Earnings Call: Q3 2014

Oct 30, 2014

Good day everyone, and welcome to the Unum third quarter earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you, Dana. Good morning, everyone, and welcome to the third 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 Securities and Exchange Commission and are also located in the sections titled Cautionary Statement Regarding Forward-Looking Statements and Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2013, and our subsequently filed Form 10-Qs. Our SEC filings can be found in the Investors section of our website. I remind you that the statements in today's call also 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, 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, Randy Horn for Colonial Life, and Jack McGarry for the Closed Block. Now I'll turn the call over to Tom Watjen. Tom? Thank you, Tom, and good morning, everybody. For the third quarter, we reported $0.87 per share in operating earnings, a 2.4% increase over last year, and a result generally consistent with our expectations. Our third quarter results reflect a continuation of many of the positive operating trends we have seen over the past few quarters, including continued strong sales growth, accelerating premium growth, and stable risk experience, all of which are helping us to produce solid margins and profitability in our core business lines. For the first 9 months of the year, our operating earnings per share increased 6.9%, which is consistent with the 5%-10% outlook we provided you at last December's investor meeting. Book value per share, excluding AOCI, continued to grow nicely, increasing 9.1% from last year's third quarter level. Now, let me highlight a few things before turning the call over to Rick for his more detailed remarks. First, we continue to see good sales momentum in our key business lines, a trend that emerged a year or so ago. Unum US sales increased by 13% this quarter, with particularly strong results in our sales to existing customers. Colonial Life also continues to generate strong sales growth, with third quarter sales also increasing 13%, reflecting solid results across all of our market segments and growth from both new account sales and sales to existing accounts. Finally, as expected, Unum UK sales rebounded this quarter, increasing 15% year over year in local currency. I'm confident that these results did not come at the expense of future profitability, but instead reflects the strength of our competitive position and today's generally more favorable benefit market conditions. Second, we are also seeing accelerating premium growth, with a 4.1% increase in premium in our core operating businesses. Premium growth has certainly been favorably impacted by the positive sales trends, but also reflects the strong persistency in most of our lines and the targeted pricing actions we have taken in selected product areas. Finally, driven by our strong risk results, we continue to generate excellent operating margins and returns in our core business segments. As a result, we again reported solid statutory earnings in the quarter, which continues to give us the financial flexibility to support the expected capital needs in the business while also returning capital to our shareholders. Now looking ahead, while today's interest rates are certainly a challenge and are likely to remain a challenge, over the past few years, we have successfully managed through a pretty low interest rate environment, and I am confident that we will continue to do so. More importantly, I do expect the positive operating trends, specifically our sales and premium growth, along with our strong risk results, to continue into next year, and we'll have more on that at our Investor Day meeting in December. Now let me turn things over to Rick for a more detailed review of our operating results. Rick? Thank you, Tom. Following on Tom's comments, I'd like to provide additional details on the drivers of our operating performance this quarter, as well as a deeper look into the top line growth and a view of our trends in our investment portfolio. I'll close with an update to our capital management position and our capital management plans. Looking first at Unum US, we saw the continued favorable trends of improved premium growth, up 3.4% year over year, and an improved benefit ratio, which declined to 70.4% for the segment from 72% in last year's third quarter. This good product performance was not enough to offset the headwinds of the low interest rate environment, and as a result, operating earnings declined to 0.5%. This general trend was consistent across the three business lines within the Unum US segment. Group Life and AD&D results were favorable, with operating earnings increasing 7%, driven by premium growth of 3.8% and lower claim incidents as the benefit ratio declined to 70% from 71.6% in the year-ago quarter. In the Supplemental and Voluntary lines, operating earnings were relatively flat at $82.5 million. Premium income increased 5%, while risk trends in both lines were improved relative to last year. Net investment income was $3 million lower than last year due to a decrease in yield on invested assets and lower miscellaneous income, partially offset by growth in the asset base. Operating income in our Group Disability business declined to $69.2 million from $78.6 million a year ago. Premium income increased by 2.2%, and the benefit ratio improved further, down to 82.1% in the third quarter from 82.9% a year ago, due to continued strong claim recovery performance, both which are very encouraging trends. The headwind in the quarter in this line was net investment income, which declined by almost $12 million on a year-over-year comparison. About one-third of the decline was attributable to lower miscellaneous income, which can be volatile from quarter to quarter. The other two-thirds of the decline resulted from the slow decline in the portfolio yield and assets over many quarters. While this interest rate environment creates ongoing pressure, we continually to gradually reprice this business to reflect the current rate environment. Overall, despite the pressure from lower investment income, you can bring it back to a solid quarter for the Unum US segment as operating ROE was in the 13%-14% range. Moving to Unum UK, operating earnings were £20.1 million for the third quarter, flat with the year-ago quarter and consistent with our expectations for this business. We have tended to experience some negative seasonality in our group income protection line in the third quarter in our Unum UK results, which caused some pressure on earnings relative to the second quarter. Our risk results remain well within our expectations, with the third quarter benefit ratio at 70.8% compared to 70.6% in the year-ago quarter. Return on equity for our U.K. business continues in the high teens. Colonial Life generated another strong quarter at $71.2 million of operating earnings, compared to $69 million a year ago. We saw a favorable experience across our lines, resulting in a benefit ratio of 52.7%, slightly improved from the 53.1% benefit ratio from last year. The underlying profitability of this business remains excellent, producing an operating ROE of 16% for the quarter. Rounding out the enterprise, the third quarter operating earnings of $26.2 million for the Closed Block was in line with our expectations of a range of $25 million-$30 million per quarter for this segment. Risk results were also generally in line. The interest-adjusted benefit ratio for the long-term care line was at 88.5% and was higher than the very favorable experience of the first half of the year, which was 82.8%, but within our expected range of 85%-90%. The interest-adjusted loss ratio for the closed disability block was 82.3%, improved from the second quarter level of 89.4%, but slightly higher than the year-ago quarter of 80.6%. As we have said before, these blocks will show volatility from quarter to quarter, but this quarter's results were within our expectations. Net investment income was an important driver result in this segment, especially relative to the very strong second quarter results, as miscellaneous investment income was $9 million less in third quarter 2014 than the second quarter. Again, this component of net investment income will be volatile quarter to quarter for the Closed Block segment and showing a negative quarter-to-quarter sway. Moving on to our sales and growth trends across the company, as Tom highlighted his remarks, we are very pleased with the results we are seeing. In Unum US, total sales increased by 13% for the quarter, and for the first nine months of the year have increased by 18% relative to the same period of 2013, which in our view gets us firmly back to a more normalized level of sales after last year's slowdown in the market. Within our group benefit lines, total sales increased by 21%, with 13% growth in the core market and 57% growth in the large case market during the third quarter. Importantly, 70% of the large case sales are sales to existing customers, giving us a high level of confidence in the pricing of this business. Voluntary benefit sales are relatively flat this quarter but are up 6% on a year-to-date basis. Along with the strong sales momentum, persistency for our Unum US employee benefit lines is encouraging and has been mostly improving throughout the year. In fact, the persistency in the Group Long-Term Disability line has improved to 90.2% in the third quarter of 2014 from 87.4% in the year-ago quarter. The net result is that Unum US premium income increased 3.4% in the third quarter, our strongest rate of growth in two years. At Colonial Life, we again had very good sales in the quarter, increasing 13% for the third quarter and 9% for the year to date compared to the same period in 2013. Results remain encouraging across all of our sales metrics. Core market corporate sales are up 11%, large case corporate sales are up 35%, and public sector sales up 11% for the third quarter of 2014 compared to the same time period 2013. In addition, recruiting results have been strong, up 16% over the prior year, with strong production results out of those new recruits new to the Colonial Life agency system. Persistency remains slightly below year-ago levels, but premium increased 3.3% for the quarter, consistent with our outlook. Finally, in the U.K., sales increased for the first time in several quarters, growing 15% in local currency as we move past the repricing and repositioning of our Group Life block. Disability sales contributed to the increase, growing at about 8%. Persistency continues to improve, particularly in the disability block, which is at 88.4% so far in 2014, compared to 81.9% last year. Overall, we are encouraged with our growth trends, and we are also pleased to see the pricing on the business we are selling today. We are continuing to see some evidence of improved top-line growth from better employment trends, but is not yet close to what we saw at pre-recession levels. Now looking at the investment portfolio, the credit quality remains in excellent shape, and the challenge of the low interest rate environment remains front and center. As I've indicated throughout my review of our segment results, the primary headwind in the quarter was the low level of miscellaneous investment income, primarily income from bond calls. This amount tends to be very volatile from quarter to quarter. In this quarter, we had a total of $7 million of miscellaneous net investment income, which was $12 million less than the second quarter and $9 million less than a year ago quarter. Beyond this volatility, the low new money yields continue to create incremental pressure on the portfolio yields that back our product lines. Looking at capital management, the weighted average risk-based capital ratio for our traditional U.S. life insurance companies remained consistent at approximately 400%, and our holding company cash and marketable securities was $720 million at quarter end. This is all fueled by statutory operating earnings, which generated $168 million and are within our range of expectations. Also, we continue to steadily buy back our shares with the capital we are generating. We bought back another $100 million for the quarter, which now brings us to $300 million for the year and into the range of our $300 million-$600 million range for the full year. Wrapping up, I would also affirm that our 2014 outlook for growth at operating earnings per share remains in a range of 5%-10%. I look forward to seeing many of you at our annual outlook meeting, which we will be holding in New York on December 16th, and we will begin to discuss our outlook for 2015. Now let me turn the call back to Tom for his closing comments. Tom? Thanks, Rick. Before we move to your questions, I will close by reiterating that I am very pleased actually with our overall results for this quarter, including our continued strong sales growth and premium growth, and once again this quarter, excellent risk results. These all bode well for our future. While the current level of interest rates and bond spreads are challenging, we have managed through periods like this before, and I am confident we will continue to do so. Our focus hasn't changed. We are continuing to profitably grow our business, to maintain strong margins through our disciplined pricing, underwriting, and expense management, and to generate capital, which we will continue to use to support the needs of our business, including investing in growth opportunities we see in the market, but also continue to return capital to our shareholders. Now, this completes our prepared remarks, and Dana, let's move to the question and answer session. Thank you, sir. If you would like to ask a question, please signal by pressing *1 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. Again, that is *1 for any questions. Okay. We will go first to Seth Weiss with Bank of America Merrill Lynch. Good morning, Seth. Hi. Good morning. Thank you. Can you give an update on the difference between your GAAP and STAT reserves within the long-term care business? Jack, would you like to take that one? Yeah. We have said previously that the difference between GAAP and STAT is over $500 million. It continues to be over $500 million. It gets wider as statutory reserves grow, but it is in the normal course of things, and it has not changed dramatically. Okay, great. Thanks. Apologies if I missed any updated sales goals guidance, but can you comment on your goals for the full year in light of what has been strong growth across the businesses for the first three quarters? Rick, do you want to take that? Sure, I can take that. I do not know if we are going to update our outlooks. We went back to last year. I think what I would tell you is if you went back to our sales expectations going into the year, Unum US was 7%-10%. We are handily outpacing that to date, and we feel very good. I think you would have heard that through the tone of all of our comments, and we can touch more on that. The U.K. is actually pretty flat year to date, so it is a little bit behind the goals, but that has been one of volatility from our life business as we have sold that. But third quarter results were pretty good, and I think bode reasonably well for the fourth quarter. Lastly, Colonial Life has had great sales this year, up 9% on a year-to-date basis. We went into the year looking at 4%-7%, so I think Randy and the team there are doing a great job in terms of sales front. We are not going to update it for the fourth quarter. I think we gave you an indicator for the year. Needless to say, I think we go into the fourth quarter feeling pretty good about what we have accomplished thus far and how we see the year wrapping up. Seth, if I could add to that. Okay. I think as you know, once we adopted the format a few years ago of having a fairly open, transparent sort of set of guidance tools and metrics that we put out there in December, we really have not updated, I do not think, Rick, any of these as we go through the course of the year. We stand by, I think, that guidance we provide both for sales, for premium, for operating earnings, and for return on equity, and I think that is kind of been our approach to this. I think we do not do the updates, as Rick said, not just by sales, but by any of the elements of that, and we stand by that outlook we provided earlier, which we think was pretty comprehensive. It is pretty detailed. As Rick said, I think if you go through all the measures we put out actually last December, you will see for many of them, we are certainly well within the range, if not above the range. But again, I think we have always had a policy of just sticking with that guidance. Yeah, that is fair enough. I appreciate the commentary. It is just fair to say that the initial guidance did not contemplate some sort of slowdown in the fourth quarter. Is that right? Is that fair enough to say? Well, look, actually, you are talking about sales. Actually, sales, I do not think we had any perceived slowdown. I think I look at all the business heads, I think. Again, we are staying with the outlook we presented. But as you can see, even at this point in the year, for the year-to-date results across many of these, we are certainly leaning very much to the high end of that guidance, if not above that guidance. We see nothing, as I said in my comments, that gives us any indication that some of the things we have seen with sales growth, premium growth, and risk are an anomaly. These are things that we seem to have great momentum in and we think are going to carry into 2015 as well. Great. That is very helpful. Thank you. Thank you. We'll take our next question from Eric Bass with Citigroup. Hi. Thank you. Good morning, Eric. Morning. You're going excuse me, going through your annual review of assumptions in the fourth quarter. Can you help us just think about the potential impact of low interest rates and tighter credit spreads on your long-term care reserves? Maybe we do. Maybe Rick, if you don't mind, just give an overall view of interest rate management, because obviously, as Rick said in his comments and I did in mine, this interest rate environment, both interest rates and spreads, is not particularly positive for our industry. Maybe start there and then we can sort of talk about some of the other branches of that. Yeah. We get into the process. I would tell you that across the company, we go through, we do, as you started into the question, we do go through our assumptions in a more detailed way in the fourth quarter, and that process will happen as normal. You mentioned specifically interest rates across the board, and I'll flip it to Jack in a second, but when you think about interest rates in the company and how we manage them, the majority of our product lines, we actually are able to price for them. That comes into how we look at the overall interest rate management. One of the lines that also is impacted by interest rates would be our long-term disability line. When we think about the reserves around that and our discount rates, we've talked in the past about a margin or at least a differential that we have between what we're getting from our earned yield and our discount rates. I know last quarter it was 90 basis points. In this quarter, I think it ticked up a basis point to 91 basis points. It gives you an indication of how we manage interest rates through those different lines. I'll flip it over to Jack to talk more specifically about long-term care with interest rates, but I think broader management as well. Yeah. Clearly long-term care is very sensitive to the interest rate environment. I would remind people that there are other important assumptions within the long-term care business as well. Morbidity and mortality are important. The ability to get rate increases in the future to respond to interest rate pressures are important. We are in the midst of a comprehensive review of all of the assumptions related to long-term care. We are making good progress on that review. It will be part of our annual normal reserve adequacy studies. We expect to have more clarity on that in the fourth quarter as those studies are completed. Got it. I guess you did not mention the IDI Closed Block. Is there anything we should be thinking about as it relates to that from an interest rate component? Sure. Let me bring up the IDI piece, which is important because when you look at our IDI block, it is a significant block from an asset level perspective. The important thing to remember there, though, is that we are not getting effectively new cash flows. So the cash flows we get in, both from premiums, coupons, and with bond maturities, basically goes to pay claims. When you think of the interest rate environment, we are somewhat indifferent to the interest rate environment around that because there is not new cash flow there to invest. When you talk about the Closed Disability Block, it is also going through a similar process around our reserving processes at year-end. So I do not want to leave that piece of it out. As Jack said, these are normal processes. We continue to watch interest rates, but I think there are a couple of areas where we watch it probably a little bit more closely. Thanks. Just one last follow-up, because you mentioned the discount rate. I guess, how should we be thinking about the decline in interest rate on your new claims discount rate? To the extent you were to make an adjustment, how much of an impact would that have on your pricing and potential competitiveness within the industry? Sure. When you think about the discount rates, Colin Devine, we have adjusted discount rates in the past. I would tell you that on an annual basis, 25 basis point move is a $12 million-$13 million impact. That is something we always look at, but once again, it is how we manage our assets relative to that discount rate. That is something we do over a longer period of time. We have a healthy margin today, but we have to be reflective of where we are today as well and manage that through a period of time. So discount rates are something that we always look at in that line. Maybe I will turn it over to Mike Simonds to talk about how we impact that from a pricing perspective. Yeah, sure. Thanks, Rick. We would be looking at discount rate, and we would be looking at trends and incidents and severity when we are building new business pricing and renewal plans. To give you a sense, in 2014, because I think it is indicative of where we sort of look going forward, we were able to put about a quarter of our core Group Disability insurance business through the renewal program, about a third of our large case business through thinking, as we always do, pricing forward for things like aging and interest rates. We place prices in the high single digits, and as Rick McKenney hit in his comment, overall block persistency was just about 90%. So we feel pretty good about the track record and the current environment to take necessary actions as we look forward. Certainly, low interest rates is something that will factor into our pricing plans and will probably mean a modestly expanded renewal program in 2015. But again, I think the environment is one where we feel pretty confident going into that. Great. Thank you. If I could add to that a little bit, too. We start a pricing discussion like this on the back of still some strong returns and margins. Maybe unlike some others in our industry, our margins and our profitability are pretty strong in that line. Therefore, pricing actions can be more temperate because they are actually only dealing with the interest rate component. The other thing I guess I would say, Eric, too, is when we go through our outlook in December that Rick referred to, we will have this all contemplated in that outlook, actually. I think we are obviously thinking, as all you are, about the fact it looks like 2015 is going to be a difficult interest rate environment and a difficult spread environment. I think you can assume we sort of build that in the way we think about the business, and as we share our outlook, it is going to be embedded in that. Got it. Thank you very much. Thank you. We'll go next to Steven Schwartz with Raymond James. Morning, Stephen. Good morning, everybody. Kind of asked and answered. I am kind of interested, though, on expense levels in general and what you're doing there. They did strike me as somewhat high this quarter. Did it strike you as high at all? Rick, do you want to touch on that at a high level? Maybe we'll go to the business units after that, actually. Yeah, no, I don't think it struck me as high this quarter. I think it's something that as we continue to invest in the business, the team here works very hard about balancing those investments with good productivity in what we saw. So you can see a little bit of volatility on quarter to quarter, but it doesn't strike me from an overall. One of the things I'd factor into that is as we grow the business and we pay more commissions and compensation, you're going to see more expenses actually flowing through as a result of that. That's a good thing. So we can break some of that out in the future, but we feel fine about our expense base. Okay. Maybe we could. Yeah. Mike, you want to add anything to that? Yeah, sure. Thanks, Tom. For you, if you ask me, I think, Tom, Rick just hit on one of the key points is just as we've seen sales growth accelerate the acquisition costs associated with bringing that business on is a pressure there. That's pressure that we're happy to have and deal with. The second is certainly we continue to make some capability investments in the business, and we think particularly around employee pay, those will pay really good dividends as we continue to build scale in that business. The last one is not new in the quarter, and it's a little bit more long-term, but as we shift our mix of business and grow our core insurance and Supplemental and Voluntary benefits business a bit faster, those tend to be higher OE but lower loss ratio type businesses. We would see just a little bit of gradual movement there, just natural mix. Okay. Rick, can you touch on the tax rate? It looked like it might have been a little bit low in the quarter. Maybe a few ticks. I think we have been right around 30%, Steven. I think if you go year to date, I think it is somewhere around 29.7, 29.8. That is tracking within a range of our expectations we would have gone for the year. Not much else to say there. Okay. Then one more, and I realize it is volatile, but the miscellaneous investment income obviously a big deal this quarter. You gave us numbers for 2Q and 3Q last year. Do you know off the top of your head what 1Q might have looked like and maybe 4Q, and that way we will at least see a run rate for the year? Sure. I have that. I can give that to you. One Q would have been around $13 million. We had $13 million, $14 million, something like that. Then a year ago, fourth quarter, I think was closer to 20. So like we said, it is volatile. With $7 million this quarter, you will see that volatility coming through. Although it causes a little bit of volatility on the margin, I think when you look in the aggregate, you really have to look to the underlying ROEs of our business lines, which continue to be very strong. No, no, the risk results were very good. Okay. Thanks, guys. Thanks, Steven. We will take our next question from Suneet Kamath with UBS. Good morning, Suneet. Morning. Just wanted to start with the long-term care review again, in the fourth quarter. If I think back to the 2011 action that you took, part of the assumption change related to a Society of Actuaries study on, I think it was lapse rates and persistency. My understanding is, excuse me, the next study from the SOA is not going to come out until 2015, but I believe you're getting some of that information currently. I guess the question is, do you think that in your review this year, you're going to have the updated information to take a good look at the lapse and persistency assumptions? I mean, just as an introduction, I think as you know, you've invested heavily in the infrastructure of your business, actually. I would say today, as we go through an analytical process like this, we're in a very different spot, actually. Obviously maybe could address any specific question, but maybe just remind everybody what we've done to build a lot better sort of database and capabilities to do the work that we're doing right now, actually. Yeah. We've made a big investment over the past year and a half in the infrastructure supporting these studies. We've built a state-of-the-art modeling capability. We've invested in our data structures and our ability to access them to look at our actual experience. We are continuing to move forward. We're in a much different place today than we were even 2 or 3 years ago. We tend to be more reliant on our own experience, particularly related to things like lapses in persistency, where we have a good exposure, we have credible data of our own, and so we will use it. There has been a recent publishing of preliminary SOA results on continuance and recovery trends. We have looked at that as part of our comprehensive process. We are taking that into account as we finalize our assumptions. I would tell you, it hasn't had a material impact on where we were, and where we think we'll come out. Got it. Okay. I guess for Rick, with interest rates falling again, it seems like we're getting into this conversation around discount rates for Group Disability, and comparisons to other companies that have a more formulaic approach to establishing the discount rate versus, I think what your approach is. So I guess the question is, can you talk about the approach that you take, why you take it? I think the other issue that comes up a lot is the fact that you use a duration weighted yield, in that 90 basis point margin that you give us. So can you talk about why you use that and what it would be if you didn't use duration weighted yield, what that margin would be? Thanks. Sure. All right, Suneet. Just to give you a view of there's a couple of things to take into account. One is how we think about running the business too, and we think about it on a basis where we are actually out in the markets. We believe in stability with our customer base and how we bring price to market and how we talk about that. I think we look at the interest rate management in a similar way, where we think about it over the longer term. You would've seen going back a couple of years ago, we've adjusted discount rates a number of times to try and make sure that we keep a good spread between what our assets are yielding and what our discount rates need to be. We'll continue to do that. We're not going to do that quarter by quarter. We do it on a longer-term trajectory, and you can continue to see us do that. It all comes back to just our philosophy around we take that back to the market and introduce it through our pricing models and everything else. I'd also refer you back to a point in time where we were investing assets at much higher returns than our discount rates, much higher. That's in the credit crisis when we were actually investing at high yields. We didn't let that flow through earnings, where theoretically we could have. We actually let that build up in our reserve margin. So it's true on both sides of the equation. When things are harder, as they are today, and when things are better, we maintain a similar philosophy around that. Second part of your question on the average duration-weighted yield, that's a non-event for this line. This line matches up, actually, duration very well. I can't give you specifically what the duration-weighted and non-duration weighted is for this line. But when you think about our assets and liabilities, they're actually pretty well matched in this line. We actually, as part of our supplement, put out a duration-weighted yield. The reason is because we have so many different lines, we're trying to balance that to give you a good indicator in our supplement around what that runs like. But in a specific line such as LTD, that's really not a helpful or a differentiable metric around that. I wouldn't spend too much time on that, Sidney. Okay. Bottom line, though, that around roughly 90 basis points or 91. I think what you're saying is if we looked at that without the duration factors, it wouldn't be dramatically different? No, it would be the same. When we actually go out and look at our 90 basis points, we actually look out over time. We don't want to actually get to a point where that comes down too quickly. That's what you've seen us do over the last several years, is actually move on discount rates before we needed to, in a sense. Not getting down to a margin where we're uncomfortable. We'll continue to do that in the future. Okay. Thanks, guys. Good. Thanks, Sidney. We'll take our next question from Yaron Kinar with Deutsche Bank. Morning, Yaron. Good morning. Three quick questions on sales, specifically the non-core sales. I think you mentioned that 70% of these sales are coming from existing customers. The questions are, one, is that true across the board in the U.K., Colonial, and the U.S.? Two, what is driving the sales growth in existing customers? Three, what's driving the growth in the remaining 30% sales growth? Why don't we go around each of the CEOs actually to speak to that. Mike, you want to pick that one to start? Yeah, sure. So we would have seen north of 60% of all the sales for Unum US coming through, and that's across lines of business and segments that we market under. I'd point out, and Rick did as well, in the large end of the market, it's actually a higher number than that. It was north of 70% that came from existing clients. It's a big part of our strategy. To your question of what's driving it's investments in new lines of business. So building out our Supplemental and Voluntary benefits in particular. It's the individual disability line of business, and it's capabilities around enrollment and re-enrollment. So we've got a good level of service delivery to those clients. They know us, know us well, and so our objective is to be there, be consultative, and be able to grow over time. That growth, we delineate it for a couple of reasons. One is it does tend to come in favorably priced to new client acquisitions. Two, it drives persistency for us. So we're quite confident that as we build out those relationships over time, it drives up our persistency. And I think that's reflected in the results that we're seeing here, where a particular line we may need to take rate action, that we still see the overall relationship holding. Randy, you want to give a little color on the Colonial Life results? You bet, Tom. We typically average about 65% or so of our sales in any given quarter being to existing customers, so that has not really changed much over time. That's just a big part of our business model, where we have our agency system going back to service in-force clients, talk to new hires, introduce new product lines, that type of thing. That's kind of just normal course of business for us. That being said, we are seeing very strong growth this year in new account sales. We were up over 20% in the third quarter, and I think that's a matter of the market conditions improving. Again, we have implemented some new products here and continue to grow our agency system. Very good sales results across the board. But again, big part of our model is to keep going back and seeing existing customers and increasing sales growth on that side of it. So it's about a 65/35 split for us. Peter, you wanted to touch on the U.K. briefly? Thanks, Tom. Sales in the third quarter were good, but there was some timing switches between quarter 2 and quarter 3. So when I look at year-to-date, as Rick said, we're sort of pretty much in line with last year. If you look at our GIP sales, though, they're up about 3%, which is a nice bit of growth there. And obviously our persistency is pretty good there. About one-third of our sales come through existing customers, and that's pretty much a standard metric for us. If you look on quarter on quarter or year to date, it's around about one-third of our sales are to existing customers. Thanks, Tom. Thank you. Yaron, did we touch the things that, the issues? Yeah. Good. Thank you. We will take our next question from Jimmy Bhullar with J.P. Morgan. Good morning, Jimmy. Hi, good morning. Just had a question on the U.K. business. Maybe if you could talk about market conditions there and your success in repricing the Group Life block. Also related to that, on the reinsurance contract, you increased your retention this year, and given that the margins there have been stabilizing, should we expect you to recapture more or increase retention further in 2015? Thanks, Jimmy. Peter, you want to pick up on the market conditions? Yeah, thanks, Jimmy. The market conditions in the U.K. life. We have been very successful at rerating the block, and feel very good about the business that is in force now. We still have what I would call sort of small rate increases to put through on some schemes, but I would put that into the business as usual. We are also able to be opportunistic at times where we see schemes that come to market where the competition is not chasing volume, where we can write those at a reasonable margin. You will see Group Life, I think, be volatile quarter on quarter as we pick and choose the schemes that we want to play on. That would be the sort of overall perspective. What was the second question? Sorry, Jimmy. Just on the reinsurance contract, you increased your retention this year. Do you expect to do or increase it further next year given that the margins have been stabilizing? We are very happy with the reinsurance contract and the way it has performed. It has done exactly what we would have wanted it to do over the past two years. Really, the question comes as an economic decision for us, and we are out to market at the moment. We are looking at the prices, and then we will discuss that with Group and the board and say, "Look, what is the deal on the table?" Depending on how those economics look, that will drive that decision. We will be able to update you on that, I think, in December when we come with our overall view of 2015. Okay. Thank you. Thanks, Jimmy. We'll take our next question from Colin Devine of Jefferies. Good morning, Colin. Good morning, gentlemen. I've got three ones. Just first to clarify on the core large case, there hasn't really been any fundamental change in the strategy that Unum in any of its regions is going to become more aggressive in the large case market? Mike, do you want to take that one? Yeah, sure. Colin, no. So, actually, I think Peter teed it up well. Where we see opportunities to write new clients in the over 2,000 life market here in the U.S., we will take advantage of it. If you looked back over six quarters, you would see a fair amount of volatility up and down. We have put together a couple of good sales quarters here. But I would expect some volatility, looking forward. I think in, Peter, the heart of your question, though, if you look at Group sales in total for Unum US, you would see that over three-quarters of all our sales were in the core market. So while the variance was a little bit different here in the pure third quarter, we still are looking to grow the core at a faster rate. Maybe, Colin, two other things I would add to that, actually. I think Mike, for the efforts of you and your team, we have actually got a very strong margin in our large case block now, actually. So there has been quite a bit of work leading up to the last several years in terms of pruning the block. The other thing is, again, I think you used the statistic, about 80% of our large case business was MVOC, which maybe speak a little bit to those two. Yeah. So most of the growth we are getting is through expansion of the client relationship, and that has helped us, along with sound, disciplined underwriting, actually to get to strong and consistent risk returns out of that large case business. And so we are confident that we can grow it probably around market rate. But again, it is going to be opportunistic on the new sales front. Okay. With respect to IDI on the Closed Block, persistency seems to finally be trending down over the last couple of years. What sort of glide path might, first is that true or has it just really been an aberration that we are seeing it get a little weaker? Are we finally seeing that block start to run off? And then I have got a final one on capital. Okay. Jeff? Yeah. Persistency is an interesting term. Actually, what's happening is as the block ages, people are retiring and ceasing their coverage because they're no longer working. We think that's going to continue to happen. That's been increasing pretty steadily over time. It will continue to increase as the block ages. We think it's just part of the consistent maturation and runoff of the block. Okay. The final one with respect to capital management. Clearly the company's not growing exceedingly fast. Your core business lines are producing ROEs that are, if they don't lead the industry, are as good as it gets. Tom, can you talk about the dividend policy? I know the buybacks are fine, but I think the other part of Unum, the payout ratio, it would seem to me you could support a payout ratio probably double the level that you're currently distributing. Yeah, let me introduce it, Colin, then maybe ask Rick to pick it up. I think as you know, our strategy on capital management has always been to have a sort of a two-pronged approach to it. Part of it's actually buybacks, part of it's actually dividend increases. I guess I'd start by the point that I think that's always going to be our view, is both of those are going to continue to contribute to our return of capital strategy to shareholders. I do think, Rick, it's safe to say the dividend has been an important piece to the puzzle. We have been continuing to grow it, but maybe you want to embellish a little bit. Well, Colin, I think the way you are looking at it is right, and we look at it the same way, which is our dividend policy. What you would have seen over the last several years, we have increased that payout ratio because we can support a higher payout ratio. We have seen that grow at double digits over the last five years. We will continue to have that be an important part of the strategy. The balancing item with that is as we look at the growth and the investment we want to have, I hear you on the growth front, but actually, as we look at the core operations, premiums are up 4%. We are feeling better about that. I would like to put more capital there overall. As we do not see use for that capital on those two fronts or throw in the M&A market as well, then we will buy back shares. I mean, you saw us do that this quarter, and that has been our MO for the last several years, and I think that will continue. But I do not want to minimize the fact that we do see an increasing payout ratio on our dividends to be important as it has been the last five years and going forward. Okay. Thanks, Rick. Good. Thanks, Colin. And we will take our next question from Tom Gallagher with Credit Suisse. Morning, Tom. Morning. First question, I realize you are in the process, so there is not a lot you can say on it. But for the year-end review, I believe what I have heard you say over time is that expect this to be GAAP only, should not have a statutory impact. Is that still the right way to think about it? Jack? Yeah. I do not think we have necessarily said GAAP only. We certainly would expect to the extent something happened, it would be more of a GAAP event than a statutory event. We talked about earlier in the call the difference between our statutory reserves and GAAP reserves, and statutory reserves are considerably more conservative. Probably the note to that would be First Unum and some of their onerous statutory requirements would be the only adjunct I would add to that statement. Tom, for your benefit, First Unum is our New York subsidiary. Yes, that's right. Okay, the next question is, in some prior periods when rates have gotten pretty low, I know you all have harvested more liquidity in certain quarters, and that's created some short-term NII pressure. I'm just wondering, is that partly what we're seeing here as well right now? I think when you think about the overall interest rate environment, I'm not sure harvesting liquidity. But when you think about where we've been able to invest and things like that, they've been in tougher spots. So we've gone into some higher-rated assets over that period of time. We've sat on some cash through some periods of time until we see the right investments out there. So that is part of what you're seeing from a net investment income perspective. I think it comes back to the choices that we have to invest in. And where we've been able to, in previous years, find asset categories we like that maybe were out of favor, and we were able to get some good deals. That's been a much harder trend this year because most assets are in an overbid situation, and that's just the reality of this year. I'm not sure if it's as much liquidity. It's probably a little bit of that. I think it's just more that it's harder to find places to put money to work. Well, Rick, specific follow-up to that. In the last few quarters here, have you been investing in more short-term securities at present, or has that not been the case? I just want to be clear. No, not materially. I'd say that's not the case, Tom. When I talk about higher-rated securities, which can have a net investment income impact, but we're looking at the relative value. That's all been part of this pressure that we're seeing from an overall perspective. Okay. Not because we're buying a lot of short assets. Got you. Last question, just as a follow-up to Suneet, just on the duration adjusted yield. A little more just to understand how you think about this philosophically. In the quarter, duration adjusted yield went to 6.19%. If I look at cash yield or nominal bond portfolio yield, it's actually all the way down to 4.71%. That's almost 150 basis point spread. Which one matters to you, really? I know you have in the supplement this duration adjusted yield, but the 4.71% is the one that's actually flowing through the P&L. Anyway, can you talk through why one matters or the other one doesn't to you? Yeah, I think that the duration-weighted yield across the portfolio is an indicator in aggregate and the best way to represent what's going on across the company. The calculation you're doing in terms of the shorter-term perspective of that's not really meaningful to me because we actually run it on a line-by-line basis, right? So whether I'm getting higher yields than that for long-term care or lower yields from that, backing some of our shorter lines, that's how we manage it. It's really a product-by-product perspective, and it's hard to give you that in one metric. So those two metrics you have out there are right, and the trend lines on those, if you follow them, would be similar. But we do manage this on a line-by-line, product line by product line basis. Okay, thanks. Good. Thanks, Tom. We'll take our next question from John Nadeau with Sterne Agee. Morning, John. Hey, good morning, everybody. I have a question about U.S. traditional group insurance sales. I guess the question is this way. You're not the first to report earnings results this quarter. There's been some that have preceded you. I recognize they don't represent the entire group insurance industry. However, just about everybody is demonstrating pretty strong sales growth. Met's talking about strong sales growth, smaller end of the market, StanCorp, and just about everywhere in between with maybe one or two small exceptions. But the overall market certainly can't be growing at this kind of pace given what we're seeing economically, lack of employment growth, or at least slow employment growth. I guess my question for you is this, who's losing the share? Yeah. I'm not asking you to name names. In general, how is this so significant? It seems very stark. My question is to give a little more color, again, what you're seeing in the market and how we're competing actually in the market. Yeah. I would say, generally, John, we see a mix really across the board. But certainly, there are some players in the market that are repricing their business. We know that the industry return on equity, I think it came up through one of the questions earlier, is somewhere in the single digits. There's work to be done in terms of pricing. So there are actually a few carriers out there where their earned premium is down, and they are shedding some business. That business shows up as new sales in other places. There is a little bit of churn within, and I think it is the combination of the economy improving and some market expansion paired with some carriers that need to do some repricing, which is generating some churn that spits out the total industry sales numbers. The way we look at it is we are comfortable with the returns we are generating in the business. We are sticking with our underwriting standards. We feel good about having that 90% persistency, so we are not feeding a lot of that churn back into the market. But I think it is the sum total of the two that gets you to a sales number. I think too, John, we are also benefiting from our investment in our service infrastructure. I think the quality of our relationships, I would say, Mike, are pretty much at an all-time high in terms of customer satisfaction. That obviously plays well into being able to expand lines of coverage and do more business with existing clients. The other thing I think we benefit from is our sense of stability. I think as we talk about our results this quarter and talk about the outlook as we get to the December meeting for 2015, there is not a huge change in focus, actually. This has been the case for the last five or six years. That consistency, that stability, those sort of things, I think play very well, I think, Mike, in terms of how we come to market now too, whereas not everybody has that same set of circumstances. I was just going to interject. That seems like a pretty good point because there are some who are going through some pretty significant change. Right. Just one more question following up on the idea of miscellaneous investment income and bond call prepayments. I guess the question I would ask is this way, to the extent that we see rising rates, it seems to me a miscellaneous investment income ought to stay down or start trending down. Obviously, on the other side of the equation, though, you get the opportunity to invest at higher yields, which is terrific. But I guess I am thinking more about just overall portfolio size. How long do you think bond call prepayments can persist? It seems to me there would be a limit to it given once a bond is called, it cannot be called again. Sure. Maybe I'll give you some comments on that, John. I've watched this cycle for the last decade, and they do ebb and flow in terms of cycles that they go through. One of the things that I would say is true of our prepayments as well, some of them are structural in nature, so it's not just somebody taking advantage of a low interest rate environment. We have private placements that have structures within them, fees structure within them that happen as a result of M&A, as an example, when people retire debt. So interest rates is not the only reason that there's restructuring in these portfolios. Yeah. But as we said, you would see volatility. We've seen a lot of consistency as you look over the last 3 plus years, but that's not to say that will continue on that pace forever, and it's something we'll call out to you as we see it. But as I've seen the cycles come and go, I think that's something you'll see across the industry and the portfolio. But I don't want to remove the fact that some of it is structural in how we invest, and those will not go away. Okay. Last one, maybe just big picture, Tom. M&A opportunities out there. I think we've heard now for a very long time, everybody wants a group insurance business. Nobody wants to give it up. Is that still the same thing that you're continuing to see, or do you think there'll be an opportunity for Unum to maybe bolt on something over the course of the next 12 or 24 months? Yeah, John, it seems like it is a continuation of the theme of what you just said. There's a lot of people who want to be in the business and increase their scale, and there doesn't seem to be many who want to part with their business. But as we said earlier, there's an awful lot of challenges for some carriers as they go through trying to sort out how do you actually effectively do this business. It's one thing to say you want to be in it, but can you actually manage the business both operationally and financially? I don't think, Rick, we're assuming any M&A activity, but we're certainly staying very close to the marketplace. It feels like it's going to be more that there's more buyers than sellers. But we're going to continue to hang around the rim, to use the basketball term. Okay. But the other side of that is we don't need to do M&A to fulfill some of the objectives that we've laid out. So if it happens, it's great. We do have the financial and operational resources to do things, but we're also very careful to stay within the framework of the things we know well. Again, we don't have to do it for us to achieve some of the objectives that we've laid out. But there's always hope. Okay. I guess fair to say, too, that maybe some of the higher level of sales is effectively a small version of M&A as some of these other companies are maybe struggling and losing business. Absolutely. Again, I think certainly, again, if there's an M&A opportunity, we want to take a look at it. But there's another way also to seize on some of these opportunities, which is just in the marketplace. I think we're doing that across actually several of our businesses. Thanks very much. Look forward to seeing you soon. Yep. Absolutely, John. Thank you. We'll take our next question from Randy Binner with FBR. Morning, Randy. Hey, good morning. Thanks. I want to just dig into sales a little bit more and I guess compare and contrast with some competitors who've had weaker sales this quarter. Thinking of Aflac, and also CNO and Torchmark. A little bit different products, different distributions, but the sense I'm getting from them is a lot of challenges, and so this is really geared towards Colonial. A lot of challenges from distraction from ACA. Kind of a better economy means it's harder for them to recruit, and I'm not sure if your independent contractor model shields you from that. Hearing there's a lot of competition even for people who are selling life and supplemental health, among new entrants into those markets. I guess I'd just been kind of curious for more kind of understanding or texture on how you're getting better sales numbers as all these other folks are kind of struggling, given all the items I mentioned. Yeah, Randy, we're always, as you're alluding to, a little cautious not to speak to specific competitors, but maybe, Randy, you could talk about the things we've been doing too, because, it's really more about, I think, the things that we've been doing that have been behind the results that you've seen from Colonial, and maybe touch on some of those things in response to Randy's question. Happy to. Good morning, Randy. Yeah, I think it really boils down for us to just consistency and focus, and primarily having a focus on our agency distribution system. This is the channel that we go to market with. We work through that channel on both the direct sales side and the smaller end of the market, and then work with them in terms of partnering with brokers, as they go upmarket. We think, very importantly, Randy, this helps us avoid any channel conflict. So we've not had to deal with any ups and downs and stresses and strains about distribution. It's just been a very singular approach for us, and I think that's worked well. From there, it's just really a sound execution of the fundamentals in that agency system. Our recruiting continues to be very strong. We're up about 16% with new agent recruits here in 2014, and I think more importantly, we're seeing the production from those new recruits very strong, up over 40%. So we're very encouraged there. We continue to improve the effectiveness of our training programs and our overall sales support. Again, that's led to a strong growth in the number of producing agents and the number of producing sales units that we have out in the field. So all of that has just led to increasing activity levels, more appointments, and a strong increase in the number of closed cases. As far as the market environment, Randy, we are seeing a gradual improvement in the economy. Still some pressure in terms of new hires in that small end of the market. Other than that, we are seeing more and more employers opening up to changes in their benefit programs, introducing voluntary benefits. Most of them are moving beyond the Affordable Care Act implementation. In fact, we're seeing strong growth in a number of our products that very much complement those changes to major medical programs, strong sales of critical illness, for example, and our accident products. All of this has really led to very broad-based growth in sales force here in 2014, both on new and existing accounts. In all of our market segments, we're seeing very strong double-digit growth. We're very optimistic about the fundamentals of our business. We have a very optimistic sales outlook. Hopefully, that answers it for you, Randy. That's really helpful. I guess the one follow-up would be, so 16% on new agent recruits, that's also a kind of a best-in-class number, at least among these publicly traded guys. Have you changed the way you recruit at all? Including covering their expenses or sign-on bonuses, or do you have new IT systems or anything that's kind of changed? Or is it all just status quo as far as the recruiting process goes? I'd put it in the fine-tuning category, Randy. Yeah. Always tweaking a little bit around the edges in terms of new approaches and how we connect digitally as well as face-to-face, that type of thing. But in terms of financing or different commission rates or something like that, really no significant changes. It's just staying focused on it. We, of course, have established goals for all of our sales managers to hit when it comes to recruiting. Then I think most importantly, then providing a great opportunity with good training, and the opportunity to make a great living. I think the word spreads rapidly out in the marketplace. All right. That's perfect. Thank you. Randy, if I could just add, too, I think a little bit of what I answered to John's earlier question, too. The stability and consistency of the things we do actually is incredibly important in the marketplace, and it's also important in Colonial's business. People know what we stand for. They know how we value the distribution system. Obviously, we continue to innovate and add new things as we go through time. Obviously, for those that haven't seen it, the sponsorship that Colonial had for "Shark Tank," for example, is a good example of those kind of things where we're stepping out. Still, I think that stability and consistency is one of those things where I think our organization, certainly domestically, is being rewarded for. All right. Thank you. I think we're bumping up against the hour here. I know people have some other things to move, so let me just say thank you for taking the time to join us this morning. We look forward to seeing many of you hopefully at our mid-December outlook meeting in New York. Operator, this will conclude our third quarter operating earnings call. Thank you. That does conclude today's conference. Thank you.