Earnings Call: Q4 2013

Feb 5, 2014

Good day everyone, and welcome to the Unum Group 2013 fourth quarter earnings results conference. Today's event is being recorded. For opening remarks and introductions, I will turn the conference over to the Senior Vice President Investor Relations, Mr. Tom White. Great. Thank you, operator. Good morning everyone, and welcome to the fourth quarter 2013 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, 2012, and our subsequently filed Forms 10-Q. Our SEC filings can be found in the investors section of our website at unum.com. I also remind you that statements in today's call speak only as of the date they are made, and we undertake no obligation to publicly update or revise any forward-looking statements. A presentation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in today's presentation can be found in our statistical supplement on our website, also in the investors section. Participating in this morning's conference call are Tom Watjen, our 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, Tommy. Good morning, everybody. Let me start by saying that I'm very pleased with our fourth quarter results and the strong close that we had for the year. Operating earnings per share, which excludes investment gains and losses, as well as certain pension and reserve adjustments, increased 3.7% to $0.85 per share, bringing full-year operating earnings to $3.32 per share, an increase of 5.4% for the year, which is towards the upper end of both our plans and the outlook we had provided the Street at the start of the year. Importantly too, our book value per share, excluding AOCI, which I continue to believe is a strong measure of enterprise growth, increased 9.4% year over year to $32.32 per share, which is slightly above the 8.6% compound annual growth rate that we've achieved since 2009. Now let me touch on a few specific items before turning things over to Rick McKenney. First, we continue to generate strong results within our ongoing businesses, Unum US, Colonial Life, and Unum UK. Unum US had another strong quarter, driven again by favorable risk results across all of our business lines. For the fourth quarter and for the full year, each of our Unum US business lines reported improved benefit ratios, the result of our longstanding focus on disciplined underwriting, pricing, and risk selection, sometimes at the expense of top-line growth. Colonial Life also delivered solid operating results with stable risk results and sound expense management driving another good quarter for this business. Lastly, Unum UK continues to show solid margin improvement, driven in large part by our aggressive group-wide repricing and repositioning actions. Overall, these ongoing business segments are generating consistent solid margins with an operating return on equity of 14.7% for the fourth quarter and 14.2% for the full year. Secondly, the results of our Closed Block remain steady and were in line with our expectations again this quarter. The loss ratio in the long-term care line improved this quarter, and we continue to make good progress in our ongoing repricing initiatives in this line. There is still more work to be done, but I am encouraged by the work that our new team has done to bring greater focus and attention to this business. Third, following on some improving sales trends that emerged from the third quarter, we saw strong sales growth in both of our U.S. operations in the fourth quarter. In Unum US, total sales increased by 5% with especially strong results in our small and mid-size employer markets, which are employers with under 2,000 employees. Group sales in these segments grew by 9.4% over last year, and our voluntary sales in these segments grew by 24%. We also saw a strong improvement in sales with Colonial Life, increasing 10.4% for the fourth quarter, which is up substantially from the levels we were seeing earlier in the year. We saw a generally good balance in our sales results, but led by strong results in the mid-size segment of that market, which are employers with 100 to 1,000 employees. Our commercial sector sales at Colonial Life grew 12.3%. We in the industry are still experiencing some challenges in the very small end of the market, but even there were signs of improvement in the quarter. Lastly, our Unum UK sales declined 9.4% in local currency this quarter. Much of that decline, though, is attributable to tougher comparisons in the larger case market and our group life sales, where we have been, as you know, raising prices. Next, moving to investments. Our investment results continue to be strong, particularly the credit quality of our portfolio. Interest rates and investment yields remain a challenge, with improving Treasury yields in the fourth quarter, mostly negated by tighter investment spreads. We have continued to maintain our investment quality standards and are continuing to adjust our prices in those products that are most interest rate sensitive. Finally, we closed the year in a very strong capital position. We estimate that our RBC ratio finished 2013 just above 400%, and our holdco liquidity position finished the year at $514 million, both well within or exceeding the outlook we provided for the year. I might add that these year-end capital levels incorporate the completion of the REDOM of our Bermuda base captive, which was not contemplated when we initially provided our 2013 outlook in December of 2012. Even with this, we have retained significant financial flexibility, and in the quarter, repurchased $50 million of stock, bringing our total for the year to $319 million, and Rick will have more on this in just a few moments. To summarize, we are pleased with the overall results we saw in the fourth quarter and for the full year of 2013. As I discussed at our outlook meeting in December, we believe that we are in good businesses and markets, and we are well-positioned to continue to deliver solid results in our ongoing businesses in 2014. We also remain intensely focused on actively managing our Closed Block segment, both the operations and capital invested in this business. Our solid financial foundation continues to give us significant financial flexibility to invest in our businesses and return capital to our shareholders, all of which I'm confident will continue to allow us to create value. Now, I'll turn things over to Rick for a review of our operating results. Rick? Great, thank you, Tom. As Tom mentioned in his comments, for the fourth quarter, we reported operating EPS of $0.85, which is up 3.7% from last year. This brings our growth in operating EPS for the full year to 5.5%. It's a good conclusion to the year, where we expected 0%-6% going into it. Looking first at Unum US, operating earnings increased year-over-year, driven by good experience in the group life and the AD&D line, and the supplemental and voluntary lines. Group Life and AD&D produced very good results this quarter, with operating income increasing by 13% to $62 million. The benefit ratio was improved in the quarter at 70%, reflecting favorable underlying experience. Also, the supplemental and voluntary line reported operating income of $85.8 million for the quarter, up from $83.6 million in the year ago quarter. Here, too, the benefit ratios for the primary lines of business were also slightly improved from the year ago results due to more favorable risk experience. Turning to our group disability business, we did see lower operating earnings, but this was driven primarily by a reduced level of miscellaneous investment income, which was about $7 million lower year-over-year. The item to focus on is that the risk results in group disability remained quite strong, with the benefit ratio declining to 83.2% this quarter from 84.5% a year ago, as the underlying experience showed stable to lower overall claim incidents and continued favorable claim recovery performance. This has been a positive trend we have seen over several quarters. Overall, it was a good quarter for the Unum US segment overall, with operating ROE for the segment at 13.7% and good momentum going into 2014. Moving to Unum UK, operating earnings were £22.2 million for the fourth quarter, improved from both the year-ago quarter, which was £21.8 million, and up from the third quarter, which was £20.1 million. We continue to be pleased with the progress we are seeing with 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 14% for the full year 2013. We still see room for improvement, and we are encouraged by the direction of this business. In the fourth quarter, the Unum UK benefit ratio improved to 73% from 76% in the year-ago quarter. The improvement was largely driven by improved performance and margins in our group life line of business. Risk experience was slightly weaker in our group disability line, reflecting slightly higher claim incidents, but overall, I'm pleased with the momentum we're seeing as we go into 2014. Colonial Life continues to produce solid, steady results with operating income at $69.4 million for the fourth quarter. The benefit ratio was stable at 52.4% for the quarter as we experienced favorable risk results in the life product line, which offset some volatility in the cancer and critical illness and accident sickness and disability product lines. Overall, the underlying profitability of this business continues to be excellent, with an operating ROE for the full year of 16.5%. The Closed Block generated operating income in the fourth quarter of $26.8 million, consistent with our expectations for the segment. The improvement in the interest-adjusted benefit ratio for the LTC line was primarily driven by a lower level of new claim incidents. The increase in the interest-adjusted benefit ratio for the closed disability block was largely attributable to a slight reduction in the claim reserve discount rate, which did not impact the bottom line. I'd like to now move to a discussion of our sales and growth trends. The positive sales momentum that we began to see in the third quarter, following a sluggish first half, continued into the fourth quarter. We were quite pleased with the sales results we saw in the quarter in our U.S. operations. Beginning with Unum US, total sales increased by 5% in the quarter. The challenges we experienced earlier in the year from the political environment and disruption in certain sectors from healthcare reform implementation seem to be lessening but are still having some impact in the very small end of the market. Persistency for our primary U.S. business lines remained well within our expectations but did decline slightly year-over-year. Overall premium growth for Unum US was up 1.4% for the full year, and similarly, our 2014 outlook calls for premium growth for Unum US in the 0%-2% range. In the U.K., sales were down 9% this quarter in local currency. Persistency in the disability line remained relatively stable at approximately 82% for 2013. However, persistency in the U.K. group life line continues to reflect the pricing actions that we're implementing, and what we have seen is that the lapses are skewed to the more poorly performing cases. Also taking into account the group life reinsurance implemented at the beginning of 2013, our U.K. premium income was down 19% for the full year. Our outlook for 2014 is for premium growth of 0%-2%, with some improvement in persistency in the group life business and overall sales growth for Unum UK in the 4%-7% range. Finally, at Colonial Life, we saw very strong sales for the quarter, an increase of 10.4%, which brought the full-year sales growth to 1.6%. Persistency declined slightly for our major business lines, but premium income increased by 3.2% for the full year. Our outlook for premium growth and for Colonial Life in 2014 calls for growth to again be in the 2%-4% range. Having covered our operating trends, I would like to now review the two reserve adjustments we reported in the first quarter, beginning with a reserve increase for unclaimed death benefits. You have probably seen over the last several years, discussion with regards to the use of the Social Security Death Master File and how insurers are using it. During 2012 and 2013, we began proactively addressing the use of the Death Master File to identify life insurance claims for death within the current year so that we could identify and pay owners of unclaimed life insurance proceeds. In 2013, we also looked at using the Death Master File to search for potential claims from previous years. During the fourth quarter of 2013, we completed our assessment of benefits, which we estimate will be paid under this initiative and establish additional reserves of $95.5 million for the payment of these benefits. Our earnings release details the allocation of these reserves by our various life insurance business lines with Unum US and Colonial Life. The second reserve adjustment is a reduction of reserves related to the group life waiver of premium benefit. Again, for some background, within our Unum US segment, we offer group life insurance coverage, which often includes provision for waiver of premium if one becomes disabled. The group life waiver of premium benefit provides for continuation of life insurance coverage when an insurer is no longer paying premium because the employee is not actively at work due to disability. Our emerging experience and that which continues to emerge within the industry indicate an increase in life expectancies, and at the same time reflects an improvement in claim recovery rates, which also lessen the likelihood of payment of a death benefit while the insurer is disabled. During the fourth quarter of 2013, we completed a review of our assumptions and modified our mortality and claim recovery assumptions, which resulted in a reduction of claim reserves of $85 million. Touching now on 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. In the fourth quarter, we saw treasury rates rise. However, that was largely negated by a continuing tighten of corporate credit spreads. All in all, it continues to be a difficult investing environment. Certainly better than this time last year, but we expect to see continued gradual pressure on our portfolio yields. As we have said before, we are not stretching our quality standards to reach for yields, but are working on careful asset selection while adjusting pricing on our liabilities to reflect the current environment. Moving on to an update on capital management, our statutory operating results continue to be strong. This quarter was impacted by the unclaimed death benefit reserve adjustment, but for 2013, after-tax operating earnings, absent this item for our traditional U.S. subsidiaries, was $680 million, consistent with our capital generation model. The underlying trend of solid statutory operating earnings remains very much intact. The weighted average RBC ratio for our traditional U.S. life insurance companies was estimated at 405%, above the upper end of our target range of 375%-400%. Holding company cash and marketable securities was $514 million at year-end. 2013 was an active year on the capital deployment front. We bought back $319 million of stock, including $50 million in the fourth quarter, and raised the dividend by 12%. We also did some things that position us well for the future. This would include freezing the qualified pension plan, which is now in an over-funded position, and the REDOM of our Bermuda sub back to a U.S. domiciliary. This was all done while meeting our capital targets we laid out at the beginning of the year. Finally, our 2014 outlook for growth and operating EPS is a range of 5%-10%. No change from our outlook meeting back in December, and many of the results of the quarter reaffirmed these views. Now I'll turn the call back to Tom for his closing comments. Tom? Thanks, Rick. Before we move to your questions, I'll close by reiterating how pleased we are with our operating results for the fourth quarter and full year 2013. We have good momentum going into 2014 with our ongoing focus on continuing to profitably grow our business through disciplined pricing, underwriting, and expense management, along with a commitment to maintaining sound risk management and managing our investments in capital. Capital that we will continue to use wisely to support our business and return to our shareholders. Now this completes our prepared remarks, and operator, let's please move to the question and answer session. Thank you. If you would like to pose 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. We ask that you do limit yourself to two questions initially. You may then reenter the queue as needed. Again, that is *1 to signal. We'll go to Mark Hughes of SunTrust. Thank you very much. Good morning. Good morning, Mark. Can you give us an update on your exchange strategy, how many exchanges you may be on, and then maybe some discussion about how many other providers you might be competing with, how your pricing strategy, how you are approaching this distribution? Be happy to, Mark. Maybe I will ask Mike to sort of lead that discussion, but certainly, obviously, Colonial is also part of that too, because both businesses certainly are connected to that whole developing area. Mike? Thanks, Tom. Good morning, Mark. Activity and interest in the private exchange market, which I assume you're referring to, continues to increase. But I'd have to say that actual volumes of business that's coming through still remains relatively small to date. The way I sort of think about it is regardless of the pace for the absolute level of adoption that ends up occurring with our product lines on private exchanges, we feel pretty well positioned for a couple of reasons. The first is we've got about 40-plus connections into the benefit administration and enrollment technology platforms that are now forming the basis for the majority of private exchanges. Having put those in place over the last 3 or 4 years, we've actually gotten a good head start. To your specific question, there's probably about a half dozen to a dozen exchanges that we're either on or in the process of getting on. A couple of important points. First, in each of those cases, the employer remains heavily involved in selecting the carrier and the types of benefit choices they're making available to their employees. That's important to us. Then second, and to your question, the product forms and pricing parameters that we're using actually look very similar to what we've got through more standard channels. We feel good about our ability to manage that risk on a go-forward basis. Randy, would you like to add anything further to that? Because again, I know both businesses are working closely on strategy and implementation. Yeah, sure, Tom. Good morning, Mark. First of all, I want to emphasize we are looking at this from an enterprise perspective. My team is working very closely with Mike's on this in terms of looking at potential partners. A lot of activity, as Mike said, out there, but we are collectively being very selective, very strategic in looking at exchange partnerships. We have somewhere in the half a dozen to a dozen range actively underway right now. But again, it has to align strategically with our distribution and service strategies. I want to emphasize also, as Mike said, that we are staying very connected to the employer, and the employer's going to be making the selection of carriers and coverages. Again, a lot of activity. We think flexibility is the key, but we feel like we're well positioned in that area going forward. Then a quick follow-up, Randy, on the Colonial Commercial, a nice increase. Why is that looking so much more active lately? Well, I think it really is kind of a process, Mark, where we've been building momentum throughout the year. We really saw some good results in that 50 lives up to 1,000 lives segment in the third quarter. It really is just getting good results from the work we've been doing all year. Our field force is very active. I think things are loosening up a little bit at this point in terms of the Affordable Care Act and implementation there. Still some pressure in the very small end of the market, under 50 lives. But again, we're seeing things open up, a lot of interest in voluntary benefits, and I think a general awareness that voluntary benefits fit very well into longer-term benefit strategies. Thank you. Thank you, Mark. We'll go next to Jimmy Buehler of J.P. Morgan. Good morning, Jimmy. Hi. Good morning. First on just your comfort with long-term care reserves. Obviously, you took the charge a few years ago in fourth quarter of 2011, and at the time, I think you'd assumed that rates would be stable for about three years or so and then begin to go higher, but in fact, they haven't. So maybe talk about how you think about your long-term care reserves if rates are close to these levels around at year-end this year. Secondly, on persistency, in most business lines it declined. Wondering whether that's because of price hikes you're trying to implement, or is it just that activity's picking up and more business is being put to bid overall in the market? Rick, do you want to pick up on the long-term care piece first? Sure. Happy to do that, Jimmy. I think when you look at it, one, we're just coming out of a year-end in terms of looking at the overall reserves, so I think that's a market we put out there. We've talked oftentimes about interest rates and how we're managing through that across all of our business lines, including long-term care. There is pressure in that line, and if I took you back to 2011 when we first made those comments around interest rates, we talked about the horizon that we'd have and the pressures we've seen out there. I think to date, we've actually done probably better than we anticipated at this time, but those pressures are out there and real, and I think that what you see in the market today is reflective of that. I also tell you that I think when you look at long-term care reserves and as we look forward, there are multiple aspects that we need to look at in that product line, both on some of the things that might be pressures, and you mentioned interest rates, as well as the things that we're doing from an operational perspective to actually mitigate that, and the biggest thing there is price increases. Jack, do you want to make any comments around the operations in LTC and what we're accomplishing there? Yeah. We continue to focus on the operations. We've actually strengthened the claims management process in long-term care, had a very successful year, which you saw in kind of a steady loss ratio for the year. In addition, we've had great success on rate increase strategies. We're ahead of the goals we set for ourselves in the GPV when we set it up. In particular, we've had strong results on the group long-term care side, which is important because those premiums go on for a lot longer, so getting an increase on the group side is actually worth more to us over the long haul than getting on the individual. So we've made progress on the operational fronts, and we're continuing to make progress. We'll be filing additional rate increases both on the individual side as well as the group side, and are optimistic about our chances of continuing to improve there. Jimmy, on your persistency question, frankly, the answer differs a little bit by business and by product within business. Maybe what we will do is just go around the horn a little bit and ask each business head to speak to it. Mike, you want to talk first on the persistency trends in the quarter? Absolutely. We saw persistencies in the high 8s, which in an absolute sense, actually we are pretty comfortable with. It did come down a point or two, depending on the product line for Unum US. From a 90% plus level. I would say that was abnormally high, and it is a little bit different sides of the same coin, where we saw sales slow down in the market. That hurt us a bit early in the year from a sales point of view, but it helped us from a persistency point of view as business was moving less frequently. Played to our advantage in the renewal program. If we looked at it, persistency in the high 8s to us feels very good. As we look at our renewal inventory headed into next year, we feel good about maintaining to slightly improving that level. I think maybe the last point is, importantly, the business that is coming off the books is at substantially lower margins than the business that we are retaining. In aggregate, we feel pretty good about it. Maybe Randy, just pick up on the persistency trends in your business. Yeah. We're continuing to see generally very stable persistency in all of our product segments. It's kind of staying in that high 70, 79% plus to 80% range. Ticked down just a little bit in the fourth quarter, but nothing we're concerned about. Again, very stable by each product segment. Good. I think lastly, Peter, I think, again, you had probably the most to do with some repricing actions. Maybe just speak a little bit to how that's affected some of your persistency, especially in group life. Thanks very much, Tom. Yeah, I would sort of put the persistency into two different categories. I think on income protection, our persistency was bang in line, actually a little bit better than we expected. We got the rate we wanted, we got the persistency we wanted, and that's gone pretty much almost spot on to plan. On group life, it's a different story. We had more to do on the discipline we had to apply there. What we've done is actually we've outperformed on rate, so we've done better than we expected on rate, but our persistency hasn't quite made where we wanted it to get it to. But we have lost the schemes that were most poorly performing, and the competition has picked those up to pick up at the rates that they were going in the marketplace. The U.K. book, about two-thirds is repriced as of right now? I would say that that's about right. I would say the income protection book is pretty much there. The group life book is about two-thirds priced. Okay. Thank you. Good. Thanks, Jimmy. We'll go next to Erik Bass of Citigroup. Tom, hi, good morning. Thank you. Can you talk a little bit about the competitive environment for voluntary benefits, particularly as more insurers are focused on the voluntary opportunity and are introducing new products? I will do that. Randy, maybe lead us off as it relates to the things you are seeing in your marketplace. Then Mike, if you could pick up a little bit what we are seeing in the Unum US marketplace. Sure. Good morning, Eric. Very dynamic marketplace. Without question, there is a lot of competition, a lot of new entrants into the voluntary space. That just tells us it is important to stay more focused than ever, which we are doing on our core segments. We just keep introducing the right types of product updates and new product introductions. Our pricing stays very stable, where we are not changing that to try to meet competition or buy share. I want to assure you of that. Very dynamic market. A lot of competitive intensity. But still a lot of opportunity, especially in that smaller end of the market, and not nearly as much competition there. Outlook in general is very positive, due to growth in the overall voluntary space, and we like our chances in our target segments. Mike? I would echo Randy's comments, and you see that reflected in the numbers. In the core market for us, we saw voluntary benefit sales up over 20% in the quarter. I think importantly for Unum US, we are seeing 33% to 40%, depending on the size segment of all our new voluntary customers coming in on top of existing or new group insurance client relationships. We feel like that is a unique position that we have got in the market, and it is helping us with what Randy said is an increasingly competitive market. We do feel, though, that the outlook is good, and as health continues to change and as deductibles continue to go up, that creates the need and the demand for a number of these voluntary products, which is a trend that I think is here for the long term. Eric, if I can just add one little piece to this. As you know, we certainly, like everybody, we worry about competition coming into marketplaces, and certainly we do have some very strong competitors in our market today and certainly new entrants into our market. I will just remind you, we made a commitment to really accelerate our development of this business five or six years ago and put significant resources into everything from product to distribution to communication tool sets. I think you are beginning, you are seeing some of the benefit of that now. Again, not that we do not want to ignore the focus of increased attention on this segment, but we have also been at this for a while too, and as I said, we have built up some pretty good infrastructure and capabilities in both Unum US and in Colonial. The reason we chose to focus more energy here back five or six years ago is we saw the movement from a defined benefit to a defined contribution world, which very much has played itself out. A lot of our focus has been around a theme which has really played itself out and I think plays to the strengths of this company. Thanks. I guess to follow up on that last point, as you are seeing more plan sponsors shift to a defined contribution model of offering benefits, how does that affect how Unum has to think about both winning employer benefits contracts, but also marketing its products to consumers? Mike, why don't you pick that up? Because, again, we spend a lot of time thinking about that. The focus throughout the company is because of what you just said, and we believe strongly that that is the case. There needs to be a much greater focus on understanding consumer and consumer tendencies, both buying and why they do not buy, actually. We are playing that out in both of our U.S. businesses, and Mike may want to speak a little bit to that. Yeah. The two points I would make are, it actually calls for more active engagement with employers. When you have a simple DB or employer-funded plan, it can be a more of a transactional business, particularly in the core. As you move to defined contribution and you involve the employee, it means you have got to have stronger relationships. We have made pretty big investments in our client management team to make sure we are actively consulting with employers on how to design these plans, how to put the right resources in place to educate and handle enrollment. A big piece of that is what Tom's referring to, which is investments that we have made on understanding consumers and the different segments, putting together product packages and hitting price points that play for those various groups of consumers. That is probably the biggest stream of investment that we are making is in those enrollment education and consumer capabilities, and I think we are starting to see some of the benefits of that. Okay, great. Thank you for the color. I will just add one more piece to it. The other part of it is too, and this is again, where we have two avenues to get to those customers, but we are also investing very heavily in that benefit communication enrollment capability, because obviously the more the consumer is being asked to make choice and make decisions for themselves as opposed to the employer making them for them, that is an important part of our deliverable, too. That is actually one of the key things that differentiate, I think, both of our voluntary efforts in the marketplace from some of the new competitors who have come into the market. Got it. Thank you very much. Thanks, Eric. We'll go next to Suneet Kamath of UBS. Good morning, Suneet. Good morning. Thanks. I just wanted to follow on a similar line of questioning, as it relates to exchanges. I guess in the past on these calls, from time to time, you've talked about the more traditional health insurance companies being more aggressive in terms of price, in group life, group disability, et cetera. As we start to think about the role exchanges may play in group life, group disability, maybe voluntary benefits, I guess I'm trying to figure out, is there a risk that we might start to see some of the health insurance companies try to bundle a lot of these products on the exchanges and maybe offer a discount to customers or something like that in order to get demand and essentially take some of the business away from companies that don't have sort of a bundled approach? Hey, Mike, do you want to take the lead on that one? Sure. I think there's always a risk that you've got a new technology or a new distribution platform that you want to stay close to and understand a couple of things. First, it's easy to go quickly to how could this displace current distribution channels, but I think it's important to note that in the lines we're in, it's a very under-penetrated market. Today, our industry is only getting to about a coverage level, if you take income protection, of about one out of every three workers. As exchanges come on and they enable you to get to different parts of the working population, I think about hourly workers, I think about part-time workers, those are largely new opportunities and they're growth opportunities for us. There is an interesting angle around overall industry growth through some of these exchange platforms. But to your specific question around health carriers, I think what we're working to do is be part of the major exchanges as they come up, including those that are coming up through health insurers. We've got a well-established partnership with UnitedHealthcare, for instance, and staying close to developments on that front is a big part of our strategy. If you think about the group and voluntary benefits between Colonial Life and Unum, you've got major market players and major share. As exchanges are being constructed, they're looking to the industry leaders to be a part, and that puts us in pretty good stead. Understood. I guess I'm just trying to wonder, and I know we're learning about these exchanges more and more each day, and so if we don't know the answer to this, then that's fine. But is there anything that prevents a health insurance company, let's say, from just offering a bundled product that does everything? Health insurance, group life, group disability, voluntary benefits, and sort of because of volume discounts or something like that, essentially can undercut pricing in the market because they make it up on volume. I just don't know if that's even possible on these exchanges. Yeah. Good question. The first thing I'd say is health carriers have always done that, and now we're talking about a consumer frontier, but we've been at the employer frontier over several decades. Yes, there's always an interesting sort of bundling story on the healthcare front. But specialist carriers like us have been very successful in pointing out a superior value proposition. I think the second point is having a big database that includes a lot of information about how different employees buy, and helping to sort of also shape the offering on the front end, but also manage the risk on the back end is a big advantage. While you could sort of simply discount if you don't have a good line of sight to, okay, for this type of an employer with this type of an employee base, you're going to have a hard time, I think, building the right product combinations and managing the risk on the back end. Suneet, if I could add to what Mike just said to it. I think if you look back through history, there's been time and again, discussions of bundling. As Mike said, even today, before the exchanges were developed, group health carriers on occasion were getting into the market very aggressively trying to come to market with, in retrospect, very underpriced offerings to their customers with a set of bundled products, and it just doesn't work, actually. Not that we don't worry about those things when we think about the competitive landscape. It's obviously a changing competitive landscape. I think you've heard us talk about this on previous calls. We do believe we need to have a plan for how we'd actually connect with exchanges. As both Mike and Randy mentioned, we certainly do have plans for those, but we also cannot ignore the fact that this probably is not going to substantially change the landscape of distribution and how we communicate with employers and the individual employees. If it does, we are in a good spot, but also we do not want to miss the fact, as Mike said, there is an awful lot of good connections we have right now to the marketplace, through distributors, through employers. Frankly, those conversations are continuing business as usual. There is not a fundamental shift, actually, in how that business is being done. If there is, I think we are going to be in a good spot, but also I would not overplay the fact that this is going to be a dramatic change in how things are done the next several years. Got it. That is helpful. I was wondering if I could just shift gears to capital, maybe for Rick. Just reviewing your 2014 outlook, specifically around the RBC. Can you just remind me why the expected RBC ratio in 2014 is expected to come down versus 2013? I think you actually were a little bit above the high end of the range you provided at Investor Day. Then second, you had mentioned that you had done some creative things in terms of capital deployment, in terms of pension plan, UPIL, et cetera. Are there any other big sort of ticket items that you might consider for 2014 that might compete with share buybacks? Rick? Sure. In terms of the RBC coming down, I would not pay too much attention to that. We have kind of been stable in our outlook of 375 to 400 over the last several years, and that is our outlook for 2014. We actually outperformed a little bit, I think, this year with some better statutory results that we had going into the year. So we are kind of still in that range. Not much to read into that. I think at 375 to 400, we feel very good about the overall RBC position. With regards to new items coming out there, I mean, it is a dynamic world, and I would have told you going into last year, some of the things that we did were not necessarily on the docket. It is similar to this year, and we are going to react to that, including amount of share repurchase. We have got a range out there of $300 million-$600 million, and it means that we will be nimble with whatever the market is giving to us. We are going to be flexible on that front. The good news is we do expect a significant amount of capital generation, and we will have opportunities to react to whatever environment we see. We'll go next to Eric Berg of RBC Capital Markets. Good morning, Eric. Good morning. Thanks very much, and again, good morning to everyone. You reminded us in your end-of-year presentation that the Closed Block remains an important user of capital and is really depressing the ROE of the entire Unum Group. Could you give us an update on the following? We all talk about whether there's going to be a long-term or several analysts, myself included, have talked about whether there's going to be a long-term care reserve increase. What about looking at this from another perspective? Is there a possibility at this point of either releasing capital in any way from this business or enjoying somehow, notwithstanding it being in a Closed Block, a sharp increase in earnings from there? Rick, do you want to start that one and we'll get Jack involved as well in that as a response. Yeah, sure. I think, Eric, when you look at the Closed Block, I think those points you mentioned around how it will evolve over time I think are very good ones in terms of how we build the block, how Jack and team are managing it without stealing much of his thunder in terms of as those opportunities provide themselves to relieve capital, similar to the way we did with our disability block going back several years. We want to make sure that we're positioned, structured and ready to take advantage of those opportunities where we can extract capital from this block. I would tell you that we don't see that right now. As you look out over maybe the next couple of years, probably don't see it, but Jack is definitely positioning the team to be ready for that. Jack, go ahead. UPIL being re-domesticated was a good example of taking a first step and positioning that. The block is still very immature. It's a young block, particularly on the group side. Results can go up and down. I would say that I think we would be cautious given the long-term nature of the block before we would take steps to recognize big fluctuations in earnings or release capital in the block. But also the industry's maturing, so interest rates are getting steadier and more predictable. People are getting more comfortable with the reserve. It's not happening today, but we're hopeful over the next 3-5 years as interest in the variable annuity blocks intensifies, that that may spill over into the long-term care block as well. We're going to position ourselves that if the capital markets ever do open up in the long-term care, we'll be in a position to take advantage of it. And just as a follow-up on the long-term care. Speaking in terms of a timetable for whether an action would be taken, if any is taken. As I recall, back at the end of 2011, when you exited, I guess it was the individual business following your exit from the group insurance business. You were making the point, as I recall, that while you had a large block, the number of policyholders on claim was relatively small. The number of policyholders in later duration claims was even smaller still, and therefore, concerned about the credibility of your data, you turned to, I guess it was, a newly released study of the Society of Actuaries to help you set reserves. Now, three years later, have things changed materially? Do you have many more people on claims that the data is credible? Or to put it differently, as you assess the adequacy of your reserves, do you still need to look to the outside to understand the ultimate outlook? Jack, why don't I ask you to pick up on that because I think you touched on it just very briefly earlier, but a little more detail on just the status of our in-force block. The number of people on claim with us has been pretty steady, actually. It's increased modestly. It's not expected to increase rapidly over time. High single digit kind of increases annually. A part of that is because old people go on claim. They have high mortality. There's younger people on claim who recover. So we've- claim block. We don't expect to see dramatic growth. We are different than most carriers because we have a big group business. Most of our lives are on the group side. They tend to be much younger. The average age is still under 50 on the group side. We would expect to have a much smaller claim block relative to the number of lives insured and the amount of premium we collect than people who have written in the older age thing. That gets back to that this is going to be a long run, that it's going to be around for a long time. It's going to grow gradually, where we don't expect dramatic things to happen as that ages, and we're preparing for that. Thank you. That's helpful. Thanks, Eric. We'll go next to Mark Finkelstein of Evercore. Good morning, Mark. Hi, good morning. A few quick ones. Incidence trends in group disability, how do they compare to kind of normalized levels? How do they compare to pre-crisis levels? Let me take that, and Mike can add onto it. I think that's a good topic. From the incidence level, we have a little bit of claims that have actually come in and then claims that ultimately get paid, and I think that that paid side has actually been fairly steady even throughout the crisis. That's one of the things that we saw is that where they actually went through to a paid status was actually fairly steady, probably elevated slightly through that period of time, and is probably coming down slightly through this period of time. I think that's a trend line that we like the looks of. Yeah, just to build on it quickly, I'd say the fundamentals of the business are strong. So whether it's the paid incidence, which is steady to modestly improved recoveries offsets, those are in very good shape. In the quarter, we had the volatility and miscellaneous income, but as we sort of think about the business on a go-forward basis on the pricing trajectory, I think we're in good shape. Okay. Rick, the New York company, any changes in asset adequacy provisions? No, in the fourth quarter, we went through and actually did not raise any cash flow testing reserves that we had done in the last several quarters. We think that that's achieved, which was driven primarily in previous years from interest rates, and that's achieved stability around that. We didn't put anything up in the fourth quarter. Okay. Last quick one is, if you look at statutory earnings for the quarter, you add back the Social Security Death Master File matching. You actually add back a little bit of an adjustment you made that kind of is offset at UPIL. Stat earnings were actually pretty strong in the quarter, and I guess I'm curious if there's anything that was anomalistic in that number or whether we should be thinking about that as a trendable number. I know you talked about kind of the year being kind of in a normalized level at 680, but the fourth quarter, if you make those adjustments, were pretty good. Yeah, no, I think Mark, you're exactly right. The fourth quarter was very good when you adjust for those two things. It reflects many of our comments, which are the risk results across the board are actually looking pretty good, and that will generate stronger things at the same time. So we're happy with the fourth quarter levels. I think if you pull out those two items, we actually get up over $700 million for the year, which is moving up faster than we probably expected at the beginning of the year and certainly helps our capital generation model. But there's nothing in that number that's going the other direction that we should be thinking through other than maybe just some seasonality. No, nothing that I would highlight. Okay, thank you. Thanks, Mark. We'll go next to Chris Giovanni of Goldman Sachs. Good morning, Chris. Morning. Wanted to see if you guys could talk about what products you're currently offering on the exchanges of the large national brokers, and then of those products, which are the ones that seem to be selling the most and recognizing we're still in the early stages here. Just trying to get a sense of the product offerings. Go ahead, Mike. Yeah, sure. Happy to take it. I would reiterate, we're talking about small volumes that have come through to date. What we've seen most prominently is actually simple employee-funded things like group short-term disability offered on a voluntary basis, group term life insurance on a voluntary basis. To be honest with you, participation has been quite different depending on the employer and the situation. Just another reason to stay close to it as it evolves, and I think volumes pick up here over the course of 2014. Then you guys, to be clear, you guys don't have a dental or vision product offering on the large national exchanges? We do not on the large national exchanges, but we rolled out over the course of 2013 a dental as part of a bundled package using a partner. So we're taking that into our core market, and to the extent that an exchange partner is looking for that, we've got it on a private label basis. Okay. Then is your sense that the dental and vision are those kind of the products that at least in the early stages seem to be leading the exchanges in these conversations you guys are having with some of those brokers? Yeah, those are always of interest. But no, I wouldn't sort of signal that there's a sort of dramatic difference from a sort of a basic term life insurance or a group short-term disability that those sort of all kind of fit into a similar package. Okay. Tom, maybe a follow-up to Suneet's question on voluntary as well. Curious if you think we could see kind of some of the big maybe managed care players that may or may not already have voluntary capabilities look to make acquisitions. Or do you think they'll kind of look to build out platforms on their own? Yeah, Chris, it's hard to say. I think let's start with what's facing. There's a lot of focus on voluntary for a good reason. This is the direction of the marketplace. As I said earlier, this is the place where we staked a claim out five or six years ago to make a much more significant commitment to this business, and we've been rewarded for doing so. It's a little early to figure out what strategically is going to happen as a result of this. You sense that even with our exchange discussions. It's not real clear how powerful or important a distribution channel exchanges are going to be. So we're all kind of struggling with a bit of a new world and trying to figure out what's changed and what's not changed because there may very well be some things that simply haven't changed. Just on an M&A front, I'd say, Rick, it's safe to say there's not a lot of voluntary businesses that are out there, actually. So I think it's more likely than not with people when they get in this business, they tend to actually have to build from within, develop relationships with some of the enrollment firms or some of the technology firms that have connections into those exchanges. Because there just simply isn't a lot of M&A activity in this marketplace at all. We're continuing to be very active looking at things, but most of these things just don't fit that particular bill. But I don't think- No, I was just going to add to that, those that are in the voluntary space today are looking to get bigger in it. Yeah. I think that that's a dynamic that we see across the board. Even if there was a desire to acquire on that front, they'd find scarce opportunities. Chris, it might not seem as sexy, but I think Mike mentioned it. We're actually looking at partnerships, actually. UnitedHealthcare is obviously one. I do think in addition to people starting businesses, people looking to buy businesses, of which there aren't many, we're also going to maybe see more partnership linkups that happen as a result of some of these themes that are happening in the marketplace. I think we've already crossed that cultural barrier, frankly, because that often is not what companies like us in our industry do. But we're in a different spot right now. We've developed, as Mike said, relationships on the dental front. We've developed relationships with one of the largest healthcare companies in the country. I think, the partnership angle is also going to be a place you're going to see us continue to play, I think, as we kind of find people who have looked at this marketplace, concluded the cost of entry is too high, need to have it somewhere in their mix of products that they offer their customers, and we can be a very viable partner in a venture like that. Okay, and then one last quick one for Rick. You mentioned the pension plan, the funded status there, the freezing of it. Have you explored any other strategies, risk transfer, or any other risk management on the block? Yeah, so when we look at our pension plan, Chris, I think that those options are out there and available to us. We sit out there with a, as I mentioned, a slightly over-funded position, and we'll have to look at are there other ways that we want to de-risk that over time, but nothing on the docket today. Thank you. Great. Thanks, Chris. We'll go to Thomas Gallagher of Credit Suisse. Good morning, Tom. Good morning. Wanted to come back to Rick. Just following up on Finkelstein's question about the strong sort of core stat earnings, and if you run rate that, just considering your top line's flattish overall, it would appear that that would pave the way for a pretty strong capital return year, all things equal. If we take the $50 million buyback in 4Q, I assume that was low just because you were dealing with the REDOM, et cetera. Can we assume a significant pickup in the pace of buybacks here, just considering the stat earnings visibility? Yeah, Tom, this is Rick. I don't know if I'd put that one for one in terms of that, but I think I'd reiterate what both you and Mark have said, is that stat run rate is higher to the tune of almost $100 million faster than we thought it would be going into that. That gives us a lot of flexibility to do different things. Once we have that, we have choices to make around how we redeploy that capital. Share repurchase has been one of the bigger ones we've used over the last several years. I think you're right in saying the $50 million in the fourth quarter had a couple of factors that weighed into it. One, we were going through a lot of restructuring with the UPIO, et cetera. The second piece I'd put into that is we were also dealing with a share price that was a lot higher. As you look at this quarter and where we are, our share price has come down as the market has. Our capital generation has been good, and I think that we feel well situated for share repurchase as part of our overall capital deployment this year, which puts us back in that $300 million-$600 million range. But it's still early in the year, and we'll see how that plays out. But share repurchase will be part of our plans. So no leaning toward low end, high end, just in terms of what you know today? I wouldn't give that to you yet, Tom, but it's only because we're just starting the year, and we've been blacked out, so we'll start buying back stock when our windows open back up. Okay, then just a related follow-up. Is another potential use, and I think you've already commented on long-term care, and that kind of is what it is, but the other thing I've been looking into is just IDI and whether or not that might be another use, just considering, I think that's just more of an interest rate issue as opposed to any claims issue. But is that particularly, I think it's Northwind, which is the larger Closed Block of IDI, is that a potential use or need for capital if you look out over the next year or two? Yeah, Tom. On the IDI block, the Closed Block, I would say to take you back, we haven't really talked as much about it lately because as we structured that block and as we've seen how that's returned over the last seven years since we went into the Northwind structure, it's actually done quite well through a pretty rough period of time. It still continues to look that way, so I don't foresee anything that would cause us to put capital into that. One of the things you might be looking at is in the fourth quarter, we had some miscellaneous income that came in in that area. As opposed to letting that flow through, we actually increased reserves for a similar amount. But that's a one-time thing. When you look at interest rates specifically, what we've got in that block is primarily the cash flows that are coming off of our portfolio are paying claims. So there really isn't any interest rate risk. It's a very well-matched book. You might get the stray item that happens around miscellaneous income, but in no means does that denote that we wouldn't have a capital call as a result of that. Okay, and then you guys don't disclose it anymore on legal entity basis. You give consolidated statutory numbers. But previously, you had showed Northwind legal entity results, and that last quarter, I believe, had lost money. Can you comment on what that did this quarter? Whether it's break even, lost money, quantum of either? I actually can comment on that. I'd tell you it has been volatile, but there's nothing in our results, and I don't have it in front of me, but I think that there's nothing in our results this quarter which would denote anything that I see challenging within the IDI Closed Block. Okay, thanks. Rick, if you step back, actually look at Northwind over a longer time horizon. We've paid off roughly half of the outstanding debt associated with Northwind. The cash flows from that block have actually, when you look out over that period of time, have come in remarkably close to what those expectations were. Again, I just ask us to step back from time to time and look at that over that period of time. That transaction's performed very much in line with what we expected. Yeah. We can see volatility quarter to quarter, but I think the bigger thing is that over the long term, it's performing as expected. Again, just to reiterate, that's not a business or not a legal entity that you would expect to be a call on capital over the next few years. That is correct. Actually, Tom pulled it up. It actually made $10 million this quarter. You are going to see a little bit of volatility around that, but I think it is fine. Okay, thanks. Thanks, Tom. We will go to Ryan Krueger of Dowling & Partners. Hey, good morning. Good morning. I just had a quick one. When we look at the Closed Block segment, the $2.7 billion of GAAP allocated equity, how much of that is long-term care versus IDI at this point? Tom? Ryan, it's Tom White. Roughly of the 2.7, it's in round numbers about $1.3 billion for the closed disability block, $1.3 billion for long-term care, and the rest is a collection of other smaller runoff businesses. Okay, great. On the long-term care piece, specifically, as the block ages and reserves increase over time, as a result, should we expect the allocated equity to grow, or how should we look at that? Go ahead. Jack, go ahead. I would expect as reserves grow, the allocated equity is going to grow. It will mature. It should be funded out of the premiums, the reserve piece. There is a little bit of a bubble yet to come. I think the other dynamic going on in the overall block is as that's happening, the disability block, as it continues to shrink down, is shrinking and there's capital being released as a result of that. But I think, as you said, Jack, when you take the two together, at least for a couple of years, probably more of an increase as a block, but we're getting to that point where actually it starts to then flatten out at that point. Okay, great. Thanks a lot. Thanks, Ryan. Go next to John Nadel of Sterne Agee. Hey, good morning, everybody. Just wanted to come back to this idea of statutory earnings being at a slightly elevated pace and maybe get at it a little bit differently. Fourth quarter, I think, we've seen from just about every group insurance type company so far that results on the underwriting side have been pretty favorable. On an overall basis, especially if you just sort of strip out the Closed Block and look at your ongoing businesses, on an overall basis, was fourth quarter for Unum better than a typical seasonal good result? Yeah, John, this is Rick. If you think about this quarter, we actually had a good fourth quarter last year, and we can have good fourth quarters, so I don't know if I'd take that. I look at it more from a full-year basis, was actually quite strong. Yeah. Okay. We saw a little bit of seasonality improvement in the fourth quarter. We did last year as well, but I'm focused more on the full-year type numbers. Yeah. Okay. On a full year basis, again, just to clarify, maybe a little bit to the good on the underwriting side on a full year basis. I think that is right. I think we have been saying consistently all year long, we have seen Yeah good underwriting results across all of our businesses. Then, just wanted to think about this. Obviously, you pointed out lower miscellaneous investment income in the disability line in the U.S. On an overall company sort of consolidated investment income basis, was miscellaneous income or maybe net investment income overall, was it low, in line, maybe slightly above? Can you characterize that? Yeah, I think it was actually right in line, John. Okay It actually reported a little bit higher, but we mentioned the Closed Block and how some of that went straight to reserves. So if you net that out, we are kind of tracking right in line with what we usually get on average. Perfect. And then last one for you is just, obviously so much to learn over the next whatever the next intermediate term around healthcare exchanges, how the market shifts a little bit. I am interested, you guys obviously have a great brand in the sort of broker space. Are you seeing any reason to invest in branding more from a retail perspective as you look at the opportunity and the getting closer to the individual employee? Actually, John, let me ask both Mike and Randy to speak to that. But I think as you heard us talk even on the call this morning, one of the themes that we began to introduce quite some time ago was really much better understanding of the consumer, what drives consumer behaviors and things like that, and from which then we can make informed decisions, I think, about what you just said. And maybe Mike just talk a little how that is relating to Unum US, and as I said, I think Randy, just talk a little of how that is relating to our Colonial Life operation. Sure. Thank you. Like you said, a lot to play out. Where we sit today, we look at it and say we see the employer very much involved and their advisors. I think you rightly call out the Unum and Colonial Life brands as strong with the distribution, also strong with employers and professional benefits decision-makers. That remains a strategic advantage for us. Then we stack up investments that we can make. Certainly brand at a consumer level is an investment that we can make. Actually, we are prioritizing investments in product and capability over that. As we sort of think about what is the next dollar and where is it going to go and where is the best returns, we feel quite strongly that having better technology, better education, and better product, which is where we are making the majority of investments, is still the best ROI for us. Okay. Randy, would you like to add anything to that, Randy? Yeah, Tom. I would emphasize what Mike said about the employer still being in the driver's seat. Our promotional and advertising efforts are going to stay focused at that employer decision maker. That being said, there is going to be more branding type emphasis at the consumer level as time goes forward. We are in the process of kind of refreshing our brand here at Colonial Life at the present time, and we will be emphasizing that more strongly in the marketplace going forward. Okay, perfect. Appreciate it. Thanks very much, guys. Thanks, John. I think with this point, we have time, I think, Tom, for one more question. One more. Good. We'll go to Yaron Kinar of Deutsche Bank. Hey, good morning. I just made it. Question on the holdco liquidity. I think that last year going into 2013, the target was one to two times interest and dividends, and it seems like the $500 million target for this year comes in a little below the top end of that range. Curious as to what drove that lower. Yaron, when we look at the holdco liquidity at 514 where we ended the year, we actually were in the $500 million to $800 million range. So we're actually within the range as we looked at it going into last year. A couple things to think about with holdco liquidity. One is, we had talked in the past about one to two times coverage, and that includes all cash uses, dividends, as well as interest payments. As we look at it now, one of the things we did last year, which was we put on a credit facility as well for $400 million. So we have significant amounts of liquidity, that which sits in cash and that which is untapped in our credit facilities as well. I think that probably is fine to drift down below that two times. Although, we kind of look at that as part of our overall sources in terms of when we think about capital deployment. You'll see that fluctuate, and I think the plan we put out there for next year would actually be in a similar range of the $500 million to $800 million. Okay. Is there some sort of rule of thumb you could offer as to how to think of a possible margin impact of decreasing retention rates and maybe higher sales? Not quickly. Yeah, no. It's a broad question. Yeah, we obviously throttle all of our businesses. Participation rates and voluntary plans, Mike, I think, and Randy, are incredibly important, so we look at it very carefully, but I'm not sure there's a good rule of thumb actually on that. Yeah, I think in general, we look at if the question is the persistency versus new sales trade-off, what we'd say is on the persistency front, where we've seen a point or two deterioration of the margins of that are significantly below the block. So it actually has, not a dampening, but actually an increase in the profitability of that block of business. And in terms of new business coming on, we're pretty disciplined about the levels that we bring it on. So I wouldn't anticipate material changes in margin based on the mix between those two factors, at least in group insurance for now. I would just add, too, I think we spend an awful lot of time on persistency because obviously part of the challenge is to obtain a new customer, but actually, frankly, most importantly, is keeping the right customers. And so when Mike talked and Randy talked about the investments we've made in sales with service infrastructures and people and training and things like that, which by the way, we've been through some significant amounts with both of those organizations already this year. A big reason to do so is because it's not just getting the sale, but actually the more we can keep business, that's an incredibly important part of our ability to generate margins and consistency of our financial performance going forward. So that's very prominent, but there's just no rule of thumb, unfortunately, I'm afraid, that we could share. Okay. Fair enough. Thank you very much. Well, again, thank you all for taking the time to join us this morning, and we look forward to seeing many of you at our various upcoming investor conferences and events over the next several weeks. This will complete our fourth quarter 2013 earnings call. Again, thank you very much. That does conclude today's conference call. Thank you for your participation.