Earnings Call: Q1 2014

May 8, 2014

Good day, everyone, and welcome to the Unum Group First Quarter Earnings Results 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 Senior Vice President, Investor Relations, Mr. Tom White. Please go ahead, sir. Great. Thank you. Good morning, everyone, and welcome to the first quarter 2014 earnings conference call for Unum. Our remarks today will include forward-looking statements, which are statements that are not of current or historical fact. As a result, actual results might differ materially from results suggested by these forward-looking statements. Information concerning factors that could cause results to differ appears in our filings with the SEC and are also located in the 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. Our SEC filings can be found in the Investors section of our website at unum.com. I remind you that the statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website, also in the Investors section. Participating in this morning's conference call are Tom Watjen, President and CEO, and Rick McKenney, Executive Vice President and CFO, as well as the CEOs of our business segments, Mike Simonds for Unum US, Peter O'Donnell for Unum UK, 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. I'm very pleased with our overall performance in the first quarter, and I think that we're off to a strong start to the year. Operating earnings per share, which excludes realized investment gains and losses, as well as certain pension costs, increased 8.8% to $0.87 per share, which is consistent with our 2014 outlook for operating earnings per share growth of 5%-10%. Our growth rate this quarter was more balanced than it's been in a while with our after-tax operating earnings increasing 4.7%, the highest rate of growth since 2011. Once again, we have been able to augment our operating performance through capital management actions, which I'll touch on in a moment. Importantly, too, our book value per share, excluding AOCI, which I continue to believe is a strong measure of enterprise value, increased 9.2% year-over-year to $33 and a penny. Now let me touch on a few specific highlights before turning things over to Rick. First, we continue to generate strong, consistent operating results within our ongoing businesses with all three, Unum US, Colonial Life, and Unum UK, generating higher year-over-year operating earnings. Unum US results continue to be driven by favorable risk results, reflecting our focus on disciplined underwriting, pricing, and risk selection. Colonial Life delivered a very strong quarter with favorable risk results and strong premium growth. Finally, Unum UK continues to show solid year-over-year margin improvement, driven in large part by our actions to improve profitability in our group life line of business. Overall, our core ongoing business segments are generating consistent, solid margins with an operating return on equity of 14.8% for the quarter, which is towards the upper end of the outlook we provided for 2014. Secondly, the results of our Closed Block were again within our expectations this quarter. The loss ratio in the long-term care line improved relative to recent trends, continuing at the lower end of the range of our expectations. This still remains a challenging business, but I am very encouraged by the actions that our team is taking to manage these blocks of business. Third, we continue to see stronger sales growth in both of our U.S. operations this quarter and good growth in the Unum UK in our flagship group disability product line. In Unum US, total sales increased by 7.2% with particularly strong results in our small and mid-size employer markets, which are employers with under 2,000 lives, where group benefit sales grew by 16.5% over last year, and our voluntary sales grew by 9%. We also, again, saw strong sales results in our Colonial Life operation, where driven by strength in our commercial market business, total sales increased 6.5% in the first quarter. Lastly, while our Unum UK sales were generally flat in local currency this quarter, group disability sales increased 6% in the quarter. Group life sales comparisons will remain challenging as we continue to take aggressive pricing actions in a very competitive market. Moving next to investments. While the credit quality of the investment portfolio remains in very good shape, we continue to be challenged by today's low interest rates and tight corporate bond spreads. Frankly, these pressures increased in the first quarter and pose challenges for us and our industry. We are, however, maintaining our investment quality standards and are continuing to adjust prices in those products that are most interest rate sensitive. We are hesitant to invest fully in this environment, and as a result, we hold higher than normal cash balances, which is having a negative impact on our net investment income. You saw that in our Unum US and Closed Block segments this quarter. Finally, our capital position remains quite strong and continues to provide us with significant financial flexibility. Our risk-based capital position was approximately 400% in the first quarter, and our holding company liquidity position stood at $822 million, which includes the proceeds from our recently completed debt offering. We repurchased $100 million of stock in the quarter, and that's now 15 of the last 16 quarters that we have repurchased shares, totaling approximately $1.9 billion over this period. As you know, dividend actions are also an important part of our capital management strategy, and as has been the practice in the past, our board of directors will review our dividend policy at the upcoming May meeting. I expect you'll see another increase at that time. Over the past five years, we have increased our dividend by 93% or about 14% per year. In summary, the first quarter was a good solid start to the year. I'm encouraged by our stronger level of operating earnings growth, which combined with our share repurchase activities, resulted in strong per share growth in operating earnings and book value. Additionally, the combination of strong persistency and good sales growth has allowed us to generate modest but profitable top-line growth. Lastly, our capital position remains very healthy, giving us the ability to invest in our business and markets while also returning capital to our shareholders through share buybacks and dividend increases. Now I'll turn things over to Rick for a review of our operating results. Rick? Thank you, Tom. Our first quarter results were solid as we reported operating earnings per share of $0.87, up almost 9% from last year. We saw good underlying growth in our after-tax operating earnings, which accounted for roughly half of that growth, with the balance coming through our ongoing capital management. We will continue to focus on driving growth in operating earnings, and our first quarter performance was the best quarter we've seen in the past two years. Looking first at Unum US, operating earnings increased 1.3% year-over-year, driven by favorable experience in the group life and AD&D line, and the supplemental and voluntary lines. Group Life and AD&D produced another strong quarter, with $59.8 million in operating income, up 3.3% on stable risk experience and premium growth of just over 2%. Our supplemental and voluntary line reported operating income of $82.5 million for the first quarter, up 14% from a year ago quarter, as our voluntary benefits experience stabilized from the higher lapses we saw in the year-ago quarter. Operating income in our group disability business declined to $68.5 million from $77.9 million a year ago, driven primarily by lower levels of miscellaneous net investment income and some pressure on net investment income from holding higher than normal cash balances in the quarter. I'd also remind you that we recorded a $4 million gain on debt since last year's first quarter. Importantly, risk results in group disability remain quite strong, with the benefit ratio declining to 83% this quarter from 84.3% a year ago, as the underlying experience showed stable to lower overall claim incidents and continued favorable claim recovery performance. Familiar themes for this line for the past several quarters. Looking forward, we expect a slightly higher level of earnings from group disability, with some incremental improvements in the benefit ratio, offset by some ongoing pressure from net investment income, given the low rate environment. We expect our margins in this line to remain strong, consistent with what we've delivered over the past several quarters. Overall, it was a solid quarter for the Unum US segment, as return on equity was 13.4%. Moving to Unum UK, operating earnings were £22 million for the first quarter, 9% higher than the first quarter of 2013, and generally consistent with our fourth quarter earnings. We continue to make good progress in improving the profitability of our U.K. business, particularly with the repricing and repositioning of the group life business. The operating ROE for the U.K. has improved to about 18% for the quarter. In the first quarter, the Unum UK benefit ratio was 70.1%, which is slightly higher than a year ago, but down from the fourth quarter. We continue to see improved performance in our group life line of business, while risk experience was a little bit weaker in our group disability line, reflecting higher claim incidents. Overall, I'm pleased with the progress Peter and his team have made in the U.K. Colonial Life generated a very strong quarter at $79.4 million compared to $75.4 million a year ago, one of the strongest quarters in its history. We saw favorable risk experience across all of its business lines, producing a benefit ratio of 50.5% compared to 52.5% a year ago. The underlying profitability of this business continues to be excellent, with an operating ROE of 18% for the quarter. Rounding out the enterprise, the Closed Block also had a strong first quarter, with operating income of $29.1 million at the high end of our range of expectations for this segment. The interest adjusted benefit ratio for the LTC line improved relative to our recent experience at 84.7%, primarily reflecting an improvement in claim incidents. We generally expect the LTC interest adjusted benefit ratio to be in the range of 85%-90%, so this quarter's experience was slightly under that. The interest adjusted benefit ratio for the closed disability block was consistent with a year ago, at 81.5%. Looking at our sales and growth trends across the company, the positive sales momentum that emerged in the second half of 2013, following the slower half of last year, continued to build in the first quarter, and we're quite pleased with the sales results in our operations. In Unum US, total sales increased by 7.2% in the quarter, with solid contributions across our various product lines and market segments. Within our group benefits lines, LTD, STD, and Group Life, total sales increased by 12.1%, with a 16.5% growth in the core market and 5% in the large case market. Additionally, our voluntary benefit sales increased by about 5%, with particularly good results in the core market segment, where we were up 9%. We continue to be encouraged as we look to the second quarter. In addition to good sales, persistency for our Unum US employee benefits line ticked up to 89% for the quarter, compared to just under 88% for the full year 2013. Bringing it all together, overall premium growth for Unum US was up 1.1% for the quarter, well within our outlook range of 0%-2% for the full year. In the U.K., sales were down slightly at £10.4 million for the quarter. We produced growth in the disability line of 5.7%, but the overall decline was driven by our group life line of business, where we continue to be careful on pricing. Persistency in the U.K. improved over last year. However, persistency in the group life line continues to reflect the pricing actions we are continuing to implement. Premium income was also lower than last year's first quarter due to lapses resulting from our repricing of the life block. Finally, at Colonial Life, we saw very good sales for the quarter, an increase of 6.5% with positive contributions from both new accounts and existing accounts. We also saw very strong trends with re-enrollments in some of our larger account cases. Persistency was slightly lower relative to the first quarter of 2013, but premium income increased by 3%, which is consistent with our expectation of 2%-4% for Colonial Life. Overall, we are quite pleased with the growth trend lines that we see in the company. Moving to the investment portfolio, the credit quality of our portfolio remains in excellent shape, and the watch list of potential problems continues to be quite low. The decline in interest rates and the spread compression made for a challenging investment environment again in the first quarter. We saw single A 10-year bonds drop by 36 basis points. At times like this, we will sometimes hold cash balances for our product portfolios at higher than normal levels as we look for better opportunities to put the money to work. The net effect is some near-term pressure on investment income relative to our expectations, and we felt that across a number of our business lines. This would be similar to what we have seen a year ago, and our team will continue to remain disciplined in good asset selection. Moving to an update on capital management, the weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 400%, and our holding company cash and marketable securities was $822 million at quarter end. Our statutory operating earnings of $130 million continues to be within our range of expectations, though it was on the lower side of what we have been experiencing. Statutory results can tend to be a little bit more volatile. During the quarter, we took advantage of the low interest rate, tight corporate bond spread environment, and did issue $350 million of 10-year notes at a 4% coupon. We are in the process of redeeming roughly half of the debt we have maturing in 2015. Total amount maturing next year is $297 million at a 6.85% coupon. As a result, for the second quarter, we will be reporting debt extinguishment costs and a currency hedge gain related to the debt, and those numbers will net close to zero. We continue to buy back our shares with some of the capital we're generating, and the first quarter was a more active quarter for share purchases relative to the end of last year. Share buybacks total $100 million and keeps us on track for our $300 million-$600 million range for the full year. I would also affirm that our 2014 outlook for growth and operating earnings per share remains in a range of 5%-10%. In fact, most of the first quarter trends we're experiencing were in line with our 2014 outlook for sales, premium growth, and our ROE expectations, and I would say it was a good start to the year. Now I'll turn it back to Tom for his closing comments. Thanks, Rick. Before we move to your questions, I'll close by reiterating how pleased we are with our start to 2014. Our focus remains on continuing to profitably grow our business through disciplined pricing, underwriting, and expense management, along with a commitment to maintaining sound risk management in managing our investments and capital. We expect to continue to generate capital, and as we have done in the past, balance the deployment of that capital with the needs of the business, opportunities we see in the marketplace, and returning capital to our shareholders through share repurchases and dividend actions. This will complete our prepared remarks, and operator, let's move to the question and answer session. Thank you. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's *1 to signal for a question. We'll go first to Suneet Kamath with UBS. Thanks. Good morning. Morning, Suneet. Hi. Just for Rick first, just to start off with long-term care, can you just give us an update in terms of how you're thinking about the guidance you've given us in the past around a potential reserve build? Obviously, there have been a number of moving pieces. UPIL has come on shore, underwriting this quarter was a little bit better, but interest rates are a little bit lower. So if we kind of put it all in the mix, how are you thinking about that original guidance that you gave us? Sure, Suneet. Let me take you back actually a couple of years, and I don't think it's changed dramatically. As we look at our long-term care assumptions, these are long-term assumptions. We will see those change as we look through time. If I were to highlight a couple of things that we continue to look at is, one, the underlying experience that we see. You would have seen we actually had a good first quarter. That is one data point, but it's certainly good to see that as we've seen volatility in the line. As you mentioned, on the interest rate side, we are in a difficult investing environment, but as we come off of year-end, I would say that it's not dramatically different than what we've seen here over the last several years. As we look out the range, it's something we have to evaluate as part of the overall mix in terms of our ability to invest those cash flows that we'll receive as part of the long-term care and the management of that. I think the big thing that we continue to work hard on, and Jack continues to work with the team, is on the pricing front, and maybe I'll turn it over to Jack to talk about the progress we're making on that front. Jack? Thanks, Rick, and good morning, Suneet. We're really pleased with the progress we're making on rate increases. We've exceeded what was built into the initial gross premium valuation reserve for rate increases. So far, we're continuing to file for additional rate increases. We're continuing to see good success in getting additional approvals. Actually, I think the environment for rate increases has continued to improve somewhat within the Any sense in terms of order of magnitude of how much better you're doing on the price increases versus what you thought? It's in the 5%-10% range. Got it. Okay. Then, I guess for Rick, just to follow up on this. As we think about still that potential reserve build hanging out there at some point, is it fair to say that, given the capital contribution you made when you brought UPIL onshore on a statutory basis, that you've handled what we might have otherwise seen as a statutory reserve build at the time that you take potential GAAP charge? Is that the right way to think about it? Certainly, when you look to last year and the work that we did about bringing our UPIL business back on shore, as part of that restructuring, actually, the statutory reserves were increased. We've talked in the past about STAT to GAAP differentials and how those were close to each other as we went back a couple of years, and our STAT reserves have increased as part of that process. So there is some room there between our statutory reserves and our GAAP reserves as we look out to the future. Right. And just a final question on this topic. So if there is a GAAP event that happens at some point, 2015, 2016, whenever it is, should we think about that as sort of a non-cash event, since perhaps there might not be a statutory impact, and thus potentially no impact on your capital management targets? Well, I think I'd just repeat what I just told you, that there is a differential between those two. To project out that far and how things would play out, I don't think is something that we want to do today. But I think the actions that we took at last year-end to bring that back on shore were good, proactive, strong actions. And we'll continue to manage the block that way. And it's hard to isolate any one thing. All right. Thanks. Good. Thanks, Nate. We'll go next to Steve Schwartz with Raymond James & Associates. Hey, good morning, everybody. A couple more general. Sales were very strong, and surprised me. I was wondering if you could put that into context of maybe new accounts, new clients, versus payroll. Yeah. Mike, you want to get started with the Unum US business, and then maybe Randy, ask you to speak as well, actually, on that. Sure. Thanks. Good morning, Steve. Morning. Yeah, we've seen a good rebound, and I think Rick McKenney alluded to it earlier, but we saw healthcare reform and ACA implementation slow things down a year ago. The first half, it was slow as employers and their advisors were sorting through the changes. We saw proposal activity down really across our market segments and sales declines in the third quarter. That started to abate a bit. We saw a little bit of growth in fourth quarter. I'd see first quarter results as the next step on that continuum, being up about 7%. Encouraging for us, we continue to see strong growth out of existing clients. Over 60% of our new sales from a Unum perspective came from those existing relationships. That's very important to us because we know those sales actually drive greater stickiness. It's a contributing factor to why I think persistency continues to tick up a bit. It also comes in favorably priced and with slightly lower acquisition costs. Existing clients remain a really key growth opportunity for us. I would say, and maybe I'll turn it over to Randy Horn with this, while in the mid and larger ends of the markets, we're seeing that increase in proposal activity continue. I'd say in the very smallest end of the market, say under 50 life employers, there's still a fair degree of sorting out going on the health insurance side. It's still a little bit sticky there. Randy Horn, before you chime in, I just, maybe Mike Simonds, I think it's worth saying, too, that the growth you saw in the first quarter really did not come from natural growth. We weren't seeing an emergence of that as a contributor to growth, per se, yet. Yeah, when we think about the earned premium line, Tom, that's right. We're seeing basically a flat level of natural growth. So the growth we'd see in premium from new employees being added or wage increases driving premium increases, our growth is coming from new lines of coverage sold, new clients coming in, and plan design changes and the like. Okay. All right. Randy, you want to add to that? Yeah, you bet, Tom. Good morning, Steven. We saw good sales growth for both new accounts and existing accounts. As Mike said, there's still some ongoing pressure in that real small end of the market, under 50 employees. So our number of new accounts was down a little bit in that segment. So on average, we were just writing larger cases. We are seeing good momentum, though, building. Things are kind of loosening up in that smaller end of the market. So we're optimistic with the trend lines we're seeing at the current time. But again, good solid numbers for both new accounts and existing accounts. Randy, same for you, not really employment growth, but just offering more products to existing accounts? Yeah, it's offering more products, but just knocking on more doors, Steve Schwartz. Our new rep count was up nicely in the first quarter. They're the ones writing a lot of those smaller new accounts, and we're seeing very good productivity from new reps so far here in 2014. Okay. One more, Randy, for you, if I may. Sure. I think it was The Wall Street Journal. Things are beginning to blur, but I think it was The Wall Street Journal. There was an article with regards to changing definitions of cancer and maybe changing treatment. I don't know if you saw that or not, but if the definition of cancer was to change, would that affect your business? I did not see that specific article, Steven. I do not think that would have a direct impact on us in terms of changing the definitions. Again, I would have to see specifically what you are talking about. Again, we sell purely indemnity products that lay out very specifically what we will pay for certain types of treatments and diagnoses. I guess if there was some broad-based change in the definition of what cancer is, it could have some impact on us, but I do not think it would be all that immediate. Of course, we would have the opportunity to go in and change our product designs and our definitions if that did take place. Okay. Thanks a lot. Thanks, Steve. We will go next to Jay Gelb with Barclays. Hi, Jay. Thank you, and good morning. In the Colonial Life segment, the benefit ratio is under 52% for the first time in a while. Just wanted to get a sense of whether you feel that level of improvement, which is sort of the low end of your range, is sustainable. Randy, you want to pick up on that? You bet. Yeah, it was definitely on the lower end of our range. We had great results in all of our major product segments, very good mortality in the quarter. Everything just lined up very nicely for us. That is lower than what we would anticipate for the balance of the year. Our outlook is for stable benefit ratios. We feel really good about kind of that 51%-53% range. Again, look for good stability there. But everything just lined up well for us in the first quarter, so a little bit on the low side there. Randy, as growth improves in Colonial Life, that would probably be a positive factor in the benefit ratio going forward, right? Absolutely. Because you have better benefit ratios in those early durations of almost every product. Okay. Then switching gears to private exchanges, any update you can provide there in terms of the growth opportunity or product expansion potential, that would be helpful. Jay, why does not Mike sort of pick that one up? I think, Randy, you can add a little to it as well, but, Mike? Sure. Thanks, Tom. Certainly, activity and interest in exchanges continues to increase out there, but actual volumes of premium coming through on private exchanges is pretty minimal to date. We think about it regardless of the pace or the absolute level of adoption amongst employers, we are pretty well-positioned, both Unum and the Colonial Life businesses. Being category leaders in each of these products is important as intermediaries and technology firms create exchanges. They are coming to us. Our leadership in voluntary benefits has positioned us well in that we have got over 40 connects into these technology companies previously focused on benefit administration, now focused on private exchanges. While it is early days, and I suspect it is going to play out not over months or quarters, but over the next few years, we feel like we are well-positioned. I think the last comment I would make before turning it to Randy, in all of the exchanges in which we are participating, and in fact, in all that we have encountered in the market, for our lines of business, the carrier is selected by the employer. I think at times there is a little bit of confusion out there as to whether individual employees are going to be choosing amongst different carriers for life insurance. But in fact, to get good spread of risk and the most efficient delivery, each of these exchanges is looking for the employer to select a carrier first. So our strong brand reputation with employers and with their advisors has played in the market traditionally and will play in these exchanges going forward. I do not know, Randy, if you would have anything to add there. Yeah, I guess maybe, Mike, the only thing I would add is in addition to the employer continuing to be involved in making account-specific decisions, the exchanges we are involved with today for a VB line of business, we would be the only carrier involved on that specific employer account for that selected VB line of coverage. So it is not an open marketplace kind of situation where an employee would be selecting amongst several different VB carriers. We are also very focused on continuing to have our agency system involved, our benefit counselors involved on those accounts. So again, we are involved in a number of exchanges today. We are evaluating several others. Not seeing a lot of sales generally in the industry coming through private exchanges today, but we feel like we are very well-positioned going forward if that, in fact, does happen. Excellent. Thank you. Thank you, Jay. We'll go next to Yaron Kinar with Deutsche Bank. Good morning, Yaron. Good morning. We've been focusing on sales in the U.S. for the first half of the Q&A. I want to switch gears maybe to the U.K. I noticed that the large case market saw some improvement in sales after some pressure last year. I think that's also the market where the Unum came into a little bit of pressure in terms of underwriting results a couple of years ago. Maybe you could give us a little more color as to what's driving the sales growth there and what's different this time as opposed to the 2010 era. Peter, you want to respond to that question? Yeah, great. Thanks very much for that. Good afternoon from the U.K. It's very different, I think. As you know, we've been undertaking a renewal program across our book. What we're seeing is in the Group Life area, where I think we were very competitive a few years ago in the Group Life market, that's where the life large cases were written around 2010. If you look at what we've written in Group Life, we're being very selective. We still see that market as very competitive. We wrote very little large schemes in the Group Life market. It's a challenging market, we think, to make money in. Some of our competitors are writing cases there and taking some of our business, actually, on our persistency was a bit lower as well in that large case. We're being selective in where we write that business and maintaining our discipline. Where we have seen success, though, is in our LTD market. We can compete very effectively with other carriers in that space. Our claims proposition is, in our view and in the broker's view, more value for money in terms of what we do for the customers. We can charge a bit of a premium for that claims service over above the competition. Actually, that premium tends to be around 10% at the large end where the claim service works. We've been successful in writing a number of large schemes in the first quarter versus the competition. We've also been successful in bringing some new schemes to market in that space where particularly the banks are looking at what the benefits are on offer. As the economy recovers a little bit in the U.K., they're willing to invest a bit more in their employee base. Got it. It is mostly financial institution, banks-oriented? That is right. Okay. One more question, if I may, on the Closed Block. I saw that the individual disability premiums declined by quite a bit. I was hoping you maybe give a little more color as to what was driving that decline. Jack, do you want to take that one? Yeah. That decline is just a natural runoff of the book. That block's been closed for a long time, since the mid-1990s. Those people are aging. Most people do not extend their coverage beyond age 65. It's like the baby boom retiring, if you will. It's just naturally running off the books. That move of maybe mid-single digit declines to low teens, we should think of that maybe as the new run rate? I think as the block ages, the decline is going to accelerate. Okay. Yeah, I would think that would be the direction. I do not know whether this quarter is specifically the new run rate, but you should think about the run rate accelerating as the block ages. But more in the mid-single digits than the double digits that you mentioned. Okay. Great. Thank you very much. Yeah, sure. We'll go next to Erik Bass with Citigroup. Hi, thank you. First question on expenses. Expenses have ticked up across a number of segments in the past few quarters. I was just hoping you could talk about what's driving this and whether we should view recent expenses as a reasonable run rate going forward, or if there's some one-off investments in there. Yeah, sure, Erik. This is Rick. When you look at our expense base overall, as you would've seen over many years, we manage it very tightly. We think about it from an expense ratio, so relative to premiums, and manage that as well. Relative to last year, you would've seen a tick up. I would tell you that it's basically we're right on our plans for this year. Included in those plans include some investments that we continue to make in the company around technology, around brand, and different things like that. It's very much in line with our expectations overall. I think what you saw this quarter is about a run rate that you should expect for the remainder of the year. Got it. Thank you. On long-term care, just curious, we saw the first noticeable reinsurance transaction this quarter with CNO's Closed Block deal that they did. I realize there are a number of significant differences between your block and theirs. I'm curious whether you view this as a one-off transaction, or does it suggest that a third-party market for long-term care risk might be beginning to emerge? Good question. This is Rick again, Erik. When you think about that, and we've talked about that previously in terms of what will happen, we think in this market over time as more data evolves in the long-term care space, I think there will be more opportunities for other people to take on that risk at certain prices. This transaction you saw out there might be one of those that actually bodes that that's out there on the horizon. I think you'd also look at a very robust reinsurance market for other blocks of business that you've seen out there. Those are all good things. What I wouldn't do is read across to our business that there'll be something of a large nature that's coming across our block anytime soon. But those are all good indicators that the market is getting better. But it's part of the transition we would expect to see in this market as data grows, as more information grows, as capital becomes available to it would be something we'd look at. And I'd point you back a number of years to what we did with our Northwind transaction, that it went through the same cycle around the individual disability space, and we'd hope to see that in the long-term care space as well. So good things, but don't read across that there's something imminent on the horizon for us. Got it. Thank you for the color. Thanks, Erik. We'll go next to Christopher Giovanni with Goldman Sachs. Thanks so much. Hi, Chris. Good morning. First question on the U.K. So it seems results are tracking back in line with your expectations, with earnings clearly stabilizing, the sales and the life piece falling as you work through kind of that repricing process. I think you're going to be through the repricing of that book by the end of the year. Just wondering how you're thinking about the reinsurance agreement that you have in place when that's up for renewal, and if you have an estimate for how much earnings you're giving up with the reinsurance contract. Rick, why don't you start on that one, and maybe Peter will pick up a little color on it. Sure. I think the way you characterized it, Chris, is right, that as we went through that reinsurance transaction, we were going through a major restructuring of the block, including the reinsurance, including pricing and what we were doing in the market. Actually, this year-end, we recaptured some of that business. I shouldn't say recapture. We renew reinsurance, but we didn't have the same amount that we reinsured out. We had retention levels higher of around 75% of the block. At the same time, on the reinsurance front, we did keep in place the volatility cover. So we actually, per life, we retain less. We think that's good volatility management for that block of business. In both cases, we've been very happy with the pricing. Once again, this is a structure which goes out one year. We have a lot of flexibility as we get towards the end of this year to figure out what type of retention we want to continue to hold on that block. But I'd put all of that in the context of we're very happy with how the returns have changed and improved for our Unum UK Life business, and we think of reinsurance there as a tool to help us manage the return to good profitability that we've experienced in the past. Yeah, Peter, do you want to add a little bit too, just in terms of where we are in the repricing actions and just maybe some of the market dynamics? Yes. Thanks, Tom. In terms of where we are in the repricing actions, we're about 75%-80% through. So I guess in U.S. terms, we're in the seventh inning, so we've probably got an eighth and ninth inning. So I expect to be done by the end of the third quarter on the repricing. As Rick said, what we've seen is, we're very happy with the business we're retaining. We're seeing those results come through. You can see that in this quarter's results very evidently in the group life product stream and the return on equity. As we reach the third quarter, we'll take another look at the reinsurance. I suspect the per life looks like a good thing to do, and then we'll look at the retention levels depending on how it's performing, but it's certainly working for us today. Great. Then, a follow-up on LTC for Jack. The repricing comments were helpful. Wondering if you could talk about conversations you're having in the marketplace. It seems like there's increased focus from the NAIC around the repricing process and if minimum loss ratios should maybe be met before submitting price increases. Really just wondering how you're thinking and handling these dialogues and if the type of loss ratios that have been proposed are adopted. Any estimate for what portion of your book are already above those minimums and would be eligible for repricing? Yeah. We've been actually very active in dialogues with the NAIC and regulators. I've gone out and personally visited Scott Kipper, who runs the Senior Issues Task Force of the NAIC. I've been out to see him twice. The loss ratios being bandied about are largely prospectively on new business written. They don't necessarily apply to in-force blocks and particularly Closed Blocks. Even with that said, the loss ratios are at a level that they wouldn't impact our ability to pursue rate increases. Got it. Then just one quick one for Mike or Tom. You've talked about expanding partnerships as the benefit marketplace evolves, and you've done a number of things with UnitedHealthcare. Just wondering if there's anything else in the pipeline that we should have on our radar. Chris, it's a great call, and Mike maybe talk about that because there is a lot going on, and we probably can't get too specific, but we're in some interesting general dialogues. Yeah. Thanks. Great question, Chris. I'd say the macro trend is you are seeing health plans continue to get less rich and gaps get created, and that creates real opportunities for us broad-based. Then finding new and interesting ways to get after those opportunities continue to surface. You mentioned the UHC partnership. That's been a very good partnership. We're about three years in. It's been a differentiator for us in that large part of the marketplace to have the world's biggest managed care company and the world's leading disability company working together. We actually have a pretty healthy pipeline of other partnerships coming that attack actually different segments as well. Thanks for the comments. Thanks, Chris. We'll go next to Tom Gallagher with Credit Suisse. Morning, Tom. Morning, Tom. Hey, wanted to come back to long-term care. First on the rate increases you are getting, can you comment on whether or not you see a big enough benefit to offset the previous comments you have made and the previous disclosures you have had about potential charges, I think mainly related to discount rates. Is there any way to quantify that? Is that a positive enough new development that there is a chance that that could fully offset the potential need to strengthen GAAP reserves? That is my first question. Yep. Go ahead, Rick. Yeah, let me take that again. Tom, maybe I will recharacterize some of the things I say, which is just to say there are kind of, if you think about it, three big moving parts, and they are constantly changing. One of them is going to be the experience in the block, and if you think about what we saw this quarter, that is good, but these are once again long-term views of how we see the experience in the block emerging. You have got the interest rate pressures. We have got to put these cash flows to work at certain levels, and we will deal with that over a period of time. This quarter, a little bit tougher, but once again, these are our long-term views around how cash will get put to work over a very long period of time. The third piece, as you say, is the price increases. That's a little bit better than we thought. These pieces of how we see them, how we feel about them, are constantly moving. We're constantly reevaluating them. As we look to establish the correct level of reserves for the block, we're going to continually reevaluate them. It's hard to look at any one moment in time and say explicitly where they are. But like I said, we can only give you the best transparency, we can give you the indicators that we see out there and how those are evolving over time. That's what we'll continue to do with you quarter in and quarter out, and that's our best read that we have as we sit here in the first quarter. Rick, can you comment on the, I believe the last time you all took a charge in 2011, there was a difference between STAT and GAAP, and you equalized those two. What is that difference today in the reserve levels? Sure, Tom. Actually, it changes over time, as these do, but I would give you a number, probably safely say it's north of $500 million in what it sits out there today. So that would be the differential today. It's a little bit north of that, and that will change over time, but there is some differential between our STAT and our GAAP books today. Okay. What's the latest update on if there is a strengthening, what kind of timing? Is it still a few years away potentially, or is there any way to give timing clarity around that? I think I'd take you back, Tom, to what I just told you, which is there's a lot of pieces, and they're moving constantly, and it's hard to give you clarity around the timing is because those dynamics are constantly changing. I probably would just leave it at that we'll continue to reevaluate it and continue to give you some views on that. But particular to the interest rate piece, I think that we go through ups and downs in the interest rate cycle. The original guidance we gave you back in 2011 still is pretty reasonable in terms of how we look at it. Okay. Just a comment about not fully investing right now. How should we think about that? I guess interest rates remain a bit low. Should we consider or should we expect you all to have that same strategy for the next few quarters if rates remain low? Is there going to be a point at which, if it goes on long enough, that you'll start more fully investing? Sure, Tom. When we think about investing, this is actually something we did exactly how it played out last year as well, was it wasn't a good selection of assets. Sometimes it's rates, sometimes it's actually supply. So there's a lot of reasons in why we wouldn't put our money fully to work. The dynamics look similarly today. If you look at last year as an example, we got it all to work by the end of the second quarter. How that's going to play out in the course of this year, I can't really tell you today, but our team looks at it very carefully, and we are in constant conversation about when to put money to work and when to sit on it and wait for what we think will be a better environment. A lot of dynamics go into that conversation as they are right now, but I can't give you much more than that as we look out to second and third quarter. Okay. Just my last question. I know you mentioned statutory earnings were a little bit lower this quarter. Is the full year expectation still roughly the same as it's been in terms of statutory? Was there anything in particular weighing on results in 1Q? Tom, the statutory results in 1Q were a little bit lighter, but I'd put you within a range. Last year, if you went to first quarter, they were actually a lot better than we thought. In STAT, we will see more volatility, but that doesn't change our outlook in terms of where we think our STAT results are going to come in. Importantly, it doesn't change our views around what our capital management programs look like. Although we see the volatility, we'll continue to watch it, but we don't read across anything to the full year yet. Okay, thanks. Good. Thank you, Tom. We'll take our next question from John Nadel with Sterne Agee. Good morning, John. Hey, good morning, everybody. Pardon me. Couple of quick ones. Most has been answered already. In the U.K., I was interested in whether you could give us some sense for the order of magnitude as you think about the pricing today on the Group Life side, cases that you're actually willing to write relative to the pricing, say, perhaps three or four years ago when you cited that you were maybe a bit overly competitive. Peter, you want to pick up on that one again? I think it's just a matter of just looking back as John said, about just the pricing environment a couple of years ago versus how you're sort of viewing it today and where we're playing and where we're not playing. Yeah, I am trying to get a sense. Is that 20% higher pricing or 100% higher pricing? It is in the 10%-15% higher pricing, I would say. So where you might be pricing around your cost to capital or slightly below even when you got pushed on competitive, we are now pushing for more of where we feel comfortable a good return on that business is. So it is low teen, double-digit increase, that kind of thing. I think the challenge, what you have seen on the Life book is, as you shrink the book, clearly that gives you some little bit of expense pressure. But we are more than happy that we are balancing that with the margin increase. Got it. That is very helpful. And John, as you know too, the Group Life business tends to be pretty price sensitive from a customer point of view, and you have far less ability to sort of differentiate your offering with service and claims processes and things like that. So those may seem like relatively small percentages, but they can swing business quite a bit. Yeah, no, I understand. Thanks, Tom. That's helpful, though. On the U.S. Group Disability side, we actually saw a couple of players in that market increase their discount rates this past quarter. I guess it doesn't really make a whole lot of sense given what we've seen on the rate side, on the interest rate side or yield side. Did you guys make any adjustments to discount rates, or do you expect to make any? Rick? Sure, John. When you look at our discount rate, it's something that we manage over a period of time. We did not make any adjustments this quarter, and we look at how we're investing money relative to the portfolio. You've seen us over the last several years manage that carefully. To give you a sense, our margin between our asset yields and our liabilities is still 90 basis points, very consistent with where it's been. Okay. We manage that all together and do it. I would tell you, we did see it on the net investment income side. It is a challenging environment, and that line feels it, but we also have the ability to price for it, to manage it, and work through it. That's not a new story for us. That's how we continue to manage it. Yeah, no, I certainly appreciate your commentary on the new money investment side. I think we're starting to see some companies maybe stretch for yield, and it certainly seems like you guys are being more conservative on that front. The last question for you, maybe for Rick, you had sort of mentioned that you've got this 2015 debt maturity, I think it's just shy of $300 million that you've. Maybe you'll write a bit more detail on what's going on there. Sure. We actually had about $300 million that was issued out of the U.K. as part of, and not directly linked, but as part of our issuance we did, we chose to actually tender for half of that. That's actually in the process of being done. That will happen probably in the mid-May timeframe or a little bit later in the month. You'll see that come through. We're actually paying to make whole as part of that, so there'll be debt extinguishment costs. But because this was U.K. debt, we also had currency hedges on, and as we removed that, there was also a gain associated with that. It'll be in a couple of different line items in our income statement, but those two roughly equate, kind of think in the $10 million-$15 million range on both sides of the equation, netting to close to zero. Got it. You'll get a head start on sort of interest expense coming down as a result of this. That's correct. Terrific. Thank you very much, guys. Thanks, John. We'll go next to Sean Dargan with Macquarie. Hi, Sean. Thanks. Good morning. Just to head back to Closed Block LTC, was there an element of the improvement in the interest-adjusted benefit ratio that was attributable to group LTC? We actually saw improvement in both individual and group. Yes. Okay. It is my understanding when a state approves a rate increase and the carrier goes to the policyholder, that they get three options. They can either pay the increased rate, they can keep their old rate with reduced benefit or lapse. With individual policyholders, I think carriers have found that overwhelmingly, the policyholders will pay the higher rate. Is that the same dynamic that you have seen in the group market? It is a little different in the group market in that the premiums, first of all, are a lot lower. Our average premium in the group market is $400 versus like $2,000 in the individual. We are probably seeing more buydowns in non-forfeiture options in the group market than we see in the individual. That tends to be positive from a reserve development perspective. Right. Is that something that's sustainable, or is that kind of a one-time benefit that you'll get maybe at the January 1 and July 1 renewal periods? Yeah, it'll tend to spike in January and July when it happens. It only happens when you're going through rate increases. It will happen as long as we're continuing to implement group long-term care rate increases. We'll be doing that for a while because you implement them in the order that states approved them at the next anniversary. We implemented the first batch of state approvals this year, but there are other batches that will be emerging next year as well. Okay. Thank you. Thanks, Sean. We'll go next to Ryan Krueger with KBW. Hey, good morning. Good morning, Ryan. Question about Colonial. You have had a lot better sales results over the last couple of quarters than one of your main competitors, despite probably facing similar headwinds in regards to healthcare reform uncertainty. I guess that begs the question, are you seeing any change in buyer behavior? What I mean by that is, has there been a shift in preference towards using brokers, which is your main distribution avenue, versus, say, using career agents for sales in these products? Well, Ryan, just to clarify, as you know, we really have two pathways into the voluntary benefit business. Certainly, the Unum US pathway sells primarily through brokers and consultants. As you know, the offering that we bring to market there is a more comprehensive full offering of group voluntary and executive benefits. The other avenue certainly is the Colonial offering, where we actually market a more limited set of voluntary benefit products, but those go through agents, and the agent may choose to actually use a broker. I just want to clarify, we have got sort of two avenues into the voluntary marketplace. We consciously chose to keep those two avenues because they actually complement one another as we come to market. In our mind, actually give us a much broader array of choice in the marketplace, everything from the very small employer to the very large employer, and the public sector as well. With that backdrop, maybe Randy, is it worth talking a little bit about what you are seeing actually from the broker side of things? Absolutely. Well, let me emphasize, first of all, that we are continuing to stay focused on our agency distribution system. We do not have different distribution channels here at Colonial Life. Again, our focus is on our career agency system. As they move up market, there typically will be a broker involved, and so we work with brokers through our agency system in a partnership manner. Really not seeing any big shifts in that. There certainly are growing opportunities as employees are given more and more responsibility for their benefits, and we are seeing more and more brokers interested in getting into the voluntary space, Ryan. So we are very optimistic and feel like the way to go is to keep focused on our agency system and have them work effectively with brokers. Mike, would you like to add a little bit of that from your market perspective? Yeah, just to echo Randy's point, we definitely see the increased interest amongst brokers. I don't know if it's a switch amongst employers going more towards accessing the benefits through the broker, but the brokers' interest, as they've seen some of their revenues cap from a healthcare perspective, they're looking for ways to build out their client relationships and diversify revenue. That drives interest in voluntary. To give you a little bit of a sense, Ryan, over a third of all our new sales in the first quarter came on an integrated group and BV basis. So we're seeing that same advisor bring multiple product solutions. That's also driving good interest in our executive benefits or IDI product line as well. Thanks a lot. That's very helpful. Just one quick follow-up. You've talked about M&A a little bit in the past. I know generally there hasn't been a lot going on or a lot available in your markets, but wondering, are there any additional lines of business that you guys would be interested in longer term, say, something like medical stop-loss that may benefit from more demand from healthcare reform? Rick, you want to just touch the overall M&A strategy? Yes, Ryan. Let me just give you a view. It's probably not going to be significantly different than what we've seen, although the market is active. I think the M&A markets in general across the insurance space are active out there. When you get more specific to our lines of business, people still tend to like their benefits business and are not avid sellers. When you get to product lines, we have a good product set, so we're pretty well filled out across the board, but we'll continue to entertain things that fit within our strategic sweet spot, working at the employer to provide protection benefits. I would also remind you that we look at around the world as well. So it's not just different lines we have in the U.S. There's different geographies, which we'll be seeing similar dynamics to what we have today. We're quite active out there and looking in terms of different opportunities. But the M&A markets, I think within our lines, particular business, probably have not changed that much as you look over the last several years. Okay. Thank you very much, guys. Good. Thanks, Ryan. It looks like we've actually exhausted our questions. So thank you all for taking the time to join us this morning, and we look forward to seeing many of you at various investor conferences and events this spring. Operator, this will complete our first quarter 2014 earnings call. Again, that does conclude today's presentation. We thank you for your participation.