Earnings Call: Q4 2014

Feb 4, 2015

Good day, everyone, and welcome to the Unum Group Fourth Quarter 2014 Earnings Results Conference Call. Today's conference is being recorded. For opening remarks and introductions, I will turn the conference over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, Debbie. Good morning, everyone, and welcome to the fourth quarter 2014 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 SEC and are also located in the section 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, 2013, and our subsequently filed Forms 10-Q. 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, and 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. Participating in this morning's conference call are Tom Watjen, President and CEO, and Rick McKenney, Executive Vice President and CFO, as well as the CEOs of our business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, Tim Arnold for Colonial Life, and Jack McGarry for the Closed Block. Now I'll turn the call over to Tom Watjen. Tom? Thanks, Tom, and good morning, everyone. The fourth quarter was a good one for the company, with operating earnings per share, excluding the special items outlined in our release of $0.90 per share, an increase of 5.9% over last year. This brought our full-year operating earnings per share to $3.55, a growth rate of 6.9%, in line with 5%-10% outlook for growth we provided coming into 2014. These results largely reflect the positive operating trends we have been highlighting throughout the year. That is strong sales momentum, accelerating premium growth in our core businesses, and stable risk experience. This quarter, we also took the appropriate actions necessary to deal with the impact of low interest rates on our businesses, particularly long-term care, and we'll cover that in more detail in a moment. But for now, let me highlight a few points before turning things over to Rick for his more detailed remarks. First, we again saw excellent sales results across all of our core businesses this quarter, continuing a trend we have been building throughout 2014. Unum US sales increased by 25% for the quarter and 21% for the full year, with strong results across all product areas and all sectors of the markets we serve. Likewise, at Colonial Life, sales this quarter were also strong, increasing 15.7% for the quarter and 11.6% for the full year, again, with solid performance across all market segments. Finally, Unum UK sales continued to rebound this quarter, increasing 27.8% for the quarter in local currency. These solid results across all three of our businesses reflect the strength of our competitive position in our markets and today's generally more favorable conditions. Second, these strong sales trends over the past few quarters, combined with improved persistency in most of our business lines and our ongoing focus on managing renewals in our in-force block, has resulted in accelerated premium growth. For all of our core business segments combined, premium income grew by 5.7%, the strongest we've seen in several years, and each business contributed. Unum US premiums grew 5.8%, Colonial Life increased 4.2%, and Unum UK increased 10.5% in local currency. This growth has not come from any meaningful economic recovery, but instead is primarily the result of adding new customers and expanding our relationships with existing customers. Finally, we continue to see strong, stable operating margins and returns in our core business segments. These results help us maintain the financial flexibility needed to both support our business needs, including support the growth we're having, while also returning capital to our shareholders. Our primary challenge, and one faced by all those in our industry, is the present low interest rate environment, which we don't expect to abate anytime soon. This quarter, we took steps necessary to manage through this environment, both with the Closed Block LTC reserve action, as well as the new claim reserve discount rate adjustment in our Unum US LTD business. I would add that we do this from a position of strength with industry-leading operating margin and significant financial flexibility. Now, before I turn the call over to Rick, I wanted to take a moment to comment on the release issued yesterday announcing the leadership changes here at Unum. After 12 of the absolute best years of my life serving as the CEO of this company, I have announced that I'll be retiring at this year's annual meeting. This is something that we all are well prepared for as our board and leadership team has spent a considerable amount of time on succession planning over the last five or six years. But I'm very pleased that Rick McKenney, who, as you know, is our CFO and internally chairs our operating committee, will become President and join our board April 1st and will succeed me as CEO at our annual meeting in May. Jack McGarry, currently President and CEO of our Closed Block, will succeed Rick as CFO on April 1st. We have an excellent plan in place to fill Jack's current role as head of the Closed Block, which obviously remains a critical area of focus of the company. The board and I have great confidence in Rick, Jack, and our whole team, and I can assure you that we won't miss a beat. It will be a very smooth transition, and I step back from active management knowing that Unum is in good hands and poised for even better things ahead. Now, as for me, the board asked me to continue as a member of the board for the next two years and to assume the Chairman's role at the annual meeting. My focus will be on fulfilling my new role as Chairman and helping to assure we have continuity at both the board and management levels. Now, I am happy to answer any questions you have later, but for now, let's get back to the discussion of our strong fourth quarter and full-year results, and for that, I will turn things back over to Rick. Thanks, Tom, and thanks for the comments, and I very much look forward to the opportunity. As far as our investors are concerned, I expect a very smooth transition. You can also expect continuation of the execution on the strategy which you have become accustomed to with Unum, which is one of disciplined growth. Let me turn back to our discussion on what was a very good quarter. I will start first with Unum US, where in total, fourth quarter operating earnings declined by 2.2% to $212.4 million, with favorable premium growth, as Tom mentioned, offset by lower net investment income and our change in discount rate that we talked about. The overall benefit ratio for the segment was stable at 71.3%, which we will dissect by each business line. Operating income in our group disability business declined to $66.7 million from $68.9 million a year ago. Premium income increased by 5.7% on strong sales and improved persistency, but the benefit ratio increased to 83.7% in the quarter from 83.2% a year ago and 82.1% in the third quarter. As we indicated at our Investor Day in December, we reduced the new claim reserve discount rate in our LTD line in the fourth quarter by 50 basis points, causing a reduction in operating earnings of $6.6 million and elevating the benefit ratio by 1.2%. Clearly, today's low interest rate environment was the driver of this decision and is also the driver of the lower net investment income, as the portfolio yield continues to decline, given the lower new money investment yields. While the impact of lower yields was offset somewhat by higher miscellaneous net investment income this quarter, the interest rate environment continues to create ongoing pressures. As we have discussed previously, we manage this impact by gradually repricing our in-force business through the renewal process, which we will continue to do in 2015, and also through pricing adjustments in new business. From an underlying risk perspective, we did experience slightly higher claim size in the fourth quarter, though it was consistent with our longer-term expectations and experience. Group Life and AD&D results also declined slightly year-over-year. Premium income growth continues to accelerate, increasing 6.7% in the fourth quarter, but the benefit ratio is slightly higher at 70.8% compared to 70% in both a year ago and previous quarters. In the supplemental and voluntary lines, operating earnings were relatively flat at $85.3 million compared to $85.8 million a year ago. Premium income increased 5%, while risk trends in both lines were generally stable. Overall, despite the pressure from lower investment income and the discount rate adjustment, it was a solid quarter for the Unum US segment, with operating ROE remaining in the 13%-14% range, well above industry averages in the group business. Looking at Unum UK, operating earnings were £24.1 million for the fourth quarter, up almost 9% from the year-ago quarter. Our risk results were solid in both the group disability and group life business, which helped the benefit ratio improve to 68.9% this quarter compared to 73% in the year-ago quarter. The margins remain in very good shape for Unum UK, which generated an operating ROE of slightly over 18% for the year. Colonial Life continues to generate strong, consistent results, with operating earnings increasing 7.1% in the fourth quarter to $74.3 million. Claim experience remained generally stable with a benefit ratio at 52.3% for the fourth quarter, compared to 52.4% in the year-ago quarter. Net investment income benefited from favorable miscellaneous net investment income in the quarter. The underlying profitability of Colonial Life remains excellent, producing an operating ROE in the 16%-17% range for both the fourth quarter and full year. Rounding out the enterprise with the Closed Block, with the completion of our reserve review in long-term care, we booked a reserve strengthening in line with the expectations we provided at our investor meeting in December. The addition to GAAP reserves was $698 million, or $454 million after tax. The assumptions behind the change are consistent with what we discussed at our meeting back in December, with the net effect of the charge largely reflecting our expectation that interest rates will remain low over the next four to five years before gradually returning to more historic levels. In addition, the statutory impact from our year-end LTC reserve work was $57 million. This is included in our capital position at year-end 2014 and reflected in our 2015 capital plans. Excluded in the impact of the reserve charge, operating earnings for the Closed Block were $30 million in the quarter, compared to $26.8 million in the year-ago quarter. Risk results were generally in line with our long-term expectations. In the LTC block, the interest adjusted benefit ratio is 89.6% for the fourth quarter, towards the higher end of our 90% range due to unfavorable mortality that we saw in the quarter. For the full year 2014, the interest adjusted benefit ratio for long-term care was 85.9%, reflecting the more favorable results we experienced in the block earlier in the year. In the closed disability block, we saw much better performance in the fourth quarter, primarily from lower claim incidents after experiencing a higher level of volatility than normal in previous quarters, with the interest adjusted benefit ratio at 81% for the fourth quarter and 83.6% for the full year 2014. I will move now to our sales and growth trends across the company, and as Tom highlighted in his remarks, we are very pleased with the results this quarter and for the full year. In Unum US, total sales increased by 25% in the fourth quarter and 21% for the full year, a very strong set of results. The growth was well-balanced between growth in the core group market under 2,000 employees, which increased by 23% this quarter, and our large case business, which increased by almost 35%. It is important to note that the bulk of our large case growth came from existing customer relationships, where our understanding of the case is much better. The growth was also well-balanced by product line, with LTD sales increasing 39% on strong growth in the core market segment, short-term disability increasing 10%, and group life and AD&D increasing by almost 27% on opportunistic sales in the large case market, primarily to existing customers. In addition, sales in the voluntary benefits grew by 21% and by 3% in the individual disability line. In addition to the strong sales momentum, our persistency for Unum US remains very encouraging, increasing to 90.5% for our group benefit lines, which include long-term disability, short-term disability, and life. For the full year 2014, from 87.7% from the full year of 2013. The net result, combined with our ongoing renewal pricing strategy, generated premium growth for Unum US this quarter of 5.8%, the strongest rate of growth in several years. I would also emphasize Tom's comments that we continue to see only slight improvements to premium growth from the economy and employment trends. Likewise, at Colonial Life, we again had very good sales results in the fourth quarter and for the full year. Sales in the fourth quarter increased by 15.7%, primarily driven by growth in the core commercial and public sector markets. Full year 2014 sales increased by 11.6%, the strongest annual rate of growth since 1990. New and existing account sales growth were both strong as we focused on recruiting and the development of quality sales reps, along with continually emphasizing reworking our existing account base. Persistency for Colonial Life primary product lines was stable to slightly higher for the year, helping to drive overall premium growth in the fourth quarter of 4.2%, the highest quarterly rate since 2012. Finally, in the U.K., sales increased by almost 28% in the fourth quarter, following an increase of 15% in the third quarter. Group disability sales continue to build momentum while our group life sales are reemerging off of low results while we are repositioning that business for better profitability. Also, we are seeing much better levels of persistency in 2014. Persistency for group disability improving to 90.1% from 82.2% the year before, and persistency in the life block improving to 76% from 66.7% the year before. Overall, it is a very strong quarter and encouraging quarter for our growth trends in our core business segments. Importantly, we are also happy with the pricing we are seeing on the business that we are selling today. As I said earlier, we are continuing to see some evidence of improved top-line growth from better employment and economic trends. However, that benefit does not appear to be accelerating. My comments on our investment results mirror my comments from the past several quarters. That is, continued solid asset quality for the portfolio, but continued declines in our portfolio yield as new money investment opportunities remain difficult. While we remain disciplined in our asset selection, we also remain disciplined in balancing the decisions we make on discount rate changes and associated pricing actions. Our move this quarter with our long-term disability business reflects that discipline as we put in place a 50 basis point reduction with an eye towards maintaining a healthy interest margin in the reserves. Looking at capital management, we estimate that the weighted average risk-based capital ratio for our traditional U.S. life insurance companies finished 2014 at just over 400%, and our holding company cash and marketable securities was $575 million. This comes from statutory operating earnings of $618 million for 2014 that are within our range of expectations. Wrapping up, I want to affirm our 2015 outlook for growth and operating earnings per share in a range of 2%-5%. I would say that with a sharp move down in rates we have seen since our outlook meeting, it would pressure us to the lower end of that range, but we'll have to see how that plays out in the coming months. Also in closing, I'd like to remind you that as of January 1st, we are adopting new accounting standards for investments in qualified affordable housing projects, which will reduce earnings by $0.04 in both 2014 and 2013 restated. We will post the details on our website by next week. Overall, I would summarize as a very good quarter with an improving top line. Let me turn the call back to Tom for his closing comments. Thanks, Rick. Before we move to your questions, I'll close by just repeating that we're very pleased with our overall results this quarter and for 2014. Our strong sales, persistency, and premium growth, along with stable risk experience, set us up well for the future. Without question, the current level of interest rates is challenging, but we're confident that we're taking the necessary steps to manage effectively in this environment. Our focus hasn't changed: to continue to profitably grow our business, to maintain strong margins through our disciplined pricing, underwriting, and expense management, and to generate capital, which we can continue to use to support the needs of our business, including investing where necessary to support growth, but also obviously continue to return capital to our shareholders. Now, this completes our prepared remarks, and Debbie, let's move to the Q&A session. Thank you. Ladies and gentlemen, to ask a question, it is *1. If you're using a speakerphone, be sure to disengage your mute function so your signal will reach our equipment. We'll go first today to Steven Schwartz with Raymond James. Hey, good morning, everybody. Can you hear me? We can, yes. Thank you. Okay, great. Congratulations, Tom, and everybody. Thank you. I want to talk about, I guess probably Rick, I should probably know this, but in the STAT operating earnings that you show in net earnings in your capital, is First Unum included in there? Yes, First Unum is included in there. Okay, so my understanding, right, in the Investor Day, you talked about $150 million STAT charge for First Unum for LTC reserves. I think it came out a little bit bigger. How do you get to $149 million net gain from operations with that kind of STAT charge in First Unum? Yeah. So actually, the STAT charge that we have in First Unum is a direct move to capital. It doesn't flow through the operating earnings that you'd see in First Unum. Although it is included in those results, that actually movement in reserves flows straight through the capital line. Okay. Following up the non-First Unum STAT charge, the $57 million. My impression, I think from the Investor Day that a STAT charge was unlikely and that there was significant margin if interest rates stayed where they were for a long time. Do we take away from this that that's not the case? Jack, you want to pick that one up? Yeah. We talked about it at Investor Day that this was logically a GAAP charge. As we worked through and settled all of the reserve numbers across the different entities, this charge emerged. My view is it really doesn't change anything we said at Investor Day. We're still very comfortable with our GAAP reserves. We still have a decent margin between our GAAP and STAT reserves. All of these charges, First Unum and the $57 million, were built into our capital plans for 2015. They were reflected in our estimates for share buyback and free cash flow generation. Okay. Jack, one more, if I may, on this topic, and then I'll turn it over. The $57 million, was that claims reserves or ALR? It was both. It was both. Okay. Thank you, guys. Thanks, David. We will take our next question from Jay Gelb with Barclays. Morning, Jay. Good morning, and congratulations. Thank you. From us as well to everyone in the transition. I just want, since I had a couple of questions on it last night, can you give us some perspective on why announce the transition now? I know it wasn't related to the fourth quarter charge, but if you just clarify that a bit, it would be helpful. Yeah. I do run the risk, Jay, of kind of over answering a little bit here because I almost have to step you back a little bit. We as a company have spent an awful lot of time on leadership development, succession planning, actually for a number of years. That is not just the management team, but obviously the board has been very heavily engaged in that process. While it is maybe not glamorous work, it is essential if you are going to have good continuity and continue to maintain the principles that are important to the company, which we believe strongly in. In fact, actually, if you look back over the last couple Investor Day meetings, you would have seen windows into our thought process. Back in 2013, as you may recall, Kevin McCarthy announced his retirement. We were going through a good, smooth transition of that responsibly to Mike Simonds. This past year, we talked about Randy Horn stepping out of the Colonial Life CEO position in a smooth transition to Tim Arnold. I guess my point is, this has been a continuum of work that we as a management team and a board has done. Obviously over the years, the succession of the CEO has to be part of the discussion with the board as well. In this case, it was not about age or health obviously. It really was more about when it just felt right. The three things I think that were important in my mind is when it just felt right, were, number one, feeling good about the leadership team and having a leadership team in place that has plenty of runway still ahead, and that can run this business very effectively for the next 5 to 10 plus years. Obviously we feel very strongly that is the case. The second thing is where the company actually is on a good trajectory, and not just one quarter or one year, but an extended period of time of solid performance. I think some of us feel very strongly that has been the case. Then lastly is, how do you make the appropriate exit after having been in the role for 12 years? That is where I think being able to find some way to stay connected to my board activity was a part of that discussion. I think the point is that this is a continuum. It is one that we have been heavily engaged in now for 5 or 6 years, so there is nothing magic about this particular day other than the feeling as though all the stars have properly aligned. Again, I feel very good about what we announced yesterday, and as we all said in our comments, we are going to have a very smooth transition of leadership. Thank you for that. Okay, on the topic of fourth quarter, sales growth again was particularly strong year-over-year. I am just wondering if your 2015 sales growth outlook might prove conservative if any of that momentum continues into this year. It might be good to go business by business if we could actually, Jay, because obviously the fundamentals of each business differ a little bit. But maybe Mike, maybe speak to the Unum US sales outlook. Yeah, no, I think the bottom line, quick answer, Jay, is I think that the guidance is still a good guidance. We had a line of sight to what the pipeline for fourth quarter looked like when we established that. I do not see big changes there. Just as a quick refresher, we do anticipate good, solid 6%-8% sales growth across most of our segments, in particular the core market group insurance segment, and our voluntary benefits segment. The offset to that, to a degree, is the large case market. We had a very good year in 2014, but we do view that as an opportunistic place to write business. We saw rates hardened a bit, as some competitors needed to reprice their books. We certainly have the capacity and the desire to repeat 2014 in the large case market, if we can do so within our disciplined pricing parameters, our business plan is built around that. So we are anticipating a bit of a decline to the tune of about 10%, and the net is that sales guidance around 2%-4%, which I think still holds true. We feel good about what we bring to market. It is really more where is the market itself going to be, and that is a little bit the wild card. Tim, do you want to touch on the Colonial Life? Sure. We feel very good about the results that we produced last year. As Rick mentioned, it is the highest growth rate in the company since 1990. We feel great about the market conditions overall. We feel good about our sales team. We feel great about the value prop that we bring to the market and the receptivity there. Good progress across all of our market segments, but we still feel comfortable with the range we have given before of 6%-8% on the sales side. Good, thanks. Peter, just lastly on the U.K.? Well, similar to Mike, really, I think in terms of 2014, we actually outperformed a little bit in the fourth quarter. We had a large one-off transaction which gave us a nice clean through around a claims buyout, which gave us a bit of a following wind for that fourth quarter. So that was a little bit better than we expected. When I look at the sales outlook, we had 7%-9% in 2015. Still looking at that, I think that is still challenging, particularly given the interest rate environment where our discipline and what we stand for is we will be continuing to put rate through, and it depends on the competitor reaction on that. However, I feel that is good today. Thanks so much. Good. Thank you, Jack. Go next to Suneet Kamath with UBS. Good morning, Suneet. Good morning. Thanks. Again, our congratulations as well to the team. Sure. Just wanted to go back to the Unum US LTD sales growth. I think it was 25%. I know you guys manage the pricing of new business relative to the discount rate, but I just wanted to confirm that the discount rate adjustment that you're making here in the fourth quarter, was that already reflected in the pricing that you put out to achieve this 25% sales growth rate? Mike? Yeah. If you think about the sales cycle, it depends on the market segment that you're in, but if you're in group insurance, you think about a sales cycle in the three-month range. So where we see interest rates three to six months back, that's where sales are coming on. I'd say we feel actually very good, and Rick made it in the opening statement, feel very good about the pricing level of new business that was coming on. Just as Peter was saying, as we look forward into 2015, we talked about this in our guidance meeting, we're going to move new business rates up. We had been thinking sort of low to mid, and I think probably mid is better in terms of what even happened with interest rates over the period of time since the end of last year. Again, feel good about the business that's coming on. We'll move it up again, and it'll depend a bit on the market and the market conditions as how much that slows sales growth. But again, feel pretty good about where we're at and the ability to price new business and to renew business over the next year or two to where interest rates are. Okay, thanks. I guess on group disability and the loss ratio, I think there was a comment in the prepared remarks about seeing higher claims maybe relative to the year ago. I just wanted to get some color in terms of what you're seeing, kind of where it came from, and whether or not you expect that will persist going forward. Mike? Yeah, sure. We saw a little bit of volatility, the average size of new claims, but actually pretty much within the long-term expectation. Other key factors, submitted incidents bounced around a little bit quarter to quarter, but paid incidents has been very steady. Then just recovery performance offsets have been rock solid. I would say overall, we are actually pretty happy with that continued consistency out of the risk line for LTD. Okay, then just the last one from me on your capital generation model, I guess for Rick or Jack. If sales are at a level that is kind of persisting here, the $150 million of capital uses that you guys talk about between interest expense and growth funding, should we still expect that to be a pretty good number at these sales levels, or could there be some upward pressure in terms of capital requirements if growth remains strong? Great. Thanks, Suneet. It is Rick. Actually, it is a very good question, and we are seeing sales results. I would go back to some of the things we talked about from an overall capital perspective, is the first place we want to put our capital is back in our business. We are doing that, and I think that we are very happy about the premium growth. I would tell you that where we sit today, we do not see a noticeable difference in terms of how that impacts the capital plan. It will continue to grow at these type of rates. You have heard that we are a little bit more metered as we look out over the course of the year. You might start to see some of that. That is a situation that we want to have and actually put more capital right back into our business. But as we sit here today, I don't think that alters our capital plans. Okay, great. Thanks, guys. Thank you, Suneet. We'll go next to Mark Hughes with SunTrust. Good morning, Mark. Good morning, and congratulations, Tom. Good. Thank you. The voluntary benefits sales there are quite strong. How does that fit in, or is there a connection with kind of the economy picking up perhaps a little bit, a little more flexibility in terms of insurance arrangements at a lot of small businesses? Is that momentum going to continue in 2015? Yeah, sure, Mark, we got two windows into that business, and maybe Mike, maybe talk to the Unum US perspective and then Tim follow on the Colonial Life piece. Yeah, sure. Thanks, Mark. Good question. On voluntary, we're sort of seeing a little bit of tailwind on a couple of fronts. We've seen participation at the plan level improve just a bit. I wouldn't say dramatically, but certainly as consumers have a little bit more disposable income as the economy improves, oil prices are a bit lower, that helps us. We're seeing good cross-selling into our existing group insurance line. That's been a big driver. Expanding voluntary through those relationships. Then new clients coming on via the voluntary benefits line. Sales were up about 21% in the quarter. It was a good year overall. I'd say the pipeline looks good. That will be one of our faster-growing business within that 2%-4% range that we talked about. For Colonial Life, we are seeing improvement in the economy coming through in our sales results, especially in the small case market. We believe that small businesses are beginning to rebound a bit with hiring. In the less than 500 life segment last quarter, our sales growth was north of 22%, and so we're seeing more traction in that marketplace. We're also seeing a continued need for the products that we manufacture based on changes happening in the medical industry. Higher deductibles create a need for a lot of our products, and we also believe that our mission to protect America's workers is resonating in the field. We feel good about the marketplace and the momentum. I think you'd made the comment, and this is more macro, some evidence of better underlying natural growth, but not accelerating. Anything you want to expand on that? Mike? Or go ahead, sorry. No, I was just going to say, Mark, from the comments, we did say that. You kind of think in the 1% type range, maybe even a little bit under that, but we haven't seen that accelerate. It's been consistent. I don't know, Mike, if you'd add to that in terms of the natural growth. Yeah, the two levers for us in covered payroll are the number of employed going up. Then it's salary that is covered for disability and life insurance that tend to be levered off of income. As Rick said, we've seen probably a little bit more on the number employed. We've seen a little bit weaker in terms of the growth on incomes. On normal times, that should be what? 3% maybe? Yeah, we would see 2%, somewhere ranging around that, up or down, few basis points. Okay. Thank you. Good. Thank you, Mark. We'll go next to Bob Glasspiegel with Janney Capital. Morning, Bob. Good morning, and congratulations to all as well. When you lowered your discount rate, interest rates were probably 40, 50 basis points higher than they are today. If we got the 10 year staying where it is or the 30 year, whatever rates that you look at that have come down when you set the discount rate for this year, should we look for sort of a headwind going into 2016? Rick, do you want to touch that? Yeah. Certainly, Bob. What I would actually say is, and that's what I was trying to articulate around our overall view in the earnings, I think as interest rates stay here relative to what we talked to you about at December, there are headwinds, and we view them as that, and so those are things that we'll have to evaluate as we get out on the year. Because what we reflected in December certainly was the current environment, which was about 50 basis points different than it is today. So we'll have to evaluate that as we get out towards the back half of the year. So there will be a potential you might do the discount rate again during the course of the year if rates stay where they are, or you wait for the renewals, there is not much you could do over the year? I think that that is something we will have to answer as we go through the year. It is still pretty early, Bob, and we just got through that process of going through the discount rate adjustment, so it is early to speculate on what we are going to do in the back half of the year. But I am saying you do have flexibility to adjust pricing mid-year as well if you had to. Yeah, Bob, this is Mike. Absolutely. And so we actually look at it on a semi-annual basis, and frankly, a little bit even more frequent than that on tactical changes. So that is certainly in play. The GBP is also sort of a headwind as well after sort of being a helpful item for last year. Is that sort of baked into your guidance and how much of a penalty for currency from U.K. do you see? Rick, do you want to touch that? Yeah. We have seen that headwind. We often talk about our results for the U.K. on a pound basis because it's hard to chase around the currency level. But as we roll that through in our EPS and what we've factored in going into next year is a level of 155 on the rate, which I think we're a little bit lower than that as we sit here today. But that's what we've factored into our forward look. Slight headwind, if it stays at 152. Yes, slight. Okay, got you. Thank you. Good. Thanks, Bob. We will go next to Jimmy Bhullar with J.P. Morgan. Morning, Jimmy. Sir, check your mute button. We are not hearing you. Can you hear me now? Yep, we got you. Good, Jimmy. Okay. You reported fairly strong sales across the board, but I was wondering if you could talk a little bit about just competitive conditions in the U.S. disability market, as you've gone through the January renewals and what you're seeing competitors do in terms of pricing. Good. Thank you. Mike? Yeah, sure. It certainly remains a competitive landscape, and that's true in group insurance and voluntary benefits as well. We still certainly see some players out there that are looking to grow share or in some cases, actually recover some share using price as a lever, but on balance, and this is similar to what we would've talked about over the last couple of quarters, we have seen, I would say, a gradual hardening in rates in the market. We've got some sizable players that are looking to improve the margins on their books and get their ROEs up from where we think industry averages are sort of in the mid-single digits. On balance, it's actually been a more favorable environment, a competitive one, but a bit more favorable. On margins, your results have been fairly stable the last several years, but as the economy recovers, are you seeing any improvement in claims incidence trends or recovery trends? What your expectations are there? Yeah, I'd say we worked pretty hard to diversify the book. Heading into the downturn of the economic cycle, we didn't see a deterioration in our claims incidence, in recovery rates or offsets. I think as things begin to improve, albeit very gradually, I wouldn't anticipate a big swing towards more favorable outcomes. Consistency is probably the best bet. Okay. Then just lastly, a clarification on your EPS guidance. I think you mentioned you're more comfortable with the low end of the 2%-5% range given the environment. I was wondering, when you talk about growth, are you talking off of the $3.55 for 2014 that you reported or the lower number, given the change in accounting for low-income housing credits? Yeah. Jim, when you look at that, it's actually going to be off of the adjusted number that we're looking at, but that's going to be recapped for 2014. We'll have it out to you. Which will be around $3.51, you're guessing? Yes. So it's going to be the $0.04, so it should be roughly $3.51. We'll have that out there shortly for you. Okay, thank you. Thanks, Jimmy. Bye. We'll go next to Yaron Kinar with Deutsche Bank. Yaron, how are you doing? Very well, good morning. Congratulations as well from us here at Deutsche Bank. A couple of quick questions here. Sure. One, what led to the uptick in the expense ratio across all the core business segments this quarter? Well, actually, it's a good news story, Yaron, when you look at it. Most of that is compensation, given the higher sales levels that we saw. That's one of those expense lines that we don't mind paying out there. We'd like to see that as part of our higher sales. Okay. Could you quantify the variable or miscellaneous investment income? What kind of an impact did that have? Certainly. I actually talked about that across a couple of our lines. Just to give you a sense of that, we run roughly in the $15 million a quarter range, at least we have over the last several years. This quarter, we actually saw an uptick of that in the $78 million range, something like that. I would remind you that last quarter we saw a downtick of $78 million. So it kind of varies around that $15 million level. So we did see a higher level in the quarter, maybe a little bit north of that 8 million that I mentioned. So we factored it through our results, and we are just going to watch that volatility as it goes through, but nothing new to note there. Okay. One final one, and I apologize if I missed this, but of the $700 million GAAP reserve strengthening in long-term care, how much of that was interest rate related? Yeah. That $700 million was virtually all interest rate related. There were some pluses and minuses on the liability side. Some of those went in opposite directions. They largely offset. So I think you can pretty much assume all of that is an interest rate charge. Great. Thank you very much. Yaron, thank you. We'll go next to Randy Binner with FBR Capital Markets. Good morning, Randy. Hey, morning. Congrats too on the kind of long-term turnaround there at Unum. I just wanted to clean up a question, I think from Stu Schwartz, which was kind of getting into the element of this charge that moved out of GAAP and into STAT. I apologize if I missed that. I just haven't been able to parse that out from the disclosures. Was there an element of STAT charging? Can you remind us of what that was versus the GAAP items that have been discussed? Great. Maybe I'll take a shot at that, Randy. When you look at the $57 million that we recorded that I mentioned, there's a lot of moving pieces as we went through that reserve charge process. On the GAAP side, we articulate that, and as Jack just said, it's mostly interest rates. As you move around the different pieces as well, you can have some STAT impacts fall out of that. So it's nothing that I would note more than the amount of movement that happened as part of that charge. The $57 million was very much contemplated as part of our overall capital results in 2014, our capital plans in 2015. All right. That 57 is all in the First Unum in N.Y. It's actually in multiple entities. That's just part of the noise that came out of the process with the different entities that moved around. Okay. But it's still mostly rates. Then I think one of the topics that's been discussed in the past is kind of sizing the delta between the GAAP and the STAT reserves or capital, either one. In the long-term care area, is that something you can update us on just to kind of think about what the potential risk would be if there was another review and maybe help us understand what the process would be for another kind of comprehensive review on long-term care, given that rates are lower than when you went through the planning process on this? Yeah. The STAT GAAP difference, we talked about it being in the several hundred million dollar range at the investor meeting. That's still applicable. That's where it is. I would say in general, over the last several years, statutory reserves have grown faster than GAAP reserves. It's likely over the ensuing years that that would continue to grow. We looked at the interest rate charge kind of as a long-term charge. We said interest rates would stay low for the next four to five years and then revert to the mean. The view is it's more of how long that charge lasts given the current interest rate environment, which has moved against us even since. But we still think it's a stable place. It has a lot of factors in it, including where spreads are, opportunities in different asset classes, and things. So we're comfortable. We kind of talked about biting off a three- to five-year horizon. We're still comfortable with that. Clearly, the current interest rate environment pushes it towards the front of that as opposed to towards the back. All right, perfect. Understood. Thank you. We'll go next to Erik Bass with Citi. Hi, thank you. Good morning. One of the factors that I think you've mentioned that's been driving sales is additional product sales to existing customers. I was just hoping you could quantify the impact there and maybe talk about how much further opportunity you see. Mike? Yeah, sure. We see about north of 60%. To give you a sense, actually, we see in the large end of the market, numbers even north of that in terms of the percentage of our sales that come from existing client relationships. That's important to us for three reasons. One, because we understand the risk a bit better. Two, it tends to come in more favorably priced because they know us and we tend to have a good service relationship. And three is each time that we add additional lines of business into a client relationship, it drives the stickiness of that account up a bit. If you take 2015, as we've talked about, low interest rates, certainly, products like LTD, we're going to be in there at renewal time with modest increases. Our chances of placing those increases in the context of a broad relationship are significantly improved. So it's really the key strategic driver for us. If you think about the runway, it's actually pretty substantial. So we average right around three products per existing client relationship, and we would see a fully integrated client be more like six or seven different lines of coverage as you think about the different demographics within the employee base. So we feel like we've got a lot of room to continue to grow within that base. Thank you. Mike, as we're saying, that's one of the variables I think you and your team are focused aggressively on. Other ones would be increased participation, but you can get pretty granular in terms of operational things that we're doing, and I think that's very much part of your game plan for 2015. Yeah, it's a great point, Tom. In addition to additional benefits offered as part of the plan, you actually look at where you have employee-contributed benefits or voluntary benefits in place, and what the participation level. Even without an additional cross-sale, you can drive premium growth, and improved risk outcomes as you get a better spread as you drive that participation up. That's one of the things as well. Thanks. That's helpful. If I could ask one follow-up on long-term care, just hoping you could go into a little bit more detail on the adjustments you made for mortality and morbidity. I realize in total, that was offset, I think, by assuming the re-rates that you've achieved. But if you could just talk about the dynamics you're seeing there and how much of the adjustments you made are based on actual claims experience. Sure. I would say the vast majority of our current assumptions are based on our own claims experience. We were informed by society studies. We had bought some risk guidelines from consultants. We measured our own experience against those, but we did look at every assumption. I would say that the vast majority of those assumptions are based on our own experience. Got it. But is it the correct read that both mortality and morbidity in isolation were slightly negative versus prior assumptions? Not necessarily, actually. Things went in different directions within there, but they offset. Okay. Thanks. I guess, just last on that, you've given a sensitivity to GAAP reserves for interest rates. Is there anything similar you could provide for either mortality or morbidity, such as what a 1% change in either of those factors would mean for the GAAP reserve? Yeah. It's clearly, they're long-term assumptions, so there is sensitivity, but I don't have a rule of thumb on a 1% change. Okay. Thank you. Thanks, Eric. We'll go next to Ryan Krueger with Keefe, Bruyette & Woods. Good morning, Ryan. Hey, thanks. Good morning. Congrats to everyone from us as well. On the, I guess, back to the sales growth in Unum US, can you give some underlying color on, I guess, if you think in general the market is growing at a substantially higher level than it was, or do you think it's more attributable to you guys gaining market share? Mike? Yeah. Thanks, Ryan. Time will tell a little bit because the industry reports lag, obviously, the company level reports. It will take a little bit of time to actually see what happened with the market. I would say I am actually encouraged. A couple of points on that front. One, we had seen a slowdown in the smallest end of the market, and Tim alluded to this from a Colonial Life perspective as well, but we have seen a persistent drag in the less than 100 employee market, and that over the last couple of quarters has really started to come back. In fact, we saw sales growth over 30% in that less than 100 life group insurance market. Those are often new lines that an employer is adding for the first time. So you start to see a little bit of market growth on that front. The second component is we are seeing the addition of additional lines on the voluntary front as health plans, as consumers are buying down health coverage through higher deductible plans, that leaves gaps. So we are taking what might be a traditional life and disability client, and you are in there with accident insurance and other supplemental health products, and that is almost always industry growth versus the swapping of business amongst carriers. Got it. Thanks. Then, if I could, one on long-term care. Can you give us or remind us what level of future premium rate increases that you guys are projecting within your long-term care reserves? Yeah. We do not have an exact number for you, but I would tell you, as we did at the investor meeting, that we are basing that level on filed rate increases. So the assumption we have going forward is based on filings that we have already made related to rate increases. The assumption is also assuming that we get results on currently filed rate increases that are largely consistent with the results we have had on previously filed rate increases. Okay. Just to be clear, your reserves do not assume any additional rate increases beyond what you have already filed? No. Great. Thank you. Good. Thanks, Ryan. We will go next to Tom Gallagher with Credit Suisse. Morning, Tom. Morning, and congrats, Tom. Thank you. Hey, just had a question about how we should be thinking about cash flow generation if rates remain low here. The $220 million or so of charges, if we add up the New York sub and Fairwind, is that a number that we should expect to be recurring if rates remain at current levels? Have you guys baked that into your capital plan, i.e., can you still do at least the low end of your buyback assumption even if rates remain low? Yeah, Tom, to answer that, I think most succinctly would be to say that we've factored in the current environment into all of our plans. As we've updated things, and even as I talked about some of the pressure we're seeing in the range inclusive of our capital plans reflects what we're seeing out there today. But can we assume, though, Rick, that we would see similar levels, greater or less of that, we'll call it $200 million or so cumulative for LTC on a stat basis. Is that a number that we should be thinking about as recurring or is there a reason to think that might abate or change? No, I actually expect that will be much lower as we get out towards the end of the year because a lot of what actually came out of what you saw in those results, both the 57 I mentioned as well as the First Unum moves, had to do with the reshaping that we did over our overall reserves. I think interest rates, their movement down now would be less impactful in terms of what we see in First Unum. And I wouldn't expect things to recur in our other entities as well. Okay, thanks. Good. Thank you, Tom. We'll go next to Eric Berg with RBC Capital Markets. Morning, Eric. Thanks. Good morning, Tom. Thanks very much. I just wanted to clarify, just to sharpen again our understanding of the difference between the 57 and what's going on in your New York company. Should I think of those two numbers, one a charge that went through your STAT income statement and one that I gather from an earlier response that went to surplus. Should I think of those two charges as independent? Jack? I'm not sure they're independent in that they all came out of the same reserve review. But the charge in New York was split. So a piece of it went through the equity line and a smaller piece in statutory earnings. Okay. My follow-up question, my second question, not a follow-up, but a separate question relates to your ability to increase prices and the speed with which you can do it. My understanding is that this is not like many businesses in the sense that once you decide that you need a price increase, my understanding is you can't do it the next day. You have to notify your salespeople. You have to notify the customers. You have to notify your intermediaries, the brokers. And there may be, I'm not sure, maybe you can include this as part of your response. There may be regulatory things that you need to do. There may be IT issues that you need to deal with from a price increase. My question, what's involved and how long does it take to raise prices once it becomes apparent they're needed? Just to clarify, Eric, are you talking about the group business or are you talking about the long-term care business or both, actually? Oh, no, I'm really talking about group disability. Group disability. Mike, maybe walk through just the pricing cycle process actually, because it's a great question. Yeah, it is a really good question. I think it's actually sometimes a little bit misunderstood because I think the ability to place increases in your in-force block is actually a confidence that has to be built over time. I think you actually nailed a number of the key pieces. First you have to understand within all the cells that make up a pretty diverse block of business, where do you want those increases to hit and at what levels? There's a fair amount of work that goes into that. But actually the real work comes once you've decided where those increases are going to hit. It starts with, as you said, communications and the ability to effectively communicate with brokers and consultants, ultimately to that end client. You want to actually show up with not just a take it or leave it, but you want to have a set of options around changes that they could be making in their plan design that could offset some of those increases. So the net is a profit improvement but that you've given a client some options to work with. You want to have clear metrics in place so that you understand the balance between placing increases at various levels and risk of termination. Then you want to have incentives lined up. So you need to have, as we put a lot of work in ensuring that we've got a field force that is properly motivated and understands the importance of placing renewals and having a healthy book of business going forward. So it takes a fair amount of work to build the confidence. I'd say, we look at it, we go through every case, say, over 500 employees every year that it's not in a rate guarantee, it's getting looked at and assessed. In the core business under, say, 500 lives, there's a lot more transactions there. We're going to go through somewhere between 25% and a third of those cases every year. But you get a sense for the scale of the program. But as far as new business is concerned, interest rates are now, what, 40, 50 basis points lower than they were just a few weeks ago. It's apparent, I think, that you need price increases on new business relative to what you were thinking about charging on new business just, again, two months ago. How long will it be before you can institute price increases on new business relative to what you had planned just a couple of months ago to charge on new business? Yeah. So you can move actually pretty quickly because you have underwriting guidelines in place that give you some flexibility. So what you do is you need to shoot towards the upper end of that range, and effectively, you're placing some increase there. Then twice a year, we go through a thorough review of all of our manual and filed rates and make adjustments. So again, it's not a long cycle. Think about it in terms of pretty quickly on underwritten business and actually getting to the full block within six months. And Mike, I think Eric referenced in his question, too, regulatory involvement. That's not necessarily the case, I don't think, in the group piece, as you think about what's needed to be responsive to the market. Yeah, certainly, it's a big compare and contrast to individual products of the long-term care business where the regulatory environment is the driver. Within group insurance, you've got much more discretion and typically ranges that you can operate within. Great. Thank you very much. Thanks, Eric. We'll take our next question from Seth Weiss with Bank of America. Morning, Seth. Yeah, hi. Thank you for taking the question. I just wanted to follow up on the existing sales to current clients. Is there a general pattern of moving from a specific product line to another, say, as group LTD, the traditional entryway, and then you will see that flow through to other product lines? Or is it generally give and takes across the board? Yeah, I would say it is give and takes across the board. So actually often there is a voluntary benefits relationship in place that we are bringing group insurance in or an employer paid component. Actually, our multi-life individual disability, which is disability income protection for higher earners, that tends to be a great place for us to do cross-selling into those relationships as well. If you look at it in sum total, it comes from every direction, but certainly, having a very large block of long-term disability, that is the base that I would say most frequently we are cross-selling into, and I would say most frequently we are cross-selling voluntary benefits into those LTD relationships. Okay, that is helpful. Thank you. And then one question on persistency, and correct me if I am wrong, but I believe the persistency that you reported for 2014, it does not account for any renewals that you may have lost on January 1. That being, can you just quickly discuss the January 1 renewals and how those came through? Yeah, sure. Your read is correct, so it is not reflected in that. But as we look forward, and you would have seen premium guidance of growth in the 4%-6% range for Unum US, and that reflects, I think, pretty strong continued persistency. We did 90.5%. That is a very high level, but certainly somewhere in that range, which we feel really good about. Great. Thank you very much. Thanks, Seth. We'll go next to Ken Billingsley with Compass Point. Hi, Ken. Good morning. I wanted to ask a question I think I heard the answer to or if it was asked. Have you disclosed what your new interest rate assumption is and what it was before? I think that's a broad question, Ken Billingsley. I think what I would tell you is our assumptions in aggregate across the company would've been what we saw at Investor Day, and they've come down now from that timeframe 40 to 50 basis points. As you get to the different parts of the business, that's all reflected through. It'll have different impacts in different areas. But I think the best way to look at that is we're reflective in our outlook for the year now based on what we see for current rates. Well, I guess another way to ask it then, if you don't have an actual percentage, obviously the charge infers that you made some kind of adjustment. Can you talk about how many basis point adjustments you made from your original long-term expectations to where those expectations are now? Is it 50 basis points, 100 basis points change? Yeah, I think you can back into it. The charge was a $700 million charge. It's largely attributable to interest rates. We'd given prior guidance that a 25 basis point change in the discount rate was worth about $400 million. Great. The other question I have is regarding the sales growth and what you saw this quarter and expectations going forward. You sound positive. A lot of large brokers, even one today, talked about they're expanding their employee benefit footprint through M&A. Can you just talk about how that's impacting your future growth prospects? It sounds like a lot of the growth is coming from existing customers, but is there going to be an avenue maybe for even bigger growth in the latter half of 2015 into 2016 as some of these other distributors and brokers are committing to growing that part of their business? Maybe, Mike, maybe you could speak to the broker side. But also, maybe Tim, it wouldn't be bad also to talk about the Colonial side of the distribution equation, too, because they are very different, but very dynamic. Mike? Sure. Ken, we have seen that consolidation that you're referring to. I wouldn't say it's been a dramatic acceleration, but a good steady increase in firms coming together. I think, as they come together, they're able to invest on scale in some of the capabilities that they need around compliance, advisory services, some of the technology components that they're bringing into employers to help them manage. Generally, I don't see a huge impact for us. We tend to have a good broad distribution and certainly strong relationships across all the major brokerage firms. But in general, I would agree with your read that employee benefits in total, but then even outside of healthcare, I'd say the focus amongst brokers and advisors towards things like voluntary benefits, and financial protection products, like we're in the business in, that level of focus has definitely increased as the uncertainty around healthcare has swirled a bit. But Tim, to that. Yeah, for Colonial Life, about 70% of our sales come from brokers, so 30% are on a direct basis. As we've seen consolidation in the broker industry, we're beginning to see brokers migrating out of the really small end of the market, and that gives us a huge opportunity to serve that marketplace on a direct basis. But we, again, 70% of our business comes from brokers. We are consistently rated as one of the best businesses for brokers to do business with on the voluntary side. So it's still a very important marketplace for us, but increasingly see the opportunity to serve the small end on a direct basis. Could you just say one part, that it's causing a migration out of, did you say the smaller accounts? Yeah, especially the below 50 life market with the ACA minimum loss ratio requirement and the impact that has on broker commissions. We're beginning to see some migration out of that marketplace, especially as brokers consolidate. Tim, that's where actually you've seen some good growth because your direct sales efforts are focused on that part of the marketplace where there's a void that's been created. Absolutely, yeah. Fourth quarter of last year in the less than 100 life market, we were up 23%. Very strong progress there. A real need in that marketplace, too, as brokers consider whether they can serve that marketplace. As we see some migration, those employees and employers in that segment still need advice, so we're there to help them with that. Consolidation on either Unum US or with Colonial Life is not No one's been able to drive higher commissions or anything else to have you pay for, obviously, the compliance and technology that they're bringing to the customer? No, we are definitely not seeing that. Not seeing that, Ken, no. Okay. The last question, I may have just missed comments at the beginning when Tom was talking about chairman. I thought he was referring to himself for the next two years, or was that in reference to Mr. Ryan? No, I will be staying on as chairman for two years, actually, Ken. Again, at the annual meeting, I will step up to the chairman role and stay on the board for two years. Our current chairman, Bill Ryan, will actually step into a lead director role until he retires at the annual meeting in 2016. Okay, but your expectation is not to be on the board after two years or just not be chairman? I think that is the thinking right now, yes. I think it is good governance. For a CEO to stick around at the board too long, I think is one of those things we very much don't want to do. I can serve in a very important role for a couple of years, both with the board and with management in terms of helping ensure continuity. But I think right now we are thinking of it as a two-year period. I did hear that correctly. All right. Well, thank you for taking my questions. Good. Thank you. We will go next to Steven Schwartz with Raymond James for follow-up. Hey. Thank you. Hey again, everybody. Just a quickie. Looking at the numbers versus my numbers, and of course, my numbers are guesstimates, I did notice that expense levels did seem kind of high. I was just wondering in general, Rick, if you can comment on were expense levels maybe higher than normal because of the sales and changes in the DAC rules that occurred in 2010 and what have you? Yeah, Steven, just come back to it. We actually, our sales costs were higher, so good growth. You do see more sales out there. DAC rules don't really have much to do with it because when we talk about our operating expense ratio, we're not factoring the DACing process into that. So good sales, pay a little bit more in expenses. That's a good news story. Okay, thanks. Good. Thank you, Steven. Well, thank you all for taking the time. I know this call went a little long, but there was obviously a lot of subjects to touch on, so we appreciate your participation. And Debbie, this will complete our fourth quarter 2014 earnings call. Thank you, gentlemen. Ladies and gentlemen, this does conclude our conference. Thank you for your participation.