Q3 2019 Earnings Call
Good day and welcome to the even in Q3 2019 earnings Conference call. Today's call is being recorded at this time I would like to turn the conference over to Mr. Tom White. Please go ahead Sir.
Great. Thank you Angela good morning, everyone and welcome to the third quarter 2019 earnings Conference call for you know our remarks today will include forward looking statements, which our statements that are not current for historical facts 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 or 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 too.
It was an 18 as well as our subsequently filed Form 10-Q 's, our FCC filings can be found any investor section of our website at Unum Dot Com I remind you that statements in today's call speak only as of today. They are made and we undertake no obligation to publicly update or revise any forward looking statements.
A reconciliation of the most directly comparable GAAP measures and reconciliations of any non-GAAP financial measures included in todays presentation.
Can be found in the statistical supplement on our website also many investors section.
Yesterday afternoon, Unum reported third quarter, 2019, net income of $242 million or $1.16 cents per diluted common share compared to a net loss of 284.7 million or $1.30 cents per diluted common share in the third quarter 2000.
18.
Net income for the third quarter 2019 included a net after tax realized investment losses of $20.8 million, an after tax costs related to the early retirement of debt.
$18.9 million.
Net income in the year ago third quarter included a net realized after tax investment gain of $7.8 million at an after tax reserve increase of $593.1 million and the long term care product line of our close block segment. Excluding these items after tax adopt.
Adjusted.
Operating income in the third quarter 2019 was $282.7 million for $1.36 per diluted common share.
Her to $300.6 million or $1.37 cents per diluted common share a year ago core.
Dissipating in this morning's conference call or you Adams, President and CEO Rick Mckenney.
Chief Financial Officer, Steve's able as well as the Ceos of our core business segments like Simon's for Unum U.S., Peter O'donnell for Unum International and Tim Arnold for colonial life, and now I'll turn the call over to Rick Mckenney for his comments.
Thanks, John and good morning, everyone.
Third quarter of 2019 was a solid quarter overall.
It was one that demonstrates the consistency and resilience of our business model and serving customers at the workplace for.
For a market environment perspective, there's no doubt said it was one that presented a volatile picture. We saw a long term interest rates move lower but we still see a positive important picture with a strong consumer.
We didn't see some headwinds this border with an unusually level low level of miscellaneous investment income. This was mainly lower bond calls that negatively impacted a number of our business lines relative to the year ago quarter, it's slightly impacted the good trends, we saw in our core business segments.
As a result, as Tom mentioned, our after tax operating earnings per share declined by one cents per share to $1.36 cents.
We're still confident reaching our outlook for the full year.
What do you have third quarter results, we continue to be pleased with the growth in premium income, we're experiencing our core business segments, which is 4% to 5% overall this growth not only represents added revenue, but also additional customers who benefit from the protections and services we provide.
And the employee benefits based markets continued to be competitive, but our offerings are meeting real customer needs.
This is also aided by an environment characterized by low unemployment and more recently wage inflation.
Specifically, we are leveraging years of relationships with customers and distribution partners, who count on us to understand and consistently served the employee benefits market.
We think this gives us a meaningful competitive advantage.
In our segments Unum U.S. premium income increased by 3.9% benefiting from our disciplined approach to sales continued strong persistency in our group lives and growth from new product lines, such as dental and vision.
[noise] colonial life is very consistent performer for many years and premium growth. This quarter was 5% despite relatively flat sales year to date.
Finally, our Unum International segment produced premium income growth of 10.5% on a U.S. dollar basis benefiting from the Unum, Poland acquisition, but also growth in unum UK in local currency from good persistency results and effective enforced block management.
Across each of our business lines, we continue to see a strong need for products and services in their markets and our investing broadly in the capabilities to meet the needs.
Next I'm also pleased with the overall margin trends, we saw this quarter across our business lines.
Steve will cover these trends in detail in his commentary, but broadly our benefit ratios remain within expectations.
This reflects the consistent disciplined we bring to product pricing and underwriting as well as enforced block management through renewals.
As pleased as I am about the growth I'm equally happy about our ability to do so well maintaining good profitability.
Expense management trends in our core business segments also continues to be favorable we're focused on effectively managing our expense base, while investing in new capabilities and then the growth areas of our business such as lead services.
Give me good keeping expenses in check as we grow the topline has helped our overall productivity expense ratios and the profitability of our business.
In aggregate these favorable operating trends continue to drive strong margins in our core business segments, which in combination produced an adjusted operating return on equity of 17.6% for the third quarter.
Core business has also continued to generate healthy statutory earnings and cash generation to fund our growth and support our capital deployment initiatives.
Touching on the close block the individual disability lie continues to be stable and the 12 month loss ratio for long term care wasn't in the middle of our range, which Steve will touch on in a minute.
So to wrap it up we're pleased with results for the third quarter, our market positioning offers good opportunities for profitable growth.
As a company we have an important and relevant purpose, we're focused on making the investments in technology products and enhanced services to meet this growing need.
So now I'll turn it over to Steve to cover the detailed the third quarter results. Thank you Rick and good morning, everybody on the phone. This morning, I'm pleased with the quarter and the overall trend we continue to see in our businesses and my comments. This morning, I will provide additional detail by the performance of our business segments and provide an update on our capital position and outlook for the full year.
Third quarter after tax adjusted operating earnings per share $1.30 success once that below the year ago quarter as I take you through the operating trends common thing Youre here is that miscellaneous investment income was unusually low this quarter. In fact, it was below our historical averages by approximately $12 million and substantial.
The below the euro go quarter by approximately $24 million.
As we've discussed in the past this is a relatively small part of our overall net investment income, which this quarter was just under $600 million.
However, it is volatile from quarter to quarter and the declined this quarter was most notable at our Unum US group disability line and then the close watch segment.
Looking at Unum US we continue to see solid underlying results from these business lines in the third quarter adjusted operating income declined 3.5% to $261.4 billion in large part due to miscellaneous investment income coming in approximately $15 million below the year ago quarter again, primarily impact.
In the group disability line.
Premium income increased 3.9% over the year ago quarter, driven primarily by the continuation of strong persistency levels in our group businesses, our recent sales trends and the growth of our dental and vision business.
Benefits experienced in this segment was generally favorable with the benefit ratio declining slightly to 67.2% in the quarter. The adjusted operating return on equity for Unum US remained quite strong it over 18% in the third quarter.
Within Unum us adjusted operating income for group disability declined by 10.8% $83 million in the third quarter. We continue to experience good premium growth an excellent benefits experienced net investment income remains under pressure.
Premium income increased 3.8% as the enforced block increase was strong persistency levels at higher sale of both Ltd, and FCD products in recent quarters.
The benefit ratio improved to 74.2% in the third quarter from 76.3% a year ago, driven by favorable claim recovery experience in our group long term care or group long term disability product line and favorable claims activity.
One of our group short term disability products consistent with recent trends net investment income in the quarter declined by 11.9% driven by the ongoing trends have reduced assets back into line at lower portfolio yields on those assets as well as lower midpoint. This investment income relative to the year ago quarter.
The increase in the other expense ratio relative to the year ago quarter was largely driven by the rapid growth of our leaves services keep in mind that fee income related to those services is included in the other income line.
Adjusted operating income for the group wide life, an ATM delight increased by 6.9% third quarter to $68.4 billion.
We have increased premium income increased 4% primarily from prior periods sales rose.
Benefit ratio of 72% was generally consistent with a year ago quarter, 71.8%.
Thats ratio improved due to the focused on expense management that operating efficiencies.
Sales for these group lines of business and you can you asked were good in the third quarter, increasing 3.4% over the year ago quarter.
The group disability lines increased 2.3%, while the group life today DMD lines increased 5.1%, primarily driven by stronger large case sales.
Persistency in the Unum U.S. group lines remained strong at 90.6% for the first nine months of 2019, and 2018 and continues to be an important source of our premium growth.
Finally, the supplemental and voluntary line adjusted operating income was $110 million for the third quarter decline of 3.4% relative to the year ago quarter premium incentive income grew by 3.8% primarily driven by prior current sales and the growth in our dental and vision product lines.
Looking at benefits experience for each product line the benefit ratio for individual error individual disability was lower relative to last year due to favorable claim recoveries and lower average claim size.
The benefit ratio for the voluntary benefits line was higher primarily due to the very favorable experience across most of our BBB product lines in a year ago quarter.
Finally in the dental and vision line the benefit ratio was higher relative to the year ago quarter due to business mix changes and unfavorable reserve development. So generally consistent with our expectations for this product line as product distribution shifts to the group products as we discontinued sales of products to the individual market last year.
Similar to group life, the expense ratio improved relative to the year ago quarter from our focused on expense management operating efficiencies sales for the supplemental voluntary lines increased by 8% for the third quarter with strong growth in the individual disability product line, which increased by approximately 35%.
New sales increased slightly in the dental and vision line, while sales were slightly lower for voluntary benefits.
Are you going to international segment reported adjusted operating income $24.2 million for the third quarter, a decline of 7.3% from the year ago quarter.
A decline was driven by an unfavorable exchange rate and lower operating income from the UK light a business in local currency, which more than offset inclusion in the financial results of you'd imports in local currency. The unum UK light a business produced adjusted operating income of 18.7 million pounds in the third quarter I'd.
Decline of 6.5% results for the UK business included growth in the premium income of 2.8% relative to the year ago quarter from continued strong persistency recent sales growth and the benefit of rate increases in that group long term disability product line.
Net investment income for Unum, UK declined 9.4% to 18.3 million pounds in the third quarter due to a part lower investment income from inflation index linked bonds that we hold to support the claim reserves associated with our group policies the provide for inflation linked increases in benefits.
That's a ratio for the UK business declined seven 3.4% in the third quarter compared to 74.2% a year ago, primarily due to favorable claims experience in the group critical illness product line and lower inflation linked increases and benefits. This was offset in part by unfavorable claim terminations in group long term disability.
Yes.
International sales in us dollars increased 16% in the third quarter with sales in the UK in local currency increasing 3.8%.
In addition to the inclusion of Unipol in this period.
Persistency for the UK business continues to be quite good EBITDA, even as we have successfully implemented renewal rate increases over the past two years.
The colonial life segment produced adjusted operating income of $87.2 billion for the third quarter, an increase of 3.6% from a year ago quarter.
Growth in premium income remained solid at 5% for the third quarter, reflecting growth in the enforced block sales growth in recent quarters.
The benefit ratio of 51.4% was generally consistent with a year ago quarter of 51.5% with favorable experience in the life quite a business, mostly offset by unfavorable experience at our cancer and critical illness line of business.
So the colonial life were relatively flat in the third quarter compared to the euro quarter with declines in the large case for commercial markets upsetting to prove sales in the public sector. We're encouraged by the actions we've been taking to rebuild our sales momentum and anticipate the fourth quarter sales will show an increase over the year ago quarter.
Moving to the closed block adjusted operating income was $26.9 billion for the quarter compared to $32.2 million in the year ago quarter, excluding the increased a long term care reserves.
As expected premium income for this segment continues to decline down by 3.9% in the third quarter, primarily due to the ongoing policy terminations and maturities for the individual disability line, which is partially offset by premium rate increases within the LTC product lines.
Net investment income declined 5.2% in the quarter with the increase in the level of invested assets offset by a lower yield and a lower level and miscellaneous investment income, which was approximately $9 million less in the quarter compared to a year ago.
In the individual disability product line the interest adjusted loss ratio was 79% for the third quarter compared to 80.5% last year, primarily driven by overall favorable claims activity.
The long term care business line the interest adjusted benefit ratio was 89.8% for the third quarter compared to 87.5% in a year ago quarter, excluding the impact of the third quarter 2018 reserve assumption update.
The increase in the benefit ratio was primarily driven by higher submitted new claims relative to the year ago quarter. However, overall results remained within our expectations of the benefit ratio in the 85% to 90% range given the inherent volatility in the product line. We still it is important to look at the benefit ratio over a longer period of time that just one quarter.
Over the past four quarters the interest adjusted benefit ratio for LTC has been 87.2% again in line with our expected range of 85% to 90%.
Ill finish the closed block discussion with two other important topics related to LTC first we made additional progress with premium rate approvals quarter and are now slightly over halfway to the $1.4 billion assumption.
We are encouraged with this rate of progress at our ability to achieve this goal in the coming years.
Second we have exceeded the new money yield target of 5.5% since July one 2018, including the third quarter of 2019.
As we have often caution we are taking a long term view of the assumptions backing this business line given its potential volatility, but we are satisfied with how the trends have evolved over the past four quarters.
Wrapping up with corporate segment, the adjusted operating loss, which excludes $25.2 billion of costs related to the early retirement of debt was higher in the third quarter at $48.9 million compared to a loss of $47.1 billion in the year ago quarter due to lower net investment income higher interest expense.
From the debt issue in June and higher pension expenses.
Statutory earnings for our traditional U.S. insurance company have remained at healthy levels for the third quarter with statutory after tax operating earnings that totaled $261 million compared to $253 million in a year ago quarter.
Capital metrics remained in good shape with the risk based capital ratio for us traditional life insurance companies at approximately 368% consistent with our plants for the year.
Cash at our holding company has totaled just over $1 billion at the end of the third quarter. During the quarter. We took advantage of a low rate environment and issued $450 million of a 30 year senior note with a 4.5% coupon. The net proceeds were used to purchase and retire the $350 million knows we had much.
During 2021, it's a tender for approximately $83 million as higher coupon debt with longer dated maturities not all the tender and redemption transactions were completed in the third quarter. So approximately $95 million of the quarter and cash balance has been used to complete the transaction early in the fourth quarter.
The transactions were intended to be generally leveraged neutral and cash neutral and we're pleased with the execution in results.
Share buybacks in the third quarter were $100 million consistent with previous quarters and our outlook for the year.
Ill wrap up by reiterating our expectation of growth in adjusted operating income per share in the 4% to 7% range for the full year 2019.
Now I'll turn the call back to Rip for his closing comments and look forward to your questions.
Great. Thank you, Steve I would reiterate it was a solid quarter overall for the company and one that I believe shows the benefits of our strong position within our markets. The team is here to respond to your question. So I'll ask Angela to begin the question answer session Angela.
Thank you, Sir if you'd like to ask a question for you signaled by pressing star one on your telephone keypad, if you're using a speakerphone. Please make sure you mean function is turned talked a lot you signaled to reach our club.
Participants you May ask one initial question, which one follow up question if needed again press star one to ask a question.
Just a moment when an opportunity to signal for questions.
And your first question will come from the line of Mr. Jimmy Mueller of Jpmorgan. Please go ahead Sir.
Hi, good morning so.
Im going to actually ask a couple of questions that are both relatively short so first on colonial you've had a couple of quarters of.
Down.
A lot sales so and some of your competitors Haven reported good sales as well so I'm wondering how much of this is just because the difficulty in recruiting and retaining given the.
Labor market.
Worse is.
And just sort of normal volatility in sales volumes.
Great. Thanks, Jimmy that Jim you want to answer that one in livestock sure. Thanks Gerry.
Certainly we see it much more competitive environment, especially on the large case markets.
In addition, remember that the comparisons on a call me Allied business to last year were pretty challenging were 13.5% growth in the second core of last year at 13% growth in the third quarter.
The impact of the recruiting fall off than we experienced in the last half of 2018 beginning of this year. Certainly is also having an impact and we suggested last quarter that the environment is challenging that remains true, but I wouldn't want you to a number of reasons for optimism in the voluntary benefits business.
The comparisons do get easier going forward last year fourth quarter sales growth, probably like was 2.6%.
We made some changes in our recruiting model on approach in the first quarter. This year and those are beginning to yield benefits and the number of new agents that are joint colonial life, and we saw recruiting rebound in the third quarter cautiously optimistic that we can sustain the levels of recruiting need for success going forward.
We introduced a new technology already this year support our agents, which includes lead generation and customer relationship management capabilities, and we're seeing improved productivity from agents as a result.
I would remind you that are just distribution model is fairly unique and allows us to serve both the brokerage market, where we see about two thirds of our sales and enforce premium but also the very important direct employer market, where we have the ability I believe somewhat uniquely to serve the less than 100 life segment.
And as a reminder, they're all 6 million businesses and you asked to have more than one employee and fewer than 100, and we believe that our distribution organization is very well equipped to serve that marketplace. We continue to make investments and the customer experience and we believe those investments will yield improvements and persistency overtime.
We are also piloting a couple scenarios, which will help us understand and potentially serve the growing freelancer market, which we see as a new opportunity for us.
And we're introducing new products and capabilities next year that we believe will enable us to even more effectively serve the large case market. So it's been a challenging environment. This year. Some of that's due to the success. We got 2018 that we're still pretty optimistic about future and we'll update you more.
And then just on long term care the loss ratio ticked up this quarter.
Could give us some details on what really drove that and then.
It's sort of within your range, but at the top end to the range and assuming that or is that actually goes above your range.
To what extent does that sort of automatically caused you to do.
Review your results or would you have to see it hover above that for a number of quarters before you take any action.
Jimmy This is Steve I'll answer that one so yes, we're just reiterating what you said we are within our range for the quarter.
This is the first quarter that we've actually had a comparable comparison on the new reserve construct in the new assumptions, our fourth quarter average has been 87.2% over the last four quarters and so we feel good about being right in the middle range. If you think about those four quarters, we had one quarter fourth quarter last year, where we were quite of.
Below the range that a couple of quarters, where we're at the middle range and then this quarter with the higher end, so I would say that.
As we think about a rolling average were right within our expectations, where we'd want to be.
The current quarter was really driven by some elevated claims incidents we didnt see anything.
Concentrated there is just an overall higher level of claims incidents and yes, we would definitely need to see several quarters that would be above the range before we start to think about kind of unpacking the reserve assumptions again and thinking hard about those longer term assumption. So we this business has a lot of volatility.
We've seen it over the last four quarters, it's gone both ways and we'll just continue to monitor.
Thank you.
And if you find that your question has been answered you may remember yourself from the Q by pressing star too and we will now take our next question from Humphrey Lee of Dowling and partners. Please go ahead.
Good morning, Thank you for taking my questions.
Looking at operating expenses I think in your prepared remarks, you talked about expense discipline has been an impact in your overall expense level. I was wondering do you think the the current results will likely be too just to be trend, though in terms of expense level or do you still have any more color.
Disciplined initiatives, obviously, if that you could drive some fall in love bottom line improvement.
Yes. Thanks, operator, thanks for the question I think you when you step back from our expense ratio. This is something that we've talked about for a long period of time, there's about being efficient we focus on that operating expense ratio as we grow revenues grow premiums we want to make sure. We're not growing expenses at the same rate, while still making sure that we're investing and all the right.
Areas for that future growth. So I think it's one that will continue to to focus on overall as you get line by line, you'll start to see some of the things that happen quarter to quarter business line by business line, given where we're investing in those those type of thing. So so I think that.
You have to do you really have to look at all different pieces I just stay at the high level, though that expense. Good expense management is something that we're focused on have been for many years, we'll continue that but maybe I'll give a sense. We'll go to each of our business, let's talk about some of the things that we're we're seeing more near term and then some of the areas, we're investing and Mike.
Thanks, Rick and good morning, hungry, So I think unum us is in many ways sort of similar to the trends that Rick spoke about so we look at it overall in the current year and look at it over the last four years, you see a pretty steady improvement in the operating expense ratio into your question I would say is we look at the portfolio investments.
Do have a good number that are designed to drive.
Continued expense efficiency out into the future I'd like bridge that you look segment by segment that slightly different so I would take you to the group disability segment, where we did see a higher expense ratio and what underpins that is actually continued growth of our fee per service and in particular, our management of our clients protected NPD leads business and.
We see that is really important and big opportunity.
Managing statutory leads in particular has become an increasingly complex undertaking certainly up and the law at the federal level, but now with many states having passed their own statutes and some state that the municipal level, adding to that complexity. So.
That's not insured premium coming in and therefore expenses are much bigger share revenues. So it's a mix shift in that group disability line and and a good about <unk> of investment like bricks that end in hiring as we prepare to bring a number more clients onboard for those services in the first quarter next year, we've got to get ahead of that.
Jim thoughts on Boyalife expenses, not sure the strong sales growth and premium income growth we've generated over the last five six years has allowed us to continue invest in the business certainly lot of investments in growth over the last years and investments in the customer experience, which are paying off for us.
I think over the last couple of years, we've seen our OE declined by about 70 basis points in yet still have the operational flexibility to invest where we need to invest to continue to spur growth and keep those improvements in customer experience Kelly.
And Peter Youre talking about expense management in the UK and our with our acquisition of pulling as well.
Sure. So I mean, obviously the expense ratio in the third COVID-19 is different when you compare it against its third quarter 18, because we're adding into Poland business. So, but if we look against our plan actually were slightly below where we expect our plan to be.
Quarter to quarter expenses are affected by timing of expenses. So you know if you're doing big projects. It tends to come through and sort of move that move the ratio rounds I tend to look at it year to date.
When I look at the year to date expense ratio when compared against prior year for the UK and Ford's crotchety coming down. So most important thing is you're growing premium is faster than expenses as rig says.
Well, we're trying to do is you to get efficiencies and the way we service our customers in the way we go to market I'm looking to invest to do that in things like digital. So for example, this quarter, we've just launched a digital servicing.
Ability for our brokers and over time as more of our brokers. We've also about digital servicing we'd expect to be able to reduce are ongoing operating expenses, perhaps invest in more digital capabilities. So it's always a balance Rick.
Okay great.
Got it so sounds like expense ratio should be continue should continue at a similar trends given the discipline that you have.
Shifting gear.
With the enrollment period around the corner can you talk about your expectation for Unum us and colonial life, specifically, we'll be able to push through any rate increases for for this cycle, especially to address low interest rate.
So Mike sure yes, thanks for the question and it took it.
As you know Humphrey from falling as for quite a while it's a pretty standard practice. So we're always looking at the book of business and making adjustments and even with the business Thats performing very consistently in the high teens from a return on equity point of view, there is going to be pockets, where we need to make.
Adjustments and so real plans are right in line with expectations. Both in terms of the place increases and really importantly, the persistency out that book coming through and so we're running just a tick above 90 for settlement group insurance side for disability and life insurance and as we as we look forward and work through this really important.
Quarter, I don't see that really materially changing one way or the other.
Tim.
Yes, so as Steve mentioned, we expect to return to growth in the fourth quarter. We are encouraged by the pipeline and cautiously optimistic.
Got it thank you.
Okay.
I will now take our next question from Ryan Krueger of KBW. Please go ahead.
Hi, Thanks, Good morning, first a follow up on renewals.
Could you talk a little bit more broadly about how renewals that going.
Competition looks like.
So I guess any preliminary thoughts.
The trends with with yearend.
Okay.
Sure Yeah, Thanks, Ryan good morning, and so.
Just as it was we just hit I'd say the renewals.
Particularly in the mid to large size businesses is really pretty much something that we've done for the January 1st effective date, which is a really important one for us not just say there that the trends that we've seen around being able to place rate, where we need to and be able to persist those clients.
Is it really is holding strong which is great and then as we look at the pipeline for new business again I think.
We've been able to create a bit of differentiation with some of the investments that we've made in technology, we've talked about over the last several quarters that would really highlight we've done a fair amount of our digital investments on the HR platforms that are clients are increasingly adopting and so workday was our first and most prominent platform that we started to build out.
Capabilities on and we've really seen nice growth there and I think.
With a new platform rolling out just here. The next couple of weeks that focuses more in on the core market I suspect that growth will continue.
Thanks, and then Steve you had previously mentioned that cash contributions for long term care could be.
$3 million to $400 million range over the next couple of years.
Just give a little bit more detail on the.
The drivers of why it will be a little bit more elevated near term versus the typical amount and then.
If you still feel good about kind of the typical buyback around 400 million.
In light of that.
Yes, so I think a couple points a perspective, if you go back the last couple of years, our contributions to the SAP in elevated compared to what they were previous to that they bid up in that three to 400 million range last year, there, even a little bit higher with the reserve charge. We took we had to contribute a little bit more capital, where we're coming into the fourth quarter.
Her and looking at first unum, specifically around cash flow testing.
And looking where that's coming in with interest rates, but kind of a line of sight. We have right now I would say that full year capital contributions would be in that three to 400 million probably closer to 400 million.
It's in our capital plan right now.
We've already made some of those capital contributions during the year, so that will not all the going in the fourth quarter, but we need we need to wrap up our fourth quarter cash flow testing before we havent finalized I would say I won't speak to next year, we'll talk about that more in the Investor day in December but.
We havent changed our capital deployment plan plans for the for the remainder of the year. So.
Got it thank you.
That's right.
Our next question will come from.
Keller of credit Suisse. Please go ahead.
Hey, good morning.
One follow up.
Jimmy's question, a little bit earlier about the flat sales at colonial.
I think also in Unum US there were some pressures I think group long term disability.
Soffe about 6% and so as I think about.
Sales he did a great job of.
Of talking about recruiting and your efforts to kind of grow all but I also think about colonial and unum us and the fact that there are always are roughly 18%.
And so the question is.
What's the competitive landscape out there is it isn't allowing you to continue to get those 18% or are we using both us and colonial and.
And with that competition, even with all of these efforts are you going to find it very difficult to to grow.
Yes, well start to quote Allied stimulants, yes on the.
Thank you for the question Andrew on the colonial life side as I mentioned earlier, we see most of the heavy competition in the large case segment.
And I will say, we do see some competitors behaving in that segment in ways that we think may not be sustainable longer term.
We still see tremendous amount of opportunity down market, especially in the mid market in the small case market, we believe especially in that less than 100 life segment that market is tremendously under served and the employees in that space are under educated regarding their benefits.
We have.
Unique enrollment capabilities in the industry's allow us to as keep on benefits either a face to face across the nation or with technology or telephonically and so we see those another competitive advantage. It will allow us to continue to maintain the margins, we have while serving and underserved part of the market. So for US we still believe.
Maintaining our margins and growing is possible, but we recognize that the competitive landscape is becoming more challenging, especially in the larger aftermarket.
Yes, I do a little bit on Unum us that sure and second question you highlighted Ltd, and just I think books now, but third quarter tends to be it is generally our smallest sales quarters. So it's it's probably too a little bit of volatility. We did see LTC Ltd sales were off a bit Andrew in the quarter, but if you look on a year to date basis. They are up over double digits and feel good about.
Disability in the business overall.
Up 6% sales for the quarter.
Which is great. Your question is a good what I mean, it's a high performing business with high teens are are we.
In terms of competition, we do exist in very competitive markets no doubt about it but I, if I had sort of narrowed in I would say that large case voluntary benefits market that Tim just highlighted I'd say, we feel that only.
Brad as well our strategy there is increasingly to integrate our voluntary sales with the rest of our group insurance and leave businesses and as I just mentioned the investments that we've made integrating into our clients HR technology as well as building out those lead management services I think provide a really in.
Forton differentiator that allows us to pull along things like the life insurance in the voluntary benefits overtime. So we look out over the to the future is certainly there's going to be some volatility and growth.
Quarter to quarter, but boy, there's a lot of opportunity ahead of us.
I think everything about the overlap profitability.
Yeah, Andrew just little bit more on the overall profitability maintaining the what are very good returning levels in the business. What I think just characterize the market ticket as you get higher larger in the case size is some irrational competition ticket a longer term year to that some of that has come out of the market and so as you look at that our ability to maintain those high returns is what we're both.
Focused on or not sacrificing our discipline around underwriting around K selection.
Go to market and so from a macro perspective, we still look to maintain those those high returns.
Excellent. Thank you for those answers and just along the same lines just done on a more micro level with your dental and vision business and the star Mount efforts.
I have noticed aflac is kind of taking a similar initiatives and.
So the question here is.
What kind of growth trajectory do you expect in what kind of returns do you expect along the way.
Yes, so let's start on the U.S. I will talk a little bit about more of the voluntary has basically lifecycle, but I think it's important in the large group or just the group business. How we're growing sales like sure. So thanks for highlighting it that is that is an important part of our our growth story going forward and we're really pleased with that bill.
But you see on the surface is really good strong premium growth.
But you did but you can't see though is underneath that actually has a really nice I'll call effect on other line. So up the group dental and vision that we wrote in the quarter over three quarters of it came with other lines or went on top of an existing clients. So that's that's really does serve to secure that relationship.
Been drive additional growth and when we do you need to make adjustments.
Through renewal pricing for things like interest rates.
A broader client relationship is really helpful. There. It. It's it is a growth prospect to have a lot of runway in front of it so even as we've had a really good success over the last three years since the acquisition and really two years actively in the market still were about 10% of our in force clients that we brought that dental.
Envision solution to so we have a long ways to go in terms of what that growth trajectory looks like.
Tim on the close sure yes, so for US the acquisition assortment certainly.
Strong catalyst for growth, we saw great growth last year, and as Mike mentioned, along with the dental products. We typically see a couple of other products that are the purchase at the same time, we appreciate star mouse experience in serving that commercial on public sector markets in the past and that's certainly been beneficial to us as well.
As Mike mentioned, we had about a one year delay after us starting with star valves, so less than 5% of our in force customers currently have our dental product and we see tremendous opportunities. There we remain excited about the growth prospects.
Awesome. Thanks, so much.
Thank you.
And we'll go ahead with our next question from Suneet Kamath of Citi. Please go ahead.
Thanks, a question for Rick I guess, it seems to me that no matter how good the core businesses.
It all comes down to long term care in terms of driving the stock inclusive of the stock doing this morning. So.
I know, it's unfair, but it's sort of is what it is so any updates in terms of third party solutions for long term care I think in the past you talked about interest rates being the primary headwind, but is that still the case or is it more.
Interest rates and uncertainty over claims trends.
Just an update on that would be hesitate.
Yes, so I think raised supply, which is with our closed block both both sides of our clothes blood individual disability side and long term care side. These are businesses were not actively marketing today and so we think that strategically we would rather be out of them I think the reality is as the market over last few years particular to long term care has been.
Challenging as we look at solutions externally you have seen a couple of smaller solutions in the market. So we watch those carefully but but it also is difficult to find counterparties that will take on this risk in the way that we think is appropriate for our company overall I think it's both I think it's actually interest rate.
I'd also say, it's also just getting credibility within the data around long term care is still gaining credibility across the industry, that's going to be important for parties to get together and work through a transaction and low interest rates are barrier as well, but I think it's both of those in concert so we do recognize.
And want to have the best core business. We can we think the team is doing a tremendous job on that front.
But we're going to continue to work through long term care a year ago, we came out with good transparency around all of our assumptions.
Where they're trending et cetera, and that's that's the most of it can do at the moment, but we will continue to look diligently for solutions to our entire close well.
Okay, and then just maybe just a follow up and again I know, it's frustrating for you guys, but would you think about anything more dramatic.
Possibly slowing the buyback program Kinect observing some capital.
To kind of throw at US solution that are you at all thinking along those lines or is that just off the table at this point.
Oh, yes things off the table today, we're looking at all options and model out many different scenarios about what we can do so.
So be able to allow our very strong core businesses to shine through and so all these ended up table, where we're focused on how do we create value for shareholders and whatever type of solution that would entail well beyond the table and when we will vary very carefully look up.
Okay. Thanks, Greg.
And we'll take our next question from John Needle Mbps. Please go ahead.
Hey, good morning.
I've two questions unrelated to each other the first.
I just wanted to think I just wanted to talk about miscellaneous investment income <unk> I think historically or at least it looks like most of the pressure relative to historical averages. It looks like that was mostly in the close block I know some of the other segments were impacted but I thought historically when you guys have higher in miscellaneous investment.
Income from you learn the closed block.
Tend to fund.
Bill.
But largely offsets that do I have that right is there really any meaningful bottom line impact from the lower investment in miscellaneous investment income.
Yes. Thanks for the question John This is Steve I'll take that so just a couple of points the comparison.
First of all if you look year over year in the change in miscellaneous investment income.
The the variance and close block with about 9 million year over year.
But in Unum US is about 14 to 15 million. So the significant portion actually at the year over year difference, that's what was in Unum us.
I'll tell you, we don't really adjusted discount rates in unlike our clothes disability block.
I'm sorry in our Unum US group disability block, that's more of a longer term view of what to do it.
With discount rates.
Also in long term care, we would not adjust our claim discount rate there either the one place that we have done it is in our closed individual disability income while we have done that over time, where we have had a very significant maybe single bond.
Bond calls.
That are able to move the overall discount rate, we have done that but I would say all things being equal for this quarter. If you look year over year. The majority of that difference went through to the bottom line.
Got you that's helpful. Thanks, Dave and then my second question.
And just coming back to the idea of uses of cash.
Relative to sources of cash shape.
Thank you probably.
Given your earnings power right now generating somewhere in the range of 1.1.
The $1.2 billion of of cash from your earning.
I'm just wondering with with the uses of cash in particular.
Steve with your comments about the statutory capital contributions being.
Much larger related the long term care block at this point.
It looks like you're effectively utilizing a 100% of your sources of cash.
Via dividends interest expense capital contributions and your buybacks.
How much how how long do you think you have the flexibility to be able to do essentially 100% deployment.
Before the buyback maybe has to be.
Got a little bit to maintain.
Some flexibility.
Yeah, I would say the perspective, given there is the last two or three years the cash calls on the holding company.
The subsidiaries is.
It's really been greater than we have this historically seen and going forward. What we expect to see if you recall when we went through tax reform that had a pretty dramatic impact on the level required capital we had doubted our insurance, but it was really just you know the stroke of the pan of changing the tax rate and how that change.
The RBC factors.
So that created more contributions down of the subs that we had historically seen.
The other thing is we did have our reserve charge last year, there was a disabled life reserve impact of that which which drove some statutory capital requirements. So I would say last two years have been a bit of anomaly I'd say that we're going to be able to navigate through this year, we do view that to be kind of a decreasing.
Call on capital and call on cash at the holding company as we go forward. So we'll monitor it though and obviously, we look at our capital plans every year and and we'll just have to evaluate that as we go.
Yes, I get the tax reform impact was the discrete one time item I'm just wondering about.
In particular that capital contributions you might need to make if rates remain low for the long term care block.
If rates don't move from here all else equal Steve should we be thinking about capital contributions for the next few years being in that 400 billion range.
No I think though the other thing to think about there is a lot of that capital contribution related to raises and first unum and how cash flow testing works. There is it's kind of a spot rate and so wherever you end up towards the end of the year you kind of build that is not forever, but you build in a pretty low interest rate.
And you need to almost funded.
Relatively quickly and so.
Okay.
It's not like when you think about our GAAP interest rate assumption, where we do have had a reversion to the mean.
How first Unum works, he kind of take a spot rate and funded so.
Any incremental in year, two or year three is not that much.
That not not necessarily yep.
Got you okay. Thank you.
Well now take our next question from Thomas Gallagher of Evercore ISI. Please go ahead.
Good morning, just just to kind of follow up on a whole.
The question about how you're thinking about about long term care and potential solutions the.
Yeah. Our estimate today is the market describing something like a 5 billion dollar valuation discount for long term care.
You know that that's certainly a subject a high degree of margin for error, but the if that's directionally close and you know you there are opportunities possibilities.
For you.
To kinda crystallize that at a much lower level.
Is that is that something that you'd be prepared to do.
And how.
How are you thinking about it now would like to things that are on the table I know the buyback had come up but would you consider doing something more.
Substantial like selling your idea I closed block or even selling a core asset like colonial just just wanted to get a sense for your head is that with with that hold.
Topic.
Yes, certainly does this is Greg I think its goes back to us and his question as well, which.
I described the discount the your your relating to the when we think of the business. We do model out different scenarios I'd be very quick to say when we look at core assets. Those are what actually we're we're tethered to take US forward. So take that out of the equation, but when you look at other structuring certainly with reinsurance other counterparties.
What that might look like we're going to evaluate and you haven't seen us do anything to date, but it's not because we're not out their modeling it relative to where our shares are today relative to where the perception and and the LTAC businesses and we'll continue to do that so I think that the actions that are required.
Do that are ones that were active.
But I don't see any dramatic change in terms of our core business, where we think the growth in our business, having a very good franchise.
Certainly the where we're we're going to continue to push.
Got it and then just a question on the on the core business for my follow up can you unpack a bit what's happening to the disability benefit ratio.
74, two is the best I can remember.
How it now I presume, you're getting some benefit and I think you indicated favorable claim recovery.
But you can you talk about where new business is priced in what you would expect that to.
How that would you would expect it to flow through relative to the 74 to like would you expect you can maintain the 74 to based on where your pricing new business today or do you would you expect that to revert somewhat to too I mean.
Sure. Thanks, Tom Good question so.
Just a quick copy out so run the risk taking business. So there's always some some chance of volatility, but if the question is what's our best estimate I'd say, where we are in the quarter, which is very similar to where we are in a year to date basis. When it comes to the group disability loss ratio is probably our best.
Estimate for the go forward as well.
Got it sees itself. So the 70 low 74 is based on what you know today, you think will is run rate of both in terms of current trends.
Again, I wouldnt try to pick any quarter, but over time and to your question about what do we targeting I think Thats 70, 475 range is it good one.
Okay. Thank you.
Thanks.
Well take our next question from Alex kind of Goldman Sachs. Please go ahead.
Hi, good morning.
Your first question I had also related to long term care.
I guess first unum when I look at the reserves, there is a pretty big asset or actuarial.
Our reserve.
Yeah. It looks like it's nearly maybe I'd, 80% of the size just regular way statutory requirement.
And I'd just be interested to hear I work for Unum life Insurance Company of America, I don't think Theres, an a. our reserve at all so.
What's the difference I know part of its just the New York domiciled, but they are different in the products does it have to do at the reinsurance so fairwind like how should I think about that difference.
Yes. This is Steve Thanks for question, Alex and I think Theres a couple of things to think about first first unum is under kind of a traditional straight cash flow testing regime and within the New York interpretations of that Theres. A couple of things that are we believe are much more conservative than you know really the economics of the business.
One is that.
They don't allow you to build into kind of your future cash flow and approved rate increases and as you know thats a pretty big part of how we think about the economics of the business going forward because there are rate increases going forward that we think we will get approved and be able to factor into the profitability New York doesn't allow you on that New York business.
Great that I would say the other thing is they cap credit spreads.
Just on your new money portfolio going forward, but they look at your existing portfolio at almost cap the yields on what you're able to factor in the economics when when you do your cash flow testing.
And so that obviously.
You know that offices, obviously decreases the yield were able to use for that evaluation and then I'd say the other thing something I mentioned earlier that for new money. They use more of a spot yield where from a best estimate perspective, we think it more as a reversion to the mean, we've talked about in our best estimate we have a five and half percent.
That increases over time up to six in the quarter for first unum cash flow testing that would be a spot rate of wherever we are right now so that those three things just in the methodology build a much more conservative view into how we do our asset adequacy testing I would say generally what do you think about the business itself and really differences there.
Sure.
Yes, we had a little bit more maybe individual business in New York, but by and large it's the same type of business no same type of policy construct so I think it's more the methodology.
Got it and then I guess Fairwind I think you guys update annually the statutory net income.
On a consolidated captive basis, and it's it's been a little negative, which you know I guess the high level suggests that maybe reserves are quite high enough to be generated a profit there, but I mean could you update us on how that's been going year to date, and if thats been negative or positive.
Yeah, I was just say normally add fairwind, where the the America LTC business is reinsured too.
We have had historically statutory losses.
We've had to fund that's been kind of our run rate of capital contributions and exited conversation earlier that factored into the comments that I made and we see that be a pretty consistent this year.
Okay. Thank you.
Yes.
Your next question comes from.
Thomas Research. Please go ahead.
Hi. Thank you you mentioned I think your target or you are above your target, 5.5% new money rate for LTC in the quarter. How much of this was helped by new allocations to alternative investments and can you talk about how much appetite you have to continue increasing the also allocation.
Yes, great great. Thanks for the question. So just to step back about our investment strategy for long term care couple of things I think are important one is obviously a very long duration reliability. So when we think about asset allocation, what we're looking to 30 year bonds alternative asset strategies fit very.
Well with that type of liability so tobacco LTC business. It's I'd say, it's a combination of investment grade bonds high yield bonds and then some of the alternative asset classes.
Right now, we we do have less than 500 million.
In all behind the LTC business, you know we feel good about that program.
And that's something that we'll continue to use as a tool to back that business. The one thing that will tell you is we take a macro view to the type of credit risk that we're taking and we've had a look at high yield bonds that alternative assets together and think about it as you know.
Trying to manage around 8% eight feet and a half percent of our total portfolio and those types of assets. So if we have decided to grow the old asset portfolio, we would we would.
Probably reduce our high yield portfolio to keep that overall.
Kind of guideline in place so that's how we're thinking about it.
Got it. Thank you and then when you look at the level of miscellaneous investment income just do you think looking at the historical average is still the right comparison or given how long rates have been low and how much debt has already been refinance could we be moving into that kind of a cyclical lower period for bond calls and free pace.
Yeah, as we mentioned earlier in your guess is as good as ours in that these tend to be very volatile, they're very episodic they're hard to predict.
I would say using historical run rate is a good place to start at it.
It's tough to predict these types of things.
I tell you what we'll just we'll just try to be transparent around that as far as what we're seeing in quarter to quarter earnings. So so you can kind of understand what that looks like.
Okay. Thank you.
Thank you Eric.
And there are no further questions at this time I'd like to hand, it back over for closing.
Thanks, and thanks, all of you ever taken the time this morning.
That completes third quarter 2019 earnings call. We do look forward to be up with all of you at our annual outlook Moody meeting on December 17th either in person in New York or through the webcast that closes our third quarter call.
This concludes today's call. We thank you for your participation you may now disconnect your lines and have a wonderful to everyone take care.