Good day, and welcome to the Unum Group third quarter 2016 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to our Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead.
Great. Thank you, Karina. Good morning, everyone, and welcome to the third quarter 2016 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 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, 2015, as well as our subsequently filed quarterly reports on Form 10-Q. Our SEC filings can be found in the Investors section of our website at unum.com.
I remind you that 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 this morning are Unum's President and CEO, Rick McKenney, and our CFO, Jack McGarry, as well as the CEOs of our core business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, and Tim Arnold for Colonial Life. Now I'll turn the call over to Rick for his opening comments. Rick?
Great. Thank you, Tom, and good morning, everyone. The third quarter was another excellent one for Unum, with after-tax operating income per share of $0.99, an increase of almost 9% over last year. For the first nine months of 2016, after-tax operating income per share has also increased close to 9%. This performance exceeds the upper end of our outlook range for the year of 3%-6% growth and is driven in large part by solid premium growth in Unum US, Unum UK, and Colonial Life, along with very consistent benefits experience. I'm very encouraged that we are delivering these strong results despite today's difficult business environment, with historically low interest rates and, more recently, the sharp decline in the value of the British pound.
The reason we're delivering these results begins with the leadership position we have established in the employee and voluntary benefits marketplace over many years. These markets offer good opportunities for growth over the long term, and we believe that our longstanding and focused commitment to serving our customers and advisors sets us apart from the competition. Our industry-leading expertise and our disciplined approach to the fundamental operations of our business have enabled us to grow our business with a high level of consistency and profitability. We'll cover these strategic points with you in greater detail at our upcoming investor meeting in December. This morning, we'll focus on the strong financial results we have achieved in the third quarter as a result of an execution of this strategy. Now let me move to provide a few highlights on the quarter.
First, the premium growth we are generating in our core operations remains healthy at approximately 4%. This trend continues to be driven by strong persistency levels in all of our core business lines and the volume of sales we've been generating over the last several years. While new sales trends are currently challenging in the Unum US markets due to competitive pricing conditions, we continue to see excellent sales trends at Colonial Life and experienced a strong level of sales growth at Unum UK this year. Specifically, Colonial Life sales grew by 9.3% this quarter and 12.7% for the year to date. Next, I continue to be very pleased with the strong profit margins we are consistently generating in our core business segments.
This demonstrates the discipline we employ in all aspects of our business, including the pricing and underwriting of new business and the management of our in-force business relationships. All this helps to provide a good balance between producing top-line growth and maintaining industry-leading profit margins. From a capital perspective, these strong operating results have continued to produce a strong level of statutory earnings and capital, which is the lifeblood of our financial flexibility. The third quarter was another excellent quarter for statutory earnings, which increased 13% and now exceed $800 million for the trailing four quarters. This capital generation enables our capital deployment strategy, which starts with the opportunity to grow our business, both through the organic growth we are generating and the ability to capitalize upon attractive acquisition opportunities. It also has resulted in delivering steady repurchases of our shares and annual dividend increases.
On the acquisition side, we closed the acquisition of Starmount Life Insurance Company during the third quarter, providing the platform to grow what we believe will be a substantial dental business over time. Dental is a good fit because it is a volume product that customers value. It is sold often at the workplace and, as a voluntary product, it fits well in our existing product portfolio and distribution channel. Another indicator of performance is the growth we have seen in book value per share, which for the third quarter is $40.33, an increase of 14% year-over-year. Book value, excluding AOCI, also increased 9.2% year-over-year to $38.39 at quarter end. In summary, it has been a very strong first three quarters of 2016.
As I said earlier, I believe the success is largely a result of our steadfast focus on disciplined execution of our business plan. This execution has multiple facets, from underwriting and pricing to paying claims to helping people return to work, all the while serving our customers very well. The combination of both operating and markets that provide good opportunities for growth and disciplined execution of our strategy leaves us very well positioned to deliver great value to our shareholders in the future. With those highlights on an excellent third quarter, I'd ask Jack to cover our third quarter results in greater detail. Jack?
Thank you, Rick, and good morning, everyone. Rick provided a high-level overview of our third quarter results. Now I want to provide a more in-depth view of the operating trends we experienced in the quarter. First, I'm very encouraged by the composition of our after-tax operating income per share growth of 8.8%, as after-tax operating income grew 3.7% over the year-ago quarter and our share count declined by 4.9% due to our ongoing capital management initiatives. This continues the favorable trend of balanced growth through earnings growth and capital management activities we've seen throughout 2016. One of the primary drivers of our overall results this quarter was the performance of Unum US. Third quarter operating income was very strong at $231 million, an increase of 5.6% from the year-ago quarter.
Premium income growth continued its positive trend, increasing 5.9% over the year-ago quarter, helped in part by the inclusion of our dental acquisition. The benefit ratio for Unum US segment improved to 69.4% in the third quarter, compared to 69.8% in the year-ago quarter, with excellent results in the group disability line. In addition, our focus on disciplined expense management continued to contribute to these favorable operating results. The other expense ratio declined to 20.9% in the quarter, compared to 21.8% in the year-ago quarter. The profitability of Unum US remains very strong, with an operating ROE of 15% for the third quarter of 2016. Within the Unum US segment, operating income in our group disability business was exceptionally strong this quarter at $85.4 million, an increase of 20.6% over last year.
Premium income increased 2.8% over the year-ago quarter, while pressure on net investment income continues as low new money yields pressure the portfolio yield. The benefit ratio was exceptional at 78.6% for the third quarter, compared to 80.5% in the year-ago quarter. This improvement in the loss ratio was driven by strong renewal results over the past couple of years and continued favorable incidence and claim recovery trends. These results leave us well-positioned to absorb any discount rate pressures that may arise from today's low interest rate environment while maintaining our group disability loss ratio in our expected 80%-82% range. Group Life and AD&D operating income declined to $53.4 million for the third quarter, down 11.3% from the year-ago quarter.
Premium income grew 5.5% over the year-ago quarter. The benefit ratio increased to 72.6% for the third quarter, compared to 71% in the year-ago quarter as a result of higher average claim size. Net investment income was negatively impacted by lower yields as well as lower asset levels resulting from reduced capital in the Group Life line. Operating income in the supplemental and voluntary lines was also very strong at $92.2 million in the third quarter of 2016, an increase of 5.1% over the year-ago quarter. Premium income growth trends remained very favorable, particularly with the addition of the dental business, increasing 12.1% in the quarter compared to last year. From a benefits perspective, our overall results remained in line with our expectations.
Benefits experienced for individual disability in the third quarter was generally consistent with the year-ago quarter. Benefits experienced for voluntary benefits was slightly less favorable relative to the year-ago quarter, primarily driven by less favorable experience in the life product line. Looking at Unum UK, operating income was £21.5 million for the third quarter, an increase of 1.9% over the year-ago quarter. Premium income increased 3.9% over the year-ago quarter. The growth benefit of last year's dental acquisition was partially offset by pressure on growth from existing customers resulting from the current economic uncertainty. The benefit ratio was 71.8% for the third quarter, relative to a favorable 67.8% in the year-ago quarter. The majority of the increase in the benefit ratio was driven by higher IBNR adjustments, which were offset by stronger net investment income on the index-linked investment portfolio.
We also saw some pressure due to higher average claim size in both the Group Life and Group Long-Term Disability line. Overall, profitability of the U.K. segment remains very strong, with an operating ROE of 20.7% for the third quarter. It's still too early to tell what the long-term impact Brexit will be on our U.K. operations. The lower weighted average exchange rate of 131 in the third quarter compared to 155 in the year-ago quarter adversely impacted the translation of U.K. earnings back into US dollars. We do not expect to see much, if any, impact to our claims experience. However, if employment trends and wage inflation slow down in the U.K. and sterling and interest rates remain under pressure, we're likely to see some negative impact to our premium growth and investment income trends.
We started to see some slowdown in underlying lives growth and wage inflation in the third quarter as companies appear to be in a wait-and-see mode for further clarity on the details and implications of Brexit. We believe that the fundamental need for protection products in the U.K. has not changed as a result of the Brexit vote. We'll be monitoring very closely for any impacts in our markets over the next several quarters. Colonial Life continued its trend of producing strong, steady results with operating income of $79 million in the third quarter of 2016, compared to $76.3 million in the year-ago quarter. Premium income growth accelerated to 6.3%. The benefit ratio was 51.6% for the third quarter, compared to 51.2% for the year-ago quarter. Colonial Life continues to generate excellent margins with an operating ROE of 17.3% for the quarter. Finally, the closed block.
Operating income was $28.6 million in the third quarter of 2016, compared to $27.7 million reported in the year-ago quarter. In the individual disability line, the interest-adjusted loss ratio was 81.5% in the third quarter compared to 80.8% in the year-ago quarter, reflecting normal volatility. For the long-term care line of business, the interest-adjusted loss ratio was 93.8% for the third quarter, compared to 89.9% in the year-ago quarter. The long-term care loss ratio was elevated due to the termination of our largest group case, which also had a unique auto portability feature. I'll explain the impact of this termination in more detail in a moment. In the absence of this event, the long-term care loss ratio would have been in the upper end of our 85%-90% range.
Similar to the second quarter, we continue to see some pressure on new claims incidents and severity from rate increase notifications to policyholders that have been delivered recently. This impact was significantly diminished in the third quarter relative to the second quarter, we would expect to continue to see some impact over the next several quarters. Also, we experienced less favorable mortality experience in the long-term care line this quarter. As I mentioned, long-term care results were negatively impacted this quarter by the termination of our largest group case. Normally, when a group long-term care termination occurs, we experience a small positive benefit to our financial results. This case was unique in that it had an auto port feature whereby employer-funded coverage automatically ported and policyholders had to opt out in order to terminate their coverage.
As lives port, we changed the persistency assumption underlying new reserves from a group assumption to a significantly lower individual assumption, which results in a much larger reserve. The unusually large number of ports, coupled with the corresponding increase in reserves, adversely impacted our loss ratio this quarter. In the absence of this unique case termination, our long-term care loss ratio would have been in the 85%-90% range, consistent with our long-term expectations. I continue to be pleased with the progress we're experiencing on achieving rate increases on our in-force long-term care business. In addition to making good progress with state regulators and receiving several new rate increase approvals this quarter, we are continuing to see strong take-up of the landing spot option. The landing spot has the same positive impact on reserves as rate increases, also has the added benefit of de-risking the portfolio.
Since future claims will be smaller under the landing spot, the reserves will be somewhat less sensitive to future changes in reserve assumptions. I'll now move to the growth trends we experienced across our business this quarter. Starting with Unum US, total sales declined 11.5% for the third quarter compared to a year ago. We continue to see competitive market conditions, particularly in the core market segment, where we have increased our rates to offset interest rate pressure. In total, for LTD, STD, and group life, we saw an overall decline in sales of 19.7%. Core market sales declined 13.7%, while large case sales were down 36.2%, reflecting a very tough comparison for large case in the year-ago quarter. I will remind you that the third quarter is the smallest sales quarter for the year, quarterly volatility can be amplified.
We remain committed to pricing discipline and maintaining strong margins in our business. The momentum in our voluntary and supplemental segment remains very encouraging, with sales roughly in line with the strong year-ago quarter, driven by continued demand for supplemental products and the Starmount acquisition. Our individual disability sales declined 23% against a very strong year-ago quarter, which benefited from several large cases. In the voluntary benefits product line, total sales were in line with the year-ago quarter. Persistency for Unum US is at very healthy levels. The employee benefits lines combined, persistency was 89.9%. This is important to us as we look to move price increases into our in-force block to offset the impact of low interest rates and pressure on discount rates. Our sales force, client management, and underwriting teams do an excellent job of managing this balance of placing rate increases with maintaining our in-force business.
This is essential to our ability to grow while protecting the strong profit margins we have in our employee benefits blocks. Likewise, voluntary benefits persistency of 76.8% was favorable to prior year results, as was individual disability persistency at 91.2%. Sales in Unum UK continue to rebound, increasing 15.6% in local currency with favorable trends across all segments. The inclusion of sales from last year's dental acquisition contributed 2% to this growth. Persistency was favorable at 86.5%, helping to drive premium income growth of 3.9% this quarter. We expect sales to moderate in the wake of Brexit and will continue to be disciplined in the U.K. market. Finally, Colonial Life turned in another great quarter for new sales, increasing 9.3% for the third quarter and 12.7% for the first nine months of the year.
Growth remains well-balanced between the core commercial market sector and the public sector, as well as with sales to existing customers and sales to new accounts. We've now achieved 12 consecutive quarters of year-over-year sales growth, reflecting our continued investment in the business in a favorable environment. Strong leading indicators such as new sales rep recruiting and new sales rep productivity give us confidence that we can maintain this positive sales momentum as we look to invest more in our Colonial Life distribution system to build out territories and expand our presence geographically. Persistency for Colonial Life was improved in the quarter to 79% from 78.6% last year. As a result, premium growth continues to build momentum, increasing 6.3% in the third quarter compared to the year-ago quarter. Overall, we remain pleased with the growth trends we see across our core business segments.
We feel it's important that we remain disciplined in our new business pricing in order to sustain the profit margins we have in our core business lines, particularly in Unum US. While it can be tempting to push for sales growth, we do not believe that this is the appropriate time to do so. Looking now at investment results, new money yields continue to come under pressure in the third quarter. Fortunately, we were able to meet our new money yield target of 5% for our long-term care portfolio again this quarter using our typical mix of investment classes and investment strategies, and we have exceeded this target every quarter since the 4Q 2014 reserve review. We will conclude this year's reserve review for long-term care over the next several weeks and currently believe that no special reserving will be necessary for year-end 2016.
If interest rates remain depressed for an extended period of time, we could see pressure in future years. I'd remind you that we have a substantial cushion between our GAAP and statutory reserves for long-term care, which means that any future reserve increase would most likely be a GAAP event with little or no impact to statutory reserves, and therefore, little to no impact on our capital deployment plans. With respect to Unum US long-term disability business, while we continue to maintain a healthy interest margin in our reserves, all-in yields have fallen significantly from year-end 2015 levels. The underlying profitability of our group disability business has improved significantly as a result of rating increases in disciplined risk management.
At the risk of sounding redundant, we are confident that the business can absorb any potential discount rate changes while maintaining an expected loss ratio in the 80%-82% range. We will provide more clarity on this at our December Outlook Meeting. The overall credit quality of our investment portfolio remains in very good shape. I'd like to highlight the further rebound in the net unrealized gain position of our energy holdings to $546 million at the end of the third quarter, compared to $433 million at the end of the second quarter and $19 million at the end of the first quarter. I believe this validates the investment decisions and credit evaluation process we have followed for many years, not just for our energy holdings, but for our management of the overall investment portfolio.
Moving to capital management, we repurchased $100 million of our shares in the third quarter, consistent with our repurchase activity in recent quarters. Our holding company liquidity position remains very healthy at approximately $600 million as of quarter end, which is at the higher end of our range for holding company cash coverage needs. During the third quarter, we completed the acquisition of Starmount Life Insurance Company and paid off $350 million of maturing debt on September 30th. Because of the higher debt level we've been carrying since our debt issuance in May of 2016, our interest expense, which we report in the corporate segment, was $7 million higher this quarter compared to the year ago quarter. With the debt maturity, our quarterly debt expense will decline by approximately $5.5 million in the fourth quarter relative to this quarter.
The risk-based capital ratio for our traditional life insurance companies improved to approximately 395% toward the upper end of our target range of 375%-400% for this year. Statutory after-tax operating earnings for our traditional U.S. insurance companies were again outstanding at $211.5 million for the third quarter of 2016 compared to the $187.9 million in the year ago quarter, an increase of 13%. This continues a strong trend in statutory earnings, which on a trailing four-quarter basis now totals $806 million. Throughout 2016, our outlook for growth and after-tax operating income per share has been expected growth rate of 3%-6%. For the first nine months of the year, we are beating that expectation with growth of 8.9%, driven by good premium growth, solid risk results, and a focus on expense management.
For the full year of 2016, we now expect to be at, if not slightly above, the upper end of our outlook range. We will provide an outlook for 2017 at our December 15th analyst meeting, while we're very encouraged by the operating trends we've seen this year and the momentum it creates for next year, we will face headwinds created by low interest rates on our portfolio yields and discount rates, as well as the impact of the decline in the British pound. To wrap up my comments, I'm very pleased with the results for the first three quarters of 2016.
We are executing very well on our strategy, particularly in critical areas such as maintaining pricing discipline despite increased competition in the U.S. market, generating strong persistency and growth in our core business segments, delivering on renewals to help achieve strong profit margins despite interest rate pressure, and achieving rate increases and meeting new money yield targets for long-term care. I believe that our success in these areas positions us well to continue to generate value for our shareholders in today's difficult environment. I'll turn things back to Rick for his closing comments.
Great. Thank you, Jack. As we move to questions, I'd like to conclude the prepared remarks by reiterating how pleased we are with our third quarter results. I continue to be encouraged by the good premium growth we are generating, which along with stable benefits experience, drives our strong capital generation. I believe these trends will continue to serve us well as we manage through this challenging business environment. We'll now move to your questions, I'll ask Karina to begin the Q&A session. Karina?
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. Again, press star one to ask a question. We'll take our first question from Humphrey Lee with Dowling & Partners. Please go ahead.
Thank you for taking my question. Maybe you can talk about the market competition that you're seeing. Unum US seems to be getting more competitive, and it's kind of reflected in your sales activities in the quarter. Can you just talk about the overall competitions from the competitors and the pricing environments in general?
Great, Humphrey. Thank you for your question. Mike, you want to answer?
Sure. Thanks, Humphrey. Great question. I'd start by referencing a point that Jack made in his comments, that's third quarter is our smallest quarter. Fluctuates a bit year-to-year, but it's typically about 15% of the year, so it's subject to a bit more volatility. I think I would sort of take the sales results and put them into two buckets, and the first would be around volatility. When we look at the large case group insurance business, voluntary benefits, and IDI, I think we saw a little bit of volatility against some good large sales in the year-ago quarter. I feel really good about the traction we've got in the market and our value proposition and how we're competing.
On the other side, though, I would say core group insurance, it's less about volatility, and it's more about a sustained trend we've seen over the last several quarters. To your question, while we've been moving rates up on new business slowly over the past, I'd say two and a half years, we have not seen the corresponding increase from the market. We've seen close ratios fall off a bit, particularly around new client sales. While certainly we would expect that given low interest rates, the market will eventually move to where we are, we just have not seen that yet. You know us well enough to know that when the market allows us to write business at sustainable rates in the core, we will be there with all the capacity that's available. Just in concluding, what I'd say is persistency remains really high.
Not just to focus on new business. We are doing a good job keeping clients, and that's helping to fuel some really nice earned premium growth, almost 6% in the quarter.
You mentioned your competition is not kind of moving the rates as you guys are doing right now. Do you feel like it's just more of a timing issue, or do you feel like there may be some kind of underpricing in the market in general?
Yeah, I'd say our point of view is that new business rates don't reflect the full impact of the low interest rate environment in the market. What I would say is we've come into each of the last couple of years, as I mentioned, with plans to sort of gradually move new business rates up. We feel like actually we've pretty much arrived, given low interest rates at where we need to be on new business. As we look at the coming quarters and we'll spend time on this at our Investor Day, I feel more optimistic that the market will come in line as the quarters come. Like I said, we will wait until that occurs.
Okay. Just maybe just sneak one more in. I think it's also a question for Mike. You mentioned in a media interview recently that you target to more than doubling the size of Starmount's operation to kind of $500 million in revenue over the next five years. Can you maybe share some of your thoughts in terms of how you can achieve that? Also kind of with some of the weaker sales in Unum US, how would that play as a headwind since these kind of products tend to be selling as a package?
Yeah, we are really excited about the acquisition of Starmount Life Insurance out of Baton Rouge, Louisiana. Felt like from the very first set of management meetings, we had great alignment around the focus on customers and on the people down there. We are really excited about adding this platform to the portfolio, and it's right on strategy for us. We talk all the time about delivering a strong client experience, keeping clients, and seeking growth through those existing client relationships. We feel like with the addition of Starmount, we bring a really strong growth opportunity to bring dental and vision insurance into those brokerage and client relationships over the next several years.
It's going to take some time to get it to national scale, we don't expect it to be a meaningful contributor to earnings as we continue to invest in that platform in the short term, we're excited about it for the mid and long term.
Good. Thank you, Humphrey.
We'll take our next question from Ryan Krueger with KBW.
Hi. Thanks. Good morning. My first question was on Unum UK. I guess from here, maybe over the intermediate term, do you think premiums will actually start to decline on a year-over-year basis on a constant FX basis? Given some of the pressures, if you could provide any more color on the outlook there.
Great, Ryan. We'll turn that to Peter O'Donnell in the U.K. Peter?
Ryan, thanks very much for your question. Just to sort of give you a little bit of background to what's happening in the U.K. As you know, we voted to exit Europe in June, since then, there's really been what I would call an interim period where people are trying to work out what that means. How that's impacting our business, if you look at our results, is sales going well, persistency going well. Natural growth, which is really lives and wage inflation, basically is anemic. It's actually a bit lower than last year, whereas when we were planning, we thought the economy would be getting to start to motor.
Really that's what I see happening in 2017 as well, is that as people are uncertain about the future, I think the negotiations will go on in 2017, I think they'll be discerning about bringing new staff on and putting wage inflation into the economy, we'll see that remain low. We might get 2%-3% on lives and wage inflation in a good economy. I think it'll be 1%-1.5%, which is pretty much what we're seeing this year. I think premiums will be lower than we expected, we'll still get a bit of growth as we look forward on the scenario that we're planning. Although I would also say that it is uncertain, it depends on how the market reacts to those Brexit negotiations. We're monitoring that.
We are also taking action around the interest rates because they've dropped off a bit, again, because the 10-year fell quite significantly. The most obvious example of where our comparators will be impacted is in the exchange rate. Whilst on a constant currency, I think it will be a bit lower than we expected. On an exchange rate, we are going to see that sort of $1.20, if it sticks there, come through each quarter for the next two or three quarters when we do relative comparisons. You need to factor that into your analyst models.
Great. Thanks. Could you give us an update on the delta between statutory and GAAP long-term care reserves? Would you expect similar impacts in First Unum from year-end asset adequacy testing as we've had in the last few years?
Great. Thanks, Ryan. Jack, you want to answer?
Yes. In terms of GAAP/STAT, I think last quarter we said it was around $800 million. It's grown a little bit. It tends to grow on a quarterly basis. It's a very comfortable margin, particularly when you think about putting that in the context of the level of interest rate discount changes we've taken over the past couple of periods. A very comfortable STAT after difference. We would expect any movements we take in long-term care in the future to be largely GAAP adjustments as opposed to cash adjustments and will allow us to maintain our capital plans and share repurchase at its current level. With respect to First Unum, we would expect similar types of adjustments in First Unum that we've seen throughout the period.
We don't expect anything outsized relative to that, and it's something that is built into our capital plans and our cash models. We're confident that it'll be a pretty smooth transition of that in the fourth quarter.
Great. Thanks a lot.
Thanks, Ryan.
We'll take our next question from John Nadel with Credit Suisse. Please go ahead.
Good morning, everybody. Mike, I wanted to follow up a little bit on the commentary around competition in Unum US and maybe pricing still needing to catch up a bit. We know that several carriers had to go through a process of sort of fixing their books of business, I guess that's a process that's been ongoing, I thought anyway, for the last couple of years. Would you characterize sort of the overall market as still needing to take a lot of rate? Because it seems to me some of those companies were really taking significant rate, playing some catch up. I just wonder what your commentary is around that.
Yeah. Thanks, John. Good morning.
Good morning.
I think your read is largely accurate. I think at any point in time, you've got some carriers that are steady as she goes, some that are moving to fix issues that have worked their way into their books and more aggressively moving up rates, and some that are looking to take share by underwriting more aggressively. It's really when you have a condition like I would characterize the current market, it isn't that everyone's out of whack. I think what we have is just enough carriers that are more interested in share than improving margins such that we're not seeing enough opportunity to show sales growth. We're still writing business, certainly, and as I said, I'm probably more optimistic heading into the next year than I've been in a little while. It'll take time, and again, we'll wait to see how it plays out.
Without naming names, would you be willing to at least say those who are, in your your view, more focused on taking share, do they tend right now to be publicly traded or private?
That's a clever way to get at it, John. Yeah, I probably would stick to avoiding giving you too much color on the specific names. Generally, I'd say when you're seeking growth and you show growth for a sustained period of time purely on new clients coming in, it can be very tricky to maintain margin. We see a pretty strong correlation over the long run between new client sales growth and profit margin.
Okay. Then just a follow-up for Jack on the group long-term care case that ported over to an individual case. Should we expect that to have an ongoing impact on the interest-adjusted loss ratio, or is it more of a discrete impact in the third quarter only?
Yeah. Thanks, John. No, that's done. We wouldn't expect it to have an ongoing impact.
Terrific. Thanks.
Just as a reminder, if you'd like to pose a question, please signal by pressing star one on your telephone keypad. Please limit yourself to one question and one follow-up question. We'll take our next question from Thomas Gallagher with Evercore ISI.
Good morning. Jack, just first question on holding company cash, just so I understand this. $600 million of Holdco cash. Is that the total number, or do you have an extra amount for planned contributions to the New York Sub and Fairwind for the year? Is that all an extra amount sitting at the holding company? Anyway, that's my first question.
Yeah. Tom, I think we noted in our Q that is net of anticipated contributions to our subsidiaries.
Okay. Jack, if I look over the last 3 years, you've averaged about $300 million of contributions, between the New York Sub, and the LTC captive Fairwind. Is it fair to assume the number would be in excess of 600 would be closer to $900 million of Holdco cash right now?
Yeah, Tom, can I talk about that for a second?
Sure
over the last 3 years, that's 2013, 2014, and 2015.
Right.
In the fourth quarter of 2013, we redomesticated our Bermuda captive into Vermont, and when we did that, we made a contribution because we stepped the reserves up on a statutory basis to the NAIC level. That was an unusual event in the fourth quarter of 2013 that recorded cash.
Got it.
In 2014, we took the reserve charge. As a result of the reserve charge, there was a change in statutory reserves related to claim reserves. There was an unusual contribution in 2014 resulting from that. I think if you look at the three-year average, those aren't average periods. There were significant events that we identified in each of them, and we don't have $300 million of cash needs in the fourth quarter or we're anticipating. If you go back and you look at our cash openings by quarter, if you back out those significant events, you don't see a drop in cash in the third quarter. I'd also note, I mean in the fourth quarter. I'd also note that the fourth quarter is a lighter cash need from an interest expense perspective because most of our coupons are due in the first and third quarter.
You can't just look at that funding. There's a reason those fundings take place in the fourth quarter. It's because we have lighter other cash needs in the fourth quarter that offset it.
Just to be clear, you wouldn't expect to have any cash need at Fairwind this year?
I wouldn't expect to have any extraordinary fourth quarter event that significantly changes our holding company cash.
Okay. Between New York and Fairwind, if I think about the amounts that would be needed there on a run rate basis, you would not expect, if I look at the last three years, including last year, there to be any meaningful amount that's needed for Fairwind. Is that?
It'll be similar to our normal amounts, clearly under $100 million. The other thing to note about these things, we fund them over the year. It's not a fourth quarter event. You only see it like for Fairwind in the fourth quarter because that's when the Blue Book gets filed. It's something that happens on an ongoing basis.
Okay, thanks. Just my follow-up on the group case that got converted on the long-term care side. How big a portion of your total group business was that? That was your largest case, you said. What % of the total was that?
Yeah, it's like 5% of the total. I mean, it was a large case. It was four to five times bigger than our second-largest case. Our average case size on the group business is like 100 lives. It was a very, very big impact relative to the block.
Okay. All right. Thank you.
All right, Tom. Thank you.
We'll take our next question from Mark Hughes with SunTrust.
Thank you. Good morning.
Hey, Mark.
Your benefit ratio in the U.S. group disability business was quite low this quarter. Was that just some natural variability or has it been trending in that direction, and you're finally just sort of giving it more credibility?
Thanks for noticing, Mark. Mike, you want to take that on?
Thanks. Good morning, Mark. I'd say it's a little bit of both. Certainly we had favorable new claim incidents and have had favorable new claim incidents over the last several quarters, but probably a little bit more so here in the most recent period. I do think probably proportionately, though, the bigger driver is just the continued impact of the strong risk management. When we talked about new price discipline leading to a difficult new sales quarter for us, I would link that directly to being conservative in our pricing. As we've worked that through in terms of new business and through our renewal
Programs that has had the effect of lowering the benefit ratio in what I think is a sustainable way. If you put good risk management at the front of the business and a really strong, consistent high-quality benefits organization at the back end of the process, I think we're really pleased with the outcome. Sitting where we are at this point is really good, and as we look forward to the fourth quarter and think about, as Jack alluded to, any necessary changes to the discount rate on new claim incurrals in LTD, should that be necessary, we feel really comfortable that the business is healthy enough to be able to absorb that and maintain that targeted range for us, which is in the 80%-82% loss ratio range.
Then your natural growth, the wage headcount growth. Any body language on whether that was a little bit better, a little bit slower this quarter?
Pretty consistent with what we've seen over the course of the year. Muted from what we would see as a healthy and strong margin, but it is a net contributor for us.
Thank you.
Thanks, Mark.
Thank you.
We'll take our next question from Bob Glasspiegel with Janney. Please go ahead.
Good morning, Unum. I'm just curious if you had any reactions to Genworth's series of announcements, specifically the charge for long-term care related to more longer duration claims, which I think you've commented you've been seeing to some extent, but are they ahead or behind the curve in your view? Do you have a rooting interest in the success of their actions? Any general commentary on their strategic move would be appreciated.
Great. Thanks, Bob. This is Rick. We don't like to comment on other people's transactions, obviously. I would highlight, we have a very different business model, but there are some things environmentally probably that's worth noting around the long-term care market. We've been discussing for some time that transactions in the space, particularly to long-term care, will come in due course. We've seen some reinsurance transactions. We see a situation where there's a buyer and a seller in the space, and so this doesn't mean anything imminent for us, but I certainly think it does mean progress in terms of the capital markets, long-term care, and looking at different solutions. The second piece I'd note as well is in this environment, we've been discussing the needs.
Jack mentioned it again in terms of what we've been doing around rate actions in the market, the need for those rate increases in our book of business. We've been doing those actions, taking that on, and I think the environment, given some of these things are being highlighted, is becoming at least more knowledgeable about the need for rate increases and what's going on, and I think that's the environment that we're looking for. Those are a couple of things going on in that environment. The last thing I'd highlight is, we also as a company have significant strength across the board. That gives us a whole lot of flexibility to do what we want to do, any options to pursue, either structurally buying back our shares as we're doing consistently and making sure that we're taking actions to ultimately benefit our shareholders.
I think you had a question specific to some of the things they did, some of the things they're seeing in their long-term care block. Maybe, Jack, you could make a couple comments on how it translates or doesn't translate to our book of business.
Yeah. I don't really want to talk about what Genworth is seeing. I will tell you what we're seeing. I think probably the most fundamentally important point is we're not scrambling to keep pace with long-term care. We are working through the long-term care issue, and we're making significant progress as a company toward doing that. We feel like we're in so much better shape today than we were even three years ago. A lot of that is because of that active management of the block. Let me talk to you about what some of those things have been. In 2014, we reset reserve assumptions. We placed those reserve assumptions on a best estimate basis using our current own experience, and our experience since then has been consistent with those expectations.
When we established those reserves, we built in currently filed rate increases using historical approval rates. Less than a third of those rate increase assumptions remain outstanding. We're making significant progress against them and feel very good about where the assumptions lie with only a small portion remaining. That not only helps to support our reserve assumptions, but it also gives us room in the future to react to future adverse claims experience should it emerge. The third point I'd make is that our block's unique in the long-term care business, as approximately half of the block is group long-term care with employer funding and extremely conservative plan designs. Because of that group coverage and employer funding, most employees terminate their employer-funded coverage when they leave the employer.
As a result, our group long-term care has a lapse rate of closer to 10% versus a less than 1% lapse rate for most individual long-term care policies. Our group long-term care has a substantially lower risk profile. I think the thing that really sets us apart as a company is the vibrancy of our company and its market-leading positions and strong profitability. We have great free cash flow generation from our core businesses. We have consistently over the last six years funded our long-term care capital needs while still allowing us to increase our dividend and maintain a consistent level of share repurchases. As a result, our long-term care charges have largely been GAAP events and not cash events, and we would expect that to continue into the future.
Can we surmise, Jack, that you bumped the earnings guidance to above the range in your answer to Tom and Ryan's questions on funding and accounting for long-term care, that the probability of a charge in a wiggle, you have pretty high confidence that you can get through the fourth quarter without an event?
Yeah, we mentioned in the script that from what we're seeing right now, we don't anticipate anything unusual in the fourth quarter with long-term care.
Thank you.
Thanks, Bob.
We'll take our next question from Randy Binner with FBR Capital Markets.
Hey, good morning. Thanks. I just have two follow-ups on the termination. First, can you tell us what the circumstances were of that group case terminating?
Yeah, it was terminated because of rate increases. We had filed group long-term care rate increases in that state. They had been approved. They were being implemented over a three-year phased-in approach. It was significant rate increases. The customer, when faced with their first one, decided they didn't want to fund the employee benefits any longer, they terminated the case. It was driven by the rate increases.
It was rate increases specifically on the LTC piece rather than the other aspects of the case. Is that right?
Yeah. It was rate increases on the group long-term care piece.
Okay. The other one there, just so I understand it, is that it had a large auto-port component, you shifted a lot of folks to individual versus group policies. The persistency assumption there goes lower, meaning you'd have a higher lapse assumption. If I'm getting all that right.
The lapse assumption goes lower. Lapses on the group side are in the 10% range. On the individual side, they're well less than 1%.
Oh, got it. As each person individually goes to a lower lapse.
Yeah.
That's the head one. Okay, got it. I had that backwards. Perfect. Thanks a lot.
No problem. Thank you, Randy.
We'll take our next question from Jimmy Bhullar with J.P. Morgan.
Hi, good morning. My first question was just on the likelihood of a discount rate reduction on the disability side. Assuming rates are where they are, how would you approach that over the next few quarters?
Jack, you want to take that?
Yeah. I think we talked about in both the press releases as well as our comments that rates are significantly below where they were in 2015. If they stay where they are, we would anticipate taking a discount rate change in long-term disability. We feel very comfortable in that given the performance of long-term disability over not only this quarter, but over the past three or four quarters, that we can take that discount rate change while maintaining the loss ratio in that 80%-82% range. We'll talk more about that at our investor meeting in December 15th, but given current conditions, it's certainly something we're looking very hard at.
Magnitude-wise, I think the last time you adjusted it was maybe around 50 basis points. Would you assume a similar reduction, or would it be larger than that?
In the ballpark, it may be a little larger. Rates have fallen on the heels of Brexit. They've recovered a little bit recently, but spreads have come in as well. That's one of the things that we'll wait until we have a better idea of where rates are in the fourth quarter, what our investment strategy is, and we'll act accordingly.
Okay.
Certainly, we do not believe that any action we will take, no matter how big it is, will take us outside of that 80%-82% range.
On the loss ratio?
Yes.
Lastly, just on long-term care, you did mention that you don't expect to charge this year. Assuming that rates don't move materially from current levels, how long can you go without taking a charge based on your current assumptions? Would 2017 necessitate a charge if rates are where they are, given what your assumptions are on reserves?
It's so volatile because rates don't stay where they are. Rates move, spreads move, supply and demand in the marketplace move. Asset classes don't all move in sync. It is really hard to predict exactly where your new money rates are going to fall in any year. Clearly, there's pressure, but we do have a good margin currently in our discount rate for long-term care versus our portfolio yield. We had the expectation that we'd be at 5% for four to five years. In 2017, we'll be three years into that. It's going to be a judgment call whether it's 2017, 2018, and a lot of it will depend on what the outlook is a year from now, given that we can't even predict what the outlook's going to be at the end of this year.
Okay. Thank you.
Thanks, Jimmy.
We'll take our next question from Michael Kovac with Goldman Sachs.
Great. Thanks for taking the question. One, first on sales to maybe follow up a little bit. As you looked at, and as we begin to think about 2017 outlook, that you're preparing for in the coming weeks and months, Unum US has obviously been weaker than you expected. Anything that changes sort of a long-term growth in terms of where you're expecting both sales and premium in that line, given challenges in 2016?
Mike?
Yeah, sure. Good morning, Michael. Thanks for the question. I think we're sticking with the strategy, so I don't think to your question, is there a material change outside of the acquisition of Starmount? I think we'll begin to contribute first to sales growth over the course, and particularly towards the back end of next year, and that will translate into top-line growth and then ultimately into earnings once we get past the first kind of series of investments into the platform. That's going to play out over a really kind of a series of years, and we're really excited about it. In general, we continue to feel very good about growth in the voluntary benefits market and our unique proposition there. I would expect growth in voluntary to be there next year.
In individual disability, that continues to be a really strong contributor as well. I think it just comes down to, again, given that we feel pretty good about our current position on new business pricing, don't see a need to move on that next year. Where will the market be?
Okay. That's helpful. Then if I could, on long-term care, with this group auto portability feature, can you give us a sense of what % of your overall group policies have this type of portability feature?
That was the only one. There isn't another group policyholder in our portfolio that has that feature.
Then sort of a follow-up on that, if I could. This sounded like it was kind of a one-time gap-type adjustment that you made. Anything on a statutory basis, given the lower lapse rates?
No.
Thanks for the answers.
Thanks, Michael.
I'm sorry. We'll take our next question from Yaron Kinar with Deutsche Bank.
Thank you. Good morning, everybody. I had a couple of questions on the long-term disability business. Are some of the pricing actions that you've taken recently already in anticipation of the low rate environment and the potential decrease at the discount rate?
Yeah. Thanks, Yaron. It's Mike. I appreciate the question. You are correct. We try to price forward for where we believe we need to be from an interest rate perspective. When Jack talks about being very comfortable about maintaining that target loss ratio of 80%-82%, it's because we put the price and renewal actions in place and feel good about the health of the business.
Okay. Conceptually, I'm still trying to understand why you would need to lower the discount rate. I understand that interest rates are coming down, but at the same time, if I remember correctly, you have quite a nice reserve margin there. Why can't you just see some of that margin erode while keeping discount rates unchanged?
Yeah. I think the reason you don't want the margin to erode is because that's earnings. I don't think you don't want to see your earnings erode. You want to be able to maintain that margin, the way to do that is to price business based on the current environment you're selling it in.
Yaron, what I'd add real quick, it's Mike, is this pricing strategy links to the value proposition in the market. For us, it is about keeping clients for the long term and growing those relationships. Sustainability of pricing is really, really important to us. We always want to be on balance conservative so that we don't end up in a situation where we're trying to play catch up and disrupting relationships.
Okay. That's helpful. Thank you.
Good.
We'll take our next.
Thanks, Yaron.
Sorry. We'll take our next question from Seth Weiss with Bank of America Merrill Lynch.
Hi. Good morning. Just want to ask a question on expenses. Rick, in your comments, you mentioned that the expense ratio in the U.S. down about a percentage point. You referenced the headwinds to the businesses that we're all aware of. Is there more room on the expense side to help offset some of the business pressures that you're seeing?
Yeah, I think it's a fair question. What we've seen over the last couple of years really actually is good management across the board by our teams on the expense side, and we think about it as relative to our overall base. The team has done a really nice job and that expense ratio has come down. I don't see that as a major driver in terms of how we take profits forward or how we run the company. I think it's something we've been doing very consistently, and it's nice to see some of that come through over different periods. Make no mistake, we're investing in our business as well. When you think about the acquisition that we did, what we're putting into our systems to connect better with our customers, we're making a lot of investments in our business today.
Don't think of us as an expense story. It's what we're putting into our systems to connect better with our customers. We're making a lot of investments in our business today. Don't think of us as an expense story. It's much more a balanced efficiency and investment back in the business.
Would you think this expense margin that we have now is a pretty safe run rate, or should I read into your comments on investing in the business that maybe see that tick up a little bit after it's ticked down in the last year?
No, I think actually it'll stay pretty consistent, might even come down a little bit lower. One of the things that we benefit by as well is scale. As our premium line's growing and the business continues to grow, we can do so a little bit more efficiently. It's flat to slightly down. You won't see it tick back up. I'm talking about longer-term trends, not necessarily what's going to happen fourth quarter or any particular quarter.
Great. Thanks a lot.
We'll take our next question from Erik Bass with Autonomous Research.
Hi, thank you. How much more room do you have to grow with existing clients from either cross-selling or increasing penetration? How does dental and vision play into this over time?
Mike, you want to start?
Sure. Thanks, Erik. I appreciate it. We've got a lot of runway is the quick answer. We average around three benefits per client, and we feel like certainly we've got five, six, seven relevant products depending on the client. There's good opportunity there. You actually highlighted one of the other big opportunities. The long-term trend in the market is from employer-funded to more employee choice. Deepening penetration into the employee base is really important. I'd say a big chunk of our product and marketing efforts has been around increasing participation in employee-elected plans. We see today on a 100% voluntary plan, you may have 1 in 5 employees fully participating. We see a lot of runway there to find good, sustainable, and profitable growth as well.
That's on the U.S. side. I think I would add as well, you've heard from Peter on the U.K. side now with their dental business. They'll be expanding their portfolio. I want to also give Tim Arnold the chance on the Colonial Life side, which has seen tremendous sales growth, to talk a little bit about his efforts to expand the portfolio. Tim?
Yeah. Thank you, Rick. I think the question was around the growth from existing customers. At Colonial Life, about two-thirds of our sales each year come from existing customers. We have a national footprint of benefits counselors who can go out and re-enroll existing customers each year, which is a major competitive advantage for us. We are also seeing very strong growth in new customers, which bodes well for the future as we go back out and re-enroll those customers as well. We feel great about the sales success we're having overall that's very broad balance, as Jack said in his comments. We have leading indicators that suggest that the strength we've seen recently in sales will continue. We have a lot of new people on the ground having good success, a lot of new offices with good success, and also making investments in our existing offices.
A lot going well currently and encouraged about the future.
Great. Thank you, Tim.
Thank you.
Thanks for the question, Erik.
Operator, any other questions?
We have no further questions at this time.
Great. Thank you, Karina. Thank you all for taking the time to join us this morning. We look forward to seeing you at our outlook meeting to be held the morning of December 15th in New York. Until then, we'll talk to you soon. Thanks. Bye-bye.
Once again, that does conclude today's conference. Thank you for your participation. You may now disconnect.