Earnings Call: Q3 2013

Nov 5, 2013

Good day, and welcome to the Unum Group third quarter 2013 earnings results conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to the Senior Vice President of Investor Relations, Mr. Tom White. Please go ahead. Great. Thank you, Jason. Good morning, everyone, and welcome to the third 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 Form 10-Q. The 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 also on the website in the Investors section. Participating in this morning's conference call are Tom Watjen, the President and CEO, Rick McKenney, Executive Vice President and CFO, and Kevin McCarthy, Executive Vice President and Chief Operating Officer, 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, everyone. The third quarter was another strong quarter for the company, with growth in operating EPS of 6.3% to $0.85 per share and an increase of 10.4% in book value per share, excluding AOCI, to $31.63. Let me touch on a few items before turning things over to Rick. First, I continue to be very pleased with the strength of our core business operating results. Unum US had another very strong quarter overall, with profit margins for this business segment continuing to improve as we stay focused on disciplined underwriting, pricing, and risk selection, often at the expense of top-line growth. These strong results were driven in part by another quarter of solid risk results in our group disability line, where the benefit ratio improved again to 82.9%. Colonial Life's operating results remained strong as well, with solid risk results and sound expense management driving another good quarter for this business. Lastly, while still below our long-term expectations, Unum UK showed strong improvement over the third quarter of last year, as the aggressive group life repricing and repositioning actions we began taking late last year have begun to have a favorable impact on our results for that line of business. I continue to feel very good about the results of our core businesses, where our disciplined approach to the business has resulted in consistently strong margins, cash flow, and operating return on equity, which was 14.5% for the quarter. Secondly, our Closed Block segment was also in line with our expectations this quarter. As we have said in the past, this segment, particularly the long-term care product line, will continue to be an area of focus for us for some time to come. I mentioned last quarter that we had taken steps to devote additional resources to this critically important area, and I can see early signs that the benefits will derive from this increased management focus on this challenging line of business. As Tom White mentioned, Jack McGarry, the CEO of this business, is with us today on today's call and available for your questions. Third, while it continues to be a challenging environment to profitably grow our business in the U.S., we saw improved sales trends this quarter within a number of important segments of our businesses. Most notably, LTD sales increased 9% in Unum US, while core market sales in Unum US, which includes our STD, LTD, and group life lines of business, increased 2%, and voluntary benefit sales in Unum US grew 6%. We also saw sales in Colonial Life increase by 1% in the greater than 50 life area of the marketplace. As we've discussed last quarter, the biggest challenge for Unum US and Colonial Life remains in the very small end of the market, which we define as the less than 50 life employer. This market segment continues to be impacted by the soft pace of economic growth, the political environment, and distractions brought on by the implementation of healthcare reform. While we believe these headwinds in the U.S. are likely to continue, we expect to continue to see pockets of growth, and we remain committed to maintaining our disciplined approach to the market and not chasing business, but instead protecting the strong margins and returns we have worked so hard to build in our core business segments. Rounding out my review of sales trends, I'm also pleased that we're seeing somewhat better pricing trends in the U.K. market, where sales and local currency grew by just under 4% for the quarter. Moving to investments, I continue to be very pleased with our investment results, including the credit quality of our portfolio. Interest rates and investment yields remain a challenge, but we continue to maintain our investment quality standards and remain focused on raising prices in those products that are most interest rate sensitive. Our capital position remains very strong, with our continued solid statutory results and cash flow providing us with significant financial flexibility. Financial flexibility which not only allows us to continue to repurchase stock, but also, as Rick McKenney will touch on further in a moment, financial flexibility that also allows us to evaluate alternatives for moving our Bermuda-based insurance subsidiary to the U.S. and still operate comfortably within the capital outlook we've given you last year. We closed the third quarter with a risk-based capital ratio of 397% and a holding company liquidity position of $678 million, both on the higher end of our target range for 2013. To summarize, before we move to a more detailed discussion of the quarter, we're pleased with the overall results we saw in the third quarter. The current business environment presents top-line growth challenges, but I'm very encouraged by the growth we did see in certain of our markets. Our risk results remain very strong, and we're committed to maintaining our disciplined underwriting, pricing, and risk selection practices to protect the solid margins, returns, and cash flow that we have consistently produced in our core business lines. I believe that this strategy, along with our strong brand and market position, continues to position us very well to both operate effectively in a still difficult environment while capitalizing on the long-term growth opportunities we continue to see in our marketplace. Now I'll turn things over to Rick McKenney for a review of our operating results. Rick McKenney? Great. Thank you, Tom Watjen. As Tom Watjen mentioned in his comments to the third quarter, we reported operating earnings per share of $0.85, an increase of 6.3%, which brings our growth in operating EPS to 6% for the first three quarters of the year. As a result of this, we're refining our outlook for the full year to the higher end of the 0% to 6% range as we look to the fourth quarter. Again, in the third quarter, across the company, we continue to see positive trends. Drilling in a little bit deeper to the results, first on Unum US, operating earnings increased year over year with favorable experience in the group disability and group life and AD&D lines, offsetting slightly lower earnings in the supplemental and voluntary lines. Focusing first on our group disability business, we continue to perform very well with the benefit ratio at a tick under 83% for the third quarter of 2013, which compares favorably to an almost 85% in the year-ago quarter and 84% in the second quarter of 2013. The underlying experience continues to be strong, with stable to lower overall claim incidents and continued strong claim recovery performance. We did adjust discount rates as the interest reserve margins remains comfortably above our target range and consistent with the margin in the year-ago quarter. The profitability of this business also continues to benefit from the pricing discipline we show on new sales and renewals. We're very pleased with the performance of this business and the strong returns it continues to produce. Group life and AD&D also produced good results for the quarter, with operating income increasing by 4.3% to $58.5 million. The benefit ratio was steady in the quarter at 71.5%, reflecting favorable underlying risk experience. Finally, in Unum US, the supplemental and voluntary line reported operating income of $82.7 million for the quarter, down from the $85.7 million in the year-ago quarter. The benefit ratios for the primary lines of business were slightly higher from the year-ago results, but very much within our expectations as the underlying risk results remained generally stable. Persistency trends also tracked with our expectations in the third quarter. Moving to Unum UK, operating earnings were £20.1 million for the third quarter, improved from the year-ago quarter, which was £17.3 million, but off slightly from the second quarter of £21.8 million. We are pleased with the overall progress we are seeing in our U.K. business, particularly with the repricing and repositioning of the group life block of business. In addition, the underlying claim experience for the group life business improved in the quarter. We did have softer sequential results in the group disability product in the quarter. However, this is not too surprising, given as historically, we are subject to seasonal volatility with disability claims in the third quarter. Overall, for the U.K., this quarter's results are within our anticipated range, and we continue to make solid progress on restoring the high margin expectations we have for this business. Colonial Life continues to produce solid, steady results with operating income at $69 million for the third quarter. The benefit ratio is slightly higher at 53% for the quarter as we experienced slightly unfavorable risk experience in the life product line and the accident, sickness, and disability product line, which offset improved claim experience in the cancer and critical illness product lines. Overall, the underlying profitability of this business remains strong. Finally, the Closed Block generated operating income in the third quarter of $25.7 million, consistent with the year-ago quarter. The slight improvement in the interest-adjusted loss ratio is attributable to a lower average claim size in the individual disability line and more favorable development in the active life reserves in the LTC line. In addition, the Closed Block had slightly less for miscellaneous net investment income in the third quarter relative to both the second quarter and the year-ago quarter. Overall, the results of the Closed Block this quarter are also in line with our expectations. Wrapping up the earnings picture, I would quickly highlight an item related to our tax rate. There was an income tax rate reduction in the U.K. enacted in July, and we adjusted deferred tax assets and liabilities through income on the date of enactment of that change. For the third quarter of 2013, this resulted in a $6.3 million tax benefit. This lowered our effective tax rate by about two percentage points. You will recall that in the year-ago third quarter, a similar U.K. income tax rate reduction was enacted, which resulted in a $9.3 million benefit. Now let me move to our discussion of our sales and growth trends. We saw some challenges in the first half of 2013 for new sales, driven in large part by the pace of economic growth, the political environment, and disruption in certain sectors of our markets from healthcare reform implementation. However, we did see good progress in the third quarter. In Unum US, as Tom highlighted in his introductory comments, we saw improved sales trends in the core employee benefits markets and in voluntary benefits. That combination of businesses, the focus areas of growth for Unum US, produced sales growth of 4% in the third quarter, following a decline of almost 18% in the second quarter. Persistency trends in our Unum US lines remain in line with our expectations, helping to produce positive premium growth for Unum US in total. I would add that we continue to see little benefit to premium income from the overall economy and employment trends on our business. In the U.K., sales were up by 3.7% this quarter in local currency. Disability sales in the core market showed an increase year-over-year, while sales in the group life market increased due to higher enrollments on existing cases. In short, we were very pleased with the underlying quality of these sales. Persistency in the U.K. continues to be impacted by the pricing actions we are taking, particularly in the group life line, with the lapse of an unprofitable large case during the quarter helped contribute to a reduction in persistency to 65%. These are all driven by actions that we put in place to improve the profitability of the book, and it is trending as we expected. Persistency in the disability line remains relatively stable at 82%. Finally, at Colonial Life, we saw aggregate sales down 3%, but premium income grew 3.2% for the quarter and 3.5% for the first nine months of the year. The decline in sales is primarily attributable to the ongoing slowdown in activity in the small end of the market. This is particularly true in the less than 50 lives market, where the most disruption seems to be going on from the implementation of healthcare reform. In fact, we're seeing new account activity down by as much as 28%. Despite this trend, we did see better sales results in other parts of Colonial Life's markets, with large case sales, which we define as greater than 1,000 lives, up by 17%, and public sector sales up by about 2%. In general, we're seeing a continuation of the same trend of fairly stagnant new account growth offset by better sales activity with existing customers. Persistency remains steady with last year's levels. Quickly moving on to the investment portfolio, the credit quality of our portfolio remains in excellent shape, and the watch list of potential problems remains quite low. Treasury yields and corporate bond spreads were more favorable during the early part of the quarter, and since our investment team was more active putting money to work in the early part of the quarter, we were able to achieve higher new money yields for the third quarter than the yields we realized in the first half of the year. Fortunately, by the time those higher rates reversed themselves in the final weeks of the quarter, we had put most of our cash to work. In addition, during the early weeks of the third quarter, we sold approximately $400 million of our lower coupon corporate bonds, and in a tactical trade, reinvested into higher yielding mortgage-backed securities and corporate securities to take advantage of the move up in interest rates at that time. This activity resulted in a net realized investment loss, which came solely from interest rates and not credit. The trade enabled us to slightly enhance the investment yield while improving the credit quality of the portfolio. Moving into an update on capital management, we continue to see very positive trends, which produce a strong overall capital position. Statutory net income remains healthy at $153 million for the third quarter and $500 million for the first nine months of the year. The weighted average risk-based capital ratio for our traditional U.S. life insurance companies was approximately 397% at the upper end of our target 2013 range of 375%-400%. Holding company cash and marketable securities was also up, totaling $678 million at the quarter end. I would also note that during the quarter, we entered into a five-year credit facility of $400 million, further solidifying our capital structure. Share repurchase activity totaled $75 million in the quarter, which brings the total on a year to date tally up to $269 million, or 3.6% of our outstanding shares. As we approach year-end, we're evaluating various options for our Bermuda-based insurance subsidiary. As a reminder, we've had a Bermuda entity since 1996. In this entity, we've reinsured certain long-term disability and long-term care blocks. As we look at it today, it does not provide the benefit worthy of its structure. Therefore, we have a goal of moving the business onshore under a domestic regulator in a subsidiary with a financial profile consistent with our traditional U.S. insurance companies. I would stress that the move would not have an impact on our consolidated GAAP fourth quarter earnings. We expect to keep our year-end capital metrics within the target levels we previously communicated. That is RBC in the 375%-400% target range and holding company liquidity in the target range of $500 million-$800 million. I would also stress that this move would not preclude us from repurchasing shares in the fourth quarter. Right now, we're pushing to complete our work before year-end, and we'll update you with our progress at our investor meeting that we have scheduled for December 16th in New York. We look forward to taking you through this as well as our outlook for 2014 at that event. Now I'll turn my comments 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 third quarter. We continue to generate solid profitability and returns by focusing on the basics, disciplined pricing, underwriting, and expense management, along with a commitment to sound risk management and managing our investments and capital. That focus on the basics will not change. Now, this completes our prepared remarks, and operator, let's move to the question and answer session. Thank you. If you do wish to ask a question on today's call, you may do so by pressing the star key followed by the digit one on your telephone keypad. If you are using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that's star one to signal for a question, and we will take our first question from Jay Gelb with Barclays. Thanks, and good morning. Good morning. A couple follow-up questions. The move for the Bermuda operation back on shore. How much capital do you feel that will deploy in the course of doing that? Certainly, Jay, this is Rick McKenney. Just let me answer a couple things. One is we're still working through the details, so we brought that out to you today. We do expect to have more details around that by Investor Day, but we're still working through the structure. How I would highlight that is actually we're going to be within the ranges of capital that our outlook that we really put out to you over the course of this year. So we feel good about that and how we take it out. As I mentioned in my notes, we'll still have the ability to buy stock in the quarter and get to those levels. So I think this is going to be a good move for us, and we'll give you more details as we get to Investor Day and the structure solidifies. On that topic of buybacks, it's been running $100 million a quarter in the first half, down to $75 million in Q3. Just trying to get a sense of what a decent run rate is on maybe a quarterly or annual basis absent that shift. Go ahead, Rick. Yeah, I'm sorry. Yeah, no, let me take you through how we're thinking about our capital. First, I'd start out with saying our capital generation this year has been excellent. We mentioned even through three quarters, $500 million of statutory earnings, which is better than I think we've anticipated. It's certainly better than our run rate that we've had. As we've talked about before, we think about capital deployment in many ways in terms of what are the best uses of our capital as we take that out. We've certainly done that through share repurchase, and that is an important piece of how we deploy capital. But I'd also take you to other things that we've done in the course of the year, retiring debt in the first quarter, solidifying our pension position in the second quarter. Now we're talking about re-domesticating our Bermuda business, which, as I just mentioned in my last comments, we'll adjust some of that capital that we take in. But we think those are all good uses and certainly, we'll continue to do that. Specific to share repurchase, I think that as we mentioned in our comments last quarter, there are a lot of factors that go into how much stock we will buy in a given quarter, when we will do that in the quarter, and how we'll go through. So I think that those still hold, but I'd take you back to how much capital we're generating, and we certainly will put that capital to work on an active basis. Okay. Then finally on the strong recovery in group LTD sales in the U.S., what's changed relative to the prior two quarters? I know a significant focus by some benefit managers at large corporates on the looming Affordable Care Act implementation had been a drag in the first half. Did that ease off in Q3? I am trying to get a better sense of what changed. Yeah. Jay, let's ask Mike Simonds just to speak to that. Mike? Yeah. Thanks, Tom. Jay, I'd say the headwinds that we've been feeling through the first half of the year have definitely still out there in the market when it comes to healthcare reform. That being said, we did see that abate just a bit as a number of healthcare decisions, particularly for larger employers, get made around mid-year, so they can now turn their attention a bit to some of our lines of business. So we were encouraged to see the increase in disability. We're encouraged to see the increase, as Tom mentioned, in our core and in our voluntary benefits sales. But we're still cautious around the outlook given that employers still have a great deal to work through, particularly in the small end of the market. With fewer prospects out there, fewer employers looking to make changes, we continue to see a pretty aggressive pricing environment as carriers are looking to meet sales goals with fewer prospects available. Yes. If I can add to Mike's comments, too, I think he said it well. I think the big challenge for us is still on the small end of the marketplace. I am not sure we saw a real swing in sentiment over the course of the last quarter. We are still cautious as we look forward, and that obviously affects both the sales activity within Unum US, but also in Colonial as well. Again, there were some encouraging signs, but as you see, we are not going to deviate from that more disciplined approach. If the business is there to be done at a profitable level, we will certainly be getting more than our fair share, but if not, we will sit on the sidelines. Again, I do not think there has been a real fundamental shift in the quarter, especially amongst that smaller employer piece, which is affecting both Unum US and Colonial. Okay. That makes sense. Thank you. Thank you. We will take our next question from Erik Bass with Citigroup. Hi, thank you. Eric. Just one follow-up on the Bermuda captive, and just how are you thinking about kind of the long-term care statutory reserves? Am I correct that as part of the re-domiciling process, you might have an opportunity to increase those reserves? Rick? The way I would answer that for you, Erik, is that when we bring it back on shore, we are expecting that we will have a company and a business that is actually similar in its reserving and capital processes that we have in the U.S. That is a key part of that, and we will take you through the details on that. But it will look very similar to our other practices we have for other U.S. businesses. Okay. Would that be a higher level of reserves than today on a statutory basis? I think, Eric, that gets you to some of the discussion around capital we just said. We are going to have to bring those details to you on Investor Day. I think that those will all be coming into play in terms of how we look at what reserving levels look like, as well as what capital levels look like. We will give you more of those details at Investor Day and quite frankly, when we are done with the process, which we are not done yet. Okay. Rick, if I can add to it. Again, I think you said it before, but this is our decision to do this. This does not have to be done. I think as we looked at just our own capital structure, the quality of our capital, looked at obviously some of the themes that are happening in our industry, we just think this is the right time to entertain this. Fortunately, we have the financial flexibility to do so. I think, as you said, Rick, when the dust settles, we will have this back on shore at a level most likely with reserves and capital that are equivalent to the other parts of our business. Okay, thanks. You mentioned the increased resources that you have allocated to the Closed Block. Can you just talk a little bit more specifically about what you are doing, particularly for the long-term care block? Yeah. Let me turn things to Jack, but just to remind others, what we did talk about last quarter was the fact that this Closed Block, and especially the long-term care component of the block, is going to be with us for many years to come. This will be an ongoing focus that we're raising our focus, frankly, to be sure that we're managing that business for the long term. We appointed Jack McGarry to run that business, and Jack McGarry has certainly added to his resources. Maybe, Jack, take people through a little bit some of the early things that you've been involved in. Yeah. A big piece of what we've done with the resources is we've really consolidated resources around long-term care. We're running it as a strategic business unit. Long-term care currently has basically all of the functions within it that affect its outcomes. In addition, we've significantly strengthened the actuarial resources that we're bringing to bear on long-term care. As many of you may know, I'm an actuary running the long-term care line. We have selected some of our best actuaries in the company to come into the unit and work on reserving, repricing, and capital management. We're underway. It's going to be a process in terms of building the tools and doing the analysis, but we feel like we're off to a great start. That really is the focus of the unit. Continue to do the operating things that continue to produce stable results, but a big focus on reserving and financial modeling, a big focus on rate increases and making sure that we get those in the best way possible, and then the final focus on capital management. Thanks. Just final, on any updates in terms of how on kind of the repricing, the kind of the environment for getting rate increases through on long-term care? Yeah. Actually, for the last couple of quarters, I think we've been saying that we believe the environment's getting better for rate increases. We've had great success with our last round of rate increases. We are above kind of our plan level that we had built into our reserves previously. One of the things that's happened, actually, is that there's been some movement at the NAIC, particularly of states that have awarded rate increases, understanding the inequity of them awarding rate increases where other states haven't. There's begun to be some internal pressure among regulators to have a more consistent approach to rate increases, and we think that's been a very positive development. We're very optimistic about the next round of rate increases that we're working diligently to get out there, that we'll continue to have good success. Great. That's helpful. Thanks for the comments. Thanks, Eric. We'll go next to Suneet Kamath with UBS. Great. Thanks. Good morning. Couple follow-ups on UPIL. Rick, in your prepared comments, you said that part of your decision to bring it onshore was that it was not producing the desired benefit that I guess you were looking for when you originally set it up. Can you just talk a little bit about what you had expected it to do and why it wasn't producing what you thought it would? Sure, Suneet. I'll take a shot at that. I think that in my comments, I also mentioned it was set up in 1996, so I don't have a good insight in terms of those details. But when you look at it, where it is today and the environment that we're in today, there is benefit there in a sense, but I think from the way we look at, as Tom mentioned, the quality of capital, the structure, the simplicity of the structure of the company, those benefits are outweighed by the simplicity we can have by having it onshore with a similar reserving and capital process we have for the line. So I think that's when we get to it's not dollars and cents benefit. I think it's much more about it had outlived its usefulness as a structure. Okay. I guess as we think about your capital generation model, the slides that you typically show us excluded, I believe, UPIL because it was just the Unum US businesses. So I'm assuming that once you bring it onshore, we're going to have to roll in what is now UPIL into that capital generation model. I think on a year-to-date basis, UPIL is losing maybe $30 million, $40 million of statutory earnings. So my question is, am I right in terms of rolling it in and how should we think about the impact on that capital generation going forward once it's brought onshore? Sure. I think we're getting a little bit out there, which is some of the things we'll probably talk to you about at Investor Day. But I think that when you think about the consolidation of it, one, the UPIL results have a lot of factors that go into it. It is a reinsurance entity, so there's a lot of timing differentials, different treatments of how investment income, capital gains, and losses are treated. So there's more noise in there than it would be actually onshore. If you think about that loss, I think if you're looking at $30 million relative to the overall capital generation, which has been $500 million year to date, it's somewhat immaterial, so I probably wouldn't focus on that too much. But we'll give you better insight to that as we get to Investor Day. Okay. Then my last question on this was, I just want to follow up on Erik Bass's question because I think where he was going was to try to understand how this change might impact your prior discussion of statutory reserves on long-term care. If I go back to last quarter's call, I think you'd originally talked about a sort of a 3- to 5-year timeframe before you'd need to take a charge with a starting point of 2011. I think you said with the improvement in rates, maybe we're closer to the 4-year timeframe. So I guess my question, following up on Erik's question was, does this decision alter that guidance from a timing perspective or from an order of magnitude perspective, and I think you've talked about a $250 million after-tax kind of charge. So I know you're saying this is your decision to do, but how does that affect the prior guidance? Can we still rely on that or is that something we'll have to address? Yeah. Certainly, Suneet, and let me clarify. We've never talked about a $250 million charge related to anything, and certainly aren't going to talk about that. What you're talking about is GAAP concepts. So when you look at the reserves that we've talked about in the past, and what we're evaluating is purely GAAP. This has zero impact in terms of our GAAP processes. This is purely a structure, a capital structure, a statutory structure that we're dealing with here. So those two are not correlated things in terms of one impacting the other. They're very different things. As I said in my comments, to be very clear, this has no impact on U.S. GAAP, the structuring that we're doing here. Yes. Okay. All right. I'll follow up. I thought that now that GAAP and STAT LTC reserves were kind of the same number, that changes in one would probably drive changes in the other. But I guess that's what you're saying is not the case? That's not the case. I think the build-up of the reserve basis and how they move can be very different and have been very different. I think that was more of a guidepost to say where they were, as opposed to one change will drive another change. That's not the case. Okay. All right. Thanks. I'll follow up. Thanks, Suneet Kamath. We'll go next to Yaron Kinar with Deutsche Bank. Morning, Yaron. Good morning, everybody. Maybe one other attempt at the Bermuda restructuring and the kind of capital deployment question. If I hear you correctly, cash generation is tracking a little higher than you estimated at the beginning of the year, and yet guidance for share deployment has come down a little bit. Would it be fair to assume that that gap of, call it maybe $150 million, is roughly what you expect to invest as you think of re-domesticating that business unit or that subsidiary? Yeah. Well, let me say I appreciate you trying to work backwards into the details, but until we actually get to the year-end, we still have more details to work through. We'll give you a lot of those movements as we get there. But when you think about capital generation and deployment, I want to reiterate, capital generation has been quite good, and we've been very active deploying capital, including, I don't want to lose the fact we bought back $75 million in the quarter. I also mentioned in my comments, we expect we'll probably buy back shares in the fourth quarter as well, depending on all the factors, including, whereas we mentioned last quarter, where the price is, what's going on overall in the company. We will be buying back shares in the fourth quarter. When you get through all those different pieces, we'll give you what we're doing as part of Bermuda structuring. We'll also give you a view in terms of where we are from a capital deployment perspective, both generation-wise and what we expect to put back through multiple channels. Okay. I guess I'll just have to be patient one more month. If we switch over to sales for a minute, if I understood the comment to Eric, it was that there was some uptick in kind of the focus from management teams on benefit purchasing in the second half of the year. Do you think that's a temporary issue or maybe are we now past the most severe pressure period that we saw kind of the first half of the year? Mike, why don't you take that one, please? Yeah, sure. Happy to do it. I'd say we did see a little bit of that, particularly in the over 50 life market where think about employers having a few more resources to be able to sort through decisions on multiple fronts. So we started to see that just a bit. I do expect that with things like the employer mandate being pushed out a year, that in the coming quarter and in actually, frankly, the next few quarters, we'll continue to have to swim upstream a bit as employers and their broker advisors help them sort through their ultimate healthcare decisions. That being said, what I would say is what's coming out of those healthcare decisions continues to be a couple of important things for us. One, the employer remaining very engaged in the overall benefits process, and the other being a constant sort of push towards more consumer-driven benefits with more employee engagement. That's a trend that we started to see six or seven years ago that's been the basis of most of the investments we've made in our capabilities is this idea of choice products, enrollment education and communication. So even as I think we're going to continue to see some short-term headwinds, it plays into a longer trend that I think we're very well positioned, both actually the Unum and the Colonial Life brands here in the U.S. Okay. Thank you very much. Thanks, Yaron. Sure. We'll go next to Mark Finkelstein with Evercore. Good morning, Mark. Good morning. Maybe one last crack at the Bermuda situation. If I just look at it, nothing economically is changing. The risk is the same, kind of how you have to fund it really doesn't change that much other than maybe just some cosmetic impacts of capital and reserving, et cetera. But just in that context, should we be thinking about maybe some easing of kind of holding company cash positions or even RBC down the road? Or should we be thinking about historical levels of margins above margins that we've been talking about? Great. Yeah, certainly. I'd like to take that one on Mark in terms of how we're thinking about this longer term, because I think that when you evaluate this structure, and as we talked about the simplification that we'll get is bringing this back onshore, it does give better clarity in terms of the different pieces that we have out there, the cash that we will hold as a holding company. I'd throw into that as well the credit facility that we just put on as well as our RBC levels. So all those come into play and as we look forward, and I think having that clarity and taking it through that is actually going to be helpful as we get out into 2014 and beyond. Okay. So no real clarity at this stage on whether we can assume reductions or changes in how you've been thinking about it. Not in and of the structure, and I think that's more of an outlook type conversation that we'll have in December. Okay, fair enough. You should have some clarity, I think, on January 1 renewals. I'm just curious in the light of maybe the prior conversation about how employers are looking at the situation. Are you seeing anything that fundamentally changes your outlook on what persistency is going to look like as you head into 2014? I think that's director Gio. Sure. Yeah, thanks, Mark. We do have a pretty good line of sight, particularly towards the larger end of the market, where employers are making decisions with a bit more lead time for implementation. I'd say, on balance, actually feeling pretty good. As you know, we've been consistently over the last couple of years, looking to modest rate increases in the 5%-8%, mid to high single digit ranges. We're having good success with that placement. Persistency is tracking well within our expectations going in, so feel very good about that. That's sort of the flip side of the malaise of healthcare reform is, when employers are sorting through healthcare decisions, it does add to the stickiness of existing programs. So it's helped facilitate, I think, a pretty successful renewal approach here. I guess just maybe pushing on that a little bit. If I think about what this line might look like when we get to Q1 2014 earnings, you've been kind of trending in that high 80s percentile. Based on what you know today, you're not seeing anything that would fundamentally alter that to the downside. In terms of persistency? Correct. Yeah. No, I think that's reasonably safe. There's still a lot of work to be done in our core markets. That's a big business for us. We've got our heads down working closely with brokers and with clients. Service levels are very strong for us right now. That usually correlates pretty well with strong persistency. We're optimistic, but also want to be clear that we've got real work to do in placing January renewals yet to go. Okay, fair enough. Just one final quick question. U.K. persistency on Group Life, kind of been 65%. Looks like if I average the second quarter and the first quarter, you're kind of in that level for the second quarter as well. I know you're going through a pretty exhaustive Group Life repricing process. Does that get better from here? How do we see that persistency level playing out? Because interestingly, you actually had better sales in Group Life in the U.K. as well. Yeah, I was thinking, Peter, maybe you just step back a little bit too and just remind everybody what your renewal program and repricing program is, what you're undertaking actually at this point. To Mark's last question, too, just where you're seeing the sales before we get into the persistency. Yeah, thanks, Tom. If I just take the sales, first of all, just taking the Group Life sales, they've actually come through selling to basically expanding coverage with Group Life schemes. Basically, schemes we've been keeping. Basically, auto-enrollment, which is a pension change in the U.K., means that more people are taking up pensions. We're seeing an uptick in Group Life sales off the back of that. So pretty comfortable about the profitability of the new business we're writing on the Group Life schemes, the new stuff coming in. Switch business does remain competitive, so we haven't been successful in the large case market. I think that's going to continue for a little while. We're waiting for some of our competitors to digest that business and as they have indigestion problems, perhaps that'll come back at a more amenable economic return from our perspective, but that'll take a while to go through the system. In terms of renewals, thanks, Tom. What we're doing there is we're putting double digit rate through the book. So that is either getting the rate through, so we're repricing that to our appropriate hurdle returns, or we are losing, particularly at the large end, some pretty large schemes. Again, to our view, it's pretty irrational pricing in general that's taking that. But our intention really is to come out of this with a smaller Group Life book, but a more profitable Group Life book. So that would be the intention. I think the persistency you're seeing at the moment will continue this year, and we'll see a bit of an uptick next year because we've got through more of the books. But it's going to remain at lower ends of the long-term range through 2014 as well. Okay. Thank you. Thanks, Mark. We'll go next to Jimmy Bohler at JP Morgan. Hi. On the buybacks, I remember beginning of the year, you had mentioned something around a $500 million number, and you bought back a decent amount of stock, but still lower than what you had expected at the beginning of the year. Just wondering if you could talk about what's changed since then. Is it the higher stock price, or is it other things that are dissuading you from buying back stock because your STAT income's been fairly healthy? Secondly, on U.K. margins, they've been pretty stable the last few quarters. How much of that is just better pricing and loss trends versus the benefit of the reinsurance transaction, and also what your expectations are for renewing the reinsurance contract next year? Rick, you want to start with the stock repurchase? Yeah, certainly. Let me give you a little bit of a different angle on it, Jimmy, too. When you go back to the beginning of the year and you look at our capital generation model, which has actually been intact for the last several years, we've talked about good, steady capital generation and redeploying that in multiple means. It's putting it back into our business. It's actually looking to acquire, which we haven't talked too much about, but that's certainly a place where we'd like to deploy capital, raising our dividend, which we've been doing very consistently, and then share buyback. We've talked about $500 million of capital generation, and I think given other choices, and particularly given where our stock price was going back even earlier in the year, share repurchase was a perfectly sensible thing to do at quite good volumes. As we've gotten through the year, we've seen other opportunities to use that capital to be redeployed wisely, whether that's retiring some of our debt, whether that's with solidifying the pension, whether that's continuing to buy back shares. We say when we're dissuaded from capital, I think we've just had other choices that we can choose to put that capital to work. Good choices, good for the overall company, good for our balance sheet, and we'll continue to do that. I think that share price played into that. I think Tom talked about that last quarter pretty extensively. But there are other uses of that capital that we certainly will put to work. We don't feel dissuaded about share repurchase. I'd remind you, $75 million that we bought back this quarter is 1% of our outstanding. They're meaningful numbers that we continue to buy, and we'll continue to do that in the future. Rick, if I could add to what you just said, I don't think any of the way we think about the options that are available to us have changed at all, actually. Those are the same options that have been in place actually since we began the aggressive share buyback program five or six years ago, over which time we've purchased over 25% of our shares. Those options are the same. It's always looking at relative value of each of those choices. As you can see, we've sort of rebalanced a little bit those priorities over the course of time just based on prices and other considerations. But those options are still the same. No change there. As Rick said, we'll certainly provide a little more feedback on that at the upcoming investor meeting. Jimmy, as it relates to your U.K. question, Peter, you want to touch on that in terms of just not just the margins, but a little bit of the recent experience and then how that affects both margins, but also some of your thinking about reinsurance? Yeah. Thanks, Tom. Thanks, Jimmy. So in terms of the group life book, we are getting through the renewal program. So you are seeing the benefit of some of the repricing and some of the shedding of the less profitable schemes. So definitely some of that is coming through. There are two aspects to the reinsurance. One is the retention level, which we brought down. So any claim we brought down to taking it from a million pounds per claim to half a million pounds. That has been very helpful during Q3. We saw a number of large claims come through, which the reinsurer took their share of. So that has helped manage the volatility and made the margins more stable. There is also an element which is a quota share, which is whilst we are repricing the book, what we found in the marketplace, the reinsurers, their appetite for this and what the returns they wanted on it was competitive relative to where we thought the book was priced. We took that advantage out in 2013. We are currently going through the renewal program in 2014. Looking at that, I would expect to retain a bit more, but we will probably still have some of the quota share in place for 2014 given what we are seeing on quotes at the moment. Thank you. Thanks, Jimmy. We'll take our next question from Eric Berg with RBC Capital Markets. Pardon me. Thanks very much. Good morning. Good morning to everyone. While I understand your desire, and you've made it clear that you're not going to get into the details of this movement of the Bermuda operation back to the U.S., one thing to me seems apparent, and I just want to check whether you agree that this is apparent. Because Bermudian accounting is essentially the same as U.S. GAAP accounting, and because U.S. GAAP accounting tends to be more generous, aggressive than statutory accounting, doesn't it stand to reason, we don't need to get into any discussion I don't think, that the statutory reserves that you will be establishing in the U.S. will be higher than the effectively GAAP reserves that you have established in Bermuda? And that therefore there's going to be some sort of hit to your statutory capital in the U.S. on an enterprise-wide basis. You will have less statutory capital and more reserves than would have been the case if you didn't make this move given the difference, given the more conservative accounting in the U.S. than in Bermuda. Doesn't that stand to reason? Isn't that obvious? Yes, Eric, I won't repeat everything you just said, but I'd say that what you say very much holds true. I think that's why when we talk about the structure, we say that we take you back to we'll be within the ranges of our capital outlook. Everything you said is true and logical, and we'll take you through how that impacts us and the magnitude of those when we get there. I'd just take you back to the answer is it will be in line and similar to our reserving and capital processes we have with other companies in the U.S., and we will also be within the ranges of capital outlook we've put out there while still having the ability to buy stock. Great. My second and final question could be directed to Jack or whomever feels it is appropriate for that person to answer it. It has to do with long-term care. Because Unum has stopped writing new business both on the group side and the individual side, I would think that you would be disadvantaged vis-à-vis regulators in the sense that I would think regulators would say, "Well, these Unum guys, they sold the business. They did their best to get the pricing correct. It's underpriced, but it's not our problem." You don't have a lot of leverage because you can't threaten to quit the business because you already have stopped writing new business. Why isn't that the case? I'm a little surprised that you describe your repricing results as excellent because again, I would think regulators would say, "These are old people. Unum made a mistake. That's its problem, not our problem." I would think that's how the discussion would go. Why hasn't it gone like that? Jack? It hasn't gone like that because we actually have the results in our repricing efforts. Again, we're ahead of plan in our actual approvals. I think there's lots of reasons. I think the flip side of that is some regulators are saying, "Look, you can make it up on new business pricing. We're giving you the rates that you want on new business," and are using that as an excuse not to approve rate increases on the old business. That goes in both directions. We have not found that being in a Closed Block status has affected our ability to get rate increases. I think regulators understand that if you are in a Closed Block status, rate increases is your only option, and they're aware of that. Conversely too, Eric, just from the company point of view, I'd say, Jack, actually, the fact that we don't have existing customers we're trying to sell business to or brokers we're trying to sell through actually makes it a lot cleaner as a decision actually as a company. Yes. Because we can actually be very specific to experience and allow the rates to just fall out of that experience as opposed to thinking about the fact that we're also trying to sell new business at the same time. I understand. That helps. Thanks very much to both of you. Thanks, Eric. We'll take our next question from Steven Schwartz with Raymond James. Hi, guys. Hey, Steven. Hi. Mostly asked and answered. Just quickly, and maybe I missed this. Where is the company, where is Unum UK in terms of repricing the group life business? What percentage of the book has been repriced? Yeah, Peter, you want to just touch on that briefly? Yeah. Briefly, we're about three-quarters of the way through, so we'll be finished at about midway through 2014. Okay. That's it. Everything else was asked. Thanks. Steven, thank you. We'll go next to Robert Glasspiegel with Janney Capital Markets. Good morning, Bob. Good morning, Unum. Quick question. Your RBC ratio looks like it's projected to be about 12 bips below where it finished the third quarter at year-end if you take the middle of the range. Does that factor in the Bermuda impact, or are there some other moving parts on dividends that are driving that decline? Yeah, Bob, just to give you a sense that range has been consistent all along, so that doesn't give you a different view that we expect it to come down or move up. I'd take you back to the different structuring pieces we've been talking about a fair bit on the call in terms of there will be movements and changes relative to that, but we expect to still be in that range on the overall. Okay. Just hammering Mark's, Mark said he was the last question on Bermuda. I guess I'm going to be the last question potentially. The Bermuda transaction, did that at all impact the buyback? You mentioned pension and bonds and stock prices, other use. Was that at all a factor in keeping a little bit more capital? I think when we look at it in terms of the very good capital generation we've had, there is a use of capital that we've talked about with Bermuda without being too specific, but I think that's fair that will be a use of our very good capital generation that we had this year, and we'll get more specific in terms of what that looks like in December. Okay. Just on the margin, it could have been a consideration on buyback. Yeah, I think it is very much a consideration on buyback. Okay, thank you. We will take our next question from Jeff Schuman with KBW Investment Research. Good morning, Jeff. Good morning. I want to go to the U.K. first. The business has been resized a bit. Premiums local currency are down, I think, 18% year to date. Is there any slight benefit in terms of being able to maybe extract a bit of capital in the U.K. given that it's now smaller? Yeah, Rick, do you want to touch on that? Certainly. Jeff, when you look at the U.K., that reduction in premium has been purely from the quota share reinsurance that Peter mentioned in his comments. That's kind of a one-time transaction. We did it on a very short basis, so it was actually out there over a year. So it's something that we did free up capital as a result of that, but we didn't repatriate that capital at the moment. Our U.K. business, we don't talk often about the U.K. capital generation. It's been very consistent, very steady, very similar cash flow characteristics that we have in the U.S., and they've been very consistent in their dividend payments that have been upstreamed. We just didn't remove the excess capital that was created there because we wanted to have the flexibility to adjust that reinsurance structure at the end of this year and into 2014. All right. I know Glass Beagle declared an end to the Bermuda questions, but I don't think I'm going to yield to his authority on that. I was wondering, one sort of basic question. If part of the goal here is simplification, is one of the options to maybe just do the ultimate simplification and just actually recapture the reinsurance, or are there some basic reasons why you actually need to have another entity? Go ahead, Rick. Jeff, that's a great question. I think when we look at evaluating our Bermuda entity, and that's one of the reasons we talk about this has been a structure that's been in place for quite some time. Just a pure recapture is not a simple exercise to go through. It is an option out there. It's not one that we preclude. We still could get to that point in the future, but I think that we won't be doing that as part of this step because of some of the complexities that are built into the structure. But in the future, that very much could be an option. I think the important part about that, too, is because it will be on a similar basis with our other U.S. businesses, that would be, from a financial perspective, basically a non-event. Okay. Then another just fairly basic question here. Obviously, you're looking at different options, but is it reasonable for us to assume that many of these options might involve some third-party participation, whether it's third-party reinsurance, letters of credit, third-party other financing? Is that a reasonable assumption? Rick? I think that I'd highlight a little bit different. Those are obviously options to us. This will not look so much like structures you've seen around the industry, so that have different letters of credit and financing. This is going to look pretty basic, like a captive reinsurance. Quite honestly, Bermuda today looks like a very basic reinsurance company. I don't think it would look like many of the other structures that we've seen out there. All right. Thanks a lot. Good. Thanks, Jeff. We'll go next to Sean Dargan with Macquarie. Sean. Yeah. Good morning. Just following up on Jeff's question about why you aren't recapturing. I think there's going to be continued noise around the use of captives. There's something on the Freakonomics blog yesterday about shadow insurance. Does anything change in your thinking about your use of the South Carolina and Vermont onshore captives? Rick? Yeah. I would start with our South Carolina captive, which is named our Tailwind Reinsurance Company. We did buy in the bonds from that, so from a structural perspective, that is now a simplified reinsurance structure we have in South Carolina. Our Northwind transaction, which sits out there, is still performing very well. We have no need to bring in the bonds that were issued on that in 2007. I think it is something straightforward, so no anticipation of changing that structure at all. Also from a reserving perspective, that is reserved on a similar basis that we do in all of our other U.S. entities as well. I do not see much scrutiny there. Okay, thanks. Just one final question. There were some high-profile employer groups who put large groups of their employees on private exchanges run by insurance brokers. I am just wondering if you participated in that and if you plan on doing so. Unum is not a household name among consumers, and I am just wondering what your competitive advantage is on a private exchange. Mike, why don't you take that one from Sean? Yeah, happy to. Hi, Sean. We mentioned it earlier, but exchange is very much a hot topic in the market. We very much see them as the latest manifestation of a long-term trend towards more employee-driven benefits. That really has been the thesis that our investments and capabilities have been based on. To your specific question, having made some pretty big investments in employee choice products and technology, people, and process to sort of facilitate empowering employees has put the Unum and the Colonial Life brands in a really good spot in the marketplace. As these private exchanges are coming on, actually, the demand for us to be involved has been pretty good, pretty consistent. It has resulted in us being connected into 40-plus different exchange mechanisms. I think also importantly, it's allowed us to play on all those exchanges where the employer remains very much involved. To your specific question, where we've seen a lot of the activity on our fronts and in our product lines, the employer wants to stay involved. There is an element of funding that they're providing in many cases. That actually positions us pretty well, given a very strong brand amongst the brokerage and employer client community. If I could, Sean, just to add a little to what Mike said. The themes that you're seeing today in terms of more focus on consumerism and giving people choices didn't just start today or just didn't start as part of the Affordable Care Act or exchanges with the government website. This started a decade or so ago, moving from a defined benefit to a defined contribution environment. Frankly, we've realigned our resources and investments very much to participate in that. If we look at our group business today, the vast majority of our group sales actually have some level of employee contribution. If you look at our voluntary benefit business, which is both Mike's and Randy's voluntary benefit business, the earned premium compound annual growth rate over the last 8 or 9 years is about 7%. A lot of that growth is frankly coming by providing gap products. Let's use one example, high-deductible health plans, I think, have doubled between 2010 and 2013. That's presented great opportunities for our group hospital indemnity products, our accident products, our critical illness products, our medical bridge products. Just as Mike said, there's an awful lot there that we've already begun to see where there's a way to play very effectively there in that consumer theme. Again, you're right, our name may not be as widely known as some brands, but we're very effective in getting, with the employer's cooperation, in front of the right people with the right set of products, and the benefit communication tools we have actually help accelerate that. As Mike said, we feel pretty good about the outlook here. Obviously, the healthcare reform and the exchanges and other things are going to be a topic that we're going to have to deal with here probably next year or so. But we're finding very effective pockets in there to grow and build with both of our two voluntary franchises. Thank you. Good. With that, I think, operator, we'll have time for one last call. We'll take our final question from Tom Gallagher with Credit Suisse. Good morning, Tom. Good morning. Just a question back on to beat the dead horse on Bermuda. How should I be thinking about what resources are available to you to fund it? I realize you're not prepared to answer any questions to size it, but I know you mentioned the credit facility a few times. Is that something that might be used, U.K. capital, or would it just be existing holdco cash, current statutory surplus that would be used to fund it? Statutory surplus in the U.S., that is. Rick? Yeah, Tom, that's a fair question. I should highlight the credit facility that we're highlighting here has nothing to do with the Bermuda process. We thought it was a good piece of structure to have in the company. It's something we haven't had for a couple of years, as we've said, with high cash balances. I wouldn't equate these two at all from that perspective. My U.K. comments around dividends there is just to remind people that it's a very strong, high-margin operating enterprise. I'd take those two out of the discussion in terms of how we're looking at the process we're going through of making sure we're within the capital range of the outlook. I'd take it back to your two points, which is holding company cash we're sitting on and then just statutory generation and capital that we have in our U.S. entities. Got it. I guess that entity has lost a little bit of money for the last few quarters. When you recapture that, would you expect the earnings pattern to change there? Or are you still going to be using, in all likelihood, modified GAAP accounting because it'll be in the captive structure? Yeah, I'll try and answer. It's a similar flavor to an earlier question, which is we have had some losses in that entity. If you look back over many periods of time, it's fluctuated a fair degree. Our reinsurance structures can be more volatile just by the nature of how the reinsurance treaties work. I think that as we look forward, that's going to be woven into our overall capital view. I think, Tom, you highlight a point which is important is, as we've seen on this call, the Bermuda entity has caused a lot of questions, and quite honestly, we don't need to be answering those questions because it is a small piece of our structure. When we have it back onshore with a similar level of reserving capital as our other onshore entities, we hopefully won't be discussing those details in the future. To that point, I think, Rick, we want to get ahead of things. This has obviously been a focus of the industry and others within the industry and will continue to be so. I think by doing the steps and taking the actions that we've, I think, begun to share with you today, we're getting ahead of those sorts of things, but do it from a position of strength because we do have the financial flexibility and we do have the sufficient cash flow and cash generation that frankly allow us to be in this kind of position. But I think as you said, Rick, in your comments, we can do all that and not do it outside of the range that we provided in terms of capital guidance, nor actually affect our ability to buy back shares this quarter. No, I applaud you guys for doing that too from a transparency standpoint. My last question, just relatedly, is so the entity that will then be filed going forward, will we have full access? So that'll be a U.S.-domiciled entity that we can then have a full set of blue books that we can then evaluate? Yeah, Tom, we haven't gotten to that point, so we'll have to evaluate a lot of different things here as we get to year-end and all the details of that which still have process steps to go through. Hopefully, we'll have a better view of that at Investor Day. But there's still a lot of work to do between now and then for our team. Okay, thanks. Good. Thanks, Tom. Thank all of you for taking the time to join us this morning. We look forward to seeing many of you at our investor meeting in New York on December 16th. This completes our third quarter earnings call. This does conclude today's conference. Thank you for your participation.