the fourth quarter were $100 million and totaled $400 million for the full year of 2019.
I'd also highlight that book value per common share, excluding AOCI, as of December 31, 2019, was $48.92, which was an increase of 11.2% over 2018. For full year 2019, after-tax adjusted operating income per share was $5.44, an increase of 4.6% over full year 2018. Looking at 2020, we continue to expect growth in after-tax adjusted operating income per share in the 4% to 7% range, which is consistent with the outlook we provided at our outlook meeting in December. Now I'll turn the call back to Rick for his closing comments and look forward to your questions.
Thank you, Steve. Again, we're very pleased with the fourth quarter, and we're in full swing for the new year in 2020. Team is here to respond to your questions, so I'll ask Kevin to begin the question and answer session. Kevin?
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please signal by pressing *1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment. Please limit yourselves to two questions, after which you may rejoin the queue. Again, that is *1 to ask a question. Our first question comes from Ryan Krueger of KBW. Please go ahead.
Hi, good morning.
Hello.
On group disability, can you give a little bit more color on the benefit ratio? I guess it improved despite absorbing the lower discount rate. Just hoping to get some incremental color on what you saw to offset that and drive further improvements.
Mike?
Yeah, sure. Good morning, Ryan. As you noted, good solid loss ratio in the group disability line at 74%. I'd say to your question specifically, strong recoveries and offsets in the quarter more than helped offset a moderate increase in new claim incidence. As you noted, and as we had talked about at Investor Day, we did go ahead and lower the new claim discount rate on new incurred by 25 basis points in the quarter.
Got it. On competition, you made a number of comments in December about seeing more voluntary competition, because you also had softer traditional group sales. Are you seeing more competition in traditional group as well, or do you view the quarter as more volatility and it's more confined to voluntary?
Ryan, it's Rick. Let me just step back and talk a little bit about how the competitive landscape has changed over the last several years. You would note a number of players that have sold businesses to others that are incumbents in our space, that's been a dynamic that we have seen out there and has covered across the group space. On the voluntary space, you would have heard us talk about new entrants, people getting into the voluntary space that would not have necessarily historically been in that space, we're seeing how that's playing out over time. I'd actually talk a little bit more about fourth quarter. I feel very good about the sales we saw in our UK operations, Colonial Life on a better trend than we saw in the first half of the year.
We did see Unum US down a little bit on the quarter. When you look at a fourth quarter, go back to the greater than $1.1 billion in sales and our maintaining our pricing discipline, which you see year in and year out, we'll continue to push through that. I think the recognition of a competitive landscape changing are a number of players that really like this space. I think that bodes well for us that we're in the front of the pack, and as they go through and come into the space and go through integration, we're focused on growth in the future. I'm very satisfied with where we are, but we're also looking forward to where it is. Competition will come and go. We've been talking about that for many, many years.
We don't necessarily see the irrational competitor, which is the one thing you can't do much about. We expect competition, and we think it's actually good for our business in the longer term. Maybe, Mike, you could add anything on what you're seeing particular to our lines in the fourth quarter?
I think you summed it up well in the fourth quarter, maybe just a little bit more color. We did see a decrease of about 8% overall. If you unpack it a little bit, sales to our existing clients were actually up about 7%. That's really important to us. Those tend to build stickier, longer-term relationships, and they come in more favorably priced than what you have to do to go out and win a new client relationship. I think that's where we felt, Ryan, the most competition is in the new client market, and I'd say, not terribly different than what we had seen emerge over the full second half of the year and pretty consistent with prior cycles in the past. I guess I'd just close by saying, as we look out into 2020, there's a lot of reasons for optimism.
We're certainly going to maintain that pricing discipline that
You have known and seen from us very consistently, new capabilities rolling out, particularly in that core market where we have struggled to get some growth within our targeted underwriting margins with the rollout of our new digital platform. We'll now be taking core clients from the onboarding all the way through the administration of their benefits completely digitally, and we think that's going to help set us apart. As well as a new investment in sales reps in the core, where we have now built out a dedicated team to target the smallest end of the core market where we see a lot of opportunity to grow. Maybe Tim, I think, might have a couple of comments about the market on the voluntary side.
Yeah, sure. Thanks, Mike. I think about the results that Colonial Life had in 2019. Certainly, the competitive environment was one factor, just as a reminder of some of the things we talked about in December, we made changes in our recruiting model that had an impact on our sales that has nothing to do with competitive environment. We also made changes in a number of key distribution relationships. We made some changes in migrating toward higher persistency industries and perhaps away from some lower persistency industries. We feel great about the quality of the sales we had in 2019. The public sector growth that Steve talked about earlier, with that being the highest persistency industry in our book, we feel very good about that.
We feel great about the continued contribution of dental in our book, we had a strong year again selling to our existing customers, that's also helpful. As we look forward, maybe at the risk of slightly over answering, as we look forward, I agree with Rick, the market opportunities are tremendous. There's still 6 million businesses out there that have more than one employee and less than 100. Those businesses tend to be underserved. Their employees are certainly underserved with less than half of America's workers having adequate life or disability insurance. We have a very strong value prop in all markets and all segments. With our current footprint, we can reach over 80% of America's workers within a one-hour drive of one of our primary offices. We have 6,000 people who do benefits education and counseling, which is desperately needed in this environment.
On the recruiting front, after a challenging second, third quarter, we rebounded nicely in the fourth quarter and are back to the levels that we saw before we made the strategic shift in our recruiting approach. We remain pretty optimistic, we still feel comfortable with the guidance.
To sum that up, Ryan, I think competition, yes, we welcome it, but as you can hear from the team, we're on offense.
Okay, bye.
Our next question comes from Suneet Kamath of Citi. Please go ahead.
Thanks. Just a first question on pricing, particularly in the U.S. Interest rates are down a decent amount so far this year. How do you feel about the level of pricing that you're putting out in the market, and do you have to maybe work some more price through to contend with where rates are today?
Yeah, Suneet, thanks for the question. It's Mike. Actually pretty consistent with where we were in December, because like we talked about in the past, certainly yields are one factor that we're going to put into new business and renewal pricing, but claim trends and expense levels are also getting factors in. There's some puts and takes. Like we talked about in December, I think we're in a really good spot given current returns to probably nudge rates up a couple of points, certainly low single digits across most products and segments. I think one of the things we work really hard to do is deliver consistency to clients in terms of predictability. Acquire clients at a sustainable rate, and then where we need to make adjustments, they're going to be pretty modest.
Got it. Then, Rick, in your opening comments, you talked a little bit more about expense efficiencies and some of the actions you guys might be taking. Can you just provide a little bit more color on what some of those actions would be and how material they could be in terms of driving growth?
Yeah, thanks, Suneet. It is a big part of our commentary, but it's a part of the actions that we're focused on right now, and it comes on two fronts. Maintaining the efficiency that you've heard year in, year out, maintaining a very good expense ratio. It's not outsized. We do it in every year. We look at how we can maintain efficiency. I think we're leaning into it a little bit harder these days, and the goal is to actually be able to channel our investments into these growth opportunities we see. You hear the optimism that we have, but we've got to make sure that we're putting the money behind these opportunities to go after it. The expense efficiency that you see will really be applied mostly back into our capabilities as we go forward.
That's why you hear a little bit more about it, because we're a little bit more focused on it, but it really will be going back more towards the opportunities, the capabilities that we see in the next several years.
Got it. Thanks, Rick.
Our next question comes from Thomas Gallagher of Evercore ISI. Please go ahead.
Morning. Just the follow-up on the competition in group. I heard your comment about the 7% increase in sales to existing clients. Most of the competition is coming from new client sales. Would you say that you're close on a lot of these cases that you're not winning? The reason I ask is if you're really losing on price by a larger or wider margin, just curious if you would have optimism that sales would recover in 2020, or is it not that far apart on pricing to the point where you think you can kind of recover from a sales standpoint?
Yeah, Tom, it's Mike, thanks for the question. I would actually say, not that far off in general. There's going to be some volatility prospect to prospect. One rule does not apply to all. I think Rick hit it earlier in the call, where we really don't see an irrational competitor too, which we have seen at times in the past, where you might be significantly out. I'd say we've got a pretty healthy market out there. I'd say, in general, we're in the hunt, and that bodes well. We are going to put some new tools into our salespeople's hands here in 2020, and I think that does bode well and fuels the optimism around the guidance we put out there for continued steady top-line growth.
I'd say the other piece is there's less churn in the market. That's my observation, certainly reflected in our persistency and as we looked at our one-one renewal cycle. There's just less business moving in the traditional group side.
Got you. Just a question on IDI closed block performance was very favorable. Was that mainly just increased mortality in the quarter? I guess just relatedly, given that you've had several years of good performance there, would you say that improves the possibility or optionality of you doing something with that block to free up capital? Where do you stand on thoughts regarding that?
Yeah. Good morning, Tom. This is Steve. I'll take that one. Just related to the quarter around our closed block individual disability income business, I'd say it was a combination. Probably the main driver was just lower incidents. It was a bit of an anomaly for us, had lower incidents on that block. We did also see strong mortality, probably not that was outsized what we would normally see in a fourth quarter. I would say it was mostly driven by incidents. Definitely would not see that sustainable into the future. In my comments, I guided back down to the low 80s. That's still where we are. I do have to say, we feel good about how that block's performed. If you go back, the majority of that block is in a special purpose vehicle. It was securitized with non-recourse debt.
That debt has performed very, very well. I think that really speaks to the consistency of the profits coming off of that block. The debt's actually going to be paid off going into the middle part of next year. We feel good about it, again, if you're thinking about kind of forward-looking, the low 80% loss ratio is probably a more normalized level. When it comes to just the block itself and how we're thinking about opportunities, we continually test the market and continually explore the market, in a variety of ways. One, we definitely look at reinsurance. Obviously, we'll look at potentially relevering that block once that debt's paid off. It also is generating some nice distributable cash flows. We also have the option to just let that come through, and have it be available at the holding company.
We'll continue to explore all three of those options, as we see. Whatever we do, it's going to be for the benefit of the shareholders, and so, we'll make sure that economically it makes sense for the company and the shareholders.
Okay, thanks. If I could just sneak one more in, just the 365 RBC, do you have a pro forma estimate of what that RBC would be if you recaptured the long-term care captives? What adjustment we should make to RBC?
Yeah. I would just go back to how we think about our targets for risk-based capital. We try to keep it in aggregate of 350, and that's what we guide towards as far as our traditional insurance companies. We don't really publicly disclose what that would look like, but I think we'd still be around that 350 range if we were to do that.
Okay, thanks.
Our next question comes from Humphrey Lee of Dowling & Partners. Please go ahead.
Good morning, thank you for taking my questions. Looking at Unum UK, you pointed out there's the impact of Brexit and interest rates. Also you have some unfavorable underwriting in the quarter. I think the profit margin is one of the lowest that I can recall. Given some of the ongoing impact, how should we think about the profit margin for that line of business going forward?
Maybe I'll just start and we'll turn it over to Peter. One of the things I would remind you, Humphrey, though, when you look at that line of business, it's still a mid-teens ROE business. It is a little bit lower. We talked about that in our comments, in the quarter. In the world of Brexit, having still a mid-teens ROE business is very good. Let me turn it over to Peter to give some more details in terms of where margins stand and where they're going.
Thanks, Humphrey. Maybe I'll just take a step back and sort of give you my view of where the business is. Yes, we've experienced a challenging environment recently with a significant uncertainty around Brexit. As you guys mentioned, interest rates and the exchange rate, I would say, are the sort of most visible indicators of that with interest rates down below, 10-year down below 1%, and the exchange rate being under $1.30 for most of the year. Good news, it's now at $1.30 and seems pretty stable around that. Very positive about the election results in December. It's really good, I think, for businesses in the U.K., if you talk to most business leaders, to see a stable government for at least five years. However, in 2020, we expect the external environment to be very similar to 2019 as the U.K. debates its future relationship with EU.
As Steve mentioned in his remarks, I feel good about the progress we're making in many areas. We've seen good growth in products that are sensitive to interest rates, good expense control, good core growth, and persistency has been good given the renewal program.
It's on our long-term disability product, we've seen the most pressure, both from interest rates and higher claims incidence and severity moving away from our long-term averages. We've been responding to that again over the last two years with our rate program, which will restore margins, and we're also being very disciplined on pricing new business. We do see volatility by quarter. In 2018, we averaged around $20 million, higher in the first half and lower in the second half. I wouldn't worry too much about that trend in the second half. It does tend to move around a lot. Basically, we landed about $80 million for the year, and as Rick mentioned, an OOE of just under 40%. In 2020, we'll continue to rerate the book and work with clients to improve claims and grow those non-interest rate sensitive products.
We expect BTOE to be broadly in line with 2019, but it can move around that $20 million mean by quarter. It's difficult to call it by quarter. Overall, very positive about the positioning and prospects for the business over the medium term, given the actions we have and are taking, and particularly as we see return to more normal and political environment as we clear Brexit.
That's helpful. Then shifting gears back to the U.S., you've talked about the efficiency, and I think I appreciate the clarity provided. Just looking at group disability, the expenses kind of came up. I think part of it is because of the leave management that you have in there, you're in spending mode to grow that business. I guess, how should we think about the general expenses for group disability going forward as we think about your efficiency gain for your underwriting business, but at the same time, while growing your leave management?
Sure, Humphrey. Good morning, it's Mike. You nailed it. In that group disability segment is where we house our fee-based services business, primarily leave management, which increasingly is becoming not just FMLA at the federal level, but state level and municipal level, as well as corporate fees. That in combination with the sizable disability fee-based services that we provide is growing. We see that as a very attractive business for us over time and one of our biggest areas of investment. The overall profile of the company that Rick was talking about, we're going to continue to drive efficiency at the macro level, and that is one primary place that we're reinvesting funds back into the business. We see that as a real problem that we can solve for clients in a differentiated way.
As we do that in the segment, as you're computing an OE ratio with premium as your denominator in a fee-based business, you're going to continue to see that OE ratio continue to drift up. What I would tell you is that if you pull the fee-based businesses out of the segment, we actually saw about a 50 basis point decline in the traditional operating expense ratio there. In summary, as you look out for that segment, I would continue to expect some modest growth in that expense ratio because of the growth in fee. You should know that underneath that, we're continuing to drive efficiency on the insurance side.
Should we expect that kind of expenses for group disability to maybe, at least in the near term, perhaps growing faster than your top line?
I think it's going to grow slightly faster. That's probably reasonable. We'll see that ratio continue.
Okay. That makes sense. Thank you.
Thanks, Humphrey.
Our next question comes from Andrew Kligerman of Credit Suisse. Please go ahead.
Great. Thank you. Just want to narrow in a little bit on some of the earlier questions. With Unum US in the group disability area, this year you had a full-year benefits ratio of 74.4%. Last year, I mean, in 2018, it was 76.1%. As I think about an earlier comment you made about being able to get low single-digit rate increases, maybe you could give some color on where that benefit ratio could stabilize. It sounds like sub 75% is doable. I know you had a favorable claims recovery this quarter, but it seems like 75% or lower is doable going forward, and maybe talk a little bit about that.
Andrew, thanks for the question. It's Mike. I think it's reasonable to have that sort of 74%-75% range in mind. I would say just in general, that is pretty tight when you think about a business like this, that can over time, particularly at a quarter-to-quarter level, have some volatility. As we look out and look at the trends on the major drivers of that benefit ratio, that seems like a reasonable range.
Great. I'm still trying to reconcile your ability to grow sales in the voluntary benefits markets. If we looked at Unum US' voluntary benefits business, it's down to 12% year-over-year, and it looked like in Colonial Life overall, it was 3% up versus 5%-7% guidance. Maybe focus specifically on the pricing there. Is pricing coming down?
Yeah, we'll start with Colonial Life and come back to you.
Andrew, thanks for the question. Pricing on the voluntary benefits side really isn't an issue. Almost all of the products that are sold on the voluntary benefits side are shelf-rated, and price is not a negotiating point. The negotiating points tend to be around what type of participation you think you might get based on the enrollment conditions.
What the compensation looks like, whether there are technology companies that would need to share in some of the compensation, et cetera. Those are the negotiating points, and we don't see those being of any particular real threat to us.
Mike, on the U.S. side?
Yeah. We talked about it a little bit, but I'd say in the upper end of the market, it is, as Tim said, much less a price point, and it's around the underwriting and the product features. We talked a little bit about that. We've rolled out some new products. They are, I think, really oriented to creating additional consumer-level value. There's less expense, both to cover administration because of the OE expense gains that we've had, but also through the channel. As those commissions level out, we've seen actually some pretty nice growth on that subset of new products, and about 25% of all of our new sales in the quarter came in on those new product chassis. Just with looking at new clients, it's about 50%.
I think it will take some time, but as we look at the pipeline for voluntary under the Unum branded side of the business, I think there's reasons for optimism.
Thanks so much.
Yep. Thanks, Andrew.
Our next question comes from Erik Bass of Autonomous Research. Please go ahead.
Hi. Thank you. Do you expect New York Life's acquisition of Cigna's group business to have much impact on the market? Historically, have you seen mutual companies approach the market much differently from a pricing or target margin perspective?
Thanks for the question, Erik. I think I would step back. I made some comments about how the market's changed as well. Prior to that acquisition, you have had consolidation in the benefits space. For different reasons and different players, you've also seen some acquisitions done from foreign players that have come into the space as well. There's a lot of dynamics. Adding a new competitor in there that is in the mutual space, this business still needs to be well-managed and worked through the business. We haven't seen the dynamics yet, but I think that it should be similar to other competition we've seen as people have gotten into the space. Mike, you want to add to that?
I think you hit it well. Just also specific to the question, we've had a couple of long-term mutual competitors in this space and have not seen a materially different sort of orientation to other competitors.
Got it. Thanks. You've had some good success with the leave management services product. Are there other opportunities to add ancillary kind of fee-based services or products to drive growth in the future?
Sure. We absolutely do think that that is the case. I think the leave services gives us a point of intersection in a pretty meaningful way down to the consumer level at the worksite, and we can see a lot of potential services branching off from that as well. That is one of the things, as we kind of look forward as a company, we've got a very strong insurance and benefits footprint across the U.S. and U.K., and we see increasingly that there's opportunities to introduce new, primarily digital backed by people services, alongside those insurance products.
Thank you.
Thanks, Erik.
Our next question comes from Jimmy Bhullar of J.P. Morgan. Please go ahead.
Hi. First, just a question on loss trends in the disability business. Obviously, they've been very favorable, and I guess the labor market's helping as well. Do you see anything that would suggest that margins are not going to hold up at the recent level? I know your guidance is a little bit more conservative than what you've been reporting. Are you pricing based on what you've seen in terms of loss claims trends over the past year or so, or more based on longer-term averages?
Sure, yeah. On group disability, I'd just take you back to the commentary earlier. I think 74%-75% on the loss ratio is very reasonable and consistent with what our expectations are. Looking out, as I was saying earlier, you look sort of the major factors that would sort of impact loss trends, and we don't see things that would materially impact that. As I say every time, it's an insurance business. It's involved taking some risk, and there certainly can be, particularly when you look at it on a quarterly basis, some volatility there. Our approach is about being really smart and disciplined upfront about the risks that we take on, and then just investing heavily in a remarkably talented group of professionals that handle the claims process, from the clinicians to the vocational rehabilitation to the disability benefits specialists.
It is a really impressive machine and quite effective at helping support people return to work in a very consistent way.
Just on the upcoming changes in long-duration contracts in terms of accounting, do you have any better insight you'll be affected? I guess the LTC and IDI businesses are where you have the most exposure, when do you think you'll be able to give some idea on what the impact on your book value would be?
Morning, Jimmy. This is Steve. I'll take that one. To step back just a little bit just on the new accounting guidance. This is a GAAP-only accounting guidance. How we view it, we'll have to change our reporting and our disclosures for GAAP-basis financial reports. From a statutory cash flow, from a capital deployment perspective, we see this as a bit of a non-event. It was delayed a year out, the effective date is in 2020, the team's working through it. The recent change was adding the scope claim reserve liability, we're working through that. The majority of the impact will be around discount rates, things that we've talked about before. As we look out, we're planning for the 2022 implementation. The team's working hard at it, as we get more information, we'll disclose it as it makes sense.
Really, nothing new to talk about right now.
Okay. Thank you.
Thanks, Jimmy.
We have no further questions at this time.
Great. Thank you, Kevin. I'd like to thank everybody for joining us on the call this morning. Kevin, that now completes our fourth quarter 2019 earnings call. Thanks, everyone.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.